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 27, 2003
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 | 04-2832409 |
111 South Worcester Street | 02712-0338 |
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
(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 $8,005,459 based on the average of the reported closing bid and asked prices for the Common Stock on March 1, 2004 as reported on the OTC Bulletin Board.
Number of shares of Common Stock outstanding as of December 27, 2003: 12,316,092 shares.
Documents incorporated by reference.
Part I
Item 1. Business.
Ceramics Process Systems Corporation (the `Company` or `CPS`) 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. The Company`s products are typically in the form of housings, packages, lids, substrates, thermal planes, heat spreaders or baseplates, and are used in applications where thermal management 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 manufacturing components, the Company has sold licenses to portions of its technology to strategic partners such as Hitachi Metals Ltd. In 2003, 2002 and 2001, 99% of the Company`s total revenue was derived from manufactured products and 1% from licensing revenues.
The Company was incorporated in Massachusetts in 1984. The Company reincorporated in Delaware in April 1987, through a merger into its wholly-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
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 designer 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 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, housings, etc. Every product is made to a customers 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. However, as the trends towards faster speeds, reduced size and 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
Lids and Heat Spreaders for High-Performance Microprocessors and Other Integrated Circuits
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 circuits 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 heat spreader 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.
Wireless Communications Infrastructure Market
The demand for wireless telecommunications services such as cellular telephone service 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 manufactures substrates and heat spreaders on which high-performance and high power circuits such as power amplifiers and power supplies 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.
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 and thermal management system are also significant; declines in the costs of all these components is driving increased use of variable speed drives.
The Company provides substrates, baseplates and heat spreaders on which power semiconductors are mounted to 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.
Customers
The Company sells primarily to major microelectronics systems houses in the United States, Europe and Asia. The Company began selling and marketing in Western Europe in 1999 and in Japan in 2000 through representatives in those areas. The Company`s customers typically purchase prototype and evaluation quantities of the Company`s products over a one to three year period before purchasing production volumes.
In 2003, the Company`s three largest customers accounted for 57%, 19% and 11% of total revenues, respectively. In 2002, the Company`s three largest customers accounted for 31%, 22%, and 12% of total revenues, respectively. In 2001, the Company`s three largest customers accounted for 36%, 20% and 9% of revenues, respectively.
In 2003, 94% of the Company`s revenues were derived from commercial applications and 4% from defense related applications. In 2002, 88% of the Company`s revenues were derived from commercial applications and 12% from defense related applications. In 2001, 90% of the Company`s revenues were derived from commercial applications and 10% from 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 2003, 2002 or 2001.
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. The 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 27, 2003, the Company had 10 United States patents and three United States patents pending. One of the three patents pending as of December 27, 2003 was issued as a patent on December 30, 2003. 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 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 27, 2003, the Company had a product backlog of approximately $2.3 million compared with a product backlog of approximately $2.5 million as of December 28, 2002. The Company shipped 38% of the year-end 2002 product backlog in 2003.
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-matrix composites and 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-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.
Employees
As of December 27, 2003, the Company had 61 full-time employees and 1 part-time employee, of whom 57 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.
All of the Company`s manufacturing, engineering, sales and administrative operations are located in a leased facility in Chartley, Massachusetts. The Company is operating at the Chartley facility as a tenant-at-will. The Company`s tool and die operations are located in Warwick, Rhode Island. The Company is operating at the Warwick, Rhode Island facility as a tenant-at-will.
The Company`s rental expense for operating leases was $103 thousand, $110 thousand, and $93 thousand in 2003, 2002 and 2001 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 27, 2003.
Part II
Item 5. Market for Registrant`s Common Stock and Related Stockholder Matters
On December 27, 2003, the Company had approximately 850 shareholders. The high and low closing bid prices of the Company`s common stock for each quarter during the years ended December 27, 2003 and December 28, 2002 are shown below.
2003 | 2002 | |||
High | Low | High | Low | |
1st Quarter | $ 0.45 | $ 0.32 | $ 1.04 | $ 0.56 |
2nd Quarter | $ 0.45 | $ 0.31 | $ 0.68 | $ 0.52 |
3rd Quarter | $ 0.45 | $ 0.30 | $ 0.52 | $ 0.32 |
4th Quarter | $ 0.40 | $ 0.32 | $ 0.40 | $ 0.30 |
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 NASD`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. Units are in thousands except share and per share amounts.
SELECTED CONSOLIDATED FINANCIAL DATA ($000)
For the Fiscal Year: | 2003 | 2002 | 2001 | 2000 | 1999 |
Summary of Operations | |||||
Product Sales | $3,969 | $4,457 | $4,438 | $5,036 | $4,806 |
License and Royalty Revenue | 25 | 37 | 23 | 9 | 0 |
Operating Expenses | 3,975 | 5,241 | 4,934 | 5,331 | 4,723 |
Operating Income (Loss) | $19 | ($747) | ($473) | ($286) | $83 |
Other Income (deduction), net | (38) | $13 | ($7) | $92 | $155 |
Net Income (Loss) | ($19) | ($734) | ($480) | ($194) | $238 |
===== | ===== | ===== | ===== | ===== | |
Net Income (Loss) Per Basic Common Share | ($0.00) | ($0.06) | ($0.04) | ($0.02) | $0.02 |
===== | ===== | ===== | ===== | ===== | |
Weighted Average Basic Number of Common Shares Outstanding | 12,293 | 12,293 | 12,292 | 12,287 | 12,286 |
===== | ===== | ===== | ===== | ===== | |
Net Income (Loss) Per Diluted Common Share | ($0.00) | ($0.06) | ($0.04) | ($0.02) | $0.02 |
===== | ===== | ===== | ===== | ===== | |
Weighted Average Diluted Number of Common Shares Outstanding | 12,293 | 12,293 | 12,292 | 12,287 | 12,483 |
===== | ===== | ===== | ===== | ===== | |
Year-End Position: | |||||
Working Capital | $856 | $580 | $1,157 | $1,539 | $1,812 |
Total Assets | 1,917 | 1,956 | 2,746 | 3,084 | 3,186 |
Long-term Obligations | 330 | 418 | 217 | 145 | 197 |
Stockholders` Equity | $1,202 | $1,221 | $1,955 | $2,434 | $2,627 |
SELECTED QUARTERLY FINANCIAL DATA
First | Second | Third | Fourth | |
Fiscal | Fiscal | Fiscal | Fiscal | |
2003 | Quarter | Quarter | Quarter | Quarter |
Total revenues | $595 | $1,107 | $868 | $1,412 |
Gross profit | ($11) | $283 | $218 | $357 |
Net income (loss) | ($206) | $29 | $7 | $151 |
Net income (loss) per basic common share | ($0.02) | $0.00 | $0.00 | $0.01 |
Net income (loss) per diluted common share | ($0.02) | $0.00 | $0.00 | $0.01 |
| ||||
2002 | ||||
Total revenues | $1,749 | $1,471 | $482 | $792 |
Gross profit | $526 | $283 | ($141) | ($86) |
Net income (loss) | $97 | ($63) | ($362) | ($406) |
Net income (loss) per basic common share | $0.01 | ($0.01) | ($0.03) | ($0.03) |
Net income (loss) per diluted common share | $0.01 | ($0.01) | ($0.03) | ($0.03) |
The Company`s results of operations fluctuate from quarter to quarter. The fluctuations are caused by various factors, primarily customer demand for the Company`s products.
Item 7. Management`s Discussion and Analysis of Financial Condition and Results of Operations
This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company`s operations and cause the Company`s actual results to be substantially different from the Company`s expectations. Those factors include, but are not limited to: (I) general economic and business conditions; (ii) customer acceptance of the Company`s products; (iii) materials and manufacturing costs; (iv) the financial condition of customers, competitors and suppliers; (v) technological developments; (vi) increased competition; (vii) changes in capital market conditions; (viii) governmental and business conditions in countries where the Company`s products are manufactured and sold; (ix) changes in trade regulations; (x) the effect of acquisition act ivity; (xi) changes in the Company`s plans, strategies, objectives, expectations or intentions; and (xii) other risks and uncertainties indicated from time to time in the Company`s filings with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report. The Company does not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.
Overview
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. The Company`s products are always made to customers` blueprints and are used as components in systems built and sold by its customers. At any point in time the Company`s product mix will consist of some products with on-going production demand, and some products which are in the prototyping or evaluation stage at the Company`s customers. The Company`s growth is dependent upon the level of demand for those products already in production, as well as the success of the Company in achieving new "design wins" for future products.
As a manufacturer of highly technical and custom products, the Company incurs fixed costs needed to support the business, but which do not vary significantly with changes in sales volume. These costs include the fixed costs of applications engineering, tooling design and fabrication, process engineering, etc. Accordingly, particularly given the Company`s current size, changes in sales volume generally result in even greater changes in financial performance on a percentage basis as fixed costs are spread over a larger or smaller base. Sales volume is therefore a key financial metric used by management.
Beginning in 2002 and continuing into 2003, the Company experienced significantly increased month-to month volatility in terms of demand compared to previous years. Generally customers began placing orders covering a shorter period of time than they had in previous years; this trend continued in 2003. In 2003 management worked with customers to determine, to the extent possible, real underlying demand, and to smooth the volatility in month-to-month demand. This had a positive effect in 2003 on reducing manufacturing inefficiencies and improving financial performance. Throughout 2003, management carefully and aggressively managed costs, and management believes the labor force and other variable costs of the Company match near-term underlying demand, but there can be no assurance this is the case.
Management believes the underlying demand for thermal management solutions is growing as the marketplace demands both integrated circuits and electronics systems with higher speed and higher performance. Management believes that the Company is well positioned to offer its solutions to current and new customers as these demands grow. In 2003, the Company`s top three customers accounted for 87% of revenue, and the remaining 13% of revenue was derived from approximately 30 other customers, many of which bought prototypes in 2003 for evaluation in systems that they will introduce into the market in the future.
Application of Critical Accounting Policies
Management prepares the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company`s significant accounting policies are presented within Note 2 to the consolidated financial statements; the significant accounting policies which management believes are most critical to aid in fully understanding and evaluating or reported financial results include the following:
Revenue Recognition
The Company recognizes product revenue from product sales at the time of shipment and passage of title. 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.
Accounts Receivable
The Company performs ongoing monitoring of the status of its receivables based on the payment history and the credit worthiness of its customers, as determined by a review of their current credit information. Management continuously monitor collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been low and within expectations, there is no guarantee that the Company will continue to experience the same credit loss rates as in the past. A significant change in the liquidity or financial position of one of the major customers could have a material adverse impact on the collectibility of accounts receivable and future operating results.
Inventory
The Company values its inventory at the lower of cost to manufacture or current estimated market value, whichever is less.
The Company follows a build to order business model; we only manufacture product to ship against specific purchase orders. In addition, 100% of the Company`s products are custom, meaning they are produced to a customer`s blueprint and generally cannot be used for any other purpose. The level of inventory fluctuates for several reasons. Some customers place a blanket purchase order and then request that the Company maintain certain inventory levels so the Company can ship immediately upon receiving a shipment release from them. In other cases to more efficiently schedule production resources the Company may deliberately produce product for which the customers` shipment dates are in the future.
In determining inventory value the Company uses the first-in, first-out method and states inventory at the lower of cost or market. As a result of the fact that the Company`s inventory is customer specific, if a customer order is cancelled it is likely that the Company would be unable to sell inventory manufactured to meet that order to another customer. The value of the Company`s work in process and finished goods is based on the assumption that specific customers will take delivery of specific items of inventory.
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 for production equipment and three years for computer equipment. Amortization of equipment under capital leases is calculated on a straight-line basis over the life of the lease. Maintenance and repairs are charged to expenses as incurred. 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.
Income Taxes
The Company records deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. We believe it is more likely than not that all of our deferred tax assets will not be realized and, accordingly, we have recorded a valuation allowance against all of our net deferred tax assets. If results of operations in the future indicate that some or all of the deferred tax assets will be recovered, the reduction of the valuation allowance will be recorded as a tax benefit during one or over many periods.
Results of Operations
Revenue in 2003 of $4 million declined by 11% from 2002 revenue of $4.5 million. This decline in revenue was caused primarily by two factors: 1) continued weakness in demand across the electronics sector, and 2) declining revenue from a large customer (as their system which incorporates several of the Company`s products reached its end of life) which was not fully offset by revenue from new applications and new customers.
Demand did increase as 2003 progressed: Q1 2003 revenue was $595 thousand, Q4 2003 revenue was $1.4 million This increase in revenue came from both existing and new customers. Management believes that in the first half of 2002 many customers purchased more product than they needed, but by the second half of 2003 these excess inventories had been consumed and customers returned to purchasing quantities that are more consistent with underlying demand. In addition, in Q4 2003, several products transitioned from the prototype to the production stage.
Revenue in 2002 of $4.5 million increased very slightly, less than 1%, over 2001 revenue of $4.5 million.
Operating Costs
Total operating costs were $4.0 million, $5.2 million and $4.9 million for the fiscal years 2003, 2002 and 2001, respectively.
Operating costs decreased in 2003 compared to 2002 by $1.2 million or 24%. This decrease was primarily the result of three factors: 1) reduced inventory write-downs: operating costs in 2002 included a write-down in the value of inventory of $197 thousand and the establishment of a reserve of $132 thousand for inventory for which future demand was uncertain; operating costs in 2003 include a reserve of $10 thousand for inventory for which future demand is uncertain, 2) management cut costs when demand declined and has been cautious in adding costs as demand has increased, and 3) changes in the product mix towards higher margin products. These three factors had the effect of reducing operating costs, reducing the cost of sales, and improving gross margins.
Operating costs increased in 2002 compared to 2001 by $307 thousand or 6%, primarily as a result of the inventory write-down and reserve described above.
Cost of product sales for 2003, 2002 and 2001 were $3.1 million, $4.0 million and $3.9 million, respectively. The decrease in cost of sales in 2003 compared to 2002 was the result of the three factors described above under operating expenses as well as a result of the decrease in revenues for 2003 compared to 2002.
The increase in cost of sales in 2002 compared to 2001 of $60 thousand or 1.5% is primarily the result of the inventory valuation adjustments described above.
Gross margins on product revenue for 2003, 2002 and 2001 were 21%, 11% and 12% respectively. The increase in gross margins in 2003 is primarily the result of the three factors described above under operating expenses.
Gross margins of 11% in 2002 declined from gross margins of 12% in 2001 primarily due to the inventory valuation adjustments made in 2002.
Selling, general and administrative (SG&A) expenses for 2003, 2002 and 2001 were $829 thousand, $1.3 million and $1.0 million respectively. The decrease in SG&A expenses in 2003 compared to 2002 primarily resulted from lower commissions paid due to lower sales of certain products, reduced travel expenses, and lower salary expenses. The increase in 2002 compared to 2001 primarily resulted from increased personnel in the sales and marketing function as well as increased commissions paid to the Company`s representative in Europe.
Other Income and Expense, Net
The Company had net other income (expense) of ($38 thousand), $13 thousand and ($7) thousand for 2003, 2002 and 2001, respectively. The other expense in 2003 is primarily interest expense for production equipment on capital leases, as well as interest paid to the Company`s President on outstanding borrowings under the line-of-credit as discussed below. In 2002, the interest expense for production equipment on capital leases was offset by other income from resolution with a customer of the status of a payment made for tooling charges for which the Company was reimbursed. In 2001, the interest expense for production equipment on capital leases was partially offset by sales of obsolete equipment.
Income Taxes
The Company provided for no income tax expense for 2003, 2002 and 2001. The Company paid no income tax in 2003, 2002 and 2001 due to its net operating losses.
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 December 27, 2003; therefore, at December 27, 2003 all net operating loss carryforwards are available to offset future taxable income.
Liquidity and Capital Resources
Cash on hand of $190 thousand at year-end 2003 reflects an increase of $39 thousand or 26% from cash on hand of $151 thousand at year-end 2002. This increase in cash was generated by operations in Q4 2003 as revenue increased.
Cash on hand of $151 thousand at year-end 2002 reflects a decrease of $149 thousand from cash on hand of $300 thousand at year-end 2001.
In 2003, operations generated cash of $118 thousand, investing activities, namely the purchase of equipment, consumed cash of $18 thousand, and financing activities, namely principal payments of capital lease obligations, consumed cash of $61 thousand. Manufacturing tightly controlled spending in 2003, and as demand increased, particularly in Q4, management constrained spending so that revenues increased faster than spending.
Management believes that cash flows from operations and existing cash balances will be sufficient to fund the Company`s cash requirements for the foreseeable future. However, there is no assurance that the Company will be able to generate sufficient revenues or reduce certain discretionary spending in the event that planned operational goals are not met such that the Company will be able to meet its obligations as they become due.
In March 2003, the Company entered into a line-of-credit agreement with the Company`s President, with maximum available borrowings of $200,000; no amount was outstanding on this line- of-credit at year-end 2003. The original expiration date on this agreement was January 16, 2004, however, the expiration date has been extended by the Company`s President to January 16, 2005.
In 2003, 2002 and 2001 the Company financed its operations through funds generated from operations, sales of fixed assets, consumption of available cash balances, and drawing on the line of credit described above.
Contractual Obligations
The Company`s contractual obligations at year-end 2003 consist of the following:
Payments Due by Period | |||||
Total | Less thanoneyear | 1-3 years | 3-5 years | More than 5years | |
Capital Lease Obligations, including interest | $344,863 | $124,692 | $170,315 | $49,856 | None |
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Newly Issued Accounting Pronouncements and Future Accounting Changes
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides new guidance on the accounting for a business combination at the date a business combination is completed. Specifically, it requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. The provisions of SFAS No. 141 are effective immediately, except with regard to business combinations initiated prior to June 30, 2001. SFAS No. 142 is effective as of January 1, 2002. Goodwill and other intangible assets determined to have an indefinite useful life that are acquired in a business combination completed after July 1, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with appropriate pre- SFAS 142 accounting literature. Goodwill and other intangible assets acquired in business combinations completed before Jul y 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 142 establishes new guidance on how to account for goodwill and intangible assets after a business combination is completed. Among other things, it requires that goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually and written down only when impaired. This statement applies to existing goodwill and intangible assets beginning with fiscal years starting after December 15, 2001. The adoption of this standard did not have a material effect on the Company`s financial statements.
On August 16, 2001, FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long- lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The adoption of this standard did not have a material effect on the Company`s financial statements.
On October 3, 2001, FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaced FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets To Be Disposed Of." The primary objectives of this project were to develop one accounting model based on the framework established in Statement No. 121 for long-lived assets to be disposed of by sale and to address significant implementation issues. The accounting model for long- lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of a business. Statement No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Th erefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The adoption of this standard in 2003 did not have a material effect on the Company`s financial statements.
In June 2002, FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement No. 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for a liability for one-time termination benefits that are incurred over a period of time. The adoption of this standard did not have a material effect on the Company`s financial statements.
In November 2002, FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor`s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statement periods ending after December 15, 2002. The Company adopted FIN 45 effective as of its first quarter of fiscal 2003, which did not have a material effect on the Company`s results of operations or financial posi tion.
On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 requires accounting policy note disclosures to provide the method of stock option accounting for each year presented in the financial statements and, for each year until all years presented in the financial statements recognize the fair value of stock-based compensation. Also, SFAS No. 148 provides two additional transition methods that eliminate the ramp-up effect resulting from applying the expense recognition provisions of SFAS No. 123. The transition provisions and annual statement disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim statement disclosure requirements were effective for the first interim statement that includes financial information after December 15, 2002. The Company adopted the provisions of this standard effective Decembe r 15, 2002 and adoption of this standard did not have a material effect on the Company`s financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". This Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity`s expected losses, is entitled to receive a majority of the entity`s expected residual returns, or both. FIN 46 also requires disclosures about unconsolidated variable interest entities in which an enterprise holds a significant variable interest. FIN 46 is currently effective for variable interest entities created or entered into after January 31, 2003. FASB Staff Position 46-6, whi ch was issued in October 2003, delayed the effective date of FIN 46 to the first reporting period ending after December 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the language used in FIN 45, and amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company`s results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), which, under previous guidance, may have been classified as equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall generally be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company`s results of operations or financial position.
Inflation
Inflation had no material effect on the results of operations or financial condition during 2003. 2002 or 2001. There can be no assurance however, that inflation will not affect the Company`s operations or business in the future.
Certain Factors That May Affect Future Results
The Company is heavily dependent on the electronics industry and changes in the industry could harm the Company`s business and operating results.
The electronics industry is subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. In particular, many sectors of the electronics industry are currently experiencing the effects of a downturn in economic conditions. This downturn is leading to reduced demand for the products provided by component suppliers like the Company. These changes in demand and in economic conditions have resulted and may continue to result in customer cancellation or rescheduling of orders, which could affect the Company`s results of operations. In addition, a protracted general recession in the electronics industry could have a material adverse effect on the Company`s business, financial condition and results of operations.
The Company`s operating results may fluctuate substantially, which may cause its stock price to fall.
The Company`s quarterly and annual results of operations have varied in the past, and the Company`s operating results may vary significantly in the future due to a number of factors including, but not limited to, the following: timing of orders from major customers; mix of products and services; pricing and other competitive pressures; delays in prototype shipments, economic conditions in the electronics industry, and the Company`s ability to time expenditures in anticipation of future revenues.
Some executive officers and key personnel are critical to the Company`s business and these key personnel may not remain with the Company in the future.
The Company`s success depends upon the continued service of some executive officers and other key personnel. The Company`s employees are not bound by employment agreements, and there can be no assurance that the Company will retain its officers and key employees.
The Company may need additional capital in the future, which may not be available.
If the Company`s capital resources are insufficient to meet future capital requirements, the Company will have to raise additional funds. The sale of equity or convertible debt securities in the future may be dilutive to the Company`s shareholders. If the Company is unable to obtain adequate funds on reasonable terms, the Company may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms.
The Company`s operating results are subject to fluctuations.
The Company has historically experienced significant fluctuations in its quarterly operating results and anticipates such fluctuations in the future. The Company`s quarterly revenues and operating results depend on the volume and timing of orders which are difficult to forecast.
The trading price of the Company`s common stock may be volatile.
The trading prices of the Company`s common stock has been and could in the future be subject to significant fluctuations in response to variations in quarterly operating results, developments in the electronics industry, changes in general economic conditions and economic conditions in the electronics industry, and other factors. In addition, the stock market in recent years has experienced significant price and volume fluctuations which have affected the market prices of technology companies and which have been unrelated to or disproportionately impacted by the operating performance of those companies. These broad market fluctuations may cause the market price of the Company`s common stock to decline.
Item 7.a. Quantitative and Qualitative Disclosure about Market Risk
The Company is not significantly exposed to the impact of interest rate changes and foreign currency fluctuations. The Company has not used derivative financial instruments.
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
In November 2002, the Company decided to replace PricewaterhouseCoopers LLP with Sansiveri, Kimball & McNamee, LLP as its independent public accountants to audit the Company`s consolidated financial statements for the year ended December 28, 2002. The decision to change independent public accountants was approved by the Company`s Board of Directors.
In connection with the audits for the year ended December 29, 2001 and through the date of the change of accountants, there were no disagreements with PricewaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to their satisfaction would have caused them to make reference in connection with their opinion on the subject matter of the disagreements.
The report of PricewaterhouseCoopers LLP on the Company`s consolidated financial statements for the years ended December 29, 2001 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.
Item 9a. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of our year ended December 27, 2003, an evaluation of the effectiveness of our "disclosure controls and procedures" (as such term si defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried out by our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that as of the end of that fiscal year, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
It should be noted that while our management believes that our disclosure controls and procedures provide a reasonable level of assurance, they do not expect that our disclosure controls and procedures or internal financial controls will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
(b) Changes in Internal Control Over Financial Reporting. During the year ended December 27, 2003, there were no changes in our internal control structure that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 directors and executive officers of the Company as of December 27, 2003 are listed below.
Name | Age | Position |
Grant C. Bennett | 49 | President, Chief Executive Officer, Treasurer and Director |
H. Kent Bowen | 62 | Director |
Francis J. Hughes, Jr. | 53 | 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.
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-Founder of the Leaders for Manufacturing Program at MIT. 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 Align Technologies.
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 has co-founded and served as a General Partner of the following venture capital funds: ARD I, L.P., ARD II, L.P. (July, 1985), ARD III, L.P. (April, 1988), Hospitality Technology Fund, L.P.(June, 1991) and Egan-Managed Capital, L.P. (February, 1997). Mr. Hughes has served as a Director of the Company since 1993. Mr. Hughes is also a director of RF Monolithics, Inc.
There are no family relationships between or among any executive officers or directors of the Company.
Audit Committee
The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are H. Kent Bowen and Francis J. Hughes, Jr.
Audit Committee Financial Expert
The Board of Directors has determined that Francis J. Hughes, Jr. is an audit committee financial expert as defined by Item 401(h) of Regulations S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Code of Ethics
The Company has adopted a code of business conduct and ethics for directors, officers, (including the principal executive officer, principal financial officer and controller) and employees, known as the CPS Code of Conduct. The CPS Code of Conduct is available by contacting the Company`s human resource department.
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 27, 2003. No other executive officer of the Company during these years received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation | Long Term Compensation | ||||||
Name & Position | Year | Salary | Bo-nus | Other Com-pensa-tion | Options /SARs | LTIP Pay-outs | All Other Compensa-tion |
Grant C. Bennett | 2003 | $80,669 | $0 | $0 | $0 | `$0 | $0 |
President & Chief | 2002 | $103,491 | $0 | $0 | $0 | $0 | $0 |
Executive Officer | 2001 | $128,915 | $0 | $0 | $0 | $0 | $0 |
The Company`s President and Chief Executive Officer did not receive option grants during year 2003. During fiscal year 2003 no options were exercised by him, and at the end of fiscal year 2003 no options were held by him.
Directors` Fees
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 2003, options to purchase 8,000 shares of the Company`s Common Stock were granted to each of the non-employee directors, namely Dr. Bowen and Mr. Hughes. 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 directors may receive expense reimbursements for attending board and committee meetings. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 27, 2003, 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:
Name and Address ofBeneficial Owner | Common Stock BeneficiallyOwned | Notes(1) | Percentage of Shares of CommonStock Outstanding |
ARD Master, L.P. | 2,184,789 | (2) | 17.7% |
Waco Partners | 1,669,980 | 13.6% | |
DIRECTORS AND OFFICERS: | |||
Grant C. Bennett | 1,612,331 | 13.1% | |
H. Kent Bowen | 40,000 | (3) | * |
Francis J. Hughes, Jr. | 2,224,789 | (4) | 18.1% |
-------------- | -------------- | ||
All directors and officers | 3,877,120 | (5) | 31.3% |
======== | ======== |
*Less than 1% of the total number of outstanding shares of Common Stock.
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. Consists of 2,184,789 shares owned by ARD Master L.P., Excludes options to purchase 40,000 shares of common stock held by Mr. Hughes.
3. Consists of options to purchase 40,000 shares of common stock.
4. Consists of shares described in Footnote 2 above owned by ARD Master, L.P., and options to purchase 40,000 shares of common stock held by Mr. Hughes.
5. Consists of all shares and options to purchase shares described in Footnotes 3,4 and 5 above, and shares owned by Grant C. Bennett listed in above table.
Item 13. Certain Relationships and Related Transactions
The Company`s President has provided the Company with a line-of-credit which expires on January 16, 2005. Such agreement provides for maximum available borrowings of $200,000, and is secured by the Company`s trade accounts receivable. There were no amounts outstanding under such agreement at December 27, 2003.
Item 14. Principal Accounting Fees and Services.
Not applicable.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K.
1.a Financial Statements
The financial statements filed as part of this Form 10-K are listed on the Index to Consolidated Financial Statements of this Form 10-K.
1.b Financial Statement Schedules:
Schedule II Valuation and Qualifying Account for the three years in the period ended December 27, 2003.
2.a. Exhibits
The exhibits to this Form 10-K are listed on the Exhibit Index 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 |
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) | March 26, 2004 |
Grant C. Bennett | ||
/s/ H. Kent Bowen | Director | March 26, 2004 |
H. Kent Bowen | ||
/s/ Francis J. Hughes, Jr. | Director | March 26, 2004 |
Francis J. Hughes |
CERAMICS PROCESS SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit No. | Description |
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 |
10.1* (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 |
10.2* (1) | 1989 Stock Option Plan of the Company, is incorporated by reference to Exhibit 10.6 to the Company`s 1989 S-1 Registration Statement |
10.3* (1) | 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 |
10.5* (1) | Retirement Savings Plan, effective September 1, 1987 is incorporated by reference to Exhibit 10.35 to the Company`s 1989 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 |
10.14* | 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 |
10.19* | Secured Line of Credit Note Due June 30, 1996 and related Security Agreement between the Company and Kilburn Isotronics, Inc. |
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 |
23.2 | Consent of Sansiveri, Kimball & McNamee 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
Reports of Independent Accountants | 26 |
| 28 |
| 30 |
| 31 |
| 32 |
| 33 |
All schedules, other than Schedule II, are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
INDEPENDENT AUDITORS` REPORT
To the Board of Directors and Stockholders of
Ceramics Process Systems Corporation:
We have audited the accompanying consolidated balance sheet of Ceramics Process Systems Corporation and subsidiary as of December 27, 2003 and December 28, 2002 and the related consolidated statements of operations, stockholders` equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company`s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. The consolidated financial statements of Ceramics Process Systems Corporation and subsidiary for the year ended December 29, 2001 were audited by other auditors whose report dated March 1, 2002 expressed an unqualified opinion.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements for the years ended December 27, 2003 and December 28, 2002 present fairly, in all material respects, the financial position of Ceramics Process Systems Corporation and subsidiary as of December 27, 2003 and December 28, 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the December 27, 2003 and December 28, 2002 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Sansiveri, Kimball & McNamee, L.L.P.
Providence, Rhode Island
March 8, 2004
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Ceramics Process Systems Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Ceramics Process Systems and its subsidiaries at December 29, 2001 and the result of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company`s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonabl e 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 presentations. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers L.L.P.
Boston, Massachusetts
March 1, 2002
CERAMICS PROCESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 27, | December 28, | ||
2003 | 2002 | ||
ASSETS | ------------- | ------------- | |
Current assets: | |||
Cash and cash equivalents | $ 189,533 | $ 150,772 | |
Accounts receivable-trade, net of allowance for doubtful | |||
accounts of $1,100 as of December 27, 2003 and | |||
$24,000 as of December 28, 2002 | 659,318 | 391,266 | |
Inventories | 347,695 | 346,747 | |
Prepaid expenses | 45,184 | 8,716 | |
------------- | ------------- | ||
Total current assets | 1,241,730 | 897,501 | |
Property and equipment: | |||
Production equipment | 2,613,235 | 2,595,708 | |
Furniture and office equipment | 197,311 | 197,311 | |
Accumulated depreciation | (2,135,095) | (1,734,516) | |
and amortization | |||
------------- | ------------- | ||
Net property and equipment | 675,451 | 1,058,503 | |
------------- | ------------- | ||
Total Assets | $1,917,181 | $1,956,004 | |
============= | ============= |
Continued 1
CERAMICS PROCESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 27, | December 28, | ||
LIABILITIES AND STOCKHOLDERS` | 2003 | 2002 | |
EQUITY | ------------- | ------------- | |
Current liabilities: | |||
Accounts payable | $ 173,302 | $ 134,090 | |
Current portion of obligations | |||
under capital leases | 96,649 | 70,135 | |
Accrued expenses | 115,792 | 112,909 | |
------------- | ------------- | ||
Total current liabilities | 385,743 | 317,653 | |
Deferred revenue | 133,884 | 133,884 | |
Obligations under capital | |||
leases less current portion | 195,794 | 283,676 | |
------------- | ------------- | ||
Total liabilities | 715,421 | 735,214 | |
------------- | ------------- | ||
Stockholders` Equity | |||
Common stock, $0.01 par value, | |||
authorized 15,000,000 shares; | |||
issued 12,316,092 shares | |||
at December 27, 2003 and | |||
December 28, 2002 | 123,161 | 123,161 | |
Additional paid-in capital | 32,657,585 | 32,657,585 | |
Accumulated deficit | (31,518,149) | (31,499,120) | |
Less treasury stock, at cost, | |||
22,883 common shares | (60,835) | (60,835) | |
------------- | ------------- | ||
Total stockholders` equity | 1,201,761 | 1,220,790 | |
------------- | ------------- | ||
Total liabilities and stockholders` | |||
equity | $1,917,181 | $1,956,004 | |
============= | ============= |
See accompanying summary of accounting policies and notes to financial statements.
Concluded 2
CERAMICS PROCESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
December 27, | December 28, | December 29, | |||
2003 | 2002 | 2001 | |||
------------ | ------------ | ------------ | |||
Revenues: | |||||
Product sales | $ 3,968,488 | $4,456,983 | $4,438,624 | ||
License and royalty revenue | 25,202 | 36,917 | 22,994 | ||
------------ | ------------ | ------------ | |||
Total Revenues | 3,993,690 | 4,493,900 | 4,461,618 | ||
Operating expenses: | |||||
Cost of product sales | 3,146,354 | 3,957,599 | 3,897,657 | ||
Selling, general, and | |||||
administrative | 828,829 | 1,283,796 | 1,036,616 | ||
------------ | ------------ | ------------ | |||
Total operating expenses | 3,975,183 | 5,241,395 | 4,934,273 | ||
------------ | ------------ | ------------ | |||
Income (loss) from operations | 18,507 | (747,495) | (472,655) | ||
Other income (expense), net | (37,536) | 13,186 | (6,854) | ||
------------ | ------------ | ------------ | |||
Net loss | $ (19,029) | $ (734,309) | $ (479,509) | ||
============ | ============ | ============ | |||
Net loss per | |||||
basic common share | $ (0.00) | $ (0.06) | $ (0.04) | ||
======= | ======= | ======= | |||
Weighted average number of | |||||
basic common shares | |||||
outstanding | 12,293,209 | 12,292,716 | 12,291,528 | ||
============ | ============ | ============ | |||
Net loss per | |||||
Diluted common share | $ (0.00) | $ (0.06) | $ (0.04) | ||
======= | ======= | ======= | |||
Weighted average number of | |||||
diluted common shares | |||||
outstanding | 12,293,209 | 12,292,716 | 12,291,528 | ||
============ | ============ | ============ |
See accompanying summary of accounting policies and notes to financial statements.
CERAMICS PROCESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS` EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 27, 2003, DECEMBER 28, 2002,
AND DECEMBER 29, 2001
Common stock | Stock- | |||||
---------- | Additional | holders` | ||||
Number | Par | Paid-in | Accumulated | Treasury | equity | |
of shares | Value | capital | deficit | stock | (deficit) | |
---------- | ----- | ---------- | ---------- | ------ | -------- | |
Balance at December 30, 2000 | ||||||
12,310,352 | $ 123,104 | $ 32,656,608 | $ (30,285,302) | $ (60,835) | $ 2,433,575 | |
Issuance of common stock pursuant to exercise of stock options | ||||||
4,869 | 48 | 828 | -- | -- | 876 | |
Net loss | ||||||
-- | -- | -- | (479,509) | -- | (479,509) | |
Balance at December 29, 2001 | ||||||
---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | |
12,315,221 | 123,152 | 32,657,436 | (30,764,811) | (60,835) | 1,954,942 | |
Issuance of common stock pursuant to exercise of stock options | ||||||
871 | 9 | 148 | -- | -- | 157 | |
Net loss | ||||||
-- | -- | -- | (734,309) | -- | (734,309) | |
Balance December 28, 2002 | ||||||
---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | |
12,316,092 | 123,161 | 32,657,585 | (31,499,120) | (60,835) | 1,220,790 | |
Net loss | ||||||
-- | -- | -- | (19,029) | -- | (19,029) | |
Balance at December 27, 2003 | ||||||
---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | |
12,316,092 | $ 123,161 | $ 32,657,585 | $ (31,518,149) | $ (60,835) | $1,201,761 | |
========== | ========== | =========== | =========== | ======== | ========== | |
See accompanying summary of accounting policies and notes to financial statements.
CERAMICS PROCESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 27, | December 28, | December 29, | |||||
2003 | 2002 | 2001 | |||||
--------- | --------- | --------- | |||||
Cash flows from operating activities: | |||||||
Net loss | $ (19,029) | $ (734,309) | $ (479,509) | ||||
Adjustments to reconcile net loss to cash | |||||||
provided (used) in operating | |||||||
activities: | |||||||
Depreciation and amortization | 400,579 | 371,097 | 351,715 | ||||
Provision for inventory write-down | 10,000 | 328,919 | -- | ||||
Gain on disposal of equipment | -- | -- | (8,934) | ||||
Bad debt expense | 24,791 | 20,000 | -- | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable - trade | (292,843) | 373,374 | 15,583 | ||||
Inventories | (10,948) | (47,797) | (60,737) | ||||
Prepaid expenses | (36,468) | 10,596 | (14,170) | ||||
Accounts payable | 38,692 | (273,413) | 108,367 | ||||
Accrued expenses | 2,883 | (3,686) | (27,845) | ||||
--------- | --------- | --------- | |||||
Net cash provided by (used in) | 117,657 | 44,781 | (115,530) | ||||
operating activities | |||||||
--------- | --------- | --------- | |||||
Cash flows from investing activities: | |||||||
Proceeds from sale of assets | -- | -- | 8,934 | ||||
Additions to property and equipment | (9,427) | (136,792) | (201,263) | ||||
--------- | --------- | --------- | |||||
Net cash used | |||||||
in investing activities | (9,427) | (136,792) | (192,329) | ||||
--------- | --------- | --------- | |||||
Cash flows from financing activities: | |||||||
Payment of capital lease obligations | (69,469) | (57,120) | (65,662) | ||||
Proceeds from issuance of common | |||||||
Stock | 157 | 876 | |||||
--------- | --------- | --------- | |||||
Net cash used in | |||||||
financing activities | (69,469) | (56,963) | (64,786) | ||||
--------- | --------- | --------- | |||||
Net increase (decrease) in cash and cash | |||||||
equivalents | 38,761 | (148,974) | (372,645) | ||||
Cash and cash equivalents at beginning of | 150,772 | 299,746 | 672,391 | ||||
the year | |||||||
--------- | --------- | --------- | |||||
Cash and cash equivalents at end of year | $ 189,533 | $ 150,772 | $ 299,746 | ||||
========= | ========= | ========= | |||||
Non-cash financing and investing activities | |||||||
Acquisition of machinery under capital leases | $ 8,100 | $ 278,133 | $ 125,639 | ||||
========= | ========= | ========= | |||||
See accompanying summary of accounting policies and notes to financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- Nature of Business
- Summary of Significant Accounting Policies
The Company serves the high-performance microprocessor market, motor controller market, wireless communications infrastructure market, and other microelectronic markets by developing, manufacturing, and marketing advanced metal-matrix composite components to house, interconnect and thermally manage microelectronic devices.
The Company has an accumulated deficit of approximately $31.5 million at December 27, 2003 and incurred net losses of $19,029 for fiscal year 2003 and $734,309 for fiscal year 2002. Management believes that cash flows from operations and existing cash balances will be sufficient to fund the Company`s cash requirements for the foreseeable future. However, there is no assurance that the Company will be able to generate sufficient revenues or reduce certain discretionary spending in the event that planned operations goals are not met, such that the Company will be able to meet its obligations as they become due. The Company has entered into a line-of credit agreement with its President with maximum available borrowings of $200,000. Such agreement will provide the Company with availability of additional debt financing.
(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) 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) Accounts Receivable
The Company reports it accounts receivable at cost less an allowance for doubtful accounts. The Company`s management provides appropriate provisions for uncollectible accounts based upon factors surrounding the credit risk and activity of specific customers, historical trends, economic conditions and other information. Adjustments to the allowance are charged to operations in the period in which information becomes available that may affect the allowance.
(2)(d) Inventories
Inventories are stated at the lower of cost, as determined under the first-in, first-out method (FIFO), or market. The reserve for obsolete inventories is based on factors regarding the sales and usage of such inventories, including inventories manufactured for specific customers.
(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 for production equipment and three years for computer equipment and software. Amortization of equipment under capital leases is calculated on a straight-line basis over the life of the lease. Maintenance and repairs are charged to expenses as incurred. 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 from product sales at the time of shipment and passage of title. 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 2003, 2002 and 2001 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 Loss Per Common Share
Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is calculated by dividing net loss 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. Common stock equivalents are excluded from the diluted calculations if a net loss is incurred as they would be anti-dilutive.
(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
Newly Issued Accounting Pronouncements and Future Accounting Changes
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor`s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statement periods ending after December 15, 2002. The Company adopted FIN 45 effective as of its first quarter of fiscal 2003, which did not have a material effect on the Company`s results of operations or financ ial position.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 requires accounting policy note disclosures to provide the method of stock option accounting for each year presented in the financial statements and, for each year until all years presented in the financial statements recognize the fair value of stock-based compensation. Also, SFAS No. 148 provides two additional transition methods that eliminate the ramp-up effect resulting from applying the expense recognition provisions of SFAS No. 123. The transition provisions and annual statement disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim statement disclosure requirements were effective for the first interim statement that includes financial information after December 15, 2002. The Company adopted the provisions of this standard effective Dec ember 15, 2002 and adoption of this standard did not have a material effect on the Company`s financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". This Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity`s expected losses, is entitled to receive a majority of the entity`s expected residual returns, or both. FIN 46 also requires disclosures about unconsolidated variable interest entities in which an enterprise holds a significant variable interest. FIN 46 is currently effective for variable interest entities created or entered into after January 31, 2003. FASB Staff Position 46-6, whi ch was issued in October 2003, delayed the effective date of FIN 46 to the first reporting period ending after December 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the language used in FIN 45, and amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company`s results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), which, under previous guidance, may have been classified as equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall generally be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company`s results of operations or financial position.
(2)(l) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. 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. Significant accounting estimates made by the Company`s management include the allowance for doubtful accounts receivable and the reserve for obsolete inventories. Such estimates are adjusted by management periodically as a result of existing or anticipated economic changes which effect, or may effect, the Company`s consolidated financial statements. 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 four 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 years 2003, 2002 and 2001 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 2003, 2002 and 2001.
(3) Inventories
As of December 27, 2003 and December 28, 2002 inventories consisted of the following:
December 27, | December 28, | |||
2003 | 2002 | |||
------------- | ------------- | |||
Raw materials | $ 23,413 | $ 19,132 | ||
Work in process | 136,124 | 126,159 | ||
Finished Goods | 198,158 | 333,456 | ||
------------- | ------------- | |||
Subtotal | 357,695 | 478,747 | ||
Reserve for obsolete | ||||
inventories | (10,000) | (132,000) | ||
------------- | ------------- | |||
$ 347,695 | $ 346,747 | |||
============ | ============ | |||
(4) Leases
At December 27, 2003, the Company had production equipment with a cost of $411,869 and accumulated amortization of $144,068 under capital leases. At December 28, 2002 the Company had production equipment with a cost of $403,769 and accumulated amortization of $62,505 under capital leases.
Future payments required under capital lease obligations are as follows at
December 27, 2003:
Year | Future Payments | |||
2004 | $ 124,692 | |||
2005 | 102,476 | |||
2006 | 67,839 | |||
2007 | 49,856 | |||
------------- | ||||
Total future minimum lease payments | 344,863 | |||
Less amount representing interest | 52,420 | |||
------------- | ||||
Present value of net future lease payments | 292,443 | |||
Less current portion | 96,649 | |||
------------- | ||||
Long-term obligation under capital leases | $195,794 | |||
======= | ||||
The Company operates as a tenant-at-will in two locations. Total rental expense for operating leases was $103,290, $109,538, and $93,223 for fiscal years 2003, 2002 and 2001, respectively.
(5) Stock-Based Compensation Plans
In 2003, no Company employees exercised options. In 2002, a Company employee exercised options for 871 shares of common stock with a market price of $0.18. In 2001 Company employees exercised options for 4,869 shares of common stock with market prices between $0.40 and $0.44.
In 2003, the Company granted 420,000 options at a fair market value of $0.31 under the 1999 Stock Incentive Plan. In 2002, the Company granted 16,000 options at a fair market value of $0.58 under the 1999 Stock Incentive Plan. In 2001, the Company granted 274,750 options at fair market values of $0.30 to $0.60 under the 1999 Stock Incentive Plan. As of December 27, 2003, the total number of options outstanding under all option plans was 1,166,113.
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. 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.
Under the 1999 Plan a total of 1,250,000 shares of common stock is available for issuance, of which 325,000 shares remain available for grant as of December 27, 2003.
As of December 27, 2003, the 1999 Plan is the only stock option plan from which awards can be made as all other options plans have expired. 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 241,113 options granted under the 1989 Plan prior to its expiration date were outstanding as of December 27, 2003.
The following is a summary of stock option activity for all of the above plans for the fiscal years 2003, 2002 and 2001.
2003 | 2002 | 2001 | ||||
------- | ------- | ------- | ||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |
----- | ----- | ----- | ----- | ----- | ----- | |
Outstanding at | ||||||
beginning of year | 880,513 | $ 0.74 | 1,015,484 | $ 0.80 | 783,987 | $ 0.98 |
Granted at | ||||||
fair market value | 420,000 | $ 0.31 | 16,000 | $ 0.58 | 274,750 | $ 0.35 |
Exercised | -- | $ - | (871) | $ 0.18 | (4,869) | $ 0.18 |
Cancelled | (134,400) | $ 0.86 | (150,100) | $ 1.14 | (38,384) | $ 1.21 |
----- | ----- | ----- | ----- | ----- | ----- | |
Outstanding at | ||||||
end of year | 1,166,113 | $ 0.57 | 880,513 | $ 0.74 | 1,015,484 | $ 0.80 |
====== | ====== | ====== | ====== | ====== | ====== | |
Options exercisable | ||||||
at year-end | 592,963 | $ 0.73 | 568,330 | $ 0.76 | 471,433 | $ 0.85 |
====== | ====== | ====== | ====== | ====== | ====== | |
The following table summarizes information about stock options outstanding at
December 27, 2003:
Options Outstanding | Options Exercisable | ||||
--------------------- | ---------------- | ||||
Range of Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
----- | ----- | ----- | ----- | ----- | ----- |
$0.00 to $0.20 | 196,113 | 2.4 | $ 0.18 | 196,113 | $ 0.18 |
$0.21 to $0.50 | 592,750 | 8.9 | $ 0.31 | 92,000 | $ 0.30 |
$0.51 to $0.80 | 24,000 | 8.2 | $ 0.59 | 24,000 | $ 0.59 |
$0.81 to $1.10 | 178,500 | 5.8 | $ 1.00 | 137,800 | $ 1.00 |
$1.11 to $1.40 | 125,750 | 6.4 | $ 1.27 | 94,850 | $ 1.27 |
$1.41 to $2.88 | 49,000 | 4.3 | $ 2.06 | 48,200 | $ 2.07 |
----------- | ---------- | ||||
$0.18-$2.88 | 1,166,113 | 6.8 | $ 0.57 | 592,963 | $ 0.73 |
======== | ==== | ======= | ======= | ====== | |
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:
2003 | 2002 | 2001 | |
----- | ----- | ----- | |
Options issued | 420,000 | 16,000 | 274,750 |
Risk-free interest rate | 3.04% | 5.04% | 4.61% |
Expected life in years | 7 | 7 | 7 |
Expected volatility | 174% | 176% | 98% |
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 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 loss for 2003, 2002 and 2001 would have been ($87,585), ($833,217), and ($585,155) respectively. Loss per share for 2003, 2002 and 2001 would have been ($0.01), ($0.07) 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) Accrued Expenses
Accrued expenses consist of the following:
December 27, | December 28, | |||
2003 | 2002 | |||
------------- | ------------- | |||
Accrued legal and | ||||
accounting | $ 38,725 | $ 33,500 | ||
Accrued payroll | 75,815 | 60,566 | ||
Accrued other | 1,252 | 18,843 | ||
------------- | ------------- | |||
$ 115,792 | $ 112,909 | |||
============= | ============= |
(7) Line of Credit - Officer
In March 2003, the Company`s President executed a line-of-credit agreement to provide the Company up to $200,000. Such agreement, which expires in January 2004, requires monthly payments of interest only at 1.5% above the prime rate, with all unpaid principal and accrued interest due on January 16, 2004. The agreement is collateralized by the Company`s trade accounts receivable. There were no amounts outstanding under such agreement at December 27, 2003. In January 2004, the Company`s President extended the expiration date of the agreement to January 14, 2005.
(8) Income Taxes
Deferred tax assets (liabilities) as of December 27, 2003 and December 28, 2002 are as follows:
Deferred Tax Assets (liability) | December 27, 2003 | December 28, 2002 | |
Net operating loss | |||
Carryforwards | $ 8,563,000 | $ 10,012,660 | |
Credit carryforwards | 121,723 | 121,723 | |
Deferred revenue | 45,520 | 45,520 | |
Depreciation | (129,885) | (116,015) | |
Reserve for obsolete inventory | 3,400 | 44,880 | |
----------------- | ----------------- | ||
Total deferred tax asset | 8,603,758 | 10,108,768 | |
Valuation allowance | (8,603,758) | (10,108,768) | |
----------------- | ----------------- | ||
Net deferred tax asset | $ - | $ - | |
========= | ========= |
Due to the uncertainty related to the realization of the net deferred tax asset, a full valuation allowance has been provided. At December 27, 2003, the Company had net operating loss carryforwards of approximately $24.9 million available to offset future income for U.S. Federal income tax purposes, and $1.3 million for state income tax purposes. These operating loss carryforwards expire at various dates from the years 2004 through 2023 for federal income tax purposes, and through 2008 for state income tax purposes.
Income tax (benefit) expense is different from the amounts computed by applying the U.S. federal income tax rate of 34 percent to pretax income as a result of the following:
Years Ended | |||
December 27, 2003 | December 28, 2002 | December 29, 2001 | |
Benefit at statutory rate | $ (6,500) | $ (249,600) | $ (163,000) |
State tax benefit, net of federal tax benefit | (500) | (18,000) | (12,000) |
Valuation allowance | 7,000 | 267,600 | 175,000 |
----------- | ----------- | ----------- | |
Total | $ -- | $ -- | $ -- |
====== | ====== | ====== | |
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 ended December 27, 2003, therefore as of year-end 2003 all net operating loss carryforwards are available to offset future taxable income.
(9) 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 27, 2003, no employer matching contributions had been made to the Plan since inception.
(10) Concentrations of Credit Risk, Significant Customers and Geographic Information
Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. As of December 27, 2003, the Company had approximately $90,000 of cash deposits which exceed the Federal Deposit Insurance Corporation (FDIC) limit of $100,000. The Company maintains such cash deposits in a high credit quality financial institution.
The Company extends credit to customers which consist principally of microelectronics systems companies in the United States, Europe and Asia. Management conducts on-going credit evaluations of its customers, and historically the Company has not experienced any significant credit-related losses with respect to its trade accounts receivable. As of December 27, 2003, the Company had trade accounts receivable due from four customers that accounted for 85% of total trade accounts receivable as of that date. Management believes that any credit risks have been properly provided for in the accompanying financial statements.
Significant customers in 2003, 2002 and 2001 were as follows:
Year Ended | Significant Customer | Percent of Total Revenues |
December 27, 2003 | A | 57% |
B | 19% | |
C | 11% | |
December 28, 2002 | A | 31% |
B | 22% | |
C | 12% | |
December 29, 2001 | A | 36% |
B | 20% | |
C | 9% | |
All of the Company`s long-lived assets and operations are located in the United States. Revenue generated from shipments made to customers` locations outside the United States accounted for 74%, 38% and 26% of total revenue in 2003, 2002 and 2001, respectively. Many of the Company`s customers who are based in the United States conduct design, purchasing and payable functions in the United States, but do manufacturing overseas, therefore instructing the Company to ship to overseas locations.
(12) Earnings Per Share (EPS)
SFAS 128, "Earnings Per Share", requires the following reconciliation of the basic and diluted EPS calculations.
2003 | 2002 | 2001 | ||||
------------ | ------------ | ------------ | ||||
Basic EPS Computation: | ||||||
Numerator: | ||||||
Net loss | $ (19,029) | $ (734,308) | $ (479,509) | |||
Denominator: | ||||||
Weighted average | ||||||
common shares | ||||||
Outstanding | 12,293,209 | 12,292,716 | 12,291,528 | |||
Basic EPS | $ (0.00) | $ (0.06) | $ (0.04) | |||
Diluted EPS Computation: | ||||||
Numerator: | ||||||
Net loss | $ (19,029) | $ (734,308) | $ (479,509) | |||
Denominator: | ||||||
Weighted average | ||||||
Common shares | ||||||
Outstanding | 12,293,209 | 12,292,716 | 12,291,528 | |||
------------ | ------------ | ------------ | ||||
Total Shares | 12,293,209 | 12,292,716 | 12,291,528 | |||
Diluted EPS | $ (0.00) | $ (0.06) | $ (0.04) | |||
(13) Supplemental Cash Flow Information
Net cash flows from operating activities, as reported in the accompanying statement of cash flows, reflect cash payments for interest of $37,391, $21,101, and $14,056 for fiscal years 2003, 2002 and 2001, respectively. In addition, the Company acquired production equipment of $8,100, $278,133 and $125,637 through the execution of capital leases in fiscal years 2003, 2002 and 2001, respectively.
SCHEDULE II
CERAMICS PROCESS SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 27, 2003, December 28, 2002
and December 29, 2001
Balance at Beginning ofPeriod | Charged to Costs andExpenses | Charged toOther Accounts | Deductions | Balance at Endof Year | |
2001 Allowance for doubtful accounts | $ -- | $12,585 | $ -- | $ -- | $12,585 |
2002 Allowance for doubtful accounts | $12,585 | $20,000 | $ -- | $8,387 | $24,198 |
2003 Allowance for doubtful accounts | $24,198 | $24,791 | $-- | $47,890 | $1,099 |
2003 Reserve for obsolete inventories | $ 132,000 | $10,000 | $ -- | $132,000 | $10,000 |
EXHIBIT A
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10K of Ceramics Process Systems Corporation (the "Company") for the period ended December 27, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Grant C. Bennett, Chief Executive Officer and Controller of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
- the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 26, 2004 | /s/ Grant C. Bennett |
EXHIBIT B
CERTIFICATIONS
I, Grant C. Bennett, President and Treasurer, certify that:
- I have reviewed this annual report on Form 10K of Ceramics Process Systems Corporation;
- Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
- Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
- The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant`s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date:
- The registrant`s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant`s auditors and the audit committee of registrant`s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant`s ability to record, process, summarize and report financial data and have identified for the registrant`s auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal controls; and
- The registrant`s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 26, 2004 | /s/ Grant C. Bennett |