FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended JUNE 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 incorporation or organization) Identification No.) 10 North Avenue Burlington, Massachusetts 01803 (Address of principal executive (Zip Codes) offices) Registrant's telephone number, including area code: (617) 272-9015 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.25 par value (Title of Class) Indicate by checkmark 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. Yes X No ----- ----- Indicate by checkmark 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 the filing requirements for at least the past 90 days. Yes No X ----- ----- The aggregate market value of voting stock held by nonaffiliates of the registrant as of August 31, 1997 was $58,000. The number of shares of common stock outstanding as of August 31, 1997 was 3,150,073. DOCUMENTS INCORPORATED BY REFERENCE None. PART I Item 1. Business General: Semicon, Inc. (the "Company") was founded in 1958. Through its subsidiary, Semicon Components, Inc., the Company is engaged in the manufacture and sale of discrete semiconductors. Discrete semiconductors are used in electronic products to convert alternating to direct current, to control the direction of electrical current flow, to regulate voltages and to protect sensitive circuitry from line surges and transient voltage spikes. Products: The Company's products include a broad line of rectifiers, zener diodes, transient voltage suppressors and unique assemblies used primarily in high reliability military-aerospace, telecommunications and commercial applications. Most of the Company's products are catalog items made to United States government and industry specifications. The Company also sells unique assemblies designed and assembled for specific circuitry needs of particular customers. Sales and Marketing: Approximately 47% of the Company's sales are made to five franchised distributors. The remainder of the Company's sales are to original equipment manufacturers ("OEM"). OEM sales are made by Company employees and two independent sales representative organizations. In the past fiscal year, the Company sold semiconductors to 91 customers at 117 locations. During that period Zeus Electronics, ACI Electronics Corp. and Micro Device Electronics accounted for 20%, 15% and 14% of sales, respectively. Approximately 69% of fiscal 1997 sales were military/defense products and the remainder were industrial/commercial products. Changes in United States defense appropriations and procurement policies, and changes in the Department of Defense Qualified Product List and product specifications could adversely affect the Company's sale of military/defense products. Competition: Microsemi Corp. is the dominant competitor in the military-aerospace market served by the Company. Microsemi Corp. offers a significantly broader range of semiconductor products than the Company. The Company is the only alternative source to Microsemi for nine series of military devices. Semtech Corporation and BKC Semiconductors Incorporated also compete with the Company on several series of military devices. All of the Company's competitors are larger and have greater resources than the Company. Competition in discrete semiconductor sales is a function of price, quality, breadth of product offerings and service (primarily delivery). Due to technological innovation, domestic and off-shore competition and decreased demand for military products, discrete semiconductors have been subject to decreasing prices for many years. 2 Backlog: Backlog, believed to be firm, totaled approximately $1,450,000 and $1,755,000 as of August 31, 1997 and 1996, respectively. Substantially all of the 1997 amount could be expected to be shipped within a year. Backlog has no seasonal aspects and is subject to cancellation and rescheduling, in most cases without penalty. Research and Development: Research and development costs are not separately accounted for but management estimates that during each of the fiscal years ended June 30, 1997, 1996 and 1995 less than $200,000 was spent on Company-sponsored activities relating to the improvement of existing products and development of new products. Raw Materials: Historically, raw materials essential to satisfy the precise requirements of the military specifications for products which represented approximately 69% of the Company's sales have been available in adequate quantities at competitive prices. However, changes in government specification, raw material availability or increased cost of raw materials could have an adverse impact on Company operations. Environmental Regulation: Operations of the Company are subject to federal, state and local laws relating to the environment. See Item 7 and Note C of Notes to Financial Statements regarding certain environmental matters. Patents and Technology: The Company holds a number of patents relating to semiconductor devices but does not currently consider them to be significant to its business. Although the Company is not aware of any infringement, it is possible that one or more of the products of the Company may infringe existing patents of others. The Company is not aware of any technological development that may render its products obsolete but, like all companies in high technology businesses, it is subject to that risk. Employees: As of August 31, 1997, the Company had 73 employees. Item 2. Properties The Company conducts its operations in approximately 30,000 square feet in a leased building located in Burlington, Massachusetts (with a lease expiring in June 1998). Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of security holders. 3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded in the over-the-counter market. The following table sets forth the range of the closing high bid and low ask prices of the Company's Common Stock in the over-the- counter market, as reported daily by the National Quotation Bureau, Inc. Such over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions. Fiscal 1996 Fiscal 1997 ------------- ------------ High Bid Low Ask High Bid Low Ask First Quarter $.01 to $.01 $.05 to $ .05 $.01 to $.01 $.05 to $.05 Second Quarter .01 to .01 .05 to .05 .01 to .01 .05 to .05 Third Quarter .01 to .01 .05 to .05 .001 to .01 .05 to .05 Fourth Quarter .01 to .01 .05 to .05 .001 to .001 .05 to .05 The approximate number of stockholders of record at August 31, 1997, was 454. The Company has paid no cash dividends to date. The Company's indenture relating to its 13% Convertible Subordinated Debentures and a guarantee agreement relating to industrial revenue bonds payable to BankBoston contain limitations on the payment of cash dividends. At August 31, 1997, under these limitations, the Company was prohibited from paying any dividends. Item 6. Selected Financial Data For selected financial data for the five years ended June 30, 1997, see Part IV of this Report, page 30, incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in connection with the consolidated financial statements, the notes to the consolidated financial statements and the five-year summary of selected financial data. 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 4 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 environment 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 $4,500,000 for principal and interest at June 30, 1997. The defaults exist because of nonpayment 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 $2,668,000 at June 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 June 30, 1997, $4,500,000. June 30, June 30, 1997 1990 Principal and Principal Principal Accrued Interest -------------------------------------------- BankBoston $ 795,000 $ 695,000 $ 789,000 Deferred Compensation and Other 820,000 180,000 180,000 NationsBank 430,000 0 0 13% Convertible Subordinated Debentures 4,125,000 1,793,000 3,531,000 ----------- ---------- ---------- $6,170,000 $2,668,000 $4,500,000 =========== ========== ========== Settlements to June 30, 1997, have included: purchases of $2,332,000 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. 5 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 effect 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 $348,000 in fiscal 1997 and $911,000 in fiscal 1996. The physical assets will be sold, salvaged and scrapped. The Company's overall liquidity decreased significantly during the year ended June 30, 1997. The decrease in accounts receivable and inventories at June 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 June 30, 1997, the Company had a deficit in stockholders' equity aggregating $4,957,000 and its current liabilities exceeded its current assets by $5,044,000. Results Of Operations Net sales of $5,138,000 for fiscal 1997 were down 22% or $1,489,000 from $6,627,000 for fiscal 1996 which was up 8% or $469,000 from $6,158,000 for fiscal 1995. Net sales for the first half of fiscal 1996 reflected a positive trend in the demand for the Company's commercial semiconductor products. The trend reversed in the second half of fiscal 1996. Bookings were 90% of sales for fiscal 1997 as compared to 123% of sales for fiscal 1996 and 105% of sales for fiscal 1995. Backlog at June 30, 1997 was $1,366,000 as compared to $1,885,000 at June 30, 1996 and $1,868,000 at June 30, 1995. Gross profit on sales was $262,000 (5% of sales) for fiscal 1997 as compared to $879,000 (13% of sales) for fiscal 1996 and $1,245,000 (20% of sales) for fiscal 1995. Gross profit has decreased over the past three years as a result of lower sales, poorer fixed costs coverage and increased silicon costs. Selling, general and administrative expenses decreased $82,000 from 1995 to 1996 and $126,000 from 1996 to 1997. The decreases resulted from decreases in sales and sales commissions and from decreases in sales and administrative personnel. 6 Interest expense decreased from fiscal 1995 through fiscal 1997 as a result of reductions in outstanding debt. Other income for fiscal 1995 represented an $18,000 gain on the sale of property located in North Carolina. The $117,000 extraordinary gain on purchases of debentures in fiscal 1997 ($242,000 in 1996 and $1,230,000 in 1995) resulted from the purchase of $62,000 ($142,000 in 1996 and $786,000 in 1995) face amount of 13% convertible Subordinated Debentures at a discount. Extraordinary gains on debt settlement in fiscal 1996 and 1995 resulted from settlements of deferred compensation obligations and NationsBank debt obligations at discounted amounts. Item 8. Financial Statements and Supplementary Data See Consolidated Financial Statements, part IV of this Report, pages 15 to 29, incorporated herein by reference. Item 9. Disagreements on Accounting and Financial Disclosure The Company believed it could not afford the cost of an independent audit for 1997, 1996 and 1995. Accordingly, management and the Board of Directors determined not to retain auditors to examine and report on the Company's financial statements for those periods. 7 PART III Item 10. Directors and Executive Officers of the Registrant The directors of the Company are as follows: Principal Occupation Director Name for the past five years Age Since CLASS I DIRECTORS: Harold W. Mahar, Jr. President and Chief 54 1988 Executive Officer since January 1988 and Director of the Company since April 1988. Richard C. Allard Executive Vice President 52 1990* and Chief Financial Officer and Director of the Company since September 1990; Vice President Finance and Treasurer of the Company since June 1981. CLASS II DIRECTORS: None CLASS III DIRECTORS: None *Mr. Allard was elected Director by the Board of Directors on September 19, 1990, to fill the vacancy created by the retirement of a director. 8 Under Massachusetts law, the Board of Directors of the Company is classified into three classes with the term of office of one class expiring each year. The terms of the Class I, II and III directors expired in 1990, 1991 and 1992, respectively. Each of the Directors holds office until the annual meeting of shareholders in the year in which such director's term expires and until such director's successor is elected and qualified. Because no annual meetings have been held since 1989, Mr. Mahar and Mr. Allard are continuing as Class I directors. Mr. Mahar and Mr. Allard are the only executive officers of the Company. Each of the executive officers of the Company holds office until the first meeting of directors following the annual meeting of shareholders and until his successor is elected and qualified. Mr. Bruce W. Everitt resigned as a director May 22, 1997. The Board of Directors held 11 meetings during the past fiscal year. All directors attended each meeting. There were no Board of Directors committee meetings during the past fiscal year. The duties of the Audit Committee are generally to review the Company's accounting policies and practices, the audit and the services provided by the independent auditors and to advise the Board of Directors with respect to the engagement of independent auditors. The duties of the Compensation Committee are generally to establish the compensation of the chief executive officer of the Company and to review incentive compensation plans and related programs of the Company. The duty of the Equity Incentive Plan Committee is to administer the Company's Equity Incentive Plan. The duty of the Employee Stock Purchase Plan Committee is to administer the Company's Employee Stock Purchase Plan. The Board of Directors does not have a standing nominating committee. At their suggestion, since 1990, directors received no compensation for serving on the Board. 9 Item 11. Executive Compensation Set forth below is information as to the cash compensation paid by the Company for each of the three fiscal years ended June 30, 1997, to its chief executive officer who was the only executive officer to be paid more than $100,000 in any of the last three fiscal years: Summary Compensation Table: Name and Principal Annual Compensation Position Year Salary ---------------------- ---------------------- Harold W. Mahar, Jr., 1997 $121,000 President and Chief 1996 $125,000 Executive Officer 1995 $125,000 Effective May 5, 1997 Mr. Mahar's annual salary was reduced to $100,000. The Company paid no bonuses or other compensation to its chief executive officer during the three years ended June 30, 1997. Further, the Company made no long term compensation awards or payouts to its chief executive officer during the three years ended June 30, 1997. Option/SAR Grants in Last Fiscal Year: None. Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values: None. Long-Term Incentive Plans-Awards in Last Fiscal Year: None. The Company has a deferred compensation agreement with Mr. Allard under which the Company has agreed to pay him, upon his retirement at age 65, $24,000 annually until the later of ten years or his death, subject to certain conditions. If Mr. Allard becomes disabled prior to his retirement, the Company has agreed to pay him $12,000 annually for life. The agreement further provides that if Mr. Allard dies while employed by the Company, the Company will pay Mr. Allard's spouse or other beneficiary $28,000 annually for ten years. The Company has severance agreements with its executive officers under which the Company agrees to pay severance benefits to each such executive, consisting of a percentage of his annual base salary (175% in the case of Mr. Mahar and 150% in the case of Mr. Allard) at the rate in effect immediately prior to the termination of employment or the change of control, whichever is higher. In addition, the executive will be entitled to certain other benefits including the acceleration of the exercisability of outstanding stock options, continued participation for up to one year in group health and medical insurance 10 plans, the payment by the Company of legal fees and expenses incurred as a result of termination of employment, and under certain circumstances, the executive shall have the option to decrease payments or benefits payable under the agreement to avoid any excise taxes payable by the executive as a result of the severance benefits. The benefits are payable to the executive only if his employment is terminated for any reason other than for cause (as defined in the agreement), or if the executive terminates his employment as the result of specified justification, in all cases during a period of two years following a "change of control" of the Company. A change of control is defined to include the acquisition of 30% or more of the combined voting power of the Company's then outstanding securities, other changes of control required to be reported as determined by certain regulatory authorities, and certain changes in membership of the Board of Directors. Such severance payments would not be reduced for compensation received by the executive from any new employment. At the option of the Company, the agreement shall not apply to a change of control which takes place five years after the date of execution of the agreement. Under these agreements, based upon the annual base salary to be paid by the Company to the executive for fiscal 1998, change of control cash severance payments would be approximately $174,000 and $126,000, respectively, for Messrs. Mahar and Allard. 11 Item 12. Security Ownership of Certain Beneficial Owners and Management Principal Owners of Common Stock: The following table sets forth, as of August 31, 1997, the beneficial ownership (as defined in the rules of the Securities and Exchange Commission) of persons known to the Company to be such owner of more than five percent of the outstanding Common Stock of the Company, based on information on file with the Securities and Exchange Commission: Common Stock Percent Name and Address Owned Beneficially (1) of Class - -------------------- ---------------------- -------- Microsemi Corp. 581,987 18.5% 2830 Fairview Street P.O. Box 26890 Santa Ana, CA 92799-6890 Mary Jean Robison 390,188 (2) 12.4% Robert E. House 210,562 (3) 6.7% (1) Each identified stockholder has sole voting and dispositive power except that Mrs. Robison is a co-trustee with respect to 50,014 shares held in a trust. The address of each stockholder except Microsemi Corp. is c/o Semicon, Inc., 10 North Avenue, Burlington, Massachusetts 01803. (2) Includes 50,014 shares held by a trust for which Mrs. Robison is a co-trustee. (3) Does not include 8,800 shares owned by Mrs. House, as to which Mr. House disclaims beneficial ownership. Equity Ownership of Management: The following table sets forth, as of August 31, 1997, the beneficial ownership (as defined in the rules of the Securities and Exchange Commission) of the Company's Common Stock by each Director and all Directors and officers of the Company as a group, from information provided by such persons: Common Stock Percent Name Owned Beneficially of Class - -------------------- ------------------ -------- Harold W. Mahar, Jr. 129,118 (1) 4.1% Richard C. Allard 37,366 (2) 1.2% All Directors and officers 166,484 5.3% (1) Does not include 103,300 owned by Mrs. Mahar, two adult sons and an adult daughter as to which he disclaims beneficial ownership. (2) Does not include 400 shares owned by adult children of Mr. Allard as to which he disclaims beneficial ownership. 12 Except as otherwise indicated, all Directors and officers have sole voting and dispositive power. For the sole purpose of calculating the aggregate market value of voting stock held by nonaffiliates of the Company as set forth on the cover page, it was assumed that only directors, executive officers and greater than five percent stockholders as of the calculation date (other than Microsemi Corp.), together with the spouses and dependent children of such persons, constituted affiliates; no acknowledgment by such persons of affiliate status is implied. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this report: (1) The financial statements listed in the Index to Consolidated Financial Statements appearing on page 15 of this report, which index is incorporated herein by reference. (2) The financial statement schedules as set forth in the above-mentioned Index to Financial Statements. (3) See Exhibit Index, pages 31 and 32, incorporated herein by reference. (b) Reports on Form 8-K in the fourth quarter of fiscal 1997: None. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. September , 1997 By: ---------------------------------- Harold W. Mahar, Jr., President and Chief Executive Officer 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 Registrant and in the capacities indicated as of September , 1997. By: ----------------------------------------- Richard C. Allard Executive Vice President, Chief Financial Officer and Director (principal financial and accounting officer) By: ----------------------------------------- Harold W. Mahar, Jr. President, Chief Executive Officer and Director (principal executive officer) 14 SEMICON, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Item 14(a) The following consolidated financial statements of Semicon, Inc. are included in item 8: Reference Consolidated balance sheets at 16 June 30, 1997 and 1996 For the years ended June 30, 1997, 1996 and 1995: Consolidated statements of operations 18 Consolidated statements of cash flows 19 Notes to financial statements 20 The following consolidated financial statement schedules are included in Item 14(d): III- Property, Plant and Equipment 26 IV - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment 27 V - Valuation and Qualifying Accounts 28 VI - Supplementary Income Statement Information 29 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. 15 SEMICON, INC. CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1996 ASSETS 1997 1996 --------- --------- Current assets: Cash and cash equivalents $ 227,000 $ 240,000 Accounts receivable, less allowances of $10,000 ($10,000 at June 30, 1996) 440,000 781,000 Inventories: Work-in-process and finished products 507,000 655,000 Raw materials and supplies 242,000 274,000 --------- --------- 749,000 929,000 Other current assets 29,000 56,000 --------- --------- Total current assets 1,445,000 2,006,000 Property, plant and equipment: Machinery and equipment 3,994,000 4,051,000 Leasehold improvements 130,000 130,000 --------- --------- 4,124,000 4,181,000 Less accumulated depreciation and amortization 4,038,000 4,048,000 --------- --------- 86,000 133,000 Other assets 1,000 1,000 --------- --------- $ 1,532,000 $ 2,140,000 ========= ========= See notes to finanical statements. SEMICON, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) June 30, 1997 and 1996 LIABILITIES AND STOCKHOLDERS' DEFICIT 1997 1996 --------- --------- Current liabilities: Accounts payable and other accrued liabilites $ 495,000 $ 423,000 Accrued compensation 119,000 185,000 Accrued interest 1,832,000 1,610,000 Federal and state income taxes 80,000 88,000 Indebtedness in default 2,668,000 2,731,000 Reserves for restructuring and environmental costs 1,295,000 1,300,000 --------- --------- Total current liabilites 6,489,000 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 (5,829,000) (5,069,000) ---------- ---------- Total stockholders' deficit (4,957,000) (4,197,000) ---------- ---------- $ 1,532,000 $ 2,140,000 ========= ========= See notes to financial statements. SEMICON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---------- ---------- ---------- Net Sales $ 5,138,000 $ 6,627,000 $ 6,158,000 Costs and expenses: Cost of products sold 4,876,000 5,748,000 4,913,000 Selling, general and administrative 863,000 989,000 1,071,000 Interest 279,000 299,000 365,000 Other (income) expense (1,000) 0 (18,000) ---------- ---------- ---------- 6,017,000 7,036,000 6,331,000 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary items (879,000) (409,000) (173,000) Income tax provision 0 0 0 ---------- ---------- ---------- Income (loss) before extraordinary items (879,000) (409,000) (173,000) Extraordinary items: Gain on purchase of debentures 117,000 242,000 1,230,000 Gain on debt settlement 0 158,000 368,000 ---------- ---------- ---------- 117,000 400,000 1,598,000 ---------- ---------- ---------- Net income (loss) $ (762,000) $ (9,000) $ 1,425,000 ========== ========== ========== Income (loss) per share: Before extraordinary items ($0.27) ($0.12) ($0.05) From extraordinary items 0.04 0.12 0.48 ----- ----- ----- Net income (loss) ($0.23) $0.00 $0.43 ===== ===== ===== Weighted average number of shares outstanding 3,305,000 3,305,000 3,305,000 ========== ========== ========== See notes to financial statements SEMICON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---------- ---------- ---------- Operating activities: Net income(loss) $ (762,000) $ (9,000) $ 1,425,000 Adjustments to reconcile net income(loss) to net cash provided by operating activites: Depreciation and amortization 47,000 25,000 13,000 Provision for accounts and note receivable 0 0 0 Extraordinary gains (117,000) (400,000) (1,598,000) Change in assets and liabilities: Accounts receivable 341,000 185,000 (57,000) Inventory 180,000 (237,000) 161,000 Other current assets 27,000 (2,000) 5,000 Accounts payable and accrued expenses 286,000 231,000 348,000 Income taxes payable (8,000) (12,000) (4,000) Other 0 8,000 18,000 ---------- ---------- ---------- Total Adjustments 756,000 (202,000) (1,114,000) ---------- ---------- ---------- Net cash provided by (used in) operating activities (6,000) (211,000) 311,000 Investing activities: Capital expenditures 0 (93,000) (48,000) Collection of investment income 0 0 0 ---------- ---------- ---------- Net cash provided by (used in) investing activities 0 (93,000) (48,000) Financing activities: Purchase of debentures (4,000) (8,000) (61,000) Other (3,000) 0 (102,000) ---------- ---------- ---------- Net cash provided by (used in) financing activities (7,000) (8,000) (163,000) ---------- ---------- ---------- Net increase(decrease) in cash and cash equivalents (13,000) (312,000) 100,000 Cash and cash equivalents at beginning of year 240,000 552,000 452,000 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 227,000 $ 240,000 $ 552,000 ========== ========== ========== Supplemental cash flow information: Interest paid $ 0 $ 0 $ 42,000 Income taxes paid (refunded), net 8,000 12,000 7,000 See notes to financial statements SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statement 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. Principles of Consolidation The consolidated financial statements include the accounts of Semicon, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories are carried at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment The Company's property, plant and equipment is stated at cost. Depreciation and amortization of property, plant and equipment have been provided principally using the straight-line method over the estimated useful lives of the related assets. Income Taxes The Company provides for income taxes currently payable and, in addition, for deferred income taxes that generally represent the future income tax effect of existing temporary differences between the book and tax bases of the Company's assets and liabilities, assuming they will be realized and settled, respectively, at the amounts reported in 20 SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) the Company's financial statements. Classification is based on when the temporary differences are expected to result in a taxable or deductible amount. Income (Loss) Per Share Net income per share is computed by dividing net income by 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. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less. Significant Customers The Company's principal business is the manufacture of discrete semiconductors. Sales are primarily to customers in the United States. The following customers each accounted for more than 10% of sales: 1997 1996 1995 ------ ------ ------ Zeus Electronics, An Arrow Co. 20% 19% 18% ACI Electronics Corp. 15% 13% 13% Micro Device Electronics 14% 5% 6% Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities at June 30, 1997 and 1996 included the following: 1997 1996 ---------- ---------- Trade accounts payable $ 384,000 $ 353,000 Commissions payable 13,000 16,000 Other 98,000 54,000 ---------- ---------- $ 495,000 $ 423,000 ========== ========== 21 SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE B-INDEBTEDNESS IN DEFAULT Indebtedness in default at June 30, 1997 and 1996 was as follows: 1997 1996 13% Convertible Subordinated ---------- ---------- Debentures due January 15, 2001 $1,793,000 $1,855,000 Industrial Revenue Bond 695,000 696,000 Retiree Deferred Compensation 180,000 180,000 ---------- ---------- $2,668,000 $2,731,000 ========== ========== The 13% Convertible Subordinated Debentures are convertible (unless previously called for redemption by the Company) into shares of common stock at any time prior to maturity at $9.22 per share. Interest is payable semiannually on July 15 and January 15. The Company continues to accrue interest on its 13% Convertible Subordinated Debentures. On July 15, 1990, the Company suspended payment of interest on its 13% Convertible Subordinated Debentures. On August 15, 1990, the Company was declared in default of its debenture obligations by the debenture Trustee. The debenture default also created a default under terms of the Company's Industrial Revenue Bond obligations. Accordingly, the Company classified these debt obligations as current liabilities. During fiscal 1997, the Company purchased $62,000 ($142,000 in 1996 and $786,000 in 1995) face amount of its 13% Convertible Subordinated Debentures at a discount. The purchases reduced indebtedness and accrued interest by $121,000 ($252,000 in 1996 and $1,292,000 in 1995) and resulted in a $117,000 ($242,000 in 1996 and $1,231,000 in 1995) extraordinary gain. The Company's industrial revenue bond liability is a guaranty obligation from the 1987 liquidation of a farmer subsidiary. The last principle reductions of the debt occurred in 1993. The last interest payments were made in 1995. The Company continues to accrue 6% interest on the obligation. Retiree deferred compensation represents an obligation to the widow of a retired employee for deferred compensation. During fiscal 1991 the Company suspended its deferred compensation payments. During fiscal 1996, the Company settled deferred compensation obligations at discounted amounts which resulted in a $158,000 extraordinary gain. 22 SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE C-RESERVES FOR RESTRUCTURING AND ENVIRONMENTAL COSTS The balance sheet reserves for restructuring and environmental costs included the following at June 30, 1997 and 1996: 1997 1996 ---------- ---------- Environmental matters $ 848,000 $ 848,000 Debt restructuring and related matters 447,000 452,000 ---------- ---------- $1,295,000 $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 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. Comprehensive remediation would exceed the Company's cash resources and force reorganization or 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. 23 SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE D-INCOME TAXES Income tax provisions consisted of the following: 1997 1996 1995 Total provisions ---------- ---------- ---------- Current: Federal $ 0 $ 0 $ 0 State 0 0 0 ---------- ---------- ---------- $ 0 $ 0 $ 0 ========== ========== ========== A reconciliation of income tax (benefit) for continuing operations computed at the statutory federal income tax rate to the income tax provision (benefit) follows: 1997 1996 1995 Income tax provision (benefit) at statutory federal income tax rate $( 299,000) $( 139,000) $( 59,000) Net operating loss not utilized 299,000 139,000 59,000 ---------- ---------- ---------- $ 0 $ 0 $ 0 ========== ========== ========== At June 30, 1997, the Company had tax loss carryforwards of approximately $7,700,000 and tax credit carryforwards of approximately $500,000 available to offset future federal taxable income and operating loss carryforwards of approximately $9,600,000 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. NOTE E-COMMITMENTS AND CONTINGENCIES The Company leases a 30,000 square foot facility in Burlington, Massachusetts under a lease agreement which expires in June 1998. The lease provides for monthly payments aggregating $100,000 per year plus real estate taxes, utilities and insurance. Rent expense aggregated $100,000 in 1997, 1996 and 1995. 24 SEMICON, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE F-STOCKHOLDER'S DEFICIT Equity Incentive Plan On November 16, 1988, the Company's Board of Directors adopted the Semicon, Inc. Equity Incentive Plan ( the "Plan"). The Plan permits the Company to grant a variety of stock and stock-based awards and related benefits to officers and other key employees of the Company and its subsidiaries. The awards and benefits available under the Plan include incentive and nonincentive stock options; restricted and unrestricted shares; rights to receive cash or shares on a deferred basis or based on performance; rights to receive cash or shares with respect to increases in the value of the common stock; rights to receive or purchase convertible securities including a maximum of 50,000 shares of the Company's preferred stock; cash payments sufficient to offset the federal, state and local ordinary income taxes of participants resulting from transactions under the Plan; loans to participants in connection with awards; and other common stock-based awards that meet the requirements of the Plan. Subject to adjustment for stock splits and similar events, the total number of shares of common stock originally reserved for issuance under the Plan was 200,000. Awards may be granted under the Plan through November 16, 1998. During the three fiscal years ended June 30, 1997, no shares were issued to employees in connection with the Plan. Employee Stock Purchase Plan On September 21, 1988, the Company's Board of Directors adopted the Semicon, Inc. Employee Stock Purchase Plan. The Employee Stock Purchase Plan is designed to encourage eligible employees of the Company to acquire, through payroll withholdings, an equity interest in the Company through the purchase of common stock at 85% of fair market value. Up to 100,000 shares of common stock of the Company may be purchased under the Employee Stock Purchase Plan. The Plan may be terminated at the discretion of the Board of Directors. The Company suspended the Plan beginning the first quarter of 1991. Common Stock Reserved The following shares of common stock were reserved for issuance at June 30, 1997: 13% Convertible Subordinated Debentures 194,469 Equity Incentive Plan 187,000 Employee Stock Purchase Plan 55,298 ------- 436,767 25 ======= SCHEDULE III--PROPERTY, PLANT AND EQUIPMENT SEMICON, INC. Balance at Other Balance at Beginning Additions Retirements Changes End of Period to Cost (Deduct) Add(Deduct) of Period ---------- ---------- ---------- ---------- ---------- Year ended June 30, 1997: Machinery and equipment $ 4,051,000 $ 0 $ (57,000)$ 0 $ 3,994,000 Leasehold Improvements 130,000 0 0 0 130,000 ---------- ---------- ---------- ---------- ---------- $ 4,181,000 $ 0 $ (57,000)$ 0 $ 4,124,000 ========== ========== ========== ========== ========== Year ended June 30, 1996: Machinery and equipment $ 3,965,000 $ 86,000 $ 0 $ 0 $ 4,051,000 Leasehold Improvements 123,000 7,000 0 0 130,000 ---------- ---------- ---------- ---------- ---------- $ 4,088,000 $ 93,000 $ 0 $ 0 $ 4,181,000 ========== ========== ========== ========== ========== Year ended June 30, 1995: Machinery and equipment $ 3,965,000 $ 0 $ 0 $ 0 $ 3,965,000 Leasehold Improvements 75,000 48,000 0 0 123,000 ---------- ---------- ---------- ---------- ---------- $ 4,040,000 $ 48,000 $ 0 $ 0 $ 4,088,000 ========== ========== ========== ========== ========== SCHEDULE IV--ACCUMULATED DEPRECIATION, DEPLETION AND AMORITIZATION OF PROPERTY, PLANT AND EQUIPMENT SEMICON, INC. Additions Balance at Charged to Other Balance at Beginning Costs and Changes End of Period Expenses (A)Retirements Add(Deduct) of Period ---------- ---------- ---------- ---------- ---------- Year ended June 30, 1997: Machinery and equipment $ 3,963,000 $ 24,000 $ (57,000)$ 0 $ 3,930,000 Leasehold Improvements 85,000 23,000 0 0 108,000 ---------- ---------- ---------- ---------- ---------- $ 4,048,000 $ 47,000 $ (57,000)$ 0 $ 4,038,000 ========== ========== ========== ========== ========== Year ended June 30, 1996: Machinery and equipment $ 3,948,000 $ 15,000 $ 0 $ 0 $ 3,963,000 Leasehold Improvements 75,000 10,000 0 0 85,000 ---------- ---------- ---------- ---------- ---------- $ 4,023,000 $ 25,000 $ 0 $ 0 $ 4,048,000 ========== ========== ========== ========== ========== Year ended June 30, 1995: Machinery and equipment $ 3,935,000 $ 13,000 $ 0 $ 0 $ 3,948,000 Leasehold Improvements 75,000 0 0 0 75,000 ---------- ---------- ---------- ---------- ---------- $ 4,010,000 $ 13,000 $ 0 $ 0 $ 4,023,000 ========== ========== ========== ========== ========== A= The annual provisions for depreciation have been computed using the following estimated ranges of useful lives: Machinery and equipment 5 years Leasehold improvements 5 Years SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS SEMICON, INC. Charged Charged Balance at (Credited) (Credited) Balance at Beginning to Costs and to Other End of of Period Expenses Accounts Deductions Period ---------- ---------- ---------- ---------- ---------- Year ended June 30, 1997: Allowance for doubtful accounts $ 10,000 $ 0 $ 0 $ 0 $ 10,000 Reserve for restructuring and environmental costs 1,300,000 0 0 5,000 1,295,000 ---------- ---------- ---------- ---------- ---------- $ 1,310,000 $ 0 $ 0 $ 5,000 $ 1,305,000 ========== ========== ========== ========== ========== Year ended June 30, 1996: Allowance for doubtful accounts $ 10,000 $ (5,000)$ 5,000 $ 0 $ 10,000 Allowance for losses on discontinued operations 896,000 0 (896,000) 0 0 Reserve for restructuring and environmental costs 1,100,000 0 200,000 0 1,300,000 ---------- ---------- ---------- ---------- ---------- $ 2,006,000 $ (5,000)$ (691,000)$ 0 $ 1,310,000 ========== ========== ========== ========== ========== Year ended June 30, 1995: Allowance for doubtful accounts $ 10,000 $ (4,000)$ 4,000 $ 0 $ 10,000 Allowance for losses on discontinued operations 896,000 0 0 0 896,000 Reserve for restructuring and environmental costs 1,104,000 0 (4,000) 0 1,100,000 ---------- ---------- ---------- ---------- ---------- $ 2,010,000 $ (4,000)$ 0 $ 0 $ 2,006,000 ========== ========== ========== ========== ========== SCHEDULE VI-SUPPLEMENTARY INCOME STATEMENT INFORMATION SEMICON, INC. Charged to Costs and Expenses Year Ended June 30, ------------------------------------- Item 1997 1996 1995 ---------------------------------------- ---------- ---------- ---------- Maintenance and repairs $ 475,000 $ 633,000 $ 557,000 Depreciation and amortization of intangible assets, preoperating cost and similar deferrals * * * Taxes, other than payroll and income taxes * * * Royalties None None None Advertising costs * * * *Less than 1% of toal sales and revenues. ITEM 6-SELECTED FINANCIAL DATA SEMICON, INC. Year Ended June 30, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Net Sales $ 5,138,000 $ 6,627,000 $ 6,158,000 $ 6,703,000 $ 5,927,000 Income (loss) from continuing operations before extraordinary item (879,000) (409,000) (173,000) (49,000) (1,223,000) Net income (loss) (762,000) (9,000) 1,425,000 227,000 (588,000) Total assets 1,532,000 2,140,000 2,330,000 2,304,000 2,023,000 Long-term debt, including current maturities 1,793,000 1,855,000 1,997,000 3,213,000 3,400,000 Total debt obligations in default: Principal 2,668,000 2,731,000 3,135,000 4,332,000 4,623,000 Accrued interest 1,832,000 1,610,000 1,427,000 1,660,000 1,362,000 --------- --------- --------- --------- --------- 4,500,000 4,341,000 4,562,000 5,992,000 5,985,000 Income (loss) per share: From continuing operations (.27) (.12) (.05) (.01) (.37) Net income (loss) (.23) (.00) .43 .07 (.18) EXHIBIT INDEX One of the following exhibits is filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. The exhibits marked with an asterisk are filed herewith. 3.1 Restated Articles of Organization of the Company, as amended (Exhibit 3.1 to Form 10-K for year ended June 30, 1988). 3.2 By-Laws of the Company, as amended (Exhibit 3.2 to Form 10-K for year ended June 30, 1991). 4.1 Indenture dated as January 15, 1981, between the Company and Industrial National Bank of Rhode Island (now known as Fleet Bank, NA), relating to 13% Convertible Subordinated Debentures due 2001 (Exhibit 4.1 to Amendment No. 1 of Registration Statement No. 2-70364). 4.2 Mortgage and Indenture and Agreement Among the Town of Amesbury, Microfab, Inc. and BayBank Middlesex (now known as BankBoston) as Trustee dated as of January 15, 1981, (Exhibit 4.2 to Amendment No. 1 of Registration Statement No. 2-70364). 4.3 Bond Purchase Agreement dated as of January 15, 1981, among BayBank Boston N.A. (now known as BankBoston) , the town of Amesbury, Microfab, Inc. and the Company (Exhibit 4.3 to Form 10-K for the year ended June 1987). 4.4 Agreement dated March 11, 1988, between BayBank Middlesex (now known as BankBoston) and the Company (Exhibit 4.4 to Form 10-K for year ended June 30, 1988). 10.1 Deferred Compensation Agreement between the Company and Mr. Allard (Exhibit 10.5 to Form 10-K for year ended June 30, 1983). 10.2 Lease, dated March 31, 1983, between Trustees of N.W. Building 28 Trust and the Company (Exhibit 10.7 to Form 10-K for the year ended June 30, 1983). *10.3 Lease Extension Agreement dated July 1997, to Lease, dated March 31, 1983, between Trustees of N.W. Building 28 Trust and the Company. 10.4 Severance Agreement dated September 21, 1988, between the Company and Mr. Mahar (Exhibit 10.13 to Form 10-K for the year ended June 30, 1988). 10.5 Severance Agreement dated September 21, 1988, between the Company and Mr. Allard (Exhibit 10.15 to Form 10-K for the year ended June 30, 1988). 10.6 Semicon, Inc. Equity Incentive Plan (Exhibit 10.16 to Form 10-K for year ended June 30, 1989). 31 10.7 Semicon, Inc. Employee Stock Purchase Plan (Exhibit 10.11 to Form 10-K for the year ended June 30, 1991). 22.1 List of subsidiaries (Exhibit 22.1 to Form 10-K for the year ended June 30, 1994.) * 27.1 Financial Data Schedule (EDGAR filing with Securities and Exchange Commission only). 32