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 March 31, 1996 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 of (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, 1996) 1 INDEX FORM 10-Q SEMICON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page Consolidated Balance Sheet - March 31, 1996 and June 30, 1995. 3 Consolidated Statement of Operations - Quarters ended March 31, 1996 and April 2, 1995 and nine months ended March 31, 1996 and April 2, 1995. 5 Consolidated Statement of Cash Flows - Quarters ended March 31, 1996 and April 2, 1995 and nine months ended March 31, 1996 and April 2, 1995. 6 Notes to Consolidated Financial Statements - March 31, 1996. 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 12 SIGNATURES 12 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) SEMICON, INC. CONSOLIDATED BALANCE SHEET ASSETS March 31, June 30, 1996 1995 ----------- ----------- Current assets: Cash and cash equivalents $ 296,000 $ 552,000 Accounts receivable, less allowances of $10,000 ($10,000 at June 30, 1995) 782,000 966,000 Inventories: Work-in-process and finished products 710,000 506,000 Raw materials and supplies 284,000 186,000 ----------- ----------- 994,000 692,000 Other current assets 57,000 54,000 ----------- ----------- Total current assets 2,129,000 2,264,000 Property, plant and equipment Machinery and equipment 3,966,000 3,965,000 Leasehold improvements 197,000 123,000 ----------- ----------- 4,163,000 4,088,000 Less accumulated depreciation and amortization 4,037,000 4,023,000 ----------- ----------- 126,000 65,000 Other assets 1,000 1,000 ----------- ----------- $ 2,256,000 $ 2,330,000 =========== =========== See notes to consolidated financial statements. 3 SEMICON, INC. CONSOLIDATED BALANCE SHEET - Continued LIABILITIES AND STOCKHOLDERS' DEFICIT March 31, June 30, 1996 1995 ----------- ----------- Current liabilities: Accounts payable and other accrued liabilities $ 287,000 $ 360,000 Accrued compensation 268,000 197,000 Accrued interest 1,553,000 1,427,000 Federal and state income taxes 88,000 100,000 Indebtedness in default 1,872,000 1,997,000 Reserves for restructuring and environmental costs 1,100,000 1,100,000 Liabilities relating to discontinued operations 896,000 896,000 ----------- ----------- Total current liabilities 6,064,000 6,077,000 Retiree deferred compensation 179,000 441,000 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 (4,859,000) (5,060,000) ----------- ----------- Total stockholders' deficit (3,987,000) (4,188,000) ----------- ----------- $ 2,256,000 $ 2,330,000 =========== =========== See notes to consolidated financial statements. 4 SEMICON, INC. CONSOLIDATED STATEMENT OF OPERATIONS QUARTER ENDED NINE MONTHS ENDED March 31, April 2, March 31, April 2, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Net Sales $ 1,823,000 $ 1,563,000 $ 5,091,000 $ 4,463,000 Costs and expenses: Cost of products sold 1,498,000 1,245,000 4,271,000 3,668,000 Selling, general and adminstrative 264,000 252,000 762,000 803,000 Interest 72,000 90,000 227,000 283,000 Other (income) expense 0 0 0 0 ----------- ----------- ----------- ----------- 1,834,000 1,587,000 5,260,000 4,754,000 ----------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item (11,000) (24,000) (169,000) (291,000) Income taxes 0 0 0 0 ----------- ----------- ----------- ----------- Income (loss) before extraordinary item (11,000) (24,000) (169,000) (291,000) Extraordinary items: Gain on purchase of debentures 17,000 316,000 212,000 895,000 Gain on debt settlement 0 0 158,000 368,000 ----------- ----------- ----------- ----------- 17,000 316,000 370,000 1,263,000 ----------- ----------- ----------- ----------- Net income (loss) $ 6,000 $ 292,000 $ 201,000 $ 972,000 =========== =========== =========== =========== Income (loss) per share: Before extraordinary items $0.00 ($0.01) ($0.05) ($0.09) Extraordinary items 0.00 0.10 0.11 0.38 ----------- ----------- ----------- ----------- Net income (loss) per share $0.00 $0.09 $0.06 $0.29 =========== =========== =========== =========== 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 March 31, April 2, March 31, April 2, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Operating activities: Net income (loss) $ 6,000 $ 292,000 $ 201,000 $ 972,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,000 3,000 15,000 9,000 Provision for bad debts 0 0 0 0 Gain on purchase of debentures (17,000) (316,000) (212,000) (895,000) Gain on debt settlement 0 0 (158,000) (368,000) Changes in assets and liabilities: Accounts receivable 168,000 (130,000) 184,000 18,000 Inventory (109,000) 107,000 (302,000) 263,000 Other current assets (25,000) 10,000 (3,000) (1,000) Accounts payable and accrued expenses 9,000 127,000 107,000 195,000 Income taxes payable (3,000) 0 (12,000) (4,000) Other noncurrent obligations 1,000 6,000 8,000 16,000 ----------- ----------- ----------- ----------- Total adjustments 29,000 (193,000) (373,000) (767,000) ----------- ----------- ----------- ----------- Cash provided by (used in) operating activities 35,000 99,000 (172,000) 205,000 Investing activities: Capital expenditures 0 (9,000) (76,000) (9,000) Collection of investment income 0 0 0 0 Discontinued operations 0 0 0 0 ---------- ----------- ----------- ----------- Cash provided by (used in) investing actitivies 0 (9,000) (76,000) (9,000) Financing activities: Debenture purchases and debt settlement (3,000) (13,000) (8,000) (148,000) Other 2,000 1,000 0 (2,000) ----------- ----------- ----------- ----------- Cash provided by (used in) financing actitivies (1,000) (12,000) (8,000) (150,000) ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 34,000 78,000 (256,000) 46,000 Cash and cash equivalents at beginning of period 262,000 420,000 552,000 452,000 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 296,000 $ 498,000 $ 296,000 $ 498,000 =========== =========== =========== =========== See notes to consolidated financial statements. 6 SEMICON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 1996 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 March 31, 1996, the Company had tax loss carryforwards of approximately $6,300,000 and tax credit carryforwards of approximately $500,000 available to offset future federal taxable income and operating loss carryforwards of approximately $8,100,000 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 March 31, 1996 NOTE D -- EXTRAORDINARY GAINS During the quarter ended March 31, 1996, the Company purchased $10,000 ($202,000 in the fiscal 1995 quarter) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $18,000 ($337,000 in the fiscal 1995 quarter) and resulted in a $17,000 ($316,000 in the fiscal 1995 quarter) extraordinary gain. During the first nine months of fiscal 1996, the Company purchased $125,000 ($581,000 in the fiscal 1995 period) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $220,000 ($951,000 in the fiscal 1995 period) and resulted in a $212,000 ($895,000 in the fiscal 1995 period) extraordinary gain. During the nine months ended March 31, 1996, the Company settled deferred compensation obligations aggregating $270,000. The settlement resulted in a $158,000 extraordinary gain. The settlement requires the Company to make payments through October 1997. At March 31, 1996, the settlement payments were secured by a $65,000 security interest in accounts receivable. During the nine months ended April 2, 1995, 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. 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 forebearance of its creditors. It continues to be in default of debt obligations aggregating $4,300,000 for principal and interest at March 31, 1996. The defaults exist because of non-payment of principal and accrued interest for periods extending back to July 1990. The Company faces various environmental issues. The Company had 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 filed 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 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 believed that the Company has liability for hazardous material cleanup at the former subsidiary, Microfab, Inc., site in Amesbury, Massachusetts. The Company denies responsibility and liability in the matter. The Company is financially unable to pay these claims or effect remediations of these issues. If pursued by others, the company could be forced to seek protection from its creditors under the United States Bankruptcy Code. The Company has no outside source of financing and does not expect to be able to obtain any such financing unless and until it eliminates its insolvency and achieves profitability. 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 $2,747,000 at March 31, 1996. However, during that period of time, interest has accrued on the unsettled portion of debt obligations in default to make the aggregate amount in default at March 31, 1996, $4,300,000. June 30, March 31, 1996 1990 -------------------------------- Principle and Principal Principal Accured Interest --------- --------- ---------------- BayBank $ 795,000 $ 696,000 $ 738.000 Deferred Compensation and Other 820,000 179,000 179,000 NationsBank 430,000 0 0 13% Convertible Subordinated Debentures 4,125,000 1,872,000 3,383,000 ------------- ------------- ------------- $ 6,170,000 $ 2,747,000 $ 4,300,000 ============= ============= ============= 9 Settlements to March 31, 1996, have included: purchases of $2,253,000 face amount of debentures for $153,000; settlement of $468,000 of NationsBank debt obligations for $100,000 and settlement of $716,000 of deferred compensation and other obligations for $186,000. Despite these settlements, the Company's overall efforts since June 30, 1990, to complete a consensual non-bankruptcy debt restructuring have been unsuccessful. The Company has recorded operating losses in all but three quarters since June 30, 1989. If the Company is unable to return to consistently 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 has suffered from the effects of a post cold war 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 Company's overall liquidity decreased significantly during the first nine month of fiscal 1996. The decrease in cash at March 31, 1996, as compared to June 30, 1995, reflected the Company's investment in inventory, plant and equipment during the period. The decrease in accounts receivable at March 31, 1996, as compared to June 30, 1995, reflected the increased cash collection rate during the month ended March 31, 1996. At March 31, 1996, the Company had a deficit in stockholders' equity aggregating $3,987,000 and its current liabilities exceeded its current assets by $3,935,000. The Company did not retain independent accountants to audit its fiscal 1993, 1994 and 1995 financial statements because management did not believe the Company could afford the cost of an audit. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 1996 Net sales increased 16% or $260,000 from $1,563,000 for the third quarter of fiscal 1995 to $1,823,000 for the third quarter of fiscal 1996. Backlog at March 31, 1996 was $1,815,000 as compared to $1,887,000 the prior year and $1,868,000 at the end of the fourth quarter of fiscal 1995. The book-to-bill ratio for the quarter ended March 31, 1996 was 88% as compared to 112% a year ago. Gross profit on sales increased slightly from $318,000 for the third quarter of fiscal 1995 to $325,000 for the third quarter of fiscal 1996. Gross margin decreased from 20% of sales for the third quarter of fiscal 1996 as a result of increases in silicon costs. Selling, general and administrative expenses increased $12,000 to $264,000 for the third quarter of fiscal 1996 from $252,000 for the third quarter of fiscal 1995. The increase related to increases in sales wages and fringes. Interest expense decreased $18,000 to $72,000 for the third quarter of fiscal 1996 as a result of reductions in outstanding debt. 10 Third quarter results for fiscal 1996 included extraordinary gains aggregating $17,000 ($316,000 in the fiscal 1995 quarter) from purchases of the Company's 13% Convertible Subordinated Debentures. NINE MONTHS ENDED MARCH 31, 1996 Net sales increased 14% or $628,000 from $4,463,000 for the first nine months of fiscal 1995 to $5,091,000 for the first nine months of fiscal 1996. The increase reflected a recent industry wide increase in the demand for commercial semiconductor products. Gross profit on sales increased slightly from $795,000 for the first nine months of fiscal 1995 to $820,000 for the first nine months of fiscal 1996. Gross margin decreased from 18% of sales for the first nine months of fiscal 1995 to 16% of sales for the first nine months of fiscal 1996 as a result of increases in silicon costs. Selling, general and administrative expenses decreased $41,000 to $762,000 for the first nine months of fiscal 1996 from $803,000 for the first nine months of fiscal 1995. The decrease related to a decrease in administrative wages and fringes that resulted from a reduction in personnel. Interest expense decreased $56,000 to $227,000 for the first nine months of fiscal 1996 as a result of reductions in outstanding debt. First nine months results for fiscal 1996 included extraordinary gains aggregating $370,000 from purchases of the Company's 13% Convertible Subordinated Debentures and from settlement of deferred compensation obligations at discounted amounts. First nine months results for fiscal 1995 included extraordinary gains aggregating $1,263,000 from purchases of the Company's 13% Convertible Subordinated Debentures and from settlements of the NationsBank debt at discounted amounts. 11 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. 27.1 - Financial Data Schedule (b) Reports on Form 8-K - None 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 12