ENDICOTT - Endicott Interconnect Technologies has defaulted on a contract with the state to maintain jobs in return for a $4 million grant from taxpayers.

It's a development that could erode the company's strength as an economic provider to the community, though more jobs are on the way, company officials said Wednesday.

Under the terms of the deal with the Empire State Development Corp., EI could owe the state as much as $2.4 million, depending on an evaluation the agency will make on why employment levels fell to an average of 1,500 workers in 2005 from more than 1,900 when local investors bought the firm from IBM Corp. in 2002.

Jessica Coben, a spokeswoman for the agency, said officials would decide how much, if any, of the grant would have to be repaid after the company files financial records and a letter explaining the circumstances, which was due Wednesday.

James Matthews, co-chairman and a principal investor, said Wednesday the company and its 1,500 jobs wouldn't exist at all if local investors hadn't stepped in to save it. It has survived many challenges since it was born in 2002 out of IBM's declining local operations, and its economic outlook looks promising, he said.

"When I negotiated with IBM, it was to keep this business in the community," Matthews said. "We would have been happy to have stepped aside if somebody else wanted to do it."

EI, which has revenues of about $250 million and will see profits for the first time this year, is now adding 200 jobs, said Matthews and company President James McNamara.

That would restore the number of jobs to levels stipulated in the agreement with the state. The additional jobs, ranging from $9-an-hour manufacturing workers to $100,000-a-year professionals, are needed to fill a burgeoning demand for a new product, HyperBGA, a substrate that connects a miniature network of processors with a range of uses in aerospace, medical and defense industries.

Matthews and McNamara said a $2.4 million penalty could affect other business, like a $25 million capital overhaul to streamline and modernize manufacturing operations at the 43-building campus. The company is consolidating its panel manufacturing business, for example, from seven buildings to one.

"I would like to tell you that we could pay $2.4 million without ever knowing it happened," Matthews said. "But I have to be honest."

Year-end audits of the work force show that in its first two years of business — 2003 and 2004 — EI met its agreement with Empire State Development Corp. to maintain at least 93 percent of its work force.

But despite a promise of 700 new jobs linked to SureScan, a venture to develop baggage scanning machines yet to come to fruition, employment levels at EI have continued to decline. The company employed an average of about 1,500 workers in 2005, according to an annual employment report required by the Empire State Development Corp. as part of the grant agreement.

That's down from 1,940 workers when EI bought the core of IBM's microelectronics plant in 2002.

Publicly funded economic development ventures, characterized as corporate welfare by some critics, have been facing increased scrutiny by a public skeptical about who they benefit and how they are overseen.

But the state money, a small part of the $100 million deal to buy the IBM site, was well placed in Endicott Interconnect, Matthews said

"The state invested $4 million and got $500 million in payroll back," he said. "That is a pretty good proposition."

One reason employment levels have dropped, Matthews said, is because the company became more efficient by hiring subcontractors to do certain kinds of jobs, such as trucking and maintenance. "The jobs are still in the community, they just are not on our payroll," he said. EI has more than 100 subcontractors that account for about 300 jobs, he said.

Matthews, a robust 72 with an open collar and easy smile, looks as if he is ready for the golf course rather than the conference room. In his modest office at the Clark Street Campus on Wednesday, he recalled the story of getting notice that the company - once the centerpiece of the Southern Tier economy - was about to be sold to a competitor and liquidated.

An entrepreneur and investor who has succeeded in businesses ranging from circuit board manufacturing to auto dealerships, Matthews said he doesn't need to be involved in high-stakes deals at his age. But he couldn't stay away from this one. Within a week, with the help of James W. Orband, a managing partner with Hinman, Howard & Kattell, and the Maines family, he laid the foundation of a $100 million deal to buy the entire campus.

Now he wants to see it prosper.

"You can't give up," he said. "You just can't quit."

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