1
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, 1997
- -------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from to
Commission file number: 0-16088
CERAMICS PROCESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2832509
- ------------------------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 South Worcester Street, P.O. Box 338
Chartley, Massachusetts 02712
- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant`s telephone no., including area code: 508-222-0614
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value, $0.01 per share
- ----------------------------------------
(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 $10,416,976 based on the average of the
reported closing bid and asked prices for the Common Stock on March 13,
1998 as reported on the OTC Bulletin Board.
Number of shares of Common Stock outstanding as of March 20,
1998: 8,704,543 shares.
Documents incorporated by reference.
2
Part I
- -----------------------------------------------------------------------
Item 1. Business.
Ceramics Process Systems Corporation (the `Company` or `CPS`)
serves the wireless communications, satellite communications, motor
controller and other microelectronic markets by developing,
manufacturing, and marketing advanced metal-matrix composite and ceramic
components to house, interconnect and thermally manage microelectronic
devices. The Company`s products are typically in the form of housings,
packages, lids, substrates, thermal planes, or heat sinks, and are used
in applications where thermal management and or weight are important
considerations.
The Company`s products are manufactured by proprietary processes the
Company has developed including the QuicksetTM Injection Molding Process
(`Quickset Process`) and the QuickCastTM Pressure Infiltration Process
(`QuickCast Process`).
Although the Company`s focus is in microelectronics markets, the
Company participates in other markets through licensing its technology to
corporations who manufacture and sell products in other markets. In
fiscal 1997, 91.5% of the Company`s total revenue was derived from
manufactured products, and 8.5% from licensing fees. In fiscal 1996, 96%
of the Company`s total revenue was derived from manufactured products and
4% from licensing fees. In fiscal 1995, 99% of the Company`s total
revenue was derived from manufactured products and less than 1% from
licensing fees.
The Company was incorporated in Massachusetts in 1984. The Company
reincorporated in Delaware in April 1987, through 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.
Markets and Products
- --------------------
MARKETS
The Company`s primary markets are original equipment manufacturers
in the wireless communications, satellite communications, and motor
controller markets.
Wireless Communications Market
The demand for wireless telecommunications services such as cellular
and Personal Communications Systems (`PCS`) has grown significantly
during the past decade, driven by reduced costs for wireless handsets, a
more favorable regulatory environment, increasing competition among
service providers and a greater availability of services and microwave
spectrum. For example, a recent study by Taylor & Associates, a market
research firm, forecast the number of subscribers of PCS services in the
United States would grow from 1.5 million at year-end 1997 to 12 million
at year-end 2000.
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
3
in infrastructure equipment such as basestations. The Company provides
components for housing, interconnecting and thermal management of
microelectronic devices to wireless communications infrastructure
equipment manufacturers.
Satellite Communications Market
Satellites provide several advantages over earth-based facilities
for many telecommunications applications. Satellites enable high-speed
communications service where there is no earth-based alternative
available which is often the case for military operations and for
communications services in developing countries. Another advantage is
that the cost to provide services via satellite does not increase with
the distance between sending and receiving stations. The cost of
providing services via satellite can be less than the cost of installing
copper or fiber optic networks.
Demand for satellite telecommunications services for both military
and commercial applications is increasing. Some satellite applications
have both military and commercial applications such as the Global
Positioning System. Commercial applications include satellite based
mobile telephone services, direct-to-home television services, and
direct-to-home internet services. Three major satellite networks that
have been announced in recent years and are in various stages of
development and deployment are Iridium, Teledesic and GlobalStar.
Military and commercial entities have announced plans to deploy over
1,000 satellites during the next decade. The Company provides components
for housing, interconnecting and thermal management of microelectronic
devices to satellite subsystem and satellite manufacturers.
Motor Controller Market
The use of power modules to control electric motors of all sizes is
growing. This growth is the result of several factors including emerging
high-power applications which demand power controllers such as hybrid and
electric vehicles, and cost declines in power modules which increasingly
make variable speed drives cost effective. Power semiconductors are a
very significant portion of the cost of variable speed drives, and the
cost of the module housing and thermal management system are also
significant; declines in the costs of all these components is driving
increased use of variable speed drives.
For example, worldwide approximately 50 million AC induction motors
greater than one-half horsepower are installed every year. Today only a
small percentage of these motors use variable speed drives because of
costs; as costs decline industry observers predict increased use of
variable speed drives. The Company provides components for housing,
interconnecting and thermal management of microelectronic devices to
motor controller manufacturers.
PRODUCTS
All markets described above have a common need for thermal
management of electronic devices to improve system performance and
reliability. A second element which many segments within these markets
have in common is the need for lightweight components, particularly for
applications which are air-borne, space-based, or transportation related.
Using its proprietary process technology, the Company produces metal-
matrix composites with superior thermal properties and which are very
lightweight to house and interconnect microelectronic devices. Each of
4
these products is produced to customers` blueprints to meet customers`
specific requirements. Typical form factors are housings, packages,
lids, substrates, thermal planes, and heat sinks.
The manufacture of microelectronic systems is comprised of three key
steps: (1) the integration of transistors into integrated circuits
(`ICs`), (2) the integration of ICs on boards or modules, and (3) the
integration of boards and modules into systems. The Company produces
products for the second and third steps described above - products used
to integrate ICs on boards, and used to integrate boards and modules into
systems.
As the complexity, speed, and density of electronic devices
continues to increase, the market increasingly demands housing and
interconnecting products which have a thermal coefficient of expansion
match to ICs, and which provide for the efficient removal of heat from
the system while providing the necessary mechanical and electrical
properties.
The metal-matrix composite aluminum silicon carbide (`Al-SiC`),
manufactured using the Company`s proprietary processes, is a material
system which meets all these requirements and which is finding acceptance
in the marketplace as a replacement for copper, copper-tungsten, copper-
moly, and graphite. In addition, the Company`s aluminum nitride (`AlN`)
ceramic components are used in applications where very high thermal
conductivity is required.
CUSTOMERS
The Company sells to major United States microelectronics systems
houses. The Company`s customers typically purchase prototype and
evaluation quantities of the Company`s products over a one to three year
period before entering into recurring production.
In fiscal 1997, Motorola Corporation, Olin Aegis, and Texas
Instruments accounted for 63%, 11%, and 10% of total revenues,
respectively. In fiscal 1996, these same companies accounted for 56%,
16%, and 13% of total revenues. In fiscal 1997, 76% of the Company`s
total revenues were from commercial business, and 24% were from defense-
related business.
Strategic Partnerships In Other Market Areas
- --------------------------------------------
In addition to its primary focus in microelectronics markets, the
Company participates in other markets through licensing its technology to
corporations who manufacture and sell products in these other markets.
In fiscal 1997, CPS recognized $0.391 million from license related
agreements.
In 1991, CPS and Sopretac, a subsidiary of Vallourec of Boulogne,
France, established a joint venture, Metals Process Systems (`MPS`), to
market on a worldwide basis licenses to use the Quickset Process for
metal injection molding. At December 30, 1995 the Company owned 40% of
the voting stock in MPS (see Patents and Trade Secrets), and Sopretac
owned 60%. In 1996, the Company`s ownership interest in MPS was reduced
to less than 1%, based on additional investment in MPS by Sopretac. The
Company accounted for its investment in MPS under the equity method and
did not recognize any income or dividends from the joint venture in 1997.
5
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 1997 and
1996. The decrease in research, development and engineering expenses
from 1995 to 1996 reflected reduced activity under collaborative
development agreements over these years.
Prior to 1995, collaborative research and development agreements,
also known as contract research agreements, were a significant source of
revenue for the Company. The Company`s focus has shifted from performing
contract research to manufacturing products using the proprietary
processes the Company has developed.
Availability of Raw Materials
- -----------------------------
The Company uses a variety of raw materials from numerous domestic
and foreign suppliers. These materials are primarily aluminum ingots,
ceramic powders and chemicals. Other than certain precious metals, of
which little is used by the Company, 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, 1997 the Company had 11 United States patents.
The Company also had several international patent applications pending.
The Company`s licensees have rights to use certain patents as defined in
their respective license agreements. The Company has granted co-
ownership of five of its patents and licensing rights to MPS in exchange
for its equity ownership in MPS. Under terms of the agreement, MPS has
the exclusive right to use such patents in the area of metal powders and
the Company has the exclusive right to use such patents in all other
areas, provided, however, that MPS has granted to the Company a non-
exclusive license to use the patents in the area of metal powders.
The Company intends to continue to apply for domestic and foreign
patent protection in appropriate cases. In other cases, the Company
believes it may be better served by reliance on trade secret protection.
In all cases, the Company intends to seek protection for its
technological developments to preserve its competitive position.
Backlog and Contracts
- ---------------------
As of December 27, 1997, the Company had a product backlog of $2.08
million, compared with a product backlog of $2.07 million at December 28,
1996. The Company shipped 99% of the year-end 1996 product backlog in
1997.
6
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 ceramic products.
Lanxide Electronic Components, PCC Composites, and Ametek Specialty
Materials are the Company`s primary competitors in the metal-matrix
composite business.
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.
The Company performs and solicits various contracts from the United
States government agencies and also sells to other government
contractors.
Employees
- ---------
As of year-end 1997, the Company and its wholly-owned subsidiary,
CPS Superconductor Corporation (`CPSS`), had 40 full-time employees, of
whom 35 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.
In February, 1994, the Company relocated its corporate headquarters,
manufacturing operations, engineering activities, and research and
development laboratories to a leased facility in Chartley, Massachusetts.
The Company is operating at the Chartley facility as a tenant-at-will.
Prior to its relocation to Chartley, the Company was headquartered in a
leased facility in Milford, Massachusetts.
7
The Company`s rental expense for operating leases was $68 thousand
each year in 1997, 1996 and 1995.
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, 1997.
Part II
- ------------------------------------------------------------------
Item 5. Market for Registrant`s Common Stock and Related
Stockholder Matters
On December 27, 1997, the Company had 296 shareholders of record.
The high and low closing bid prices of the Company`s common stock for
each quarter during the years ended December 27, 1997 and December 28,
1996 are shown below.
1997 1996
--------------- --------------
High Low High Low
---- ---- ---- ----
1st Quarter 1/2 5/16 7/16 5/32
2nd Quarter 7/8 11/32 11/16 1/8
3rd Quarter 1 1/2 5/8 11/16 3/8
4th Quarter 2 5/8 1 3/8 5/8 5/16
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 the Over-the-Counter
Bulletin Board 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.
8
SELECTED CONSOLIDATED FINANCIAL DATA
For the Fiscal Year: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------
Summary of Operations
- ---------------------
Revenue $ 4,589 $ 2,007 $ 1,387 $ 1,192 $ 4,164
Operating Expenses 2,993 2,201 2,221 3,071 4,113
------ ------- ------- ------- -------
Operating Income (Loss) 1,596 (194) (834) (1,879) 51
Net Other Income (Expense) (219) (217) (274) (38) 0
------ ------ ------ ------ ------
Net Income (Loss) $ 1,377 $ (411) $(1,108) $(1,917) 51
====== ====== ====== ====== ======
Net Income (Loss) Per
Basic Common Share $ .18 $ (0.05) $ (0.14) $( 0.25) $ 0.01
====== ====== ====== ====== ======
Weighted Average Basic
Number of Common Shares
Outstanding 7,799 7,781 7,675 7,581 7,587
====== ====== ====== ====== ======
Net Income (Loss) Per
Diluted Common Share $ .13 $ (0.05) $ (0.14) $( 0.25) $ 0.01
====== ====== ====== ====== ======
Weighted Average Diluted
Number of Common Shares
Outstanding 12,280 7,781 7,675 7,581 7,636
====== ====== ====== ====== ======
- --------------------------------------------------------------------
Year-end Position
- -----------------
Working Capital(Deficit) $(1,788) $(3,200) $(2,736) $ ( 165) $ 51
Total Assets $ 1,905 $ 795 $ 526 $ 932 $1,112
Long-term Obligations $ 310 $ 88 $ 0 $ 1,620 $ 8
Stockholders` Equity
(Deficit) $(1,520) $(2,905) $(2,493) $(1,458) $ 449
Basic and diluted earnings per share shown above have been calculated
using the rules governed in SFAS 128 `Earnings Per Share` (See Note 14 to
Consolidated Financial Statements).
Item 7. Management`s Discussion and Analysis of Financial Condition and
Results of Operations
9
This Annual Report on Form 10-K contains forward-looking statements
that involve a number of risks and uncertainties. There are a number of
factors that could cause the Company`s actual results to differ
materially from those forecasted or projected in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to
reflect events or changed circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Responsibility For Financial Statements
- ---------------------------------------
Management has prepared and is responsible for the consolidated
financial statements and information included in this report. These
financial statements were prepared in accordance with generally accepted
accounting principles which are consistently applied. The Company
maintains accounting and control systems to assure its records accurately
and appropriately reflect the operations of the Company, based on
management`s best available information and judgment.
Results of Operations
- ---------------------
Revenue
- -------
Total revenue of $4.59 million in 1997 reflects an increase of $2.58
million, or 128%, from 1996 total revenue of $2.01 million. Total revenue
of $2.01 million in 1996 reflects an increase of 45% from 1995 total
revenue of $1.4 million. The increase in revenue from 1996 to 1997 is
primarily the result of a shift in mix from small prototyping runs to
recurring production of several products. Because metal-matrix
composites are relatively new materials, the Company`s customers often
take one to three years to evaluate prototypes and modify their designs
to take advantage of the benefits metal-matrix composites offer before
purchasing production quantities. In 1997, several products, primarily
for wireless communications applications, made this transition from
prototyping quantities to production quantities.
Ninety-one percent of total revenue in 1997 and 96% of total revenue
in 1996 consisted of sales of manufactured products; revenue earned under
license agreements in 1997 and 1996 amounted to $391 thousand and $85
thousand, respectively.
Operating Costs
- ---------------
Total operating costs were $3.0 million, $2.2 million, and $2.2
million, for the fiscal years 1997, 1996, and 1995, respectively.
Cost of sales for the years 1997, 1996, and 1995, were $2.5 million,
$1.7 million, and $1.6 million, respectively. Selling, general and
administrative costs were $0.5 million, $0.5 million, and $0.6 million,
for these same years, respectively.
10
The $0.8 million increase in cost of sales in 1997 versus 1996 is
attributable to higher sales volume in 1997. Unit shipments in 1997 were
337% higher than unit shipments in 1996 while cost of sales increased
only 47%, reflecting a shift in mix from small prototyping runs to
recurring production of several products. Gross margins increased from
12.2% in 1996 to 41.0% in 1997 as more products entered into recurring
production. Manufacturing efficiencies improved as processes operated on
a consistent daily basis, labor content per part declined as capital
equipment was installed, and the cost of raw materials per unit shipped
declined as the Company took advantage of reductions in vendors` prices
as a result of higher quantity usage.
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 1997 and
1996. The decrease in research, development and engineering expenses
from 1995 to 1996 reflected reduced activity under collaborative
development agreements over these years.
The 1997 selling, general and administrative expenses of $0.5
million were the same as 1996. The decrease in selling, general and
administrative expenses of $0.1 million from 1995 to 1996 was primarily
attributable to reduced headcount.
Net Other Expenses
- ------------------
The Company had net other expenses of $219 thousand, $217 thousand,
and $274 thousand for the fiscal years 1997, 1996, and 1995,
respectively. The decrease in net other expense in 1996 compared to 1995
was due to higher interest rates on certain balances offset by a
reduction in amounts paid to MPS (See Note 12 to the Notes to
Consolidated Financial Statements).
Income Taxes
- ------------
The Company neither paid nor accrued Federal income taxes in 1997,
1996, or 1995, due to its tax losses in those years. The Company paid
$585 to Massachusetts for 1996 income taxes and accrued $2,000 for 1997.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that they did not exceed the 50% ownership change in the three-
year period ending December 27, 1997, therefore, as of year-end 1997 all
net operating loss carryforwards are available to offset future taxable
income.
Liquidity and Cash Reserves
- ---------------------------
Cash on hand at December 27, 1997 totaled $561 thousand, an increase
of $448 thousand from the 1996 year-end balance of $113 thousand. In
1997, operations generated net cash of $784 thousand, investing
activities, primarily the purchase of capital equipment, consumed net
cash of $215 thousand, and financing activities, primarily payment of
debt principal, consumed net cash of $120 thousand.
The Company believes it will be able to finance its working capital
obligations, capital expenditures for production equipment, and to
service debt through funds generated from operations throughout 1998.
The Company continues to sell to a limited number of customers and loss
of any one of these customers could cause the Company to require external
financing.
11
Prior to 1997, the Company financed its operations primarily through
equity placements, debt, contract research and development revenues,
license fees, and sale of products. In 1994 and 1995, the Company issued
notes and convertible notes in the amount of $2.4 million to finance its
working capital obligations and building renovations cost (See Notes 7,
8, and 15 to the Notes to Consolidated Financial Statements). Certain of
these notes and convertible notes matured in 1995 and 1996 at which time
the Company defaulted on principal and interest repayments of these
obligations.
In 1997, the Company renegotiated and paid down several notes. In
the first fiscal quarter of 1998, $450,000 of convertible notes principal
was converted by note holders into the Company`s common stock and the
accrued interest on this debt was paid by the Company in cash. The
maturity date on convertible notes in the principal amount of $920,000
was extended by note holders to January 15, 1999. As of April 9, 1998
the Company is no longer in default of any debt.
Newly Issued Accounting Changes
- -------------------------------
Financial Accounting Standards Board Statement No. 130 (`FAS 130`)
`Reporting Comprehensive Income` is effective for fiscal years beginning
after December 15, 1997, although earlier application is permitted. The
Company intends to adopt the requirements of this pronouncement in its
financial statements for the year ending December 26, 1998. FAS 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
FAS 130 requires that all components of comprehensive income shall be
reported in the financial statements in the period in which they are
recognized. Furthermore, a total amount for comprehensive income shall
be displayed in the financial statement where the components of other
comprehensive income are reported. The Company was not previously
required to present comprehensive income or the components thereof in its
financial statements under generally accepted accounting principles.
Financial Accounting Standards Board Statement No. 131 (`FAS 131`)
`Disclosure about Segment of an Enterprise and Related Information` is
effective for financial statements issued for periods beginning after
December 15, 1997. FAS 131 requires disclosures about segments of an
enterprise and related information regarding the different types of
business activities in which an enterprise engages and the different
economic environments in which it operates.
The Company does not believe that the implementation of FAS 130 or
131 will have a material impact on its financial statements.
Year 2000
- ---------
The Company is assessing the potential impact on information systems
as a result of reaching the year 2000. The Company believes its current
systems are not year 2000 compliant. The Company is implementing year
2000 compliant systems in 1998 and does not expect the associated costs
to be material to the Company`s financial position or results of
operations.
12
Inflation
- ---------
Inflation had no material effect on the results of operations or
financial condition during 1997, 1996, or 1995. There can be no
assurance, however, that inflation will not affect the Company`s
operations or business in the future.
Item 8. Financial Statements and Supplementary Data
See Index to the Company`s Financial Statements and the accompanying
financial statements and notes which are filed as part of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
- --------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Directors of the Company are elected annually and hold office until
the next annual meeting of stockholders and until their respective
successors are duly elected and qualified. The executive officers of the
Company are appointed by the Board of Directors and hold office until
their respective successors are duly elected and qualified.
The Directors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Grant C. Bennett 43 President
Chief Executive
Officer,
Treasurer
and Director
H. Kent Bowen 56 Director
Francis J. Hughes, Jr. 47 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-Director of
the Leaders for Manufacturing Program at MIT from 1991 through July,
1992. Dr. Bowen has been a Director of the Company since 1984 and served
as Chairman of the Board of Directors of the Company from 1984 to August,
1988. Dr. Bowen is also a director of General Signal Corporation.
13
Mr. Francis J. Hughes, Jr. has served as President of American
Research and Development Corporation (`ARD`), a venture capital firm,
since 1992. Mr. Hughes joined ARD`s predecessor organization in 1982,
and became Chief Operating Officer in 1990. Mr. Hughes served as General
Partner of the following venture capital funds: ARD I, L.P., ARD II,
L.P. (since July, 1985), ARD III, L.P. (since April, 1988), Hospitality
Technology Fund, L.P. (since June, 1991) and Egan-Managed Capital, L.P.
(since February, 1997). Mr. Hughes has served as a Director of the
Company since 1993. Mr. Hughes is also a director of RF Monolithics,
Inc., and Texas Micro, Inc.
There are no family relationships between or among any executive
officers or Directors of the Company.
Item 11. Executive Compensation
The following table sets forth certain information with respect to
the annual and long-term compensation of the Company`s Chief Executive
Officer for the three fiscal years ended December 27, 1997. No other
executive officer of the Company serving on the last day of fiscal year
1997 received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Other All Other
Compen- Options/ LTIP Compensa-
Name & Position Year Salary Bonus sation SAR`s Payouts tion
- ---------------------- -------- ----- ------- -------- ------- ---------
($) ($) ($) (#) ($) ($)
Grant C. Bennett 1997 $100,163 $0 $0 0 $0 $0
President and 1996 $ 95,550 $0 $0 0 $0 $0
Chief Executive 1995 $ 92,925 $0 $0 0 $0 $0
Officer
The Company`s President and Chief Executive Officer did not receive
option grants during fiscal year 1997. During fiscal year 1997 no
options were exercised by him, and at the end of the fiscal year 1997 no
options were held by him.
Directors` Fees
- ---------------
Under the terms of the Company`s 1992 Director Option Plan (the
`Director Plan`), Directors who are neither officers nor employees of the
Company (the `Outside Directors`) are entitled to receive stock options
as compensation for their services as Directors. A non-statutory stock
option (the `initial option`) to purchase up to 4,000 shares of Common
Stock was granted on May 1, 1992 to each eligible Director who was then
serving as a Director, and shall be granted to each other eligible
Director upon his or her initial election as a Director. Also, each
eligible Director is entitled to receive a non-statutory stock option
(the `reelection option`) to purchase up to 2,000 shares of Common Stock
on each subsequent date that he or she is reelected as a Director of the
14
Company. In addition, under the terms of the Plan, the Director serving
as Chairman of the Board and each Director serving on a standing
committee of the Board is entitled to receive an option to an additional
500 shares as part of his initial option and each reelection option.
Options vest in 12 equal monthly installments beginning one month from
the date of grant, provided that 2,000 shares of each initial option vest
immediately. No options were granted to Directors under the Director
Plan in 1997. At December 27, 1997, options to purchase 35,500 shares of
Common Stock were outstanding under the Director Plan. 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.
Severance Benefit Program
- -------------------------
Effective June 1, 1989, the Board of Directors adopted the Company`s
Severance Benefit Program (the `Severance Program`) for certain employees
and officers selected from time to time by the Compensation Committee.
The Severance Program, which extends through May, 1998, provides that
upon `Involuntary Termination` of a participating employee (a
`Participant`), such Participant will (i) continue to receive 50% of his
then current annual base salary for a period of six months from the
termination date, (ii) receive a lump sum payment at the time of
termination equal to the Participant`s unused vacation pay, and (iii) for
a period not to exceed six months, continue to receive benefits in all
group benefit plans of the Company in which such Participant participated
immediately prior to termination, at a cost to the Participant no greater
than the cost at the time of termination. `Involuntary Termination` is
defined in the Severance Program as the (a) involuntary termination of
employment, other than for `cause` or due to disability or death, or (b)
voluntary termination of employment as a result of reduction in the
Participant`s salary, other than a reduction which is related primarily
to the economic performance or prospects of the Company, and which is not
applied to an individual Participant. `Cause` is defined in the
Severance Program as willful engaging of a Participant in conduct that is
materially injurious to the Company. In order to receive benefits under
the Severance Program, the Participant may not (i) become employed by,
render any services for, act on behalf of, or have any interest, direct
or indirect, in any business which competes, directly or indirectly, with
the Company, or (ii) recruit or solicit any employee of the Company to
terminate his or her employment or relationship with the Company.
Mr. Bennett is currently participating in the Severance Program. No
amounts were paid under the Severance Program in 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 20,
1998, 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:
15
Percentage of
Common Stock Shares of
Name and Address Beneficially Common Stock
of Beneficial Owner Owned (1) Outstanding
- ------------------- ------------ -------------
Ampersand Specialty Materials
Ventures Limited Partnership
(`ASMV`)
55 William Street, Suite 240
Wellesley, MA 02181 1,821,348 (2) 17.3%
Waco Partners
c/o Wechsler & Co., Inc.
105 South Bedford Road, Suite 310
Mount Kisco, NY 10549 1,669,980 (3) 17.3%
American Research and
Development III, L.P.
(`ARD III`)
30 Federal Street
Boston, MA 02110-2508 1,214,527 (4) 13.3%
American Research and
Development I, L.P.
(`ARD I`)
30 Federal Street
Boston, MA 02110-2508 1,018,152 (5) 11.3%
Techno Venture Management Corp.
(`TVM`)
101 Arch Street, Suite 1950
Boston, MA 02110 523,808 6.0%
Grant C. Bennett (Director & Officer) 1,646,167 18.9%
H. Kent Bowen (Director) None *
Francis J. Hughes, Jr. (Director) 2,237,179 (6) 24.6%
All Directors and Officers as a
group (three persons) 3,883,346 (7) 43.5%
*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) Includes 1,806,348 shares of Common Stock issuable upon
conversion of Convertible Notes held by Ampersand Specialty Materials
Ventures Limited Partnership (`ASMV`)(including principal and interest
thereon), convertible within 60 days after March 20, 1998 (See `Certain
Transactions`). Includes options, exercisable within 60 days after March
20, 1998, to purchase 15,000 shares held by General Partners of a
16
partnership that controls ASMV, as to which shares the General partners
disclaim beneficial ownership.
(3) Includes 1,000,000 shares of Common Stock issuable upon
conversion of a Convertible Note held by Waco Partners convertible within
60 days after March 20, 1998.
(4) Includes 388,258 shares of Common Stock issuable upon conversion
of Convertible Notes held by ARD III (including principal and interest
thereon), convertible within 60 days after March 20, 1998 (See `Certain
Transactions`). Includes options to purchase 4,800 shares of Common
Stock exercisable within 60 days after March 20, 1998. Excludes shares
described in Footnote 5 below, and excludes options to purchase 4,500
shares of Common Stock held by Mr. Hughes which are exercisable within 60
days after March 20, 1998.
(5) Includes 325,452 shares of Common Stock issuable upon conversion
of Convertible Notes held by ARD I (including principal and interest
thereon), convertible within 60 days after March 20, 1998 (See `Certain
Transactions`). Includes options to purchase 4,200 shares of Common
Stock exercisable within 60 days after March 20, 1998. Excludes shares
described in Footnote 4 above, and excludes options to purchase 4,500
shares of Common Stock held by Mr. Hughes which are exercisable within 60
days after March 20, 1998.
(6) Includes 688,500 shares of Common Stock owned by ARD I and
821,469 shares of Common Stock owned by ARD III, as to which shares Mr.
Hughes disclaims beneficial ownership. Mr. Hughes, a Director of the
Company, is a General Partner of partnerships which control ARD I and ARD
III. Includes 713,710 shares of Common Stock issuable upon conversion of
the Convertible Notes held by ARD I and ARD III (including principal and
interest thereon), convertible within 60 days after March 20, 1998 (See
`Certain Transactions`); Mr. Hughes disclaims beneficial ownership of
these shares. Includes options to purchase 9,000 shares of Common Stock,
exercisable within 60 days after March 20, 1998, held by ARD I and ARD
III. Includes options to purchase 4,500 shares of Common Stock held by
Mr. Hughes which are exercisable within 60 days after March 20, 1998.
(7) Includes (a) 1,509,969 shares of Common Stock owned by affiliates
of Directors, as to which shares they disclaim beneficial ownership, (b)
713,710 shares of Common Stock issuable upon conversion of the
Convertible Notes held by affiliates of Directors (including principal
and interest thereon), convertible within 60 days after March 20, 1998
(See `Certain Transactions`), to which shares the Directors disclaim
beneficial ownership, and (c)6,317 shares of Common Stock which officers
and Directors have the right to acquire under outstanding stock options
exercisable within 60 days after March 20, 1998 and (d) 9,000 shares of
Common Stock which a Director has the right to acquire under outstanding
stock options exercisable within 60 days after March 20, 1998, to which
shares the Director disclaims beneficial ownership.
Item 13. Certain Relationships and Related Transactions
In February, 1991, the Company transferred to Metals Process Systems
(`MPS`), a French societe anonyme, certain licensing rights and a co-
ownership interest in certain of the Company`s patents, for 49% of the
voting stock of MPS. Under the terms of the transfer agreement, MPS shall
17
have the exclusive right to use such patents in the area of metal powders
and the Company shall have the exclusive right to use such patents in all
other areas, provided, however that MPS has granted to the Company a non-
exclusive license to use the patents in the area of metal powders. In
1993, this equity position was adjusted to 40%, based on additional
capital contributions to MPS by the Company and Sopretac, the co-owner of
the joint venture. The Company`s investment was recorded under the equity
method. To date the Company`s investments in MPS have been written down
to zero as the Company`s share of MPS` losses have exceeded its
investment. In 1995 the Company contributed approximately $60,000 to MPS,
which, based on CPS` share of MPS` losses, was also charged to operations
in 1995. In 1996, CPS` equity interest was reduced to 1% based upon
additional investment by Vallourec in MPS.
In 1994, the Company issued convertible subordinated notes to
affiliates of Directors and other persons known by the Company to
beneficially own more than 5% of the outstanding shares of the Company.
Below is a summary of the notes, including shares of the Company`s Common
Stock issuable upon conversion of the note principal and interest within
60 days after March 20, 1998.
Per
Annum Shares Issuable Upon Conversion
Principal Interest Within 60 Days After
Amount Rate March 20, 1998
-------------------------------
Principal Interest
--------- --------
Noteholder ($) (%) Shares Shares
ASMV $660,000 10% 1,320,000 486,347
Waco Partners $500,000 10% 1,000,000 13,151
ARD III $141,440 10% 282,880 105,378
ARD I $118,560 10% 237,120 88,332
Affiliates of
Directors as
a group $260,000 10% 520,000 193,710
Part IV
- ------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as part of this Form 10-K.
1. Financial Statements
--------------------
The financial statements filed as part of this
Form 10-K are listed on the Index to Consolidated
Financial Statements on page 21 of this Form 10-K.
18
2.a. Exhibits
--------
The exhibits to this Form 10-K are listed on the
Exhibit Index on pages 18-20 of this Form 10-K.
2.b. Reports on Form 8-K
-------------------
None.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CERAMICS PROCESS SYSTEMS CORPORATION
By: /s/ Grant C. Bennett
--------------------------
Grant C. Bennett
President
Date: April 9, 1998
Pursuant to the Requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- -------------------- ------------------------ ------------
/s/ Grant C. Bennett President, Treasurer and Director}
- -------------------------- (Principal Executive Officer) }
Grant C. Bennett }
}
}
}
/s/ H. Kent Bowen Director }
- -------------------------- }
H. Kent Bowen } April 9,
} 1998
}
}
/s/ Francis J. Hughes, Jr. Director }
- -------------------------- }
Francis J. Hughes, Jr. }
}
20
CERAMICS PROCESS SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
3.1** Restated Certificate of Incorporation of the
Company, as amended, is incorporated herein by
reference to Exhibit 3 to the Company`s
Registration Statement on Form 8-A
(File No. 0-16088) --
3.2** By-laws of the Company, as amended, are
incorporated herein by reference to Exhibit 3.2
to the Company`s Registration Statement on Form
S-1 (File No. 33-14616)(the `1987 S-1Registration
Statement`) --
4.1** Specimen certificate for shares of Common Stock of
the Company is incorporated herein by reference to
Exhibit 4 to the 1987 S-1 Registration Statement --
4.2** Description of Capital Stock contained in the
Restated Certificate of Incorporation of the
Company, as amended, filed as Exhibit 3.1 --
(1)10.1** 1984 Stock Option Plan of the Company, as amended,
is incorporated herein by reference to Exhibit
10(b) to the Company`s Annual Report on Form 10-K
for the year ended December 31, 1988 --
(1)10.2** 1989 Stock Option Plan of the Company, is
incorporated by reference to Exhibit 10.6 to the
Company`s 1989 S-1 Registration Statement --
(1)10.3** 1992 Director Stock Option Plan is incorporated by
reference to Exhibit 10.5 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991 --
10.4** Participation Agreement, dated February 14, 1991,
between the Company and Sopretac, a French societe
anonyme, is incorporated by reference to Exhibit
10.10 to the Company`s Annual Report on Form 10-K
for the year ended December 28, 1991 --
(1)10.5** Retirement Savings Plan, effective September 1,
1987 is incorporated by reference to Exhibit 10.35
to the Company`s 1989 S-1 Registration Statement --
(1)10.6** Severance Benefit Program, effective June 1, 1989,
is incorporated by reference to Exhibit 10.36 to
the Company`s S-1 Registration Statement --
10.7** Research and Development Agreement, dated as of
June 26, 1991, between the Company and Carpenter
Technology Corporation (`CarTech`) is
incorporated by reference to Exhibit 10.17 to the
Company`s Annual Report on Form 10-K for the year
ended December 28, 1991 --
21
10.8** Option and License Agreement, dated as of June 26,
1991, between the Company and CarTech is
incorporated by reference to Exhibit 10.19 to the
Company`s Annual Report on Form 10-K for the year
ended December 28, 1991 --
10.9** License Agreement, dated as of December 11, 1992,
between the Company and CarTech is incorporated by
reference to Exhibit 10.19 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.10** Amendment to Research and Development Agreement,
dated as of December 11, 1992, between the Company
and CarTech is incorporated by reference to Exhibit
10.20 to the Company`s Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.11** Amendment to Option and License Agreement, dated as
of December 11, 1992, between the Company and
CarTech is incorporated by reference to Exhibit
10.21 to the Company`s Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.12** BancBoston lease line of credit, dated December 23,
1991, between the Company and The First National
Bank of Boston is incorporated by reference to
Exhibit 10.20 to the Company`s Annual Report on
Form 10-K for the year ended December 28, 1991 --
10.13** Amendment to BancBoston lease line of credit, dated
December 31, 1992, between the Company and the
First National Bank of Boston is incorporated by
reference to Exhibit 10.21 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.14** Form of 10% Convertible Subordinated Note Due June
30, 1995 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.22 to the Company`s
Annual Report for the fiscal year ended January 1,
1994 --
10.15** 10% Convertible Subordinated Note Due April 21,
2001 between the Company and Waco Partners and
related Subordinated Convertible Note Purchase
Agreement between the Company and Wechsler & Co.,
Inc. is incorporated by reference to Exhibit 10.21
to the Company`s Annual Report for the fiscal year
ended December 31, 1994 --
22
10.16** 10% Convertible Subordinated Note Due January 31,
1996 and related Common Stock Purchase Warrant
between the Company and Ampersand Specialty
Materials Ventures Limited Partnership is
incorporated by reference to Exhibit 10.22 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.17** Form of 10% Convertible Subordinated Note Due April
24, 1996 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.23 to the Company`s
Annual Report for the fiscal year ended December
31, 1994 --
10.18** Senior Secured Promissory Note Due March 30, 1996
and related Security Agreement between the Company
and Aavid Thermal Technologies, Inc. is
incorporated by reference to Exhibit 10.24 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.19** Secured Line of Credit Note Due June 30, 1996 and
related Security Agreement between the Company and
Kilburn Isotronics, Inc. --
10.20** Amended and Restated Promissory Note dated July
31, 1996 between the Company and Texas Instruments
Incorporated --
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 Coopers and Lybrand L.L.P
** 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.
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
CERAMICS PROCESS SYSTEMS CORPORATION
Page
- ------------------------------------------------------------
Report of Independent Accountants 24
Consolidated Balance Sheets as of December 27, 1997 and
December 28, 1996 25
Consolidated Statements of Operations for the years ended
December 27, 1997, December 28, 1996,
and December 30, 1995 27
Consolidated Statements of Stockholders` Deficit for
the years ended December 27, 1997,
December 28, 1996, and December 30, 1995 28
Consolidated Statements of Cash Flows for the years ended
December 27, 1997, December 28, 1996,
and December 30, 1995 29
Notes to Consolidated Financial Statements 31
All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.
24
REPORT OF INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------
The Board of Directors and Stockholders
Ceramics Process Systems Corporation:
We have audited the consolidated financial statements of Ceramics Process
Systems Corporation listed in the index on page 23 of this Form 10-K.
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ceramics Process Systems Corporation as of December 27, 1997 and December
28, 1996, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 27, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 16, 1998
Except for Note 15, as to which the date is
April 9, 1998
25
CONSOLIDATED BALANCE SHEETS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
ASSETS
December 27, December 28,
1997 1996
------------ ------------
Current Assets:
Cash and cash equivalents $ 561,166 $ 113,331
Accounts receivable, trade 626,121 141,035
Inventories (Note 2) 123,325 156,445
Prepaid expenses 15,528 1,340
--------- ----------
Total current assets 1,326,140 412,151
--------- ----------
Property and equipment (Notes 2 & 4):
Production equipment 1,208,145 1,018,055
Office equipment 70,404 60,403
Leased Equipment 262,108 126,948
--------- ---------
1,540,657 1,205,406
Less accumulated depreciation and
amortization 925,371 819,377
Less accumulated amortization
of leased equipment 41,790 5,290
--------- ---------
Net property and equipment 573,496 380,739
--------- ---------
Deposits 5,072 2,337
--------- ---------
Total Assets $1,904,708 $795,227
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
26
CONSOLIDATED BALANCE SHEETS (continued)
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS` DEFICIT
December 27, December 28,
1997 1996
------------ ------------
Current Liabilities:
Accounts payable $ 154,657 $ 128,762
Accrued expenses (Note 9) 677,109 789,766
Deferred revenues 163,430 355,987
Notes payable (Note 7) 206,962 450,000
Current portion of convertible notes
payable (Note 8):
Related parties 260,000 260,000
Other 1,610,000 1,610,000
Current portion of capital
lease oblications(Note 4) 42,205 17,383
----------- -----------
Total current liabilities 3,114,363 3,611,898
Long term portion of
Notes payable other 137,868 --
Capital lease obligations 172,114 87,999
----------- -----------
Total Liabilities 3,424,345 3,699,897
----------- -----------
Commitments (Notes 2,4,7 and 8)
Stockholders` Deficit (Notes 5 and 8):
Common stock, $0.01 par value.
Authorized 15,000,000 shares; issued
7,824,582 shares in 1997 and
7,780,766 shares in 1996 78,246 77,808
Preferred stock, $0.01 par value.
Authorized 5,000,000 shares;
no shares issued and outstanding -- --
Additional paid-in capital 30,464,833 30,457,384
Accumulated deficit (32,001,881) (33,379,027)
----------- -----------
(1,458,802) (2,843,835)
Less treasury stock, at cost,
22,883 common shares in 1997
and 22,883 common shares in 1996 (60,835) (60,835)
----------- -----------
Total Stockholders` Deficit (1,519,637) (2,904,670)
----------- -----------
Total Liabilities and
Stockholders` Deficit $1,904,708 $795,227
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
Years Ended
------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Revenue:
Product Sales $4,197,912 $ 1,922,006 $ 1,385,022
License agreements 391,001 85,000 2,000
---------- ----------- ----------
Total Revenue 4,588,913 2,007,006 1,387,022
---------- ----------- ----------
Costs and expenses:
Cost of sales 2,475,140 1,686,148 1,635,592
Selling, general and
administrative 517,362 515,346 585,129
---------- ----------- ----------
Total costs and expenses 2,992,502 2,201,494 2,220,721
---------- ----------- ----------
Operating income (loss) 1,596,411 (194,488) (833,699)
---------- ----------- ----------
Other income (expense):
Interest income 3,581 - 1,289
Interest expense (237,968) (248,500) (216,347)
Gain (loss) on disposal of
equipment -- 27,043 (666)
Other income (expense) 15,122 4,640 (58,098)
---------- ----------- ----------
(219,265) (216,817) (273,822)
========== =========== ==========
Net income (loss) $1,377,146 $ (411,305) $(1,107,521)
========== =========== ==========
Net income (loss) per
basic common share $ 0.18 $ (0.05) $ (0.14)
========== =========== ==========
Weighted average
number of basic common
shares outstanding 7,799,279 7,780,766 7,674,534
========== =========== ==========
Net income (loss) per
diluted common share $ 0.13 $ (0.05) $ (0.14)
========== =========== ==========
Weighted average
number of diluted
shares outstanding 12,279,643 7,780,766 7,674,534
========== =========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS` DEFICIT
For the years ended December 27, 1997, December 28, 1996
and December 30, 1995
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------------------------
Common stock
--------------- Additional Total
Number Par paid-in Accumulated Treasury Stockholders`
of shares Value capital deficit stock deficit
--------- ----- ---------- ----------- -------- -------------
Balance at December 31,
1994 7,610,786 $76,108 $30,387,166 $(31,860,201) $(60,835) $(1,457,762)
Common stock issued in
settlement of
interest obligation 169,980 1,700 70,218 -- -- 71,918
Net loss -- -- -- (1,107,521) -- (1,107,521)
--------- ------- ----------- ------------ -------- -----------
Balance at December 30,
1995 7,780,766 77,808 30,457,384 (32,967,722) (60,835) (2,493,365)
Net loss -- -- -- (411,305) -- (411,305)
--------- ------- ----------- ------------ -------- -----------
Balance at December 28,
1996 7,780,766 77,808 30,457,384 (33,379,027) (60,835) (2,904,670)
Stock Options Exercised 43,816 438 7,449 -- -- 7,887
Net Income -- -- -- 1,377,146 -- 1,377,146
--------- ------- ----------- ------------ -------- -----------
Balance at December 27,
1997 7,824,582 $78,246 $30,464,833 $32,001,881 $(60,835) $(1,519,637)
========= ======= =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
Years Ended
--------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating
activities:
Net loss $1,377,146 $ (411,304) $(1,107,521)
Adjustments to reconcile
net loss to cash provided
by (used in) used in
operating activities:
Depreciation 115,994 108,070 104,531
Amortization 36,500 5,290 11,517
Loss(gain)on disposal of
equipment -- (27,043) 666
Loss on investment -- -- 65,893
Changes in assets and
liabilities:
Accounts receivable, trade (485,086) 70,540 31,553
Inventories 33,120 (127,419) 27,100
Prepaid expenses (14,188) 9,484 17,319
Other current assets -- 475 24,044
Accounts payable 25,895 (47,732) 7,871
Accrued expenses (112,657) 214,558 257,993
Due to customer -- 51,950 --
Deferred revenue (192,557) 355,987 (6,300)
--------- ----------- ----------
Net cash provided by (used in)
operating activities 784,167 202,856 (565,334)
--------- ----------- ----------
Cash flows from investing
activities:
Proceeds from sale of assets -- 27,500 8,040
Additions to property and
equipment (212,827) (147,768) (41,327)
Investment in joint venture -- -- (65,893)
Deposits (2,735) (1,384) 1,670
--------- ----------- ----------
Net cash used in investing
activities (215,562) (121,652) (97,510)
--------- ----------- ----------
The accompanying notes are an integral part of the consolidated
financial statements.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
Years Ended
--------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Cash flows from financing activities:
Principal payments for capital
lease obligations (23,487) -- (7,532)
Proceeds from issuance of notes
payable -- -- 450,000
Proceeds from issuance of common
stock 7,887 -- --
Principal payment of notes
payable other (105,170) -- --
--------- ----------- ----------
Net cash provided by
financing activities (120,770) -- 442,468
--------- ----------- ----------
Net increase (decrease)
in cash and cash equivalents 447,835 81,204 (220,376)
Cash and cash equivalents
at beginning of year 113,331 32,127 252,503
--------- ----------- ---------
Cash and cash equivalents
at end of year $ 561,166 $ 113,331 $ 32,127
========= =========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------
(1) Nature of Business
------------------
Ceramics Process Systems Corporation serves the wireless
communications, satellite communications, motor controller and other
microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house,
interconnect, and thermally manage microelectronic devices.
(2) Summary of Significant Accounting Policies
------------------------------------------
(2)(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Ceramics Process Systems Corporation and its wholly-owned subsidiary, CPS
Superconductor Corporation (`CPSS`). All significant intercompany
balances and transactions have been eliminated in consolidation.
(2)(b) Cash and Cash Equivalents
------------------------------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
(2)(c) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Year end
inventory balances consisted of the following:
December 27, December 28,
1997 1996
------------ ------------
Raw materials $ 11,097 $ 39,412
Work-in-process 112,228 85,933
Finished goods -- 131,100
-------- --------
$123,325 $156,445
======== ========
(2)(d) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of
equipment is calculated on a straight-line basis over the estimated
useful life, generally five years. Amortization under capital leases is
calculated on a straight-line basis over the life of the lease.
Depreciation of leasehold improvements is calculated using the straight-
line method over the lease term or the estimated useful lives, whichever
is shorter. Upon retirement, the cost and related accumulated
depreciation or amortization are removed from their respective accounts.
Any gains or losses are included in the results of operations in the
period in which they occur.
32
(2)(e) Revenue Recognition
-------------------
The Company recognizes product revenue generally upon shipment.
Revenue related to license agreements is recognized upon receipt of the
license payment or over the license period, if the Company has continuing
obligations under the agreement. Revenue related to research and
development contracts is recognized on the percentage-of-completion
basis, which is generally based on the relationship of incurred costs to
total estimated costs on each contract. Advance payments in excess of
revenue recognized are recorded as customer deposits.
(2)(f) Research and Development Costs
------------------------------
The Company continues to perform product development under prototype
manufacturing agreements with customers. In fiscal 1997 and fiscal 1996,
the Company did not incur any costs for research and development and did
not perform any externally funded research and development programs. In
prior periods research and development costs were charged to expense as
incurred.
(2)(g) Income Taxes
------------
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 `Accounting for Income Taxes`
(`SFAS 109`). SFAS 109 proscribes the asset and liability method which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between tax and
financial statement basis of assets and liabilities, measured using
enacted tax rates expected to be in effect in the period which the
temporary differences reverse.
(2)(h) Net Income/Loss Per Common and Common Equivalent Share
-------------------------
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, `Earnings per Share`. This statement replaced the
calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share (EPS). Basic EPS excludes the effect of
any dilutive options, warrants or convertible securities and is computed
by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed by dividing income
available to common stockholders by the sum of the weighted average
number of common shares and common share equivalents computed using the
average market price for the period under the treasury stock method. All
earnings per share amounts have been restated to conform with the SFAS
128 requirements.
33
(2)(i) Use of Estimates in the Preparation of Financial Statements
-------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(2)(j) Risks and Uncertainties
-----------------------
The Company manufactures its products to customer specifications and
a significant portion of the Company`s revenues have historically been
generated from three customers. Financial instruments which potentially
subject the Company to concentrations of credit risk consist of trade
accounts receivable. The Company has not incurred significant losses on
its accounts receivable in the past.
(2)(k) Financial Instruments
--------------------------
A substantial portion of the Company`s borrowings have been financed
by significant stockholders of the Company, one of which reduced its
ownership interest in 1996. In addition, the Company was in default of a
significant portion of its convertible notes payable at year-end 1997,
although this default has been cured in 1998 (See Note 15 Subsequent
Event) It is not practicable to estimate the fair value of the Company`s
notes payable and convertible notes payable.
(2)(l) 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 1997, 1996, and 1995, consisted of 52 weeks.
(2)(m) Dividend Policy
---------------
Dividends are declared at the discretion of the Company`s Board of
Directors. To date, no cash dividends have been declared. Any earnings
are reinvested in the Company.
(3) Supplemental Cash Flow Information
----------------------------------
The Company acquired equipment through capital lease obligations in
1997 in the amount of $135,160 and in 1996 in the amount of $111,079.
Additionally, the Company paid interest on leases amounting to $15,196,
$5,891, and $3,901 in 1997, 1996, and 1995, respectively.
(4) Leases
------
At December 27, 1997 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $41,790 under capital
leases. At December 30, 1996 the Company had production equipment with a
cost of $126,948 and accumulated amortization of $5,290 under capital
leases. At December 30, 1995 the Company had no property under capital
leases.
34
Future payments required under capital lease obligations are as
follows at December 27, 1997:
1998 $ 62,916
1999 $ 62,916
2000 $ 62,916
2001 $ 56,940
2002 $ 21,497
--------
Total future minimum lease payments $267,185
========
Less amount representing interest $ 52,866
--------
Present value of net future lease payments $214,319
Less current portion $ 42,205
--------
Long-term obligation under capital leases $172,114
========
The Company is operating at its Chartley facility as a tenant-at-
will. Total rental expense for operating leases was $67,500 each year for
1997, 1996 and 1995.
(5) Stock-Based Compensation Plans
------------------------------
The Company has adopted the disclosure requirements of Statements of
Financial Accounting Standards (SFAS) No.123, `Accounting for Stock-Based
Compensation`. The Company continues to recognize compensation costs
using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25, `Accounting for Stock Issued to Employees`. No
compensation costs were recognized in 1997, 1996, and 1995.
In 1997, Company employees exercised options for 43,816 shares of
common stock at market prices between $0.625 and $2.375.
In 1997, the Company maintained two stock option plans affording
employees and other persons affiliated with the Company, excluding non-
employee Directors, the opportunity to purchase shares of its common
stock. In August, 1994, one of the stock option plans expired and no new
grants are currently available under it. Under the remaining plan, the
Board of Directors may grant incentive stock options to officers and
other key employees of the Company. Additionally, the remaining plan
permits the Board of Directors to issue non-qualified stock options to
officers and other key employees and consultants of the Company.
All incentive stock options are granted at the fair market value of
the stock or in the case of certain optionees, at 110% of such fair
market value at the time of the grant. Such options are exercisable in
installments following a minimum period of employment and expire within
ten years from the date granted. All non-qualified stock options are
granted at a price not less than 50% of the fair market value at the time
of the grant. Options vest over various periods not exceeding 5 years.
35
In addition, during 1992 the Company adopted the 1992 Director
Option Plan (the `Director Plan`) to compensate outside directors for
their services. Under the Director Plan, eligible directors are
35
initially granted options to purchase up to 4,000 shares of the Company`s
common stock, and are granted options to purchase up to 2,000 shares of
the Company`s common stock upon re-election as a director. Additionally,
directors serving on standing committees of the Board are granted options
to purchase up to 500 shares of the Company`s common stock. No options
to purchase shares of the Company`s common stock under the Director Plan
were granted in 1997, 1996 or 1995. At December 27, 1997, options to
purchase 35,500 shares of Common Stock were outstanding under the
Director Plan.
In 1997 the Company granted 109,000 options at the current fair
market values of $0.5625 to $1.50. In April, 1996 and June, 1995 the
Company granted 330,461 and 400,490 options at the then current fair
market value of $0.18 and $0.44, with similar terms and conditions to
existing option holders in exchange for the previously issued options.
As of December 27, 1997, the total remaining number of shares
authorized for issuance under these stock option plans amounted to
469,716.
The following is a summary of stock option activity for all of the
above plans for the fiscal years 1997, 1996 and 1995.
1997 1996 1995
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 430,961 0.68 447,267 $0.93 565,083 $1.57
Granted at fair
market value 109,000 1.00 330,461 0.18 400,390 0.44
Exercised (43,816) 0.18 - - - -
Canceled (121,759) 0.41 (346,767) 0.52 (518,206) 1.24
------- ----- ------- ----- ------- -----
Outstanding at
end of year 374,386 0.93 430,961 $0.68 447,267 $0.93
======= ===== ======= ===== ======= =====
Options exercisable
at year-end 165,461 1.44 100,500 $2.34 251,453 $1.32
The following table summarizes information about stock options
outstanding at December 27, 1997:
<CAPTIONS>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Range Remaining Weighted Weighted
of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (in years) Price Exercisable Price
- ------------- ----------- ----------- -------- ----------- --------
$0.18 222,886 8.27 $0.18 72,961 $0.18
0.625 - 0.875 22,500 5.77 0.75 17,500 $0.79
1.312 - 1.50 49,000 9.72 1.35 -- --
2.25 - 3.75 80,000 4.25 2.79 75,000 $2.82
------- -------
$0.18 - $3.75 374,386 7.45 $0.93 165,461 $1.44
======= =======
37
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:
1997 1996 1995
---- ---- ----
Options issued 59,000 222,886 0
Risk-free interest rate 6.27% 6.31% 0
Expected life in years 7 7 7
Expected volatility 80% 80% 80%
Expected dividends 0 0 0
All options are granted at the fair market value on the date of
grant.
Had compensation cost for the Company`s two employee stock option
plans been recorded based on the fair value of awards at grant date
consistent with the alternative method prescribed by SFAS 123, the
Company`s pro forma net income (loss) for 1997, 1996, and 1995 would have
been $1,362,316, $(419,108), and $(1,107,521), respectively. Diluted
income (loss) per share for 1997, 1996 and 1995 would have been $0.13,
$(0.05), and $(0.14), 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) Research and Development Agreements
-----------------------------------
In 1997, 1996 and 1995, the Company recognized no revenue or related
costs from research and development agreements.
(7) Notes Payable
-------------
Notes payable consist of the following at December 27, 1997:
Note Payable 1
Note payable dated March 31, 1995 as
amended October 1, 1997, with interest payable
at a rate of 10% per year; due in installments
on Janaury 1, 1998, April 1, 1998, July 1,
1998, October 1, 1998 and December 31, 1998.
The note is collateralized by accounts
receivable, inventory, property and
equipment. $218,750
Note Payable 2
Note payable dated July 19, 1995, as
amended July 31, 1996 and July 31, 1997,
with interest payable at a rate of 10% per
year due in installments on March 29, 1998,
June 26, 1998, September 25, 1998,
December 24, 1998, March 26, 1999 and
June 25, 1999. $126,080
--------
$344,830
========
38
(8) Convertible Notes Payable
-------------------------
Convertible notes payable consist of the following at
December 27, 1997:
Convertible Note Payable 1
Unsecured notes payable dated February 16,
1994 with five parties, due June 30, 1995
plus interest at 10% per annum. $ 250,000
Convertible Note Payable 2
Unsecured note payable dated April 21,
1994, due April 21, 2001; interest at 10%
per annum is due semi-annually on
September 30 and March 31. $ 500,000
Convertible Note Payable 3
Unsecured note payable dated July 20,
1994, due January 31, 1996 plus interest
at 10% per annum. $ 120,000
Convertible Note Payable 4
Unsecured notes payable dated October 26,
1994 with six parties, due April 24, 1996
plus interest at 10% per annum. $1,000,000
----------
$1,870,000
==========
At December 27, 1997, the Company was in default of Convertible
Notes Payable 1, 2, 3 and 4. The Company cured all conditions of default
in 1998, see Note 15 Subsequent Events below.
$260,000 of the principal balance of the convertible notes payable
at December 27, 1997 represent amounts due to holders of greater than 10%
of the Company`s common stock for which the related accrued interest and
interest expense as of December 27, 1997 was $86,667 and $25,929
respectively.
Conversion privileges provided in the notes payable allow for the
conversion of any unpaid principal throughout the term of each note, at
the option of the note holders, for one share of the Company`s common
stock for each $0.50 of unpaid principal. The convertible notes are
subordinated to all other indebtedness of the Company.
Conversion privileges provided in Note Payable 1, Note Payable 3,
and Note Payable 4 allow for the conversion of any unpaid interest
throughout the note terms, at the option of the note holders, for one
share of the Company`s common stock for each $0.50 of unpaid principal.
At the option of the Company, interest due under Note Payable 2 may be
paid in shares of the Company`s common stock at a conversion price of the
lesser of $0.50 per share or 90% of the average closing bid price of the
Company`s common stock during the twenty consecutive trading days ending
five business days immediately preceding the date on which any interest
payment is due. 4,649,328 shares of common stock at December 27, 1997
are reserved for the conversion of convertible notes and related
interest.
39
Principal maturities for notes payable and convertible notes
payable, if these were not in default, are as follows at December 27,
1997:
Currently $1,370,000
1998 206,962
1999 137,868
2000 0
2001 0
Thereafter 500,000
----------
$2,214,830
==========
(9) Accrued Expenses
----------------
Accrued expenses consist of the following:
December 27, December 28,
1997 1996
------------ --------
Accrued legal and accounting $ 33,190 $161,267
Accrued interest (Note 3 and 7) 526,294 445,450
Accrued payroll 108,242 79,170
Accrued other 172,813 103,879
-------- --------
$840,539 $789,766
======== ========
(10) Income Taxes
------------
Deferred tax assets and liabilities are as follows:
December 27, December 28,
1997 1996
------------ ------------
Net operating losses $11,410,000 $ 12,180,000
Vacation and other accrued
expenses 79,000 78,000
Depreciation (93,000) (88,000)
Total 11,396,000 12,170,000
Valuation allowance (11,396,000) (12,170,000)
------------ ------------
$ -- $ --
============ ============
Due to the uncertainty related to the realization of the net
deferred tax asset, a full valuation allowance has been provided. At
December 27, 1997, the Company had net operating loss carryforwards of
approximately $33,000,000 available to offset future income for U.S.
Federal income tax purposes, and $4,700,000 for state income tax
purposes. These operating loss carryforwards expire at various dates from
the years 2000 through 2011 for federal income tax purposes and the years
1998 through 2001 for state income tax purposes.
40
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that it did not exceed the 50% ownership change in the three-
year period ending at year-end 1997 therefore as of year-end 1997 all net
operating loss carryforwards are available to offset future taxable
income.
(11) 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, 1997, no employer matching
contributions had been made to the Plan.
(12) Joint Venture
-------------
In February 1991, the Company formed a joint venture company, Metals
Process Systems (`MPS`), headquartered in Boulogne, France, with
Sopretac, a Vallourec Group Company, to market and license jointly-held
technology for use with powdered metals to third parties. The Company
contributed certain proprietary technology to the venture in exchange for
a 49% equity position. The Company`s investment was recorded under the
equity method. To date the Company`s investments in MPS have been
written down to zero as the Company`s share of MPS` losses have exceeded
its investment. In 1995 the Company contributed approximately $60,000 to
MPS, which, based on CPS` share of MPS` losses, was also charged to
operations in 1995. In 1996, CPS` equity interest was reduced to 1% based
upon additional investment by Vallourec in MPS.
(13) Significant Customers and Export Sales
--------------------------------------
Significant customers in 1997, 1996, and 1995 were as follows:
Significant Significant
Customer Customer
Year ended December 27, 1997 A 63%
B 11%
C 10%
Year ended December 28, 1996 A 56%
B 16%
C 13%
Year ended December 30, 1995 A 27%
C 21%
D 11%
Export sales were 1%, 0%, and 2% of total revenue in 1997, 1996, and
1995 respectively, and represented sales to Europe and Japan.
41
(14) Earnings Per Share
------------------
SFAS 128, which now governs earnings per share computation, requires
the following reconciliation of the basic and diluted EPS calculations.
For the years ended
December 27 December 28 December 30
1997 1996 1995
----------- ----------- -----------
Basic EPS Computation:
Numerator:
Net income (loss) $1,377,146 ($411,304) ($1,107,521)
Denominator:
Weighted average
common shares
outstanding 7,799,279 7,780,766 7,674,534
Basic EPS $0.18 ($0.05) ($0.14)
Diluted EPS Computation:
Numerator:
Net income (loss) $1,377,146 ($411,304) ($1,107,521)
Interest on
convertible debt $186,489 --- ---
--------- -------- ----------
Total net income (loss) $1,563,635 ($411,304) ($1,107,521)
Denominator:
Weighted average
common shares
outstanding 7,799,279 7,780,766 7,674,534
Stock options 191,040 --- ---
Convertible debt 4,289,324 --- ---
---------- --------- ---------
Total Shares 12,279,643 7,780,766 7,674,534
Diluted EPS $0.13 ($0.05) ($0.14)
(15) Subsequent Event
----------------
As of April 9, 1998 the Company cured all conditions of default
relating to convertible notes. On March 19, 1998 Convertible notes
outstanding in the principal amount of $450,000 were converted by note
holders into 900,000 shares of the Company`s Common Stock, and the
Company paid accrued interest in full on these notes in cash. On April
9, 1998 Convertible notes outstanding in the principal amount of $920,000
were amended by agreement of note holders and the Company to establish a
maturity date of January 15, 1999.