FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-3286 SEMICON, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2242662 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10 North Avenue, Burlington, MA 01803 (address of principal executive offices) (Zip Code) 617-272-9015 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.25 Par Value - 3,304,873 shares (at April 30, 1995) 1 INDEX FORM 10-Q SEMICON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page Consolidated Balance Sheet - April 2, 1995 and June 30, 1994. 3 Consolidated Statement of Operations - Quarters ended April 2, 1995 and April 3, 1994 and nine months ended April 2, 1995 and April 3, 1994. 5 Consolidated Statement of Cash Flows - Quarters ended April 2, 1995 and April 3, 1994 and nine months ended April 2, 1995 and April 3, 1994. 6 Notes to Consolidated Financial Statements - April 2, 1995. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) SEMICON, INC. CONSOLIDATED BALANCE SHEET ASSETS April 2, June 30, 1995 1994 ----------- ----------- Current assets: Cash and cash equivalents $ 498,000 $ 452,000 Accounts receivable, less allowances of $10,000 ($10,000 at June 30, 1994) 891,000 909,000 Inventories: Work-in-process and finished products 424,000 595,000 Raw materials and supplies 166,000 258,000 ----------- ----------- 590,000 853,000 Other current assets 60,000 59,000 ----------- ----------- Total current assets 2,039,000 2,273,000 Property, plant and equipment Machinery and equipment 3,965,000 3,965,000 Leasehold improvements 84,000 75,000 ----------- ----------- 4,049,000 4,040,000 Less accumulated depreciation and amortization 4,019,000 4,010,000 ----------- ----------- 30,000 30,000 Other assets 1,000 1,000 ----------- ----------- $ 2,070,000 $ 2,304,000 =========== =========== See notes to consolidated financial statements. 3 SEMICON, INC. CONSOLIDATED BALANCE SHEET - Continued LIABILITIES AND STOCKHOLDERS' DEFICIT April 2, June 30, 1995 1994 ----------- ----------- Current liabilities: Accounts payable and other accrued liabilities $ 267,000 $ 311,000 Accrued compensation 206,000 189,000 Accrued interest 1,501,000 1,677,000 Federal and state income taxes 100,000 104,000 Indebtedness in default 2,202,000 3,213,000 Reserves for restructuring and environmental costs 1,100,000 1,104,000 Liabilities relating to discontinued operations 896,000 896,000 ----------- ----------- Total current liabilities 6,272,000 7,494,000 Retiree deferred compensation 439,000 423,000 Stockholders' deficit: Preferred stock, $1.00 par value 1,000,000 shares authorized, none issued 0 0 Common stock, $.25 par value, 10,000,000 shares authorized, 3,304,873 shares issued 826,000 826,000 Additional paid-in-capital 46,000 46,000 Accumulated deficit (5,513,000) (6,485,000) ----------- ----------- Total stockholders' deficit (4,641,000) (5,613,000) ----------- ----------- $ 2,070,000 $ 2,304,000 =========== =========== See notes to consolidated financial statements. 4 SEMICON, INC. CONSOLIDATED STATEMENT OF OPERATIONS QUARTER ENDED NINE MONTHS ENDED April 2, April 3, April 2, April 3, 1995 1994 1995 1994 ----------- ----------- ----------- ----------- Net Sales $ 1,563,000 $ 1,554,000 $ 4,463,000 $ 5,010,000 Costs and expenses: Cost of products sold 1,245,000 1,248,000 3,668,000 3,944,000 Selling, general and administrative 252,000 283,000 803,000 784,000 Interest 90,000 98,000 283,000 345,000 Other (income) expense 0 (67,000) 0 (67,000) ----------- ----------- ----------- ----------- 1,587,000 1,562,000 4,754,000 5,006,000 ----------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item (24,000) (8,000) (291,000) 4,000 Income taxes 0 0 0 0 ----------- ----------- ----------- ----------- Income (loss) before extraordinary item (24,000) (8,000) (291,000) 4,000 Extraordinary items: Gain on purchase of debentures 316,000 3,000 895,000 151,000 Gain on debt settlement 0 0 368,000 0 ----------- ----------- ----------- ----------- 316,000 3,000 1,263,000 151,000 ----------- ----------- ----------- ----------- Net income (loss) $ 292,000 $ (5,000)$ 972,000 $ 155,000 =========== =========== =========== =========== Income (loss) per share: Before extraordinary items ($0.01) $0.00 ($0.09) $0.00 Extraordinary items 0.10 0.00 0.38 0.05 ----------- ----------- ----------- ----------- Net income (loss) per share $0.09 $0.00 $0.29 $0.05 =========== =========== =========== =========== Weighted average number of shares outstanding 3,305,000 3,305,000 3,305,000 3,305,000 =========== =========== =========== =========== See notes to consolidated financial statements. 5 SEMICON, INC. CONSOLIDATED STATEMENT OF CASH FLOWS QUARTER ENDED NINE MONTHS ENDED April 2, April 3, April 2, April 3, 1995 1994 1995 1994 ----------- ----------- ----------- ----------- Operating activities: Net income (loss) $ 292,000 $ (5,000)$ 972,000 $ 155,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,000 13,000 9,000 39,000 Provision for bad debts 0 0 0 (40,000) Gain on purchase of debentures (316,000) (3,000) (895,000) (151,000) Gain on debt settlement 0 0 (368,000) 0 Changes in assets and liabilities: Accounts receivable (130,000) 117,000 18,000 (91,000) Inventory 107,000 (132,000) 263,000 75,000 Other current assets 10,000 (11,000) (1,000) (19,000) Accounts payable and accrued expenses 127,000 82,000 195,000 332,000 Income taxes payable 0 (2,000) (4,000) (4,000) Other non-current obligations 6,000 (122,000) 16,000 (107,000) ----------- ----------- ----------- ----------- Total adjustments (193,000) (58,000) (767,000) 34,000 ----------- ----------- ----------- ----------- Cash provided by (used in) operating activities 99,000 (63,000) 205,000 189,000 Investing activities: Capital expenditures (9,000) 0 (9,000) 0 Collection of investment income 0 5,000 0 11,000 Discontinued operations 0 0 0 0 ----------- ----------- ----------- ----------- Cash provided by (used in) investing activities (9,000) 5,000 (9,000) 11,000 Financing activities: Debenture purchases and debt settlement (13,000) 0 (148,000) 0 Other 1,000 (1,000) (2,000) (1,000) ----------- ----------- ----------- ----------- Cash provided by (used in) financing activities (12,000) (1,000) (150,000) (1,000) ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 78,000 (59,000) 46,000 199,000 Cash and cash equivalents at beginning of period 420,000 548,000 452,000 290,000 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 498,000 $ 489,000 $ 498,000 $ 489,000 =========== =========== =========== =========== See notes to consolidated financial statements. 6 SEMICON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) April 2, 1995 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K. NOTE B -- INCOME (LOSS) PER SHARE Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options and the assumed conversion of 13% Convertible Subordinated Debentures when their effect is dilutive. If the effect of the assumed conversion of 13% Convertible Subordinated Debentures is dilutive, net income used to calculate earnings per share is increased to include the after tax effect of debenture interest assumed to be forgone. Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding, excluding common equivalent shares which would be antidilutive. NOTE C -- INCOME TAXES At April 2, 1995, the Company had tax loss carryforwards of approximately $7,000,000 and tax credit carryforwards of approximately $500,000 available to offset future federal taxable income and operating loss carryforwards of approximately $8,900,000 and credit carryforwards of approximately $500,000 to offset future book income. These carryforwards expire principally in the years 2001-2007. These carryforwards may be subject to limitations on annual utilization under current Internal Revenue Service regulations. Book loss carryforwards exceed those available for income tax purposes due primarily to various accruals and reserves not currently deductible. 7 SEMICON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued April 2, 1995 NOTE D -- EXTRAORDINARY GAINS During the quarter ended October 2, 1994, the Company settled its debt obligations with NationsBank. The settlement reduced indebtedness and accrued interest by $468,000 and resulted in a $368,000 extraordinary gain. During the quarter ended April 2, 1995, the Company purchased $202,000 ($2,000 in the fiscal 1994 quarter) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $337,000 ($3,000 in the fiscal 1994 quarter) and resulted in a $316,000 ($3,000 in the fiscal 1994 quarter) extraordinary gain. During the first nine months of fiscal 1995, the Company purchased $581,000 ($104,000 in the fiscal 1994 period) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $951,000 ($157,000 in the fiscal 1994 period) and resulted in a $895,000 ($151,000 in the fiscal 1994 period) extraordinary gain. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION LIQUIDITY AND SOURCES OF CAPITAL The Company operates at the forbearance of its creditors. It continued to be in default of debt obligations aggregating $4,839,000 for principal and interest at April 2, 1995. The defaults exist because of non-payment of principal and interest for periods extending back to July 1990. The Company faces various environmental issues. The Company has a compliance deadline of August 2, 1995, to remediate environmental problems at its Burlington, Massachusetts operating site, currently estimated to cost $350,000 to $600,000. The Company will file a "Financial Inability" notice as required by the code of Massachusetts Regulations before the August 1995 compliance deadline. The Company was designated a potentially responsible party ("PRP") by the United States Environmental Protection agency at a superfund landfill site in Lowell, Massachusetts. The settling PRP group has demanded that the Company pay 10.8% of the $20,000,000 to $25,000,000 estimated cost of landfill cleanup. The Company intends to defend itself against this claim. In November 1989, the Commonwealth of Massachusetts notified the Company that the Massachusetts Department of Environmental Protection believes that the Company is liable for hazardous material cleanup at the former Microfab, Inc. site in Amesbury, Massachusetts. The Company denies responsibility and liability in the matter. Further, the Company has no outside source of financing and does not expect to be able to obtain any such financing. Customer insecurity about the Company's financial condition continues. The foregoing factors and the Company's operating losses make the Company's financial condition precarious. The Company continues to attempt to settle debt obligations at less than face amount and has succeeded in reducing the principal amount of its debt in default from $6,170,000 at June 30, 1990, to $3,337,000 at April 2, 1995. However, during that period of time, interest has 9 accrued on the unsettled portion of debt obligations in default to make the aggregate amount in default at April 2, 1995, $4,839,000. June 30, April 2, 1995 1990 Principal and Accrued Principal Principal Interest BayBank $ 795,000 $ 696,000 $ 707,000 Deferred Compensation and Other 820,000 439,000 439,000 NationsBank 430,000 0 0 13% Convertible Subordinated Debentures 4,125,000 2,202,000 3,693,000 ---------- ---------- ---------- $6,170,000 $3,337,000 $4,839,000 ========== ========== ========== Settlements to January 1, 1995, have included: purchases of $1,923,000 face amount of debentures for $133,000; settlement of $468,000 of NationsBank debt obligations for $100,000 and settlement of $438,000 of deferred compensation and other obligations for $74,000. Despite fiscal 1995 year to date retirements of $1,419,000 of debt obligations for $148,000 cash and extraordinary gains of $1,263,000, the Company's overall efforts since June 30, 1990, to complete a consensual non-bankruptcy debt restructuring have been unsuccessful. The Company has recorded an operating loss in every quarter except one since June 30, 1989. If the Company is unable to return to continuously profitable operations, to make satisfactory arrangements with its creditors and to satisfy its environmental obligations, the Company might be required to seek protection from its creditors under the United States Bankruptcy Code. The Company continues to suffer from the effects of a decrease in the demand for discrete semiconductor products used in military applications. The decrease in demand has resulted in fierce price competition and a shift in sales mix to commercial products where the Company must compete with large, highly automated domestic and foreign manufacturers. The decrease in inventories at April 2, 1995, as compared to June 30, 1994, reflected the Company's efforts to reduce inventory investment and improve inventory turnover. The decrease in accrued interest and indebtedness in default reflected the settlement of $1,419,000 of debt obligations during the period. 10 At April 2, 1995, the Company had a deficit in stockholders' equity aggregating $4,641,000 and its current liabilities exceeded its current assets by $4,233,000. The Company did not retain independent accountants to audit its 1993 and 1994 financial statements and it does not plan to retain independent accountants for 1995 because management does not believe the Company can afford the cost of an audit. RESULTS OF OPERATIONS Quarter Ended April 2, 1995 Net sales increased 1% or $9,000 from $1,554,000 for the third quarter of fiscal 1994 to $1,563,000 for the third quarter of fiscal 1995. Backlog at April 2, 1995 was $1,887,000 as compared to $1,576,000 the prior year and $1,733,000 at the end of the second quarter of fiscal 1995. The book-to-bill ratio for the quarter ended April 2, 1995 was 112% as compared to 99% a year ago. Price competition remained fierce. Gross profit on sales increased from $306,000 (20% of sales) for the third quarter of fiscal 1994 to $318,000 (20% of sales) for the third quarter of fiscal 1995. Selling, general and administrative expenses decreased $31,000 to $252,000 for the third quarter of fiscal 1995 from $283,000 for the third quarter of fiscal 1994. The decrease included an $18,000 decrease in administrative salaries as a result of a layoff and an $11,000 decrease in sales commissions paid to outside sales representatives. Interest expense decreased $8,000 to $90,000 for the third quarter of fiscal 1995 as a result of reductions in outstanding debt. Third quarter results for fiscal 1995 included extraordinary gains aggregating $316,000 ($3,000 in fiscal 1994) from purchases of the Company's 13% convertible subordinated debentures at discounted amounts. Nine Months Ended April 2, 1995 Net sales decreased 11% or $547,000 from $5,010,000 for the first nine months of fiscal 1994 to $4,463,000 for the first nine months of fiscal 1995. A drop in selling prices from a year ago and a change in sales mix to lower price products have caused average selling prices to decrease. Sales of high reliability military specification devices decreased $675,000 to 69% of total sales from $3,776,000 (75% of total sales) a year ago. Price competition remained fierce. Gross profit on sales decreased from $1,066,000 (21% of sales) for the first nine months of fiscal 1994 to $795,000 (18% of sales) for the first nine months of fiscal 1995. The decrease resulted from decreases in sales and selling prices which were not offset by corresponding decreases in fixed and other manufacturing costs. 11 Selling, general and administrative expenses increased $19,000 to $803,000 for the first nine months of fiscal 1995 from $784,000 for the first nine months of fiscal 1994. The increase related to a $45,000 bad debt expense credit in the first quarter of fiscal 1994 when the reserve for bad debts was reduced because of improved collection experience. Interest expense decreased $62,000 to $283,000 for the first nine months of fiscal 1995 as a result of reductions in outstanding debt. First nine months results for fiscal 1995 included extraordinary gains aggregating $972,000 ($155,000 in fiscal 1994) from purchases of the Company's 13% Convertible Subordinated Debentures and from settlement of the NationsBank debt at discounted amounts. 12 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K - None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEMICON, INC. Date: By: Richard C. Allard Executive Vice President and Chief Financial Officer 14