FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 29, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-3286
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SEMICON, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2242662
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
10 North Avenue, Burlington, MA 01803
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(address of principal executive offices)
(Zip Code)
781-272-9015
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(Registrant's telephone number, including area code)
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(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 No X
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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 - 3,139,898 shares (at April 30, 1998)
1
INDEX
FORM 10-Q
SEMICON, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
Consolidated Balance Sheet - March 29, 1998
and June 30, 1997. 3
Consolidated Statement of Operations - Quarters ended
March 29, 1998 and March 30, 1997 and nine 5
months ended March 29, 1998 and March 30, 1997.
Consolidated Statement of Cash Flows - Quarters ended
March 29, 1998 and March 30, 1997 and nine 6
months ended March 29, 1998 and March 30, 1997.
Notes to Consolidated Financial Statements -
March 29, 1998. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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 29, June 30,
1998 1997
----------- -----------
Current assets:
Cash and cash equivalents $ 179,000 $ 227,000
Accounts receivable, less allowances
of $10,000 ($10,000 at June 30, 1997) 503,000 440,000
Inventories:
Work-in-process and finished products 386,000 507,000
Raw materials and supplies 180,000 242,000
----------- -----------
566,000 749,000
Other current assets 59,000 29,000
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Total current assets 1,307,000 1,445,000
Property, plant and equipment:
Machinery and equipment 3,602,000 3,994,000
Leasehold improvements 130,000 130,000
----------- -----------
3,732,000 4,124,000
Less accumulated depreciation
and amortization 3,676,000 4,038,000
----------- -----------
56,000 86,000
Other assets 0 1,000
----------- -----------
$ 1,363,000 $ 1,532,000
=========== ===========
See notes to consolidated financial statements.
3
SEMICON, INC.
CONSOLIDATED BALANCE SHEET - Continued
LIABILITIES AND STOCKHOLDERS' DEFICIT
March 29, June 30,
1998 1997
----------- -----------
Current liabilities:
Accounts payable and other accrued liabilities $ 579,000 $ 495,000
Accrued compensation 153,000 119,000
Accrued interest 1,947,000 1,832,000
Federal and state income taxes 75,000 80,000
Indebtedness in default 2,583,000 2,668,000
Reserves for restructuring and environmental costs 1,294,000 1,295,000
----------- -----------
Total current liabilities 6,631,000 6,489,000
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 (6,140,000) (5,829,000)
----------- -----------
(5,268,000) (4,957,000)
Less cost of 164,975 shares of Common
Stock held in treasury (0 shares at
June 30, 1997) 0 0
----------- -----------
Total stockholders' deficit (5,268,000) (4,957,000)
----------- -----------
$ 1,363,000 $ 1,532,000
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4
SEMICON, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED NINE MONTHS ENDED
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Sales $ 1,260,000 $ 1,393,000 $ 3,742,000 $ 3,848,000
Costs and expenses:
Cost of products sold 1,169,000 1,358,000 3,514,000 3,730,000
Selling, general and administrative 163,000 216,000 520,000 661,000
Interest 65,000 72,000 203,000 213,000
Other (income) expense 0 0 (14,000) 0
----------- ----------- ----------- -----------
1,397,000 1,646,000 4,223,000 4,604,000
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item (137,000) (253,000) (481,000) (756,000)
Income taxes 0 0 0 0
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (137,000) (253,000) (481,000) (756,000)
Extraordinary items:
Gain on purchase of debentures 32,000 20,000 170,000 103,000
Gain on debt settlement 0 0 0 0
----------- ----------- ----------- -----------
32,000 20,000 170,000 103,000
----------- ----------- ----------- -----------
Net income (loss) $ (105,000)$ (233,000)$ (311,000)$ (653,000)
=========== =========== =========== ===========
Income (loss) per share:
Before extraordinary items ($0.04) ($0.07) ($0.15) ($0.23)
Extraordinary items 0.01 0.00 0.05 0.03
----------- ----------- ----------- -----------
Net income (loss) per share ($0.03) ($0.07) ($0.10) ($0.20)
=========== =========== =========== ===========
Weighted average number of
shares outstanding 3,147,000 3,305,000 3,155,000 3,305,000
=========== =========== =========== ===========
See notes to consolidated financial statements.
5
SEMICON, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
QUARTER ENDED NINE MONTHS ENDED
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Operating activities:
Net income (loss) $ (105,000)$ (233,000)$ (311,000)$ (653,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 10,000 11,000 30,000 33,000
Provision for bad debts 0 0 0 0
Gain on purchase of debentures (32,000) (20,000) (170,000) (103,000)
Gain on debt settlement 0 0 0 0
Changes in assets and liabilities:
Accounts receivable (122,000) (48,000) (63,000) 298,000
Inventory (16,000) 85,000 183,000 154,000
Other current assets (28,000) 14,000 (30,000) 22,000
Accounts payable and accrued expenses 275,000 109,000 321,000 137,000
Income taxes payable (3,000) (2,000) (5,000) (7,000)
Other 0 0 0 0
----------- ----------- ----------- -----------
Total adjustments 84,000 149,000 266,000 534,000
----------- ----------- ----------- -----------
Cash provided by (used in)
operating activities (21,000) (84,000) (45,000) (119,000)
Investing activities:
Capital expenditures 0 0 0 0
Collection of investment income 0 0 0 0
----------- ----------- ----------- -----------
Cash provided by (used in)
investing activities 0 0 0 0
Financing activities:
Debenture purchases and debt settlement (4,000) (1,000) (5,000) (4,000)
Other 2,000 0 2,000 0
----------- ----------- ----------- -----------
Cash provided by (used in)
financing activities (2,000) (1,000) (3,000) (4,000)
----------- ----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents (23,000) (85,000) (48,000) (123,000)
Cash and cash equivalents
at beginning of period 202,000 202,000 227,000 240,000
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period $ 179,000 $ 117,000 $ 179,000 $ 117,000
=========== =========== =========== ===========
See notes to consolidated financial statements.
6
SEMICON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 29, 1998
NOTE A -- UNAUDITED FINANCIAL 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. For example, management believes
inventories carried at their on going operating value in the financial
statements would be worth only $49,000 scrap value in a bankruptcy liquidation.
During fiscal 1998 the Company liquidated its epoxy product line and machine
shop assets for $25,000 cash.
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 (loss) per share ("Basic") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Net income per
share with dilution results from dividing net income by the weighted average
number of common shares outstanding plus dilutive shares 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.
7
SEMICON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- Continued
March 29, 1998
NOTE C -- INCOME TAXES
At March 29, 1998, the Company had tax loss carryforwards of approximately
$8,000,000 and tax credit carryforwards of approximately $500,000 available to
offset future federal taxable income and operating loss carryforwards of
approximately $9,900,000 and credit carryforwards of approximately $500,000 to
offset future book income. These carryforwards expire principally in the years
2001-2007. These carryforwards may be subject to limitations on annual
utilization under current Internal Revenue Service regulations. Book loss
carryforwards exceed those available for income tax purposes due primarily to
various accruals and reserves not currently deductible.
NOTE D -- RESERVES FOR RESTRUCTURING AND ENVIRONMENTAL COSTS
The balance sheet reserves for restructuring and environmental costs included
the following:
March 29, 1998 June 30, 1997
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Environmental matters $ 848,000 $ 848,000
Debt restructuring
and related matters 446,000 447,000
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$ 1,294,000 $ 1,295,000
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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 by November 1999 environmental problems at its Burlington,
Massachusetts operating site, currently estimated to cost $350,000 to $600,000.
In September 1996, the Company filed a "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.
Separately, NW Building 37 Company has initiated investigations and other
response actions at the site. 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.
8
NOTE E -- EXTRAORDINARY GAINS
During the quarter ended March 29, 1998, the Company purchased $16,000 ($11,000
in the fiscal 1997 quarter) face amount of its 13% Convertible Subordinated
Debentures. The purchases reduced indebtedness and accrued interest by $33,000
($21,000 in the fiscal 1997 quarter) and resulted in a $32,000 ($20,000 in the
fiscal 1997 quarter) extraordinary gain.
During the first nine months of fiscal 1998, the Company purchased $86,000
($56,000 in the fiscal 1997 period) face amount of its 13% Convertible
Subordinated Debentures. The purchases reduced indebtedness and accrued
interest by $175,000 ($96,000 i n the fiscal 1997 period) and resulted in a
$170,000 ($103,000 in the fiscal 1997 period) extraordinary gain.
9
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 remains 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.
The Company faces various environmental issues as described in Note D to the
consolidated financial statements. Enforced remedial action on any of these
issues will force the Company to liquidate under Chapter 7 of the United States
Bankruptcy code.
The Company operates at the forbearance of its creditors. It continues to be
in default of debt obligations aggregating $4,530,000 for principal and
interest at March 29, 1998. 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 $2,583,000 at March 29, 1998.
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
$4,530,000 at March 29, 1998.
March 29, 1998
-----------------------------------
June 30, 1990 Principal and
Principal Principal Accrued Interest
----------------- ------------- -------------------
BayBank $ 795,000 $ 696,000 $ 821,000
Deferred Compensation
and Other 820,000 180,000 180,000
NationsBank 430,000 0 0
13% Convertible
Subordinated Debentures 4,125,000 1,707,000 3,529,000
------------- ------------- -------------
$ 6,170,000 $ 2,583,000 $ 4,530,000
============= ============= =============
10
Settlements to December 28, 1997 have included: purchases of $2,418,000 face
amount of debentures for $164,000; 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 Company's epoxy encapsulated semiconductor products were no longer able to
compete with foreign manufacturers, and, accordingly, the Company phased out
it's epoxy product lines during calendar year 1997. Epoxy product sales
amounted to $36,000 in the six months ended December 28, 1997 and $245,000 in
the six months ended December 29, 1996. Epoxy line assets with an original
book value of approximately $392,000 and a net depreciated value of $0 were
liquidated for $13,000 cash in the quarter ended December 28, 1997, and the
resulting gain was included in other income.
The Company's overall liquidity decreased during the nine months ended March
29, 1998. The cash generated from a net reduction of $280,000 in working
capital during the period was used to fund operating losses.
During the nine months ended March 29, 1998 the Company purchased 164,975
shares of its $.25 per value share Common Stock for $164.98 ($.001 per share).
At March 29, 1998, the Company had a deficit in stockholders' equity
aggregating $5,268,000 and it's current liabilities exceeded its current assets
by $5,324,000.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 29, 1998
Net sales decreased 10% or $133,000 from $1,393,000 for the third quarter of
fiscal 1997 to $1,260,000 for the third quarter of fiscal 1998. Backlog at
March 29, 1998 was $1,517,000 as compared to $1,803,000 the prior year. The
book-to-bill ratio f or the quarter ended March 29, 1998 was 124% as compared
to 82% a year ago.
Gross profit on sales increased from $35,000 for the third quarter of fiscal
1997 to $91,000 for the third quarter of fiscal 1998. Gross margin increased
primarily as a result of decreased manufacturing overhead costs.
Selling, general and administrative expenses decreased $53,000 to $163,000 for
the third quarter of fiscal 1998 from $216,000 for the third quarter of fiscal
1997. The decrease related to decreases in executive wages and sales
representative commissions.
Interest expense decreased $7,000 to $65,000 for the third quarter of fiscal
1998 as a result of reductions in outstanding debt.
Third quarter results for fiscal 1998 included extraordinary gains aggregating
$32,000 ($20,000 in the fiscal 1997 third quarter) from purchases of the
Company's 13% Convertible Subordinated Debentures at discounted amounts.
11
NINE MONTHS ENDED MARCH 29, 1998
Net sales decreased 3% or $106,000 from $3,848,000 for the first nine months of
fiscal 1997 to $3,742,000 for the first nine months of fiscal 1998.
Gross profit on sales increased from $118,000 for the first nine months of
fiscal 1997 to $228,000 for the first nine months of fiscal 1998. Gross margin
increased primarily as a result of reductions in manufacturing overhead costs.
Selling, general and administrative expenses decreased $141,000 to $520,000 for
the first nine months of fiscal 1998 from $661,000 for the first nine months of
fiscal 1997. The decrease related to decreases in wages and sales commissions.
Interest expense decreased $10,000 to $203,000 for the first nine months of
fiscal 1998 as a result of reductions in outstanding debt.
First nine months results for fiscal 1998 included extraordinary gains
aggregating $170,000 ($103,000 in the first nine months of fiscal 1997) from
the purchase of the Company's 13% Convertible Subordinated Debentures at
discounted amounts.
12
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