Total number of pages: 39
With Exhibits
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 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 0-20506
BKC SEMICONDUCTORS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2883532
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 LAKE STREET, LAWRENCE, MASSACHUSETTS 01841
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 681-0392
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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 filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark 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 this Form 10-K or any
amendment to this Form 10-K.[X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant, based upon the closing sale price of the
Common Stock on December 19, 1997, was approximately $6,701,158 on the Nasdaq
SmallCap Market System. The number of shares held by non affiliates was 639,971.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on December
19, 1997, was 1,276,411.
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PART I
------
ITEM 1. BUSINESS
--------
GENERAL
- -------
BKC Semiconductors Incorporated, incorporated in 1985,
manufactures a wide range of discrete semiconductor diodes for signal switching,
voltage conversion, rectification, and surge suppression in electronic circuits.
The Company's manufacturing and executive offices are located at 6 Lake Street,
Lawrence, Massachusetts 01841. The telephone number is (978) 681-0392, and the
fax number is (978) 681- 9135.
PRODUCTS
- --------
The Company's product line includes:
SILICON SWITCHING DIODES. Silicon switching diodes are designed
for relatively low-power (500 milliwatt or less) applications. In end
applications, they provide voltage rectification. These diodes are generally
used for signal switching functions.
RECTIFIERS. High voltage diodes are often called rectifiers and
are diodes designed for higher power (less than 10 watts) applications.
ZENER DIODES. A zener diode is analogous to a valve which stops
flow in one direction but breaks down at a specific pressure to allow flow in
the reverse direction. When reverse voltage is applied to a zener diode, it
resists the flow of current until its breakdown voltage is reached, at which
point it allows current to flow at a particular voltage level. Zener diodes are
used as voltage regulators, maintaining the voltage at the breakdown voltage.
Zener diodes are used to maintain a particular voltage in an electronic unit.
TRANSIENT SUPPRESSORS. Transient suppressors operate as
higher-power zener diodes just as rectifiers operate as higher-power diodes.
SCHOTTKY DIODES. Schottky diodes operate in much the same ways as
silicon and germanium diodes, but they are manufactured with metal as well as
semiconducting materials. A Schottky diode provides a low voltage drop like that
of a germanium diode but also switches very rapidly.
GERMANIUM DIODES. Germanium diodes (which are less common than
silicon diodes) have advantages in certain applications. A germanium diode
functions similarly to a silicon diode, but it has a lower voltage drop across
it in operation.
MARKETS
- -------
Due to the broad applications of discrete semiconductor devices,
any industry manufacturing electronic systems is a potential user of BKC
products. The Company generally sells its products in two main markets: the
military/aerospace and the commercial/industrial markets.
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HIGH-RELIABILITY MILITARY/AEROSPACE PRODUCT MARKET. BKC has
established itself as a high reliability manufacturer of discrete semiconductor
devices to military specifications. Sales of products built to military
specifications are made primarily in the U.S. These sales represented
approximately 65% of total revenues of the Company in fiscal year 1997. The
Company does business with a number of suppliers of conventional high
reliability/military/space products, including Motorola, Honeywell, Magnavox,
Rockwell, Texas Instruments, Boeing, Raytheon and Hughes.
Despite anticipated reductions in many areas of the US. military
budget, BKC believes that the demand for its products, built to military
specifications, for use in satellite communications, civil aviation and space
applications will remain strong. The Company believes that there is significant
market share growth opportunities considering the ever increasing supplier base.
This is coupled with BKC's broad line of product and reputation for excellent
service and high quality.
COMMERCIAL/INDUSTRIAL PRODUCT MARKET. The market for BKC's
commercial/ industrial products includes such applications as consumer products,
automotive electronic systems, medical applications, computers,
telecommunications and industrial production. Sales of commercial/industrial
products represented approximately 35% of the Company's sales in fiscal year
1997.
The commercial market is a very price competitive arena for
discrete semiconductors with many high volume suppliers. As such, BKC's strategy
for this market includes a combination of specialized and sourced products to
attack profitable niche opportunities.
CUSTOMERS
- ---------
The Company's business strategy includes working closely with a
limited customer base to develop partnership programs and products designed to
meet customers' ongoing needs. The Company has franchise agreements with several
major components distributors, including Zeus/Arrow, Hamilton/Hallmark and
Future Electronics. The Company also has several major end users as customers,
including GM Delco, Hughes, Motorola, Lucent, Ericsson and Alcatel. Of these one
customer represents approximately 16.5% of the Company's sales. While the loss
of any one of these key customers would be significant, the Company is not
dependent on any one or two customers.
COMPETITION
- -----------
In general, the discrete semiconductor industry is very
competitive and characterized by continual technological change and product
obsolescence, periodic shortages of materials, variations in manufacturing
yields and efficiencies and significant foreign competition. The Company has a
number of major competitors in the discrete semiconductor components in the
military/aerospace and the commercial/industrial market. Many of the Company's
current and prospective competitors are larger, offer broader product lines and
have substantially greater technical, financial, marketing, manufacturing, and
other resources than the Company.
SALES AND DISTRIBUTION
- ----------------------
The Company's products are sold by independent sales
representatives as well as the premier distributors, such as Zeus/Arrow,
Hamilton/Hallmark, and Future Electronics.
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BKC's products are sold in North America, the Far East, Israel,
Canada, Western Europe and elsewhere. The Company's sales force covers North
America, Europe and the Far East, working with its 31 independent sales
representatives. In 1997 approximately 35% of sales were made through
distributors.
MANUFACTURING
- -------------
All of BKC's manufacturing operations are conducted at its
facility in Lawrence, Massachusetts. BKC's manufacturing process comprises six
operations: wafer fabrication, assembly, testing, military processing, finishing
operations, and quality assurance.
WAFER FABRICATION -- SILICON PRODUCTS. BKC purchases silicon
wafers with an epitaxial layer already applied. Each line of diodes and
rectifiers as well as each zener of a particular voltage has its own specific
requirements as to silicon substrate and epitaxial resistivities. Each silicon
wafer is processed through a multitude of steps, producing a die lot. Once the
die lot is completed, samples are evaluated and tested in order to determine
yield information and establish a reliability confidence level. If a die lot
meets BKC standards, it is approved for assembly.
WAFER FABRICATION -- GERMANIUM DIODES. BKC purchases raw
germanium material then recasts it into a workable mold. This mold is then drawn
into a germanium ingot using radio frequency energy while doping the impurities
necessary to produce the desired resistivity. Different resistivities are
required for each line of specifications being targeted. Once obtained, the
ingot is sliced into wafers, which are processed through multiple steps in order
to produce a die lot. The die lot is then tested and approved in the manner
described above.
ASSEMBLY AND TESTING. The Company assembles its products into
hermetically sealed protective packages. The Company uses an automated assembly
line which is intended to reduce packaging time and improve quality. The test
area, which is equipped to process all BKC part types, tests the electrical
characteristics of each part and sorts each part by electrical specification.
MILITARY PROCESSING. Parts designed to meet military, high
reliability specifications are specially processed in the reliability
department. This processing is conducted to remove infant-mortality type
failures which cannot be detected by standard electrical testing and is designed
for customers needing products with above-average reliability.
FINISHING. Finishing operations include electroplating a
solderable finish on the device leads, marking the part with the specific part
number, polarity band and BKC logo, and packaging the parts for shipment.
QUALITY ASSURANCE. The function of BKC's Quality Assurance group
is to measure the quality level at which manufacturing is operating. The quality
level is monitored by using a Statistical Process Control system located at
strategic points throughout the manufacturing process, commencing in the wafer
fabrication area and ending with a quality monitor just prior to shipping.
BACKLOG
- -------
The backlog of unfilled orders totaled $3,727,000, as of
September 30, 1997, as compared to approximately $3,185,000 as of September 30,
1996. The increase in the backlog is due to increased orders of high reliability
product types. Orders counted in the backlog may be postponed or canceled by
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the customer at any time subject to the terms of the purchase order. Therefore,
the backlog level is not necessarily indicative of future operating results. The
Company expects to fill all orders (unless canceled) of its current backlog
during the 1998 fiscal year.
PATENTS AND PROPRIETARY RIGHTS
- ------------------------------
The Company has a number of proprietary processes and techniques;
however, the Company does not own any patents on any of its technologies or
processes nor are any pending. The Company attempts to restrict access to its
proprietary technologies and processes by requiring that its salaried employees
sign non-disclosure agreements as a condition of employment and by restricting
customer and visitor access to proprietary technology and information of the
Company. There can be no assurance that the Company will be successful in its
efforts to protect its proprietary technologies or processes. In addition, the
laws of some foreign countries in which the Company sells or may sell its
products do not protect the Company's proprietary rights in such products to the
same extent as do the laws of the U.S.
RESEARCH AND DEVELOPMENT
- ------------------------
BKC believes that its future is significantly dependent on its
ability to develop and introduce new products for its targeted markets in a
timely manner. Based upon information furnished by the Sales organization, as
well as demand from key customers, R&D efforts will continue in areas that will
broaden wafer fab capability and expand package types that the Company can
utilize to service the market.
RAW MATERIALS
- -------------
The principal raw materials used by the Company include germanium
and silicon. Each of these items is currently available from several sources at
the quality level and in the quantities that the Company requires. Strong
industry demand has often extended the lead time for production of its products.
In the past, extended lead times for raw materials have tended to be
industry-wide, affecting the Company's competitors as well as the Company. The
Company also relies on third parties for the manufacture of certain assemblies
which are incorporated into certain of the Company's products, such as wafers
for silicon switching diodes, zeners and rectifiers. The loss of any critical
supply or supplier could have a material effect on the performance of the
Company.
EMPLOYEES
- ---------
As of September 30, 1997, the Company had 135 full-time
employees, 117 of whom were engaged in manufacturing (including test
development, quality and materials functions), and 2 in product development, 8
in sales, and 8 in finance and administration. The Company's employees are not
represented by any collective bargaining agreements and the Company has never
experienced a work stoppage.
ENVIRONMENTAL MATTERS
- ---------------------
The Company is a potentially responsible party in connection with
the contamination of soil and groundwater on the Company's leased manufacturing
site in Lawrence. The Company, as tenant, might be considered an "operator" and
therefore strictly liable for cleanup costs or liable for damages to
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third parties, unless it can establish certain defenses. The Company believes
that its use, storage and disposal of material are carefully controlled and do
not result and have not in the past resulted in a release thereof. New England
Environmental Technologies Corporation ("NEET") has conducted preliminary site
investigations and has advised the Company that, although one of the
contaminants found is used in the Company's operations, the Company is not a
likely source of the contamination and that the contamination most likely
results from historical improper disposal of chlorinated solvents on the site
and upgradient of the site predating the Company's occupancy of the property.
If the Company were required to pay cleanup costs, applicable
hazardous waste laws allow the Company to seek contribution from other parties
who caused the contamination or are also subject to strict liability (i.e.,
current and former owners and operators). The current owner and the prior lessee
have agreed to hold harmless the Company with respect to any contamination that
may have occurred prior to October 16, 1985.
Although the outcome of this matter and the cost, if any, to the
Company cannot be reasonably estimated at this time, management does not believe
that the cost, if any, to the Company will have a material adverse effect on the
financial position of the Company.
Federal, state and local regulations impose various environmental
controls on the discharge of chemicals and gases used in BKC's manufacturing
process. The Company believes that its operations are currently in substantial
compliance with all applicable environmental laws and regulations and that costs
of continuing compliance will not, except as described herein, be material to
the Company's financial condition.
The Company believes that it has insurance coverage in amounts
and scope which are adequate and customary for its industry. The Company's
policies contain exclusionary provisions attempting to limit the insurer's
responsibility for damages, if any, arising from certain events, including those
arising from pollution or contamination of the environment. Whether these
limitations would ultimately preclude recovery by the Company of damages arising
from these types of losses would likely be the subject of a dispute between the
Company and its insurers at or after the time at which such liability arises.
ITEM 2. PROPERTIES
----------
The Company's executive offices and manufacturing facilities are
located in Lawrence, Massachusetts, and consist of one building containing
approximately 160,000 gross square feet. The building is occupied by the Company
pursuant to a lease expiring in October, 2000. Approximately 92,000 square feet
of the building are occupied by the Company, 53,000 square feet are sub-leased
by the Company to third parties, 15,000 square feet are common area. The Company
believes its currently leased facilities are adequate for all its reasonably
foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS
-----------------
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------
During the fourth quarter of fiscal 1997, no matter was submitted to
a vote of the security holders through the solicitation of proxies or otherwise.
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PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap System
under the symbol BKCS. Prior to February 25, 1997, the Common Stock traded on
the Nasdaq National Market System. The following table sets forth for the
periods indicated the high and low bid quotations of the Common Stock as
reported by Nasdaq. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
1996 1997
---- ----
HIGH LOW HIGH LOW
FISCAL QUARTER BID BID BID BID
- -------------- --- --- --- ---
First quarter $3.75 $1.88 $3.75 $1.50
Second quarter 4.00 1.75 3.25 1.50
Third quarter 4.75 1.75 2.75 1.75
Fourth quarter 3.75 2.25 3.75 2.75
On December 19, 1997, the last reported bid price for the Common
Stock on the Nasdaq SmallCap system was $5.25, per share.
As of December 19, 1997, the Company estimated that there are
approximately 700 record holders of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock since
inception, and it does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share
data)
The following table summarizes certain financial data which
are qualified by more detailed financial statements
included herein.
<TABLE>
<CAPTION>
STATEMENT OF CONSOLIDATED INCOME (LOSS) DATA:
- ------------------------------------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $11,089 $9,797 $11,277 $11,384 $9,775
Gross profit 3,181 1,947 1,278 2,005 2,915
Income (loss) from operations 879 96 (1,530) (533) 700
Net income (loss) 378 34 (1,207) (475) 353
Net income (loss) per share .30 .03 (.97) (.38) .28
Weighted average shares outstanding 1,276 1,273 1,244 1,247 1,248
CONSOLIDATED BALANCE SHEET DATA:
- ------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Working capital $2,482 $2,015 $1,744 $3,100 $3,232
Total assets 6,904 6,429 7,824 8,351 7,761
Short-term debt 2,067 1,805 2,967 2,144 1,556
Long-term debt and non-current capital
lease obligations 568 581 915 1,219 591
Stockholders' equity 3,347 2,969 2,852 4,062 4,558
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATION
- --------------------
1997 compared to 1996. Revenues for 1997 fiscal year were $11,089,064
versus $9,796,858 for fiscal year 1996, a 13% increase. Of fiscal 1997's
revenue, 96%, compared to 88% for the prior fiscal year, was from products
manufactured by BKC, as opposed to products resold by the Company. This shift to
BKC-produced product follows the Company's strategic plan of focusing on our
internal strengths of a high quality, high reliability product supplier for
demanding applications in space/satellite, telecommunications and
industrial/medical markets.
Net Income for fiscal 1997 was $378,109 or $.30 per share, versus
$34,156 or $.03 per share in fiscal 1996. This ten-fold increase was a result of
the increased margins gained in 1997 as BKC shifted the demand of its customer
base from the commercial marketplace to high reliability product users. In
addition the increased volumes of BKC-manufactured product (which generally have
higher margins than resold products) contributed to the increased profits.
Gross profits for fiscal year 1997 were $3,180,847 or 29% of revenues
versus $1,947,406 or 20% of revenues for fiscal 1996. This improvement in gross
profits was a direct result of product mix shift to BKC-produced high
reliability products, as well as benefit of increased manufacturing volumes as
discussed above.
Total operating expenses for fiscal year 1997 were $2,301,377 or 21%
of revenues versus $1,851,051 or 19% of revenues for fiscal year 1996. The
increase in expenses was due to costs related to product marketing, research and
development, market expansion, as well as increased administrative costs to
support revenue growth.
Research and Development expenses (R&D) were $97,051 in fiscal year
1997 versus $211,825 in the prior year. The reduction in R&D expenses reflects
the cost shift into manufacturing as previously developed products are
introduced in the production area.
The major risks the Company faces are its ability to introduce
product enhancements and new product development and to hire and retain key
personnel.
1996 compared to 1995. Revenues for 1996 fiscal year were $9,796,858
versus $11,277,350 for fiscal year 1995. A major element attributing to the
lower revenue for fiscal year 1996 was a decrease in the level of product resale
revenue which is derived from resale of components manufactured for BKC from an
off-shore vendor. During fiscal year 1996 the total revenue from components
resale was $1,115,000 versus $2,166,000 during fiscal year 1995. This drop of
$1,051,000 in such revenue during fiscal year 1996 is related to the sensitivity
of the computer industry's inventory levels and model design changes. BKC's core
product line, which is 100% manufactured at its Lawrence site, saw a slight
decline in fiscal year 1996 versus fiscal year 1995 resulting from BKC actions
regarding increased pricing and product pruning.
Net Income for the year was $34,156, or $.03 per share, versus a net
loss of ($1,207,469), or ($.97) per share, for fiscal year 1995. Included in the
net income figure for the year was a gain on disposal of property and equipment
of $208,815. The additional improvement in net income versus the
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prior year was due to increased pricing and resultant margins, plus positive
results from cost reductions and reduced spending actions throughout the
Company.
Gross Profits for fiscal year 1996 were $1,947,406, or 20% of sales,
versus $1,277,972, or 11% of sales in fiscal year 1995. This improvement was a
result of management instituted initiatives involving increased prices,
manufacturing cost reductions and decreasing the manufacturing spending levels.
Operating Expenses for the year were $1,851,051, versus $2,808,197
for fiscal year 1995, which in fiscal year 1995 included a write down of assets
in the amount of $574,873 due to the Company's decision to exit the photo
detector business. Selling expenses for the current fiscal year were $898,714,
versus $1,286,202 for fiscal year 1995. The improvement in selling expenses was
due to the elimination of selling expenses related to the photo detector
business and reduction in the general expenses and spending related to the
selling activity.
General and Administrative Expenses were $740,512 for the fiscal year
compared to $785,415 for fiscal year 1995. The reduction in spending was a
result of the company-wide focus on cost reduction and profit improvement
objectives.
Research and Development Expenses (R&D) were $211,825 versus $161,707
for the prior fiscal year. This increase in spending was a planned action to
invest in new product development such as the square ended melf product line
which had its production launch during the first quarter of fiscal year 1997.
The increased spending reflects management's commitment to new product
development as the Company returns to profitability.
The major risks the Company faces include the availability of silicon
wafers, which is a total industry problem, other raw materials, and the speed
and effectiveness in accomplishing performance improvement initiatives planned
for fiscal year 1997.
As discussed above, fiscal year 1996, in total, had overall positive
net income. The first through third quarter of fiscal year 1996 had positive
performance, while quarter four had both a decrease in revenue compared to prior
quarters, negative operating profits, and negative net income. The issues with
the fourth quarter were a major decrease in resale product revenue, and a
softening in demand from BKC's distributors and some key OEM customers. In
addition, during the fourth quarter of fiscal year 1996 certain adjustments were
made to recognize the return of products by some BKC distributors and
product/customer account issues. Looking ahead, there is continued concern
regarding market demand as we enter the new year. Meeting business plan shipping
and manufacturing levels will be a critical factor in reaching the Company's
fiscal year 1997 goals.
LIQUIDITY AND CAPITAL RESOURCES. The Company's ability to meet its
short term commitments are reflected by its working capital ratios.
WORKING CAPITAL:
----------------
(Data in $000's except ratios)
1995 1996 1997
---- ---- ----
Beginning of Year $3,100 $1,744 $2,015
End of Year 1,744 2,015 2,482
Increase/(decrease) in Working Capital. (1,356) 271 467
Working Capital Ratio (Current Assets/
Current Liabilities) 1.4 1.7 1.8
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The Company generated a $289,000 positive cash flow from operations
during fiscal 1997 versus a positive cash flow of $1,193,000 for fiscal 1996.
The $904,000 change in cash flow between the two years primarily reflects a
decrease of $453,000 in Accounts Payable along with a $571,000 increase in
Accounts Receivable.
During fiscal 1997, an additional $127,000 of cash was provided from
financing activities through additional borrowings on the Company's existing
line of credit agreement with Eastern Bank.
The combined benefit of cash generated from operations and additional
borrowings were used to purchase $418,000 of plant and equipment in fiscal 1997
as compared to $145,000 in fiscal 1996.
As of September 30, 1997, the Company had a revolving credit line
with Eastern Bank for $2,500,000, collateralized by accounts receivable and
inventories. The balance used on the line was $1,683,272. The line of credit
agreement contains certain restrictive covenants which the Company has complied
with or the bank has waived. The Company believes that its current debt and cash
flow from operations will be adequate to fund all operations in fiscal 1998.
The Company had long term debt, including the amount due within one
year of $952,000. The debt is secured by all the assets of the Company. Refer to
Notes 5 and 6 within the consolidated financial statements for details.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and schedules together with the auditors reports
thereon are referenced in Part IV and are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
--------
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT
The executive officers and directors of the Company and their ages as
of September 30, 1997, are as follows:
NAME AGE POSITIONS HELD WITH COMPANY
Albert A. Magdall 62 Chairman, Director
James R. Shiring 56 President, CEO, Director
John L. Campbell 63 Strategic Marketing and
Distribution, Clerk, Director
William J. Kady 57 Vice President of Quality,
Director
Gerald T. Billadeau 55 Director
W. Randle Mitchell, Jr. 63 Director
Thomas M. Cunneen 37 Vice President Marketing and Sales
Bryan A. Schmidt 45 CFO, Treasurer
Messrs. Billadeau, Kady and Campbell founded the Company in 1985. Mr.
Billadeau served as the Company's President and Chief Executive Officer from
1985 through July of 1995.
Mr. Magdall has been a Director since November 1994. He was elected
Chairman of the Board in May 1995. From July 1995 to March 1996, Mr. Magdall
served as interim President and Chief Executive Officer. On March 19, 1996, Mr.
Shiring became President and Chief Executive Officer, and Mr. Magdall resumed
his role as Chairman and an independent Director. In 1992 and 1993, he held the
position of Senior Vice President of Genicom Corporation (Nasdaq), a company
involved in the manufacture and sales of computer printers. The Company's four
European Sales and Service subsidiary companies were under his direction. From
1960 until 1987, Mr. Magdall was employed by IBM Corporation where he had a long
record of successful management in product development and manufacturing. In
1979 and 1980, Mr. Magdall served as secretary to the IBM Corporate Management
Committee reporting to the Chairman of the Board. From 1980 until 1987, Mr.
Magdall served as a Vice President in several IBM business areas.
Mr. Shiring joined BKC as its President and Chief Executive Officer
and a Director on March 19, 1996. Mr. Shiring had been Managing Director of
Clare Europe, a unit of CP Clare, a worldwide manufacturer of electronic
components, and prior to that Chief Operating Officer of the parent company of
CP Clare. Mr. Shiring's professional background covers 33 years of progressive
global experience in the electronics industry with the focus on semiconductor
components. His prior professional experience had been with Westinghouse,
Varian, Semicon, Teledyne, and Theta-J Corporation, the forerunner to CP Clare
Corporation.
Prior to the founding of BKC, Mr. Billadeau served as Vice President
and Controller of the ITT Semiconductors Division of ITT from 1980 to 1985. From
1973 to 1980, Mr. Billadeau served as Assistant Controller and Financial Manager
of a subsidiary of ITT. Mr. Billadeau left BKC June 1995 pursue other interests
and is currently CFO at Riverside Millwork Company in Concord NH. He remains a
Director of the Company.
Mr. Kady, Vice President of Quality and a Director, served in various
capacities in the ITT Semiconductors Division of ITT, primarily in the areas of
engineering, quality and reliability, with the
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exception of the period from 1970 to 1979, during which time Mr. Kady owned and
managed an automobile dealership.
From 1963 to 1985, Mr. Campbell, Director of Strategic Marketing and
Distributor Sales, as well as a Director of the Company, held a number of sales
and marketing positions in the ITT Semiconductors Division of ITT, lastly as
Eastern Regional Sales Manager.
Mr. Mitchell has been a member of the Board since 1994, and is
currently Chairman of the Board of Learning Services Corporation (a privately
held company specializing in post-acute acquired brain injury rehabilitation).
He previously served as President and Chief Executive Officer and a director of
Amoskeag Company (Nasdaq) from 1992 to 1994, and as its Chief Financial Officer
from 1979 to 1991. He also served as Executive Vice President and Chief
Financial Officer of Amoskeag's 80% controlled subsidiary, Fieldcrest Cannon,
Inc. (NYSE), from 1985 to 1990. Mr. Mitchell has also served as Chairman of the
Board of the Bangor and Aroostook Railroad, a subsidiary of Amoskeag Company, as
a director and Chairman of the Audit Committee of the Keesville National Bank
(New York), and as a director of Fanny Farmer Candy Shops, Inc., Boston Bancorp
and the South Boston Savings Bank.
Mr. Thomas M. Cunneen joined BKC as its Vice President of Sales and
Marketing in 1996. Prior to joining BKC, Mr. Cunneen had been Vice President,
Field Operations of CP Clare, a worldwide manufacturer of electronic components.
Mr. Cunneen's professional background covers fourteen years of progressive
global experience in the electronics industry with the focus on semiconductor
components. His prior professional experience has been with Sprague, Sigma
Instruments and Theta-J Corporation, the forerunner to CP Clare Corporation for
the past ten years.
Mr. Bryan A. Schmidt joined BKC as its Controller in June 1996 and
was subsequently elected treasurer and CFO. Mr. Schmidt's professional training
includes degrees of BS and MBA in Finance from Northeastern University and
progressive financial management experience within manufacturing concerns for
the last twenty years. Prior to joining BKC, Mr. Schmidt was Controller and CFO
for Gare, Inc., a manufacturer of products for the ceramics industry.
All directors hold office until the next annual meeting of
stockholders and until their successors have been elected. The officers of the
Company are elected annually and serve at the discretion of the Board of
Directors of the Company. There are no family relationships among any of the
directors and executive officers of the Company.
The Company's outside directors, Messrs. Mitchell, Billadeau, and
Magdall serve on the Audit and Compensation Committees.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than ten percent of
its common stock to file reports with the Securities and Exchange Commission
disclosing their ownership of stock in the Company and changes in such
ownership. Copies of such reports are also required to be furnished to the
Company. Based solely on a review of the copies of such reports received by it,
the Company believes that during fiscal 1997, all such filing requirements were
complied with.
14
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the compensation paid to the Chief
Executive Officer and the other most highly compensated executive officer (the
"Named Executive Officers") by the Company for services to the Company for the
fiscal years ended September 30, 1997, 1996, and 1995. None of the Company's
other executive officers had a total annual salary and bonus exceeding $100,000
during fiscal 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
FISCAL ALL OTHER
NAME YEAR SALARY($) BONUS($) COMP. $(1)
---- ---- --------- -------- ----------
<S> <C> <C> <C> <C>
James R. Shiring (2) 1997 $130,000 $10,000 $1,146
President and CEO, Director 1996 92,500 0 700
1995 --- --- ---
Thomas M. Cunneen (3) 1997 100,000 12,000 286
Vice President of Sales & Marketing 1996 59,615 --- 167
1995 --- --- ---
------------------------------------------------
<FN>
(1) Premium cost of life insurance policy for Mr. Shiring and Mr. Cunneen.
(2) Mr. Shiring became President and Chief Executive Officer of the Company on March 19, 1996.
(3) Mr. Cunneen joined the Company as Vice President. of Sales and Marketing on May 14, 1996.
</FN>
</TABLE>
FISCAL YEAR END OPTION VALUES
During Fiscal 1997, none of the named executive officers exercised
options that had been granted by the Company. The following table sets forth
information regarding the vested and unvested number of shares and the
unrealized value (the difference between the option price and the market value)
of the referenced options issued by the Company and held by the Named Executive
Officers on October 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS (#) OPTIONS ($)
Name Vested Unvested Vested Unvested
<S> <C> <C> <C> <C>
James R. Shiring 37,500 37,500 $51,375 $51,375
Thomas M. Cunneen 25,000 25,000 9,250 9,250
</TABLE>
Mr. Shiring and Mr. Cunneen have employment agreements with the
Company that provide for the payment salary and benefits. Agreements
automatically renew for successive one year periods, unless terminated per terms
of the agreements.
COMPENSATION COMMITTEE REPORT
For fiscal 1997, the Compensation Committee approved a formal cash
incentive compensation plan ("Plan") which rewarded several key employees if
certain predetermined earnings targets were achieved and certain business
objectives were met. The actual results for fiscal 1997 were such that a total
of $92,000 was awarded to the Plan participants. A similar incentive
compensation plan for certain key employees has been approved by the
Compensation Committee for fiscal 1997.
15
<PAGE>
DIRECTORS' COMPENSATION
The outside Directors' compensation is as follows: (i) reimbursement
for expenses related to attendance at each meeting. (ii) payment of $1,000 for
each Board of Directors meeting attended, and $500.00 for each committee meeting
attended. If a committee meeting occurs the same day as a board meeting, only
the Board Meeting fee will be paid. (iii) grant of stock options valued at
$7,500.00 each year pursuant to the Company's Non-Employee Director Stock Option
Plan by the stockholders of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of December 12, 1997, by
(i) each person who is known by the Company to own beneficially more than 5% of
the outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors who owns Common Stock; (iii) each of the named executive officers; and
(iv) all directors and executive officers of the Company as a group. Except as
otherwise indicated, each person has sole investment and voting power with
respect to the shares shown as being beneficially owned by such person, based on
information provided by such owners.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT OF SHARES
NAME BENEFICIALLY OWNED OUTSTANDING(5)
---- ------------------ --------------
<S> <C> <C>
Gerald T. Billadeau (1) ................................... 196,680 15.4%
John L. Campbell (2) ...................................... 165,660 13.0%
William J. Kady (3) ....................................... 206,370 16.2%
Albert A. Magdall (4) ..................................... 37,730 3.0%
W. Randle Mitchell, Jr. (5) ............................... 4,730 *
James R. Shiring (6)....................................... 37,500 2.9%
Thomas M. Cunneen (7) ..................................... 25,000 1.9%
All officers and directors as a group (8 persons) (8) ..... 682,003(9) 53.4%
<FN>
*Less than 1%.
(1) Includes beneficial ownership of 180 shares of Common Stock held by spouse.
(2) Includes beneficial ownership of 160 shares of Common Stock held by spouse.
(3) Includes beneficial ownership of 6,100 shares of Common Stock held by
spouse.
(4) Includes 4,730 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(5) Includes 4,730 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(6) Consists of 37,500 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(7) Consists of 25,000 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
(8) Based on 1,276,411 shares outstanding.
(9) Includes 80,293 shares which may be acquired by exercise of stock options
within 60 days after Dec. 12, 1997.
</FN>
</TABLE>
The Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change in control of the Company. The Company also knows of no
agreements among its shareholders which relate to voting or investment power of
its shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements: PAGE
Index to Consolidated Financial Statements and 20
Schedules
Report of Independent Certified Public 21
Accountants
Consolidated Balance Sheet, September 30, 1997 22
and 1996
Statement of Consolidated Income (Loss) for the 23
years ended September 30, 1997, 1996 and 1995
Statement of Consolidated Stockholders' Equity 24
for the years ended September 30, 1997, 1996
and 1995
Statement of Consolidated Cash Flows for the 25
years ended September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements, 26
September 30, 1997, 1996 and 1995
(2) Schedules for the years ended September 30, 1997,
1996 and 1995:
II - Valuation and Qualifying Accounts 38
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the
required information is included in the Consolidated Financial
Statements and Notes thereto.
(3) Exhibits:
EXHIBIT
NO. TITLE
--- -----
**3.2 -Restated Articles of Organization of the
Registrant
**3.4 -Amended and Restated By-Laws of the Registrant
*4.3 -Specimen share certificate.
*10.3 -Registrant's Savings Plan dated September 20,
1991.
**10.28 -Agreement dated March 25, 1992 between
Registrant and Arthur W. Wood Company, Inc.
17
<PAGE>
EXHIBIT
NO. TITLE
--- -----
10.39 -Financing with Eastern Bank, filed as an exhibit
to the Company's Form 10-K for the year ended
September 30, 1994 and incorporated herein by
reference.
10.40 -BKC/Eastern Bank/City of Lawrence - HUD Financing
Agreement dated November 25, 1996, filed as an
exhibit to the Company's Form 10-K for the year
ended September 30, 1996 and incorporated herein
by reference.
27.1 -Financial data schedule
***99.1 -Registrant's 1994 Stock Option Plan
***99.2 -Registrant's 1994 Non-Employee Director Stock
Option Plan
* Incorporated by reference to the same exhibit number to the
Registration Statement on Form S-18 filed with the Commission on June
22, 1992.
** Incorporated by reference to the same exhibit number of
Amendment No. 1 to the Registration Statement on Form S-18
filed with the Commission on August 4, 1992.
*** Incorporated by references to the same exhibit number of the
Registration Statement on Form S-8 filed with the Commission on May 29,
1995.
(b) Reports on Form 8-K:
The Company filed no Reports on Form 8-K with the Securities and
Exchange Commissions during the quarter ended September 30, 1997.
18
<PAGE>
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.
BKC Semiconductors Incorporated
Date: December 23, 1997 /s/ James R. Shiring
-------------------------------------------------
By: James R. Shiring, President and Chief Executive
Officer, Director, Principal 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 and on the dates indicated.
Date: December 23, 1997 /s/ James R. Shiring
---------------------------------------------------
James R. Shiring, President and Chief Executive
Officer, Director, Principal Executive Officer
Date: December 23, 1997 /s/ Bryan A. Schmidt
---------------------------------------------------
Bryan A. Schmidt, CFO, Treasurer, Principal
Financial and Accounting Officer
Date: December 23, 1997 /s/ John L. Campbell
--------------------------------------------------
John L. Campbell, Strategic Marketing
and Distribution, Clerk, Director
Date: December 23, 1997 /s/ William J. Kady
--------------------------------------------------
William J. Kady, Vice President Quality, Director
--------------------------------------------------
Date: December 23, 1997 Albert A. Magdall, Chairman, Director
--------------------------------------------------
Date: December 23, 1997 W. Randle Mitchell, Jr., Director
--------------------------------------------------
Date: December 23, 1997 Gerald T. Billadeau, Director
19
BKC SEMICONDUCTORS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Financial Statements:
Report of Independent Certified Public Accountants 21
Consolidated Balance Sheet, September 30, 1997 and 1996 22
Statement of Consolidated Income (Loss) for the years 23
ended September 30, 1997, 1996 and 1995
Statement of Consolidated Stockholders' Equity for the 24
years ended September 30, 1997, 1996 and 1995
Statement of Consolidated Cash Flows for the years 25
ended September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements, September 26
30, 1997, 1996 and 1995
Schedules for the years ended September 30, 1997, 1996 and 1995:
II - Valuation and Qualifying Accounts 38
All other schedules called for under Regulation S-X are not
submitted because they are not applicable or not required, or
because the required information is included in the
Consolidated Financial Statements and Notes thereto.
----------------------------------------------------------------
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
BKC Semiconductors Incorporated
We have audited the accompanying consolidated balance sheet of BKC
Semiconductors Incorporated and subsidiaries as of September 30, 1997 and 1996,
and the consolidated statements of income (loss), stockholders' equity and cash
flows for the years ended September 30, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of BKC
Semiconductors Incorporated and subsidiaries as of September 30, 1997 and 1996,
and the results of their operations and their cash flows for the years ended
September 30, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
Our audits, referred to above, also include the financial schedules
listed in the Index at Item 14(a)(2). In our opinion, based on our audits, such
financial schedules present fairly the information required to be set forth
therein.
SULLIVAN BILLE, P.C.
Boston, Massachusetts
October 31, 1997
21
<PAGE>
<TABLE>
<CAPTION>
BKC SEMICONDUCTORS INCORPORATED
-------------------------------
CONSOLIDATED BALANCE SHEET, SEPTEMBER 30, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
A S S E T S
===========
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,593 $ 5,921
Accounts and notes receivable - trade (less
allowance for doubtful accounts: 1997,
$14,706; 1996, $11,694) 1,811,349 1,274,927
Inventories 3,249,197 3,119,741
Prepaid expenses 78,098 33,577
Deferred income taxes 274,900 460,000
----------- -----------
Total current assets 5,417,137 4,894,166
PROPERTY AND EQUIPMENT - Net 1,455,668 1,426,439
OTHER ASSETS 31,410 107,908
----------- -----------
TOTAL $ 6,904,215 $ 6,428,513
=========== ===========
L I A B I L I T I E S A N D
S T O C K H O L D E R S' E Q U I T Y
=======================================
CURRENT LIABILITIES:
Note payable - bank $ 1,683,272 $ 1,430,839
Accounts payable 566,061 1,019,836
Accrued liabilities 301,626 54,481
Current maturities of long-term debt 383,986 374,070
----------- -----------
Total current liabilities 2,934,945 2,879,226
----------- -----------
LONG-TERM DEBT - Net of current maturities 568,184 580,610
----------- -----------
DEFERRED INCOME TAXES 54,300
----------- -----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A - 6%,
authorized, 5,000 shares of no par value;
issued 2,940 shares 242,078 242,078
Common stock - authorized, 2,000,000 shares
of no par value; issued, 1,295,311 shares 3,916,721 3,916,721
Deficit (456,394) (834,503)
----------- -----------
Total 3,702,405 3,324,296
Less cost of shares held in treasury:
Convertible preferred stock, 2,940 shares 235,200 235,200
Common stock, 18,900 shares 120,419 120,419
----------- -----------
Stockholders' equity - net 3,346,786 2,968,677
----------- -----------
TOTAL $ 6,904,215 $ 6,428,513
=========== ===========
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------
22
<PAGE>
<TABLE>
<CAPTION>
BKC SEMICONDUCTORS INCORPORATED
STATEMENT OF CONSOLIDATED INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE $ 11,089,064 $ 9,796,858 $ 11,277,350
COST OF REVENUE 7,908,217 7,849,452 9,999,378
------------ ----------- ------------
GROSS PROFIT 3,180,847 1,947,406 1,277,972
------------ ----------- ------------
OPERATING EXPENSES:
Selling 1,191,734 898,714 1,286,202
General and administrative 1,012,592 740,512 785,415
Research and development 97,051 211,825 161,707
Write down of assets of Photo
Detector division 574,873
------------ ----------- ------------
Total operating expenses 2,301,377 1,851,051 2,808,197
------------ ----------- ------------
INCOME (LOSS) FROM OPERATIONS 879,470 96,355 (1,530,225)
------------ ----------- ------------
OTHER (INCOME) EXPENSE:
Interest expense - net 252,192 293,262 311,727
Gain on disposal of property and
equipment (208,815)
------------ ----------- ------------
Other expense - net 252,192 84,447 311,727
------------ ----------- ------------
INCOME (LOSS) BEFORE PROVISION
(CREDIT) FOR INCOME TAXES 627,278 11,908 (1,841,952)
PROVISION (CREDIT) FOR INCOME TAXES 249,169 (22,248) (634,483)
------------ ----------- ------------
NET INCOME (LOSS) $ 378,109 $ 34,156 $ (1,207,469)
============ =========== ============
NET INCOME (LOSS) PER SHARE $ .30 $ .03 $ (.97)
============ =========== ============
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------
23
<PAGE>
<TABLE>
<CAPTION>
BKC SEMICONDUCTORS INCORPORATED
===============================
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE
CONVERTIBLE RETAINED PREFERRED COMMON
PREFERRED COMMON EARNINGS STOCK HELD STOCK HELD STOCKHOLDERS'
STOCK STOCK (DEFICIT) IN TREASURY IN TREASURY EQUITY - NET
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ 242,078 $ 3,834,221 $ 338,810 $(235,200) $(118,115) $4,061,794
PURCHASE OF 1,000 SHARES OF
COMMON STOCK FOR THE
TREASURY (2,304) (2,304)
NET LOSS FOR THE YEAR (1,207,469) (1,207,469)
----------- ----------- --------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 1995 242,078 3,834,221 (868,659) (235,200) (120,419) 2,852,021
ISSUANCE OF 33,000 SHARES OF
COMMON STOCK 82,500 82,500
NET INCOME FOR THE YEAR 34,156 34,156
----------- ----------- --------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 1996 242,078 3,916,721 (834,503) (235,200) (120,419) 2,968,677
NET INCOME FOR THE YEAR 378,109 378,109
----------- ----------- --------- --------- --------- ----------
BALANCE AT SEPTEMBER 30, 1997 $ 242,078 $ 3,916,721 $(456,394) $(235,200) $(120,419) $3,346,786
=========== =========== ========= ========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------
24
<PAGE>
<TABLE>
<CAPTION>
BKC SEMICONDUCTORS INCORPORATED
STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Cash received from customers and
tenants $ 10,517,642 $ 10,413,935 $ 10,990,248
Cash paid to suppliers and employees (9,964,575) (9,123,310) (11,047,999)
Interest received 2,959
Interest paid (255,151) (293,262) (311,727)
Income taxes paid (11,469) (8,030) (32,800)
Income tax refunds received 204,003 436,627
------------ ------------ ------------
Net cash provided by operating
activities 289,406 1,193,336 34,349
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (418,917) (145,049) (268,196)
Proceeds from disposal of property and
equipment 426,344
------------ ------------ ------------
Net cash provided by (used in)
investing activities (418,917) 281,295 (268,196)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line-
of-credit agreements 252,433 (848,808) 647,596
Proceeds from issuance of long-term
debt 244,912 55,819 26,864
Principal payments on long-term debt (370,162) (704,061) (462,065)
Purchase of stock for the treasury (2,304)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 127,183 (1,497,050) 210,091
------------ ------------ ------------
NET DECREASE IN CASH (2,328) (22,419) (23,756)
CASH AT BEGINNING OF YEAR 5,921 28,340 52,096
------------ ------------ ------------
CASH AT END OF YEAR $ 3,593 $ 5,921 $ 28,340
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- -----------------------------------------------------------------------------
25
<PAGE>
BKC SEMICONDUCTORS INCORPORATED
===============================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
---------------------------------
1. OPERATIONS
BKC Semiconductors Incorporated (the Company), and its subsidiaries,
Souza Semiconductors, Inc. (Souza), BKC Photo Detector Division,
Inc. (Photo Detector) and Clearwater Enterprises of Massachusetts,
Inc. (Clearwater), design, manufacture and market discrete and photo
detector semi-conductor devices in the United States and
internationally. The Company grants credit to its customers in the
industrial, automotive, telecommunications, military and aerospace
industries. Approximately 7.5%, 8% and 19% of revenues during the
years ended September 30, 1997, 1996 and 1995, respectively, were
from international sales.
There was one customer which accounted for 16.5% and 10% of revenue
for the years ended September 30, 1997 and 1996, respectively. There
were no customers accounting for more than 10% of revenue during the
year ended September 30, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries Souza, Clearwater and Photo Detector.
All material intercompany transactions have been eliminated.
Effective September 30, 1996, Clearwater was liquidated. Effective
June 30, 1995, Souza was merged into the Company and Photo Detector
was liquidated. In connection with Photo Detector's liquidation, the
Company recorded a loss of $574,873 in the accompanying statement of
consolidated income (loss) from the write down of inventory and
property and equipment to its net realizable value.
MANAGEMENT ESTIMATES
--------------------
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
26
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
-------------------
Revenue from product sales is recorded upon shipment to the customer.
INVENTORIES
-----------
Inventories are valued at the lower of cost (first-in-first-out
method) or market.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are recorded at cost. Depreciation and
amortization are computed principally on the straight-line method
for financial accounting purposes, and accelerated methods for tax
purposes, over the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line method over
their respective lives or the lease terms, whichever is shorter.
Costs of maintenance and repairs are charged to expense while costs of
significant renewals and betterments are capitalized.
INCOME TAXES
------------
Amounts in the consolidated financial statements related to income
taxes are calculated using the principles of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes"
(SFAS 109). Under SFAS 109, prepaid and deferred taxes reflect the
impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the
amounts recognized for tax purposes as well as tax credit
carryforwards and loss carryforwards. These deferred taxes are
measured by applying currently enacted tax rates. A valuation
allowance is used to reduce deferred tax assets when it is "more
likely than not" that some portion or all of the deferred tax assets
will not be realized.
3. INVENTORIES
Inventories consisted of the following:
September 30,
-----------------------------------------
1997 1996
---- ----
Raw Material $ 681,157 $ 558,008
Work in Process 1,756,847 1,519,481
Finished Goods 811,193 1,042,252
---------- ----------
Total $3,249,197 $3,119,741
========== ==========
27
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Machinery and equipment $5,673,562 $5,268,890
Leasehold improvements 247,889 233,444
Equipment under capital lease 132,000 132,000
Furniture and office equipment 153,583 31,043
---------- ----------
Total 6,207,034 5,665,377
Less accumulated depreciation and
amortization 4,751,366 4,238,938
---------- ----------
Property and equipment - net $1,455,668 $1,426,439
========== ==========
</TABLE>
The useful lives employed for computing depreciation and amortization
on principal classes of property and equipment are as follows:
CLASS DESCRIPTION YEARS
----------------- -----
Machinery and equipment 5 - 10
Leasehold improvements 10
Equipment under capital lease 5
Furniture and office equipment 5 - 10
5. NOTE PAYABLE - BANK
Note payable - bank of $1,683,272 and $1,430,839 at September 30, 1997
and 1996, respectively, represents borrowings on the Company's
$2,500,000 line of credit. Interest is payable monthly at prime plus
1% (1997, 9-1/2%; 1996, 9-1/4%). The line is collateralized by a
security interest in substantially all assets of the Company. The
loan documents contain certain restrictive covenants which the
Company has complied with or the bank has waived. The revolving
line-of-credit agreement has a renewal date of January 31, 1998.
28
<PAGE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
September 30,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Note payable - bank, prime plus 1% (1997, 9-1/2%; 1996, 9-1/4%),
payable in monthly instalments of $27,500, plus interest, balance
due March 2000, collateralized by a security interest in
substantially all assets of the Company and a $450,000 guarantee
by the City of Lawrence, Massachusetts, the guarantee is reduced
by $25,000 per month and expires May 1998
$852,500 $908,839
Notes payable - other, 8-1/2%, payable in monthly instalments
aggregating $2,920 ($2,778 in 1996), including interest, through
September 1998, collateralized by
security interests in certain equipment 30,731 11,108
Capital lease obligations, 10.7% to 14.2%, payable in monthly
instalments aggregating $3,726 ($2,825 in 1996), including
interest, through December 2000, collateralized by security
interests in certain equipment 68,939 34,733
-------- --------
Total 952,170 954,680
Less current maturities 383,986 374,070
-------- --------
Long-term debt - net $568,184 $580,610
======== ========
</TABLE>
The above note payable - bank contains the same restrictive covenants
as the Company's line of credit (Note 5) which the Company has
complied with or the bank has waived.
Principal payments of long-term debt as of September 30, 1997 are due
as follows:
YEAR ENDED
SEPTEMBER 30, AMOUNT
------------- ------
1998 $383,986
1999 347,651
2000 212,294
2001 8,239
--------
Total $952,170
========
29
<PAGE>
7. LEASE AGREEMENTS
The Company leases its manufacturing and office facility in Lawrence,
Massachusetts under an eight-year operating lease which expires in
October 2000, at an annual rental of $144,000 through October 1997
and $168,000 thereafter. The lease provides for an option to
purchase the facility at a base price of $960,000 adjusted by
increases in the Consumer Price Index (not to exceed 5% per year).
The option expires in October 1999. The future minimum lease
payments, under the lease, are as follows:
YEAR ENDED
SEPTEMBER 30, AMOUNT
------------- ------
1998 $166,000
1999 168,000
2000 168,000
2001 14,000
--------
Total $516,000
========
The above future minimum lease payments have not been reduced by the
total sublease rentals to be received of approximately $619,000
under non-cancelable subleases.
The amount charged to rent expense was approximately $144,000, for
each of the years ended September 30, 1997, 1996 and 1995. The
Company received approximately $210,500, $228,400 and $219,000 in
sublease rental income for the years ended September 30, 1997, 1996
and 1995, respectively.
The Company leases certain equipment under operating lease agreements
which expire at various dates through December 1999. The future
minimum lease payments are as follows:
YEAR ENDED
SEPTEMBER 30, AMOUNT
------------- ------
1998 $ 54,045
1999 9,096
2000 7,180
2001 2,127
-------
Total $72,448
=======
8. INCOME TAXES
Provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------
1997 1996 1995
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ 11,252 $(215,988)
State $ 9,769 9,000 30,205
Deferred:
Federal 213,500 (42,352) (355,805)
State 25,900 (148) (92,895)
-------- -------- ---------
Provision (credit) for
income taxes - net $249,169 $(22,248) $(634,483)
======== ======== =========
</TABLE>
30
<PAGE>
8. INCOME TAXES (Continued)
The differences between the provision (credit) for income taxes
and income taxes using the U.S. Federal Income Tax Rate of 34%
is as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Amount computed using the
above rate $213,300 $ 4,000 $(626,300)
State income tax - net of
federal tax benefit 23,600 10,200 (107,375)
Reduction of deferred tax
asset due to uncertainty of
state loss carryforward, net
of federal tax benefit 66,000
Other 12,269 (36,448) 33,192
-------- -------- ---------
Provision (credit) for
income taxes - net $249,169 $(22,248) $(634,483)
======== ======== =========
</TABLE>
The Company has available federal net operating loss carryforwards of
approximately $397,700 expiring through September 2011 and state net
operating loss carryforwards of approximately $1,732,200 expiring
through September 2001. A deferred tax asset valuation allowance of
$66,700 and $100,000 at September 30, 1997 and 1996, respectively,
has been recognized to offset the related deferred tax asset due to
the uncertainty of realizing a portion of the benefit of the state
loss carryforward.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
-----------------------------
1997 1996
---- ----
Deferred income tax assets:
Federal and state net operating loss
carryforwards $299,900 $616,900
Inventory reserve 61,100 51,700
Other non-deductible accruals 8,700 6,900
-------- --------
Total deferred income tax
assets 369,700 675,500
Deferred income tax liabilities - tax
over book depreciation (82,400) (115,500)
Valuation allowance for deferred tax
assets (66,700) (100,000)
-------- --------
Net deferred income tax
asset $220,600 $460,000
======== ========
31
<PAGE>
8. INCOME TAXES (Continued)
The above deferred income tax assets and liabilities are shown in the
accompanying consolidated balance sheet under the following
captions:
September 30,
---------------------
1997 1996
---- ----
Current asset $274,900 $460,000
Long-term liability (54,300)
--------
Net deferred income tax asset $220,600 $460,000
======== ========
9. EMPLOYEE BENEFIT PLAN
The Company has a deferred compensation plan (the Plan) under Section
401(k) of the Internal Revenue Code for the benefit of all employees
who meet certain requirements. Each participant in the plan may
elect to defer or contribute up to 20% of his/her annual
compensation on a pre-tax basis to a maximum of $9,500 per year.
The Company is not required to make any contributions under the Plan
and did not make a contribution to the Plan during the years ended
September 30, 1997, 1996 and 1995.
10. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding
during the respective period. Shares reserved for outstanding
warrants have been excluded from the net income per share
calculation because their effect is antidilutive. The weighted
average number of shares outstanding is as follows:
YEAR ENDED NUMBER
SEPTEMBER 30, OF SHARES
------------- ---------
1997 1,276,411
1996 1,272,895
1995 1,243,978
11. STOCK PURCHASE WARRANTS
Inconnection with the Company's public offering in August 1992, the
Company sold to the underwriter warrants to purchase up to 50,000
shares of common stock at a price per share equal to 140% of the
initial per share public offering price of the common stock of $7.
The underwriter warrants were exercisable for a period of four years
commencing August 21, 1993. The warrants expired in August 1997
without being exercised.
32
<PAGE>
12. STOCK OPTION PLANS
During the year ended September 30, 1995, the Company's Board of
Directors and Stockholders approved the 1994 Stock Option Plan (the
Plan) covering its officers and employees. The total number of
shares of common stock, no par value, for which options may be
granted under the Plan, as amended, cannot exceed 235,000 shares.
Following the statutory requirements of the Internal Revenue Code, the
Plan provides that the Board of Directors may establish the purchase
price of the stock at the time the option is granted. However, the
purchase price may not be less than 100 percent of the fair market
value of the Company's common stock. The aggregate fair market value
of the stock for which any employee may be granted options in any
calendar year shall not exceed $100,000 plus any unused limit
carried over (as defined in the Plan) to such year from any prior
calendar year. The Plan terminates in 2004, ten years from its
effective date. Options granted vest over a period of two to three
years and expire ten years from the date of grant. The Plan provides
that any outstanding options will become immediately exercisable
upon merger or acquisition transaction in which the Company does not
survive as a separate entity.
Also during the year ended September 30, 1995, the Company's Board of
Directors and Stockholders approved the 1994 Non- Employee Director
Stock Option Plan (the NED Plan). The total number of shares of
common stock, no par value, for which options may be granted under
the NED Plan cannot exceed 60,000 shares.
The NED Plan provides that the Board of Directors may select
non-employee directors of the Company to whom the options will be
granted. Options may be granted on April 1 of each year for each
non-employee director for a number of shares of common stock not to
exceed $7,500 in market value at the date of grant. The purchase
price may not be less than 100 percent of the fair market value of
the Company's common stock at the time the option is granted. The
NED Plan terminates in 2004, ten years from its effective date.
Options granted vest over a two year period and expire ten years
from the date of grant or 180 days after a director ceases to be a
director.
33
<PAGE>
12. STOCK OPTION PLANS (Continued)
The following table summarizes stock option activity:
STOCK PRICE
OPTION PER SHARE
------ ---------
Outstanding at September 30, 1994 -0- -0-
Granted 7,060 $2.13
------- -------------
Outstanding at September 30, 1995 7,060 $2.13
Granted 216,500 $2.00 - $3.75
------- -------------
Outstanding at September 30, 1996 223,560 $2.00 - $3.75
Granted 31,250 $1.88 - $2.00
Cancelled (5,000) ($3)
-------- -------------
Outstanding at September 30, 1997 249,810 $1.88 - $3.75
======= =============
Exercisable at:
September 30, 1996 -0- -0-
September 30, 1997 97,635 $2 - $3.75
Available for Grant at:
September 30, 1996 71,440
September 30, 1997 45,190
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost for the Company's
two stock option plans been determined based on the fair value at
the grant date for awards consistent with the provisions of SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1997
----
Net income - as reported $378,109
Net income - pro forma 370,388
Earnings per share - as reported 0.30
Earnings per share - pro forma 0.29
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model.
34
<PAGE>
13. CASH FLOW INFORMATION
The following is a reconciliation of net income (loss) to net cash
provided by operating activities for the years ended September 30,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 378,109 $ 34,156 $(1,207,469)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Non-cash charges (credits) to
net income (loss):
Depreciation and amortization 538,003 528,061 562,688
Gain on disposal of property
and equipment (208,815)
Write down of assets of Photo
Detector division 574,873
Provision for doubtful
accounts 35,000 7,244 11,410
Reserve for inventory
obsolescence 203,000 551,908
Deferred income taxes 239,400 (42,500) (448,700)
Decrease (increase) in other
assets 50,923 (24,058) (24,135)
Decrease (increase) in current
assets:
Accounts receivable (571,422) 617,577 (287,102)
Refundable income taxes 215,255 218,044
Inventories (332,456) (81,659) (105,639)
Prepaid expenses (44,521) 9,755 15,857
Increase (decrease) in current liabilities:
Accounts payable (453,775) 122,337 179,397
Accrued liabilities 247,145 15,983 (6,783)
--------- ----------- -----------
Net cash provided by
operating activities $ 289,406 $ 1,193,336 $ 34,349
========= =========== ===========
</TABLE>
The Company incurred the following non-cash investing and financing
activities:
During the years ended September 30, 1997 and 1995, $122,740 and
$307,375, respectively, of property additions were financed.
During the year ended September 30, 1997, the Company refinanced
$855,088 of long-term debt with the same bank.
TheCompany issued 33,000 shares of common stock for $82,500 in lieu
of compensation during the year ended September 30, 1996.
35
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
determining its fair value disclosures for financial instruments:
CASH
----
Thecarrying amount reported in the consolidated balance sheet
approximates fair value.
SHORT AND LONG-TERM DEBT
Thecarrying amount of the Company's short-term bank borrowings and
floating-rate long-term debt approximates its fair value. The
fair value of the Company's fixed rate long-term debt is
estimated using discounted cash flow analysis.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $ 3,593 $ 3,593 $ 5,921 $ 5,921
Line-of-credit 1,683,272 1,683,272 1,430,839 1,430,839
Long-term debt
(including current
maturities) 952,170 952,170 954,680 954,680
</TABLE>
15. CONTINGENCIES
The Company is a potentially responsible party in connection with the
contamination of soil and groundwater on the Company's leased
manufacturing site in Lawrence. The Company, as tenant, might be
considered an "operator" and therefore strictly liable for cleanup
costs or liable for damages to third parties, unless it can
establish certain defenses. The Company believes that its use,
storage and disposal of materials are carefully controlled and do
not result and have not in the past resulted in a release thereof.
New England Environmental Technologies Corporation ("NEET") has
conducted preliminary site investigations and has advised the
Company that, although one of the contaminants found is used in the
Company's operations, the Company is not a likely source of the
contamination and that the contamination most likely results from
historical improper disposal of chlorinated solvents on the site and
upgradient of the site predating the Company's occupancy of the
property.
36
<PAGE>
15. CONTINGENCIES (Continued)
Ifthe Company were required to pay cleanup costs, applicable
hazardous waste laws allow the Company to seek contribution from
other parties who caused the contamination or are also subject to
strict liability (i.e., current and former owners and operators).
The current owner and the prior lessee have agreed to hold harmless
the Company with respect to any contamination that may have occurred
prior to October 16, 1985.
Although the outcome of this matter and the cost, if any, to the
Company cannot be reasonably estimated at this time, management does
not believe that the cost, if any, to the Company will have a
material adverse effect on the financial position of the Company.
37
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
BKC SEMICONDUCTORS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE ----------
AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER
30, 1995:
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $10,092 $11,410 $1,502 (1) $20,000
Reserve for
inventory
obsolescence $ -0- $551,908 $551,908
YEAR ENDED SEPTEMBER
30, 1996:
Allowance for
doubtful accounts $20,000 $7,244 $15,550 (1) $11,694
Reserve for
inventory
obsolescence $551,908 $423,405 (2) $128,503
YEAR ENDED SEPTEMBER
30, 1997:
Allowance for
doubtful accounts $11,694 $35,000 $31,988 (1) $14,706
Reserve for
inventory
obsolescence $128,503 $203,000 $179,619 (2) $151,884
<FN>
(1) Represents accounts written off during the respective period.
(2) Represents inventory written off during the respective period.
</FN>
</TABLE>
38
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-START> Oct-01-1996
<PERIOD-END> Sep-30-1997
<CASH> 3,593
<SECURITIES> 0
<RECEIVABLES> 1,811,349
<ALLOWANCES> 0
<INVENTORY> 3,249,197
<CURRENT-ASSETS> 5,417,137
<PP&E> 6,207,034
<DEPRECIATION> 4,751,366
<TOTAL-ASSETS> 6,904,215
<CURRENT-LIABILITIES> 2,934,945
<BONDS> 0
<COMMON> 3,796,302
0
6,878
<OTHER-SE> (456,394)
<TOTAL-LIABILITY-AND-EQUITY> 6,904,215
<SALES> 11,089,064
<TOTAL-REVENUES> 11,089,064
<CGS> 7,908,217
<TOTAL-COSTS> 7,908,217
<OTHER-EXPENSES> 2,301,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (252,192)
<INCOME-PRETAX> 627,278
<INCOME-TAX> 249,169
<INCOME-CONTINUING> 378,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 378,109
<EPS-PRIMARY> $0.30
<EPS-DILUTED> $0.30
</TABLE>
