-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UuOH3VmrZOjxE/l7f5Itqa9DmvdoCZLH2r2rmhQqfcNDpjHxibgrgxZVH0WINfqa FfTGOMOSFbkb4pIx6rwvuQ== 0000950146-99-000850.txt : 19990419 0000950146-99-000850.hdr.sgml : 19990419 ACCESSION NUMBER: 0000950146-99-000850 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMX CORP CENTRAL INDEX KEY: 0000880858 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 133584740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10938 FILM NUMBER: 99595279 BUSINESS ADDRESS: STREET 1: 1 LABRIOLA COURT CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9146985353 MAIL ADDRESS: STREET 1: 431 FAYETTE AVE CITY: MAMARONECK STATE: NY ZIP: 10543 FORMER COMPANY: FORMER CONFORMED NAME: SEMICONDUCTOR PACKAGING MATERIALS CO INC DATE OF NAME CHANGE: 19930328 10-K 1 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 ---------------------------------------------- (Name of Business Issuer in Its Charter) Delaware 13-3584740 -------------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1 Labriola Court Armonk, New York 10504 ---------------------------------------- --------- (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 -------------------- ------------------- 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 - --------- ----------------------------- 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 EX-10.63 2 FIFTH AMENDMENT AND FORBEARANCE AGREEMENT FIFTH AMENDMENT AND FORBEARANCE AGREEMENT AGREEMENT, made as of January 13, 1999, among SEMX CORPORATION (formerly known as Semiconductor Packaging Materials Co., Inc.) a Delaware corporation, (the "Borrower") and AMERICAN SILICON PRODUCTS, INC. ("ASP"), a Delaware corporation, POLESE COMPANY, INC., a California corporation, RETCONN INCORPORATED, ("RETCONN") a Connecticut corporation, TYPE III, INC., a California corporation, S.T. ELECTRONICS, INC. ("STE"), a California corporation, SPM HOLDINGS CORPORATION ("SPM Holdings"), a Delaware corporation, AMERICAN SILICON PRODUCTS, B.V. ("ASP B.V.") a Netherland corporation, THERMAL PACKAGING SOLUTIONS, INC. ("TPS") a Nevada corporation, (collectively, the "Subsidiary Guarantors") and FIRST UNION NATIONAL BANK, a national banking association as Lender and agent for Fleet National Bank (the "Lender"). Background A. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement dated January 23, 1997, between Semiconductor Packaging Materials Co., Inc. (now known as SEMX Corporation), and First Union Bank of Connecticut (predecessor in interest to First Union National Bank) (as modified, amended, restated or supplemented from time to time, the "Credit Agreement"). B. The Borrower has informed the Lender that, inter alia, it will be unable to make the principal payment under the Term Loan due and payable on January 1, 1999, and will be unable to comply with the financial covenants contained in Sections 9.8, 9.9, 9.10 and 9.11 of the Credit Agreement. The Borrower and the Subsidiary Guarantors have requested that the Lender: (i) forbear from requiring the Borrower to make scheduled payments of principal under the Term Loan from January 1, 1999 through March 31, 1999; (ii) waive the Borrower's compliance with the financial covenants contained in Sections 9.8, 9.9, 9.10 and 9.11 of the Credit Agreement through March 31, 1999; (iii) extend the maturity of the Interim Note to April 1, 1999; (iv) extend the maturity of the Revolving Loan from January 31, 1999 to April 1, 1999. The parties agree that the maturity date of the Term Loan will be accelerated to April 1, 1999. C. The obligations of the Borrower under the Credit Agreement have been guaranteed or will be guaranteed simultaneously hereunder unconditionally by the Subsidiary Guarantors. D. The Borrower has another subsidiary International Semiconductor Products Pte., Ltd. ("ISP"). The Lender was delivered a document entitled Guaranty by ISP dated on or about July 31, 1998, by the Borrower. The Borrower has advised the Lender that this documents was not authorized and was delivered to the Lender in error. The Lender reserves all of its rights with respect to this document. E. The Lender has agreed to the Borrower's and the Subsidiary Guarantors' requests to the terms and conditions of this Agreement. Agreement In consideration of the foregoing Background, which is incorporated by reference, the parties, intending to be legally bound, agree as follows: 1. Conditions Precedent. The obligation of the Lender under this Agreement is subject to the receipt and review, to the satisfaction of the Lender, of the following: (a) this Agreement shall be duly executed by the parties hereto; (b) the Borrower will cause the Lender to be provided with a $950,000. first mortgage on premises located at 15 Clarkson Street, Providence, Rhode Island and a $750,000. second mortgage on premises located at 1 Labriola Court, Armonk, New York in a form acceptable to Lender; (c) STE, TPS and SPM Holding will execute and deliver to Lender an acceptance and assumption of guaranty and security and agreement in the form annexed. (d) ASP B.V. will request and utilize their best efforts to obtain ABN Amro's consent to the granting to Lender by ASPBV of a second security interest in Accounts and a second mortgage on real property in Holland (the "Dutch Property") in the amount of 500,000 Dutch Guilders; (e) Borrower shall deliver a Secretary's Certificate of the Borrower and each of the Subsidiary Guarantors authorizing this transaction except as set forth in 23(d); (f) Borrower shall deliver a true and complete copy of the September 30, 1998 Report on Form 10-Q filed by the Borrower with the Securities and Exchange Commission; (g) The counsel for the Borrower and Subsidiary Guarantors will deliver their opinion that these documents are 2 authorized, duly executed and enforceable against their clients; and (h) The Borrower shall pay a restructuring fee payable $25,000 at the Closing and $1,000. per day from and including February 1, 1999 until the obligations under the Credit Agreement have been entirely repaid which daily fee shall be due and payable weekly on the Friday of each week for the immediately prior seven (7) day period and at the date of repayment in full; (i) the Borrower shall have granted to Lender a security interest in certain vehicles set forth on Schedule 1.(i); (j) the Subsidiary Guarantors shall have signed the ratification to Guaranty in the form annexed except as set forth in Section 23(d); (k) the Borrower shall have paid all of the current and past expenses and fees as provided in Sections 3 and 22 due as of the closing in accordance with the Schedule annexed. (l) the Borrower will provide a copy of any appraisal, independent valuation or marketing report that they may have regarding the Dutch Property including, but not limited to, the appraisal or report utilized by ABN Amro in extending its real estate loan to ASPBV in Holland; (m) Borrower and Subsidiary Guarantors will provide acknowledgements of the pledge of all bank and/or securities accounts maintained in their name at institutions other than Lender or Fleet National Bank and shall provide such acknowledgements for any other accounts they may open from time to time. (n) Borrower shall provide such other agreements and instruments as the Lender reasonably deems necessary to carry out the terms and provisions of this Agreement. 2. Modifications to Credit Documents. All of the terms and conditions contained in the Credit Documents shall remain in full force and effect except as follows: a) Modification to Credit Agreement (i) Section 4.2(b) is hereby deleted in its entirety and is replaced with a new Section 4.2(b)(1) and 4.2(b)(ii) as follows: 3 Section 4.2(b)(i) In the event that the value of the Borrowing Base of the Borrower and Subsidiary Guarantors falls below $5,100,000. the Borrower shall within fifteen days of the time of submission of the report make a payment in reduction of the Revolving Loan, in the amount equal to the difference between $5,100,000. and the valuation shown on the periodic Borrowing Base certificate provided for in Section 8.14. Section 4.2(b)(ii) In the event that any ISP L/C Liability valuation exceeds US $3,200,000, then the Borrower shall, on or before the fifth day of the next month after the date of calculation, pay to the Lender the amount that the ISP L/C Liability exceeds US $3,200,000, such sum to be applied to reduce the Revolving Loan. (ii) Section 6.2 is hereby modified to add the following: c. No Default or Event of Default shall have occurred or shall result from the making of the requested Loan or the issuance of the requested Letter of Credit. d. No adverse change deemed material by Lender, in its sole and absolute discretion, in the financial condition, operations, properties, business, management of ownership of Borrower and the Subsidiary Guarantors, or the risks associated with the transaction contemplated by this Agreement, shall have occurred from the date of this Agreement or which shall have occurred prior to the date of this Agreement but was not disclosed to the Lender, at or before the date this Agreement is executed. e. Lender shall hold valid, enforceable and perfected first priority Liens in and to all of the Collateral, which Collateral shall be subject to no Liens, except for the Permitted Encumbrances. f. No law or regulation shall prohibit, and no order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain Lender from making the requested Loan or the issuance of the requested Letter of Credit. 4 g. After giving effect to the amount of the requested Loan and the Maximum ISP L/C Liability, the amount outstanding under the Revolving Loan Commitment shall not exceed the lesser of (i) $15,000,000. and (ii) the amount of current Borrowing Base submitted in connection with the request for a Loan plus $9,700,000. minus the amount of any principal repayments made from December 1, 1998 to March 30, 1999. The formula for availability under the Revolving Loan is as follows: Assume: RL is the amount outstanding under the Revolving Loan including the Maximum ISP L/C; B is the amount of the current Borrowing Base; RLA is the amount available under the Revolving Loan Commitment; P is the amount repaid; RLA = $9,700,000.+B-P-RL This provision can be illustrated by the following examples: Assume that the full $15,000,000 facility is drawn and the Borrower repays $300,000. of the Revolving Loan during the period from December 1, 1998 to March 30, 1999, the Borrower would have no availability if the Borrowing Base equals $5,200,000 i.e. ($9,700,000) + ($5,200,000) - ($300,000) - ($14,700,000) = -$100,000, and would have $100,000 available if the Borrowing Base was $5,400,000 i.e. ($9,700,000) + ($5,400,000) - ($300,000) -($14,700,000) = $100,000. In the example RL=$14,700,000., if (i) B <= $5,300,000. RLA is zero or negative so that there would be no availability and (ii) B>$5,300,000., RLA is a positive number so that there is availability. h. The Borrower has submitted a Borrowing Base certificate which shows the value of the 5 current Borrowing Base to be at least $5,300,000. i. Lender shall have received such other documents and evidence with respect to the transactions contemplated by this Agreement, in form and substance satisfactory to Lender, as Lender may reasonably request. (iii) A new Section 8.12 is hereby added as follows: Section 8.12 Financial Projections. Attached as Exhibit 8.12 are financial projections prepared by the Borrower for the Borrower and Subsidiary Guarantors on a consolidated basis which represent a fair and accurate estimate of the Borrower's and Subsidiary Guarantors' financial performance for the period from December 1, 1998 to and including March 31, 1999 based on management's assumptions at the time the projections were submitted to the Lender. (iv) A new Section 8.13 is hereby added as follows: Section 8.13 Accounts, Inventory and Collateral Position Reporting. In addition to any other reporting requirements, the Borrower shall provide to the Lender monthly on or before the twentieth day of the next ensuing month a report exhibiting in a form acceptable to the Lender, aged accounts receivable, inventory valued at the lower of cost or market value and aged accounts payable all calculated as of the last day of the month for which the report is being rendered together with current copies of account receivable agings and net payable agings commencing on January 31, 1999 which will correspond to the month of December. Attached as Schedule 8.13 is a true and complete report as of November 30, 1998. (v) A new Section 8.14 is hereby added as follows: Section 8.14 Borrowing Base Reporting. Borrower and the Subsidiary Guarantor shall provide a Borrowing Base certificate on January 31, 1999 for the month of December, 1998 and thereafter (A) the first day of each month containing true information as of the 6 2nd Friday of the prior month, (B) twentieth day of each month providing true information as of the last day of the prior month, and (C) in connection with each request for a Revolving Loan or a Letter of Credit as of the Friday prior to such request. Attached as Schedule 8.14 is a true and complete Borrowing Base certificate compiled as of November 30, 1998. (vi) A new Section 8.15 is hereby added as follows: Section 8.15 Material Adverse Change. In the event of the occurrence of a material adverse change in the business, financial conditions or in the value of collateral pledged to the Lender, the Borrower and/or any Subsidiary Guarantor shall give immediate written notice thereof to the Lender. (vii) A new Section 8.16 is hereby added as follows: Section 8.16 Sale of Borrower and/or RETCONN Incorporated. The Borrower together with Compass Partners International, LLC, Borrower's present investment bankers, or such replacement or additional investment banker, shall report to the Lender, in writing, on the first and twentieth day of each month, the status of each and every proposed transaction for the sale of Borrower and/or RETCONN and describing in pertinent detail any contracts, offers, or expressions of interest. (viii) A new Section 8.17 is hereby added as follows: Section 8.17 Life Insurance. A true and complete schedule of the Borrower owned insurance insuring the lives of all key employees together with a schedule of agreements pertaining to the obligation of Borrower to provide all or part of the proceeds of such insurance to the employee is annexed as Schedule 8.17. The Borrower shall take all reasonable steps to cause all such insurance not specifically required to be paid to such employees or at their direction pursuant to the employment agreements to be assigned to the Lender by January 31, 1999 on such forms as are promulgated by the 7 insurance companies. The Borrower shall provide copies of any such employment agreements containing insurance requirements to the Lender at or prior to the date hereof. (ix) A new Section 8.18 is hereby added as follows: Section 8.18 Covenant Reporting. The Borrower including the Subsidiary Guarantors shall provide to the Lender on January 31, 1999 for the month of December, 1998 and monthly on the twentieth day of each month for the prior month internally prepared financial statements and a statement demonstrating the covenant values set forth in Sections 9.18, 9.19, 9.20, 9.21 and 9.22 and stating whether Borrower is in compliance with such covenants. The financials and covenant compliance report shall be certified to be true and accurate by an officer of the Borrower to the best of such officer's knowledge after due and diligent inquiry subject to final audit review by their outside auditors. (x) A new Section 8.19 is hereby added as follows: Section 8.19 13 Week Cash Flow Forecasts. The Borrower shall provide a 13 week cash flow forecast in the form approved by the Lender for the week just ended and the next 12 weeks on Friday of each and every week on a rolling basis showing actual receipts and expenditures as compared to the budgeted amounts in such form and content acceptable to Lender. (xi) A new Section 9.18 is hereby added as follows: Section 9.18 Minimum Sales. Based upon the Borrower's projections, the Borrower covenants that the consolidated sales of the Borrower including the Subsidiary Guarantors on a consolidated basis shall not be less than the following amounts for each of the months specified: December 1998 $4,874,000. January 1999 $5,184,000. February 1999 $5,303,000. March 1999 $5,750,000. 8 (xii) A new Section 9.19 is hereby added as follows: Section 9.19 Earnings Covenant. Based on the Borrower's projections, the Borrower covenants that the Consolidated EBITDA of the Borrower including the Subsidiary Guarantors shall not be less than the following amounts for each of the months specified: December 1998 $ 690,000. January 1999 $1,050,000. February 1999 $1,057,000. March 1999 $1,172,000. (xiii) A new Section 9.20 is hereby added as follows: Section 9.20 Ratio of Current Assets to Current Liabilities. Borrower including the Subsidiary Guarantors on a consolidated basis shall not permit the ratio of Current Assets to Current Liabilities to be less than .90 as of December 1998 and .95 at all times thereafter and from time to time. (xiv) A new Section 9.21 is hereby added as follows: Section 9.21 Interest Coverage Ratio. The Borrower including the Subsidiary Guarantors on a consolidated basis, shall not permit the Interest Coverage Ratio for the periods set forth to be less than the following amounts: December 1998 0.6 January 1999 1.6 February 1999 1.7 March 1999 2.0 (xv) A new Section 9.22 is hereby added as follows: Section 9.22 Tangible Net Worth. The Borrower including Subsidiary Guarantors shall not permit its Tangible Net Worth on a consolidated basis to be less than $14,000,000. at any time or from time to time. (xvi) Section 10.3 is hereby deleted and is hereby replaced with the following and a new Section 10.11 is hereby added as follows: 9 10.3 Covenants. Any Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.1(a) or (b), 8.11 or Section 9 or (b) default in the due performance or observance by it of any other term, covenant or agreement contained in this Agreement or any other Credit Document (other than those set forth in Sections 10.1, 10.2 and 10.5 hereof which shall immediately constitute an Event of Default) and such failure continues for more than twenty (20) business days after such failure occurred, except that if the Borrower fails to comply with Sections 8.13, 8.14, 8.16, 8.18 and 8.19 the Borrower shall be in default if it fails to provide such information within three days after it is due. 10.11 Decrease in the Value of the Borrowing Base. The value of the Collateral comprising the Borrowing Base, as shown on a certificate required under this Agreement or otherwise, decreases by more than $300,000. from the November 30 Borrowing Base to less than $4,900,000. (xvii) Section 11.1 is hereby modified to provide that the following terms will have the following revised definitions: "Interest Coverage Ratio" shall mean, at anytime, the ratio of consolidated EBIT to Consolidated Interest Paid. "Interim Loan Maturity Date: shall mean April 1, 1999. "Revolving Loan Maturity Date" shall mean April 1, 1999. "Term Loan Maturity Date" shall mean April 1, 1999. and the following new definitions will be added: "Accounts" shall mean, all present and future rights of Borrower to payment for goods sold or leased or for services rendered, whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance including, without limitation, all Eligible Accounts (herein defined). 10 "Borrowing Base" shall mean, as of any date of determination, an amount equal to eighty percent (80%) of the Eligible Accounts and 50 percent (50%) of the Eligible Inventory. "Current Assets" shall mean current assets as determined in accordance with GAAP consistently applied and shall include only the following items: (i) cash in bank, on hand and in transit; (ii) prepaid items (excluding unamortized debt discount and expense); (iii) Accounts, other receivables, bills and notes receivable acquired in the ordinary course of business; (iv) Inventories at not in excess of cost or current market value, whichever is lower; and (v) readily marketable, direct obligations of the United States of America and certificates of deposit issued by a bank, in each case at not in excess of cost or current market value, whichever is lower; all after deduction of adequate reserves in each case where a reserve is proper in accordance with GAAP; provided, however, that any of such assets which are subject to a pledge, lien or security interest to secure payment of any Indebtedness which is not included in Current Liabilities shall be excluded from Current Assets to the extent of such Indebtedness. "Current Liabilities" shall mean current liabilities as determined in accordance with GAAP consistently applied and shall include, as of the date of determination thereof, (a) all Indebtedness payable on demand or maturing within one year after such date without any option on the part of the obligor to extend or renew beyond such year, (b) final maturities, installments and prepayments of Indebtedness required to be made within one year after such date, and (c) all other items (including taxes accrued as estimated and reserves for deferred income taxes) which, in accordance with GAAP, would be included on a balance sheet as current liabilities. Notwithstanding the above, the term debt due to the Lender shall be accounted for as long term debt for purposes of calculating the financial covenants of this Agreement. "Eligible Accounts" shall mean Accounts which consist of ordinary trade accounts receivable owned by Borrower and the Subsidiary Guarantors, payable in cash in United States dollars and arising out of the final sale of Inventory or delivery of services in the ordinary course of Borrower's business as presently conducted by it other than: (i) any Account with respect to which the goods covered thereby have not been delivered or services have not been rendered or with respect to which Borrower failed to issue an original invoice within two (2) days after delivery of such goods or performance of such services; (ii) any Account with respect to which Lender does not have a valid and prior, fully perfected Lien or which is not free of all Liens or other claims of all other Persons (other than the Permitted 11 Encumbrances) including, but not limited to, those accounts listed as contra accounts in the BDO Seidman asset based review of the Borrower; (iii) any Account which is not due and payable, absolutely and unconditionally, within thirty (30) days from the date of the original invoice applicable thereto; (iv) any Account with respect to which more than ninety (90) days have elapsed since the date of issuance of the original invoice applicable thereto; (v) any Account resulting from goods which are shipped or delivered to the Account Debtor on an absolute sale basis or goods shipped on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis, or on the basis of any other similar understanding; (vi) any Account with respect to which the Account Debtor is a director, officer, shareholder, employee or an Affiliate of Borrower; (vii) any Account with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof; (viii) any Account with respect to which the Account Debtor is not a resident of the United States; (ix) any Account with respect to which the Account Debtor is the subject of bankruptcy or a similar insolvency proceeding, or has made an assignment for the benefit of creditors, or whose assets have been conveyed to a receiver or trustee, or who has failed or suspended or gone out of business; (x) any Account of a particular Account Debtor in excess of a credit limit established as to that Account Debtor by Borrower; (xi) any Account which is evidenced by chattel paper, a promissory note or other instrument; (xii) any Account with respect to which the terms or conditions prohibit or restrict assignment or collection rights; (xiii) any Account if more than 50% of the Accounts of such Account Debtor are past due more than 90 days; and (xiv) any Account which does not conform at the time to Borrower's representations and warranties. "Eligible Inventory" means Inventory of the Borrower and Subsidiary Guarantors in which Lender has a first priority, perfected security interest and which is not, in Lender's opinion, obsolete and unmerchantable, and which Lender in its sole judgement, shall deem Eligible Inventory based on such considerations as you may from time to time deem appropriate and shall not include any (1) work in progress, (2) inventory of ASP or (3) raw material of Semiconductor Packaging Materials Co. a/k/a SPM, a division of Borrower. "Equipment" shall mean, all machinery, all manufacturing, distribution, selling, data processing, office and equipment, all furniture, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels, aircraft and all other goods other than Inventory, and in each case whether now owned or hereafter acquired by Borrower and wherever located, and accessions and additions thereto, parts 12 and appurtenances thereof, substitutions therefor and replacements thereof. "GAAP" shall mean, generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession which are applicable to the circumstances as of the date of determination. "Inventory" shall mean, all goods, now owned or hereafter acquired by Borrower and Subsidiary Guarantor (wherever located, whether in the possession of Borrower or of a bailee or other Person) which are held for sale or lease or other disposition, which are raw materials, work in process, supplies, whole goods, spare parts or components, all materials which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of any such goods, all documents of title representing the same, and all records, files and writings with respect thereto, and shall include such property the sale or other disposition of which has given rise to Accounts and which has been returned to or repossessed or stopped in transit by Borrower. "ISP Letter of Credit" shall mean, the letter of credit opened by Lender at the request of ISP in the amount of SD $5,000,000. "ISP L/C Liability" shall mean the liability of the Lender to the beneficiary of the ISP Letter of Credit in United States Dollars which amount shall be valued on the last day of each month. "Maximum ISP L/C Liability" shall mean $3,200,000. "Net Worth" shall mean, the amount by which all the assets of Borrower, as determined in accordance with GAAP, at any given time, exceed the sum of the then Total Liabilities and the Minority Interests. "November 30 Borrowing Base" shall mean the Borrowing Base certificate shown on Schedule 8.14 annexed hereto and made a part hereof certified by an officer of the Borrower to be true and accurate to the best of such officer's knowledge after due and diligent inquiry and for purposes of this Agreement shall have a Borrowing Base valuation of $5,200,000. 13 "Tangible Net Worth" shall mean, the amount of the Net Worth minus goodwill, patents, and other intangible assets as determined in accordance with GAAP. (xviii) The following is added after the notice information contained in Section 12.3 of the Credit Agreement: If to the Borrower: and Gratch Jacobs, & Brozman, P.C. 950 Third Avenue New York, New York 10022 Attention: Andrew Brozman, Esq. Tel: 212-925-2560 Fax: 212-319-0856 If to the Lender: First Union National Bank 5 Research Drive Shelton, Connecticut 06494 Attention: Nancy Haskins, Vice President Tel: 203-944-4707 Fax: 203-944-4678 and Zeichner Ellman & Krause 757 Third Avenue New York, New York 10017 Attention: Stephen F. Ellman, Esq. Tel: 212-223-0400 Fax: 212-753-0396 (xix) Section 12.7 is hereby amended to delete the word "Connecticut" and to substitute therefore the word "New York" and any reference to the state or federal courts located in the State of Connecticut shall refer instead to courts located in the County of New York. 3. Consultant. The Borrower agrees to pay all expenses, with respect to the Lender's consultant PricewaterhouseCoopers LLC, which amount is anticipated to be approximately $100,000. within sixty days of the day such amounts are sent to Zeichner Ellman & Krause (who shall promptly forward copies of the invoices to the Borrower). 14 4. Reaffirmation by the Borrower. The Borrower acknowledges that (a) it is legally, validly and enforceably indebted to Lender under the Revolving Note, the Interim Note and the Term Note, without defense, counterclaim or offset, (b) it is legally, validly and enforceably liable to the Lender for all costs and expenses of collection and attorneys' fees related to or in any way arising out of this Agreement, the Credit Agreement, the Revolving Note, the Interim Note, the Term Note, and the other Credit Documents, and (c) as of the date hereof, the amount outstanding under (x) the Revolving Note is $11,822,862.50 (consisting of $11,800,000. principal and $22,862.50 accrued interest) and the undrawn amount under the Letter of Credit is $3,093,100.50. as of December 31, 1998, (y) the Interim Note is $1,002,798.61 (consisting of $1,000,000 principal and $2,798.61 accrued interest), and (z) the Term Note is $15,079,601.47 (consisting of $15,050,000 principal and $29,601.47 accrued interest). In addition, Fleet National Bank's affiliate, Fleet Precious Metals, Inc., has a separate facility to the Borrower in the amount of $1,118,373. as of January 12, 1999 pursuant to a consignment agreement (the "Consignment Agreement") in connection with the consignment of gold (the "Gold Liability") and Lender has a separate equipment leasing facility to SPM Holding dated October 24, 1995 which have amounts outstanding under Schedule 1 of $317,098., Schedule 2 of $311,524. and Schedule 3 of $551,597.00 plus any applicable interest, fees and other costs (the "Lease Liability"), all of the separate obligations of the Borrower and Subsidiary Guarantors under the Gold Liability and the Lease Liability are due and owing without offset, claim, defense or right of recoupment. Except as modified by this Agreement, the Borrower hereby remakes all representations, warranties and covenants contained in the Credit Documents and acknowledges that the liens and security interests granted pursuant to the Security Documents encompass the indebtedness of the Revolving Note, the Interim Note and the Term Note. The Borrower represents that except as described on Current Report on Form 10-Q for the period ended September 30, 1998 of the Borrower which was filed with the Securities and Exchange Commission, there are no pending, or to the Borrower's knowledge threatened, legal proceedings to which the Borrower is a party, which materially or adversely affect the transactions contemplated by this Agreement or the ability of the Borrower or any Subsidiary Guarantor to conduct its business. 5. Reaffirmation by the Subsidiary Guarantors. Each Subsidiary Guarantor acknowledges that it is legally and validly indebted to the Lender under the Subsidiary Guaranty without defense, counterclaim or offset, and affirms that the Subsidiary Guaranty is or remains in full force and effect and includes, without limitation, the indebtedness, liabilities and obligations arising under, or 15 in any way connected with, the Credit Agreement, the Revolving Note, the Interim Note, the Term Note, this Agreement and the other Credit Documents, whether now existing or hereafter arising and acknowledges that the liens and security interests granted pursuant to the Security Documents to which such Subsidiary Guarantor is a party encompasses the foregoing indebtedness and obligations. 6. Other Representations and Agreements by Borrower and Subsidiary Guarantors. The parties agree that to the best of their knowledge they are not aware that any Default or Event of Default has occurred and is continuing, other than as set forth herein on Schedule 6 annexed hereto and made a part hereof and that the Lender has not given its consent to or waived any Default or Event of Default other than set forth on Schedule 6. The Borrower and the Subsidiary Guarantors represent, warrant and confirm that the Credit Agreement and the other Credit Documents are in full force and effect and enforceable against the Borrower and the Subsidiary Guarantors in accordance with the terms thereof except to the extent that the Borrower and Subsidiary Guarantors make no representation or warranty as to the effectiveness of the ASPBV guaranty under Dutch law. The Borrower and each Subsidiary Guarantor confirm all of the rights and remedies of Lender under the Credit Documents, including, without limitation, any power of attorney granted to Lender under any of the Credit Documents. The parties acknowledge and agree that the Credit Agreement, the Credit Documents, the Consignment Agreement and this Agreement (all as previously amended, modified or supplemented in writing from time to time) constitute the entire agreement and understanding between Lender and Borrower and each Subsidiary Guarantor and supersedes all prior agreements, conversations and understandings relating to the subject matter hereof; the parties hereto acknowledge and agree that the parties hereto have not made any representation except as expressly set forth in this Agreement and even if any such representations were made, the parties have not relied on any such representation except as expressly set forth in this Agreement. The Borrower and each of the Subsidiary Guarantors represent and confirm that as of the date hereof, neither the Borrower nor any of the Subsidiary Guarantors has any claim or defense (and to the extent any such defense exists the Borrower and the Subsidiary Guarantors each hereby waives every claim and defense) against the Lender arising out of or relating to the Credit Agreement, this Agreement and the other Credit Documents or the making, administration or enforcement of the Revolving Note, the Interim Note, the Term Note and the Loans and the remedies provided for under the Credit Agreements. 16 7. Forbearance and Waiver, Release. (a) In consideration of the execution, delivery and performance of this Agreement by the Borrower and the Subsidiary Guarantors, the Lender agrees (x) to forbear from requiring the Borrower to make regularly scheduled payments under the Term Loan from the date of this Agreement to the earliest to occur (a "Termination Event") of (i) April 1, 1999, (ii) the occurrence of an Event of Default under the Credit Agreement, (iii) the occurrence of a breach of this Agreement by the Borrower or any of the Subsidiary Guarantors, and (iv) the occurrence of a breach under the Consignment Agreement and all such forborn payments shall be due and payable on the Term Loan Maturity Date, Revolving Note Maturity Date and the Interim Note Maturity Date, and (y) to waive until the occurrence of a Termination Event the Borrower's compliance with the financial covenants contained in Sections 9.8, 9.9, 9.10 and 9.11 of the Credit Agreement. (b) IN CONSIDERATION OF THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT BY THE BORROWER AND THE SUBSIDIARY GUARANTORS, THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS RELEASE, REMISES AND DISCHARGES THE LENDER ITS SUBSIDIARIES AND AFFILIATES AND ALL OF THEIR PAST AND PRESENT OFFICERS, DIRECTORS, REPRESENTATIVES, EMPLOYEES, ATTORNEYS OF AND FROM ALL ACTIONS, CAUSES OF ACTION, SUITS, REBORROWINGS, CONTROVERSIES, AGREEMENTS, PROMISES, DAMAGES, JUDGMENTS, CLAIMS AND DEMANDS IN LAW OR IN EQUITY WHICH ANY OF THEM EVER HAD, NOW HAS OR WHICH ANY OF THEM SHALL HAVE AGAINST THE LENDER ARISING OUT OF ANY ACTION OF THE LENDER OCCURRING PRIOR TO THE DATE OF THIS AGREEMENT. 8. Prejudgment Remedy Waiver; Waivers. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS ACKNOWLEDGES THAT THE LOANS AND THE TRANSACTIONS EVIDENCED BY THE REVOLVING NOTE, THE INTERIM NOTE, THE TERM NOTE, THE CREDIT AGREEMENT, THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS ARE COMMERCIAL TRANSACTIONS AND EACH WAIVES ITS RIGHTS TO NOTICE AND HEARING PRIOR TO THE ISSUANCE OF ANY PREJUDGMENT REMEDY, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE LENDER MAY DESIRE TO USE, AND FURTHER WAIVES DILIGENCE DEMAND, PRESENTMENT FOR PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND NOTICE OF ANY RENEWALS OR EXTENSIONS. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, WILLINGLY, VOLUNTARILY AND WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. 9. Letters of Credit. The maturity of all letters of credit issued in connection with revolving commitment including the ISP Letter of Credit shall not be extended for a term beyond April 15, 1999 and the amount of letters of credit outstanding on April 1, 1999 shall be secured by cash or marketable securities other than the 17 Borrower at the Lender's ordinary and customary margin requirements. 10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York (without regard to such State's conflicts of law principles). 11. Representation. The execution and delivery of this Agreement and all of the other Loan Documents are within the Borrowers' and each Subsidiary Guarantor's powers, corporate or otherwise, have been duly authorized or will be ratified by all necessary corporate action, and do not contravene, or constitute a default under any provision of applicable law or regulation of any of its corporate documents or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrowers and the Subsidiary Guarantors. The execution and delivery of this Agreement by the Lender are within Lender's power and has been duly authorized. 12. Acceleration. In the event that the Borrower or any Subsidiary Guarantor defaults in the prompt payment of the aforesaid obligations or in the due performance of or compliance with any of the terms or conditions hereof or of the Credit Documents or if the Borrower or any Subsidiary Guarantor defaults under any obligations to Fleet National Bank or its affiliates under the Gold Liability or otherwise or any other loan or facility with Lender under the Lease Liability or otherwise and after the expiration of any applicable grace, notice and right to cure provisions in this Agreement or any applicable agreement under which such default occurred , the Lender may declare all of the obligations in accordance with the original terms of the Loan Documents to be immediately due and payable. 13. Remedies. In the event of a demand or default, the Lender shall have such rights and remedies as are provided and permitted by the Loan Documents and applicable law. 14. Loan Documents Remain Effective. Except for any modification specifically set forth herein or in the exhibits, the Loan Documents remain in full force and effect. Nothing herein shall be construed as a waiver of any rights or remedies which the Lender may have at law, equity, under the Loan Documents, as modified hereby, or otherwise, all of which are specifically reserved. 15. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 18 16. Amendments, Etc. No amendment, modification, termination, or waiver of any provision of this Agreement, nor consent to any departure by the parties from this Agreement, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 17. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Lender and the Borrower, the Subsidiary Guarantors and their respective successors and assigns, except that the Borrower and Subsidiary Guarantor may not assign or transfer any of its rights under this Agreement without the prior written consent of the Lender. 18. Right to Inspect, UCC Filings. At any time during the term of this Agreement, the Lender shall have the right to inspect the books and records of the Borrower and the Subsidiary Guarantors during normal business hours and upon 24 hours notice. At any time and from time to time the Borrower and each Subsidiary Guarantor authorize Lender or its designee to file any financing statements without the Borrower or such Subsidiary Guarantor's signature to perfect any security interest granted to Lender in any jurisdiction. 19. Power of Attorney. Borrower and Subsidiary Guarantors hereby irrevocably appoint Lender, or any other person whom Lender may designate, as Borrower and Subsidiary Guarantors' attorney-in-fact, coupled with an interest, with full power of substitution and with full power from time to time in Borrower and Subsidiary Guarantors' stead: (i) to file without the signature of Borrower and Subsidiary Guarantors any and all financing statements, modifications and continuations in respect of the Collateral and the transactions contemplated by this Agreement and the other Loan Documents in any jurisdiction which Lender deems appropriate with respect to any Collateral, and Borrower and Subsidiary Guarantors agrees to reimburse Lender for the reasonable expense of any such filing including reasonable attorneys fees; (ii) to sign any such statement on behalf of Borrower and Subsidiary Guarantors if Lender deems such filing necessary or desirable under applicable law; and (iii) to file a carbon, photographic or other reproduction of this Agreement or of a financing statement if Lender deems such filing necessary or desirable under applicable law. 20. No Waiver. No delay or omission in the exercise of any power or remedy herein provided or otherwise available to the Lender shall impair or affect the Lender's right thereafter to exercise same, including the execution of the Agreement. 19 21. Submission to Jurisdiction. (i) Any legal action or proceeding with respect to this agreement or any document related hereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower and Subsidiary Guarantors hereby accept for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdiction. (ii) The Borrower and Subsidiary Guarantors irrevocably consent to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address, and such service will become complete three days after the date such process is so mailed. (iii) Nothing contained in this Paragraph 21 shall affect the right of the Lender to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Subsidiary Guarantor in any other jurisdiction. 22. Expenses. The Borrower shall promptly pay all expenses of the Lender with respect to: (i) the drafting, negotiation and enforcement of this Agreement and the documents executed in connection therewith, including, but not limited to, reasonable attorneys fees and disbursements and the fees incurred in connection with the August 1, 1998 Fourth Modification Agreement and Forbearance Agreement and foreign counsel fees; (ii) inspection and evaluation of any collateral, from time to time, including collateral audits and appraisals; (iii) any filing, recording, title insurance or other fees and taxes or search fees incurred in protecting, perfecting and insuring the Lender's lien or security interest in the Collateral; and (iv) all out of pocket expenses in connection therewith incurred by the Lender, including, but not limited to, site visits to view and observe the Collateral. Borrower authorizes Lender to debit any account for the payment of any such fees and disbursements if such amounts are not paid as and when due pursuant to the Schedule. 23. Additional Collateral. (a) As additional collateral for the Credit Agreement, the Borrower and each Subsidiary Guarantor shall to the extent reasonable and practical as determined by Lender in its sole and absolute discretion maintain each and every bank and/or securities 20 account relationship at Lender or Fleet National Bank. Borrower represents that attached as Schedule 24 is a true and complete schedule of all bank accounts maintained in its name and that of the Subsidiary Guarantors which are not maintained at either Lender or Fleet National Bank or either of their affiliates in locations where neither Lender or its affiliates and Fleet National Bank or its affiliates have convenient branches for general operating accounts. Borrower and the Subsidiary Guarantors hereby specifically assign and grant a security interest in any accounts maintained in the name of Borrower and Subsidiary Guarantor's. (b) The Borrower shall use its best efforts to obtain the consent ABN-AMRO or its successors and assigns to the granting to Lender by ASP B.V. of a second priority security interest in accounts receivable and a second mortgage on the real property in the Netherlands. Provided that ABN-AMRO consents, on or before February 15, 1999, the Borrower shall cause and ASP B.V. shall grant as additional security for the Obligations, a second priority security interest in the ASP B.V. accounts receivable and a second mortgage on the ASP B.V.'s real property located in the Netherlands in the amounts of 500,000 Dutch Guilders. together with all customary verifications of title and all necessary corporate approvals and an opinion of Dutch counsel acceptable to Lender and its counsel. Notwithstanding the foregoing, the inability of the Borrower to obtain the consent of ABN-AMRO after utilizing its best efforts shall not be a default under this Agreement. (c) On or before February 15, 1999, the Borrower shall cause and ASP B.V. shall grant as additional security for the Obligations, a first priority security interest in all other personal property of ASP B.V. to the extent that such property is not the collateral of ABN-AMRO. In the event such property is the collateral of ABN-AMRO, the Borrower shall use its best efforts to obtain the consent of ABN-AMRO to grant a second priority security interest in accordance with section (b) hereof. (d) On or before January 22, 1999, ASP B.V. shall deliver a guaranty in the form signed by the Subsidiary Guarantors, a board resolution approving such guaranty, copies of all appropriate corporate documentation furnished by the other Subsidiary Guarantors and an opinion of Dutch counsel acceptable to Lender and its counsel. 21 24. Jury Trial Waiver. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH, OR IN ANY WAY RELATED TO, THE FINANCING TRANSACTIONS OF WHICH THE CREDIT AGREEMENT, THE REVOLVLING NOTE, THE INTERIM NOTE, THE TERM NOTE, THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS IS A PARTY OR THE ENFORCEMENT OF ANY OF THE LENDER'S RIGHTS. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY WILLINGLY, VOLUNTARILY AND WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. The parties have executed this Agreement as of the date first written above. Borrower: SEMX CORPORATION By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman Subsidiary Guarantors: AMERICAN SILICON PRODUCTS, INC. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman POLESE COMPANY, INC. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman RETCONN INCORPORATED By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman 22 TYPE III, INC. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman S.T. ELECTRONICS, INC. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman SPM HOLDINGS CORPORATION By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman THERMAL PACKAGING SOLUTIONS, INC. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman ASP, B.V. By: /s/ Gilbert D. Raker ---------------------------- Name: Gilbert D. Raker Title: Chairman Lender: FIRST UNION NATIONAL BANK By: /s/ Thomas J. Donnelly ---------------------------- Name: Thomas J. Donnelly Title: Sr. Vice President 23 EX-10.64 3 ASSET PURCHASE AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE I PURCHASE AND SALE OF ASSETS........................................................ 2 Section 1.1 Purchase and Sale of Assets........................................................ 2 Section 1.2 Determination of Purchase Price.................................................... 4 Section 1.3 Estimated Cash Payment at Closing.................................................. 10 Section 1.4 Assumption of Certain Liabilities.................................................. 11 ARTICLE II CLOSING............................................................................ 12 Section 2.1 Time and Place..................................................................... 12 Section 2.2 Deliveries by the Companies and the Shareholder.................................... 12 Section 2.3 Deliveries by the Purchaser........................................................ 14 ARTICLE III CERTAIN COVENANTS OF THE SHAREHOLDER AND THE PURCHASER............................. 16 Section 3.1 Confidentiality.................................................................... 16 Section 3.2 Restrictive Covenant............................................................... 19 Section 3.3 Allocation of Purchase Price....................................................... 22 Section 3.4 Transfer Taxes..................................................................... 24 Section 3.5 Execution of General Release....................................................... 25 Section 3.6 Preparation of Final Tax Returns................................................... 25 Section 3.7 Access to Books and Records........................................................ 25 Section 3.8 Certain Employee Matter............................................................ 25 Section 3.9 Relocation of West Pearl Road Facility............................................. 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES BY THE SHAREHOLDER WITH RESPECT TO THE COMPANIES.... 28 Section 4.1 Organization, Authorization and Valid and Binding Agreement........................ 28 Section 4.2 Capitalization of the Foreign Subsidiary........................................... 29 Section 4.3 No Equity Investments or Subsidiaries.............................................. 30 Section 4.4 Consents; No Violation............................................................. 31
Section 4.5 Financial Statements............................................................... 32 Section 4.6 Absence of Certain Changes......................................................... 34 Section 4.7 Certain Tax Matters................................................................ 36 Section 4.8 Title to Properties; Encumbrances.................................................. 38 Section 4.9 Leasehold Improvements, Machinery, Equipment and Furniture......................... 41 Section 4.10 Computer Programs, Databases and Software.......................................... 42 Section 4.11 Patents, Trademarks, Copyrights.................................................... 42 Section 4.12 Litigation......................................................................... 44 Section 4.13 Insurance.......................................................................... 44 Section 4.14 Employee Benefit Plans............................................................. 44 Section 4.15 Bank Accounts...................................................................... 52 Section 4.16 Contracts and Commitments.......................................................... 53 Section 4.17 Labor Relations.................................................................... 54 Section 4.18 Compliance with Applicable Law..................................................... 56 Section 4.19 Environmental Matters.............................................................. 57 Section 4.20 Inventory.......................................................................... 59 Section 4.21 Accounts Receivable................................................................ 60 Section 4.22 Certain Interests.................................................................. 60 Section 4.23 Intercompany Transactions.......................................................... 61 Section 4.24 Product Warranty; Product Liability................................................ 61 Section 4.25 Backlog............................................................................ 62 Section 4.26 Certain Payments................................................................... 62 Section 4.27 Books and Records.................................................................. 62 Section 4.28 Government Contracts and Foreign Government Contracts.............................. 63 Section 4.29 Customer Furnished Assets.......................................................... 63
ii TABLE OF CONTENTS (Cont'd.) Section 4.30 Disclosure......................................................................... 63 Section 4.31 Future Compliance.................................................................. 64 ARTICLE V FURTHER REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER.......................... 65 Section 5.1 Authorization and Valid and Binding Agreement...................................... 65 Section 5.2 Consents; No Violation............................................................. 66 Section 5.3 No Default......................................................................... 67 ARTICLE VI REPRESENTATIONS AND WARRANTIES BY THE PURCHASER.................................... 67 Section 6.1 Organization....................................................................... 67 Section 6.2 Authorization...................................................................... 67 Section 6.3 Valid and Binding Agreement........................................................ 68 Section 6.4 Consents; No Violation............................................................. 68 Section 6.5 Limited Representations............................................................ 69 ARTICLE VII CONDUCT OF BUSINESS OF THE COMPANY PENDING THE CLOSING DATE........................ 69 Section 7.1 Conduct and Preservation of Business............................................... 69 Section 7.2 Other Transactions................................................................. 74 Section 7.3 Insurance.......................................................................... 75 Section 7.4 Access............................................................................. 75 ARTICLE VIII CERTAIN COVENANTS OF THE PARTIES................................................... 76 Section 8.1 Consents; Third Parties............................................................ 76 Section 8.2 Guarantees......................................................................... 76 Section 8.3 Supplemental Disclosure............................................................ 77 Section 8.4 Further Assurances................................................................. 77 Section 8.5 Purchaser Confidentiality Obligations.............................................. 77
iii TABLE OF CONTENTS (Cont'd.) Section 8.6 Hart-Scott-Rodino Filing........................................................... 78 Section 8.7 No Negotiation With Lenders........................................................ 78 ARTICLE IX CLOSING CONDITIONS................................................................. 78 Section 9.1 Conditions to the Obligations of the Purchaser..................................... 78 Section 9.2 Conditions to the Obligations of the Shareholder................................... 82 ARTICLE X SURVIVAL OF REPRESENTATIONS AND INDEMNIFICATIONS................................... 84 Section 10.1 Survival of Representations........................................................ 84 Section 10.2 Statements as Representations...................................................... 85 Section 10.3 Indemnification of the Purchaser................................................... 85 Section 10.4 Indemnification of the Shareholder and the Companies............................... 86 Section 10.5 Procedure.......................................................................... 87 Section 10.6 Remedies Cumulative and Exclusive.................................................. 89 Section 10.7 Limitations........................................................................ 89 ARTICLE XI TERMINATION, AMENDMENT AND WAIVER.................................................. 90 Section 11.1 Termination........................................................................ 90 Section 11.2 Effect of Termination.............................................................. 91 Section 11.3 Amendment, Extension and Waiver.................................................... 91 ARTICLE XII MISCELLANEOUS...................................................................... 92 Section 12.1 Finder's Fees...................................................................... 92 Section 12.2 Expenses........................................................................... 92 Section 12.3 Parties in Interest................................................................ 92 Section 12.4 Entire Agreement................................................................... 93 Section 12.5 Modification....................................................................... 93
iv TABLE OF CONTENTS (Cont'd.) Section 12.6 Notices............................................................................ 93 Section 12.7 Law Governing; Jurisdiction; Attorneys Fees........................................ 95 Section 12.8 Interpretation and Construction.................................................... 96 Section 12.9 Public Announcements............................................................... 97
v LIST OF SCHEDULES Schedule 1 Definitions Schedule 1.1(a)(v) Material Fixed Assets Schedule 1.1(a)(vi) Assumed Contracts Schedule 1.1(a)(vi)-1 Senior Management Employment Agreements Schedule 1.1(b) Additional Excluded Assets Schedule 1.2(c)(i)(3) Vacation Policy Schedule 1.2(c)(i)(4) Inventory Methodology Schedule 1.3(a) Estimated Purchase Price Wire Transfer Instruction Schedule 1.3(b) Wire Transfer Instructions for Other Payments Schedule 3.3 Allocation Schedule Schedule 3.8 Senior Management Employees Schedule 3.8(a) Change in Control Payments Schedule 3.8(b) Severance policy Schedule 4.1(e) Qualifications Schedule 4.4 Companies' and Shareholder's consents Schedule 4.5(a) Selling Companies' Financial Statements Schedule 4.5(b) Foreign Subsidiary's Reference Balance Sheet Schedule 4.6 Absence of certain changes Schedule 4.6-1 Due Inquiry Persons Schedule 4.7 Tax exceptions Schedule 4.8(a) Title to properties Schedule 4.8(c) Sufficiency of Purchased Assets Schedule 4.8(d) Leased Real Properties Schedule 4.8(e) Underground Storage Tanks Schedule 4.9 Tangible asset defects Schedule 4.10 Computer programs and year 2000 compliance Schedule 4.11 Registrable intellectual property rights Schedule 4.11-1 Pending intellectual property rights applications Schedule 4.12 Litigation Schedule 4.13 Insurance Schedule 4.14 Employee plans Schedule 4.14(c) ERISA exceptions Schedule 4.15 Bank accounts Schedule 4.16(a) Material contracts and commitments Schedule 4.16(b) Defaults under material contracts and commitments Schedule 4.17 Labor relations Schedule 4.17(c) List of Employees Schedule 4.18(a) Violation of Laws
vi Schedule 4.18(b) Notification of violation of Laws Schedule 4.20 Inventory Defects Schedule 4.21 Accounts Receivable Schedule 4.22 Certain Interests Schedule 4.23 Intercompany transactions Schedule 4.24 Warranty Obligations Schedule 4.25 Backlog Schedule 4.27 Books and Records offsite Schedule 4.29 Customer Furnished Items Schedule 5.2 Shareholder's consents Schedule 6.4 Purchaser's consents Schedule 7.1 Conduct of business Schedule 8.2 Shareholder guarantees Schedule 9.1(e) Required Employment Agreements Schedule 9.1(j) Required Employee Releases
vii ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (the "Agreement") dated as of January 26, 1999, by and among LITTON SYSTEMS, INC., a Delaware corporation (the "Purchaser"), SEMX CORPORATION, a Delaware corporation (the "Shareholder"), RETCONN, INCORPORATED, a Connecticut corporation (the "Company") S.T. ELECTRONICS, INC., a California corporation (the "Domestic Subsidiary") and RETCONN SPM (MALAYSIA) SDN. BHD., incorporated under the laws of Malaysia (the "Foreign Subsidiary" and together with the Domestic Subsidiary, the "Subsidiaries"). WHEREAS, the Shareholder owns all of the issued and outstanding capital stock of the Company; WHEREAS, the Company owns all of the issued and outstanding capital stock of the Domestic Subsidiary and ninety-nine (99%) percent of the issued and outstanding capital stock of the Foreign Subsidiary (the "Foreign Subsidiary's Shares"); WHEREAS, the Company and the Domestic Subsidiary are sometimes hereinafter referred to collectively as the "Selling Companies"; WHEREAS, the Selling Companies and the Foreign Subsidiary are sometimes hereinafter referred to as the "Companies"; WHEREAS, upon the terms and subject to the conditions contained in this Agreement, the Purchaser desires to purchase from the Selling Companies, and the Selling Companies desire to sell to the Purchaser, all of their assets (including the Foreign Subsidiary Shares) other than the Excluded Assets; and WHEREAS, an index of the meaning of capitalized terms is set forth in Schedule 1 hereof. NOW, THEREFORE, in consideration of the premises set forth above and the mutual covenants and agreements set forth herein, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.1 Purchase and Sale of Assets. (a) Upon the terms and subject to the conditions contained in this Agreement, on the closing of sale (the "Closing" and the "Closing Date") each of the Selling Companies shall sell, transfer, convey, assign and deliver to the Purchaser, and the Purchaser shall purchase from the Selling Companies, free and clear of all liens, security interest and encumbrances (other than the Assumed Monetary Liabilities and Assumed Contractual Liabilities) all of the assets of the Selling Companies except for the Excluded Assets including, without limitation, the following assets (collectively, the "Purchased Assets"): (i) All cash, cash equivalents, deposits and prepaid expenses; (ii) All accounts receivable excluding amounts due from any Affiliate of the Shareholder (collectively, the "Accounts Receivable"); 2 (iii) All inventory including, but not limited to, work-in-progress, raw materials and supplies (collectively, the "Inventory"); (iv) All trademarks, copyrights and patents and applications therefor, tradenames, engineering drawings and manuals, customer lists, telephone and fax numbers, catalogs, fliers, brochures and other advertising and promotional materials, books and records, software, databases, choses in action (including the rights of the Company in the action entitled "Retconn, Incorporated vs. Palco Connector, Inc., Harold Niver and John Maturo" more particularly described in item 4 of Schedule 4.12 (the "Palco Litigation")), trade secrets, all inventions whether or not patented or patentable, know how and all other intellectual and intangible property owned or used by the Selling Companies in the operation of their businesses (collectively, the "Intangible Property"); (v) Machinery, equipment, tools, vehicles, computers and office equipment, dies and molds, leasehold improvements (except those at the West Pearl Facility), furniture and fixtures and all other tangible personal property owned by the Selling Companies including, without limitation, the assets listed on Schedule 1.1(a)(v) (collectively, the "Fixed Assets"); (vi) All open sale and purchase orders made in the ordinary course of business and all material contracts 3 necessary to operate the businesses of the Selling Companies as presently conducted all of which are listed on Schedule 1.1(a)(vi) (the "Assumed Contracts"), but excluding the lease to the 199 West Pearl Road, Torrington, Connecticut facility of the Company and any Real Property in connection therewith (the "West Pearl Facility" and the "West Pearl Lease") and further excluding the employment agreements of those persons identified on Schedule 1.1(a)(vi)-1 (collectively, the "Senior Management Employment Agreements"); and (vii) The Foreign Subsidiary's Shares. (b) The Selling Companies shall retain all amounts due from any affiliated corporation, insurance rebates and refunds, tax refunds, insurance policy rebates or refunds, their corporate books, books of account, tax records and the items identified in Schedule 1.1(b) (collectively, the "Excluded Assets"). Section 1.2 Determination of Purchase Price. (a) The "Purchase Price" for the Purchased Assets shall be equal to the Closing Date Net Worth plus Eighteen Million Two Hundred Seventy Eight Thousand ($18,278,000) Dollars (the "Cash Portion of the Purchase Price") plus the Assumed Monetary Liabilities. (b) The "Closing Date Net Worth" of the Companies shall be equal to the value of the Purchased Assets as set forth on the Closing Date Balance Sheet of the Companies less the aggregate amount of liabilities set forth on the Closing Date Balance Sheet 4 of the Companies (the "Assumed Monetary Liabilities") as the same are finally determined in accordance with the procedures set forth below. (c) (i) The "Closing Date Balance Sheet" shall be a pro forma balance sheet of the Companies as of the close of business on the Closing Date, which balance sheet shall be prepared on a basis consistent with the Companies' balance sheet as at October 31, 1998 (the "Reference Balance Sheet") and in accordance with generally accepted accounting principles applied in a manner consistent with those used to prepare the Reference Balance Sheet as well as the year-end accounting conventions used to prepare the Companies' December 31, 1997 balance sheet except that (1) the amount, if any, included on the books of the Companies as good will or with respect to the Excluded Assets shall be excluded, (2) the parties have agreed upon a fixed reserve of Fifty Three Thousand ($53,000) Dollars for bad debts and the same shall be reported on the Closing Date Balance Sheet, (3) an accrual shall be made for vacation pay in accordance with the Companies' policy as set forth on Schedule 1.2(c)(i)(3), (4) the parties will jointly take physical inventory immediately after Closing using the methodology set forth on Schedule 1.2(c)(i)(4) and that inventory less an agreed upon fixed reserve for excess and obsolete inventory of One Million Two Hundred Eighty Three Thousand ($1,283,000) Dollars shall be reported on the Closing Date Balance Sheet (5) no severance or parachute payment amounts required to be paid by the Purchaser or the Selling Companies 5 pursuant to the provisions of Section 3.8 hereof or otherwise shall be accrued on the Closing Date Balance Sheet, (6) all costs and expenses incurred by the Company in connection with the preparation to move the West Pearl Facility in accordance with Section 3.9 shall not be accrued on the Closing Date Balance Sheet as such costs and expenses are to be paid by Purchaser pursuant to the provisions of Section 3.9 hereof, (7) no employee bonuses with respect to the period before Closing will be accrued as the same will be paid by the Shareholder pursuant to the provisions of Section 3.8, (8) the income taxes payable by the Companies to federal, state and local tax authorities and the income tax liability shown to be owing by the Companies to the Shareholder as well as income or transfer taxes payable by the Companies or the Shareholder by reason of the consummation of the transactions contemplated by this Agreement shall not be accrued on the Closing Date Balance Sheet, (9) no intercompany liability due to the Shareholder or any Affiliate of the Shareholder (including the Companies) will be accrued, (10) no change shall be made in the remaining useful life of any Purchased Asset based upon Purchaser's intention to take the same out of service, (11) the term loan debt allocated to the Companies by the Shareholder shall not be accrued on the Closing Date Balance Sheet and (12) no accrual shall be made for legal, accounting or finders fees incurred in connection with this Agreement and the consummation of the transactions contemplated hereby as the same will be paid by the Shareholder. 6 (ii) Within forty-five (45) days after the Closing Date, the Shareholder shall prepare and deliver to the Purchaser a proposed final Closing Date Balance Sheet (the "Proposed Closing Date Balance Sheet"), which shall be prepared in the manner set forth above. (iii) If within forty-five (45) days after the Purchaser's receipt of the Closing Date Balance Sheet (the "Review Period"), the Purchaser provides the Shareholder with a written notice of its disagreement with one or more items (individually a "Price Dispute" and collectively, the "Price Disputes") on the Proposed Closing Date Balance Sheet (a "Price Dispute Notice"), the Purchaser and the Shareholder shall exercise good faith efforts to resolve all matters set forth in the Price Dispute Notice during the thirty (30) day period (the "Resolution Period") following receipt by the Shareholder of the applicable Price Dispute Notice. The Price Dispute Notice shall include a detailed explanation with respect to each Price Dispute by the Purchaser. If all Price Disputes are resolved during the Resolution Period, the parties shall agree in writing to a final Closing Date Balance Sheet. If the Purchaser fails to deliver a Price Dispute Notice before expiration of the Review Period, the Closing Date Balance Sheet shall be deemed to be identical in all respects to the Proposed Closing Date Balance Sheet. (iv) If the Purchaser and the Shareholder are unable to resolve in writing all Price Disputes during the Resolution Period, either party may refer the unresolved Price Disputes to 7 KPMG Peat Marwick or such other accounting firm agreed upon by the parties (the "Firm"). The Firm shall be instructed promptly to select the individual believed by the Firm's management to be best suited to the engagement. (A) The Purchaser and the Shareholder shall have a period of sixty (60) days following the engagement of the Firm (as evidenced by the date of its written acceptance of the engagement) to prepare their submissions to the Firm, and each party shall provide to the other such access to its personnel, books and records with respect to the Companies or otherwise relating to the Price Disputes as is reasonably necessary to enable such other party to do so. Not later than sixty (60) days after the engagement of the Firm (as evidenced by the date of its written acceptance of the engagement), the Purchaser and the Shareholder shall submit simultaneous briefs to the Firm (with a copy simultaneously submitted to the other party) setting forth their respective positions regarding the unresolved Price Disputes, and not later than thirty (30) days after the submission of such briefs the Purchaser and the Shareholder shall submit simultaneous reply briefs (with a copy simultaneously submitted to the other). If a hearing is requested by either party, or if additional briefing, a hearing or other information is required by the Firm, the Firm shall give simultaneous notice thereof to the Purchaser and the Shareholder as soon as practicable, and the Purchaser and the Shareholder shall promptly respond with a view to minimizing any delay in the process. If 8 either party fails to timely submit such briefs, the Firm shall make its decision on the basis of such information, if any, as shall have been so submitted. (B) The Firm shall make a determination with respect to the Price Disputes referred to it and shall state in writing, in reasonable detail, the bases and reasons for its decision (which shall be based solely on presentations by the Shareholder and the Purchaser and not on any independent review). The Firm shall have the power to determine all issues regarding the Price Disputes referred to it, including, without limitation, procedure, arbitrability and waiver and shall be guided in reaching any decision by the terms of this Agreement. In no event shall the Firm determine, with respect to any Price Dispute, an amount that is outside the range of the amounts submitted by the Purchaser and the Shareholder. The Firm shall not have the authority to modify any provision of this Agreement, and no decision rendered by it shall have that effect. The determination by the Firm pursuant to the process described herein shall be conclusive and binding upon the parties. The fees and expenses of the Firm shall be shared equally by the Purchaser and the Shareholder. (v) If the Cash Portion of the Purchase Price as finally determined is more than the Estimated Cash Portion of the Purchase Price, then the Purchaser shall, within ten (10) business days after the Closing Date Balance Sheet becomes final and binding on the parties ("Payment Adjustment Date"), pay to 9 the Shareholder (by wire transfer of immediately available funds to the account specified by the Shareholder in Schedule 1.3) an amount in cash equal to the amount by which the Cash Portion of the Purchase Price exceeds the Estimated Cash Portion of the Purchase Price. If the Estimated Cash Portion of the Purchase Price paid at Closing shall have been greater than the Cash Portion of the Purchase Price as finally determined, then the Shareholder shall, pay to the Purchaser on the Payment Adjustment Date (by wire transfer of immediately available funds to an account specified in writing by the Purchaser) an amount in cash equal to the amount by which the Estimated Cash Portion of the Purchase Price exceeds the Cash Portion of the Purchase Price. All adjustment payments to be made pursuant to this Section 1.2(c) shall bear simple interest at the rate of six (6%) per cent per annum based on a year of 365 days from the Closing Date through the date of payment. Section 1.3 Estimated Cash Payment at Closing. (a) On the Closing Date the Purchaser shall pay to the Shareholder and to the other persons and firms designated on Schedule 1.3(a) by wire transfer of immediately available funds to the accounts specified in Schedule 1.3(a) an aggregate amount equal to Twenty Three Million Nine Hundred Thousand ($23,900,000) Dollars (the "Estimated Cash Portion of the Purchase Price"). (b) In addition, Purchaser will wire the amounts listed on Schedule 1.3(b) in accordance with the wire instructions set forth on Schedule 1.3(b). 10 Section 1.4 Assumption of Certain Liabilities. (a) In addition to paying the Cash Portion of the Purchase Price and the other payments required to be made by it pursuant to the provisions of this Agreement, the Purchaser shall assume at Closing and shall thereafter pay when due all of the other liabilities of the Companies of the nature and type to be accrued on the Closing Date Balance Sheet as provided in Section 1.2(c) above, all of which liabilities so assumed shall be accrued on the Closing Date Balance Sheet. (b) At Closing, the Purchaser shall also assume (i) all of the obligations of the Selling Companies under the Assumed Contracts accruing on or after the Closing Date (excluding, however, liabilities accruing on or after the Closing Date with respect to defaults or events occurring prior to the Closing Date, which with the giving of notice or the passage of time, or both, would constitute a default under any such Assumed Contract) and (ii) warranty obligations and obligations for customer returns customer returns, adjustments and repairs relating to products sold by the Companies in the ordinary course of business in conformity with the Selling Companies' warranty and return policies, such items referred to in (ii) of this Section not to exceed Two Hundred Thousand ($200,000) Dollars in the aggregate. The obligations referred to in (b)(i) and (b)(ii) of this Section are collectively referred to as the "Assumed Contractual Liabilities". 11 (c) Except as expressly provided in Section 3.8(a) or (b) with respect to certain Change in Control payments and severance obligations, Section 3.9 with respect to the West Pearl Facility relocation expenses and in Section 1.4(a) and (b) above, the Purchaser shall not be obligated to assume or become liable for, and shall not assume or become liable for, any of the liabilities, obligations, debts, contracts or other commitment of the Selling Companies of any kind whatsoever, known or unknown, fixed or contingent, including, without limitation, any environmental liability or obligation arising out of the condition of the Real Property at the Closing and any obligations of the Companies disclosed on Schedule 4.12 other than with respect to the Palco Litigation. ARTICLE II CLOSING Section 2.1 Time and Place. Upon the terms and subject to the conditions contained in this Agreement, the Closing of the transactions contemplated by this Agreement shall take place at the offices of Salon, Marrow & Dyckman, LLP, 685 Third Avenue, New York, New York 10017, at 10:00 a.m. local time, on February 5, 1999, or on the first Friday which follows, by at least one (1) week, the satisfaction of the conditions set forth in Sections 9.2(d), 9.2(g) and 9.2(h) hereof whichever is later, or at such other place, time and date as may be agreed upon by the parties. 12 Section 2.2 Deliveries by the Companies and the Shareholder. At the Closing, the Companies and the Shareholder shall deliver or cause to be delivered to the Purchaser the following: (a) Executed bills of sale and assignments of the Purchased Assets including patent assignments, in form and substance reasonably satisfactory to Purchaser and its counsel. (b) Copies of the Certificates of Incorporation of the Companies and the Shareholder as amended, certified as of the most recent practicable date by the Secretary of State of the State of its incorporation or, in the case of the Foreign Subsidiary by its Secretary or Assistant Secretary or other officer. (c) Certificates from the Department of Revenue of the State of Connecticut and the State of California as to the payment of taxes by the Company and the Domestic Subsidiary, respectively, such certificate to be dated as of the most recent practicable date. (d) A certificate of the Secretary or Assistant Secretary of the Shareholder and the Companies stating that (i) the resolutions referred to in Sections 4.1(b) and 5.1(b) were duly and validly adopted, have not been modified, revoked or rescinded in any respect and are in full force and effect on the Closing Date, (ii) the Certificates of Incorporation of the Companies and the Shareholder have not been amended or modified since the date of the certification referred to in Section 2.2(b). Attached to 13 such certificate shall be a true and correct copy of the By-Laws of the Companies and the Shareholder as in effect on the date hereof and at all times thereafter to and including the Closing Date. (e) The Shareholder's certificate referred to in Section 9.1(c). (f) The opinion of Companies' and the Shareholder's counsel referred to in Section 9.1(f). (g) Any material consents from third parties required in connection with the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby and thereby. (h) A Certificate of Amendment to the Certificates of Incorporation of each of the Selling Companies duly executed and in form to be filed changing its name to a name which does not contain any of the words or initials Retconn or S.T. Electronics and a certificate of amendment to the organization documents of the Foreign Subsidiary to a name designated by Purchaser which does not contain the letters SPM. (i) All other documents, instruments and writings required to be delivered by the Companies or the Shareholder to the Purchaser at the Closing pursuant to this Agreement or otherwise required or reasonably requested in connection herewith. Section 2.3 Deliveries by the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Shareholder, the Companies or their designees the following: 14 (a) Payment by wire transfers of immediately available funds of (i) the Estimated Cash Portion of the Purchase Price to the Shareholder or its designees in accordance with Schedule 1.3(a) and (ii) the Change in Control Payments required to be paid at Closing pursuant to the provisions of Section 3.8(a) hereof in accordance with Schedule 1.3(b). (b) A certificate of the Secretary or Assistant Secretary of the Purchaser stating that to the resolutions referred to in Section 6.2 were duly and validly adopted, have not been modified, revoked or rescinded in any respect and are in full force and effect on the Closing Date. (c) The officers' certificate referred to in Section 9.2(c). (d) The opinion of the Purchaser's counsel referred to in Section 9.2(e). (e) An Assumption Agreement whereby the Purchaser assumes and agrees to pay the Assumed Monetary Liabilities and assumes and agrees to perform the Assumed Contractual Liabilities including the obligations of the Companies under the Assumed Contracts, in form and substance reasonably satisfactory to the Shareholder and its counsel. (f) All other documents, instruments and writings required to be delivered by the Purchaser to the Shareholder at the Closing pursuant to this Agreement or otherwise required or reasonably requested in connection herewith. 15 ARTICLE III CERTAIN COVENANTS OF THE SHAREHOLDER AND THE PURCHASER Section 3.1 Confidentiality. (a) The Shareholder does hereby acknowledge that the Purchaser would be irreparably damaged if Confidential Information of the business and affairs of the Companies were disclosed or utilized on behalf of any person, firm, corporation or other business organization after the date hereof, and, if the transactions contemplated by this Agreement close, for a period of five (5) years after the Closing Date (the "Restricted Period"). The Shareholder covenants and agrees not to, and to use diligent efforts to cause its agents, employees, affiliates or associates (collectively, "Affiliates" (as the terms "affiliate" and "associate" are defined by the Rules and Regulations promulgated under the Securities Act of 1933, as amended) not to, except as required in the ordinary course of the business of the Companies prior to Closing, disclose or use any such Confidential Information. "Confidential Information" as used herein shall mean information disclosed by the Companies to the Shareholder, or developed or obtained by the Shareholder before the Closing Date relating to or concerning any of the products or processes of the Companies and the research, development, sale, distribution, marketing, maintenance, support and licensing of the same and the development and exploitation of proprietary rights relating thereto, whether or not any of the foregoing are patentable or copyrightable, including, without 16 limitation, all know-how, technical information, inventions, ideas, concepts, processes, procedures, operations, computer programs and software, research and development plans and results, data bases, specifications, documentation, algorithms, source codes, object codes, program listings, product platforms and architectures, concepts, screens, formats, "look and feel" of proprietary software, trade secrets, technology, product information, customer and supplier lists, financial information, business and marketing plans, the practices and methods of the Companies and marketing and other relationships between the Companies, their customers, employees, agents, consultants and independent contractors. Confidential Information shall not include information which (i) is disclosed in a printed publication available to the public, is otherwise in the public domain at the time of disclosure, or becomes publicly known through no wrongful act on the part of the Shareholder (ii) is obtained by the Shareholder lawfully from a third party who is believed by the Shareholder not to be under an obligation of secrecy to the Companies or the Purchaser and is believed to not be under any similar restrictions as to use or (iii) is generally disclosed to third parties by the Companies or Purchaser without similar restrictions on such third parties. (b) The Shareholder and the Selling Companies acknowledge that the violation by them of the foregoing covenant could not reasonably or adequately be compensated by damages in an action at law. Therefore, in addition to any other remedies or 17 sanctions provided by law, and without limiting the right of the Purchaser or its successors or assigns to pursue all other or legal and equitable rights available to them, the Purchaser shall have the right during the Restricted Period to compel specific performance hereof by the Shareholder and the Selling Companies or to obtain temporary and permanent injunctive relief against violations hereof by the Shareholder and the Selling Companies, and, in furtherance thereof, to apply to any court with jurisdiction over the parties hereto to enforce the provisions hereof. (c) In the event the Shareholder or the Selling Companies is served with legal process which in the opinion of its counsel requires it to disclose Confidential Information, then it will give notice thereof to the Purchaser to enable Purchaser to take whatever steps it deems appropriate at Purchaser's sole cost and expense to protect the confidentiality of such Confidential Information. (d) In the event the transactions contemplated by this Agreement close, then the Shareholder shall promptly request that all Confidential Information delivered to proposed purchasers of the Companies be returned to the Shareholder or that such proposed purchasers certify that they have destroyed the same. The Shareholder shall deliver such information and certifications to the Purchaser promptly after receipt of the same. In addition, the Shareholder shall assign to Purchaser all of the 18 Shareholder's rights under any confidentiality agreements which were executed by any such proposed purchaser. (e) At Purchaser's request, the Shareholder shall at Purchaser's expense, but only after authorization by Purchaser, undertake all commercially reasonable steps to obtain confidential treatment (to the extent the same may be available) for this Agreement and all agreements, instruments and documents executed in connection herewith, if any such agreements are required to be filed with any securities exchange, securities regulating agency or any similar body or organization governing the Shareholder. Section 3.2 Restrictive Covenant. (a) For and in consideration of the benefits to be derived, directly and indirectly, from this Agreement and the transactions contemplated hereby, the Shareholder covenants and agrees that for a period of three (3) years from and after the Closing Date (the "Non-Competition Period") it shall not directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of any business or Person engaged in the Defined Business or any business substantially similar thereto or competitive therewith anywhere in the world. (b) Notwithstanding the provisions of Subsection 3.2(a), the Shareholder shall not be prohibited from (A) the acquisition by asset purchase, stock purchase, merger, consolidation or otherwise of the business, properties, rights and assets of any 19 corporation, partnership or other business entity (a "Person") partially engaged in the Defined Business provided that (x) such activity does not exceed twenty-five (25%) percent of the total revenues of such Person for the fiscal year of such person immediately preceding the closing of such acquisition and (y) the annual revenues of such Person from the Defined Business do not exceed Five Million ($5,000,000) Dollars for the fiscal year of such person immediately preceding the closing of such acquisition (if the foregoing provisions are not satisfied, then the Shareholder shall sell or otherwise dispose of the portion of such Person engaged in the Defined Business within one (1) year following such acquisition); or (B) the direct or indirect ownership of not more than five percent (5%) of any class of debt or equity security of any Person engaged in the Defined Business provided that such security is traded on a national securities exchange or automated quotation system. For purposes hereof "Defined Business" shall mean the design, manufacture, sale and distribution of radio frequency connectors and cable assemblies. (c) The Shareholder and the Selling Companies covenant and agree that during the Non-Competition Period, they shall not solicit, encourage or induce any customer, supplier, agent, sales representative or Continuing Employee to discontinue his or its business relationships with the Purchaser; provided, however, that the foregoing shall not restrict the Shareholder or the Selling Companies from soliciting any Continuing Employee terminated by Purchaser after the date Purchaser gives notice of 20 termination to such Continuing Employee; and provided further, however, that the foregoing shall not apply to any employment related discussions between the Shareholder or the Selling Companies and any Continuing Employee that are initiated by such Continuing Employee at any time. A "Continuing Employee" shall mean any person employed by the Companies immediately prior to the Closing Date who accepts employment with the Purchaser; provided, however, any employee whose employment with the Purchaser is subsequently terminated by such employee shall not be considered a Continuing Employee three (3) months after his employment with the Purchaser has terminated. (d) The Shareholder and the Selling Companies covenant and agree that Purchaser's remedy at law for any breach of this Section 3.2 is inadequate and that, in the event of any such breach by the Shareholder or the Selling Companies, Purchaser shall be entitled to injunctive relief, without posting bond or other security, in addition to any other remedy at law, in equity or under this Agreement to which it may be entitled. Without limiting the generality of the preceding sentence, the parties acknowledge and agree that it is impossible to measure in money all of the damages that would accrue to Purchaser by reason of any breach of this Section 3.2. The Shareholder and the Selling Companies waive in advance any claim or defense, in any legal proceeding that may in the future be commenced by the Purchaser to enforce such provisions, that Purchaser has an adequate remedy at law, and the Shareholder and the Selling Companies agree not 21 to urge in any legal proceeding that an adequate remedy at law exists. (e) Notwithstanding anything in Section 12.3 to the contrary, this Section 3.2 is for the benefit of the Purchaser and each of its subsidiaries and Affiliates as currently existing or as are established at any time during the Non-Competition Period, and may be enforced by any such entity as if it had been a named party to this Agreement. (f) In the event that the provisions of this Section 3.2 shall be determined by a court of competent jurisdiction to be unenforceable under applicable laws as to that jurisdiction (the parties agreeing that such decision shall not be binding, res judicata or collateral estoppel in any other jurisdiction) for any reason whatsoever, then any such provision or provisions shall not be deemed void, but the parties hereto agree that said limits may be modified by the court and that said covenant contained in this Section 3.2 shall be amended in accordance with said modifications, it being specifically agreed by the Shareholder and the Purchaser that it is their continuing desire that this covenant be enforced to the full extent of its terms and conditions or if a court finds the scope of the covenant unenforceable, the court should redefine the covenant so as to comply with applicable laws. Section 3.3 Allocation of Purchase Price. (a) Annexed hereto as Schedule 3.3 is an allocation of the Estimated Purchase Price among the Purchased Assets and the 22 restrictive covenant of the Shareholder as agreed to by the parties based upon the Estimated Purchase Price set forth in Schedule 3.3 ("Agreed Allocation of Estimated Purchase Price"). The Purchase Price as finally determined in accordance with Section 1.2 shall be allocated by agreement of the parties within thirty (30) days thereof, in accordance with the character of each such adjustment, on a basis consistent with the Agreed Allocation of Estimated Purchase Price (the "Final Allocation") provided, however, if they cannot so agree, then such dispute shall be submitted to the Firm for determination as if it were a Price Dispute. (b) The Shareholder and the Purchaser agree to follow the Agreed Allocation of Estimated Purchase Price and the Final Allocation, when completed, for all purposes, including any federal, foreign, state, county or local income and franchise tax return filed by them subsequent to the Closing Date, and including the determination by the Shareholder and the Selling Companies of taxable gain or loss on the sale of the Purchased Assets and the determination by the Purchaser of its tax basis in the Purchased Assets. (c) The Shareholder, the Selling Companies and the Purchaser each covenants and warrants: (i) that in no tax return hereafter filed by it, or any of its successors or assigns, will it or any of its successors or assigns, treat the allocation of the aggregate consideration paid hereunder for the Purchased Assets and the 23 restrictive covenant of the Shareholder inconsistently with that set forth in this Section; and (ii) that in no tax audit, tax examination, tax review or tax litigation will it, or any of its successors or assigns, claim or assert that the allocation of the aggregate consideration paid hereunder for the Purchased Assets and the restrictive covenant of the Shareholder should be inconsistent with that set forth in this Section; provided, however, that the foregoing shall not be construed to prevent any of the parties from settling with the Internal Revenue Service if it challenges the allocation on such terms as a party may negotiate in its complete discretion. Section 3.4 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration, value added and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any real property transfer tax and any similar tax) shall be paid by the Purchaser when due, and the Purchaser will, at its own expense, file all necessary tax returns and other documentation with respect to all such taxes and fees, and, if required by applicable law, the Companies will join in the execution of any such tax returns and other documentation. The Purchaser shall furnish the Companies with all required resale certificates or other exemption certificates with respect to the Purchased Assets at or before Closing. 24 Section 3.5 Execution of General Release. Intentionally omitted. Section 3.6 Preparation of Final Tax Returns. The Shareholder shall at its expense prepare and file all the Federal, state and local tax returns required to be prepared for the Selling Companies' fiscal year ending December 31, 1998 and for following periods as required by law. Section 3.7 Access to Books and Records. Purchaser and Shareholder shall each grant the other and its representatives access to all books and records transferred to the Purchaser, retained by the Foreign Subsidiary or retained by the Shareholder, as the case may be, upon reasonable notice during regular business hours and will permit the other party and its representatives to copy the same to enable it to prepare the tax returns of the Companies, to respond to any governmental inquiries or for other good reason. Neither party shall destroy any of such books and records other than in accordance with its standard record retention policy without first providing the other sixty (60) days prior written notice of its intent to do so to enable the other party to take and preserve any such books and records. Section 3.8 Certain Employee Matters. (a) On or immediately after the Closing Date, the Purchaser agrees to offer employment to all of the Selling Companies' senior employees identified on Schedule 3.8 (collectively, "Senior Management Employees"). The Purchaser agrees on behalf 25 of the Selling Companies to pay on the Closing Date to the persons listed on Schedule 3.8(a) the amount due such person pursuant to the "Change in Control" provisions of his employment agreement as set forth on Schedule 3.8(a) ("Change in Control Payment") less applicable withholding and payroll taxes as determined by the Shareholder, which latter amount shall be paid to the Company for deposit by it with the applicable taxing authorities. All such payments to be made directly to such persons shall be conditioned at the Shareholder's or Purchaser's request upon the delivery of a release by such persons to the Shareholder, the Selling Companies and the Purchaser in form and substance reasonably satisfactory to them, failing which such Change in Control Payment shall be paid instead to the Shareholder. (b) The Purchaser shall offer continued employment to at least ninety (90%) per cent of all of the employees of the Selling Companies including the Senior Management Employees employed on the Closing Date. The Purchaser shall pay to the Shareholder on the Payment Adjustment Date the aggregate amount of severance due employees who are not offered employment by the Purchaser calculated in accordance with the Selling Companies' severance policy as set forth in Schedule 3.8(b). (c) If and to the extent permitted by the terms of its employee benefit plans, the Purchaser shall offer to all of the Selling Companies' employees that are hired by it, credit for their years of service with the Selling Companies for eligibility 26 and vesting purposes under the Purchaser's employee benefit plans. (d) The Shareholder shall cause the Selling Companies to give all appropriate notices to its employees by reason of the termination of their employment by the Companies which are required under Federal, state or local law including notices under COBRA. (e) The Selling Companies shall pay at Closing all bonuses due their employees through the Closing Date. Section 3.9 Relocation of West Pearl Road Facility. At the request of the Purchaser, the Company shall cooperate with the Purchaser at the Purchaser's expense to prepare to remove the operations of the Company conducted and the Purchased Assets located at the West Pearl Facility to the Purchaser's Watertown, Connecticut facility immediately following the Closing; provided, however, the Company shall not be obligated to take any action which would adversely affect the operation of its business if the transactions contemplated by this Agreement do not close. All costs and expenses incurred by the Company in connection with such preparations which were authorized or approved by Purchaser, including, but not limited to, employee overtime charges, shall be borne and paid for by the Purchaser regardless of whether the transactions contemplated by this Agreement close; provided, however, that the Shareholder shall be responsible for all costs and expenses associated with the surrender of the West Pearl Facility in accordance with the West Pearl Lease. 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES BY THE SHAREHOLDER WITH RESPECT TO THE COMPANIES The Shareholder hereby represents and warrants to the Purchaser as follows: Section 4.1 Organization, Authorization and Valid and Binding Agreement. (a) Each of the Company and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the State or Country of its incorporation and has the corporate power and authority to enter into this Agreement, to carry out the transactions contemplated hereby, to own and lease the properties and other assets it presently owns or leases and to carry on its business as presently conducted. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the shareholders of the Selling Companies and by each of the Boards of Directors of the Companies and the resolutions adopted by the shareholders of the Selling Companies and by each of the Boards of Directors of the Companies evidencing such authorization, a copy of which as certified by the Secretary or Assistant Secretary of each of the Companies was previously delivered to the Purchaser, were duly and validly adopted, and have not been modified, revoked or rescinded in any respect and are in full force and effect. No other corporate proceedings on the part of the Companies are necessary to 28 authorize this Agreement, or the transactions contemplated hereby. (c) This Agreement constitutes a valid and binding agreement of each of the Companies enforceable against each of the Companies in accordance with its terms. (d) The copies of the Certificate of Incorporation, and all amendments thereto, of each of the Companies, as certified by the Secretary of State of its incorporation or its Secretary or Assistant Secretary, and the By-Laws, as amended to date, of each of the Companies, a copy of which as certified by its Secretary or Assistant Secretary was previously delivered to the Purchaser, are true, complete and correct copies of the Certificate of Incorporation and By-Laws of each of the Companies, as amended and presently in effect. (e) Each of the Companies is duly licensed or qualified to do business as a foreign corporation and is in good standing in every domestic and foreign jurisdiction in which it is required to be so licensed or qualified except where failure to so qualify would not have a material adverse effect on its condition (financial or otherwise), assets, liabilities, earnings, prospects or business ("Material Adverse Effect"). A correct and complete list of such jurisdictions is set forth in Schedule 4.1(e). Section 4.2 Capitalization of the Foreign Subsidiary. The authorized capital stock of the Foreign Subsidiary consists solely of 1,000,000 shares of common stock, having a par value of 29 RM 1.00 each, of which a total of 200,000 shares are outstanding. All of the Foreign Subsidiary's shares are duly authorized, validly issued and outstanding, fully paid and non assessable. There are no outstanding (i) options, warrants, convertible debentures or other securities or rights to purchase or acquire any capital stock of the Foreign Subsidiary or (ii) contracts, commitments, agreements, understandings, arrangements or restrictions to which the Foreign Subsidiary, the Company or the Shareholder is a party or by which any one or more of them is bound relating to any shares of capital stock or other securities of the Foreign Subsidiary (including the Foreign Subsidiary's Shares). The Company owns 198,000 shares of the common stock of the Foreign Subsidiary free and clear of all liabilities, obligations, claims, liens, charges, pledges, encumbrances and restrictions of any kind whatsoever. The remaining 2,000 shares of the issued and outstanding common stock of the Foreign Subsidiary is owned by Ong ai Leng and Rizal Hafiz bin Ruslan subject to a trust agreement in favor of the Company, a true and correct copy of which has been delivered to the Purchaser. Section 4.3 No Equity Investments or Subsidiaries. (a) Except for the Domestic Subsidiary and the Foreign Subsidiary, the Company does not own nor does it have the right to acquire any interest in any other corporation, limited liability company, joint venture, partnership, limited partnership or any other business organization. 30 (b) Neither the Domestic Subsidiary nor the Foreign Subsidiary owns nor does it have the right to acquire any interest in any other corporation, limited liability company, joint venture, partnership, limited partnership or any other business organization. Section 4.4 Consents; No Violation. Except as set forth in Schedule 4.4, neither the execution or delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the compliance with any of the provisions hereof, (i) violates any statute or law or any rule, regulation, order, award, judgment or decree of any court or governmental authority, affecting any of the Companies in any way, (ii) violates or conflicts with or constitutes a default under any contract, commitment, agreement, understanding, arrangement, trust or restriction of any kind to which any of the Companies is a party, by which any of them is bound or which otherwise in any way affects any of them, (iii) will cause, or give any persons valid grounds to cause (with or without notice, the passage of time or both), the maturity of any debt, any liability or obligation of any of the Companies to be accelerated, or will increase any such liability or obligation, (iv) requires any filing with, the notification of, or the obtaining of any permit, authorization, consent or approval of any third party or governmental or regulatory authority, foreign or domestic, or (v) violates or conflicts with the Certificate of Incorporation or By-Laws, as amended, of any of the Companies. 31 Section 4.5 Financial Statements. (a) Annexed hereto as Schedule 4.5(a) are the internally prepared and unaudited consolidated balance sheet of the Companies as of December 31, 1996, December 31, 1997 and October 31, 1998 accompanied by an officer's certificate and the related internally prepared and unaudited consolidated statements of income, stockholders' equity and cash flow of the Companies for the years or period then ended (collectively, the "Companies' Financial Statements"). The balance sheets included in the Companies' Financial Statements are correct and complete and fairly present the financial position and assets and liabilities (whether absolute or accrued) of the Companies as of the respective dates thereof, in accordance with generally accepted accounting principles applied on a consistent basis except (i) no accrual for vacation pay was made, (ii) the reserve for obsolete and excess inventory items was calculated using a method different than the method agreed to by the parties for the purpose of determining the Closing Date Net Worth, (iii) the accruals for Federal income tax liabilities and term loan indebtedness do not reflect legal obligations of the Companies and (iv) there are no footnotes to the Companies' Financial Statements except as to commitments and contingencies with respect to the October 31, 1998 Companies' Financial Statement, and the statements of income, stockholders' equity and cash flow included in the Companies' Financial Statements are correct and complete and fairly present the results of operations and changes in cash flow of the Companies for the periods 32 indicated, in accordance with generally accepted accounting principles applied on a consistent basis except that (i) no accrual for vacation pay was made, (ii) the reserve for obsolete and excess inventory items was calculated using a method different than the method agreed to by the parties for the purpose of determining the Closing Date Net Worth, (iii) corporate overhead charges and allocations (including Federal taxes and interest) imposed by the Shareholder or the Companies may not accurately reflect the value of the goods and services provided by the Shareholder or the Companies or the legal obligations of the Companies and (iv) there are no footnotes to such Financial Statements except as to commitments and contingencies with respect to the October 31, 1998 Financial Statement. (b) Annexed hereto as Schedule 4.5(b) is the internally prepared and unaudited balance sheet of the Foreign Subsidiary as of October 31, 1998 accompanied by an officer's certificate (the "Foreign Subsidiary's Reference Balance Sheet"). The Foreign Subsidiary's Reference Balance Sheet is correct and complete and fairly presents the financial position and assets and liabilities (whether absolute or accrued) of the Foreign Subsidiary as of the date thereof in accordance with generally accepted accounting principles applied on a basis consistent with those used to prepare the Companies' Financial Statements except that (i) no accrual for vacation pay was made, (ii) no accruals were made for certain expenses incurred by the Company and the Domestic 33 Subsidiary on behalf of the Foreign Subsidiary, (iii) there are no footnotes to the Foreign Subsidiary's Reference Balance Sheet except as to commitments and contingencies and (iv) all intercompany assets and liabilities are separately identified. The Companies' Financial Statements and the Foreign Subsidiary's Reference Balance Sheet are herein sometimes collectively referred to as the "Financial Statements." Section 4.6 Absence of Certain Changes. Except as and to the extent set forth in Schedule 4.6 or as disclosed or reflected in the October 31, 1998 Financial Statements referred to in Section 4.5, since October 31, 1998, none of the Companies has: (i) suffered any material adverse change in its working capital, financial condition, assets, liabilities, or to the Best Knowledge of the Shareholder, its business or prospects; (ii) experienced any material labor relations difficulty, or suffered any material casualty loss (whether or not insured); (iii) made any material change in its business or operations or in the manner of conducting its business other than changes in the ordinary course of business; (iv) incurred any obligations or liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), except items incurred in the ordinary course of business and consistent with past practice, or experienced any change in any assumptions underlying or methods of calculating any bad debt, contingency or other reserves; (v) permitted or allowed any of its properties or assets (whether real, personal or mixed, tangible or intangible), to be 34 mortgaged, pledged or subjected to any lien or encumbrance, except liens or encumbrances for taxes not yet delinquent; (vi) sold, transferred or conveyed any of its properties or assets (whether real, personal or mixed, tangible or intangible), except in the ordinary course of business and consistent with past practice; (vii) granted any increase in the compensation of any officer or employee (including, without limitation, any increase pursuant to any bonus, pension, profit sharing or other plan or commitment) or instituted or adopted any new benefit programs, plans or other arrangements for officers or employees, and no such increases (other than annual salary and bonus reviews) or new programs, plans or arrangements are customary on a periodic basis or required by agreement or understanding; (viii) made any pension, retirement, profit-sharing, bonus or other employee welfare or benefit payment except in the ordinary course of business consistent with past practices; (ix) declared, paid or made or set aside for payment or making, any dividends or other distribution in respect of its capital stock or other securities, or directly or indirectly redeemed, purchased or otherwise acquired any of its capital stock or other securities; (x) made any material change in any method of accounting or accounting practice; (xi) paid, loaned or advanced any amount to or in respect of, or sold, transferred or leased any properties or assets (whether real, personal or mixed, tangible or intangible) to, or entered into any agreement, arrangement or transaction with, the Shareholder, any of the officers or 35 directors of the Companies, or any Affiliate thereof; (xii) subdivided or in any way reclassified any shares of its capital stock; (xiii) released or waived any material right; or (xv) agreed, whether in writing or otherwise, to take any action described in this Section 4.6. For purposes of this Agreement "Best Knowledge of the Shareholder" or "Knowledge of the Shareholder" or words of similar import shall mean actual knowledge of the Shareholder after due inquiry is made by the Shareholder of the persons and firms listed on Schedule 4.6-1 and the books and records of the Companies. Section 4.7 Certain Tax Matters. (a) Each of the Companies has duly filed all Tax Returns required to be filed by it. All such Tax Returns are true, correct and complete, and each of the Companies has duly paid or made provision for the payment of all Taxes which are shown to be due and payable on such Tax Returns. True and correct copies of all Tax Returns for all periods with respect to which the assessment or collection of tax by the applicable taxing authority is not barred by the applicable statute of limitations have previously been delivered or made available to the Purchaser. Since October 31, 1998, none of the Companies has incurred any liabilities for Taxes other than in the ordinary course of business. There are no liens with respect to Taxes (other than liens with respect to personal property taxes and real property taxes not yet delinquent) upon any of the properties or assets, real, personal or mixed, tangible or 36 intangible, of the Companies. To the Best Knowledge of the Shareholder, except as accurately and completely described in Schedule 4.7, there are no pending questions relating to, nor claims asserted for, Taxes against any of the Companies, and, to the Best of the Shareholder's Knowledge, there is no valid basis for any such question or claim. Except as set forth in Schedule 4.7, none of the Companies has granted any extension of the limitation period applicable to any claim for Taxes for any period. (b) Each of the Companies has withheld from its employees and any other applicable payees (and timely paid to the appropriate governmental entity) proper and accurate amounts for all periods through the date hereof in compliance with all tax withholding provisions of applicable federal, state, local and foreign laws (including, without limitation, income, social security and employment tax withholding for all types of compensation, and withholding on payments to non-United States persons). (c) For purposes of this Agreement, (i) "Taxes" means all taxes, however denominated, including any interest, penalties or additions to tax that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political sub division of any such government, which taxes shall include, without limiting the generality of the foregoing, all income taxes (including, but not limited to, United States federal income taxes and state income taxes), 37 payroll, employee and other withholding taxes, unemployment insurance, social security, sales and use taxes, excise taxes, franchise taxes, net worth taxes, gross receipts taxes, occupation taxes, real and personal property taxes, stamp taxes, transfer taxes, workers' compensation and other obligations of the same or of a similar nature whether arising before, on or after the Closing Date, and (ii) "Tax Returns" means all reports, elections, estimates, information statements and returns relating to, or required to be filed in connection with, any Taxes pursuant to the statutes, rules and regulations of any Federal, state, local or foreign government taxing authority. Section 4.8 Title to Properties; Encumbrances; Sufficiency of Property. (a) Other than with respect to the Companies' intellectual property rights as to which representations are made in Section 4.11 hereof and except as set forth in Schedule 4.8(a), each of the Companies has good title to all of its respective properties and assets, real, personal and mixed, tangible and intangible, including, without limitation, all the properties and assets reflected in the October 31, 1998 Financial Statements (except assets collected, consumed or disposed of since October 31, 1998 in the ordinary course of business and consistent with past practice). None of such properties or assets (or any other properties or assets used in the business of the Companies) are subject to any mortgage, pledge, lien, security interest, conditional sale agreement, encumbrance or charge of any kind, 38 except (i) liens set forth on Schedule 4.8(a), (ii) liens shown on the October 31, 1998 Financial Statements (iii) liens in favor of First Union National Bank, N.A. (successor to First Union Bank of Connecticut) for itself and as agent for Fleet National Bank (the "Bank") and (iv) liens for current taxes not yet delinquent and taxes for which adequate provision is made in the Reference Balance Sheet. (b) None of the Companies owns any real property. (c) Except as set forth on Schedule 4.8(c), the Purchased Assets constitute all of the assets necessary to enable Purchaser to operate the Defined Business as a going concern in substantially the same manner as such Defined Business has heretofore been conducted by the Companies. (d) The Companies conduct the Defined Business on parcels of real property including, without limitation, their soils, surface and ground waters and buildings (collectively, the "Real Property") that are leased by the Companies, which are described in Schedule 4.8(a); the Companies have no other branches or representative offices. Except as described in Schedule 4.8(a), no party other than the Companies holds any lease, license or other right to own or occupy any of the Real Property. (e) To the Best Knowledge of the Shareholder, no defect or condition of the Real Property or the soil or geology of such property exists which will impair its current or planned use. To the Best Knowledge of the Shareholder, the buildings on the Real Property do not contain any friable asbestos and, except as set 39 forth on Schedule 4.8(e), there are no underground storage tanks located on the Real Property. (f) No notice of violation of the applicable laws or of any covenant, condition, restriction or easement affecting the Real Property or its use or occupancy has been received by the Companies from any governmental entity or other person entitled to enforce the same. (g) No written notice has been received by the Companies as to any plan, study, or effort by any governmental entity which may adversely affect the current or planned use of the Real Property. (h) No notice has been received by the Companies as to any: (i) public improvement that may involve an assessment being levied, or which may result in the creation of a lien on the Real Property; (ii) intended or proposed law (including, but not limited to, zoning changes or variances) that may adversely affect the current or planned use or occupancy of the Real Property, or (iii) suit, action, claim, or legal, administrative, or other proceeding or investigation or remediation pending, threatened or contemplated, affecting or arising in connection with the Real Property. (i) No written notice has been received by the Companies that there is any existing or contemplated plan to construct, modify or realign any street, highway, power lines, or pipelines 40 or any proposed or eminent domain proceeding, which would result in the taking of any part of the Real Property, or would adversely affect its current or planned use. (j) No written notice has been received by the Companies that there are encroachments from the Real Property of any improvements on to any adjoining property or on to the Real Property from any adjoining property. (k) No written notice has been received by the Companies that the present conduct of the Defined Business and the ownership, occupancy, use and operation of the Real Property violates any deed, lease or applicable zoning, city planning and building statutes, laws, ordinances, rules and regulations. Section 4.9 Leasehold Improvements, Machinery, Equipment and Furniture. Except as set forth in Schedule 4.9, all leasehold improvements, machinery, equipment and furniture owned or leased by the Companies and which are currently used are structurally sound with no material defects, in good operating condition and repair (ordinary wear and tear excepted) and usable in the ordinary course of business. None of the Companies has received notification that it is in material violation of any applicable building, zoning, environmental, health, safety or other law, ordinance or regulation in respect of any of its assets or their operation, which violation remains uncured, and, to the Best Knowledge of the Shareholder, no such material violation exists. 41 Section 4.10 Computer Programs, Databases and Software. Schedule 4.10 accurately identifies all significant computer programs (other than standard packaged software for personal computers) owned or licensed by any of the Companies and currently used in connection with the operation of the Defined Business of the Companies. Except as noted on Schedule 4.10, to the Best Knowledge of the Shareholder, such programs are Year 2000 Compliant. For purposes of this Agreement, "Year 2000 Compliant" shall mean that data using dates later than December 31, 1999 will be correctly processed in any level of computer hardware or software including, but not limited to, embedded hardware, microcode, firmware, application programs, files and databases. Except as described in Schedule 4.10, all of the Purchased Assets, and all of the products and services currently being manufactured or provided by the Companies, are Year 2000 Compliant. Section 4.11 Patents, Trademarks, Copyrights. Schedule 4.11 identifies each patent, trademark and copyright owned by any of the Companies (collectively, the "Registerable Intellectual Property Rights"). Except for the lien of the Bank, each of the Companies has good title to, and is the sole owner of, its respective Registerable Intellectual Property Rights free and clear of all liens, claims and encumbrances. Except as set forth in Schedule 4.11-1, none of the Companies has any pending application for any Registerable Intellectual Property Rights (collectively, the "Pending Intellectual Property Rights 42 Applications"). None of the Companies licenses any of its intellectual property rights to others, and, except for software licenses, none of the Companies licenses intellectual property rights owned by others. Except as set forth in Schedule 4.11, no party has claimed or asserted or, to the Best Knowledge of the Shareholder, threatened that any of the Products, nor any processes, methods, designs, formulae, know-how, trade secrets, proprietary information, trademarks, service marks, trade dress, trade styles, logos, trade names, assumed names, copyrights, or designations used by any of the Companies, infringe any patents, trademarks, copyrights, confidential or proprietary rights or any other rights, of another. None of the Companies have covenanted not to assert against any third party any rights relating to the intellectual property used or held for use in the Defined Business. None of the intellectual property rights owned by the Companies has been declared invalid or is the subject of a pending or, to the Knowledge of the Shareholder, threatened action for cancellation or a declaration of invalidity, or opposition proceeding, nor to the Best of the Shareholder's Knowledge is there any basis upon which such a claim or challenge could be made, and there is no pending judicial proceeding involving any claim, and, except as set forth on Schedule 4.11, to the Best of the Shareholder's Knowledge, neither the Companies nor any of their Affiliates has received written notice or claim of any infringement, misuse or misappropriation of any patent, trademark, trade name, copyright, license or similar intellectual 43 property right owned by any third party. All maintenance, renewal or other similar fees currently due and required by the applicable governmental entity to maintain in effect all the Companies' registered intellectual property rights have been paid, and no such fee or any fine is due with respect thereto. Section 4.12 Litigation. Except as set forth in Schedule 4.12, there is no claim, action, suit, proceeding or investigation pending or, to Best Knowledge of the Shareholder, threatened against or affecting any of the Companies or the transactions contemplated hereby. Section 4.13 Insurance. Schedule 4.13 sets forth a complete and accurate list of all policies (including their respective expiration dates) of fire, liability, product liability, workmen's compensation, health, title and other forms of insurance presently in effect with respect to the Companies. All such policies (i) are valid, outstanding and enforceable policies and (ii) will remain in full force and effect at least through the respective dates set forth in Schedule 4.13 or the Closing Date, whichever is earlier, without the payment of additional premiums other than additional premiums in the ordinary course prior to Closing. Section 4.14 Employee Benefit Plans. (a) Definitions. (1) Benefit Arrangement. "Benefit Arrangement" shall mean any employment, consulting, severance or other similar contract, arrangement, policy or plan and each plan, arrangement 44 (written or oral), program, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Internal Revenue Code of 1986, as amended (the "Code") providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is, or within the prior five years was, entered into, maintained, contributed to or required to be contributed to by any of the Companies, an ERISA Affiliate, or any predecessor thereof, or under which any of the Companies, or any ERISA Affiliate, may incur any liability, and (C) covers or covered any employee or former employee, independent contractor or former independent contractor, officer, director or agent of any of the Companies, or any ERISA Affiliate. (2) Employee Plans. "Employee Plans" shall mean collectively all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. (3) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 45 (4) ERISA Affiliate. "ERISA Affiliate" shall mean (A) any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with or under "common control" with the Company as defined in Section 414(b) or (c) of the Code, or (B) any entity which is (or at any relevant time was) a member of an "affiliated service group" (as such term is defined in Section 414(m) of the Code) which includes the Companies. (5) Multiemployer Plan. "Multiemployer Plan" shall mean any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA (A) which any of the Companies or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which any of the Companies, or any ERISA Affiliate, may incur any liability and (B) which covers any employee or former employee, officer, director or agent of the Company or any ERISA Affiliate. (6) PBGC. "PBGC" shall mean the Pension Benefit Guaranty Corporation. (7) Pension Plan. "Pension Plan" shall mean any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which is or was maintained, administered, contributed to or required to be contributed to, by any of the Companies, any ERISA Affiliate or any predecessor thereof or under which any of the Companies, or any ERISA Affiliate, may incur any liability and (B) which covers 46 or covered any employee or former employee, officer, director or agent of any of the Companies, any ERISA Affiliate or any predecessor thereof. (8) Welfare Plan. "Welfare Plan" shall mean any "employee welfare benefit plan" as defined in Section 3(1) of ERISA (A) which any of the Companies, or any ERISA Affiliate, maintains, administers, contributes to or is required to contribute to, or under which the Company, or any ERISA Affiliate, may incur any liability and (B) which covers any employee or former employee, independent contractor or former independent contractor, officer, director, or agent of any of the Companies or any ERISA Affiliate. (b) Disclosure; Delivery of Copies of Relevant Documents and Other Information. Schedule 4.14(b) contains a complete list of Employee Plans. True and complete copies of each of the following documents have heretofore been delivered or made available by the Companies to Purchaser: (i) each Welfare Plan, Pension Plan and Multiemployer Plan (and, if applicable, related trust, funding and investment agreements) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been distributed to the Companies', or any ERISA Affiliate's, employees and all annuity contracts or other funding instruments, (ii) each Benefit Arrangement (and, if applicable, related trust, funding or investment agreement), including written interpretations thereof and written descriptions thereof which have been distributed to 47 the Companies', or any ERISA Affiliate's, employees (including descriptions of the number and level of employees covered thereby) and a complete description of any such Benefit Arrangement which is not in writing, (iii) the most recent determination letter issued by the Internal Revenue Service with respect to each Pension Plan, (iv) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan, (v) all actuarial reports prepared for the last three plan years for each Pension Plan, (vi) a description of complete age, salary, service and related data as of the last day of the last fiscal year for employees and former employees of the Companies and each ERISA Affiliate, and (vii) a description setting forth the amount of any liability of any of the Companies as of the Closing Date for payments more than thirty days past due with respect to each Welfare Plan. (c) Representations and Warranties. Except as set forth in Schedule 4.14(c): (1) Pension Plans. (A) No Pension Plan is or has ever been subject to (A) the minimum funding requirements of ERISA or the Code or (B) Title IV of ERISA. None of the Companies nor any ERISA Affiliate has, or will as of the Closing Date have, any liability for unpaid contributions with respect to any Pension Plan. (B) Each Pension Plan which is intended to be a tax-qualified plan as described in Section 401(a) of the Code, 48 and each related trust agreement, annuity contract or other funding instrument, has been established and operated so as to be qualified and tax-exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) from its adoption to date. To the Best Knowledge of the Shareholder, nothing has occurred or, in connection with the transaction contemplated by this Agreement, will occur, that could adversely affect the qualified status of any such Pension Plan. (C) Each Pension Plan and each related trust, funding or investment agreement, annuity contract or other funding instrument presently complies and has been maintained in compliance with its terms and, both as to form and in operation, in all material respects with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including but not limited to ERISA and the Code. (D) None of the Companies, nor any ERISA Affiliate, has engaged in, or is a successor or parent corporation to, an entity that has engaged in a transaction described in Section 406 of ERISA. (2) Multiemployer Plans. None of the Companies, any ERISA Affiliate nor any predecessor thereof has, at any time, been a party to or withdrawn from a Multiemployer Plan in a "complete withdrawal" or a "partial withdrawal" as defined in Sections 4203 and 4205 of ERISA, respectively. 49 (3) Welfare Plans. (A) Each Welfare Plan has been maintained in material compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including but not limited to ERISA and the Code. (B) None of the Companies, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment pursuant to any retiree medical benefit plan or other retiree Welfare Plan. (C) Each Welfare Plan which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with the provisions of Part 6 of Title I of ERISA and Sections 162(l) and 4980B of the Code at all times. (4) Benefit Arrangements. Each Benefit Arrangement has been maintained, in all material respects, in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including but not limited to ERISA and the Code. (5) Effect of Transaction. The execution of and performance of the transactions contemplated by this Agreement will not constitute an event under any Employee Plan or agreement that will result in any payment (whether severance pay or otherwise), acceleration, vesting or increase of benefits with 50 respect to any employee, former employee, independent contractor or former independent contractor, officer, director or agent of any of the Companies or any ERISA Affiliate. (6) Unrelated Business Taxable Income. No Employee Plan (or trust or other funding vehicle pursuant thereto) is subject to any tax under Code Section 511. (7) Deductibility of Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of any of the Companies, or any ERISA Affiliate, that, individually or collectively, provides for the payment by any of the Companies, or any ERISA Affiliate, of any amount (i) that is not deductible under Section 162(a)(1) or 404 of the Code or (ii) on account of a change in ownership or effective control as described in Section 280G of the Code. (8) Fiduciary Duties and Prohibited Transactions. None of the Companies, any ERISA Affiliate, nor any plan fiduciary of any Welfare Plan or Pension Plan has engaged in or, in connection with the transaction contemplated by this Agreement, to the Best Knowledge of the Shareholder, will engage in, any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Code. (9) Validity and Enforceability. Each Welfare Plan, Pension Plan, related trust agreement, annuity contract or other 51 funding instrument and Benefit Arrangement is legally valid and binding and in full force and effect. (10) Litigation. None of the Companies, any ERISA Affiliate nor any Employee Plan of the Company or of any ERISA Affiliate is a party to any litigation relating to or seeking benefits under any Employee Plan, nor, to the Best Knowledge of the Shareholder, do there exist any facts or events which could form the basis for any such litigation. (11) No Amendments. None of the Companies, nor any ERISA Affiliate, has any announced plan or legally binding commitment to create any additional Employee Plans or to amend or modify any existing Employee Plan. (12) No Other Material Liability. To the Best Knowledge of the Shareholder, no event has occurred in connection with which any of the Companies or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (i) under any statute, regulation or governmental order relating to any Employee Plans or (ii) pursuant to any obligation of any of the Companies or any ERISA Affiliate to indemnify any person against liability incurred under any statute, regulation or order as they relate to the Employee Plans. Section 4.15 Bank Accounts. Schedule 4.15 sets forth the names and locations of all banks in which each of the Companies has an account or safe deposit box and the names of all persons authorized to draw thereon or to have access thereto. All cash 52 and cash equivalents to be listed on the Closing Date Balance Sheet will be deposited in said accounts and safe deposit boxes. Section 4.16 Contracts and Commitments. (a) Schedule 4.16(a) sets forth a true and complete list of all Material Contracts, judgment, orders or decrees by which any of the Companies or its assets or its employees are bound. A "Material Contract" shall mean (whether written or oral) (i) any contract involving the payment of more than Fifty Thousand ($50,000) Dollars in the aggregate, (ii) any contract which restricts or limits in any way the manner in which any of the Companies conducts its business or uses its assets (other than restrictions regarding the use of assets leased by the Companies which are contained in those leases) or restricts or limits the activities of any of its employees, (iii) any license to or by any of the Companies of intellectual property rights (other than standard software licenses associated with commercial off the shelf software used by the Companies), (iv) any lease of real property, (v) any lease of personal property whose remaining term exceeds one (1) year or which may require the payment of more than twenty-five thousand ($25,000) dollars during the remaining term thereof, (vi) any sales, representative, sales agency, dealership, distribution, marketing, advertising or similar contract, (vii) any contract whose remaining term exceeds one (1) year or which may require the payment of money or the delivery of products or services the aggregate value of which will or may reasonably be expected to exceed Fifty Thousand ($50,000) Dollars 53 during the remaining term thereof, (viii) any employment or consulting contract, (ix) any contract with a labor union, (x) any note, guaranty or other instrument issued to a creditor of any of the Companies and any agreement executed in connection therewith, and (xi) any contracts with or other arrangements with Affiliates. Except as set forth in Schedule 4.16(a), the legal enforceability after the Closing Date by the Companies or any of them of any Material Contract will not be affected in any manner by the execution and delivery of this Agreement, nor by the consummation of the transactions contemplated hereby and thereby. (b) Except as set forth in Schedule 4.16(b), none of the Companies is in default, and, to the Best Knowledge of the Shareholder, no other party is in default and there is no basis for any valid claim of default against the Companies, in any material respect under any Material Contract. (c) To the Best Knowledge of the Shareholder no contract or bids were bid at a loss. No progress payments or deposits have been received by the Companies with respect to any Material Contract. Section 4.17 Labor Relations. (a) Except as and to the extent set forth in Schedule 4.17: (i) no collective bargaining agreement presently covers (nor has any, in the past, covered) any employees of any of the Companies, nor is any currently being negotiated by any of the Companies; (ii) each of the Companies is in material compliance with all federal, state and local laws, including, without limitation, the 54 rules and regulations of the Department of Labor and the Office of Federal Contract Compliance Programs, respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice; (iii) there is no unfair labor practice complaint against any of the Companies pending or, to the Best Knowledge of the Shareholder, threatened before the National Labor Relations Board; (iv) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the Best Knowledge of the Shareholder, threatened against or involving any of the Companies; (v) no attempt to organize any group or all of the employees of any of the Companies has been made or proposed in the past three (3) years; (vi) no charges with respect to or relating to any of the Companies are pending before the Equal Employment Opportunity Commission or any state, local or foreign agency responsible for the prevention of unlawful practices; (vii) none of the Companies has received notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation of or relating to any of the Companies and no such investigation is in progress; (viii) no private agreement restricts any of the Companies from relocating, closing or terminating any of its operations or facilities; and (ix) none of the Companies has in the past three (3) years experienced any work stoppage or other labor difficulty or committed any unfair labor practice. 55 (b) The employee policy manual heretofore delivered to the Purchaser contains all material current employee policies which have been communicated to the employees of the Companies and/or by which the Companies are bound. (c) Annexed hereto as Schedule 4.17(c) is a list as of a recent date of the employees of the Companies and their date of hire. Section 4.18 Compliance with Applicable Law. (a) Except as set forth in Schedule 4.18(a), none of the Companies has in the past been, nor is it presently, in material violation of, except violations which have been waived or cured and which have not recurred and with respect to which there is no ongoing liability, in respect of its operations, real property, intellectual property, equipment and all other aspects of its businesses, any applicable law (whether statutory or otherwise), rule, regulation, order, ordinance, judgment or decree of any governmental authority (federal, state, local or otherwise) (collectively, "Laws"), including but not limited to the Federal Occupational Safety and Health Act, the Worker Adjustment Retraining and Notification Act, the Americans With Disabilities Act, the Foreign Corrupt Practices Act and ERISA. (b) Except as described in Schedule 4.18(b), none of the Companies has received any notification of any asserted present or past material failure of it to comply with any of such Laws, except failures of compliance which have been waived or cured and 56 which have not recurred and with respect to which there is no ongoing liability. Section 4.19 Environmental Matters. (a) Definitions. (1) "Environmental Proceedings" means any and all administrative, regulatory or judicial actions, orders, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating to any Environmental Law or Environmental Permit or Hazardous Substance, including, without limitation, (A) any and all Environmental Proceedings by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (B) any and all Environmental Proceedings by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Substances or arising from alleged injury or threat of injury to the environment. (2) "Environmental Laws" means collectively any federal, state, or local statute, law, rule, regulation, ordinance, code, policy or rule of common law in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment or Hazardous Substances, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability 57 Act of 1980, as amended by the Super-Fund Amendments and Reauthorization Act of 1986, 42 U.S.C. 9601 et seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. 11001 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq.; the Clean Air Act, as amended, 42 U.S.C. 7401 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. 136 et seq.; the Safe Drinking Water Act, 42 U.S.C. 300f et seq.; the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. 1001 et seq.; or the Hazardous Materials Transportation Act, as amended, 49 U.S.C. 1801 et seq.; and the corresponding state laws, regulations and local ordinances, etc. which may be applicable, as any such laws, rules, regulations, etc. have been be amended. (3) "Environmental Permits" means collectively all permits, approvals, identification numbers, licenses and other authorizations required under any applicable Environmental Law. (4) "Hazardous Substances" means collectively (A) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes", "toxic substances," "toxic pollutants," "hazardous air pollutants," "pollutants," "contaminants," "toxic chemicals," "petroleum or petroleum products," "toxics," "hazardous chemicals," "extremely hazardous substances," "pesticides," "polychlorinated biphenyls" or related materials, 58 as now or in the past defined in any applicable Environmental Law; (B) any petroleum or petroleum products, natural or synthetic gas, radioactive materials, asbestos-containing materials, urea formaldehyde foam insulation and radon; and (C) any other chemical, material or substance exposure to which is prohibited, limited or regulated by any governmental authority. (b) (i) None of the Companies has violated nor is it in violation of any applicable Environmental Law in any material respect; (ii) each of the Companies has all Environmental Permits necessary to conduct its business and is in compliance with their requirements; (iii) to the Best Knowledge of the Shareholder, none of the properties currently or formerly owned, leased or used by any of the Companies (including, without limitation, soils, surface and ground waters and buildings) is contaminated with any Hazardous Substances as the result of any action or omission of any of the Companies; and (iv) there are no past, pending or threatened Environmental Proceedings against any of the Companies and, to the Best Knowledge of the Shareholder, there exists no circumstances that could reasonably be anticipated to form the basis thereof against any of the Companies. Section 4.20 Inventory. Except as set forth on Schedule 4.20, all inventory received by the Companies and on hand at the date hereof has passed all required testing specifications and receiving inspections under applicable contracts. 59 Section 4.21 Accounts Receivable. Schedule 4.21 is a list of all accounts receivable of the Companies as of a recent date. All such accounts receivable arose from bona fide transactions in the ordinary course of business consistent with past practice, are the valid and legally binding obligations of the persons obligated to pay such accounts receivable, and are, to the Best Knowledge of the Shareholder, subject to no material defense, counterclaim, set-off, reduction or condition. There are no guarantees and other enhancements issued in favor of any of the Companies with respect to its accounts receivable by parties other than the account debtor. Section 4.22 Certain Interests. Except as set forth on Schedule 4.22, no Affiliate of the Companies, nor any officer or director of any of the Companies' or any Affiliate thereof, has any material interest in any property used in or pertaining to the Companies; no such person is indebted or otherwise obligated to the Companies; and the Companies are not indebted or otherwise obligated to any such person, except for amounts due under normal arrangements applicable to all employees generally as to salary or reimbursement of ordinary business expenses not unusual in amount or significance. Except as provided in Section 3.8, the consummation of the transactions contemplated by this Agreement will not (either alone, or upon the occurrence of any act or event, or with the lapse of time, or both) result in any benefit or payment (severance or other) arising or becoming due from the 60 Companies or the successor or assign of any thereof to any person. Section 4.23 Intercompany Transactions. Except as set forth on Schedule 4.23 and except for intercompany transactions permitted by the provisions of Section 7.1 hereof, (i) the Companies have not engaged in any transaction with the Shareholder or any Affiliate thereof, (ii) the Companies have no liabilities or obligations to the Shareholder or any Affiliate thereof and (iii) neither the Shareholder nor any Affiliate thereof has any obligations to the Companies. Except as set forth on Schedule 4.23 or as otherwise expressly provided for in this Agreement, the consummation of the transactions contemplated by this Agreement will not (either alone, or upon the occurrence of any act or event, or with the lapse of time, or both) result in any payment arising or becoming due from the Companies or the successor or assign of any thereof to the Shareholder or any Affiliate thereof. Section 4.24 Product Warranty; Product Liability. Except as set forth on Schedule 4.24 or provided for in the Financial Statements, the Companies have not committed any act, and there has been no omission by the Companies, which may reasonably be expected to result in, and there has been no occurrence relating to any product or service of the Companies which may reasonably be expected to result in, product liability or liability for breach of warranty (whether covered by insurance or not) on the part of the Companies, with respect to products designed, 61 manufactured, assembled, repaired, maintained, delivered or installed or services rendered prior to or on the Closing Date. Section 4.25 Backlog. Schedule 4.25 sets forth the backlog of the Companies as of a recent date. Section 4.26 Certain Payments. None of the Companies nor any director, officer, agent or employee thereof, nor any other person associated with or acting for or on behalf of the Companies, has indirectly or directly (A) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to any person, private or public, regardless of form, whether in money, property or services (i) to obtain favorable treatment in securing business; (ii) to pay for favorable treatment for business secured; (iii) to obtain special concessions or for special concessions already obtained for or in respect of the Companies; or (iv) in violation of any applicable law; or (B) established or maintained any fund or asset that has not been recorded in the books and records of the Companies. Section 4.27 Books and Records. Except as set forth in Schedule 4.27, the Companies have none of their records, systems, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Companies. The books of the Companies are complete and correct in all material respects, and all material 62 transactions involving the business of the Companies have been in all material respects accurately set forth in such books and records. The Companies have retained all business records in accordance with all applicable Laws. Section 4.28 Government Contracts and Foreign Government Contracts. The Companies have no government contracts or foreign government contracts. Section 4.29 Customer Furnished Assets. Schedule 4.29 identifies by description or inventory number all personal property, equipment and fixtures loaned, bailed or otherwise furnished to the Companies by or on behalf of any customer that are or should be in the possession of the Companies (collectively, the "Customer Furnished Items"). Schedule 4.29 identifies each government contract or other executory contract pursuant to which each such Customer Furnished Item is furnished. The Companies have complied in all material respects with all of its obligations relating to the Customer Furnished Items, and, upon the return thereof to the customer who provided such Customer Furnished Item in the condition thereof on the date hereof, the Companies would have no material liability with respect thereto. Section 4.30 Disclosure. (a) No representation or warranty to the Purchaser contained in this Agreement, and no statement contained in the Schedules hereto or any certificate furnished to the Purchaser pursuant to the provisions hereof, contains any untrue statement 63 of a material fact or omits to state a material fact necessary in order to make the statements herein or therein not misleading. (b) Any matter disclosed on a schedule annexed hereto shall be deemed incorporated by reference and disclosed in all other schedules annexed hereto whether or not explicitly cross referenced. Section 4.31 Future Compliance. (a) From and after the date hereof and through the Closing Date, the Shareholder will use diligent efforts to cause each of the Companies to take all action necessary and will not take any action nor permit any inaction by any of the Companies which would cause any of the representations, warranties, covenants and/or agreements set forth in this Agreement to be untrue, incorrect or unsatisfied in any particular. (b) Each representation and warranty set forth in this Agreement shall be true on and as of the Closing Date as though such representation and warranty was made again on and as of such time without exception for changes occurring in the ordinary course of business except as otherwise specifically permitted or contemplated by any such representation or warranty hereunder and provided such changes either individually or in the aggregate have not had a Material Adverse Effect. (c) The Shareholder shall deliver updated Schedules to the Purchaser three (3) business days prior to the Closing Date. 64 ARTICLE V FURTHER REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER The Shareholder further represents and warrants to the Purchaser as follows: Section 5.1 Authorization and Valid and Binding Agreement. (a) The Shareholder is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement, to carry out the transactions contemplated hereby, to own and lease the properties and other assets it presently owns or leases and to carry on its business as presently conducted. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Shareholder and the resolutions adopted by the Board of Directors of the Shareholder evidencing such authorization, a copy of which as certified by the Secretary or Assistant Secretary of the Shareholder has been previously delivered to the Purchaser, were duly and validly adopted, and have not been modified, revoked or rescinded in any respect and are in full force and effect. No other corporate proceedings on the part of the Shareholder are necessary to authorize this Agreement, or the transactions contemplated hereby. 65 (c) This Agreement constitutes a valid and binding agreement of the Shareholder enforceable against the Shareholder in accordance with its terms. (d) The copy of the Certificate of Incorporation, and all amendments thereto, of the Shareholder, as certified by the Secretary of State of the State of Delaware, and the By-Laws, as amended to date, of the Shareholder, as certified by its Secretary or Assistant Secretary previously delivered to the Purchaser are true, complete and correct copies of the Certificate of Incorporation and By-Laws of the Shareholder, as amended and presently in effect. Section 5.2 Consents; No Violation. Except as set forth in Schedule 5.2, neither the execution or delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the compliance with any of the provisions hereof, (i) violates any statute or law or any rule, regulation, order, award, judgment or decree of any court or governmental authority, affecting the Shareholder in any way, (ii) violates or conflicts with or constitutes a default under any contract, commitment, agreement, understanding, arrangement, trust or restriction of any kind to which the Shareholder is a party, by which it is bound or which otherwise in any way affects it, (iii) will cause, or give any persons valid grounds to cause (with or without notice, the passage of time or both), the maturity of any debt, any liability or obligation of the Shareholder to be accelerated, or will increase any such liability or obligation, (iv) requires 66 any filing with, the notification of, or the obtaining of any permit, authorization, consent or approval of any third party or governmental or regulatory authority, foreign or domestic, or (v) violates or conflicts with the Certificate of Incorporation or By-Laws, as amended, of the Shareholder. Section 5.3 No Default. The Shareholder is not in default under the terms of its loan agreements with the Bank in any material respect. ARTICLE VI REPRESENTATIONS AND WARRANTIES BY THE PURCHASER The Purchaser hereby represents and warrants to the Shareholder as follows: Section 6.1 Organization. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. Section 6.2 Authorization. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Purchaser and the Executive Committee of the Purchaser's parent, Litton Industries, Inc., and the resolutions adopted by the Board of Directors of the Purchaser and the Executive Committee of Litton Industries, Inc. evidencing such authorization, copies of which as certified by the Secretary or Assistant Secretary of the Purchaser and Litton Industries, Inc., 67 as the case may be, previously have been delivered to the Shareholder, were duly and validly adopted, and have not been modified, revoked or rescinded in any respect and are in full force and effect. No other corporate proceedings on the part of the Purchaser or Litton Industries, Inc. are necessary to authorize this Agreement or the transactions contemplated hereby. Section 6.3 Valid and Binding Agreement. This Agreement constitutes a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms. Section 6.4 Consents; No Violation. Except as set forth in Schedule 6.4, neither the execution or delivery of this Agreement, the consummation of the transactions contemplated hereby, nor the compliance with any of the provisions hereof, (i) violates any statute or law or any rule, regulation, order, award, judgment or decree of any court or governmental authority, affecting the Purchaser in any way, (ii) violates or conflicts with or constitutes a default under any contract, commitment, agreement, understanding, arrangement, trust or restriction of any kind to which the Purchaser is a party, by which it is bound or which otherwise in any way affects it, (iii) will cause, or give any persons valid grounds to cause (with or without notice, the passage of time or both), the maturity of any debt, liability or obligation of the Purchaser to be accelerated, or will increase any such liability or obligation, (iv) requires any filing with, the notification of, or the obtaining of any permit, authorization, consent or approval of any third party or 68 governmental or regulatory authority, foreign or domestic, or (v) violates or conflicts with the Certificate of Incorporation or By-Laws, as amended, of the Purchaser. Section 6.5 Limited Representations. (a) Purchaser acknowledges and agrees that it is not relying upon any representation or warranty concerning the Companies, the Shareholder, the Foreign Subsidiary's Shares, the business, assets, liabilities, operations or profitability of the Companies except for the representations and warranties set forth in Articles IV and V. (b) The Purchaser represents and warrants that it has no reason to believe that any of the representations and warranties set forth in Articles IV and V contains any untrue statement of a material fact or omits to state a material fact in order to make the statements therein not misleading. ARTICLE VII CONDUCT OF BUSINESS OF THE COMPANY PENDING THE CLOSING DATE Each of the Companies and the Shareholder agree with the Purchaser that, except as contemplated by this Agreement or otherwise as provided in Schedule 7.1, from the date hereof until the Closing Date, unless otherwise consented to by the Purchaser in writing: Section 7.1 Conduct and Preservation of Business. Each of the Companies will conduct its business diligently, in the ordinary course and consistent with past practice and exclusively through the Companies. Each of the Companies will use all 69 reasonable efforts (without making any commitments on behalf of Purchaser) to preserve its business organization intact, to keep available to Purchaser the present officers and employees of the Companies, to maintain in effect all existing qualifications, franchises, licenses, permits, consents, authorizations and registrations of the Companies with respect to their businesses, and to preserve for Purchaser the present relationships of the Companies with material suppliers, customers and others having business relations with the Companies. Each of the Companies will conduct its business and operations in a manner consistent with the conduct of its business operations prior to the date hereof. Each of the Companies shall continue all practices, policies, procedures and operations relating to its business in substantially the same manner as heretofore conducted. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement or with the prior written consent of Purchaser, from the date hereof to the Closing Date, none of the Companies will: (a) incur any obligations or liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), except obligations or liabilities incurred in the ordinary course of business and consistent with past practice, or permit any change in any assumptions underlying or methods of calculating any bad debt, contingency or other reserves; (b) permit or allow any of its properties or assets (whether real, personal or mixed, tangible or intangible) to be 70 mortgaged, pledged or subjected to any lien or encumbrance, except liens for taxes not yet delinquent; (c) cancel or release any debts or claims, or waive any rights of substantial value or sell, transfer or convey any of its properties or assets (whether real, personal or mixed, tangible or intangible), except in the ordinary course of business and consistent with past practice; (d) dispose of or permit to lapse any license, permit or other form of material authorization; or dispose of or disclose to any person, other than employees, consultants and representatives bound by confidentiality obligations or agreements, any trade secret, formula, process or know-how; (e) except with the prior consent of the Purchaser, grant any increase in the compensation of any officer or employee (including, without limitation, any increase pursuant to any bonus (other than year-end bonuses consistent with past practices which each of the Companies shall timely pay), pension, profit-sharing or other plan or commitment); make any payment under any existing Employee Plan not required under the terms thereof; institute or adopt any new Employee Plan; modify, amend or terminate any existing Employee Plan or extend the term or alter the terms of any employment agreement; (f) make any capital expenditures or commitments in excess of One Hundred Thousand ($100,000) Dollars in the aggregate for replacements or additions to property, plant or equipment; 71 (g) declare, pay or make, or set aside for payment or making, any dividend or other distribution in respect of its capital stock or other securities, or directly or indirectly redeem, purchase or otherwise acquire any of its capital stock or other securities; (h) issue, authorize or propose the issuance of any shares of its capital stock or securities convertible into, or rights, warrants or options to acquire, any such shares or other convertible securities; (i) delay or defer payment of accounts payable or other obligations of any of the Companies or accelerate collection of accounts receivable or other obligations due the Companies in a manner inconsistent with past practice; (j) pay, loan or advance any amount to or in respect of, or sell, transfer or lease any properties or assets (whether real, personal or mixed, tangible or intangible) to, or enter into any agreement, arrangement or transaction with, the Shareholder, any of the officers or directors of the Shareholder or any of the Companies, any Affiliate of the Shareholder, the Companies or any of their respective officers or directors, or any business or entity in which the Shareholder or any Affiliate of any such persons has a direct or indirect interest except that the foregoing shall not be construed to prevent the Companies from transferring cash to one another or to the Shareholder or from purchasing goods or services from the Shareholder or any Affiliates in conformity with past practices; 72 (k) subdivide or in any way reclassify any shares of its capital stock; (l) terminate or voluntarily suffer the termination of any Material Contract except for Material Contracts which are not Assumed Contracts and except for Material Contracts expiring in the ordinary course of business pursuant to their terms and which would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on the Companies considered as a whole, or, in any material respect, amend or suffer the amendment of, or fail to perform all of its obligations or suffer or permit any default to exist under, any Material Contract which is also an Assumed Contract; (m) enter into or obtain any contract, lease, commitment, license, permit or authorization, except (i) contracts or commitments for the purchase of services, supplies, inventory or equipment (not to exceed Fifty Thousand ($50,000) Dollars for any one purchase contract or commitment unless authorized by Purchaser, which authorization shall not be unreasonably withheld or delayed) or the sale of products provided in each case such contract or commitment is entered into in the ordinary course of business and at rates consistent with normal and usual practices, and (ii) other contracts or commitments entered into in the ordinary course of business and consistent with past practice, provided that any such other contract or commitment (x) is terminable by the Companies on not more than ninety (90) days' notice and (y) will not require any of the Companies to expend 73 more than Fifty Thousand ($50,000) Dollars during the term thereof; (n) enter into any license of any material intellectual property, whether as licensor, licensee, grantor or grantee, except in connection with the sale of products in the ordinary course of business; (o) fail to take such action as may be reasonably necessary to maintain, preserve, renew and keep in full force and effect the corporate existence, qualifications and franchises of the Companies, or fail to comply with any law applicable to the conduct of the businesses of any of the Companies; (p) amend the Certificate of Incorporation or By-Laws (or other similar charter documents) of any of the Companies; or (q) agree, whether in writing or otherwise, to take any action prohibited in this Section 7.1. Section 7.2 Other Transactions. Unless and until this Agreement is terminated pursuant to Section 11.1, none of the Companies shall, nor shall any of them permit any of its officers, directors, employees or agents (through a representative or otherwise) to, (i) furnish any information concerning the businesses of any of the Companies (other than as required by law) to any person other than the Purchaser interested in acquiring any of the Companies or any of the assets, businesses or operations of any of the Companies, or (ii) solicit, accept or entertain any offer, or enter into discussions or negotiations, with respect to any merger or consolidation, or 74 sale of all or substantially all of the assets, of any of the Companies with any person other than the Purchaser. None of the Companies nor the Shareholder shall, nor shall any of them permit any of the officers, directors, employees or agents of any of the Companies (through a representative or otherwise) to, acquire, on behalf of any of the Companies, by purchase or otherwise, all or any part of the business or the assets of, or stock or other evidence of beneficial ownership of, any firm, corporation or other person. Section 7.3 Insurance. The Companies shall maintain the insurance coverage specified in Schedule 4.13, or policies providing substantially equivalent coverage, in full force and effect. Section 7.4 Access. (a) The Companies shall permit the Purchaser and its counsel, accountants and other representatives full access, during normal business hours throughout the period pending the Closing Date, to the facilities, personnel, accountants and other representatives of the Companies and to all of the properties, books, contracts, commitments and records (including those stored on computer tapes or discs or other computer format and including the records and work papers prepared or used by the Companies' accountants during their examinations of the Companies) of the Companies, and will furnish the Purchaser during such period with all such information concerning the businesses, operations, 75 assets, liabilities and prospects of the Companies as the Purchaser may reasonably request. (b) The Companies agree to the performance of environmental testing on or about the properties occupied by the Companies, subject to the owner's consent, at the Purchaser's expense; provided, that any such testing shall be done only upon reasonable written notice to the Companies and shall be performed at such times as to cause minimal disruption in the Companies' business operations. The Companies shall be solely responsible for any environmental testing at the West Pearl Facility required by the West Pearl Lease. ARTICLE VIII CERTAIN COVENANTS OF THE PARTIES Section 8.1 Consents; Third Parties. The Companies and the Shareholder covenant and agree to use their respective diligent efforts to obtain all requisite consents and to secure all requisite actions of third parties prior to the Closing and to deliver to the Purchaser, promptly after receipt thereof but in no event later than the Closing, executed counterparts of all such consents or other evidence of such actions. Section 8.2 Guarantees. The Purchaser covenants and agrees to use commercially reasonable efforts to obtain the release of all guarantees by the Shareholder of the obligations of the Companies which are listed on Schedule 8.2 (collectively, the "Shareholder Guarantees"); provided, however, that the Purchaser shall not be required to pay any amounts to obtain such releases. 76 Section 8.3 Supplemental Disclosure. In addition to its obligations under Section 4.31(c), the Companies and the Shareholder shall have the continuing obligation until Closing to promptly supplement or amend the Schedules hereto with respect to any material matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules; provided, however, that for the purposes of the rights and obligations of the parties hereunder, any such supplemental or amended Schedules, and any matters discovered by the Purchaser in the course of its due diligence prior to the Closing Date (collectively, the "Supplemental Disclosures"), shall not be deemed to cure any breach of any representation or warranty made in this Agreement or to have been disclosed as of the date of this Agreement. Section 8.4 Further Assurances. From time to time (whether at or after the Closing Date), at the request of any other party and without further consideration, and at its own expense, each party will execute and deliver to such other party such other documents, and take such other action, as the other party may reasonably request in order to consummate more effectively the transactions contemplated hereby. Section 8.5 Purchaser Confidentiality Obligations. The Purchaser hereby agrees that until the Closing shall have occurred, all information gathered by or provided to the Purchaser with respect to the Companies, including, without 77 limitation, information listed in the Schedules to this Agreement and other information provided in the course of the Purchaser's due diligence investigation of the Companies, shall be considered confidential information of the Companies and shall be subject to the confidentiality agreement between the Shareholder and the Purchaser heretofore executed. Section 8.6 Hart-Scott-Rodino Filing. The parties shall, if they have not already done so, file or cause to be filed with the United States Federal Trade Commission and the United States Department of Justice all documents required to be filed pursuant to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations promulgated thereunder and shall request in such filings early termination of the "Hart-Scott-Rodino" waiting period. All documents so filed will be complete and accurate in all material respects. Section 8.7 No Negotiation With Lenders. Purchaser agrees for itself and its Affiliates that it will not negotiate with the Shareholder's lenders or representatives to purchase the stock or assets of the Companies without first obtaining the prior written consent of the Shareholder. ARTICLE IX CLOSING CONDITIONS Section 9.1 Conditions to the Obligations of the Purchaser. All obligations of the Purchaser hereunder are subject to the 78 fulfillment, prior to or at the Closing, of each of the following conditions: (a) Representations and Warranties. The representations and warranties made by the Shareholder in this Agreement shall be true when made and at and as of the Closing Date as though such representations and warranties were made at and as of the Closing Date (without exception for changes occurring in the ordinary course of business except as otherwise specifically permitted or contemplated by any such representation or warranty hereunder and provided such changes either individually or in the aggregate have not had a Material Adverse Effect) and the Companies and the Shareholder shall have performed and complied with all covenants, agreements, obligations and conditions required by this Agreement to be so performed or complied with by them on or prior to the Closing Date; provided, however, that in the event that at any time before the Closing occurs an Event of Breach is disclosed to or discovered by the Purchaser, Purchaser shall either terminate this Agreement or Purchaser shall be deemed to have waived such Event of Breach and any and all liability of the Companies. An "Event of Breach" means the existence or occurrence of any fact, condition, circumstance, act or failure to act (other than their willful failure to close) which now constitutes or would on or after the Closing Date constitute a breach of any representation, warranty, covenant or agreement of the Companies or the Shareholder under this Agreement or which would otherwise give rise to actual or potential liability of the Shareholder or the 79 Companies to the Purchaser. Upon the termination of this Agreement by the Purchaser due to the disclosure or discovery of an Event of Breach, all liability and obligations of the parties hereto shall terminate, other than those liabilities and obligations which by their express terms are intended to survive termination of this Agreement. (b) Performance. The Companies and the Shareholder shall have performed and complied with all covenants, agreements, obligations and conditions required by this Agreement to be so performed or complied with by them on or prior to the Closing Date. (c) Shareholder's Certificate. The Shareholder shall have delivered to the Purchaser a certificate signed by it, dated the Closing Date, certifying as to the fulfillment of the conditions specified in Section 9.1(a) and (b). (d) Consents. At the Closing, all consents listed on Schedule 4.4 marked with an asterisk, UCC-3 releases from the Bank and approvals required by the terms hereof shall continue to be in full force and effect. (e) Employment Agreement. The persons listed on Schedule 9.1(e) shall have executed employment agreements in form and substance satisfactory to Purchaser. (f) Opinion of Counsel to the Companies and the Shareholder. The Purchaser shall have received an opinion of counsel to the Companies and the Shareholder, Salon, Marrow & 80 Dyckman, LLP, dated the Closing Date, in form and substance reasonably satisfactory to the Purchaser. (g) Material Adverse Change. Since the date of this Agreement, there shall not have occurred any event that has caused or resulted in, or may reasonably be expected to cause or result in, a material adverse change in the condition (financial or otherwise), of the assets, liabilities, earnings, prospects or business of the Companies considered as a whole. (h) No Injunction. There shall not be in effect on the Closing Date any judgment, order, injunction or decree of any court enjoining the consummation of the transactions contemplated by this Agreement. (i) No Government Proceeding or Litigation. There shall not be threatened, instituted or pending any suit, action, investigation, inquiry or other proceeding by or before any governmental or other regulatory or administrative agency or commission which in the reasonable judgment of the Purchaser may have a material adverse effect on the business, prospects, financial condition or results of operation of any of the Companies or seeks the imposition of limitations on the ability of the Purchaser to own the Purchased Assets. (j) Expiration of Hart-Scott-Rodino Waiting Period. The Hart-Scott-Rodino waiting period shall have expired or the parties shall have received notice of the early termination thereof. 81 (k) Deliveries at Closing. All agreements, instruments, documents, actions and payments required to be executed and delivered or taken or made pursuant to the provisions of Section 2.2 hereof and any other section hereof by the Companies and the Shareholder shall have been duly executed and delivered or taken or made, as the case may be. Section 9.2 Conditions to the Obligations of the Shareholder. All obligations of the Shareholder and the Companies hereunder are subject to the fulfillment, prior to or at the Closing, of each of the following conditions: (a) Representations and Warranties. The representations and warranties made by the Purchaser in this Agreement shall be true when made and at and as of the Closing Date as though such representations and warranties were made at and as of the Closing Date. (b) Performance. The Purchaser shall have performed and complied with all covenants, agreements, obligations and conditions required by this Agreement to be so performed or complied with by it on or before the Closing Date. (c) Officers' Certificate. The Purchaser shall have delivered to the Shareholder a certificate of its President or Vice President, dated the Closing Date, certifying to the fulfillment of the conditions specified in Section 9.2(a) and (b). (d) Consents. At the Closing, either (i) all consents and approvals required by the terms hereof shall continue to be in 82 full force and effect or (ii) if all such consents and approvals are not in full force and effect and Purchaser has nonetheless elected to close, Purchaser shall have agreed to indemnify the Shareholder and the Companies and secured such indemnity in a manner reasonably satisfactory to the Shareholder against all losses incurred by reason of the fact that all such consents and approvals were not in full force and effect. (e) Opinion of Counsel to the Purchaser. The Shareholder and the Companies shall have received an opinion of the general counsel of the Purchaser, John Preston, dated the Closing Date, in form and substance reasonably satisfactory to the Shareholder and the Companies. (f) No Injunction. There shall not be in effect on the Closing Date any judgment, order, injunction or decree of any court enjoining the consummation of the transactions contemplated by this Agreement. (g) Restructuring of Loans. An agreement in form and substance satisfactory to the Shareholder in its sole discretion shall have been entered into with the Bank and the Shareholder's other lenders within ten (10) business days of the date hereof providing for the restructuring of its loans with the Bank and such other lenders. (h) Hart-Scott-Rodino. The Hart-Scott-Rodino waiting period shall have expired or the parties shall have received notice of the early termination thereof. 83 (i) Release of Guarantees or Indemnification. All Shareholder Guarantees shall be released effective the Closing Date or the Purchaser shall have agreed in writing to indemnify the Shareholder and secured such indemnity in a manner reasonably satisfactory to the Shareholder. (j) Employee Releases. The persons listed on Schedule 9.1(j) shall have executed releases in favor of the Companies and the Shareholder in form and substance satisfactory to them. (k) Deliveries at Closing. All agreements, instruments, documents, actions and payments required to be executed and delivered or taken or made pursuant to the provisions of Section 2.3 hereof and any other section hereof by the Purchaser shall have been duly executed and delivered or taken or made, as the case may be. ARTICLE X SURVIVAL OF REPRESENTATIONS AND INDEMNIFICATIONS Section 10.1 Survival of Representations. All representations, warranties and agreements made by any party in this Agreement or pursuant hereto shall survive the Closing; provided, however, that, except with respect to the representations and warranties of the Purchaser contained in Article VI hereto and the representations and warranties of the Shareholder contained in Article V hereof and the representations and warranties contained in Section 4.1 (Organization, Authorization and Valid and Binding Agreement), Section 4.2 (Capitalization of the Foreign Subsidiary), Section 4.8(a) 84 (Title to Properties) and Section 4.19 (Environmental Matters) hereof, each of which representations and warranties shall survive for the applicable statute of limitations, the representations and warranties contained in this Agreement shall expire on October 31, 2000 unless a Claim has been made by the Purchaser or the Shareholder, as the case may be, on or prior to such date or the Purchaser or the Shareholder, as the case may be, has given notice of a potential claim setting forth the facts with respect thereto on or prior to such date. Section 10.2 Statements as Representations. All statements contained in this Agreement, the Schedules or any certificate delivered pursuant hereto shall be deemed representations and warranties for all purposes of this Agreement and shall expire as provided in Section 10.1 above. Any matter disclosed in or on any schedule or certificate annexed to this Agreement or delivered pursuant hereto shall be deemed to have been disclosed for all applicable purposes even if not disclosed on another applicable schedule or certificate. Section 10.3 Indemnification of the Purchaser. Upon the terms and subject to the conditions of this Article X, the Shareholder hereby agrees to indemnify, defend and hold harmless the Purchaser from and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs and expenses, including, without limitation, interest, penalties, costs of defense, and reasonable attorneys' fees and expenses (collectively "Claims"), asserted against, 85 imposed upon or incurred by the Purchaser by reason of or resulting from a breach of any agreement, covenant, representation or warranty of the Companies or of the Shareholder contained in this Agreement including, without limitation, all obligations and liabilities of the Selling Companies incurred prior to the Closing Date and any environmental liability or obligation arising out of the condition of the Real Property at Closing and any obligations of the Companies disclosed on Schedule 4.12 other than with respect to the Palco Litigation (collectively, "Purchaser Claims") other than the Assumed Monetary Liabilities and Assumed Contractual Liabilities. Section 10.4 Indemnification of the Shareholder and the Companies. Upon the terms and subject to the conditions of this Article X, the Purchaser hereby agrees to indemnify, defend and hold harmless the Shareholder and the Companies from and against all Claims asserted against, imposed upon or incurred by the Shareholder or the Companies by reason of or resulting from a breach of any agreement, covenant, representation or warranty of the Purchaser contained in this Agreement including, without limitation, the failure of the Purchaser to duly pay the Assumed Monetary Liabilities or duly perform and pay the Assumed Contractual Liabilities and with respect to any claim arising by reason of the ownership or use of the Purchased Assets or the operation by the Purchaser of the businesses of the Companies acquired hereunder by the Purchaser on or after the Closing Date. (collectively, "Shareholder Claims"). 86 Section 10.5 Procedure. (a) Whenever any Purchaser Claims or Shareholder Claims shall arise for indemnification hereunder, the party seeking indemnification (the "Indemnified Party") shall promptly notify each party from whom indemnification is due (the "Indemnifying Party") of the Claim and, when known, the facts which form the basis for such Claim. In the event of any such Claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third person, the notice to the Indemnifying Party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnified Party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld or delayed, unless a proceeding shall have been instituted against the Indemnified Party and the Indemnifying Party shall not have taken control of such proceeding after notification thereof, as provided in Section 10.5(b) of this Agreement. (b) In connection with any Claim giving rise to indemnity hereunder resulting from or arising out of any claim, tax assessment or legal proceeding by a person who is not a party to this Agreement, the Indemnifying Party at its sole cost and expense may, upon written notice to the Indemnified Party, assume the defense of any such claim or legal proceeding with counsel reasonably satisfactory to the Indemnified Party (counsel giving 87 opinions under Article IX shall be deemed acceptable); provided that the Indemnified Party may participate in (but not control) any such proceeding and be represented by attorneys of its or their own choosing, with the fees and expenses of such counsel to be at the sole expense of the Indemnified Party unless (i) the Indemnifying Party shall not have notified the Indemnified Party in writing that it will assume the defense of such Claim and pay all liabilities relating thereto and employed counsel reasonably acceptable to the Indemnified Party as contemplated by this sentence or (ii) the named parties to any such proceeding include both (x) the Indemnified Party hereunder and (y) the Indemnifying Party hereunder and representation of both by the same counsel would be inappropriate due to the conflict of interest between them, and in either of such circumstances the fees and expenses of such counsel shall be the sole expense of the Indemnifying Party. The foregoing notwithstanding, if such proceedings involves both a Claim or Claims subject to indemnification hereunder and a Claim or Claims not subject to indemnification hereunder, then the expenses of counsel shall be equitably shared. The Indemnified Party shall be entitled to participate in (but not control) the defense of any such action, with its counsel and at its own expense, and the Indemnifying Party shall not settle or compromise any such action without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed (other than settlements that involve only the payment of money by the Indemnifying Party as to 88 which no consent shall be required). If the Indemnifying Party does not assume the defense of any such Claim or litigation resulting therefrom within twenty (20) days after notice of such Claim is given, (i) the Indemnified Party may defend against such Claim or litigation in such manner as it may deem appropriate, including, but not limited to, settling such Claim or litigation, after giving notice of the same to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate, and (ii) the Indemnifying Party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the Indemnifying Party thereafter seeks to question the manner in which the Indemnified Party defended such third party Claim or litigation, or the amount or nature of any such settlement, the Indemnifying Party shall have the burden to prove by a preponderance of the evidence that the Indemnified Party did not defend or settle such third party Claim or litigation in a reasonably prudent manner. Section 10.6 Remedies Cumulative and Exclusive. The remedies provided herein shall be cumulative, but shall preclude assertion by any party of any other rights or the seeking of any other remedies against any other party hereto. Section 10.7 Limitations. (a) The obligations of the Shareholder under this Article X shall not be effective until the aggregate amount of all such obligations exceeds Two Hundred Fifty Thousand ($250,000) Dollars 89 (the "Deductible Amount"), and then only to the extent such aggregate amount exceeds the Deductible Amount. (b) To the extent that a Purchaser Claim hereunder is compensable or protected under an enforceable contract of insurance maintained by the Shareholder or the Companies ("Insurance Claim" and "Insurance Policy"), the Insurance Claim shall be diligently pursued to the full extent of the Insurance Policy before the Shareholder shall be liable hereunder. (c) No claims under this Article X shall be subject to indemnification hereunder to the extent that the subject matter thereof is used in computing the Closing Net Worth of the Companies; provided that this limitation shall be inapplicable with respect the amount, if any, by which such Claim exceeds the amount so used to compute the Closing Net Worth. (d) In no event shall a party be able to claim consequential, special or indirect damages. ARTICLE XI TERMINATION, AMENDMENT AND WAIVER Section 11.1 Termination. This Agreement may be terminated at any time prior to the Closing Date by: (a) mutual written agreement of the Purchaser, on the one hand, and the Companies and the Shareholder, on the other hand; (b) the Purchaser if any of the conditions provided in Section 9.1 have not been satisfied and such event has not been waived by the Purchaser; or 90 (c) the Companies and the Shareholder (i) if any of the conditions provided in Section 9.2 have not been satisfied and such event has not been waived by the Companies and the Shareholder (ii) at any time on written notice after February 28, 1999 if the Closing shall not have occurred by such date. Section 11.2 Effect of Termination. In the event of termination of this Agreement as provided above, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto, except based upon obligations set forth in Section 8.5 and Section 12.1; provided, however, that nothing herein contained shall relieve any party from its liability for breach of the terms of this Agreement; provided further, however, that if a Supplemental Disclosure has rendered a representation or warranty to be untrue or if an Event of Breach has otherwise been discovered or disclosed, then the Purchaser's or Shareholder's only remedy in such case shall be to terminate this Agreement in which event none of the parties shall have any further liability to the others hereunder except as set forth above in this Section 11.2. Section 11.3 Amendment, Extension and Waiver. At any time prior to the Closing Date, the Purchaser, on the one hand, and the Companies and the Shareholder, on the other hand, may by an instrument in writing signed on behalf of each party hereto (i) amend this Agreement, (ii) extend the time for the performance of any of the obligations or other acts of the parties hereto, (iii) waive any inaccuracies in the representations and warranties 91 contained herein or any document delivered pursuant hereto and (iv) waive compliance with any of the agreements or conditions contained herein. ARTICLE XII MISCELLANEOUS Section 12.1 Finder's Fees. Each of the Shareholder, the Companies and the Purchaser represents and warrants that it has not dealt with any third party as a finder, broker or advisor in connection with the transactions contemplated by this Agreement other than Compass Partners International, LLC, whose fees and expenses the Shareholder shall be responsible to pay. Section 12.2 Expenses. The Shareholder shall bear all fees and out-of-pocket expenses incurred by any of the Shareholder or the Companies in connection with this Agreement and the consummation of the transaction contemplated hereby, and all prior activities related to the sale of the Purchased Assets. The Purchaser shall bear all fees and out-of-pocket expenses incurred by the Purchaser in connection with this Agreement and the consummation of the transaction contemplated hereby. Section 12.3 Parties in Interest. All the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Purchaser shall in such event remain jointly and severally liable for the performance by such Affiliate of all of the obligations of the Purchaser hereunder including, without 92 limitation, the Purchaser's obligations to assume and perform the Assumed Contracts. No one not party to this Agreement shall be considered a third party beneficiary of this Agreement or have any rights hereunder. Section 12.4 Entire Agreement. This Agreement, including the Exhibits and Schedules referred to herein or delivered pursuant hereto, together with the Confidentiality Agreement dated October 22, 1998 and accepted on October 26, 1998 by the Purchaser, between the Purchaser and the Shareholder, contains the entire understanding of the parties with respect to its subject matter and supersedes all prior agreements and understandings between the parties with respect to its subject matter. Section 12.5 Modification. This Agreement may not be altered, modified or amended unless such alteration, modification or amendment is in writing and signed by the parties to this Agreement nor, except as otherwise specifically set forth herein, may this Agreement be terminated except by a writing signed by the parties to this Agreement; and no waiver of any breach of any condition, provision or term of this Agreement on any one occasion shall be deemed to be a waiver of any subsequent breach, condition, provision or term of this Agreement on any other occasion whether of like or different nature. Section 12.6 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in 93 person, or sent by a recognized overnight delivery service such as Federal Express, DHL or Airborne, with delivery charges paid for next-business-day delivery, or sent by registered or certified mail, postage prepaid, return receipt requested, or sent by fax (if confirmed by regular mail), as follows: If to the Shareholder or the Companies: SEMX Corporation 1 Labriola Court Armonk, New York 10504-1336 Fax No. (914) 273-5860 Attention: Gilbert Raker Copy simultaneously to: Salon, Marrow & Dyckman, LLP 685 Third Avenue New York, New York 10017 Fax No. (212) 661-3339 Attention: Joel Salon, Esq. If to the Purchaser: c/o Litton Industries, Inc., 21240 Burbank Blvd. Woodland Hills, California 91367 Fax No. 818-598-2025 Attn: General Counsel Any such notice, request, claim, demand or other communication shall be deemed given upon delivery if given or delivered in person, or upon receipt if sent by fax which is confirmed by regular mail, or on the third business day following mailing if mailed as provided above or on the business day immediately following the date on which such communication is entrusted to such overnight delivery service. Failure to accept a notice shall not invalidate the same. Any party may change its address for purposes hereof by written notice in accordance herewith, 94 except that notices of change of address shall only be effective upon receipt. Section 12.7 Law Governing; Jurisdiction; Attorneys Fees. (a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without regard to its conflict of laws rules. (b) Except with respect to disputes resolved pursuant to Section 1.2(c) hereof, the more-prevailing party shall be entitled to recover all costs and expenses incurred by it in enforcing the terms and conditions of this Agreement, including, without limitation, expert fees and attorney fees and disbursements; provided, however, that the parties shall bear their own fees and costs (including, without limitation, attorneys fees) in connection with the preparation of this Agreement and the Closing of the transactions contemplated hereby as provided in Section 12.2 hereof. (c) Any dispute between the parties hereto (other than with respect to the Closing Date Balance Sheet, which shall be handled in the fashion described in Section 1.2(c) above and other than as set forth in Sections 3.1(b)and 3.2(d)) shall be submitted to and finally settled under the Commercial Arbitration Rules of the American Arbitration Association by an arbitrator appointed in accordance with those rules. The place of the arbitration shall be in New York City. The determination by the arbitrator shall be final and binding upon the parties and shall be enforceable in any court of competent jurisdiction. The arbitrator shall not 95 have any power to change any provision of this Agreement and no decision rendered by the arbitrator shall have that effect. Each party shall bear one-half (1/2) of the costs and expenses of the arbitration or as shall be otherwise determined by the arbitrator. Section 12.8 Interpretation and Construction. (a) The captions and the Schedule titles set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement or as in any way limiting or amplifying the terms and provisions hereof or thereof. (b) This Agreement shall be construed according to its fair meaning as if prepared jointly by the parties hereto. (c) Each section, subsection and lesser section of this Agreement constitutes a separate and distinct undertaking, covenant and/or provision hereof. (d) If any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions hereof which can be given effect without the invalid provisions, and, to this end, the provisions of this Agreement are intended and shall be deemed severable. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by 96 applicable law, the parties hereby waive any provision of law which renders any provision of this Agreement prohibited or unenforceable in any way. In the event any such provision is found to be unlawful or otherwise unenforceable, the parties hereto agree to negotiate in good faith to modify the void or unenforceable provision, but only to the extent necessary to make such provision valid and enforceable having full regard for all applicable laws and the interests and purposes of the parties in entering into this Agreement. (e) This Agreement may be executed by fax in counterparts, each of which shall be deemed an original, and all of which shall constitute but one and the same instrument which may be sufficiently evidenced by one counterpart. Section 12.9 Public Announcements. Except as hereinafter provided, no public announcement or press release concerning the transactions contemplated hereby will be made by any party without the prior consent and joint approval of all parties; provided, however, that any party may make such public announcement, press release or other disclosure as it may determine, upon the advice of counsel, it is required to make in order to comply with its disclosure obligations under applicable law, provided further, that prior to any such announcement, release or disclosure such party shall consult with the other parties as to the need therefor and the content thereof. For greater certainty, it is understood and agreed that following the initial submission by a disclosing party to the other parties of 97 any form of announcement, release or disclosure that is either consented to or submitted to the other parties for consultation in cases requiring disclosure under applicable law, any subsequent announcements, releases or disclosures which are substantially the same in content need not be submitted to the other parties for their consent or consultation. [BALANCE OF THIS PAGE 98 LEFT INTENTIONALLY BLANK] 98 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the undersigned on the date first above written. RETCONN, INCORPORATED By:______________________________ By:______________________________ S.T. ELECTRONICS, INC. By:______________________________ By:______________________________ SEMX CORPORATION By:______________________________ By:______________________________ RETCONN SPM (MALAYSIA) SDN. BHD. By:______________________________ By:______________________________ LITTON SYSTEMS, INC. By:______________________________ By:______________________________ 99 SCHEDULE 1
DEFINITION LOCATION - ---------- -------- "Accounts Receivable" Section 1.1(a)(ii) "Affiliate" Section 3.1(a) "Affiliated Service Group" Section 4.14(a)(4) "Agreed Allocation of Estimated Purchase Price" Section 3.3(a) "Agreement" Preamble "Assumed Contracts" Section 1.1(a)(vi) "Assumed Contractual Liabilities" Section 1.4(b) "Assumed Monetary Liabilities" Section 1.2(b) "Bank" Section 4.8(a) "Benefit Arrangement" Section 4.14(a)(1) "Best Knowledge of the Shareholder" Section 4.6 "Cash Portion of the Purchase Price" Section 1.2(a) "Change in Control Payment" Section 3.8 "Claims" Section 10.3(a) "Closing" Section 1.1(a) "Closing Date" Section 1.1(a) "Closing Date Balance Sheet" Section 1.2(c)(i) "Closing Date Net Worth" Section 1.2(b)[(ix)] "Code" Section 4.14(a) "Company" Preamble "Companies" Preamble "Confidential Information" Section 3.1(a) "Continuing Employee" Section 3.2(c) "Customer Furnished Items" Section 4.29 "Deductible Amount" Section 10.7 "Defined Business" Section 3.2(b)(i) "Domestic Subsidiary" Preamble "Employee Pension Benefit Plan" Section 4.14(a)(7) "Employee Plans" Section 4.14(a)(2) "Employee Welfare Benefit Plan" Section 4.14(a)(8) "Employment Agreement" Section 2.2(i) "Environmental Claims" Section 10.3(c) "Environmental Laws" Section 4.19(a)(2) "Environmental Permits" Section 4.19(a)(3) "Environmental Proceedings" Section 4.19(a)(1) "ERISA" Section 4.14(a)(3) "ERISA Affiliate" Section 4.14(a)(4) "Estimated Cash Portion of the Purchase Price" Section 1.3 "Event of Breach" Section 9.1(a) "Excluded Assets" Section 1.1(b) "Final Allocation" Section 3.3(a) "Financial Statements" Section 4.5(b) "Firm" Section 1.2(c)(iv) "Fixed Assets" Section 1.1(a)(v) "Foreign Subsidiary" Preamble "Foreign Subsidiary's Reference Balance Sheet" Section 4.5(b)
100 "Foreign Subsidiary's Shares" Preamble "Hazardous Substances" Section 4.19(a)(4) "Indemnified Party" Section 10.5(a) "Indemnifying Party" Section 10.5(a) "Insurance Claim" Section 10.7(b) "Insurance Policy" Section 10.7 "Intangible Property" Section 1.1(a)(iv) "Inventory" Section 1.1(a)(iii) "Knowledge of the Shareholder" Section 4.6 "Laws" Section 4.18(a) "Material Adverse Effect" Section 4.1(e) "Material Contracts" Section 4.16(a) "Multiemployer Plan" Section 4.14(a)(5) "Non-Competition Period" Section 3.2(a) "Palco Litigation" Section 1.1(a)(iv) "PBGC" Section 4.14(a)(6) "Payment Adjustment Date" Section 1.2(c)(v) "Pending Intellectual Property Rights Applications" Section 4.11 "Pension Plan" Section 4.14(a)(7) "Person" Section 3.2(b)(i) "Price Disputes" Section 1.2(c)(iii) "Price Dispute Notice" Section 1.2(c)(iii) "Proposed Closing Date Balance Sheet" Section 1.2(c)(ii) "Purchase Price" Section 1.2(a) "Purchased Assets" Section 1.1(a) "Purchaser" Preamble "Purchaser Claims" Section 10.3(a) "Real Property" Section 4.8(d) "Reference Balance Sheet" Section 1.2(c)(i) "Registrable Intellectual Property Rights" Section 4.11 "Resolution Period" Section 1.2(c)(iii) "Restricted Period" Section 3.1(a) "Review Period" Section 1.2(c)(iii) "Selling Companies" Preamble "Companies' Financial Statements" Section 4.5(a) "Senior Management Employee" Section 3.8(a) "Senior Management Employee Agreements" Section 1.1(a)(vi) "Shareholder" Preamble "Shareholder Claims" Section 10.4 "Shareholder Guarantees" Section 8.2 "Subsidiaries" Preamble "Supplemental Disclosures" Section 8.3 "Taxes" Section 4.7(e) "Voluntary Employee' Beneficiary Association" Section 4.14(a)(1) "Welfare Plan" Section 4.14(a)(8) "West Pearl Facility" Section 1.1(a)(vi) "West Pearl Lease" Section 1.1(a)(vi) "Year 2000 Compliant" Section 4.10
101 Amendment Agreement dated February 19, 1999 by and among LITTON SYSTEMS, INC., SEMX CORPORATION, RETCONN, INCORPORATED, S.T. ELECTRONICS, INC. and RETCONN SPM (MALAYSIA) SDN. BHD. BACKGROUND WHEREAS: A. The parties hereto have entered into an Asset Purchase Agreement dated as of January 26, 1999 and letter agreement of even date therewith (the "Purchase Agreement"); B. The parties desire to amend the Purchase Agreement as hereinafter set forth; and C. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement. NOW, THEREFORE, the parties agree as follows: 1. Amendment to Subsection 1.1(b) Subsection 1.1(b) is hereby amended by adding after the word "all" in the first line thereof the phrase: "of the Selling Companies' bank accounts (excluding the net cash balances thereof which is a Purchased Asset, which shall be reflected on the Closing Date Balance Sheet and which shall be transferred to the Purchaser through the purchase price adjustment procedure described in Section 1.2 via an adjustment in the amount owed to or by the Purchaser equal to the net cash balances as of the Closing Date), all" 2. Delivery of Assets Received After Closing. If the Shareholder, the Selling Companies or any of their Affiliates receive any assets (or the proceeds of any assets) after Closing which belong to Purchaser by virtue of the consummation of transactions contemplated by the Purchase Agreement including, without limitation, checks or other payments for Accounts Receivable of the Selling Companies, then they shall turn over the same to the Purchaser promptly after the receipt of the same. Likewise, if the Purchaser or any of its Affiliates receive on or after the Closing any asset (or the proceeds of any asset) which is an Excluded Asset, then they shall turn over the same to the Shareholder promptly after the receipt of the same. 3. Ratification. Except as modified herein, the Purchase Agreement is hereby ratified and confirmed. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. RETCONN, INCORPORATED By: -------------------------------- By: -------------------------------- S.T. ELECTRONICS, INC. By: -------------------------------- By: -------------------------------- SEMX CORPORATION By: -------------------------------- By: -------------------------------- RETCONN SPM (MALAYSIA) SDN. BHD. By: -------------------------------- By: -------------------------------- LITTON SYSTEMS, INC. By: -------------------------------- By: -------------------------------- 2 March 5, 1999 Litton Systems, Inc. 21240 Burbank Boulevard Woodland Hills, California 91367 Ladies and Gentlemen: Reference is made to the Asset Purchase Agreement among Litton Systems, Inc., SEMX Corporation, Retconn, Incorporated, S.T. Electronics, Inc. and Retconn SPM (Malaysia) SDN. BHD. dated the date hereof (the "Purchase Agreement"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement. In the event it is necessary to obtain prior approval from any governmental authority before the transfer of the Foreign Subsidiary's Shares to the Purchaser or prior approval from any governmental authority in order to comply with the terms and conditions of any license issued by any governmental authority to the Foreign Subsidiary ("Approvals"), then in either of such events the transactions contemplated by the Purchase Agreement shall close except that the Foreign Subsidiary's Shares will not be transferred until such time as such Approvals are obtained. If any Approvals are required, the Company or the Purchaser, as the case may be, shall apply for the same as soon as is practical after the execution of the Purchase Agreement. If the Foreign Subsidiary's Shares are not able to be transferred at the Closing, then the Estimated Purchase Price to be paid at the Closing shall be reduced by twenty eight thousand nine hundred twenty-six ($28,926) dollars, the book value of the Foreign Subsidiary's Shares as at October 31, 1998, and the book Litton Systems, Inc. March 5, 1999 Page 2 value of the Foreign Subsidiary's Shares shall be excluded from the Closing Date Balance Sheet. The book value of the Foreign Subsidiary's Shares as of the date of the transfer of the same to Purchaser shall be determined using the methodology set forth in the Purchase Agreement and that amount will be paid by the Purchaser to the Shareholder upon the transfer of the Foreign Subsidiary's Shares to the Purchaser. If the Foreign Subsidiary's Shares are not transferred at the Closing, then the Shareholder and the Companies shall cause the Foreign Subsidiary to enter into an arrangement with the Purchaser to manufacture cable assemblies for the Purchaser as soon as is practicable after the Foreign Subsidiary's pending application to manufacture cable assemblies is approved by the applicable governmental authority. If the required Approvals are not obtained within one hundred twenty (120) days of the date hereof, then either the Purchaser or the Company may terminate their respective obligations to purchase and sell the Foreign Subsidiary's Shares upon written notice to the other in which case the obligations of the parties hereunder and under the Purchase Agreement with respect to the Foreign Subsidiary and with respect to the purchase and sale of the Foreign Subsidiary's Shares shall terminate. Further, if after the date hereof and prior to the consummation of the transfer of the Foreign Subsidiary's Shares there shall have occurred any event that has caused or resulted in, or may reasonably be expected to cause or result in, a material adverse change in the condition (financial or otherwise), of the assets, liabilities, earnings, prospects or business of the Foreign Subsidiary, then the Purchaser may terminate its obligations hereunder and under the Purchase Agreement to purchase the Foreign Subsidiary's Shares upon written notice to the Shareholder whereupon the obligations of the parties hereunder and under the Purchase Agreement with respect to the Foreign Subsidiary and with respect to the purchase and sale of the Foreign Subsidiary's Shares shall terminate. Notwithstanding anything to the contrary contained above, Litton may within three (3) business days after the Company has given it written notice that all Approvals necessary to transfer the Foreign Subsidiary's Shares have been obtained, terminate its obligation to purchase the Foreign Subsidiary's Shares by written notice to the Shareholder whereupon the obligations of the parties hereunder and under the Purchase Agreement with respect to the Foreign Subsidiary and with respect to the purchase and sale of the Foreign Subsidiary's Shares shall terminate. Litton Systems, Inc. March 5, 1999 Page 3 If the Shareholder does not notify the Purchaser that an agreement in form and substance satisfactory to the Shareholder in its sole discretion has been entered into with the Bank and the Shareholder's other lenders within ten (10) business days of the date hereof providing for the restructuring of its loans with the Bank and such other lenders, then the Purchaser may upon written notice terminate the Purchase Agreement and this Agreement. Please confirm your agreement with the foregoing by countersigning below. Very truly yours, SEMX CORPORATION S.T. ELECTRONICS, INC. RETCONN SPM (MALAYSIA) SDN. BHD. By:__________________________ Accepted and Agreed: LITTON SYSTEMS, INC. By:__________________________ EX-10.65 4 SIXTH AMENDMENT AND FORBEARANCE AGREEMENT SIXTH AMENDMENT AND FORBEARANCE AGREEMENT AGREEMENT, made as of February 19, 1999, among SEMX CORPORATION (formerly known as Semiconductor Packaging Materials Co., Inc.) a Delaware corporation, (the "Borrower") and AMERICAN SILICON PRODUCTS, INC. ("ASP"), a Delaware corporation, POLESE COMPANY, INC., a California corporation, TYPE III, INC., a California corporation, SPM HOLDINGS CORPORATION ("SPM Holdings"), a Delaware corporation, AMERICAN SILICON PRODUCTS, B.V. ("ASP B.V.") a Netherland corporation, THERMAL PACKAGING SOLUTIONS, INC. ("TPS") a Nevada corporation, (collectively, the "Subsidiary Guarantors") and FIRST UNION NATIONAL BANK, a national banking association as Lender and agent for Fleet National Bank (the "Lender"). Background A. Capitalized terms not otherwise defined shall have the meanings ascribed to them in the Credit Agreement dated January 23, 1997, between Semiconductor Packaging Materials Co., Inc. (now known as SEMX Corporation) and First Union Bank of Connecticut (predecessor in interest to First Union National Bank) (as modified, amended, restated or supplemented from time to time, the "Credit Agreement"). B. The Borrower has informed the Lender that, inter alia, it will be selling Retconn, Incorporated and S.T. Electronics, Inc. (the "Sold Subs"). The Borrower and the Subsidiary Guarantors have requested that the Lender: (i) modify the Borrower's compliance with the financial covenants contained in the Fifth Amendment; (ii) extend the maturity of the Interim Note to June 30, 1999; and (iii) extend the maturity of the Revolving Loan from April 1, 1999 to June 30, 1999. C. The Lender has agreed to the Borrower's and the Subsidiary Guarantors' requests subject to the terms and conditions of this Agreement. Agreement In consideration of the foregoing Background, which is incorporated by reference, the parties, intending to be legally bound, agree as follows: 1. Conditions Precedent. The obligation of the Lender under this Agreement is subject to the receipt and review, to the satisfaction of the Lender, of the following: (a) this Agreement shall be duly executed by the parties hereto; (b) Subsidiary Guarantors shall execute a ratification of guaranty in the form annexed; (c) Borrower shall deliver a Secretary's Certificate of the Borrower and each of the Subsidiary Guarantors authorizing this transaction; (d) Borrower shall deliver a true and complete copy of the December 31, 1998 Report on Form 10-K within three (3) days after filing by the Borrower with the Securities and Exchange Commission; (e) Counsel for the Borrower and Subsidiary Guarantors will deliver their opinion that this Agreement and the documents referred to herein are authorized, duly executed and enforceable against their clients; (f) the Borrower shall have paid all of the current and past expenses and fees as provided in Section 18 due as of the closing out of the proceeds from the Retconn Sale; (g) Borrower shall cause the proceeds from the sale of Retconn Incorporated, S.T. Electronics and Retconn spm (Malasia) SDN. BHD. (the "Retconn Sale") to be disbursed as set forth in the schedule annexed hereto and made a part hereof; (h) Borrower and Subsidiary Guarantors, except ASP B.V. (i) will provide acknowledgements of the pledge of all bank and/or securities accounts maintained in their name at institutions other than Lender or Fleet National Bank on or before March 5, 1999, or close such account and provide confirmation thereof to Lender, (ii) hereby represent that they have sent out letters to each such bank or securities firm, and (iii) shall 2 provide such acknowledgements for any other accounts they may open from time to time; (i) Borrower shall provide such other agreements and instruments as the Lender reasonably deems necessary to carry out the terms and provisions of this Agreement. 2. Modifications to Credit Documents. All of the terms and conditions contained in the Credit Documents shall remain in full force and effect except as follows: a) Modification to Credit Agreement (i) Section 1.1(b) is hereby amended by adding the following at the end of the paragraph: The Revolving Loan shall be segregated into four separate facilities: (i) Borrowing Base Facility equal to $5,130,000; (ii) Unrestricted Facility equal to $2,220,000.; (iii) Tax Facility equal to $4,450,000.; and (iv) the Maximum ISP L/C Liability Facility in the amount of $3,200,000 (collectively, the "Facilities" and individually, a "Facility"). (ii) Section 1.3 is hereby amended to add a subparagraph (c) as follows: Section 1.3(c) Each Notice of Borrowing shall indicate which Facility of the Revolving Loan the Borrower seeks to utilize for its borrowings and shall attach the referenced items necessary as conditions precedent to a drawing under the appropriate Facility. No Facility can be drawn as a Eurodollar Loan and all existing drawings are deemed to be Prime Rate Loans. (iii) Section 4.2(b)(i) is hereby deleted in its entirety and is replaced with a new Section 4.2(b)(i) as follows: Section 4.2(b)(i) In the event that the value of the Borrowing Base of the Borrower 3 and Subsidiary Guarantors falls below $3,600,000 less year end adjustments for fiscal year 1998 for inventory and accounts receivable which comprise the Borrowing Base, the Borrower shall within fifteen days of the time of submission of the report make a payment in reduction of the Revolving Loan, in the amount equal to the difference between $3,600,000 less year end adjustments for fiscal year 1998 for inventory and accounts receivable which comprise the Borrowing Base and the valuation shown on the periodic Borrowing Base certificate provided for in Section 8.14. (iv) Section 6.2 is hereby modified to delete subparagraphs (g) and (h) and to add new subparagraphs (g) and (h) as follows: g. After giving effect to the amount of the requested Loan, the amount outstanding under the Borrowing Base Facility shall not exceed the lesser of (i) $5,130,000. and (ii) the amount of current Borrowing Base plus $100,000. h. The Borrower has submitted a Borrowing Base certificate which shows the value of the current Borrowing Base to be at least $3,700,000 less year end adjustments for fiscal year 1998 for inventory and accounts receivable which comprise the Borrowing Base. (iv) Section 6.2 is hereby modified to add the following: (j) With respect to each Revolving Loan advanced under the Unrestricted Facility, the Borrower need not comply with items (g) and (h) of this Section 6.2, but in no event shall the amounts outstanding under the Unrestricted Facility exceed $2,220,000. after giving effect to the requested Loan. (k) With respect to each Revolving Loan under the Tax Facility, (i) the Notice of Borrowing shall be accompanied by a certificate from the Borrower's chief financial officer stating that an amount equal to the amount of the Loan sought is necessary to pay federal and state income tax liability for tax year 1999 and shall 4 attach a true, accurate and complete copy of the federal and state income tax forms to be filed by Borrower; (ii) in no event shall the amounts outstanding under the Tax Facility exceed $4,450,000. after giving effect to the requested Loan; and (iii) the Borrower need not comply with items (g) and (h) of this Section 6.2. (l) After giving effect to the amount of a requested Revolving Loan, the amount outstanding under the Revolving Loan Commitment shall not exceed in any event or under any circumstances the sum of $15,000,000. (v) Section 9.18 is hereby deleted and replaced with a new Section 9.18, which is hereby added as follows: Section 9.18 Minimum Sales. Based upon the Borrower's projections, the Borrower covenants that the consolidated sales of the Borrower including the Subsidiary Guarantors on a consolidated basis shall not be less than the following amounts for each of the months specified: January 1999 $4,320,000. February 1999 $3,215,000. March 1999 $3,513,000. April 1999 $3,295,000. May 1999 $3,236,000. June 1999 $3,335,000. (vi) Section 9.19 is hereby deleted and replaced with a new Section 9.19, which is hereby added as follows: Section 9.19 Earnings Covenant. Based on the Borrower's projections, the Borrower covenants that the Consolidated EBITDA of the Borrower including the Subsidiary Guarantors shall not be less than the following amounts for each of the months specified: January 1999 $ 875,000. February 1999 $6,862,000. 5 March 1999 $ 710,000. April 1999 $ 662,000. May 1999 $ 649,000. June 1999 $ 677,000. (vii) Section 9.20 is hereby deleted and replaced with a new Section 9.20, which is hereby added as follows: Section 9.20 Ratio of Current Assets to Current Liabilities. Borrower including the Subsidiary Guarantors on a consolidated basis shall not permit the ratio of Current Assets to Current Liabilities to be less than .75:1.0 at all times and from time to time. (viii) Section 9.21 is hereby deleted and replaced with a new Section 9.21, which is hereby added as follows: Section 9.21 Interest Coverage Ratio. The Borrower including the Subsidiary Guarantors on a consolidated basis, shall not permit the Interest Coverage Ratio to be less than 1.5:1.0. (x) Section 10.11 is hereby deleted and replaced with a new Section 10.11 is hereby added as follows: 10.11 Decrease in the Value of the Borrowing Base. The value of the Collateral comprising the Borrowing Base, as shown on a certificate required under this Agreement or otherwise, decreases by more than $300,000. from $3,700,000. less year end adjustments for fiscal year 1998 for inventory and accounts receivable which comprise the Borrowing Base. (xi) Section 11.1 is hereby modified to provide that the following terms will have the following revised definitions: "Applicable Margin" shall mean (a) in the case of Revolving Loans which are Prime Rate Loans, 1% and (b) in the case of the Interim Loan, 1%. 6 "Interim Loan Maturity Date: shall mean June 30, 1999. "Revolving Loan Maturity Date" shall mean June 30, 1999. 3. Reaffirmation by the Borrower. The Borrower acknowledges that (a) it is legally, validly and enforceably indebted to Lender under the Revolving Note and the Interim Note, without offset, claim, defense, counterclaim or right of recoupment, (b) it is legally, validly and enforceably liable to the Lender for all costs and expenses of collection and attorneys' fees related to or in any way arising out of this Agreement, the Credit Agreement, the Revolving Note, the Interim Note and the other Credit Documents, and (c) as of the date hereof, the amount outstanding under (w) the Revolving Note is $11,845,725 (consisting of $11,800,000. principal and $45,725. accrued interest); (x) the undrawn amount under the Letter of Credit is $3,025,718.25. as of January 31; (y) the Interim Note is $1,003,875. (consisting of $1,000,000 principal and $3,875. accrued interest), and (z) the amount outstanding under the Mortgage Loan made by First Union to Borrower is $1,363,999.91 plus applicable interest, reserves and escrows. In addition, Fleet National Bank's affiliate, Fleet Precious Metals, Inc., has a separate facility to the Borrower in the approximate amount of $1,126,000.00 as of February 19, 1999 representing 3,877 troy ounces pursuant to a consignment agreement (the "Consignment Agreement") in connection with the consignment of gold (the "Gold Liability") and Lender has a separate equipment leasing facility to SPM Holding dated October 24, 1995 which have amounts outstanding under Schedule 1 of $298,364., Schedule 2 of $305,403. and Schedule 3 of $535,134. plus any applicable interest, fees and other costs (the "Lease Liability"), all of the separate obligations of the Borrower and Subsidiary Guarantors under the Gold Liability and the Lease Liability are due and owing without offset, claim, defense, counterclaim or right of recoupment. Except as modified by this Agreement, the Borrower hereby remakes all representations, warranties and covenants contained in the Credit Documents and acknowledges that the liens and security interests granted pursuant to the Security Documents encompass the indebtedness of the Revolving Note and the Interim Note. The Borrower represents that except as described on Current Report for the period ended September 30, 1998 of the Borrower, which 7 was filed with the Securities and Exchange Commission, there are no pending, or to the Borrower's knowledge threatened, legal proceedings to which the Borrower is a party, which materially or adversely affect the transactions contemplated by this Agreement or the ability of the Borrower or any Subsidiary Guarantor to conduct its business. The amount due under the Term Loan which is being paid off by wire transfer from the proceeds of the Retconn Sale is $15,104,102.42 as of February 19, 1999. 4. Reaffirmation by the Subsidiary Guarantors. Each Subsidiary Guarantor acknowledges that it is legally and validly indebted to the Lender under the Subsidiary Guaranty without defense, counterclaim or offset, and affirms that the Subsidiary Guaranty is or remains in full force and effect and includes, without limitation, the indebtedness, liabilities and obligations arising under, or in any way connected with, the Credit Agreement, the Revolving Note, the Interim Note, this Agreement and the other Credit Documents, whether now existing or hereafter arising and acknowledges that the liens and security interests granted pursuant to the Security Documents to which such Subsidiary Guarantor is a party encompasses the foregoing indebtedness and obligations and remain in full force and effect. 5. Other Representations and Agreements by Borrower and Subsidiary Guarantors. The parties agree that to the best of their knowledge they are not aware that any Default or Event of Default has occurred and is continuing, other than as set forth herein on Schedule 5 annexed hereto and made a part hereof and that the Lender has not given its consent to or waived any Default or Event of Default other than set forth on Schedule 5. The Borrower and the Subsidiary Guarantors represent, warrant and confirm that the Credit Agreement and the other Credit Documents are in full force and effect and enforceable against the Borrower and the Subsidiary Guarantors in accordance with the terms thereof except to the extent that the Borrower and Subsidiary Guarantors make no representation or warranty as to the effectiveness of the ASPBV guaranty under Dutch law. The Borrower and each Subsidiary Guarantor confirm all of the rights and remedies of Lender under the Credit Documents, including, without limitation, any power of attorney granted to Lender under any of the Credit Documents. The parties acknowledge and agree that the Credit Agreement, the Credit Documents, the Consignment 8 Agreement and this Agreement (all as previously amended, modified or supplemented in writing from time to time) constitute the entire agreement and understanding between Lender and Borrower and each Subsidiary Guarantor and supersedes all prior agreements, conversations and understandings relating to the subject matter hereof; the parties hereto acknowledge and agree that the parties hereto have not made any representation except as expressly set forth in this Agreement and even if any such representations were made, the parties have not relied on any such representation except as expressly set forth in this Agreement. The Borrower and each of the Subsidiary Guarantors represent and confirm that as of the date hereof, neither the Borrower nor any of the Subsidiary Guarantors has any claim or defense (and to the extent any such defense exists the Borrower and the Subsidiary Guarantors each hereby waives every claim and defense) against the Lender arising out of or relating to the Credit Agreement, this Agreement and the other Credit Documents or the making, administration or enforcement of the Revolving Note, the Interim Note and the Loans and the remedies provided for under the Credit Agreements. 6. Release of Lender. IN CONSIDERATION OF THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT BY THE BORROWER AND THE SUBSIDIARY GUARANTORS, THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS RELEASE, REMISE AND DISCHARGE THE LENDER ITS SUBSIDIARIES AND AFFILIATES AND ALL OF THEIR PAST AND PRESENT OFFICERS, DIRECTORS, REPRESENTATIVES, EMPLOYEES, ATTORNEYS OF AND FROM ALL ACTIONS, CAUSES OF ACTION, SUITS, REBORROWINGS, CONTROVERSIES, AGREEMENTS, PROMISES, DAMAGES, JUDGMENTS, CLAIMS AND DEMANDS IN LAW OR IN EQUITY WHICH ANY OF THEM EVER HAD, NOW HAS OR WHICH ANY OF THEM SHALL HAVE AGAINST THE LENDER ARISING OUT OF ANY ACTION OF THE LENDER OCCURRING TO AND INCLUDING THE DATE OF THIS AGREEMENT. 7. Letters of Credit. The maturity of all letters of credit issued in connection with revolving commitment including the ISP Letter of Credit shall not be extended for a term beyond July 15, 1999 and the amount of letters of credit outstanding on June 30, 1999 shall be secured by cash or marketable securities other than securities issued by the Borrower at the Lender's ordinary and customary margin requirements. 9 8. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York (without regard to such State's conflicts of law principles). 9. Representation. The execution and delivery of this Agreement and all of the other Loan Documents are within the Borrowers' and each Subsidiary Guarantor's powers, corporate or otherwise, have been duly authorized or will be ratified by all necessary corporate action, and do not contravene, or constitute a default under any provision of applicable law or regulation of any of its corporate documents or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrowers and the Subsidiary Guarantors. The execution and delivery of this Agreement by the Lender are within Lender's power and has been duly authorized. 10. Acceleration. In the event that the Borrower or any Subsidiary Guarantor defaults in the prompt payment of the aforesaid obligations or in the due performance of or compliance with any of the terms or conditions hereof or of the Credit Documents or if the Borrower or any Subsidiary Guarantor defaults under any obligations to Fleet National Bank or its affiliates under the Gold Liability or otherwise or any other loan or facility with Lender under the Lease Liability or otherwise and after the expiration of any applicable grace, notice and right to cure provisions in this Agreement or any applicable agreement under which such default occurred , the Lender may declare all of the obligations in accordance with the original terms of the Loan Documents to be immediately due and payable. 11. Remedies. In the event of a demand or default, the Lender shall have such rights and remedies as are provided and permitted by the Loan Documents and applicable law. 12. Loan Documents Remain Effective. Except for any modification specifically set forth herein or in the exhibits, the Loan Documents remain in full force and effect. Nothing herein shall be construed as a waiver of any rights or remedies which the Lender may have at law, equity, under the Loan Documents, as modified hereby, or otherwise, all of which are specifically reserved. 10 13. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 14. Amendments, Etc. No amendment, modification, termination, or waiver of any provision of this Agreement, nor consent to any departure by the parties from this Agreement, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Lender and the Borrower, the Subsidiary Guarantors and their respective successors and assigns, except that the Borrower and Subsidiary Guarantor may not assign or transfer any of its rights under this Agreement without the prior written consent of the Lender. 16. No Waiver. No delay or omission in the exercise of any power or remedy herein provided or otherwise available to the Lender shall impair or affect the Lender's right thereafter to exercise same, including the execution of the Agreement. 17. Submission to Jurisdiction. (i) Any legal action or proceeding with respect to this agreement or any document related hereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower and Subsidiary Guarantors hereby accept for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdiction. (ii) The Borrower and Subsidiary Guarantors irrevocably consent to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, 11 postage prepaid, to the Borrower at its address, and such service will become complete three days after the date such process is so mailed. (iii) Nothing contained in this Paragraph 21 shall affect the right of the Lender to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Subsidiary Guarantor in any other jurisdiction. 18. Expenses. The Borrower shall promptly pay all expenses of the Lender with respect to: (i) the drafting, negotiation and enforcement of this Agreement and the documents executed in connection therewith, including, but not limited to, reasonable attorneys fees and disbursements and the fees incurred in connection with the January 13, 1999 Fifth Modification Agreement and Forbearance Agreement and foreign counsel fees; (ii) inspection and evaluation of any collateral, from time to time, including collateral audits and appraisals; (iii) any filing, recording, title insurance or other fees and taxes or search fees incurred in protecting, perfecting and insuring the Lender's lien or security interest in the Collateral; (iv) all out of pocket expenses in connection therewith incurred by the Lender, including, but not limited to, site visits to view and observe the Collateral; (v) any fees due to PriceWaterhouseCoopers in connection with their work as consultants; and (vi) Borrower shall pay a restructuring fee in the sum of $50,000. on June 30, 1999 if the Interim Loan, Revolving Loan and ISP Letter of Credit liability has not been paid in full and terminated, as the case may be. Borrower authorizes Lender to debit any account for the payment of any such fees and disbursements if such amounts are not paid as and when due. 19. Lender Releases. (i) Upon receipt of the indefeasible payment of the proceeds from the Retconn Sale, Lender hereby releases the Sold Subs from any liability under the Subsidiary Guaranty and the Subsidiary Security Agreement and acknowledges that the Term Loan has been paid in full. (ii) The obligations of the Borrower to cause it to perform certain obligations set forth in the Fifth Amendment and Forbearance Agreement set forth in Schedule 19(ii) have been waived by the Lender. 12 20. Jury Trial Waiver. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH, OR IN ANY WAY RELATED TO, THE FINANCING TRANSACTIONS OF WHICH THE CREDIT AGREEMENT, THE REVOLVLING NOTE, THE INTERIM NOTE, THE TERM NOTE, THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS IS A PARTY OR THE ENFORCEMENT OF ANY OF THE LENDER'S RIGHTS. THE BORROWER AND EACH OF THE SUBSIDIARY GUARANTORS ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY WILLINGLY, VOLUNTARILY AND WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEYS. The parties have executed this Agreement as of the date first written above. Borrower: SEMX CORPORATION By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary Subsidiary Guarantors: AMERICAN SILICON PRODUCTS, INC. By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary POLESE COMPANY, INC. By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary 13 TYPE III, INC. By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary SPM HOLDINGS CORPORATION By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary THERMAL PACKAGING SOLUTIONS, INC. By: /s/ Douglas G. Sages ------------------------- Name: Douglas G. Sages Title: Secretary ASP, B.V. By: /s/ Gilbert D. Raker ------------------------- Name: G. D. Raker Title: Chairman Lender: FIRST UNION NATIONAL BANK By: /s/ Nancy Haskins ------------------------- Name: Nancy Haskins Title: Vice President 14 SCHEDULE OF ALLOCATION OF PROCEEDS OF SALE OF RETCONN INCORPORATED AND ITS SUBSIDIARIES Initial Sale Price: $23,900,000 Closing costs, including Compass Bank and legal fees $ 1,680,000 ($100,000 escrow for PwC) Payment of Term Loan. $15,050,000 Reduction of Revolving Loan but available to pay federal and state income taxes for tax year 1999. $ 4,450,000 Reduction in Revolving Loan and available for formula drawing. $ 500,000 Reduction in Revolving Loan but available for drawing, without formula compliance. $ 2,220,000 ----------- $23,900,000 Any additional proceeds shall be paid to the Lender in reduction of the Interim Loan. SCHEDULE 5 Financial covenants in Sections 9.8, 9.9, 9.10 and 9.11. Financial covenant in Section 9.19 for January 1999, only. SCHEDULE 19(ii) Section 1(h) requirement to pay $1,000 per day after February 1, 1999. Section 1(i) vehicles belonging to S.T. Electronics, Inc. are not required to be pledged as collateral. Any requirement that Douglas Sages be employed as Chief Financial Officer. Section 23(b) and (c) of the Fifth Amendment and Restructuring Agreement. Any requirement that all the proceeds from the sale of Retconn be distributed entirely to the Lender, but only on condition that the proceeds be distributed as provided in this Agreement and on the Schedule annexed. EX-22 5 LIST OF SUBSIDIARIES OF THE COMPANY Polese Company, Inc Type III, Inc. Thermal Packaging Solutions, Inc. American Silicon Products, Inc. SPM Holdings Corporation American Silicon Products, B. V. International Semiconductor Products Pte Ltd Semiconductor Materials S.A. R. L. EX-23.1 6 CONSENT OF GOLDSTEIN GOLUB KESSLER INDEPENDENT AUDITOR'S CONSENT To the Board of Directors SEMX Corporation We hereby consent to incorporation by reference in the Registration Statements (No. 33-84752, No. 33-95762 and No. 333-7797) on Form S-8 of our report dated February 5, 1999, except for Note 15 as to which the date is February 19, 1999, related to the consolidated balance sheet 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, which report appears in the December 31, 1998 annual report on Form 10-K of SEMX Corporation. GOLDSTEIN GOLUB KESSLER LLP New York, New York April 15, 1999 EX-27 7 ARTICLE 5 FDS FOR 1998 10-K
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 1,141 0 8,252 245 10,447 26,186 52,326 13,974 82,324 40,250 13,055 0 0 638 24,733 82,324 47,524 65,903 37,982 53,125 27,005 0 3,475 (17,702) (5,500) (11,958) 0 0 0 (11,958) (1.98) (1.98)
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