UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 26, 1998January 1, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from to
Commission file number: 0-16088
CERAMICS PROCESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2832509
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 South Worcester Street, P.O. Box 338
Chartley, Massachusetts 02712
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(Address of principal executive offices) (Zip Code)
Registrant`s telephone no., including area code: 508-222-0614
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value, $0.01 per share
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(Title of class)
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
than the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days.
[X] Yes [ ] 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 the Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by non-
affiliates of the Registrant was $6,430,925$31,842,836 based on the average of the
reported closing bid and asked prices for the Common Stock on March 1,
1999 as reported on the OTC Bulletin Board.
Number of shares of Common Stock outstanding as of MarchJanuary 1,
1999:2000: 12,285,969 shares.
Documents incorporated by reference.
Part I
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Item 1. Business.
Ceramics Process Systems Corporation (the `Company` or `CPS`)
serves the wireless communications satellite communications,infrastructure market, high-
performance microprocessor market, motor controller market, and other
microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house, interconnect and
thermally manage microelectronic devices. The Company`s products are
typically in the form of housings, packages, lids, substrates, thermal
planes, or heat sinks, and are used in applications where thermal
management and and/or weight are important considerations.
The Company`s products are manufactured by proprietary processes
the Company has developed including the QuicksetTM Injection Molding
Process (`Quickset Process`) and the QuickCastTM Pressure Infiltration
Process (`QuickCast Process`).
Although the Company`s focus is in microelectronics markets,manufacturing components, the
Company participates in other markets through licensinghas sold licenses to portions of its technology to corporations who manufacture and sell productsstrategic
partners such as Hitachi Metals Ltd. In fiscal 1999, 100% of the
Company`s total revenue was derived from manufactured products; in other markets. In
fiscal 1998 86.7% of the Company'sCompany`s total revenue was derived from
manufactured products and 13.3% from licensing fees,fees; and in fiscal 1997,
91.5% of the Company`s total revenue was derived from manufactured
products and 8.5% from licensing fees and in fiscal 1996, 96% of the Company`s total
revenue was derived from manufactured products and 4% from licensing fees.
The Company was incorporated in Massachusetts in 1984. The Company
reincorporated in Delaware in April 1987, through merger into its
wholly-
ownedwholly-owned Delaware subsidiary organized for purposes of the
reincorporation. In July 1987, the Company completed its initial public
offering of 1.5 million shares of its Common Stock.
Overview of Markets and Products
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MARKETS--------------------------------
Consumer demand continues to motivate the electronics industry to
produce products which:
- - operate at higher speeds;
- - are smaller in size; and
- - operate with higher reliability.
While these three requirements result in products of ever-increasing
performance, these requirements also create a fundamental challenge for
the designer to manage the heat generated by the system moving at higher
speeds. Smaller assemblies further concentrate the heat and increase
the difficulty of removing it.
This challenge is found at each level in an electronic assembly: at
the integrated circuit level speeds are increasing and line widths are
decreasing; at the circuit board level higher density devices are placed
closer together on circuit boards; and at the system level higher
density circuit boards are being assembled closer together.
The Company`s primary markets are original equipment manufacturersdesigner must resolve the thermal management issues or the system
will fail. For every 10 degree Celsius rise in temperature, the
reliability of a circuit is decreased by approximately half. In
addition, heat usually causes changes in parameters which degrade the
performance of both active and passive electronic components.
To resolve thermal management issues the designer is primarily
concerned with two properties of the materials which comprise the
system: 1) thermal conductivity, which is the rate at which heat moves
through materials, and 2) thermal expansion rate (Coefficient of Thermal
Expansion or CTE) which is the rate at which materials expand or
contract as temperature changes. The designer must ensure that the
temperature of an electronic assembly stays within a range in which the
differences in the wireless communications,expansion rates of the materials in the assembly do
not cause a failure from breaking, delaminating, etc.
CPS combines at the microstructural level a ceramic with a metal
to produce a composite material which has the thermal conductivity
needed to remove heat, and a thermal expansion rate which is
sufficiently close to other components in the assembly to ensure the
assembly is reliable. The ceramic is silicon carbide (SiC), the metal
is aluminum (Al), and the composite is aluminum silicon carbide (AlSiC),
a metal-matrix composite. CPS can adjust the thermal expansion rate of
AlSiC components to match the specific application by modifying the
amount of SiC compared to the amount of Al in the component.
CPS produces products made of AlSiC in the shapes and
configurations required for each application - i.e., in the form of
lids, substrates, housing etc. Every product is made to a customer`s
blueprint. The CPS process technology allows most products to be made
to net shape, requiring no or little final machining.
Although the Company`s focus today is on AlSiC components, the
Company believes its proprietary Quickset- Quickcast process technology
can be used to produce other metal-matrix composites which may meet
future market needs.
Today, the problem of thermal management is most acute in high-
performance, high-density applications such as cellular basestations,
high-performance microprocessors, motor controllers and components for
satellite communications,communications. However, as the trends towards faster speeds,
reduced size and motor
controller markets.increased reliability continue, and as high-density
circuitry is used in a larger number of applications, the Company
believes that the Company`s products will be used in additional market
segments.
Specific Markets and Products
- -----------------------------
Wireless Communications Infrastructure Market
- ---------------------------------------------
The demand for wireless telecommunications services such as
cellular and Personal Communications Systems (`PCS`) has grown
significantly during the past decade, driven by reduced costs for
wireless handsets, a more favorable regulatory environment, increasing
competition among service providers and a greater availability of
services and microwave spectrum.
In developing countries wireless telephone networks are being
installed as an alternative to installing or upgrading traditional
wireline networks. The growth in wireless communications has required,
and will continue to require, substantial investment by service
providers in infrastructure equipment such as basestations.
The Company providesmanufactures substrates and heat sinks on which high-
performance circuits such as power amplifiers are mounted in wireless
basestations. Use of the company`s products allows the basestation
manufacturer to reduce overall basestation size, increase the number of
calls a basestation can handle, and to improve reliability.
Lids for High-Performance Microprocessors and Other Integrated Circuits
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Increases in speed, circuit density, and the number of connections
in microprocessor chips (MPUs) and application specific integrated
circuits (ASICs) are accelerating a transition in the way in which these
ICs are packaged. Packages provide mechanical protection to the
integrated circuit (IC), enable the IC to be connected to other circuits
via pins, solder bumps or other connectors, and allow attachment of a
heat sink or fan to ensure the IC does not overheat. In the past most
high-performance ICs were electrically connected to the package by fine
wires in a process known as wire bonding. Increasingly high-performance
semiconductors are connected to the package by placing metal bumps on
the connection points of the die, turning the die upside down in the
package, and directly connecting the bumps on the die with corresponding
bumps on the package base by reflowing the bumps. This is referred to
as a "flip-chip package". Flip chip packages allow for connection of a
larger number of leads in a smaller space, and can provide other
electrical performance advantages compared to wire bonded packages.
In many flip chip configurations a lid or cap is placed over the
die to protect the die from mechanical damage and to facilitate the
removal of heat from the die. Often a heat sink or fan is then attached
to the lid. For a high-density die the package designer must ensure
that the lid has sufficient thermal conductivity to remove heat from the
die, and that all components of the package assembly - the die itself,
the package base, and the package lid - are made from materials with
sufficiently similar thermal expansion rates to ensure the assembly will
not break itself apart over time as it thermally cycles.
The Company`s composite material, AlSiC, has been developed to
meet these two needs: it is engineered to have sufficient thermal
conductivity to allow the heat generated by the die to be removed
through the lid, and it is engineered to expand upon heating at a rate
similar to other materials used in the package assembly in order to
ensure reliability of the package over time as it thermally cycles. The
Company produces lids made of AlSiC for high performance microprocessors
used in servers and other applications.
Most participants in the semiconductor industry believe the
densities of ICs will continue to increase following the well-known
"Moore`s Law". As IC densities increase, generally so does the IC size,
and the amount of heat generated by the IC. The company believes the
need for thermal management will continue to grow rapidly. For example,
the Semiconductor Industry Association (SIA) 1997 Roadmap anticipates
the use of 1.5 GHz, 40 million transistor, 385mm2 microprocessor chips
dissipating as much as 110 Watts in workstations and servers to be
offered in 2001, and a further substantial increase to 3.5 GHz, 200
million transistor, 520 mm2 chips dissipating 160 watts for use in
workstations and servers to be offered in 2006.
Motor Controller Market
- -----------------------
The use of power modules to control electric motors of all sizes is
growing. This growth is the result of several factors including
emerging high-power applications which demand power controllers such as
trains, subways and certain industrial equipment, and cost declines in
power modules which increasingly make variable speed drives cost
effective. Power semiconductors are a very significant portion of the
cost of variable speed drives, and the cost of the module housing interconnecting and
thermal management system are also significant; declines in the costs of
microelectronic devicesall these components is driving increased use of variable speed drives.
For example, worldwide approximately 50 million AC induction motors
greater than one-half horsepower are installed every year. Today only a
small percentage of these motors use variable speed drives because of
costs; as costs decline industry observers predict increased use of
variable speed drives.
The Company provides substrates, baseplates and heatsinks on which
power semiconductors are mounted to wireless communications infrastructure
equipment manufacturers.produce modules for motor control.
The Company`s AlSiC baseplates have sufficient thermal conductivity to
allow for removal of heat through the baseplate, and have a thermal
expansion rate sufficiently similar to the other components in the
assembly to ensure reliability over time as the assembly thermally
cycles. The Company believes this market will continue to grow as the
use of power modules penetrates additional motor applications, and as
electric motors themselves penetrate new applications such as the hybrid
electric vehicle.
Satellite Communications Market
- -------------------------------
Satellites provide several advantages over earth-based facilities
for many telecommunications applications. Satellites enable high-speed
communications service where there is no earth-based alternative
available which is often the case for military operations and for
communications services in developing countries. Another advantage is
that the cost to provide services via satellite does not increase with
the distance between sending and receiving stations. The cost of
providing services via satellite can be less than the cost of installing
copper or fiber optic networks.
Demand for satellite telecommunications services for both military
and commercial applications is increasing. Some satellite applications
have both military and commercial applications such as the Global
Positioning System. Commercial applications include satellite based
mobile telephone services, direct-to-home television services, and
direct-to-home internet services. Military and commercial entities have
announced plans to deploy over 1,000 satellites during the next decade.
The Company provides componentsproduces housings, substrates, baseplates, and
heatsinks on which circuitry is mounted for housing, interconnectinguse in satellites. In
addition to the thermal conductivity and the tailored thermal management of microelectronic devices to satellite subsystem and satellite
manufacturers.
Motor Controller Market
The use of power modules to control electric motors of all sizesexpansion
rate, AlSiC is
growing. This growth is the result of several factors including emerging
high-power applications which demand power controllers such as hybrid and
electric vehicles, and cost declines in power modules which increasingly
make variable speed drives cost effective. Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of
the module housing and thermal management system are also significant;
declines in the costs of all these componentslightweight material which is driving increased use of
variable speed drives.
For example, worldwide approximately 50 million AC induction motors
greater than one-half horsepower are installed every year. Today only a
small percentage of these motors use variable speed drives because of
costs; as costs decline industry observers predict increased use of
variable speed drives. The Company provides components for housing,
interconnecting and thermal management of microelectronic devices to motor
controller manufacturers.
PRODUCTS
All markets described above have a common need for thermal
management of electronic devices to improve system performance and
reliability. A second element which many segments within these markets
have in common is the need for lightweight components, particularlyan important
attribute for applications which are air-borne, space-based,spaced-based or
transportation related.
Using its proprietary process technology, the Company produces metal-matrix
composites with superior thermal properties and which are very lightweight
to house and interconnect microelectronic devices. Each of
these products is produced to customers` blueprints to meet customers`
specific requirements. Typical form factors are housings, packages,
lids, substrates, thermal planes, and heat sinks.
The manufacture of microelectronic systems is comprised of three key
steps: (1) the integration of transistors into integrated circuits
(`ICs`), (2) the integration of ICs on boards or modules, and (3) the
integration of boards and modules into systems. The Company produces
products for the second and third steps described aboveCustomers
- products used
to integrate ICs on boards, and used to integrate boards and modules into
systems.
As the complexity, speed, and density of electronic devices
continues to increase, the market increasingly demands housing and
interconnecting products which have a thermal coefficient of expansion
match to ICs, and which provide for the efficient removal of heat from
the system while providing the necessary mechanical and electrical
properties.
The metal-matrix composite aluminum silicon carbide (`Al-SiC`),
manufactured using the Company`s proprietary processes, is a material
system which meets all these requirements and which is finding acceptance
in the marketplace as a replacement for copper, copper-tungsten, copper-
moly, and graphite. In addition, the Company`s aluminum nitride (`AlN`)
ceramic components are used in applications where very high thermal
conductivity is required.
CUSTOMERS---------
The Company sells to major United States microelectronics systems
houses. The Company`s customers typically purchase prototype and
evaluation quantities of the Company`s products over a one to three year
period before entering into recurring production.
In fiscal 1999, the Company`s three largest customers accounted for
67%, 8%, and 6% of total revenues, respectively. In fiscal 1998, the
Company'sCompany`s three largest customers accounted for 72%, 13%, and 6% of
total revenues, respectively.revenues. In fiscal 1997, these
same companiesthe Company`s three largest customers
accounted for 56%, 9%, and 9% of total revenues.
In fiscal 1999, 89% of the Company`s revenues were derived from
commercial applications and 11% were derived from defense related
applications. In fiscal 1998, 94% of the Company`s revenues were
derived from commercial applications and 6% were derived from defense
related applications. In fiscal 1997, 76% of the Company`s total
revenues were derived from commercial business,applications and 6%24% were derived
from defense-related business.
Strategic Partnerships In Other Market Areas
- --------------------------------------------
In addition to its primary focus in microelectronics markets, the
Company participates in other markets through licensing its technology to
corporations who manufacture and sell products in these other markets.
In 1991, CPS and Sopretac, a subsidiary of Vallourec of Boulogne,
France, established a joint venture, Metals Process Systems (`MPS`), to
market on a worldwide basis licenses to use the Quickset Process for
metal injection molding. At December 30, 1995 the Company owned 40% of
the voting stock in MPS (see Patents and Trade Secrets), and Sopretac
owned 60%. In 1996, the Company`s ownership interest in MPS was reduced
to less than 1%, based on additional investment in MPS by Sopretac. The
Company accounted for its investment in MPS under the equity method and
did not recognize any income or dividends from the joint venture in 1998.defense related applications.
Research and Development
- ------------------------
The Company continues to perform product development under
prototype manufacturing agreements with customers. The Company had no
externally funded collaborative research and development agreements in
fiscal years 1999, 1998, 1997, or 1996.1997.
Availability of Raw Materials
- -----------------------------
The Company uses a variety of raw materials from numerous domestic
and foreign suppliers. These materials are primarily aluminum ingots,
ceramic powders and chemicals. Other than certain precious metals, of
which little is used by the Company, theThe raw materials used by the
Company are available from domestic and foreign sources and none is
believed to be scarce or restricted for national security reasons.
Patents and Trade Secrets
- -------------------------
As of December 26, 1998January 1, 2000, the Company had 1110 United States patents.
The Company also has several international patents covering the same
subject matter as the U.S. patents. The Company`s licensees have rights
to use certain patents as defined in their respective license
agreements. The Company has granted co-ownership of five of its patents
and licensing rights to MPSa joint venture company, Metals Process Systems
(MPS) in exchange for its equity ownership in MPS. Under terms of the
agreement, MPS has the exclusive right to use such patents in the area
of metal powders and the Company has the exclusive right to use such
patents in all other areas, provided, however, that MPS has granted to
the Company a non-exclusive license to use the patents in the area of
metal powders.
The Company intends to continue to apply for domestic and foreign
patent protection in appropriate cases. In other cases, the Company
believes it may be better served by reliance on trade secret protection.
In all cases, the Company intends to seek protection for its
technological developments to preserve its competitive position.
Backlog and Contracts
- ---------------------
As of December 26, 1998,January 1, 2000, the Company had a product backlog of $1.27$1.45
million compared with a product backlog of $2.07$1.27 million at December 27,
1997.26,
1998. The Company shipped 100% of the year-end 19971998 product backlog in
1998.fiscal 1999.
Competition
- -----------
The Company has developed and expects to continue to develop
products for a number of different markets and will encounter
competition from different producers of metal matrixmetal-matrix composites and
ceramic products.other competing materials.
The Company believes that the principal competitive factors in its
markets include technical competence, product performance, quality,
reliability, price, corporate reputation, and strength of sales and
marketing resources. The Company believes its proprietary processes,
reputation, and the price at which it can offer products for sale will
enable it to compete successfully in the advanced microelectronics
markets. However, many of the American and foreign companies now
producing or developing metal matrixmetal-matrix composites have far greater
financial and sales and marketing resources than the Company, which may
enable them to develop and market products which would compete against
those developed by the Company.
Government Regulation
- ---------------------
The Company produces non-nuclear, non-medical hazardous waste in
its development and manufacturing operations. The disposal of such
waste is governed by state and federal regulations. Various customers,
vendors, and collaborative development agreement partners of the Company
may reside abroad, thereby possibly involving export and import of raw
materials, intermediate products, and finished products, as well as
potential technology transfer abroad under collaborative development
agreements. These types of activities are regulated by the Bureau of
Export Administration of the United States Department of Commerce.
The Company performs and solicits various contracts from the United
States government agencies and also sells to other government
contractors.
Employees
- ---------
As of December 26, 1998,January 1, 2000, the Company and its wholly-owned subsidiary,
CPS Superconductor Corporation (`CPSS`), had 4050 full-time employees, of
whom 3545 were engaged in manufacturing and engineering and 5 in sales and
administration. The Company also employs temporary employees as needed
to support production and program requirements.
None of the Company`s employees is covered by a collective
bargaining agreement. The Company considers its relations with its
employees to be excellent.
Item 2. Properties.
The Company'sAll of the Company`s operations including corporate headquarters,
manufacturing operations and engineering activities and research and development laboratories toare located in a
leased facility in Chartley, Massachusetts. The Company is operating at
the Chartley facility as a tenant-at-will.
The Company`s rental expense for operating leases was $82 thousand,
$68$82 thousand and $68 thousand in fiscal 1999, 1998 1997 and 1996,1997,
respectively.
Item 3. Legal Proceedings.
The Company is not a party to any litigation which could have a
material adverse effect on the Company or its business and is not aware
of any pending or threatened material litigation against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 26, 1998.January 1, 2000.
Part II
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Item 5. Market for Registrant`s Common Stock and Related
Stockholder Matters
On December 26, 1998,January 1, 2000, the Company had 836876 shareholders. The high and
low closing bid prices of the Company`s common stock for each quarter
during the years ended January 1, 2000 and December 26, 1998 and December 27, 1997 are shown
below.
1999 1998 1997
--------------- --------------
High Low High Low
---- ---- ---- ----
1st Quarter $1.69 $1.19 $2.71 $2.00
$0.50 $0.31
2nd Quarter $2.00 $1.38 $2.62 $1.38
$0.87 $0.34
3rd Quarter $1.63 $1.00 $1.96 $1.25
$1.50 $0.62
4th Quarter $1.19 $0.63 $1.53 $1.25 $2.62 $1.38
The Company has never paid cash dividends on its Common Stock. The
Company currently plans to reinvest its earnings, if any, for use in the
business and does not intend to pay cash dividends in the foreseeable
future. Future dividend policy will depend, among other factors, upon
the Company`s earnings and financial condition.
The Company`s Common Stock is traded on theNASD`s Over-the-Counter
Bulletin Board (OTCBB) under the symbol CPSX.
Item 6. Selected Consolidated Financial Data
The following selected financial data of the Company
should be read in conjunction with the consolidated financial statements
and related notes filed as part of this Annual Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
For the Fiscal Year: 1999 1998 1997 1996 1995 1994
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Summary of Operations
- ---------------------
Product Revenue $5,525 $4,589 $2,007 $1,387 $1,192$4,806 $4,788 $4,198 $1,922 $1,385
License Revenue 0 737 391 85 2
Operating Expenses 4,723 3,722 2,993 2,201 2,221 3,071
------ ------ ------ ------ ------
Operating Income (Loss) 83 1,803 1,596 (194) (834)
(1,879)
Net Other Income (Expense) 155 (131) (219) (217) (274) (38)
------ ------ ------ ------ ------
Net Income (Loss) $1,672$ 238 $ 1,672 $ 1,377 $ (411)$( 411) $(1,108) $(1,917)
====== ====== ====== ====== ======
Net Income (Loss) Per
Basic Common Share $ 0.02 $ 0.16 $ 0.18 $ (0.05) $ (0.14) $(0.25)$(0.14)
====== ====== ====== ====== ======
Weighted Average Basic
Number of Common Shares
Outstanding 12,286 10,566 7,799 7,781 7,675
7,581
====== ====== ====== =========== ===== ===== ======
Net Income (Loss) Per
Diluted Common Share $ 0.02 $ 0.14 $ 0.13 $ (0.05) $ (0.14) $(0.25)$(0.14)
====== ====== ====== ====== ======
Weighted Average Diluted
Number of Common Shares
Outstanding 12,483 12,547 12,280 7,781 7,675 7,581
====== ====== ====== ====== ======
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Year-end Position
- -----------------
Working Capital (Deficit) $1,782$1,812 $ 1,782 $(1,788) $(3,200) $(2,736)
$ (165)
Total Assets 3,186 2,984 1,905 795 526
932
Long-term Obligations 197 125 310 88 -
1,620
Stockholders'Stockholders` Equity
(Deficit) $2,389$2,627 $ 2,389 $(1,520) $(2,905) $(2,493) $(1,458)
Item 7. Management`s Discussion and Analysis of Financial Condition and
Results of Operations
This Annual Report on Form 10-K contains forward-looking statements
that involve a number of risks and uncertainties. There are a number of
factors that could cause the Company`s actual results to differ
materially from those forecasted or projected in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or changed circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
- ---------------------
Revenue
- -------
Revenue from sales of products in fiscal 1999 was $4.81 million, up
slightly from sales of products in fiscal 1998 of $4.78 million. No
revenue was received from licensing agreements in fiscal 1999 compared
to $0.74 million received from licensing agreements in fiscal 1998.
Because no licensing revenue was received in fiscal 1999, total revenue
decreased $720 thousand or 13% to $4.81 million in fiscal 1999 from
$5.52 million in fiscal 1998.
Although product revenue increased only slightly in fiscal 1999
compared to fiscal 1998, the sources of product revenue changed
significantly. Demand from the Company`s largest customer declined in
fiscal 1999 by $0.75 million, or 19%, compared to fiscal 1998, while
revenue from other customers increased by $0.77 million, or 94%.
Total revenue increasedof $5.52 million in fiscal 1998 reflects an increase
of $936 thousand or 20% to $5.52 million in 1998
from $4.59 million in 1997. Totalover total revenue of $4.59 million in 1997
reflects an increase of $2.58 million or 128% over total revenue of $2.01
million in 1996.fiscal
1997. The increase in revenue from fiscal 1997 to fiscal 1998 iswas due
to increased customer demand resulting in an increase in product shipments of $590 thousand, and increased revenues
from licensing activities of $347 thousand.
The increase in revenue from 1996 to 1997 is primarily the
result of a shift in product sales mix from small prototyping runs to
recurring production of several products. Because metal-matrix composites
are relatively new materials, the Company`s customers often take one to
three years to evaluate prototypes and modify their designs to take
advantage of the benefits metal-matrix composites offer before purchasing
production quantities. In 1997, several products, primarily for wireless
communications applications, made this transition from prototyping
quantities to production quantities.
Operating Costs
- ---------------
Total operating costs were $4.7 million, $3.7 million, and $3.0
million for years fiscal 1999, fiscal 1998, and fiscal 1997,
respectively.
Operating costs increased in fiscal 1999 compared to fiscal 1998
by $1 million as a result of two factors, 1) actions taken, primarily
the hiring of additional personnel, to strengthen and improve the
quality, engineering, manufacturing and sales functions within the
Company to prepare for future growth, and 2) changes in the product mix.
In fiscal 1999 the Company hired managers for new business development
and quality assurance, and technicians for product development, quality
assurance and maintenance, in addition to operators for production
positions. The Company purchased additional capital equipment for the
quality department and manufacturing operations. The Company also
conducted a year-long program to revise and upgrade its quality system
with the objective of achieving registration to the ISO 9001 standard in
early 2000. Management believes these actions will enable the company
to better meet the rigorous quality requirements of its current and
future customer base. Changes in product mix resulted in increases in
tooling and raw material expenses. Operating costs increased in fiscal
1998 compared to fiscal 1997 by $0.7 million primarily as a result of
increased sales volume.
Cost of sales for fiscal years 1999, 1998, and 1997 were $3.8
million $3.0 million, and $2.2
million for the fiscal years 1998, 1997, and 1996, respectively.
Cost of sales for the years 1998, 1997, and 1996 were $3.0 million
$2.5 million, and $1.7 million, respectively. Selling, general
and administrative costs were $0.7$0.9 million, $0.5$0.7 million, and $0.5
million for these same years, respectively.
The $0.8 million increase in cost of sales in fiscal 1999 versus
fiscal 1998 is attributable to increased overhead expenses described
above, as well as increased raw material and labor expenses associated
with changes in product mix. The $0.5 million increase in cost of sales
in fiscal 1998 versus fiscal 1997 is attributabledue to higher average sales volume
in fiscal 1998. The $0.8 million increase in
cost of sales in 1997 versus 1996 is attributable to higher sales volume in
1997. Unit shipments in 1997 were 337% higher than unit shipments in 1996
while cost of sales increased only 47%, reflecting a shift in mix from
small prototyping runs to recurring production of several products.
Gross margins on product revenue declined tofor fiscal years 1999, 1998 and
1997 were 21%, 37% in 1998 fromand 41% in
1997 primarily due to increased manufacturing overhead expensesrespectively. As the Company believes arehas
transitioned from a research and development focus to a manufacturing
focus, the Company has incurred expenses to build the manufacturing
infrastructure needed to support future growth. Gross margins increased to
41% in 1997 from 12% in 1996 as more products entered into recurring
production and manufacturing efficiencies improved as processes operated on
a consistent daily basis, labor content per part declined as capital
equipment was installed, and the cost of raw materials per unit shipped
declined asIn 1999, the Company
took advantage of reductions in vendors` prices as
a result of higher quantity usage.
The 1998 selling, generaladded engineering and administrative expenses of $685
increased 33% from 1997 selling, general and administrative expenses of
$517 primarily as a result of increased salary and travel expense.preventative maintenance personnel, for example.
The Company added personneldoes not anticipate continuing to add fixed costs at a
greater rate than revenue growth in the sales function in 1998 and the Company
expects to continue to increase headcountnear future. In addition,
fiscal 1999 gross margins were negatively affected by reduced shipments
in the sales function as it
expends greater efforts on building it'ssecond half of fiscal 1999 to the Company`s largest customer,
resulting in the fixed costs being spread over a smaller base.
Selling, general and administrative expenses offor fiscal years 1999,
1998 and 1997 were $0.9 million, $0.7 million, and $0.5 million
were consistentrespectively. The increase of $0.2 million from fiscal 1998 to fiscal
1999, and the increase of $0.2 million from fiscal 1997 to 1996.fiscal 1998
primarily resulted from hiring additional sales personnel in fiscal 1999
and fiscal 1998, and incurring additional travel and sales promotion
expenses. The Company began to sell product actively in Europe in
fiscal 1999.
The Company continues to perform product development under
prototype manufacturing agreements with customers. The Company had no
externally funded collaborative research and development agreements in
fiscal 1999, 1998 1997 or 19961997.
Net Other ExpensesIncome and Expense
- ------------------
The Company had net other expensesincome (expense) of $149 thousand, $0 $219
thousand and $217($219) thousand for the fiscal years 1999, 1998 1997 and 19961997
respectively. The decreaseincrease in net other expenseincome in 1998fiscal 1999 compared
to 1997fiscal 1998 is primarily due to reduced interest expense as a resultthe gain on sale of extinguishing debt or conversion of
debt to equity in 1998.obsolete
equipment. Additionally, interest income increased due to average higher
cash balances.balances in fiscal 1999. Net other expenses were similar in amount
in 19971999 and 1996,1998, and were primarily interest expense.
Income Taxes
- ------------
The Company'sCompany`s Federal income taxes expense intax expenses were ($6), $36, and $21
thousand for 1999, 1998 was $57,126 which
includes alternative minimum taxes for fiscaland 1997 of $21,060 and taxes for
fiscal 1998 of $36,066.respectively. The Company did not accrue or pay Federalpaid no
income taxestax in 19961999 due to its tax lossesloss carryforwards and changes in that year.the
tax code relating to small business and the alternative minimum tax.
The ($6) expense for 1999 is an adjustment for over accrual of taxes in
1998.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that they did not exceed the 50% ownership change in the three-
year period ending December 26, 1998,January 1, 2000; therefore, as of year-end 1998at January 1, 2000 all
net operating loss carryforwards are available to offset future taxable
income.
Liquidity and Cash Reserves
- ---------------------------
Cash on hand increased $938of $1,034 thousand at fiscal year end 1999 reflects a
decrease of $465 thousand or 167% to31% over cash on hand of $1,499 thousand at
fiscal year end 1998 from $561 thousand1998. Government securities on hand at fiscal year end
1997.1999 were $307 thousand compared to no government securities on hand at
fiscal year end 1998. In 1998,fiscal 1999, operations generated net cash of
$1,266 thousand, investing activities
generated net cash of $55 thousand, and financing activities, primarily
payment of debt principal, consumed net cash of $383 thousand. Cash
generated by operations increased in 1998 from 1997 primarily because of
increased product and licensing revenues in 1998 compared to 1997.
Cash on hand of $561 at fiscal year end 1997 reflects an increase of
$448 thousand or 396% over cash on hand of $113 at fiscal year end 1996. In
1997, operations generated net cash of $784$365 thousand, investing activities, primarily the purchase of capital
equipment and short term investments in the form of government
securities, consumed net cash of $215$784 thousand, and financing
activities, primarily paymentnamely principal payments of debt principal,capital lease obligations,
consumed net cash of $120$47 thousand.
Cash on hand of $1,499 thousand at fiscal year end 1998 reflects
an increase of $938 thousand or 167% over cash on hand of $561 thousand
at fiscal year end 1997. The increase in 1998 from 1997 is primarily
the result of receipt of licensing fees, and cash generated by
operations increased
in 1997 from 1996 primarily because of increased product and licensing
revenues in 1997 compared to 1996.operations.
In 1999, 1998, and 1997 the Company financed its operations through
funds generated from operations. Prior to 1997, the Company financed its
operations primarily through, debt, contract research and development
revenues, license fees, an equity placement, and sale of products.
In 1994 and 1995, the Company issued notes and convertible notes
in the amount of $2.4 million to finance its working capital obligations
and building renovations cost. In 1997, the Company paid down several
notes. In 1998, the Company converted the remaining notes into equity.
Specifically, in 1998 the Company issued 3,740,000 shares of common
stock upon conversion of note principal in the amount of $1,870,000, the
Company issued 723,916 shares of common stock upon conversion of accrued
interest in the amount of $361,958, and the Company paid accrued
interest in cash in the amount of $160,542.
The Company believes it will be able to finance its working capital
obligations and capital expenditures for production equipment through funds generated from
operations throughout 1999.2000. The Company continues to sell to a limited
number of customers and loss of any one of these customers could cause
the Company to require external financing.
As of year-end 1998 the Company has no notes outstanding.
Newly Issued Accounting Pronouncements and Future Accounting Changes
- ---------------------------------------------------------------------------------------------------
In June 1998, the FASB issued FASSFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," FAS No. 133 requires that allwhich establishes
accounting and reporting standards for derivative instruments, be recorded on the balance sheet at their fair
value. Changesincluding
certain derivative instruments embedded in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transactionscontracts and if it is, the
type of hedge transaction. The statement is effective for
fiscal years
beginning after June 15, 1999.hedging activities. The Company will adopt FASSFAS No. 133 for itsas required by
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in
fiscal 2001. To date the Company has not utilized derivative
instruments or engaged in hedging activities, and therefore the adoption
of SFAS No. 133 is not expected to have a material impact on the
Company`s financial position or results of operations.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". SAB 101 summarizes the SEC`s view
in applying generally accepted accounting principles to selected revenue
recognition issues. The application of the guidance in SAB 101 will be
required no later than the Company`s second quarter of the fiscal year
ending December 30, 2000. The effect of applying the guidance, if any, will be reported as
a cumulative effect adjustment resulting from a change in accounting
principle. The Company`s evaluation of SAB 101 is not yet complete.
Year 2000 Issue
- ---------------
TheIn 1998 and 1999 the Company has identified three areas of possible
exposure to Year 2000 problems: 1) Applicationapplication programs (financial,
CAD/CAM and management information programs) used by the company, 2)
Embeddedembedded programs in production and analytical equipment used by the
Company, and 3) Programsprograms used by vendors, customers and other third
parties with whom the Company conducts business.
The Company has completed an assessment of its exposure in each of
these three areas and has developed and implemented a plan and timetable to address issues
identified. The assessment indicated the area of greatest risk iswas the
area of application programs. In the process of addressing the Year
2000 issue, the Company has concurrently sought to upgrade certain computer
systems to provide greater functionality. In fiscal 1998 and 1999, the
Company made capital expenditures of $84less than $100 thousand to purchase
and install new financial, accounting, and selected manufacturing
computer systems which are Year 2000 compliant and which provide greater
functionality . For the application
programs which the Company does not intend to replace but which are not
currently Year 2000 compliant, the Company has identified patches and
upgrades which the company is implementing through the first half of 1999.functionality.
Regarding the second area, the Company is testingtested all production and
analytical equipment one machine at a time to determine where Year 2000 problems exist,existed, and
to implement upgrades and or other remedies for
problems identified. The Company's timetable calls for completion of this
process by the end of the first half of 1999. Ifimplemented upgrades or other remedies are not possible for certainas appropriate. No production or
analytical equipment the Company believes it
can replace the capital equipment in an orderly manner without disrupting
production. The Company does not currently believe any capital equipment
will need to be replaced, but there is no guarantee this will be the case.
The Company does not believe the costrequired replacement as a result of upgrades will be material, but
there is no guarantee this will be the case.Year 2000
problems.
Regarding the third area, the Company is interviewinginterviewed vendors and
customers to determine their exposure to Year 2000 issues. The Company is
developingissues, and developed
a contingency plan for sourcing materials and other services in the
event of noncompliance byan interruption.
As of March 1, 2000 the Company has not experienced any
interruptions in its customersoperations from the Year 2000 issue, and vendors. The contingency plandoes not
expect any interruptions in the future; however there can be no
assurance this will be in place by the end of
the third fiscal quarter of 1999.case.
Inflation
- ---------
Inflation had no material effect on the results of operations or
financial condition during 1999, 1998 1997 or 1996.1997. There can be no
assurance,assurance; however, that inflation will not affect the Company`s
operations or business in the future.
Item 8. Financial Statements and Supplementary Data
See Index to the Company`s Financial Statements and the
accompanying financial statements and notes which are filed as part of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
- --------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Directors of the Company are elected annually and hold office until
the next annual meeting of stockholders and until their respective
successors are duly elected and qualified. The executive officers of the
Company are appointed by the Board of Directors and hold office until
their respective successors are duly elected and qualified.
The Directorsdirectors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Grant C. Bennett 4445 President
Chief Executive
Officer,
Treasurer
and Director
Michael Bernique 5556 Director
H. Kent Bowen 5758 Director
Francis J. Hughes, Jr. 4849 Director
Mr. Grant C. Bennett has held the positions of President, Chief
Executive Officer and Director of the Company since September, 1992.
Prior to that time, he served as Vice President-Marketing and Sales of
the Company from November, 1985 to September, 1992. Before joining CPS,
Mr. Bennett was a consultant at Bain & Company, a Boston-based
management consulting firm.
Mr. Michael Bernique is currently President and CEO of TelOptica, a
network optimization and professional services firm. He served as
President, Satellite Data Networks Group of General Instrument
Corporation from 1996 to 1998, as Senior Vice President, North American
Sales and Vice President and General Manager, Transmission Products
Division of DSC Communications from 19931989 to 1996, and in a variety of
positions with Motorola from 19861985 to 1993,1989, including Vice President
Domestic Operations, Cellular Infrastructure. Mr. Bernique was elected
to the Company'sCompany`s Board of Directors in 1999. Mr. Bernique is also
a directorChairman of the Board of Directors of RF Monolithics, Inc.
Dr. H. Kent Bowen has served as a Professor at Harvard Business
School since July, 1992. Prior to that time, he held the position of
Ford Professor of Engineering at the Massachusetts Institute of
Technology (`MIT`) from 1981 to 1992. Dr. Bowen served as Co-Director
of the Leaders for Manufacturing Program at MIT from 1991 through July,
1992. Dr. Bowen has been a Director of the Company since 1984 and
served as Chairman of the Board of Directors of the Company from 1984 to
August, 1988. Dr. Bowen is also a director of General SignalSPX Corporation.
Mr. Francis J. Hughes, Jr. has served as President of American
Research and Development Corporation (`ARD`), a venture capital firm,
since 1992. Mr. Hughes joined ARD`s predecessor organization in 1982,
and became Chief Operating Officer in 1990. Mr. Hughes served as General
Partner of the following venture capital funds: ARD I, L.P., ARD II,
L.P. (since July, 1985), ARD III, L.P. (since April, 1988), Hospitality
Technology Fund, L.P. (since(since June, 1991) and Egan-Managed Capital, L.P.
(since February, 1997). Mr. Hughes has served as a Director of the
Company since 1993. Mr. Hughes is also a director of RF Monolithics,
Inc., and Texas Micro, Inc.
There are no family relationships between or among any executive
officers or Directorsdirectors of the Company.
Item 11. Executive Compensation
The following table sets forth certain information with respect to
the annual and long-term compensation of the Company`s Chief Executive
Officer for the three fiscal years ended December 26, 1998.January 1, 2000. No other
executive officer of the Company serving on the last day of fiscal year
19981999 received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Other All Other
Compen- Options/ LTIP Compensa-
Name & Position Year Salary Bonus sation SAR`s Payouts tion
- ---------------------- -------- ----- ------- -------- ------- ---------
($) ($) ($) (#)($) ($) ($)
Grant C. Bennett 1999 $125,000 $0 $0 0 $0 $0 $0
President and 1998 $104,026 $0 $0 0 $0 $0 $0
President andChief Executive 1997 $100,163 $0 $0 0 $0 $0 $0
Chief Executive 1996 $ 95,550 $0 $0 0 $0 $0 $0
Officer
The Company`s President and Chief Executive Officer did not receive
option grants during fiscal year 1998.1999. During fiscal year 19981999 no
options were exercised by him, and at the end of the fiscal year 19981999 no
options were held by him.
Directors` Fees
- ---------------
UnderThe Company adopted the terms of the Company`s 1992 Director Stock Option Plan (the
`Director Plan`("1992
Director Plan"), Directors who are neither officers nor employees on February 20, 1992. As of the
Company (the `Outside Directors`) are entitled to receive stock options
as compensation for their services as Directors. A non-statutory stock
option (the `initial option`) to purchase up to 4,000 shares of Common
Stock was granted on MayJanuary 1, 1992 to each eligible Director who was then
serving as a Director, and shall be granted to each other eligible
Director upon his or her initial election as a Director. Also, each
eligible Director is entitled to receive a non-statutory stock option
(the `reelection option`) to purchase up to 2,000 shares of Common Stock
on each subsequent date that he or she is reelected as a Director of the
Company. In addition, under the terms of the Plan, the Director serving
as Chairman of the Board and each Director serving on a standing
committee of the Board is entitled to receive an option to an additional
500 shares as part of his initial option and each reelection option.
Options vest in 12 equal monthly installments beginning one month from
the date of grant, provided that 2,000 shares of each initial option vest
immediately. No options were granted to Directors under the Director
Plan in 1998. At December 26, 1998,2000 options to
purchase 35,50035,000 shares of Common Stock were outstanding under the 1992
Director Plan. No grants were made under this plan in fiscal 1999, 1998
or 1997. The 1992 Director Plan expired on April 16, 1998 and no new
grants are available under it.
The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on
January 22, 1999. Under the terms of the 1999 Plan, all of the
Company`s employees, officers, directors, consultants and advisors are
eligible to be granted options, restricted stock awards, or other stock-
based awards. In 1999, options to purchase 24,000 shares of the
Company`s Common Stock were granted to directors under the 1999 Plan.
All options granted are nonstatutory stock options granted at the fair
market value of the stock, are exercisable one year from the date of
grant, and expire ten years from the date of grant. The 1999 Plan
includes provisions for the acceleration of vesting in the event of a
change in control of the Company. Outside Directorsdirectors may receive expense
reimbursements for attending Boardboard and Committee
Meetings.committee meetings. Directors
who are officers or employees of the Company do not receive any
additional compensation for their services as Directors.directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 1,
1999,2000, with respect to the beneficial ownership of the Company`s Common
Stock by (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock, (ii) each Director of
the Company, (iii) each Executive Officer of the Company named above in
the Summary Compensation Table, and (iv) all Directors and Officers as a
group:
Percentage of
Common Stock Shares of
Name and Address Beneficially Common Stock
of Beneficial Owner Owned (1) Outstanding
- ------------------- ------------ -------------
Ampersand Specialty Materials
Ventures Limited Partnership
(`ASMV`)
55 William-----------
ARD Master, L.P.
30 Federal Street
Suite 240
Wellesley,Boston, MA 02181 1,837,810 15.0%02110-2508 1,173,214 (2) 9.5%
ARD I, L.P.
30 Federal Street
Boston, MA 02110-2508 1,021,884 (3) 8.3
Waco Partners
c/o Wechsler & Co., Inc.
105 South Bedford Road, Suite 310
Mount Kisco, NY 10549 1,669,980 13.6%
American Research and
Development III, L.P.
(`ARD III`)
30 Federal Street
Boston, MA 02110-2508 1,219,191 (2) 9.9%
American Research and
Development I, L.P.
(`ARD I`)
30 Federal Street
Boston, MA 02110-2508 1,021,884 (3) 8.3%
Grant C. Bennett (Director & Officer) 1,642,331 13.4%1,627,331 13.2%
Michael Bernique (Director) None8,000 (4) *
H. Kent Bowen (Director) None16,000 (5) *
Francis J. Hughes, Jr. (Director) 2,245,575 (4)2,199,598 (6) 18.3%
All Directors and Officers as a
group (three(four persons) 3,887,906 (5)3,850,929 (7) 31.6%
*Less than 1% of the total number of outstanding shares of
Common Stock.
(1)1. The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated, each
stockholder referred to above has sole voting and investment power
respect to the shares listed.
(2)2. Total of 1,219,1911,173,214 shares includes 1,216,471consists of 1,170,494 shares owned by ARD
IIIMaster L.P., and options to purchase 2,720 shares of common stock
exercisable within 60 days after March 1, 1999.2000. Excludes shares described in Footnote 3 below,
and excludes options to
purchase 4,500 shares of common stock held by Mr. Hughes which are
exercisable within 60 days after March 1, 1999.
(3)2000.
3. Total of 1,021,884 shares includesconsists of 1,019,604 shares owned by ARD
I, L.P., and options to purchase 2,280 shares of common stock
exercisable within 60 days after March 1, 1999.2000. Excludes shares described in Footnote 2 above,
and excludes options to
purchase 4,500 shares of common stock held by Mr. Hughes which are
exercisable within 60 days after March 1, 1999.
(4) Total2000.
4. Consists of 2,245,575 includes a) 1,216,471 shares of Common Stock owned
by ARD III, 1,019,604 shares of common stock owned by ARD I, options to purchase 2,7208,000 shares of common stock
exercisable within 60 days after March 1, 1999 owned by ARD III and2000
5. Consists of options to purchase 2,28016,000 shares of Common Stockcommon stock
exercisable within 60 days after March 1, 19992000.
6. Consists of shares and options to purchase shares described in
Footnotes 2 and 3 above owned by ARD I,
as to which shares Mr. Hughes disclaims beneficial ownership (Mr. Hughes, a
Director of the Company, is a General Partner of partnerships which controlMaster, L.P., and ARD I, L.P.,
and ARD III) and, b) options to purchase 4,500 shares of common stock held by Mr.
Hughes which are exercisable within 60 days after March 1, 1999
(5) Total2000.
7. Consists of 3,887,906 includes 2,245,575all shares and options to purchase shares described in
Footnote 4Footnotes 4,5 and 6 above, and 1,642,331 shares owned by Mr.Grant C. Bennett
a director and
officer of the Company.listed in above table.
Item 13. Certain Relationships and Related Transactions
In 1994, the Company issued convertible subordinated notes to
affiliates of Directors and other persons knowknown by the Company to
beneficially own more than 5% of the outstanding shares of the Company.
In 1998 all remaining notes were converted into equity and accrued
interest was paid in cash or converted into equity as summarized below.
There were no notes outstanding as of December 26, 1998.year-end 1998 or year-end 1999.
Shares Issued Upon Conversion of
Principal and Shares Issued or cash
Paid for Accrued Interest in 1998
Per ---------------------------------
Annum Principal Interest Interest
Principal Interest Conversion Conversion Payment
Amount Rate Shares Shares Cash
Noteholder ($) (%) ---------- ---------- ---------
ASMV $660,000 10% 1,320,000 517,810 -
Waco Partners $750,000 10% 1,500,000 - $132,260
ARD III $141,440 10% 282,880 112,122 -
ARD I $118,560 10% 237,120 93,984 -
Affiliates of
Directors as
a group $260,000 10% 520,000 206,106 -
Part IV
- ------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as part of this Form 10-K.
1. Financial Statements
--------------------
The financial statements filed as part of this
Form 10-K are listed on the Index to Consolidated
Financial Statements on page 21 of this Form 10-K.
2.a. Exhibits
--------
The exhibits to this Form 10-K are listed on the
Exhibit Index on pages 18-20 of this Form 10-K.
2.b. Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CERAMICS PROCESS SYSTEMS CORPORATION
By: /s/ Grant C. Bennett
--------------------------
Grant C. Bennett
President
Date: March 26, 199830, 2000
Pursuant to the Requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- -------------------- ------------------------ ------------
/s/ Grant C. Bennett President, Treasurer and Director}
- -------------------------- (Principal Executive Officer) }
Grant C. Bennett }
}
}
}
/s/ Michael Bernique Director }
- -------------------------- }
Michael Bernique } March 26,
} 1998}Mar. 30,
}2000
}
}
/s/ H. Kent Bowen Director }
- -------------------------- }
H. Kent Bowen }
}
}
}
/s/ Francis J. Hughes, Jr. Director }
- -------------------------- }
Francis J. Hughes, Jr. }
}
CERAMICS PROCESS SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
3.1** Restated Certificate of Incorporation of the
Company, as amended, is incorporated herein by
reference to Exhibit 3 to the Company`s
Registration Statement on Form 8-A
(File No. 0-16088) --
3.2** By-laws of the Company, as amended, are
incorporated herein by reference to Exhibit 3.2
to the Company`s Registration Statement on Form
S-1 (File No. 33-14616)(the `1987 S-1Registration
Statement`) --
4.1** Specimen certificate for shares of Common Stock of
the Company is incorporated herein by reference to
Exhibit 4 to the 1987 S-1 Registration Statement --
4.2** Description of Capital Stock contained in the
Restated Certificate of Incorporation of the
Company, as amended, filed as Exhibit 3.1 --
(1)10.1** 1984 Stock Option Plan of the Company, as amended,
is incorporated herein by reference to Exhibit
10(b) to the Company`s Annual Report on Form 10-K
for the year ended December 31, 1988 --
(1)10.2** 1989 Stock Option Plan of the Company, is
incorporated by reference to Exhibit 10.6 to the
Company`s 1989 S-1 Registration Statement --
(1)10.3** 1992 Director Stock Option Plan is incorporated by
reference to Exhibit 10.5 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991 --
10.4** Participation Agreement, dated February 14, 1991,
between the Company and Sopretac, a French societe
anonyme, is incorporated by reference to Exhibit
10.10 to the Company`s Annual Report on Form 10-K
for the year ended December 28, 1991 --
(1)10.5** Retirement Savings Plan, effective September 1,
1987 is incorporated by reference to Exhibit 10.35
to the Company`s 1989 S-1 Registration Statement --
(1)10.6** Severance Benefit Program, effective June 1, 1989,
is incorporated by reference to Exhibit 10.36 to
the Company`s S-1 Registration Statement --
10.7** Research and Development Agreement, dated as of
June 26, 1991, between the Company and Carpenter
Technology Corporation (`CarTech`) is
incorporated by reference to Exhibit 10.17 to the
Company`s Annual Report on Form 10-K for the year
ended December 28, 1991 --
10.8** Option and License Agreement, dated as of June 26,
1991, between the Company and CarTech is
incorporated by reference to Exhibit 10.19 to the
Company`s Annual Report on Form 10-K for the year
ended December 28, 1991 --
10.9** License Agreement, dated as of December 11, 1992,
between the Company and CarTech is incorporated by
reference to Exhibit 10.19 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.10** Amendment to Research and Development Agreement,
dated as of December 11, 1992, between the Company
and CarTech is incorporated by reference to Exhibit
10.20 to the Company`s Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.11** Amendment to Option and License Agreement, dated as
of December 11, 1992, between the Company and
CarTech is incorporated by reference to Exhibit
10.21 to the Company`s Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.12** BancBoston lease line of credit, dated December 23,
1991, between the Company and The First National
Bank of Boston is incorporated by reference to
Exhibit 10.20 to the Company`s Annual Report on
Form 10-K for the year ended December 28, 1991 --
10.13** Amendment to BancBoston lease line of credit, dated
December 31, 1992, between the Company and the
First National Bank of Boston is incorporated by
reference to Exhibit 10.21 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.14** Form of 10% Convertible Subordinated Note Due June
30, 1995 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.22 to the Company`s
Annual Report for the fiscal year ended January 1,
1994 --
10.15** 10% Convertible Subordinated Note Due April 21,
2001 between the Company and Waco Partners and
related Subordinated Convertible Note Purchase
Agreement between the Company and Wechsler & Co.,
Inc. is incorporated by reference to Exhibit 10.21
to the Company`s Annual Report for the fiscal year
ended December 31, 1994 --
10.16** 10% Convertible Subordinated Note Due January 31,
1996 and related Common Stock Purchase Warrant
between the Company and Ampersand Specialty
Materials Ventures Limited Partnership is
incorporated by reference to Exhibit 10.22 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.17** Form of 10% Convertible Subordinated Note Due April
24, 1996 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.23 to the Company`s
Annual Report for the fiscal year ended December
31, 1994 --
10.18** Senior Secured Promissory Note Due March 30, 1996
and related Security Agreement between the Company
and Aavid Thermal Technologies, Inc. is
incorporated by reference to Exhibit 10.24 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.19** Secured Line of Credit Note Due June 30, 1996 and
related Security Agreement between the Company and
Kilburn Isotronics, Inc. --
10.20** Amended and Restated Promissory Note dated July
31, 1996 between the Company and Texas Instruments
Incorporated
--10.21 1999 Stock Incentive Plan adopted by the Company`s
Board of Directors on January 22, 1999
21** Subsidiaries of the Registrant are incorporated
herein by reference to Exhibit 22 to the Company`s
Annual Report on Form 10-K for the year ended
December 31, 1988 --
23.1 Consent of PricewaterhouseCoopers LLP
** Incorporated herein by reference.
(1) Management Contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
CERAMICS PROCESS SYSTEMS CORPORATION
Page
- ------------------------------------------------------------
Report of Independent Accountants 22
Consolidated Balance Sheets as of January 1, 2000 and
December 26, 1998 and
December 27, 1997 23-24
Consolidated Statements of Operations for the years ended
January 1,2000, December 26, 1998,
and December 27, 1997
and December 28, 1996 25
Consolidated Statements of Stockholders` Equity (Deficit)
for the years ended January 1, 2000,
December 26, 1998 and December 27, 1997 and December 28, 1996 26-2726
Consolidated Statements of Cash Flows for the years ended
January 1, 2000, December 26, 1998,
and December 27, 1997 and December 28, 1996 2827
Notes to Consolidated Financial Statements 3028-37
All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.
Report of Independent Accountants
- ------------------------------------------------------------------------
To the Board of Directors and Stockholders
Ceramics Process Systems Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flowsindex present fairly, in all material respects, the
financial position of Ceramics Process Systems Corporation (the "Company")and its
subsidiary at January 1, 2000 and December 26, 1998, and December 27, 1997, and the results
of their operations and their cash flows for each of the threefiscal years
in the period
ended January 1, 2000, December 26, 1998 and December 27, 1997 in
conformity with accounting principles generally accepted accounting
principles.in the United
States. These financial statements are the responsibility of the
Company'sCompany`s management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally
accepted auditing standardsin the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 8, 1999
3, 2000
CONSOLIDATED BALANCE SHEETS
Ceramics Process Systems Corporation
ASSETS
January 1, December 26,
December 27,2000 1998 1997
-------- --------
Current assets:
Cash & cash equivalents $ 1,033,522 $ 1,498,774
$ 561,166Short-term investments 306,672 --
Accounts receivable 547,134 626,121receivable-trade 387,569 514,152
Accounts receivable-other 109,065 32,982
Inventories 307,348 204,200 123,325
Prepaid expenses 30,193 1,830 15,528
------------ ------------
Total current assets 2,174,369 2,251,938 1,326,140
Property & equipment:
Production equipment 2,013,331 1,569,021 1,470,253
Office equipment 202,523 155,232 70,404
Accumulated depreciation
and amortization (1,204,000) (1,000,637) (967,161)
------------ ------------
Net property and equipment 1,011,854 723,616 573,496
------------ ------------
Deposits -- 8,772 5,072
------------ ------------
Total assets
$ 2,984,3263,186,223 $ 1,904,7082,984,326
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS (continued)
Ceramics Process Systems Corporation
LIABILITIES & STOCKHOLDERS'STOCKHOLDERS` EQUITY
(DEFICIT)January 1, December 26,
December 27,2000 1998 1997
-------- ------
Current liabilities:
Accounts payable $ 96,753142,667 $ 154,65796,753
Accrued expenses 157,300 184,032 677,109
Deferred revenue 142,266 163,430
Notes payable -- 206,962
Current portion of convertible notes payable:
Related parties -- 260,000
Other -- 1,610,0009,884 10,670
Current portion of capital lease
obligations 52,255 46,959 42,205
---------- --------
Total current liabilities 470,010 3,114,363
Long term portion:
Notes payable -- 137,868
Capital362,107 338,414
Deferred revenue 124,000 131,596
Long-term portion of capital lease
obligations 72,900 125,155 172,114
---------- --------
Total liabilities 559,006 595,165 3,424,345
---------- --------
Stockholders'Stockholders` Equity (Deficit)
Common stock, $0.01 par value,
authorized 15,000,000 shares; issued
12,308,852 shares at January 1, 2000
and 12,308,852 shares at
December 26, 1998 and 7,824,582 shares at December 27, 1997 123,089 78,246123,089
Additional paid-in capital 32,656,353 30,464,83332,656,353
Accumulated deficit (30,091,390) (30,329,446) (32,001,881)
Less treasury stock, at cost, 22,883
common shares (60,835) (60,835)
---------- --------
Total stockholders'equity (deficit)stockholders`equity 2,627,217 2,389,161 (1,519,637)
---------- --------
Total liabilities & stockholders'stockholders`
equity (deficit)$ 3,186,223 $ 2,984,326
$ 1,904,708
======================= ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Ceramics Process Systems Corporation
For the years ended
January 1, December 26, December 27,
December 28,2000 1998 1997
1996
------------ ------------ -----------------------
Revenue:
Product sales $4,805,865 $4,787,790 $4,197,912
$1,922,006
License revenues -- 737,504 391,001 85,000
---------- ---------- ----------
Total revenue 4,805,865 5,525,294 4,588,913 2,007,006
---------- ---------- ----------
Operating expenses:
Cost of sales 3,812,094 3,037,351 2,475,140 1,686,148
Selling, general, and
administrative 910,343 684,658 517,362 515,346
---------- ---------- ----------
Total operating expenses 4,722,437 3,722,009 2,992,502 2,201,494
---------- ---------- ----------
Operating income (loss)83,428 1,803,285 1,596,411 (194,488)
---------- ---------- ----------
Other income (expense):
Interest income 59,739 41,455 3,581
--
Interest expense ( 15,957) (132,202) (237,968)
(248,500)
Other income 104,917 90,774 15,122 31,683
---------- ---------- ----------
Income (loss) before taxes 232,127 1,803,312 1,377,146
(411,305)
Provision forfor(benefit from) taxes 5,929 (130,877) -- --
---------- ---------- ----------
Net income (loss)$ 238,056 $1,672,435 $1,377,146 $ (411,305)
========== ========== ==========
Net income (loss) per
basic common share $0.02 $0.16 $0.18 $(0.05)$ 0.18
========== ========== ==========
Weighted average
number of basic common
shares outstanding 12,285,969 10,565,961 7,799,279 7,780,766
=========== ========== ==========
Net income (loss) per
diluted common share $0.02 $0.14 $0.13 $(0.05)$ 0.13
========== ========== ==========
Weighted average number
of diluted common
shares outstanding 12,483,279 12,547,427 12,279,643 7,780,766
=========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'CONSOLIDATED STATEMENTS OF STOCKHOLDERS` EQUITY (DEFICIT)
For the years ended January 1, 2000, December 26, 1998 and
December 27, 1997
Ceramics Process Systems Corporation
Common stock Stock-
-----------------Additional holders`
Number Par Paid-in Accumulated Treasury equity
of shares Value capital deficit stock (deficit)
------- ------- ---------- ---------- ------- -----------
Balance at December 28, 1996
7,780,766 $77,808 $30,457,384 $(33,379,027) $(60,835) $(2,904,670)
Stock Options Exercised
43,816 438 7,449 -- -- 7,887
Net income
-- -- -- 1,377,146 -- 1,377,146
------- ------- ------- --------- ------ ---------
Balance at December 27, 1997
7,824,582 78,246 30,464,833 32,001,881 (60,385) (1,519,637)
Common stock issued in debt conversion
4,463,916 44,639 2,187,319 -- -- 2,231,958
Stock Options Exercised
20,354 204 4,201 -- -- 4,405
Net income
-- -- -- 1,672,435 -- 1,672,435
------- ------- ------- ------- ------- --------
Balance at December 26,1998
12,308,852 123,089 32,656,353 (30,329,446) (60,385) 2,389,161
Net income
-- -- -- 238,056 -- 238,056
------- ------- ------- ------- ------- ---------
Balance at January 1, 2000
12,308,852$123,089 $32,656,353 $(30,091,390) $(60,835) $2,627,217
========== ======= =========== ============ ======== =========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ceramics Process Systems Corporation
For the years ended
Jan. 1, Dec. 26, Dec 27,
2000 1998 1997
---------- ---------- ---------
Cash flows from operating activities:
Net income $ 238,056 $1,672,435 $1,377,146
Adjustments to reconcile net income
to cash provided by
operating activities:
Depreciation 167,359 146,234 115,994
Amortization 46,959 36,600 36,500
Gain on disposal of equipment (104,225) (53,800) --
Changes in assets and liabilities:
Accounts receivable, trade 126,583 78,987 (485,086)
Accounts receivable, other 17,982
Inventories (103,148) (80,875) 33,120
Prepaid expenses (28,364) 13,698 (14,188)
Accrued interest on investments (6,672) -- --
Accounts payable 45,914 (57,904) 25,895
Accrued expenses (26,732) (131,120) (112,657)
Deferred revenue (8,382) ( 21,164) (192,557)
Net cash provided by ----------- ---------- --------
operating activities 365,330 1,603,091 784,167
----------- ---------- --------
Cash flows from investing activities:
Additions to property and equipment (502,555) (332,954) (212,827)
Proceeds on disposal of property and
equipment 10,160 53,800 --
Deposits 8,772 (3,700) (2,735)
Purchase of marketable securities (300,000)
Net cash used in investing ----------- ----------- ---------
activities (783,623) (282,854) (215,562)
----------- ----------- ---------
Cash flows from financing activities:
Principal payment of capital lease (46,959) (42,204) (23,487)
obligations
Principal payments of notes payable -- (344,830) (105,170)
Proceeds from issuance of common stock -- 4,405 7,887
Net cash used in ----------- ----------- ---------
financing activities (46,959) (382,629) (120,770)
----------- ----------- --------
Net increase (decrease) in cash (465,252) 937,608 447,835
Cash and cash equivalents at beginning
of period 1,498,774 561,166 113,331
Cash and cash equivalents at ----------- --------- -------
end of period $1,033,522 $1,498,774 $561,166
=========== =========== =======
The accompanying notes are an integral part of the consolidated
financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------
(1) Nature of Business
------------------
The Company serves the wireless communications infrastructure
market, high-performance microprocessor market, motor controller market,
and other microelectronic markets by developing, manufacturing, and
marketing advanced metal-matrix composite components to house,
interconnect and thermally manage microelectronic devices.
(2) Summary of Significant Accounting Policies
------------------------------------------
(2)(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Ceramics Process Systems Corporation (the "Company") and its wholly-
owned subsidiary, CPS Superconductor Corporation(`CPSS`). All
intercompany balances and transactions have been eliminated in
consolidation.
(2)(b) Basis of Presentation
----------------------
Certain amounts in the financial statements and notes thereto have
been reclassified to conform to fiscal year 1999 classifications.
(2)(c) Cash, Cash Equivalents, and Investments
---------------------------------------
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Management determines the appropriate classification of securities
at the time of purchase and re-evaluates such designation as of each
balance sheet date. As of January 1, 2000, in addition to cash and cash
equivalents, the Company held investments in government securities with
an original maturity of greater than three months in the amount of
$306,672. These government securities are classified as held-to-
maturity and carried at amortized cost. As of January 1, 2000, the
estimated fair value of each investment approximated its amortized cost
and therefore there were no significant unrealized gains or losses. No
investments were held as of December 26, 1998.
Short-term investments of $306,672 held at January 1, 2000 had
maturities of less than one year.
(2)(d) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Year-end
inventory balances consisted of the following:
January 1, December 26,
2000 1998
--------- ---------
Raw materials $ 71,134 $107,259
Work-in-process 236,214 96,941
--------- ---------
$ 307,348 $204,200
========= =========
(2)(e) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of
equipment is calculated on a straight-line basis over the estimated
useful life, generally five years. Amortization under capital leases is
calculated on a straight-line basis over the life of the lease.
Depreciation of leasehold improvements is calculated using the straight-
line method over the lease term or the estimated useful lives, whichever
is shorter. Maintenance and repairs are charged to expenses as incurred
and betterments are capitalized. Upon retirement or sale, the cost and
related accumulated depreciation or amortization are removed from their
respective accounts. Any gains or losses are included in the results of
operations in the period in which they occur.
(2)(f) Revenue Recognition
-------------------
The Company recognizes product revenue generally upon shipment.
Revenue related to license agreements is recognized upon receipt of the
license payment or over the license period, if the Company has
continuing obligations under the agreement. Advance payments in excess
of revenue recognized are recorded as deferred revenue.
(2)(g) Research and Development Costs
------------------------------
The Company continues to perform product development under
prototype manufacturing agreements with customers. In fiscal 1999 and
fiscal 1998, the Company did not incur any costs for research and
development and did not perform any externally funded research and
development programs. In prior periods research and development costs
were charged to expense as incurred.
(2)(h) Income Taxes
------------
The Company accounts for income taxes utilizing the asset and
liability method which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between tax and financial statement basis of assets and
liabilities, measured using enacted tax rates expected to be in effect
in the period which the temporary differences reverse.
(2)(i) Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing net
income by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is calculated by
dividing net income by the sum of the weighted average number of common
shares plus additional common shares that would have been outstanding if
potential dilutive common shares had been issued for granted stock
option and stock purchase rights.
(2)(j) Comprehensive Income
--------------------
The Company has no items of comprehensive income, and therefore
net income is equal to comprehensive income.
(2)(k) Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities. The Company will adopt SFAS No. 133 as required by
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in
fiscal 2001. To date the Company has not utilized derivative
instruments or engaged in hedging activities, and therefore the adoption
of SFAS No. 133 is not expected to have a material impact on the
Company`s financial position or results of operations.
In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". SAB 101 summarizes the SEC`s view
in applying generally accepted accounting principles to selected revenue
recognition issues. The application of the guidance in SAB 101 will be
required no later than the Company`s second quarter of the fiscal year
2000. The effect of applying the guidance, if any, will be reported as
a cumulative effect adjustment resulting from a change in accounting
principle. The Company`s evaluation of SAB 101 is not yet complete.
(2)(l) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of 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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
(2)(m) Risks and Uncertainties
-----------------------
The Company manufactures its products to customer specifications
and a significant portion of the Company`s revenues have historically
been generated from three customers. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
of trade and other accounts receivable. The Company has not incurred
significant losses on its accounts receivable in the past.
(2)(n) Fiscal Year-End
---------------
The Company`s fiscal year end is the last Saturday in December or
the first Saturday in January, which results in a 52- or 53-week year.
Fiscal year 1999 consisted of 53 weeks and fiscal years 1998, and 1997,
consisted of 52 weeks.
(2)(o) Stock-based Compensation Plans
-------------------------------
The Company has adopted the disclosure requirements of Statements
of Financial Accounting Standards (SFAS) No.123, `Accounting for Stock-
Based Compensation`. The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting
Principles Board Opinion No. 25, `Accounting for Stock Issued to
Employees`. No stock-based compensation costs were recognized in 1999,
1998, and 1997.
(3) Supplemental Cash Flow Information
----------------------------------
No equipment was acquired through capital lease obligations in
1999 or 1998. The Company acquired equipment through capital lease
obligations in 1997 in the amount of $135,160. The Company paid interest
on these capital leases amounting to $15,957, $20,710, and $15,196 in
fiscal years 1999, 1998, and 1997, respectively. In fiscal 1998 the
Company issued 4,463,916 shares of common stock upon conversion of note
principal and accrued interest in the amount of $2,231,959, and paid
$160,542 in cash for accrued interest. The Company paid federal income
taxes of $36,066 and $21,060 in 1998 and 1997 respectively. In 1999 the
Company recognized a gain of $104,225 on the sale of equipment. At
January 1, 2000 a receivable of $94,065 was outstanding on the
transaction.
(4) Leases
------
At January 1, 2000 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $125,349 under capital
leases. At December 26, 1998 the Company had production equipment with
a cost of $262,108 and accumulated amortization of $78,390 under capital
leases.
Future payments required under capital lease
obligations are as follows at January 1, 2000:
2000 62,916
2001 56,940
2002 21,497
--------
Total future minimum lease payments 141,353
--------
Less amount representing interest 16,198
--------
Present value of net future lease payments 125,155
Less current portion 52,255
--------
Long-term obligation under capital leases $ 72,900
========
The Company is operating at its Chartley facility as a tenant-at-
will. Total rental expense for operating leases was $82,000 for 1999,
$82,000 for 1998 and $67,500 for 1997.
(5) Stock-Based Compensation Plans
------------------------------
In 1999 no options were exercised by Company employees. In 1998
Company employees exercised options for 20,354 shares of common stock at
market prices between $0.18 and $.0625. In 1997 Company employees
exercised options for 43,816 shares of common stock at market prices
between $0.625 and $2.375.
In 1999 the Company granted 311,500 options at fair market values
of $1.00 to $1.53 under the 1989 Stock Option Plan and the 1999 Stock
Incentive Plan. In 1998 the Company granted 51,000 options at fair
market values of $1.44 to $2.375 under the 1989 Stock Option Plan. In
1997, under the 1989 Stock Option Plan, the Company granted 109,000
options at fair market value of $0.18 with similar terms and conditions
to existing option holders in exchange for the previously issued
options. As of January 1, 2000, the total number of options outstanding
under all option plans was 632,853.
The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on
January 22, 1999. Under the terms of the 1999 Plan all of the Company`s
employees, officers, directors, consultants and advisors are eligible to
be granted options, restricted stock awards, or other stock-based
awards. In 1999, options to purchase 273,500 shares of the Company`s
Common Stock were granted to employees and directors under the 1999
Plan. All options were nonstatutory stock options granted at the fair
market value of the stock, and expire ten years from the date of grant.
The options granted to employees vest in equal annual installments over
a five-year period. The options granted to directors vest one year from
date of grant. The 1999 Plan includes provisions for the acceleration of
vesting in the event of a change in control of the Company.
Under the 1999 Plan a total of 1,250,000 shares of common stock is
available for issuance. In 1999, options to purchase 273,500 shares of
the Company`s Common Stock were granted to employees and directors,
leaving 976,500 shares available for grant as of January 1, 2000.
As of January 1, 2000 the 1999 Plan is the only stock option plan
from which awards can be made, all other options plans have expired.
The 1984 Stock Option Plan expired on August 24, 1994 and no additional
grants can be made from this plan. The 1989 Stock Option Plan expired
on February 22, 1999 and no additional grants can be made from this
plan. The 1992 Director Stock Option Plan expired on April 16, 1998 and
no additional grants can be made from this plan. A total of 359,353
options granted under the 1984, 1989 and 1992 Plans prior to their
expiration dates were outstanding as of January 1, 2000.
The following is a summary of stock option activity for all of the
above plans for the fiscal years 1999, 1998 and 1997.
1999 1998 1997
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------ ------------------ ------------------
Outstanding at
beginning of
year 338,698 $ 0.81 374,386 $ 0.93 430,961 $ 0.68
Granted at fair
market value 311,500 $ 1.09 51,000 $ 2.04 109,000 $ 1.00
Exercised (20,354) $ 0.22 (43,816) $ 0.18
Cancelled (17,345) $ 1.58 (66,334) $ 2.57 (121,759) $ 0.41
--------- -------- --------- ------ -------- ------
Outstanding at
end of year 632,853 $ .92 338,698 $ 0.81 374,386 $ 0.93
========= ======= ========= ===== ======== ======
Options exercisable
at year-end 273,053 $ .56 176,734 $ 0.60 165,461 $ 1.44
The following table summarizes information about stock options
outstanding at January 1, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Range Remaining Weighted Weighted
Of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (in years) Price Exercisable Price
- -------- ----------- ----------- -------- ----------- --------
$0.18 203,353 6.2 $0.18 203,353 $0.18
0.75-0.875 12,000 2.3 0.80 12,000 0.80
$1.00 243,000 9.6 1.00 0 0
1.3 - 1.53 115,000 8.48 1.35 32,666 1.35
2.188 - 2.88 59,500 6.89 2.36 25,034 2.56
------- ------
$0.18 - $2.88 632,853 7.9 $0.93 273,053 $0.56
======== =======
The fair value of each option grant under SFAS 123 is estimated on
the date of grant using the Black-Scholes option-pricing model. The
following table presents the annualized weighted average values of the
significant assumptions used to estimate the fair values of the options:
1999 1998 1997
---- ---- ----
Options issued 311,500 51,000 59,000
Risk-free interest rate 5.30% 5.52% 6.27%
Expected life in years 7 7 7
Expected volatility 95% 88% 80%
Expected dividends 0 0 0
All options are granted at the fair market value on the date of
grant.
Had compensation cost for the Company`s two employee stock option
plans been recorded based on the fair value of awards at grant date
consistent with the alternative method prescribed by SFAS 123, the
Company`s pro forma net income for 1999, 1998, and 1997 would have been
$181,810, $1,632,788, and $1,362,316 respectively. Diluted
income per share for 1999, 1998 and 1997 would have been $.01, $0.14,
and $0.13, respectively. The pro forma amounts include
amortized fair values attributable to options granted after December 15,
1994 only and therefore, are not likely to be representative of the
effects on reported net income for future years.
(6) Accrued Expenses
------------
Accrued expenses consist of the following:
January 1, December 26,
2000 1998
-------- --------
Accrued legal and accounting $ 37,000 $ 47,500
Accrued payroll 87,814 107,383
Accrued other 32,486 29,149
-------- --------
$ 157,300 $184,032
======== ========
(7) Income Taxes
------------
Deferred tax assets and liabilities are as follows:
January 1, December 26,
2000 1998
------------ ------------
Net operating losses $10,683,000 $10,851,000
Vacation and other accrued
expenses 88,000 79,000
Depreciation (107,000) (99,000)
------------ ------------
Total 10,664,000 10,831,000
Valuation allowance (10,664,000) (10,831,000)
----------- -----------
-- --
============ ============
Due to the uncertainty related to the realization of the net
deferred tax asset, a full valuation allowance has been provided. At
January 1, 2000, the Company had net operating loss carryforwards of
approximately $30,900,000 available to offset future income for U.S.
Federal income tax purposes, and $2,800,000 for state income tax
purposes. These operating loss carryforwards expire at various dates
from the years 2000 through 2011 for federal income tax purposes and the
years 1999 through 2001 for state income tax purposes.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that it did not exceed the 50% ownership change in the three-
year period ending at year-end 1999 therefore as of year-end 1999 all
net operating loss carryforwards are available to offset future taxable
income.
(10) Retirement Savings Plan
-----------------------
Effective September 1, 1987, the Company established the Retirement
Savings Plan (the `Plan`) under the provisions of Section 401 of the
Internal Revenue Code. Employees, as defined in the Plan, are eligible
to participate in the Plan after 30 days of employment. Under the terms
of the Plan, the Company may match employee contributions under such
method as described in the Plan and as determined each year by the Board
of Directors. Through January 1, 2000, no employer matching
contributions had been made to the Plan since inception.
(11) Significant Customers and Segment Information
---------------------------------------------
Significant customers in 1999, 1998, and 1997 were as follows:
Significant Significant
Customer Customer
Year ended January 1, 2000 A 67%
B 8%
C 6%
D 4%
Year ended December 26, 1998 A 72%
B 13%
C 6%
D 1%
Year ended December 28, 1997 A 56%
B 9%
C 9%
D 10%
All of the Company`s long-lived assets and operations are located
in the United States. Revenue generated from overseas customers
accounted for 0%, 13% and 1% for 1999, 1998, and 1997 and December 28, 1996
Ceramics Process Systems Corporation
Common stock
----------------- Additional
Number Par Paid-in Accumulated
Treasury Stockholders'
of shares Value capital deficit
stock equity
(deficit)
------- ------- ------- ------- ---
- ---- -------
Balance at
December 30, 1995 7,780,766 $77,808 $30,457,384 $(32,967,722)
$(60,835) $(2,493,365)
Net loss -- -- -- (411,305)
- -- (411,305)
------- ------- ------- ------- ---
- ---- -------
Balance at
December 28, 1996 7,780,766 -- -- (411,305)
- -- (411,305)
Stock Options
Exercised 43,816 438 7,449 --
- -- 7,887
Net income -- -- -- 1,377,146
- -- 1,377,146
------- ------- ------- ------- ----
- --- -------
Balance at
December 27, 1997 7,824,582 438 7,449 965,841
- -- 973,728
Common stock issued
in debt conversion 4,463,916 44,639 2,187,319 --
- -- 2,231,958
Stock Options
Exercised 20,354 204 4,201 --
- -- 4,405
Net income -- -- -- 1,672.435
- -- 1,672,435
------- ------- ------- ------- ----
- --- ---------
Balance at
December 26, 1998 12,308,852 $123,089 $32,656,353 $(30,329,446)
$(60,835) $2,389,161
========== ======== =========== ============
========= ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ceramics Process Systems
Dec. 26, Dec. 27, Dec 28,
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $1,672,435 $1,377,146 $(411,304)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation 146,234 115,994 108,070
Amortization 36,600 36,500 5,290
Gain on disposal of equipment (53,800) -- (27,043)
Changes in assets and liabilities:
Accounts receivable, trade 78,987 (485,086) 70,540
Inventories (80,875) 33,120 (127,419)
Prepaid expenses 13,698 (14,188) 9,484
Other current assets 475
Accounts payable (57,904) 25,895 (47,732)
Accrued expenses (131,120) (112,657) 214,558
Due to customer 51,950
Deferred revenue (21,164) (192,557) 355,987
Net cash provided by ----------- ----------- ---------
operating activities 1,603,091 784,167 202,856
----------- ----------- ----------
Cash flows from investing activities:
Additions to property and equipment (332,954) (212,827) (147,768)
Proceeds on disposal of property and
equipment 53,800 27,500
Deposits (3,700) (2,735) (1,384)
Net cash used in investing ----------- ----------- ----------
activities (282,854) (215,562) (121,652)
----------- ----------- ----------
Cash flows from financing activities:
Principal payment of capital lease (42,204) (23,487)
obligations
Principal payments of notes payable (344,830) (105,170) --
Proceeds from issuance of common stock 4,405 7,887 --
Net cash used in ----------- ----------- ----------
financing activities (382,629) (120,770) --
----------- ----------- ----------
Net increase in cash 937,608 447,835 81,204
Cash and cash equivalent at beginning
of period 561,166 113,331 32,127
Cash and cash equivalent at end ----------- ----------- ----------
of period $1,498,774 $ 561,166 $113,331
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------
(1) Nature of Business
------------------
Ceramics Process Systems Corporation serves the wireless
communications, satellite communications, motor controller and other
microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house,
interconnect, and thermally manage microelectronic devices.
(2) Summary of Significant Accounting Policies
------------------------------------------
(2)(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Ceramics Process Systems Corporation and its wholly-owned subsidiary, CPS
Superconductor Corporation (`CPSS`). All significant intercompany
balances and transactions have been eliminated in consolidation.
(2)(b) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(2)(c) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Year end
inventory balances consisted of the following:
26-Dec-98 27-Dec-97
--------- ---------
Raw materials $ 107,259 $ 11,097
Work-in-process 96,941 112,228
--------- ---------
$ 204,200 $123,325
========= =========
(2)(d) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of
equipment is calculated on a straight-line basis over the estimated
useful life, generally five years. Amortization under capital leases is
calculated on a straight-line basis over the life of the lease.
Depreciation of leasehold improvements is calculated using the straight-
line method over the lease term or the estimated useful lives, whichever
is shorter. Upon retirement, the cost and related accumulated
depreciation or amortization are removed from their respective accounts.
Any gains or losses are included in the results of operations in the
period in which they occur.
(2)(e) Revenue Recognition
-------------------
The Company recognizes product revenue generally upon shipment.
Revenue related to license agreements is recognized upon receipt of the
license payment or over the license period, if the Company has continuing
obligations under the agreement. Revenue related to research and
development contracts is recognized on the percentage-of-completion
basis, which is generally based on the relationship of incurred costs to
total estimated costs on each contract. Advance payments in excess of
revenue recognized are recorded as customer deposits.
(2)(f) Research and Development Costs
------------------------------
The Company continues to perform product development under prototype
manufacturing agreements with customers. In fiscal 1998 and fiscal 1997,
the Company did not incur any costs for research and development and did
not perform any externally funded research and development programs. In
prior periods research and development costs were charged to expense as
incurred.
(2)(g) Income Taxes
------------
The Company accounts for income taxes utilizing the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between tax and financial statement basis of assets and
liabilities, measured using enacted tax rates expected to be in effect in
the period which the temporary differences reverse.
(2)(h) Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted net income per common share is calculated by dividing
net income by the sum of the weighted average number of common shares plus
additional common shares that would have been outstanding if potential
dilutive common shares had been issued for granted stock option and stock
purchase rights.
(2)(i) Comprehensive Income
--------------------
The Company has adopted Financial Accounting Standards Board
Statement No. 130 (`FAS 130`) `Reporting Comprehensive Income` effective
for fiscal years beginning after December 15, 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. FAS 130
requires that all components of comprehensive income shall be reported in
the financial statements in the period in which they are recognized.
Furthermore, a total amount for comprehensive income shall be displayed in
the financial statement where the components of other comprehensive income
are reported. The Company has no items of comprehensive income, and
therefore net income is equal to comprehensive income.
(2)(j) Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transactions and, if it is, the
type of hedge transaction. The statement is effective for fiscal years
beginning after June 15, 1999. The Company will adopt FAS No. 133 for its
fiscal year ending December 30, 2000.
(2)(k) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of 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
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(2)(l) Risks and Uncertainties
-----------------------
The Company manufactures its products to customer specifications and
a significant portion of the Company`s revenues have historically been
generated from three customers. Financial instruments which potentially
subject the Company to concentrations of credit risk consist of trade
accounts receivable. The Company has not incurred significant losses on
its accounts receivable in the past.
(2)(m) Financial Instruments
---------------------
Although the Company has no borrowings outstanding as of year-end
1998, in the past a substantial portion of the Company's borrowings have
been financed by significant stockholders of the Company, one of which
reduced its ownership interest in 1996. The Company was in default of a
significant portion of its convertible notes payable at year-end 1997; in
1998 these convertible notes payable were converted into equity.
(2)(n) Fiscal Year-End
---------------
The Company`s fiscal year end is the last Saturday in December or
the first Saturday in January, which results in a 52- or 53-week year.
Fiscal years 1998, 1997, and 1996, consisted of 52 weeks.
(3) Supplemental Cash Flow Information
----------------------------------
The Company acquired equipment through capital lease obligations in
1997 in the amount of $135,160 and in 1996 in the amount of $111,079.
Additionally, the Company paid interest on leases amounting to $20,710,
$15,196, and $5,891 in 1998, 1997, and 1996, respectively. In 1998 the
Company issued 3,740,000 shares of common stock upon conversion of note
principal in the amount of $1,870,000, the Company issued 723,916 shares of
common stock upon conversion of accrued interest in the amount of $361,958,
and the Company paid accrued interest in cash in the amount of $160,542. In
1998 the Company's Federal income taxes expense was $57,126 which includes
alternative minimum taxes for fiscal 1997 of $21,060 and taxes for fiscal
1998 of $36,066. The Company did not accrue or pay Federal income taxes in
1996 due to its tax losses in that year.
(4) Leases
------
At December 26, 1998 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $78,390 under capital
leases. At December 27, 1997 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $41,790 under capital
leases.
Future payments required under capital lease
obligations are as follows at December 26, 1998:
1999 $ 62,916
2000 62,916
2001 56,940
2002 21,497
--------
Total future minimum lease payments 204,269
--------
Less amount representing interest 32,155
--------
Present value of net future lease payments 172,114
Less current portion 46,959
--------
Long-term obligation under capital leases $ 125,155
========
The Company is operating at its Chartley facility as a tenant-at-
will. Total rental expense for operating leases was $82,000
for 1998,and $67,500 each year for 1997 and 1996, respectively.
(5) Stock-Based Compensation Plans
------------------------------
The Company has adopted the disclosure requirements of Statements of
Financial Accounting Standards (SFAS) No.123, `Accounting for Stock-Based
Compensation`. The Company continues to recognize compensation costs
using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25, `Accounting for Stock Issued to Employees`. No
compensation costs were recognized in 1998, 1997, and 1996.
In 1998, Company employees exercised options for 20,354 shares of
common stock at market prices between $0.18 and $0.625.
In 1998, the Company maintained two stock option plans affording
employees and other persons affiliated with the Company, excluding non-
employee Directors, the opportunity to purchase shares of its common
stock. In August, 1994, one of the stock option plans expired and no new
grants are currently available under it. Under the remaining plan, the
Board of Directors may grant incentive stock options to officers and
other key employees of the Company. Additionally, the remaining plan
permits the Board of Directors to issue non-qualified stock options to
officers and other key employees and consultants of the Company.
All incentive stock options are granted at the fair market value of
the stock or in the case of certain optionees, at 110% of such fair
market value at the time of the grant. Such options are exercisable in
installments following a minimum period of employment and expire within
ten years from the date granted. All non-qualified stock options are
granted at a price not less than 50% of the fair market value at the time
of the grant. Options vest over various periods not exceeding 5 years.
In addition, during 1992 the Company adopted the 1992 Director
Option Plan (the `Director Plan`) to compensate outside directors for
their services. Under the Director Plan, eligible directors are
initially granted options to purchase up to 4,000 shares of the Company`s
common stock, and are granted options to purchase up to 2,000 shares of
the Company`s common stock upon re-election as a director. Additionally,
directors serving on standing committees of the Board are granted options
to purchase up to 500 shares of the Company`s common stock. No options
to purchase shares of the Company`s common stock under the Director Plan
were granted in 1998, 1997 or 1996. At December 26, 1998, options to
purchase 20,500 shares of Common Stock were outstanding under the
Director Plan.
In 1998 the Company granted 51,000 options at the current fair
market values of $1.44 to $2.375. In 1997, and 1996 the Company granted
109,000 and 330,461 options at the then current fair market value of $0.18
and $1.50, respectively, with similar terms and conditions to existing
option holders in exchange for the previously issued options.
As of December 26, 1998, the total remaining number of shares
authorized for issuance under these stock option plans amounted to
411,862.
The following is a summary of stock option activity for all of the
above plans for the fiscal years 1998, 1997 and 1996.
1998 1997 1996
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------ ------------------ ------------------
Outstanding at
beginning of
year 374,386 $ 0.93 430,961 $ 0.68 447,267 $ 0.93
Granted at fair
market value 51,000 $ 2.04 109,000 $ 1.00 330,461 $ 0.18
Excerised (20,354) $ 0.22 (43,816) $ 0.18
Cancelled (66,334) $ 2.57 (121,759) $ 0.41 (346,767) $ 0.52
------------------ ------------------ ------------------
Outstanding at
end of year 338,698 $ 0.81 374,386 $ 0.93 430,961 $ 0.68
================== ================== ==================
Options exercisable
at year-end 176,734 $ 0.60 165,461 $ 1.44 100,500 $ 2.34
The following table summarizes information about stock options
outstanding at December 26, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Range Remaining Weighted Weighted
Of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (in years) Price Exercisable Price
- -------- ----------- ----------- -------- ----------- --------
$0.18 204,198 7.25 $0.18 129,234 $0.18
0.625 - 0.875 12,000 3.39 0.80 12,000 0.80
1.312 - 1.50 59,000 8.96 1.36 16,333 1.35
2.188 - 3.75 63,500 7.46 2.35 19,167 2.68
------- -------
$0.18 - $3.75 338,698 7.45 $0.81 176,734 $0.60
======== ========
The fair value of each option grant under SFAS 123 is estimated on the
date of grant using the Black-Scholes option-pricing model. The following
table presents the annualized weighted average values of the significant
assumptions used to estimate the fair values of the options:
1998 1997 1996
---- ---- ----
Options issued 51,000 59,000 222,886
Risk-free interest rate 5.52% 6.27% 6.31%
Expected life in years 7 7 7
Expected volatility 88% 80% 80%
Expected dividends 0 0 0
All options are granted at the fair market value on the date of
grant.
Had compensation cost for the Company`s two employee stock option
plans been recorded based on the fair value of awards at grant date
consistent with the alternative method prescribed by SFAS 123, the
Company`s pro forma net income (loss) for 1998, 1997, and 1996 would have
been $1,632,788, $1,362,316, and $(419,108), respectively. Diluted
income (loss) per share for 1998, 1997 and 1996 would have been $0.14,
$0.13, and $(0.05), respectively. The pro forma amounts include
amortized fair values attributable to options granted after December 15,
1994 only and therefore, are not likely to be representative of the
effects on reported net income for future years.
(6) Notes Payable
- -------------
Notes payable consisted of the following at December 27, 1997:
Note Payable 1
Note payable dated March 31, 1995 as
amended October 1, 1997, with interest payable
at a rate of 10% per year; due in installments
on January 1, 1998, April 1, 1998, July 1,
1998, October 1, 1998 and December 31, 1998.
The note is collateralized by accounts
receivable, inventory, property and
equipment. $218,750
Note Payable 2
Note payable dated July 19, 1995, as
amended July 31, 1996 and July 31, 1997,
with interest payable at a rate of 10% per
year due in installments on March 29, 1998,
June 26, 1998, September 25, 1998,
December 24, 1998, March 26, 1999 and
June 25, 1999. 126,080
--------
$344,830
========
In 1998, Notes Payable 1 and 2 were paid in cash and no Notes Payable
were outstanding as of December 26, 1998.
(7) Convertible Notes Payable
-------------------------
Convertible notes payable consisted of the following at
December 27, 1997:
Convertible Note Payable 1
Unsecured notes payable dated February 16,
1994 with five parties, due June 30, 1995
plus interest at 10% per annum. $ 250,000
Convertible Note Payable 2
Unsecured note payable dated April 21,
1994, due April 21, 2001; interest at 10%
per annum is due semi-annually on
September 30 and March 31. 500,000
Convertible Note Payable 3
Unsecured note payable dated July 20,
1994, due January 31, 1996 plus interest
at 10% per annum. 120,000
Convertible Note Payable 4
Unsecured notes payable dated October 26,
1994 with six parties, due April 24, 1996
plus interest at 10% per annum. 1,000,000
----------
$1,870,000
==========
At December 27, 1997, the Company was in default of Convertible
Notes Payable 1, 2, 3 and 4. The Company cured all conditions of default
in the first fiscal quarter of 1998.
$260,000 of the principal balance of the convertible notes payable at
December 27, 1997 represent amounts due to holders of greater than 10% of
the Company's common stock for which the related accrued interest and
interest expense as of December 27, 1997 was $86,667 and $25,929
respectively.
In 1998 all Convertible Notes Payable were converted into common
stock of the Company and no Notes Payable were outstanding as of December
26, 1998.
(8) Accrued Expenses
------------
Accrued expenses consist of the following:
December 26, December 27,
1998 1997
-------- --------
Accrued legal and accounting $ 47,500 $ 33,190
Accrued interest -- 526,294
Accrued payroll 107,383 108,242
Accrued other 29,149 172,813
-------- --------
$ 184,032 $840,539
======== ========
(9) Income Taxes
------------
Deferred tax assets and liabilities are as follows:
December 26, December 27,
1998 1997
------------ ------------
Net operating losses $10,851,000 $11,410,000
Vacation and other accrued
expenses 79,000 79,000
Depreciation (99,000) (93,000)
------------ ------------
Total 10,831,000 11,396,000
Valuation allowance (10,831,000) (11,396,000)
----------- -----------
-- --
============ ============
Due to the uncertainty related to the realization of the net
deferred tax asset, a full valuation allowance has been provided. At
December 26, 1998, the Company had net operating loss carryforwards of
approximately $31,000,000 available to offset future income for U.S.
Federal income tax purposes, and $4,200,000 for state income tax
purposes. These operating loss carryforwards expire at various dates from
the years 2000 through 2011 for federal income tax purposes and the years
1998 through 2001 for state income tax purposes.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that it did not exceed the 50% ownership change in the three-
year period ending at year-end 1998 therefore as of year-end 1998 all net
operating loss carryforwards are available to offset future taxable
income.
(10) Retirement Savings Plan
-----------------------
Effective September 1, 1987, the Company established the Retirement
Savings Plan (the `Plan`) under the provisions of Section 401 of the
Internal Revenue Code. Employees, as defined in the Plan, are eligible
to participate in the Plan after 30 days of employment. Under the terms
of the Plan, the Company may match employee contributions under such
method as described in the Plan and as determined each year by the Board
of Directors. Through December 26, 1998, no employer matching
contributions had been made to the Plan.
(11) Significant Customers and Segment Information
---------------------------------------------
Significant customers in 1998, 1997, and 1996 were as follows:
Significant Significant
Customer Customer
Year ended December 26, 1998 A 72%
B 13%
C 6%
D 1%
Year ended December 28, 1997 A 56%
B 9%
C 9%
D 10%
Year ended December 30, 1996 A 61%
B 0%
C 10%
D 17
All of the Company's long-lived assets and operations are located in
the United States. Revenue generated from overseas customers accounted for
13%, 1% and 0% for 1998, 1997, and 196 respectively.
(12) Earnings Per Share
------------------
SFAS 128 requires the following reconciliation of the basic and
diluted EPS calculations.
For the years ended
Jan. 1, 2000 Dec. 26, 1998 Dec. 27, 1997 Dec. 28, 1996
------------- ------------- -------------
Basic EPS Computation:
Numerator:
Net income (loss) $ 1,672,435 $ 1,377,146 $ (411,305)
Denominator:
Weighted average
common shares
outstanding 10,565,961 7,799,279 7,780,766
Basic EPS Computation:
Numerator:
Net income $ 238,056 $ 1,672,435 $1,377,146
Denominator:
Weighted average
common shares
outstanding 12,285,969 10,565,961 7,799,279
Basic EPS $ 0.02 $ 0.16 $ 0.18 $(0.05)
Diluted EPS Computation:
Numerator:
Net income (loss) $ 1,672,435 $ 1,377,146 $(411,305)
Interest on
convertible debt 87,290 186,489 --
----------- ----------- ----------
Total net income
(loss) $ 1,759,725 $ 1,563,635 $(411,305)
Denominator:
Weighted average
common shares
outstanding 10,565,961 7,799,279 7,780,766
Stock options 204,749 191,040 --
Interest converted 359,292 -- --
Convertible debt 1,417,425 4,289,324 --
----------- ----------- ----------
Total Shares 12,547,427 12,279,643 7,780,766
Diluted EPS Computation:
Numerator:
Net income $ 238,056 $ 1,672,435 $1,377,146
Interest on
convertible debt -- 87,290 186,489
----------- ----------- ----------
Total net income
$ 238,056 $ 1,759,725 $1,563,635
Denominator:
Weighted average
common shares
outstanding 12,285,969 10,565,961 7,799,279
Stock options 197,310 204,749 191,040
Interest converted 359,292 --
Convertible debt -- 1,417,425 4,289,324
----------- ----------- ----------
Total Shares 12,483,279 12,547,427 12,279,643
Diluted EPS $ 0.02 $ 0.14 $ 0.13
$ (0.05)