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 30, 1997 ------------------------ 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 or15(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 No X ------ ------ 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, 1997) 1 INDEX FORM 10-Q SEMICON, INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page 4 Consolidated Balance Sheet - March 30, 1997 and June 30, 1996. Consolidated Statement of Operations - Quarters ended March 30, 1997 and March 31, 1996 and nine months ended March 30, 1997 and March 31, 1996. 5 Consolidated Statement of Cash Flows - Quarters ended March 30, 1997 and March 31, 1996 and nine months ended March 30, 1997 and March 31, 1996. 6 Notes to Consolidated Financial Statements - March 30, 1997. 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 30, June 30 1997 1996 -------------- ------------ Current assets: Cash and cash equivalents $117,000 $240,000 Accounts receivable, less allowances of $10,000 ($10,000 at June 30, 1996) 483,000 781,000 Inventories: Work-in-process and finished products 553,000 655,000 Raw materials and supplies 222,000 274,000 ------------ ------------ 775,000 929,000 Other current assets 34,000 56,000 ------------ ------------ Total current assets 1,409,000 2,006,000 Property, plant and equipment Machinery and equipment 4,051,000 4,051,000 Leasehold improvements 130,000 130,000 ------------ ------------ 4,181,000 4,181,000 Less accumulated depreciation and amortization 4,081,000 4,048,000 ------------ ------------ 100,000 133,000 Other assets 1,000 1,000 ------------ ------------ $ 1,510,000 $ 2,140,000 ========= ======== See notes to consolidated financial statements. 3 SEMICON, INC. CONSOLIDATED BALANCE SHEET - Continued LIABILITIES AND STOCKHOLDERS' DEFICIT March 30, June 30, 1997 1996 ------------ ------------ Current liabilities: Accounts payable and other accrued liabilities $373,000 $423,000 Accrued compensation 162,000 185,000 Accrued interest 1,770,000 1,610,000 Federal and state income taxes 81,000 88,000 Indebtedness in default 2,675,000 2,731,000 Reserves for restructuring and environmental costs 1,299,000 1,300,000 ------------ ------------ Total current liabilities 6,360,000 6,337,000 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 (5,722,000) (5,069,000) ------------ ------------ Total stockholders' deficit (4,850,000) (4,197,000) ------------ ------------ $ 1,510,000 $ 2,140,000 ========== ========= See notes to consolidated financial statements. 4 SEMICON, INC. CONSOLIDATED STATEMENT OF OPERATIONS QUARTER ENDED NINE MONTHS ENDED March 30, March 31, March 30, March 31, 1997 1996 1997 1996 ------------- ------------- ------------ - Net Sales $ 1,393,000 $ 1,823,000 $ 3,848,000 $ 5,091,000 Costs and expenses: Cost of products sold 1,358,000 1,498,000 3,730,000 4,271,000 Selling, general and adminstrative 216,000 264,000 661,000 762,000 Interest 72,000 72,000 213,000 227,000 Other (income) expense 0 0 0 0 ------------ ------------ ----------- 1,646,000 1,834,000 4,604,000 5,260,000 ------------ ------------ ------------ Income (loss) before income taxes and (253,000) (11,000) (756,000) (169,000) extraordinary item Income taxes 0 0 0 0 ------------ ---------- ------------ Income (loss) before extraordinary item (253,000) (11,000) (756,000) (169,000) Extraordinary items: Gain on purchase of debentures 20,000 17,000 103,000 212,000 Gain on debt settlement 0 0 0 158,000 ------------ ------------ ------------ 20,000 17,000 103,000 360,000 ------------ ------------ ------------ Net income (loss) $ (233,000) $ 6,000 $ 653,000 $ 201,000 ============ ========== ========= ========= Income (loss) per share: Before extraordinary items ($0.07) $0.00 ($0.23) ($0.05) Extraordinary items 0.00 0.00 0.03 0.11 ------------ ------------ ------------ Net income (loss) per share ($0.07) $0.00 ($0.20) $0.06 ======== ======== ======= ====== 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 QUART ER ENDED NINE MON THS ENDED March 30, March 31, March 30, March 31, 1997 1996 1997 1996 ------------ ------------- ------------ --- Operating activities: Net income (loss) $ (233,000) $ 6,000 $ (653,000) $ 201,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,000 5,000 33,000 15,000 Provision for bad debts 0 0 0 0 Gain on purchase of debentures (20,000 ) (17,000) (103,000) -212,000 Gain on debt settlement 0 0 0 -158,000 Changes in assets and liabilities: Accounts receivable (48,000 ) 168,000 298,000 184,000 Inventory 85,000 (109,000) 154,000 -302,000 Other current assets 14,000 ( 25,000) 22,000 -3,000 Accounts payable and accrued expenses 109,000 9,000 137,000 107,000 Income taxes payable ( 2,000) ( 3,000) (7,000) -12,000 Other 0 1,000 0 8,000 ------------ ------------ ------------ ---- Total adjustments 149,000 29,000 534,000 (373,000) ------------ ------------ ------------ -- Cash provided by (used in) operating activities (84,000) 35,000 (119,000) (172,000) Investing activities: Capital expenditures 0 0 0 -76,000 Collection of investment income 0 0 0 0 ----------- ------------ ------------ --- Cash provided by (used in) investing activities 0 0 0 (76,000) Financing activities: Debenture purchases and debt settlement (1,000) (3,000) (4,000) -8,000 Other 0 2,000 0 0 ----------- ----------- ---------- ------- Cash provided by (used in) financing actitivies (1,000) (1,000) (4,000) -8,000 ----------- ----------- ---------- - Increase (decrease) in cash and cash equivalents (85,000) 34,000 (123,000) (256,000) Cash and cash equivalents at beginning of period 202,000 262,000 240,000 552,000 ------------ ------------ ------------ --------- Cash and cash equivalents at end of period $ 117,000 $ 296,000 $ 117,000 $ 296,00 ======== ======= ====== ====== See notes to consolidated financial statements. 6 SEMICON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 30, 1997 NOTE A -- UNAUDITED FINACIAL STATEMENTS AND BASIS OF PRESENTATION The Company has not had its financial statements audited in accordance with Securities and Exchange Commission regulations and accordingly it has indicated on the cover page of its Securities and Exchange Commission filings that it has not filed all reports required. The Company cannot afford the cost of an audit of its financial statements. In the opinion of management, any available cash should be applied to debt settlement. The financial statements of the Company have been presented on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company may not be able to continue its operations because it is experiencing losses, negative working capital, and a stockholders' deficit with various debt defaults. The Company's plans at this time are focused on restructuring its debt, stabilizing operating results and providing cash flow. Management believes there is more potential value for creditors and stockholders in continuing to operate the Company and attempting to restructure debt than there is in bankruptcy and bankruptcy liquidation. 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 30, 1997, the Company had tax loss carryforwards of approximately $7,300,000 and tax credit carryforwards of approximately $500,000 available to offset future federal taxable income and operating loss carryforwards of approximately $9,400,000 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 30, 1997 NOTE D -- RESERVES FOR RESTRUCTURING AND ENVIRONMENTAL COSTS The balance sheet reserves for restructuring and environmental costs included the following: March 30, 1997 June 30, 1996 ------------------------ ------------------ Environmental matters $ 848,000 $ 848,000 Debt restructuring and related matters 451,000 452,000 --------------- ---------------- $ 1,299,000 $ 1,300,000 ========= ========= Reserves for environmental matters were originally established in 1990 to cover (1) the estimated cost of remediation of an environmental matter at the Company's Burlington, Massachusetts facility, (2) a $200,000 potentially responsible party group settlement contingent liability associated with the Company's Burlington, Massachusetts facility to be paid when the Company's net worth exceeds $1,000,000 and (3) a potential liability associated with an environmental matter at a former subsidiary operation. The Company has agreed to remediate environmental problems at its Burlington, Massachusetts operating site, currently estimated to cost 350,000 to 600,000 by November 1999. In September 1996, the Company filed its most recent "financial inability" notice with the commonwealth of Massachusetts indicating that it cannot afford to pay the cost of remediation. If the Commonwealth of Massachusetts requires remediation in spite of the Company's financial inability to comply, the Company will be forced to liquidate under Chapter 7 of the United States Bankruptcy Code. 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 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. Comprehensive remediation would exceed the Company's cash resources and force liquidation of the Company under the United States Bankruptcy Code. Reserves for debt restructuring and related matters were established in 1990 to cover the estimated cost of consensual non-bankruptcy restructuring and bankruptcy restructuring. NOTE E -- EXTRAORDINARY GAINS During the quarter ended March 30, 1997, the Company purchased $11,000 ($10,000 in the fiscal 1996 quarter) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $21,000 ($18,000 in the fiscal 1996 quarter) and resulted in a $20,000 ($17,000 in the fiscal 1996 quarter) extraordinary gain. During the first nine months of fiscal 1997, the Company purchased $56,000 ($125,000 in the fiscal 1996 period) face amount of its 13% Convertible Subordinated Debentures. The purchases reduced indebtedness and accrued interest by $96,000 ($220,000 in the fiscal 1996 period) and resulted in a $103,000 ($212,000 in the fiscal 1996 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. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION LIQUIDITY AND SOURCES OF CAPITAL The Company continues to operate because management believes an operating company offers more potential value for creditors and stockholders than bankruptcy and bankruptcy liquidation. Management's focus is on restructuring debt, stabilizing operating results and providing positive cash flow. Management's efforts to date have been unsuccessful as evidenced by the continued deterioration of the Company's financial condition and liquidity. The Company continues to generate operating losses and its cash flow is negative.If this continues, the Company will seek protection from its creditors under the United States Bankruptcy Code. The Company faces various environmental issues as described in Note C to the consolidated financial statements. Enforced remedial action on any of these issues could force the Company to liquidate under Chapter 7 of the United States Bankruptcy code. The Company operates at the forebearance of its creditors. It continues to be in default of debt obligations aggregating $4,445,000 for principal and interest at March 30, 1997. The defaults exist because of non-payment of principal and accrued interest for periods extending back to July 1990. 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 $2,675,000 at March 30, 1997. 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 30, 1997, $4,445,000. June 30, March 30, 1997 1990 Principal and Principal Principal Accrued Interest BayBank $ 795,000 $ 696,000 $ 779,000 Deferred Compensation and Other 820,000 180,000 180,000 NationsBank 430,000 0 0 13% Convertible Subordinated Debentures 4,125,000 1,799,000 3,486,000 ------------ -------------- --------------- $ 6,170,000 $ 2,675,000 $ 4,445,000 ========= ========= ========= 9 Settlements to March 30, 1997, have included: purchases of $2,326,000 face amount of debentures for $158,000; 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 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 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 epoxy encapsulated semiconductor products are no longer able to compete with foreign manufacturers, and, accordingly, the Company will phase out its epoxy product lines during calendar year 1997. Epoxy sales amounted to $890,000 in fiscal year 1996. The physical assets will be sold, salvaged and scrapped. Any cash realized from epoxy asset disposition will be applied first to debt settlement and thereafter to manufacturing the remaining product lines. The Company's overall liquidity decreased significantly during the nine months ended March 30, 1997. The decrease in accounts receivable and inventories at March 30, 1997, as compared to June 30, 1996, reflected the Company's collection of accounts receivable at a rate faster than product was shipped and the use of inventories to generate shipments. The cash generated from these activities was used to fund operating losses. At March 30,1997, the Company had a deficit in stockholders' equity aggregating $4,850,000 and its current liabilities exceeded its current assets by$4,951,000 RESULTS OF OPERATIONS QUARTER ENDED MARCH 30, 1997 Net sales decreased 24% or $430,000 from $1,823,000 for the third quarter of fiscal 1996 to $1,393,000 for the third quarter of fiscal 1997. The decrease reflected a decrease in the demand for certain commercial semiconductor products shipped in fiscal 1996. Backlog at March 30, 1997 was $1,803,000 as compared to $1,815,000 the prior year and $1,885,000 at the end of the fourth quarter of fiscal 1996. The book-to-bill ratio for the quarter ended March 30, 1997 was 82% as compared to 88% a year ago. Gross profit on sales decreased from $325,000 for the third quarter of fiscal 1996 to $35,000 for the third quarter of fiscal 1997. Gross margin decreased as a result of lower sales and poorer fixed costs coverage and as a result of increases in silicon costs. Selling, general and administrative expenses decreased $48,000 to $216,000 for the third quarter of fiscal 1997 from $264,000 for the third quarter of fiscal 1996. The decrease related to decreases in sales wages and commissions. Third quarter results for fiscal 1997 included extraordinary gains aggregating $20,000 ($17,000 in the fiscal 1996 quarter) from purchases of the Company's 13% Convertible Subordinated Debentures at discounted amounts. 10 NINE MONTHS ENDED MARCH 30, 1997 Net sales decreased 24% or $1,1243,000 from $5,091,000 for the first nine months of fiscal 1996 to $3,848,000 for the first nine months of fiscal 1997. The decrease reflected a decrease in the demand for certain commercial semiconductor products shipped in fiscal 1996. Gross profit on sales decreased from $820,000 (16% of sales) for the first nine months of fiscal 1996 to $118,000 (3% of sales) for the first nine months of fiscal 1997. Gross margin decreased as a result of lower sales and poorer fixed costs coverage and as a result of increased silicon costs. Selling, general and administrative expenses decreased $101,000 to $661,000 for the first nine months of fiscal 1997 from $762,000 for the first nine months of fiscal 1996. The decrease related to a decrease in sales wages and commissions. Interest expense decreased $14,000 to $213,000 for the first nine months of fiscal 1997 as a result of reductions in outstanding debt. First nine months results for fiscal 1997 included extraordinary gains aggregating $103,000 ($370,000 in the fiscal 1996 first nine months) from purchases of the Company's 13% Convertible Subordinated Debentures and from settlement of deferred compensation obligations 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