1
Rule 424(b)(4)
Reg. No. 333-2590
PROSPECTUS
3,840,000 SHARES
[CERION LOGO]
COMMON STOCK
Of the 3,840,000 shares of Common Stock offered hereby, 1,615,000 shares
are being sold by Cerion Technologies Inc. ("Cerion" or the "Company"), an
indirect, wholly-owned subsidiary of Nashua Corporation ("Nashua" or the
"Selling Stockholder"), and 2,225,000 shares are being sold by the Selling
Stockholder. Upon completion of this offering, Nashua will continue to own
approximately 45.3% of the Company's outstanding Common Stock (approximately
37.0% if the Underwriters' over-allotment option is exercised in full). See
"Ownership of Common Stock by Nashua" and "Information Concerning Nashua and its
Relationship with the Company." The Company will not receive any of the proceeds
from the sale of the shares by the Selling Stockholder.
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the
determination of the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "CEON."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY STOCKHOLDER(2)
- --------------------------------------------------------------------------------------------------
Per Share......................... $13.00 $0.91 $12.09 $12.09
Total(3).......................... $49,920,000 $3,494,400 $19,525,350 $26,900,250
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Selling Stockholder
estimated at $1,000,000.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase up to an additional 576,000 shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Stockholder will be
$57,408,000, $4,018,560 and $33,864,090, respectively. See "Underwriting."
The Common Stock is offered by the several Underwriters, when, as and if
delivered to and accepted by them and subject to their right to reject orders in
whole or in part. It is expected that delivery of the certificates for the
Common Stock will be made on or about May 30, 1996.
WILLIAM BLAIR & COMPANY
THE DATE OF THIS PROSPECTUS IS MAY 24, 1996
2
Cerion's aluminum disk substrate
manufacturing operation is arranged into
[Photo] individual manufacturing cells designed to
produce high product volumes with consistent
quality.
The Company's aluminum disk
substrates are manufactured
to meet stringent customer [Photo]
specifications for smoothness,
flatness and uniformity.
The Company also uses its core competencies
[Photo] in precision machining to produce organic
photoconductor drum substrates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including Risk Factors and Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. See "Underwriting."
THE COMPANY
Cerion manufactures precision-machined, aluminum disk substrates, which are
the metallic platforms of magnetic thin film disks used in the hard disk drives
of portable and desktop computers, network servers, add-on storage devices and
storage upgrades. The Company's manufacturing and engineering expertise,
together with its proprietary manufacturing processes and equipment, enable it
to supply customers with high product volumes and consistent quality while
meeting increasingly stringent product tolerances. The Company believes that its
ability to develop and manufacture high quality aluminum substrates helps thin
film disk manufacturers meet the rapidly evolving technological requirements of
the hard disk drive market. The Company also uses its core competencies in
precision machining to produce aluminum organic photoconductor ("OPC") drum
substrates for laser printer cartridges.
The market demand for aluminum substrates used for thin film disks in disk
drives has been growing rapidly, stimulated by demand for personal computers
("PCs"), storage upgrades and add-ons to existing computers and the growing use
of sophisticated network servers. According to TrendFOCUS, an industry
publication, the number of thin film disks produced worldwide in 1993, 1994 and
1995 was 134 million, 186 million and 256 million, respectively, and is
projected to reach 336 million in 1996, which would represent a compound annual
growth rate of approximately 36% over this four-year period.
The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua's
computer products divisions. Since the sale by Nashua of those divisions in
1994, the Company has expanded its customer and product base in response to
growth in market demand for substrates. The Company's net sales increased from
$14.6 million in 1994 to $28.2 million in 1995, a 93.6% increase. In the three
months ended March 29, 1996, the Company's net sales were $11.8 million,
compared to $5.0 million for the three months ended March 31, 1995. This growth,
combined with the efficiencies gained from the Company's continued improvements
in its proprietary manufacturing processes and equipment, has resulted in
reduced unit manufacturing costs and increased operating margins. These factors
led to the Company achieving operating income of approximately $6.0 million, or
21.2% of net sales, in 1995, and $3.2 million, or 27.2% of net sales, in the
three months ended March 29, 1996.
Cerion focuses its operations on providing value-added engineering and
technological solutions for markets requiring the precision finishing of
aluminum. The Company intends to continue to combine its engineering expertise,
innovative manufacturing techniques and proprietary equipment and processes to
provide a high volume of precision-engineered products with consistent, high
quality at competitive prices. The key elements of the Company's strategy are as
follows:
- - Focus on Development of High-End Products. Cerion increasingly focuses its
development and manufacturing efforts on producing high-end substrates that
consistently meet the most stringent product tolerances demanded by the thin
film disk industry. The Company believes it is a leader in developing new
products exceeding current industry requirements, potentially increasing the
likelihood that the Company's products will be designed into new disk media
for higher-capacity disk drives.
- - Continue to Improve Proprietary Manufacturing Processes and Production
Equipment. The Company seeks to continue to improve its manufacturing
processes and equipment to increase efficiency and production capacity and to
improve product quality. The Company believes its proprietary equipment
enables Cerion to achieve significant cost savings and reduces the capital
required to expand capacity. The Company believes these characteristics give
it a competitive advantage in the high-end aluminum substrate marketplace.
3
4
- - Develop Collaborative Relationships with Customers and Suppliers. The
Company's technical collaboration with its customers and suppliers during the
design phase of new thin film disks facilitates customer qualification of its
products and improves the Company's ability to rapidly reach cost-effective,
high-volume manufacturing. In addition, the Company receives ongoing feedback
on the performance of its aluminum disk substrates, allowing Cerion to provide
better products and customer service. The Company also works with its
suppliers to optimize their products' performance in the Company's
manufacturing process.
- - Expand Manufacturing Capacity. Consistent with strong industry growth, the
Company believes that potential demand for its aluminum disk substrates may
exceed its current manufacturing capacity. In 1996, the Company plans to add
manufacturing cells to use the remaining available manufacturing space at its
Champaign, Illinois facility and further increase production efficiency at
this facility. The Company also plans to add a new manufacturing facility in
1997 to meet the increasing demands of its customers while also allowing it to
pursue new customer and product opportunities.
- - Maintain Strict Control of Manufacturing Process. The Company's real-time
statistical monitoring of its manufacturing processes results in greater
product uniformity and higher production yields, and provides its customers
with statistical information regarding product consistency. The Company's
quality system is ISO 9001 registered.
THE OFFERING
Common Stock Offered by the Company........................... 1,615,000 shares
Common Stock Offered by the Selling Stockholder............... 2,225,000 shares
Common Stock Outstanding Immediately after the Offering....... 7,016,540 shares (1)
Use of Proceeds to the Company................................ Capital expenditures, primarily in
connection with an additional
manufacturing facility, repayment
of certain indebtedness, working
capital and other general corporate
purposes. See "Use of Proceeds."
Use of Proceeds to the Selling Stockholder.................... Repayment of indebtedness. See "Use
of Proceeds."
Nasdaq National Market Symbol................................. CEON
- ---------------
(1) Excludes 699,960 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan, of which options to purchase 422,680
shares have been granted at an exercise price per share equal to the initial
public offering price set forth on the cover page of this Prospectus.
Includes 1,540 shares of Common Stock granted effective upon the completion
of this offering. See "Capitalization," "Management -- 1996 Stock Incentive
Plan," "Shares Eligible for Future Sale" and Note 14 of Notes to the
Financial Statements.
4
5
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------------------------- ------------------
PRO
FORMA MAR. 31, MAR. 29,
1991 1992 1993 1994 1995 1995(1) 1995 1996
------- ------- ------- ------- ------- ------- -------- -------
STATEMENTS OF OPERATIONS DATA:
Net sales................ $10,557 $16,542 $14,612 $14,553 $28,175 $28,175 $5,028 $11,774
Cost of sales............ 11,172 13,544 12,306 12,995 19,668 19,668 3,880 7,098
------- ------- ------- ------- ------- ------- ------- ------
Gross profit........... (615) 2,998 2,306 1,558 8,507 8,507 1,148 4,676
Selling, general &
administrative
expenses............... 1,384 1,321 1,651 1,731 2,537 3,510 508 1,476
------- ------- ------- ------- ------- ------- ------- ------
Operating income
(loss).............. (1,999) 1,677 655 (173) 5,970 4,997 640 3,200
Interest expense......... 141 89 94 115 316 1,129 84 120
------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
provision (benefit)
for income taxes.... (2,140) 1,588 561 (288) 5,654 3,868 556 3,080
Provision (benefit) for
income taxes........... (810) 612 222 (105) 2,210 1,512 218 1,232
------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)........ $(1,330) $ 976 $ 339 $ (183) $ 3,444 $ 2,356 $ 338 $ 1,848
======= ======= ======= ======= ======= ======= ======= ======
Net income per share..... $ 0.44 $ 0.34
======= ======
Shares outstanding(2).... 5,400 5,400
MARCH 29, 1996
-----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
BALANCE SHEET DATA:
Working capital.................................................... $ 2,821 $ 22,346
Total assets....................................................... 15,492 33,875
Total debt......................................................... 11,142 10,000
Stockholders' equity (deficit)..................................... (836) 18,689
- ---------------
(1) The pro forma statement of operations data present the results of the
Company after giving effect to the following, as if each had occurred as of
January 1, 1996: (i) interest expense related to dividends to Nashua in the
form of a $10.0 million principal amount interest-bearing note (the "First
Nashua Note") and an approximately $1.1 million principal amount
interest-bearing note (the "Second Nashua Note" and, together with the First
Nashua Note, the "Nashua Notes"); (ii) the elimination of a corporate charge
paid to Nashua; and (iii) the inclusion of other expenses that would have
been incurred if the Company were an independent public company.
(2) Reflects shares outstanding as of December 31, 1995, giving effect to a
stock split. See Notes 11 and 14 of Notes to the Financial Statements.
(3) Adjusted to give effect to the sale of 1,615,000 shares of Common Stock
offered by the Company hereby, after deducting the underwriting discount,
and the application of the net proceeds therefrom. See "Use of Proceeds."
------------------------
The business of the Company began in 1982 as Disk-Tec, Inc. ("Disk-Tec").
Nashua acquired Disk-Tec in 1986 and has operated the business since then. As of
December 31, 1995, Nashua converted the Company into a wholly-owned subsidiary
of Nashua by contributing to it the business of the Nashua Precision
Technologies division in return for the Company's stock and its assumption of
the liabilities of the business. As of the date of this Prospectus, the Company
is a Delaware corporation and an indirect, wholly-owned subsidiary of Nashua.
Unless the context otherwise requires, all references in this Prospectus to the
"Company" shall be deemed to include its predecessors. The Company's principal
executive offices are located at 1401 Interstate Drive, Champaign, Illinois
61821-1090, and its telephone number is (217) 359-3700. The Company's e-mail
address is mail@cerion.com.
5
6
RISK FACTORS
Prospective purchasers of the shares offered hereby should carefully
consider the following risk factors in addition to the other information
presented in this Prospectus before purchasing the shares of Common Stock
offered hereby.
Dependence on a Small Number of Customers. Aluminum disk substrates, all
sales of which were to thin film disk manufacturers, represented over 95% of the
Company's sales in 1995. The Company's aluminum disk substrate customers in 1995
were StorMedia Incorporated ("StorMedia"), HMT Technology Corporation ("HMT"),
IBM Corporation ("IBM") and Conner Peripherals, Inc. ("Conner," now a part of
Seagate Technology, Inc. ("Seagate")), which represented approximately 47%, 42%,
7% and 4%, respectively, of the Company's aluminum disk substrate sales. There
are a relatively small number of thin film disk manufacturers worldwide. Because
many of these thin film disk manufacturers supply all or part of their aluminum
disk substrate needs either through captive suppliers or vertically-integrated
operations, the Company believes that the dependence of its aluminum disk
substrate business on a few customers will continue in the future. The Company's
customer base, and each customer's relative importance, have fluctuated and may
continue to fluctuate. The loss of one or more of the Company's customers or
potential customers through consolidations, adverse financial circumstances or
otherwise could have a material adverse effect on the Company's business,
results of operations and financial condition. StorMedia recently announced that
it will produce aluminum disk substrates, as part of the production of nickel
plated and polished substrates, at a new manufacturing facility in Singapore. In
addition, HMT has recently announced that it will use a facility it acquired in
Oregon for aluminum disk substrate production, as well as for nickel plating and
polishing. The internal production of aluminum disk substrates by the Company's
principal customers could result in the reduction or elimination of purchases
from the Company or the sale by such customers of aluminum disk substrates in
competition with the Company. Moreover, the decision by one or more of the
Company's customers to move to a single supply source could materially adversely
affect the Company if the Company were not chosen as the single supply source,
just as a decision by one or more of the Company's customers to expand its base
of suppliers could reduce its purchases from the Company and materially
adversely affect the Company's business, results of operations and financial
condition. For example, in 1994 StorMedia shifted a significant portion of its
demand to a competitor of the Company to eliminate the Company's sole-supplier
status, which significantly affected the Company's results of operations.
There has also been a trend toward consolidation in the disk drive
industry, which the Company expects to continue. For example, two leading disk
drive manufacturers, Seagate and Conner, recently merged to form the world's
largest disk drive manufacturing company. If any of the Company's customers or
competitors were to combine, it could result, among other things, in a reduction
of the number of their suppliers or increased pricing pressures, which could
materially adversely affect the Company's business, operating results and
financial condition.
There can be no assurance that the Company's current customers will
continue to place orders with the Company, that orders by existing customers
will continue at the levels of previous periods or that customers will not
cancel existing orders (which they may generally do without penalty), nor can
there be any assurance that the Company will be able to obtain orders from new
customers. The level of orders for aluminum disk substrates also depends on the
production levels of thin film disk manufacturers, which may be subject to
disruptions and delays as well as fluctuations in market demand. The loss of one
or more of the Company's current customers, particularly HMT or StorMedia, or a
significant reduction in the level of their orders, could materially adversely
affect the Company's business, operating results and financial condition. See
"-- Absence of Long-Term Purchase Commitments," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Customers and Marketing" and "-- Competition."
Dependence on Intensely Competitive and Cyclical Hard Disk Drive
Industry. The demand for the Company's aluminum substrates for thin film disks
depends solely upon the demand for hard disk drives, which in turn depends on
the demand for new computers, storage upgrades and add-ons to existing computers
and the growing use of sophisticated network servers. The disk drive industry is
cyclical and historically has experienced periods of oversupply and reduced
production levels, resulting in significantly reduced demand for thin film
disks, as well as pricing pressures. The effect of these cycles on suppliers,
including manufacturers of
6
7
thin film disks and aluminum disk substrates, has been magnified by the hard
disk drive manufacturers' practice of ordering components, including thin film
disks, in excess of their current needs during periods of rapid growth. In
recent years, the disk drive industry has experienced significant growth, and
the Company has not only expanded its capacity, but expects to make significant
capital expenditures to expand capacity further. There can be no assurance that
growth in the disk industry will continue at recent rates or at all, that the
level of demand for disk drives will not decline, or that future demand will be
sufficient to support existing and future capacity. In addition, the growth rate
of PC unit sales has recently been reported to have declined and may continue to
decline, which may adversely affect the demand for hard disk drives. A decline
in demand for hard disk drives could reduce the Company's sales of its primary
product line and have a material adverse effect on the Company's business,
operating results and financial condition. Additionally, the hard disk drive
industry is intensely competitive, and in the past some disk drive manufacturers
have experienced substantial financial difficulties. There can be no assurance
that the Company will not face difficulty in collecting receivables or will not
be required to offer more liberal payment terms in the future, particularly in a
period of reduced demand. Any failure to collect or delay in collecting
receivables could have a material adverse effect on the Company's business,
operating results and financial condition.
Absence of Long-Term Purchase Commitments. As is customary in this
industry, the Company's sales are usually made pursuant to purchase orders which
are subject to cancellation, modification or rescheduling generally without
penalties. Customers typically provide the Company with forecasts of expected
requirements for the next three to six-month period and submit purchase orders
or releases 14 to 60 days in advance of shipment dates. In the past, certain
forecasts of the Company's customers have failed to materialize or have been
altered and delivery schedules have been deferred. For instance, in 1994 changes
in a large customer's orders adversely affected the Company's results of
operations. Changes in forecasts, rescheduling and quantity reductions may
result in inventory losses and under-utilization of production capacity. From
time to time customers have changed certain specifications or standards for
their products, resulting in lower production yields, higher manufacturing costs
and lower productivity and margins than anticipated by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Backlog."
Risk of Excess Industry Capacity. The Company believes that Kobe
Precision, Inc., a subsidiary of Kobe Steel, Ltd. ("Kobe"), its primary
competitor among independent aluminum disk substrate manufacturers, is
attempting to increase aluminum substrate manufacturing capacity. The Company
also expects to increase its manufacturing capacity, and some or most of the
vertically-integrated, thin film disk or hard drive manufacturers are expected
to do the same. These efforts may result in significant additional capacity in
the industry within the next one to two years. To the extent these efforts
result in industry capacity in excess of levels of demand, the Company could
experience increased levels of competition and increased pricing pressures,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on New Manufacturing Facility. The Company believes that growth
in the Company's net sales will require the successful expansion by the Company
of its manufacturing capacity. Although the Company plans to add manufacturing
cells to use the remaining available manufacturing space at its Champaign,
Illinois facility, and to further increase production efficiency at this
facility, the Company believes that it must build, purchase or lease a new
facility and accompanying equipment to further expand capacity. The Company's
present intention is to locate this new facility in central Illinois (the "New
Facility").
Adding a new facility would entail substantial risks, requiring the Company
to expand its management, while presenting other management and operational
challenges which the Company has not previously faced. In addition, the products
manufactured in the New Facility may need to be qualified by each customer
before products could be delivered to that customer from the New Facility. In
the event one or more of the Company's customers were to fail to qualify the
products to be manufactured for that customer, the Company's business, operating
results and financial condition could be materially adversely affected. In
addition, construction delays, cost overruns, difficulty in obtaining required
personnel or similar problems which may occur in connection with the
commencement and expansion of operations at a new facility could inhibit the
Company's growth plans and materially adversely affect the Company's business,
operating results
7
8
and financial condition. There can be no assurance that the New Facility will be
able to manufacture products in sufficient volume or with adequate production
yields to be profitable or to cover the costs of operations and investment in
the site. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Facilities and Properties."
Dependence on Key Employees. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
engineering and research and development personnel, many of whom would be
difficult to replace. The Company does not have long-term employment contracts
with any of its key personnel. The Company believes that its future success will
depend in large part upon its ability to attract and retain skilled management,
engineering, sales, marketing and research and development personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business -- Employees" and "Management -- Executive Officers and Directors."
Management of Growth. The Company has recently experienced a period of
rapid expansion in its operations that has placed, and could continue to place,
a significant strain on the Company's management and other resources. In
addition, some managerial functions have been performed by Nashua, and the
Company has only recently added resources to enable it to operate as an
independent company. This offering and the Company's status as a public company
thereafter are expected to place additional demands on the Company's management.
The Company's ability to manage its expanding operations effectively will
require it to continue to improve its operational, financial and management
information systems and to recruit, retain, train, motivate and manage its
employees in an area of low unemployment. If the Company's management is unable
to manage its operations effectively, the Company's business, operating results
and financial condition could be adversely affected. In addition, growth in the
Company's net sales will require the Company to successfully add a new
production facility. See "-- Dependence on New Manufacturing Facility" and
"Management."
Intense Competition Among Manufacturers of Aluminum Disk Substrates. The
Company believes that Kobe is its primary competitor among independent aluminum
disk substrate manufacturers. Kobe has significantly greater financial,
technical and marketing resources than the Company. In addition, Kobe has an
advantage in that it is supplied by an affiliated company with the aluminum
blanks from which its aluminum disk substrates are manufactured. Moreover,
Seagate and several other industry participants currently produce aluminum disk
substrates internally for their own use, and the Company believes that a
majority of the thin film disk market currently is supplied by such vertically
integrated manufacturers. These companies could make their products available
for distribution into the market as direct competitors of the Company.
Additionally, the Company's principal current aluminum disk substrate customers
have announced that they will produce aluminum disk substrates for internal use.
Any of these changes could reduce the already small number of current and
potential customers for the Company's products and increase competition for the
remaining market. Moreover, the aluminum disk substrate industry is
characterized by intense price competition. Although the Company's products
compete on the basis of availability and quality, price is also an important
competitive factor. Any increase in price competition could have a material
adverse effect on the Company's gross margins and on its business, operating
results and financial condition. There can be no assurance that the Company will
be able to continue to compete successfully with existing or new competitors.
Although the Company believes its products are competitive, the Company
believes that certain factors have had a negative impact on its products'
competitiveness. The Company currently lacks the capability to nickel plate and
polish its substrates, a capability considered important by certain customers.
In addition, the Company's inability to expand production more quickly to meet
customer needs has hampered the Company's competitiveness. Moreover, the
Company's manufacturing facility in Illinois is a great distance from its
principal customers. The Company's manufacturing process is also more labor
intensive than a number of its competitors and, as a result, may be more
adversely affected by rising labor costs. See "-- Dependence on a Small Number
of Customers" and "Business -- Competition."
Lengthy Qualification Process for New Products and Changes in Manufacturing
Processes. The Company is required to work closely with manufacturers in the
thin film disk industry in order to become
8
9
qualified as a supplier. In addition, changes in products or, in certain cases,
manufacturing processes, also may require additional customer qualification.
Qualifying aluminum disk substrates requires the Company to work extensively
with the customer to meet product specifications. Therefore, customers often
require a significant number of product presentations and demonstrations as well
as substantial interaction with the Company's senior management before making a
purchasing decision. Accordingly, the Company's products typically have a
lengthy sales cycle during which the Company may expend substantial financial
resources and management time and effort with no assurance that a sale will
result. In the event the Company's products do not become qualified for a
particular product development program on a timely basis, the Company could be
excluded as a supplier of aluminum disk substrates for such program entirely or
could become a secondary source of supply for such program, which typically
results in lower sales. In addition, the Company may be prevented or delayed
from making certain manufacturing process improvements due to the qualification
process. Such failure to become qualified or timely qualified could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Customers and Marketing."
Dependence on Suppliers. The Company relies on Alcoa Memory Products,
Inc., a subsidiary of Aluminum Company of America, Incorporated ("Alcoa"), as
its sole supplier of the aluminum blanks used by it for producing aluminum disk
substrates. It also relies on a sole supplier for the aluminum drum blanks used
for its OPC drum substrates, and on a limited number of suppliers for certain
materials used in its aluminum disk and OPC drum substrate manufacturing
processes, including etching chemicals and coolants. The Company does not have
any long-term supply contracts with Alcoa or any of its other major suppliers.
Changing suppliers for certain materials would be expensive and require long
lead times. For certain materials, a change in supplier could result in the
Company being required to requalify its products with certain of its customers.
Any significant limitations on the supply of raw materials could disrupt, limit
or halt the Company's production of aluminum disk substrates or OPC drum
substrates and could have a material adverse effect on the Company's business,
operating results and financial condition. Further, a significant increase in
the price of one or more of these components could also materially adversely
affect the Company's business, results of operations and financial condition.
See "Business -- Manufacturing Processes and Proprietary Equipment" and
"-- Sources of Supply."
Technological Change; Reliance on New Products. There can be no assurance
that the Company will be able to anticipate or respond to technological advances
or shifts and compete effectively against competitors' new products. For
example, certain glass and ceramic substrates currently are being sold in the
thin film disk market. If these materials were to become more prevalent and the
Company were unable to produce glass and ceramic substrates competitively, the
Company's business, results of operations and financial condition could be
materially adversely affected. In addition, various other materials may be under
development by others which could compete with aluminum thin film disks, and new
technologies may be under development which could render thin film disks
obsolete. To the extent the industry were to move towards any such new
technologies or other substrate materials, the Company's business, results of
operations and financial condition could also be materially adversely affected.
The Company's growth has been highly dependent on its ability to rapidly
adapt its products to more stringent specifications. Generally, new products
have higher average selling prices and, assuming similar production yields,
higher gross margins than more mature products. Although the Company is
attempting to develop other new products and processes, there can be no
assurance that these efforts will be successful. The Company's gross margins,
business, operating results and financial condition could be materially
adversely affected if these efforts are not successful or if the technologies
that the Company has chosen not to develop prove to be competitive alternatives
to its existing products. See "Business -- The Cerion Strategy."
No History of Independent Operations; Past Losses. Nashua operated the
business of the Company from the time of its acquisition in 1986 until December
31, 1995. As of December 31, 1995, Nashua converted the Company into a
wholly-owned subsidiary of Nashua pursuant to an agreement through which Nashua
contributed the assets of its Precision Technologies division to the Company, in
return for the assumption by the Company of the liabilities of that business and
the issuance to Nashua of all of the Company's outstanding capital stock. While
the Company was profitable in 1992, 1993 and 1995, it posted operating losses of
approximately $2.0 million in 1991 and $173,000 in 1994. The Company has
benefited from the financial and
9
10
other resources of Nashua. Although certain members of the Company's management
were previously associated with Nashua, and Nashua will be the Company's largest
stockholder upon completion of this offering, the Company will no longer have
access to Nashua's financial resources and will have less access to the
management and other resources of Nashua after this offering. Accordingly, the
Company's prospects must be evaluated in light of the risks, expenses and
difficulties likely to be encountered by a newly independent, public business.
There can be no assurance that the Company will develop the financial,
management, manufacturing and other resources necessary to operate successfully
as a newly independent, public company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Information
Concerning Nashua and its Relationship with the Company -- Intercompany
Agreement."
Future Capital Needs. The Company believes that in order to achieve its
expansion objectives, it will need significant financial resources over the next
several years for capital expenditures and working capital. The Company expects
to spend approximately $6.3 million on capital expenditures during 1996
(exclusive of the New Facility). In addition, the Company currently expects to
spend from $9.0 to $12.0 million on the New Facility. The Company believes that
it will be able to fund these expenditures from a combination of the proceeds of
this offering and cash flow from operations. In the event the Company decides to
expand its facilities further or sooner than presently contemplated, it is
likely to require additional debt or equity financing. There can be no assurance
that such additional funds will be available to the Company or, if available,
will be available on favorable terms. In addition, the Company may require
additional capital for other purposes. Moreover, the Company's $10.0 million
principal amount First Nashua Note matures on February 28, 1998 and may need to
be refinanced. The Company expects to enter into a secured revolving bank credit
facility. Assuming that such credit facility is established, the Company expects
to apply a portion of the proceeds from this offering to prepay in full the
First Nashua Note. If the Company were unable to generate sufficient funds from
operations or obtain sufficient capital or refinancing for existing
indebtedness, it could be required to curtail its capital equipment, working
capital and research and development expenditures, which could materially
adversely affect the Company's future operations and competitive position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," and "Information Concerning
Nashua and its Relationship with the Company."
Intellectual Property and Proprietary Rights. The Company currently relies
on a combination of trade secrets, technical expertise and continuing
technological research and development to establish and protect proprietary
rights in its manufacturing processes and equipment. The Company believes that
because of the nature of competition in the Company's primary markets, legal
intellectual property protection is and will continue to be a less significant
factor in the Company's success than the Company's core competencies in
engineering and manufacturing processes, and the experience and expertise of its
personnel. There can be no assurance that the Company's intellectual property
protections will prove effective.
The Company attempts to ensure that its products, processes and equipment
do not infringe patents and other proprietary rights of third-parties.
Nevertheless, there can be no assurance that such infringement may not be
committed or alleged. If infringement is alleged, there is no assurance that the
Company would prevail in any ensuing litigation, or that if the Company were
unsuccessful, that the necessary licenses would be available on acceptable
terms, if at all. In any event, patent and proprietary rights litigation can be
extremely protracted and expensive. See "Business -- Intellectual Property and
Proprietary Rights."
Control by Single Stockholder. Following the offering made hereby, Nashua
will beneficially own approximately 45.3% of the outstanding Common Stock
(approximately 37.0% if the Underwriters' over-allotment option is fully
exercised). As a result, Nashua may be able to elect all of the members of the
Board of Directors or block the approval of mergers, consolidations, a sale of
substantially all of the Company's assets or other extraordinary corporate
transactions, and will retain significant voting power for the approval of all
matters requiring stockholder approval. Immediately following the consummation
of the offering, two of the five members of the Board of Directors of the
Company will be executive officers of Nashua and two will be outside directors
of Nashua.
In addition, conflicts of interest could arise with respect to business
transactions between the Company and Nashua on certain matters, including the
sale of products, the purchase of services, potential acquisitions
10
11
of businesses or properties, the issuance of additional securities, the
prepayment of the First Nashua Note and the election of new or additional
directors. The Company has not instituted any formal plan or arrangement to
address potential conflicts of interest between the Company and Nashua. The
Company, however, intends to seek the approval of its directors who are not
officers or employees of Nashua for any future significant business transactions
between the Company and Nashua. See "Ownership of Common Stock by Nashua" and
"Information Concerning Nashua and its Relationship with the Company."
Environmental Compliance. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous and non-hazardous materials used or created during its
manufacturing processes. A failure by the Company to comply with present and
future regulations could subject it to future liabilities. Such regulations
could also restrict the Company's ability to expand its facilities or could
require the Company to acquire costly equipment or to incur other significant
expenses to comply with environmental regulations. See
"Business -- Environmental Regulation."
No Prior Market; Possible Volatility of Stock Price. Prior to the offering
made hereby, there has been no public market for the Common Stock and there can
be no assurance that an active public market for the Common Stock will develop
or continue after this offering. The initial public offering price has been
negotiated among the Company, Nashua and William Blair & Company, L.L.C., as the
Representative of the Underwriters (the "Representative") and may not be
indicative of future market prices. The trading price of the Common Stock could
be subject to wide fluctuations in response to variations in operating results,
changes in earnings estimates by analysts or reported results of operations that
are materially different from such estimates, changes in the disk drive or PC
industry, announcements of technological innovations or new products by the
Company or its competitors and other events or factors, including the events and
other factors described in this "Risk Factors" section. In addition, the stock
market from time to time has experienced extreme price and volume fluctuations
that have affected the market price for many companies and that frequently have
been unrelated to the operating performance of those companies. Such market
fluctuations may adversely affect the market price of Common Stock. There can be
no assurance that the market price of the Common Stock will not decline below
the initial public offering price. See "Underwriting."
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have 7,016,540 shares of Common Stock outstanding. Of those shares,
the 3,840,000 shares of Common Stock offered hereby will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act ("Rule 144"). Of
the remaining 3,176,540 shares, 3,175,000 shares were issued to Nashua by the
Company in a private transaction prior to this offering and are "restricted
securities" (as that term is defined in Rule 144) that are tradable subject to
compliance with Rule 144, including completion of a holding period, and 1,540
shares have been granted effective upon completion of this offering to two
directors of the Company. The Company, its officers and directors and Nashua
have agreed that, for a period of 180 days after the date of this Prospectus,
without the prior written consent of the Representative, they will not offer,
sell, or otherwise dispose of any Common Stock or securities convertible or
exchangeable into, or exercisable for, Common Stock, subject to certain
exceptions. The shares of Common Stock held by Nashua have been pledged to
secure certain indebtedness of Nashua to financial institutions. The shares held
by Nashua after this offering will continue to be pledged to such financial
institutions, which have agreed to be bound by the foregoing lockup agreement.
However, the Representative may in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to such lockup
agreements. Following expiration of such 180-day period, however, Nashua will,
under a Registration Rights Agreement with the Company, have the right to
require the Company to register for sale under the Securities Act any or all of
the shares of Common Stock held by Nashua, subject to certain restrictions. See
"Information Concerning Nashua and its Relationship with the
Company -- Registration Rights Agreement" and "Shares Eligible for Future Sale."
Because there has been no public market for the shares of Common Stock, the
Company is unable to predict the effect, if any, that future sales of shares, or
the availability of shares for future sale, will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock and could impair the Company's
future ability to obtain capital through an offering of equity securities.
11
12
Immediate and Substantial Dilution. Investors purchasing shares of Common
Stock in this offering will be subject to immediate dilution in net tangible
book value per share of $10.34. See "Dilution."
No Dividends. The Company intends to retain all available funds for use in
the operation and expansion of its business and therefore does not anticipate
that any cash dividends will be declared or paid in the foreseeable future.
Moreover, payment of dividends may also be limited by the terms of future debt
agreements. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Effect of Anti-takeover Provisions. Certain provisions of the Company's
Amended and Restated Certificate of Incorporation and By-laws could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that investors might be willing to pay in
the future for the Common Stock. These provisions require that the Company have
a Board of Directors comprised of three classes of directors with staggered
terms of office, provide for the issuance of "blank check" preferred stock by
the Board of Directors without stockholder approval, require super-majority
approval to amend certain provisions in the Company's Certificate of
Incorporation and By-laws, and impose various procedural and other requirements
that could make it more difficult for stockholders to effect certain corporate
actions. See "Description of Capital Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,615,000 shares of
Common Stock offered by the Company pursuant to this offering are estimated to
be approximately $19.5 million, after deducting the underwriting discount.
The Company plans to use approximately $9.0 to $12.0 million of the
proceeds of this offering to build, purchase or lease the New Facility and its
accompanying equipment. See "Risk Factors -- Dependence on New Manufacturing
Facility." In addition, approximately $1.2 million of the proceeds of this
offering will be used to pay principal and accrued interest under the Second
Nashua Note. The Company expects to enter into a secured revolving bank credit
facility. Assuming that such credit facility is established, the Company expects
to apply a portion of the proceeds from this offering to prepay in full the
First Nashua Note. Any balance of the net proceeds is expected to be used for
capital equipment for its Champaign, Illinois facility, working capital and for
other general corporate purposes. In addition, a portion of the net proceeds may
also be used for acquisitions of complementary businesses, products or
technologies. The Company has no commitments or agreements with respect to any
such acquisition transactions as of the date of this Prospectus, and is not
currently engaged in any acquisition discussions. Pending such uses, the Company
intends to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities. The Company will not receive any
proceeds from the sale of Common Stock by Nashua.
The net proceeds to Nashua from the sale of the 2,225,000 shares of Common
Stock offered by Nashua pursuant to this offering are estimated to be
approximately $25.9 million ($32.9 million if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discount and the
estimated expenses of the offering payable by Nashua. Nashua plans to use
substantially all of the net proceeds of this offering to reduce its
indebtedness outstanding under a credit agreement between Nashua and Chemical
Bank, individually and as agent for The First National Bank of Boston and Bank
of Montreal, and to prepay a portion of its senior notes held by Prudential
Capital Corporation.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock, and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. Any payment of dividends in the future
will depend upon the financial condition, capital requirements and earnings of
the Company and such other factors as the Board of Directors may deem relevant.
Payment of dividends may also be limited by the terms of future debt agreements,
including the contemplated new credit facility. In 1996, the Company declared
dividends to Nashua distributed in the form of the Nashua Notes.
12
13
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 29, 1996 as adjusted to reflect the sale of 1,615,000 shares of Common
Stock offered by the Company hereby, after deducting the underwriting discount,
and the use of the net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with the Financial Statements, including the Notes
thereto, of the Company appearing elsewhere in the Prospectus.
MARCH 29, 1996
--------------------------
ACTUAL AS ADJUSTED
------- --------------
(DOLLARS IN THOUSANDS)
Short-term debt -- Second Nashua Note(1)............................ $ 1,142 --
======= =======
First Nashua Note(1)................................................ $10,000 $ 10,000
Stockholders' equity:
Preferred Stock, par value $.01 per share, 100,000 shares
authorized, none issued and as adjusted........................ -- --
Common Stock, par value $.01 per share, 20,000,000 shares
authorized; 5,400,000 shares issued and outstanding; 7,016,540
shares issued and outstanding as adjusted(2)................... 54 70
Additional paid in capital........................................ (890) 18,619
Retained earnings................................................. -- --
------- -------
Total stockholders' equity (deficit)...................... (836) 18,689
------- -------
Total capitalization.................................... $ 9,164 $ 28,689
======= =======
- ---------------
(1) See Note 14 of Notes to the Financial Statements.
(2) Excludes 699,960 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan, of which options for 422,680 shares of
Common Stock have been granted by the Company to certain employees and
directors effective upon completion of this offering, at an exercise price
per share equal to the initial public offering price. Includes 1,540 shares
of Common Stock granted effective upon completion of this offering. See
"Management -- 1996 Stock Incentive Plan."
13
14
DILUTION
The net tangible book value (deficit) of the Company as of March 29, 1996
was $(836,000), or $(0.15) per share of Common Stock. Net tangible book value
(deficit) per share is determined by dividing the total number of shares of
Common Stock outstanding into the net tangible book value of the Company (total
tangible assets less total liabilities). After giving effect to the sale of
1,615,000 shares of Common Stock offered by the Company hereby at the initial
public offering price of $13.00 per share, after deducting the underwriting
discount, the Company's net tangible book value as of March 29, 1996 would have
been $18.7 million or $2.66 per share. This represents an immediate dilution of
$10.34 per share to investors purchasing shares in this offering. The following
table illustrates the per share dilution:
Initial public offering price per share............................... $13.00
Net tangible book value (deficit) per share before the
offering........................................................ $(0.15)
Increase per share attributable to new investors................. 2.81
------
Pro forma net tangible book value per share after the offering........ 2.66
------
Dilution per share to new investors(1)................................ $10.34
======
- ---------------
(1) The computations in the table set forth above exclude 699,960 shares of
Common Stock reserved for issuance pursuant to employee stock-based benefit
plans and includes 1,540 shares of Common Stock granted effective upon
completion of this offering. See "Management -- 1996 Stock Incentive Plan."
Effective upon completion of this offering, the Company has granted certain
employees and directors options to purchase 422,680 of these reserved shares
at an exercise price per share equal to the initial public offering price.
14
15
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
Statements of Operations for the years ended December 31, 1993, 1994 and 1995
and with respect to the Company's Balance Sheets at December 31, 1994 and 1995
are derived from the Financial Statements of the Company that have been audited
by Price Waterhouse LLP, independent accountants, and appear elsewhere in this
Prospectus. Statements of Operations data for the years ended December 31, 1991
and 1992 and three months ended March 31, 1995 and March 29, 1996 and Balance
Sheet data at December 31, 1991, 1992 and 1993 and March 31, 1995 and March 29,
1996 are derived from unaudited financial statements of the Company not included
herein. The unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments which the Company considers necessary for
the fair presentation of its financial position and the results of its
operations for these periods. The unaudited pro forma financial information of
the Company gives pro forma effect to the issuance of the Nashua Notes and
certain other adjustments (as applicable) as if they had occurred as of January
1, 1995 for statement of operations purposes. The unaudited pro forma financial
information does not necessarily reflect the results of operations that would
have existed had the Company been an independent public company. The data set
forth below should be read in conjunction with the Financial Statements, the
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------------ ---------------------
PRO FORMA MARCH 31, MARCH 29,
1991 1992 1993 1994 1995 1995(1) 1995 1996
------- ------- ------- ------- ------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales....................... $10,557 $16,542 $14,612 $14,553 $28,175 $ 28,175 $ 5,028 $11,774
Cost of sales................... 11,172 13,544 12,306 12,995 19,668 19,668 3,880 7,098
------- ------- ------- ------- ------- -------- ------- -------
Gross profit.................. (615) 2,998 2,306 1,558 8,507 8,507 1,148 4,676
Selling, general &
administrative expenses....... 1,384 1,321 1,651 1,731 2,537 3,510 508 1,476
------- ------- ------- ------- ------- -------- ------- -------
Operating income (loss)....... (1,999) 1,677 655 (173) 5,970 4,997 640 3,200
Interest expense................ 141 89 94 115 316 1,129 84 120
------- ------- ------- ------- ------- -------- ------- -------
Income (loss) before provision
(benefit) for income
taxes....................... (2,140) 1,588 561 (288) 5,654 3,868 556 3,080
Provision (benefit) for income
taxes......................... (810) 612 222 (105) 2,210 1,512 218 1,232
------- ------- ------- ------- ------- -------- ------- -------
Net income (loss)............... $(1,330) $ 976 $ 339 $ (183) $ 3,444 $ 2,356 $ 338 $ 1,848
======= ======= ======= ======= ======= ======== ======= =======
Net income per share............ $ 0.44 $ 0.34
======== =======
Shares outstanding(2)........... 5,400 5,400
DECEMBER 31,
----------------------------------------------- MARCH 31, MARCH 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- --------- ---------
BALANCE SHEET DATA:
Working capital................. $ 517 $ (139) $ (27) $ 2,645 $ 3,436 $ 2,833 $ 2,821
Total assets.................... 4,127 3,428 4,629 7,546 11,874 7,830 15,492
Short-term debt................. 18 21 23 26 -- 26 1,142
Long-term debt.................. 386 365 342 316 -- 310 10,000
Stockholder's equity
(deficit)(3).................. 2,958 1,987 3,182 6,121 8,458 6,117 (836)
- ---------------
(1) The pro forma statement of operations data presents the results of the
Company after giving effect to the following, as if each had occurred as of
January 1, 1996: (i) interest expense of $1.1 million (less $304,000
allocated interest expense to the Company) related to dividends to Nashua in
the form of the Nashua Notes in the aggregate original principal amount of
approximately $11.1 million; (ii) the elimination of a $227,000 corporate
charge paid to Nashua; and (iii) the inclusion of $1.2 million in estimated
selling, general and administrative expenses that would have been incurred
if the Company were an independent public company.
(2) Reflects shares outstanding as of December 31, 1995, giving effect to a
stock split. See Notes 11 and 14 of Notes to the Financial Statements.
(3) Represents parent company investment at December 31, 1991, 1992, 1993, 1994
and 1995 and March 31, 1995 and stockholders' equity (deficit) at March 29,
1996.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Financial Data and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus.
OVERVIEW
The Company manufactures precision-machined, aluminum disk substrates,
which are the metallic platforms of magnetic thin film disks used in the hard
disk drives of portable and desktop computers, network servers, add-on storage
devices and storage upgrades. The Company's manufacturing and engineering
expertise, together with its proprietary manufacturing processes and equipment,
enables it to supply customers with high product volumes and consistent quality
while meeting increasingly stringent product tolerances. The Company also uses
its core competencies in precision machining to produce OPC drum substrates for
laser printer cartridges and photocopiers.
The Company was acquired by Nashua in 1986 to provide aluminum substrates
to Nashua's oxide disk operations. As the market for oxide disks declined,
Nashua purchased a thin film disk manufacturing business in 1987, after which
the Company's production capabilities were transferred from supplying the oxide
disk operation to supplying the thin film disk business. In May 1994, Nashua
sold its thin film disk manufacturing business as part of an overall
restructuring. That thin film disk manufacturing business, renamed StorMedia, is
a significant customer of the Company, accounting for approximately 47% of net
disk sales in 1995.
Nashua's sale of that business in May 1994 transformed the Company from a
captive integrated supplier to Nashua's thin film disk business to an
independent manufacturer of aluminum disk substrates. The transition in part
resulted from reduced demand by StorMedia, which eliminated its sole supplier
relationship with the Company by shifting a significant portion of its demand to
a competitor of the Company. As a result, in 1994 the Company reduced its
operations significantly to match the reduced levels of demand and began to
actively explore new customer and product opportunities.
The Company has increased monthly unit production of aluminum disk
substrates from March 1994 to March 1996 by approximately 220%. This increase is
the result of moving operations to seven days, three shifts per day from five
days, three shifts per day, the addition of manufacturing cells, equipment
redesign to increase throughput and other efficiency improvements. These
production increases have lowered unit manufacturing costs by spreading fixed
costs over higher sales volumes. In addition, the Company continues to focus on
improving its manufacturing processes to achieve lower unit costs through
productivity gains.
Future growth in the Company's net sales requires the successful expansion
by the Company of its manufacturing capacity. In 1996, the Company plans to add
manufacturing cells to use the remaining available manufacturing space and
further increase production efficiency at its Champaign, Illinois facility. The
Company plans to further expand by adding the New Facility in central Illinois.
The Company expects to bring the New Facility on line in stages beginning in
mid-1997 and that the production from the New Facility may lower gross profits
as a percentage of net sales, primarily because of higher overhead and other
expenses, including depreciation. Manufacturing and other problems which may
occur in connection with the commencement and expansion of operations in a new
facility could adversely affect the Company's operating results. See "Risk
Factors -- Dependence on New Manufacturing Facility," and "-- Future Capital
Needs."
The Company's gross margins have fluctuated and are expected to continue to
fluctuate based upon a variety of factors, such as, among other things, the
level of utilization of the Company's production capacity, changes in product
mix, average selling prices, product demand or manufacturing yields, increases
in production and engineering costs associated with initial production of
products, changes in the cost of or limitations on availability of materials and
labor shortages. Generally, new products have higher average selling prices and,
assuming similar yields, higher gross margins than more mature products.
Therefore, the Company's ability to introduce new products on a timely basis is
an important factor in its continued success. Manufacturing yields and
production capacity utilization also impact the Company's gross margins. New
products tend to have lower manufacturing yields and usually are initially
produced in lower quantities than
16
17
more mature products. Manufacturing yields generally improve as the product
matures and production volumes increase. Manufacturing yields also vary
depending on the complexity and uniqueness of product specifications, which are
subject to customer changes. Because the aluminum disk substrate and the OPC
drum businesses are capital intensive and require a high level of fixed costs,
gross margins are sensitive to changes in volume. Assuming fixed product prices,
small variations in yields and productivity generally have a significant impact
on gross margins. The Company's business is also characterized by orders and
shipment schedules which typically can be canceled, modified or rescheduled
generally without penalty to the customer. Due to the absence of a substantial
noncancelable backlog, the Company typically plans its production and inventory
based on short-term forecasts of customer demands, which can fluctuate
substantially. The Company's cost of sales includes direct labor, supporting
personnel, raw materials and supplies. See "Risk Factors -- Technological
Change; Reliance on New Products," and "-- Absence of Long-Term Purchase
Commitments."
The Company's research, development and engineering is a continuous
improvement process that begins with manufacturing employees initiating,
developing and implementing process changes on a trial basis to test their
potential under controlled circumstances. The Company's research, development
and engineering costs, which are included within selling, general and
administrative expenses in the Financial Statements, totalled $813,000,
$787,000, $809,000, $211,000 and $362,000 for the years ended December 31, 1993,
1994 and 1995, and the three months ended March 31, 1995 and March 29, 1996,
respectively. The research, development and engineering costs (other than a
portion of Nashua's research and development costs allocated to the Company)
capture only those personnel, primarily engineers, who direct process
improvement activities. Consequently, the Company's focus on the continuous
improvement process, which is an important part of the Company's success, is
also reflected in cost of sales and selling, general and administrative expenses
in addition to the research, development and engineering expenses described
above. See "Business -- Manufacturing Processes and Proprietary
Equipment -- Employee Participation" and Notes 2 and 3 of Notes to the Financial
Statements.
Corporate charges to the Company by Nashua are included in selling, general
and administrative expenses in the Company's Financial Statements. In 1993, 1994
and 1995, corporate charges to the Company by Nashua were approximately $68,000,
$88,000, $227,000, $66,000 and $102,000 for the years ended December 31, 1993,
1994 and 1995, and the three months ended March 31, 1995 and March 29, 1996,
respectively. Upon consummation of this offering, an Intercompany Agreement will
be in effect under which Nashua will, to the extent requested by the Company,
provide the Company with certain services at an intercompany charge based on
Nashua's actual costs in providing such services, as reasonably determined by
Nashua. See "Information Concerning Nashua and its Relationship with the
Company."
The Company's net income in 1996 will include the effect of the Nashua
Notes. The First Nashua Note was issued as of March 1, 1996 in the original
principal amount of $10.0 million. The annual interest rate on the First Nashua
Note is 7.32% until September 30, 1996, after which the interest rate will
increase to a rate equal to prime plus 2.5% (10.75% at April 1, 1996). In
addition, the Company can take advantage of certain prepayment discounts through
August 31, 1996. The Company expects to enter into a secured revolving bank
credit facility which would bear interest at market rates. Assuming that such
credit facility is established, the Company expects to apply a portion of the
proceeds from this offering to prepay in full the First Nashua Note. The Second
Nashua Note was issued as of March 29, 1996 in the original principal amount of
approximately $1.1 million and bears interest at the annual rate of 7.32%. The
Second Nashua Note does not contain any prepayment discounts. See "Information
Concerning Nashua and its Relationship with the Company -- Nashua Notes."
17
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statements of
operations data expressed as a percentage of net sales. The trends illustrated
in the following table may not be indicative of future results.
THREE MONTHS ENDED
-------------------
YEARS ENDED DECEMBER 31, MAR. MAR.
----------------------------- 31, 29,
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 84.2 89.3 69.8 77.2 60.3
----- ----- ----- ----- -----
Gross profit.......................... 15.8 10.7 30.2 22.8 39.7
Selling, general & administrative
expenses.............................. 11.3 11.9 9.0 10.1 12.5
----- ----- ----- ----- -----
Operating income (loss)............... 4.5 (1.2) 21.2 12.7 27.2
Interest expense........................ 0.7 0.8 1.1 1.6 1.0
----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes......... 3.8 (2.0) 20.1 11.1 26.2
Provision (benefit) for income taxes.... 1.5 (0.7) 7.9 4.4 10.5
----- ----- ----- ----- -----
Net income (loss)....................... 2.3% (1.3)% 12.2% 6.7% 15.7%
===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 31, 1995
Net Sales. Net sales increased $6.7 million, or 134.2%, to $11.8 million
in the three months ended March 29, 1996 from $5.0 million in the three months
ended March 31, 1995. This growth is attributable to growth in the market for
aluminum disk substrates, growth of net sales to its existing customers and the
addition of a new customer in 1996. The increase in net sales consisted
primarily of growth in unit volume, and, to a lesser extent, higher average
selling prices. Improved utilization of existing production capacity,
productivity gains and additional capacity attributable to capital expenditures
contributed to growth in unit production. The Company's growth in net sales in
the first quarter of 1996 reflected a shift away from commodity-level aluminum
disk substrates with lower average selling prices to high-end products requiring
more stringent product tolerances and higher average selling prices.
Gross Profit. Gross profit increased $3.5 million to $4.7 million in the
three months ended March 29, 1996 from $1.1 million in the three months ended
March 31, 1995. Gross profit as a percentage of net sales increased to 39.7% in
the first quarter of 1996 compared to 22.8% in the first quarter of 1995. The
increase in gross profit was due to increases in volume, improved utilization of
existing manufacturing capacity and the spreading of fixed costs over a
substantially higher sales volume. Gross profit also increased from higher
average selling prices of the Company's products in the first quarter of 1996
compared to the first quarter of 1995.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased $968,000, or 190.6%, to $1.5 million in the
three months ended March 29, 1996 from $508,000 in the three months ended March
31, 1995. This increase was primarily due to the costs of additional personnel
to support the Company's growth, including the costs of hiring two of the
Company's executive officers and associated expenses, the costs associated with
the Company becoming a stand-alone company, and increased profit-sharing and
performance-based bonus expenses. Selling, general and administrative expenses
as a percentage of sales increased to 12.5% in the first quarter of 1996
compared to 10.1% in the first quarter of 1995.
Interest Expense. Interest expense consists of interest expense allocation
to the Company by Nashua and $62,000 of interest on the First Nashua Note for
March 1996. Interest expense increased $36,000 to $120,000 in the three months
ended March 29, 1996 from $84,000 in the three months ended March 31, 1995. See
Note 3 of Notes to the Financial Statements.
Provision for Income Taxes. Provision for income taxes increased to $1.2
million in the three months ended March 29, 1996 from $218,000 in the three
months ended March 31, 1995. The Company's effective tax rate was 40.0% in the
first quarter of 1996 compared to 39.2% in the first quarter of 1995.
18
19
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Net Sales. Net sales increased $13.6 million, or 93.6%, to $28.2 million
in 1995 from $14.6 million in 1994. This growth is attributable to growth in the
market for aluminum disk substrates, the Company's emergence in May 1994 from
its primarily captive integrated supplier relationship to become an independent
supplier of aluminum disk substrates, and the absence in 1995 of certain
disruptions in the Company's business in 1994. As a result, the Company was able
to grow its net sales significantly to other customers, such as HMT and Conner.
The increase in net sales was primarily in the Company's disk substrate
business, which represented approximately $13.1 million of the increase. This
increase resulted primarily from growth in unit volume and, to a lesser extent,
higher average selling prices. Improved utilization of existing production
capacity, productivity gains and additional capacity attributable to capital
expenditures contributed to growth in unit production. The Company shifted its
sales mix in 1995 away from commodity-level aluminum disk substrates with lower
average selling prices to high-end products requiring more stringent product
tolerances and higher average selling prices. The remainder of the net sales
increase in 1995 resulted from increased sales of the Company's aluminum drum
substrates, which had higher unit volumes and higher average selling prices.
Gross Profit. Gross profit increased $6.9 million to $8.5 million in 1995
from $1.6 million in 1994, which had been adversely affected, as discussed
below. Gross profit as a percentage of net sales increased to 30.2% in 1995
compared to the depressed level of 10.7% in 1994. The increase in gross profit
was partly due to higher net sales while the gross margin increase was due to
increases in volume, improved utilization of existing manufacturing capacity and
the spreading of fixed costs over a substantially higher sales volume. Gross
profit also increased from higher average selling prices of the Company's
products in 1995.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased $806,000, or 46.6%, to $2.5 million in 1995
from $1.7 million in 1994. This increase was primarily due to increased
profit-sharing and performance-based bonus expenses, associated costs of
increased personnel to support the Company's growth, increased research,
development and engineering costs, and an increase in the overhead allocated to
the Company by Nashua relating in part to the increased sales of the Company.
Upon consummation of this offering, Nashua and the Company will enter into an
Intercompany Agreement for services. Selling, general and administrative
expenses as a percentage of net sales decreased to 9.0% in 1995 compared to
11.9% in 1994. This decrease was primarily due to expenses being spread over a
substantially higher sales volume. See "Information Concerning Nashua and its
Relationship with the Company -- Inter-company Agreement."
Interest Expense. Interest expense consists primarily of interest expense
allocation to the Company by Nashua. Interest expense increased $201,000 to
$316,000 in 1995 from $115,000 in 1994. See Note 3 of Notes to the Financial
Statements.
Provision (Benefit) for Income Taxes. Provision for income taxes increased
to $2.2 million in 1995 from a benefit of $105,000 in 1994. The Company's
effective tax rate was 39.1% in 1995 compared to 36.5% in 1994, primarily
because of a decrease in nondeductible items as a percentage of income (loss)
before provision (benefit) for income taxes.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Net Sales. Net sales remained relatively flat at $14.6 million in 1994
compared to 1993. The Company emerged in May 1994 from being primarily a captive
integrated supplier to Nashua's thin film disk business (now StorMedia) to
becoming an independent manufacturer of aluminum disk substrates. As a result,
StorMedia shifted a significant portion of its demand from the Company to a
competitor to eliminate its sole supplier relationship with the Company. This
decrease in demand from StorMedia was partially offset by increased sales to
HMT, a customer to which the Company initiated sales in 1993. The Company's
overall unit volume in its disk substrate business decreased and was partially
offset by a slight increase in average selling prices. The decrease in net sales
from the Company's disk substrate business was also partially offset by
increased sales of its drum substrates, which had higher unit volumes partially
offset by lower average selling prices.
19
20
Gross Profit. Gross profit decreased $748,000, or 32.4%, to $1.6 million
in 1994 from $2.3 million in 1993. Gross profit as a percentage of net sales
decreased to 10.7% in 1994 compared to 15.8% in 1993. These decreases were
primarily due to severance costs from the Company's reduction in manufacturing
personnel as the Company reacted to a shift in anticipated demand from
StorMedia. In addition, the Company had increased depreciation and a write-off
of certain inventories related to products not meeting customer specifications.
Moreover, lower unit volumes resulted in decreased manufacturing efficiencies.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses remained relatively flat at approximately $1.7 million
in 1994 and 1993, representing 11.9% and 11.3% of net sales in such years,
respectively. The Company reduced its profit sharing expense as a result of
lower profitability and had lower research, development and engineering
expenses. These decreases were offset primarily by increased corporate overhead
allocations to the Company by Nashua and certain severance costs. See
"Information Concerning Nashua and its Relationship with the Company --
Intercompany Agreement."
Provision (Benefit) for Income Taxes. Benefit for income taxes was
$105,000 in 1994 compared to a provision for income taxes of $222,000 in 1993.
The Company's effective tax rate was 36.5% in 1994 compared to 39.6% in 1993
primarily because of an increase in nondeductible items, as a percentage of
income (loss) before provision (benefit) for income taxes.
QUARTERLY RESULTS
The Company's operating results may be subject to significant quarterly
fluctuations. As a result, the Company's operating results in any quarter may
not be indicative of its future performance. Factors affecting quarterly
operating results include: market demand for new and existing products; timing
of significant orders; changes in pricing by the Company or its competitors;
order cancellations, modifications and quantity adjustments and shipment
reschedulings; changes in product mix; manufacturing yields and the level of
utilization of the Company's production capacity. The impact of these and other
factors on the Company's net sales and operating results in any future period
cannot be forecasted with certainty. The Company's expense levels are based, in
part, on its expectations as to future sales. Because the Company's sales are
generally made pursuant to purchase orders that are subject to cancellation,
modification, quantity reduction or rescheduling generally without penalty, the
Company's backlog as of any particular date may not be indicative of sales for
any future period, and such changes could cause the Company's net sales to fall
below expected levels. If sales levels are below expectations, operating results
are likely to be materially adversely affected. Furthermore, net income may be
disproportionately affected by a reduction in net sales because a
proportionately smaller amount of the Company's expenses varies with its sales.
20
21
The following table presents summary unaudited quarterly operating results
for the Company for each of the last nine fiscal quarters. In the opinion of the
Company, this information has been prepared on the same basis as the Financial
Statements appearing elsewhere in this Prospectus and reflects all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of results of operations for those periods. This quarterly
financial data should be read in conjunction with the Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus. The results for any
quarter are not necessarily indicative of the results of any future period. The
Company has not experienced material seasonality in its results.
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
APR. 2, JULY 1, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 31, MAR. 29
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Net sales..................... $3,439 $3,193 $3,362 $4,559 $5,028 $5,890 $7,232 $10,025 $11,774
Gross profit.................. 269 234 195 860 1,148 1,607 2,131 3,621 4,676
Operating income (loss)....... (194) (226) (200) 447 640 1,123 1,478 2,729 3,200
Net income (loss)............. (142) (162) (138) 259 338 636 854 1,616 1,848
The following table sets forth certain unaudited quarterly results for each
of the last nine fiscal quarters expressed as a percentage of net sales:
QUARTERS ENDED
--------------------------------------------------------------------------------------------------
APR. 2, JULY 1, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 31, MAR. 29
1994 1994 1994 1994 1995 1995 1995 1995 1996
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 % 100.0%
Gross profit.................. 7.8 7.3 5.8 18.9 22.8 27.3 29.5 36.1 39.7
Operating income (loss)....... (5.6) (7.1) (6.0) 9.8 12.7 19.1 20.4 27.2 27.2
Net income (loss)............. (4.1) (5.1) (4.1) 5.7 6.7 10.8 11.8 16.1 15.7
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs and capital expenditures in order to support the Company's sales growth.
During the periods presented, these capital requirements have generally been
satisfied by cash flows from operations and by net funds provided in 1993 and
1994 by Nashua.
Nashua historically has performed cash management services for the Company.
The Company's cash flow is directed to Nashua, and Nashua in turn provides cash
to the Company to fund operating expenses and capital expenditures.
Simultaneously with the closing of this offering, this arrangement between the
companies will cease. Promptly thereafter, the Company and Nashua will determine
the respective cash flows from the Company to Nashua, and from Nashua to the
Company, during the period from January 1, 1996 through the closing date, and
will promptly settle any net amount due from one to the other.
Net cash provided by (used in) operating activities was $1.0 million,
$(2.0) million and $4.0 million in 1993, 1994 and 1995, respectively, and
$414,000 and $2.2 million in the three months ended March 31, 1995 and March 29,
1996, respectively. The increase in cash provided by operating activities from
1994 to 1995 and from the first quarter of 1995 to the first quarter of 1996 was
primarily due to increases in net income and accounts payable as the Company
experienced strong growth in net sales. The increase in accounts payable from
December 31, 1994 to December 31, 1995 consisted of increased trade payables
associated with the growth in the business and capital projects undertaken by
the Company in connection with its expansion. The increase in accounts payable
from the first quarter of 1995 to the first quarter of 1996 primarily resulted
from the Company foregoing certain early payment discounts on trade payables
pursuant to a change in Nashua's cash management practices.
Net cash used in investing activities was $1.9 million, $1.1 million and
$2.5 million in 1993, 1994 and 1995, respectively, and $61,000 and $1.7 million
in the first quarter of 1995 and the first quarter of 1996, respectively. Cash
used in investing activities was primarily capital expenditures related to
modifications that the Company made to its existing equipment and purchases of
new equipment to increase manufacturing and efficiency.
21
22
Net cash provided by (used in) financing activities was $0.8 million, $3.1
million and $(1.4) million in 1993, 1994 and 1995, respectively, and $(347,000)
and $(548,000) in the first quarter of 1995 and the first quarter of 1996,
respectively. Net cash provided by financing activities increased in 1994 due to
investments made by Nashua to fund the Company's capital expenditures and
increased accounts receivable. The increase in cash used in financing activities
in 1995 resulted from net funds provided to Nashua and the repayment of
indebtedness.
As of March 1, 1996, the Company distributed a dividend to Nashua in the
form of the First Nashua Note in the principal amount of $10.0 million. The
First Nashua Note bears interest at the annual rate of 7.32% from March 1, 1996
to September 30, 1996. Thereafter, until February 28, 1998, when the entire
principal amount of the First Nashua Note becomes due, interest accrues at an
annual rate equal to prime plus 2.5%. The First Nashua Note may be prepaid at
any time without penalty. If the First Nashua Note is paid in full on or before
May 31, 1996, the lesser of $183,000 or all interest accrued as of the date of
payment will be forgiven. Thereafter, the amount of prepayment discount on the
First Nashua Note declines each month through August 31, 1996. Interest on the
First Nashua Note that accrues from March 1, 1996 through May 31, 1996 will not
be due and payable until May 31, 1996. Thereafter, interest is payable monthly.
As of March 29, 1996, the Company distributed another dividend to Nashua in
the form of the Second Nashua Note in the principal amount of approximately $1.1
million. The Second Nashua Note bears interest at the annual rate of 7.32% and
matures upon the earlier of the closing of this offering or July 31, 1996.
Interest on the Second Nashua Note will not be due and payable until the
maturity date of the indebtedness. The Second Nashua Note is expected to be paid
from the proceeds of this offering.
Subsequent to this offering, the Company's primary cash requirements will
continue to be the funding of working capital needs and increased manufacturing
requirements, as well as debt service requirements on the First Nashua Note. The
Company has budgeted $6.3 million to be used for capital expenditures in 1996.
This will be primarily used to increase production capacity and to establish a
specialized machining center for the Company to conduct research and development
in the Company's existing facility in Champaign, Illinois. Working capital needs
are expected to be funded primarily by cash flow from operations. The Company
estimates that the New Facility will cost between $9.0 million and $12.0 million
and will be funded primarily from the Company's net proceeds of the offering. In
addition, the Company plans to use the remaining proceeds from the offering for
other general corporate purposes. The Company expects to enter into a secured
revolving bank credit facility. Assuming that such credit facility is
established, the Company expects to apply a portion of the proceeds from this
offering to prepay in full the First Nashua Note.
INFLATION
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
22
23
BUSINESS
Cerion manufactures precision-machined, aluminum disk substrates, which are
the metallic platforms of magnetic thin film disks used in the hard disk drives
of portable and desktop computers, network servers, add-on storage devices and
storage upgrades. The Company's manufacturing and engineering expertise,
together with its proprietary manufacturing processes and equipment, enable it
to supply customers with high product volumes and consistent quality while
meeting increasingly stringent product tolerances. The Company believes that its
ability to develop and manufacture high quality aluminum substrates helps thin
film disk manufacturers meet the rapidly evolving technological requirements of
the hard disk drive market. The Company also uses its core competencies in
precision machining to produce aluminum OPC drum substrates for laser printer
cartridges.
The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua's
computer products divisions. Since the sale by Nashua of those divisions in
1994, the Company has expanded its customer and product base in response to
growth in market demand for substrates. The Company's net sales increased from
$14.6 million in 1994 to $28.2 million in 1995, a 93.6% increase. In the three
months ended March 29, 1996, the Company's net sales were $11.8 million,
compared to $5.0 million for the three months ended March 31, 1995. This growth,
combined with the efficiencies gained from the Company's continued improvements
in its proprietary manufacturing processes and equipment, has resulted in
reduced unit manufacturing costs and increased operating margins. These factors
led to the Company achieving operating income of approximately $6.0 million, or
21.2% of net sales, in 1995, and $3.2 million, or 27.2% of net sales, in the
three months ended March 29, 1996.
INDUSTRY BACKGROUND
The introduction of increasingly powerful microprocessors and more memory
intensive software, combined with the development and growth of multimedia
computing applications and Internet usage, have stimulated demand for PCs in
both the home and business markets. In addition, the applications currently
being developed for PCs require greater storage capacity, sharply increasing the
demand for high-capacity disk drives. According to International Data
Corporation, mean storage capacity per desktop disk drive has increased from 170
megabytes in 1993 to 540 megabytes in 1995. The market demand for aluminum
substrates used for thin film disks in disk drives has been growing rapidly,
stimulated by demand for PCs, storage upgrades and add-ons to existing computers
and the growing use of sophisticated network servers. According to TrendFOCUS,
an industry publication, the number of thin film disks produced worldwide in
1993, 1994 and 1995 was 134 million, 186 million and 256 million, respectively,
and is projected to reach 336 million in 1996, which would represent a compound
annual growth rate of approximately 36% over this four year period.
Although the average storage capacity per disk drive has increased
significantly, the average number of disks per drive has remained relatively
constant, primarily as a result of significant advances in technology and in the
storage capacity of thin film disks. The Company believes that success in the
disk drive industry will continue to depend on the ability of the disk drive
manufacturer, together with its suppliers of critical components, such as thin
film disks and disk substrates, to keep pace with these advances. As a result,
thin film disk manufacturers are likely to continue to require more stringent
smoothness and flatness tolerances and higher quality levels from their aluminum
disk substrate suppliers.
A thin film disk is composed of a substrate, generally aluminum, which must
be flat, smooth and free of surface defects. This base substrate is then coated
with very thin layers of nickel plating and magnetic material, which creates the
disk's magnetic properties. Minor deviations in the tolerance or qualities of
the aluminum substrate can cause significant numbers of disks to be rejected,
causing significant yield loss to thin film disk manufacturers.
The increased demand for high performance disk drives has resulted in
increased pressures for aluminum substrate manufacturers to tighten their
specifications for smoothness, flatness and uniformity. These qualities
23
24
contribute to improved disk performance in the following ways: (i) the flatter
the disk, the less risk that the recording head will "crash" against the surface
of the disk, thus increasing the performance and reliability of the finished
product; (ii) with a smoother original substrate, thin film disk manufacturers
are able to spend less time and use less material on the smoothing of the nickel
plating layer that is applied on the aluminum substrate, resulting in cost
efficiencies; and (iii) a smoother disk facilitates storage of information at
higher densities, thus increasing the disk's memory capability.
THE CERION STRATEGY
Cerion focuses on providing value-added engineering and technological
solutions that meet the demands of markets requiring precision finishing of
aluminum. The Company's strategy is to combine engineering expertise, innovative
manufacturing techniques and proprietary equipment to provide a high volume of
advanced, precision-machined products of consistent, high quality at competitive
prices. The Company's strategy has been heavily influenced by the teachings of
Dr. W. Edwards Deming, a consultant who helped revolutionize quality and
productivity in Japanese industry. Dr. Deming served as a consultant to the
Company from 1986 until his death in 1993, and many of his management principles
have been adopted by the Company.
In 1995, the Company completed its strategy of exiting the production of
lower priced disks meeting less stringent tolerance requirements. The Company
has shifted its aluminum disk substrate manufacturing to the "high end" of the
market, in which products must meet more demanding specifications of flatness,
smoothness and uniformity. The Company seeks to be a supplier to the high end of
the disk market for the following reasons: (i) those customers that demand the
highest quality and most stringent tolerances have the greatest ability to
benefit from the value added by the Company's core competencies -- its
engineering skills, proprietary manufacturing processes and proprietary
equipment; and (ii) the Company believes that, unlike the lower-end, less
exacting segment of the disk market, suppliers in the high end of the market
compete substantially on quality as well as on price, thereby permitting higher
average selling prices.
The key elements of the Company's strategy are as follows:
- - Focus on Development of High-End Products. Cerion increasingly focuses its
development and manufacturing efforts on producing high-end substrates that
consistently meet the most stringent product tolerances demanded by the thin
film disk industry. The Company believes it is a leader in developing new
products exceeding current industry requirements. For example, the Company's
innovations in proprietary processes, such as chemical etching, resulted in
the manufacture of substrates capable of meeting increasingly stringent
tolerance requirements. In addition, Cerion's proprietary grinding technology
has led to the development of the Company's newest product, its FFX Super
Smooth ("FFX") disk, which is substantially smoother than aluminum disk
substrates commercially available. The FFX disk is in qualification stages
with two of the Company's customers. The Company focuses on developing
products ahead of market requirements, increasing the likelihood that the
Company's products will be designed into new disk media for higher-capacity
disk drives.
- - Continue to Improve Proprietary Manufacturing Processes and Production
Equipment. The Company seeks to continue to improve its manufacturing
processes and equipment to increase efficiency and production capacity and to
improve product quality. The Company believes its proprietary equipment
enables Cerion to achieve significant cost savings and reduces the capital
required to expand capacity. In addition, the Company believes that continuing
advances by the Company in these areas has helped the Company to develop
manufacturing expertise that may give it a competitive advantage.
- - Develop Collaborative Relationships with Customers and Suppliers. The
Company's technical collaboration with its customers and suppliers during the
design phase of new thin film disks facilitates customer qualification of its
products and improves the Company's ability to rapidly reach cost-effective,
high-volume manufacturing. By engaging in technical collaboration with its
customers, the Company receives ongoing feedback on the performance of its
aluminum disk substrates, allowing Cerion to provide better products and
customer service. The Company also works with its suppliers to optimize their
products' performance in the Company's manufacturing processes.
24
25
- - Expand Manufacturing Capacity. Consistent with strong industry growth, the
Company believes that potential demand for its aluminum disk substrates may
exceed its current manufacturing capacity. In 1996, the Company plans to add
manufacturing cells to use the remaining available manufacturing space at its
Champaign, Illinois facility and to further increase production efficiency at
this facility. The Company also plans to add the New Facility in 1997 to meet
the increasing demands of its customers while also allowing it to pursue new
customer and product opportunities.
- - Maintain Strict Control of Manufacturing Process. The Company's real-time
statistical monitoring of its manufacturing processes results in greater
product uniformity and higher production yields, and provides its customers
with more detailed statistical information regarding product consistency,
which can improve the customer's own production yields relative to competing
substrates. In addition, product uniformity is an essential factor in the
supplier qualification process of disk drive manufacturers. The Company's
quality system is ISO 9001 registered.
PRODUCTS
The Company currently manufactures products within two categories: aluminum
disk substrates, which represented at least 95% of net sales for the last three
years, and OPC drum substrates. The Company's aluminum disks are the base, or
substrate, for the memory disk in a hard disk drive. The Company's current
aluminum disk substrate products consist of 95mm (3 1/2 inch) and 65mm (2 1/2
inch) diameter disks. The 95mm product, which accounts for the large majority of
the Company's current disk substrate sales, is used primarily in the hard disk
drives of desktop computers, network servers and add-on storage devices. The
65mm diameter product is used primarily in laptop computers. The Company's
aluminum disk substrates have evolved significantly over time. For example, the
Company's 95mm product, which the Company has been selling since 1987 for thin
film disk applications, has been enhanced over time to incorporate greatly
improved characteristics for smoothness, flatness, and dimensional variations.
Most laser printers and certain office copiers contain an organic
photoconductor ("OPC") imaging drum which accepts an electric charge that
attracts toner for transfer to paper. These OPC drums use a precision-machined
aluminum substrate onto which a photo-reactive coating is applied. OPC drums are
incorporated into laser printer cartridges that are consumed during operation
and replaced on a regular basis. The Company produces OPC drum substrates in
30mm and 40mm diameters for use in desktop laser printer cartridges. The Company
is also developing OPC drum substrates and magnetic roller substrates for use in
office copiers and laser printer cartridges, respectively.
The Company currently is exploring other product offerings to expand on its
core product lines. The Company has developed its FFX disk, which is designed to
be a high-end 95mm product and which has only one-quarter of the surface
roughness of the Company's standard product. The Company's FFX disk is in
product qualification stages with two of the Company's customers. In addition,
the Company is investigating application of its precision-machining capabilities
for other products, materials and industries.
MANUFACTURING PROCESSES AND PROPRIETARY EQUIPMENT
The Company's manufacturing methods are derived from careful attention to
the practice of continuous improvement and statistical methods of data analysis.
Together with its engineering expertise and internally developed, proprietary
equipment, the Company believes its manufacturing and processing methods provide
it with lower capital equipment costs relative to certain of its competitors, as
well as superior yields and product quality. In the application of these
processes, the Company has arranged its manufacturing operation in a cellular
manner. The Company staffs each cell with a team of cross-trained employees.
These teams monitor the productivity of their individual cells and are trained
to prevent and, if necessary, correct quality problems within their cells. In
addition, teams are encouraged to suggest process improvements. These individual
manufacturing cells are built around equipment necessary for most process steps,
thus allowing each cell to operate, in many respects, as a mini-factory. This
cellular approach substantially reduces in-process inventory, facilitates more
effective communication and improves both quality and productivity.
25
26
The following diagram summarizes the stages in the Company's aluminum disk
substrate manufacturing process:
STAGE DESCRIPTION
----- -----------
Raw aluminum blanks are received by the Company and
Thickness Sorting sorted by individual thickness to a resolution of .0001
| of an inch.
\ /
Blanks are chemically etched to reduce thickness
Chemical Etching variation and remove the hard oxide layer on the
| surface, making the disks easier to grind.
\ /
Edge and Chamfer The inner and outer diameters of the disks are machined
Machining to exacting tolerances and are finished to specific
| chamfer angles.
\ /
The initial grinding step begins to improve the flatness
Rough Grinding of the disk through application of a grinding stone with
| a relatively large abrasive.
\ /
Annealing The disks are subjected to high temperatures to release
| stresses built up during the preceding machining steps.
\ /
A very fine abrasive grinding stone is applied to the
Final Grinding disk to produce the final surface finish, thickness and
flatness.
Even though there are extensive quality checks throughout the process, some
parameters can be checked only after the final grinding stage. Those parameters
include visual quality, surface finish, thickness, and flatness.
The Company's real-time statistical monitoring of its processes results in
greater product uniformity and higher production yields, and provides its
customers with more detailed statistical information regarding product
consistency. The greater uniformity of the Company's products can improve the
customer's own production yields relative to competing aluminum disk substrates.
Proprietary real-time tracking systems allow the Company to pinpoint where in
the manufacturing process a defect may have occurred, so that any disks affected
may be isolated and removed, and feedback may be provided to the operators in
order to eliminate the source of the defect immediately.
The Company's study of its customers' manufacturing processes has led to
the adoption of certain manufacturing and processing methods that the Company
believes to be unique. For instance, the Company
26
27
has pioneered the use of chemical etching in the manufacture of aluminum disk
substrates. This process was developed in collaboration with the University of
Illinois chemical engineering department and certain of the Company's suppliers.
Today, all of the aluminum disk substrates produced by the Company are
chemically etched.
Proprietary Equipment and Processes
The Company has developed proprietary equipment and processes that allow it
to produce aluminum disk substrates within narrow specifications of smoothness,
flatness and uniformity. For example, the Company has internally developed and
built proprietary grinding machines for its own use, which the Company believes
provide it with both a cost advantage and a superior substrate over that
produced by commercially available grinders. The capital cost of the Company's
custom-built proprietary grinding machine is less than 25% of the list price of
comparable grinders from a leading manufacturer.
The Company's internally developed and manufactured proprietary abrasive
stones used in the grinding process are significantly less expensive than
typical commercially available alternatives. In-house control of grinding stone
fabrication enables the Company to produce superior products with less machining
time and allows for the custom fabrication of grinding stones for specific
products. Custom fabrication of grinding stones has enabled the Company to
pioneer its new FFX product, which has a mirror-like surface with an average
surface roughness of less than 20 angstroms (a unit of length equal to one
ten-millionth of a millimeter), as opposed to the 80 angstrom average of the
current disk substrates sold by the Company.
Employee Participation
The Company believes that a critical component of its program of continuous
process improvements and quality control is the active participation of its
employees in these efforts. Employee teams are aware of production targets and
meet regularly to discuss and evaluate process improvements. As an incentive to
such involvement, the Company in 1995 distributed 4% of its pretax earnings to
its employees (other than executive officers and key employees) as profit
sharing.
To facilitate process improvements, the Company encourages employees to
pursue their own ideas by providing a procedure in which an employee writes a
detailed description of a process improvement that is then reviewed by key
engineering, manufacturing, training, maintenance and safety personnel. If
approved, the Company provides support, such as process or safety engineering,
to the employee, who is then responsible for implementation of his or her
suggestion on a trial basis. At the end of the trial period, the employee
prepares a report, including results and recommendations, and, if the trial has
been successful, a change notification document is issued. Upon approval by key
areas, the change is implemented system-wide. The Company assigns a process
engineer full time to facilitate employee team meetings to review process
improvement issues.
In 1995, the Company conducted approximately 54 such employee-initiated
improvement trials and adopted 38. The following are selected examples of
process improvements generated by such trials since September 1995: an increase
in disk production yields of approximately 1.5 percentage points; a reduction of
production-halting tracking errors from approximately 17 per week to
approximately two per week; and a reduction of machining time at a key
production step by nearly 40%.
The Company places significant emphasis on training and education. The
Company provides a tuition payment benefit available to all employees. In
addition, the Company's hourly pay system works on a pay-for-skills basis.
Employees are certified to pre-set standards in various skills relating to their
job assignments. As the employees earn additional certifications, their pay
increases. Classroom training in statistics, decision-making, business basics,
teamwork and systems-thinking are being added to this skill certification
system. The Company believes these practices foster a Company-wide dedication,
sense of common ownership and increased skills which contribute to higher
product quality and manufacturing yields.
27
28
CUSTOMERS AND MARKETING
Aluminum disk substrates represented over 95% of the Company's sales in
1995. During 1995, the Company shipped aluminum disk substrates to four
companies, StorMedia, HMT, IBM and Conner, representing approximately 47%, 42%,
7% and 4%, respectively, of the Company's net sales of disk substrates. In its
OPC drum substrate product line, the Company shipped products in 1995 to two
companies, Nashua and Xerox Corporation ("Xerox"). The Company's customer base,
and each customer's relative importance, has fluctuated and may continue to do
so. In addition, as is customary in the industry, the Company's sales are
generally made pursuant to purchase orders which are subject to cancellation,
modification or rescheduling generally without penalties and, in the past,
certain orders have been canceled or deferred. See "Risk Factors -- Dependence
on a Small Number of Customers" and "-- Absence of Long-Term Purchase
Commitments."
The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua's
computer products divisions. Since the sale by Nashua of those divisions in
1994, the Company has expanded its customer and product base in response to
growth in market demand for substrates, and it continues its efforts to broaden
its customer base, both in the aluminum disk substrate and OPC drum substrate
markets. Nevertheless, the Company believes that its dependence on a small
number of customers will continue. Consequently, the loss of, or reduction in
demand from, one or more aluminum disk substrate customers through vertical
integration, consolidation, adverse financial circumstances, production
disruptions or otherwise could have a material adverse effect on the Company's
business, results of operations and financial condition. A significant reduction
in shipments to any aluminum disk substrate customer could also have a material
adverse effect on the Company. See "Risk Factors -- Dependence on a Small Number
of Customers."
The Company, like other suppliers to the thin film disk industry, is
required to work closely with thin film disk manufacturers in order to meet
their specifications and to become qualified as a supplier. Qualifying aluminum
disk substrates requires the Company to work extensively with the customer to
meet product specifications. Therefore, customers often require a significant
number of product presentations and demonstrations as well as substantial
interaction with the Company's senior management before making a purchasing
decision. Accordingly, the Company's products typically have a lengthy sales
cycle during which the Company may expend substantial financial resources and
management time and effort with no assurance that a sale will result. See "Risk
Factors -- Lengthy Qualification Process for New Products and Changes in
Manufacturing Processes."
To meet these demands, the Company uses a system of multi-tiered
communication for sales, marketing and customer service. Senior management of
the Company, and production, operation and engineering personnel, directly
market and interact with their counterparts at the Company's customers. The
Company believes that this multi-tiered approach has resulted in strong, active
relationships with both customers and suppliers and has helped the Company
pursue close technical collaboration with its customers during the design phase
of new products and throughout the products' subsequent life cycle. To
supplement its multi-tiered approach, the Company recently created the position
of Customer Service Director, who is responsible for bringing coordination and
timely closure to customer service issues.
Recently the Company hired a Vice President-Marketing to pursue
opportunities outside of existing customer relationships as well as coordinate
marketing efforts to existing customers. The Vice President-Marketing is
expected to initiate and develop contacts with potential customers. As new
customer relationships mature, however, the Company plans to apply its
multi-tiered marketing approach to foster closer ties.
SOURCES OF SUPPLY
The Company relies on Alcoa as its sole source of supply for the aluminum
disk blanks used in producing substrates. The Company also relies on VAW of
America, Inc. ("VAW") as its sole source of supply for the aluminum drum blanks
used in producing OPC drum substrates. A limited number of suppliers provide
certain chemicals used in the Company's manufacturing processes, which chemicals
are often customized to meet the Company's needs. The Company has no long-term
supply agreement with Alcoa, VAW or any of its other suppliers. The Company's
reliance on Alcoa, VAW and its chemical suppliers therefore entails risk. If
28
29
their products were to become unavailable or available in significantly reduced
quantities or increased prices, it would have a significant impact on the
Company's operating results. Locating and qualifying a substitute supplier could
be a time-consuming and uncertain process. Changing suppliers for certain
materials could require that the product be requalified with the customer.
Moreover, a substitute supplier might be reluctant to undertake such a project
without a significant commitment by the Company to higher prices or future
purchases. See "Risk Factors -- Dependence on Suppliers."
The Company believes, however, that the advantages of working closely with
these suppliers may offset the foregoing risks. For example, Alcoa works closely
with the Company to optimize Alcoa's production processes to meet the Company's
specifications.
COMPETITION
The aluminum disk substrate industry and the OPC drum substrate industry
are both characterized by intense competition. The Company believes that the
principal competitive factors affecting these industries are product
availability, quality and price. The Company's primary independent aluminum disk
substrate competitor is Kobe, which the Company believes has production capacity
that is substantially greater than the Company's. The Company believes that Kobe
also has significantly greater financial, technical and marketing resources. In
addition, Kobe has the advantage of being supplied by an affiliated company with
the aluminum blanks used for its aluminum disk substrates. StorMedia recently
announced that it will produce aluminum disk substrates, as part of the
production of nickel plated and polished substrates, at a new manufacturing
facility in Singapore. In addition, HMT has announced that it will use a
facility it acquired in Oregon for aluminum disk substrate production, as well
as for nickel plating and polishing. Several other disk drive and thin film disk
manufacturers, including Seagate, Akashic Memories Corporation and Komag, Inc.,
produce aluminum disk substrates internally for their own use. Moreover,
vertically integrated companies could make their aluminum disk substrates
available for distribution in the market as direct competitors of the Company.
Any of these changes would reduce the already small number of current and
potential customers and increase competition for the remaining market. Such
competition could materially adversely affect the Company's business, results of
operations and financial condition. In addition, because of the limited number
of potential customers in the disk drive industry, the loss of one or more of
its customers through consolidations, adverse financial circumstances or
otherwise could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors -- Dependence
on a Small Number of Customers."
The Company believes that Kobe and certain vertically-integrated disk drive
manufacturers are currently attempting to increase aluminum disk substrate
manufacturing capacity in light of current shortages of supply. These efforts,
together with the Company's own efforts to increase production, may result in
significant additional capacity in the aluminum disk substrate industry during
the next one to two years. If these efforts were to result in industry capacity
in excess of demand, the Company would likely experience increased competition
which could materially adversely affect the Company's business, results of
operations and financial condition. See "Risk Factors -- Risk of Excess Industry
Capacity" and "-- Intense Competition Among Manufacturers of Aluminum Disk
Substrates."
The Company believes that a majority of the machined aluminum disk
substrates in the U.S. market is supplied by vertically-integrated disk drive
manufacturers, such as Seagate, and that the balance is supplied by independent
aluminum disk substrate manufacturers such as the Company. Shortage of supply in
the past has influenced disk drive manufacturers and thin film disk
manufacturers to attempt to vertically integrate substrate manufacturing into
their own operations.
BACKLOG
The Company's sales generally are made pursuant to supply agreements,
purchase orders and releases which are subject to cancellation, modification or
rescheduling generally without penalty. The Company's backlog of supply
agreements and purchase orders requesting delivery in the following quarter was
approximately $7.9 million as of December 31, 1995, as compared to $2.5 million
as of December 31, 1994. Because these purchase orders may be canceled, modified
or rescheduled by customers on short notice and generally
29
30
without penalty, the Company does not believe that its backlog as of any
particular date should be considered indicative of sales for any future period.
See "Risk Factors -- Absence of Long-Term Purchase Commitments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing processes, product
designs and internally-developed equipment as proprietary and seeks to protect
its proprietary rights through a combination of employee and third-party
non-disclosure agreements, internal security procedures and trade secret laws.
Because patent protection requires public disclosure of a process or design,
which gives potentially valuable knowledge to a competitor even if the patent is
issued, the Company evaluates the advantages and disadvantages of seeking patent
protection for its proprietary processes and designs versus continuing to rely
on trade secret protections. To date, the Company has generally opted to protect
its proprietary rights as trade secrets but may file patent applications in the
future.
Although the Company intends to defend its proprietary interests, there can
be no assurance that these measures will be successful. The Company believes,
however, that because of the rapid pace of change in manufacturing processes and
product design in the aluminum disk substrate and OPC drum substrate industries,
legal protections of its proprietary rights are less significant factors in the
Company's success than the innovative skills, experience and technical
competence of its employees.
The Company attempts to ensure that its products and processes do not
infringe patents and other proprietary rights of third parties. Nevertheless,
there can be no assurance that such a claim will not arise at some future date.
If a patent claim were to arise, the Company might be required to seek a patent
license from a third party. Although patent holders commonly offer such
licenses, no assurance can be given that licenses would be offered or that the
terms of any offered licenses would be acceptable to the Company. If a patent
license were to become necessary, the failure to obtain such a license could
cause the Company to incur substantial liabilities and possibly to suspend use
of the process or equipment utilizing the patented invention. See "Risk Factors
- -- Intellectual Property and Proprietary Rights."
EMPLOYEES
As of May 23, 1996, the Company had 509 full-time employees located at its
existing facility in Champaign, Illinois, with approximately 486 in
manufacturing and research, development and engineering, and the remainder in
administration and marketing. The Company believes it has good relations with
its employees. None of the Company's employees is represented by a labor union.
The Company believes that attracting and motivating skilled technical talent,
and managing turnover, is vital to its success. See "Risk Factors -- Dependence
on Key Employees."
FACILITIES AND PROPERTIES
The Company's headquarters and manufacturing facility are located in one
36,000 square foot building in Champaign, Illinois. At this Company-owned
facility, Cerion operates 17 manufacturing cells for aluminum disk substrates
and four for OPC drum substrates. The Company plans to add three manufacturing
cells at this facility for aluminum disk substrates.
The Company also has an option to purchase 3.8 acres of land adjacent to
its headquarters. In addition, the Company leases 12,000 square feet in Urbana,
Illinois for cleaning shipping containers and for storage of finished goods and
raw materials.
The Company's existing facility is operating three shifts per day, seven
days per week and, upon the expected addition of the three manufacturing cells
described above, will be using all remaining manufacturing space at this
facility. Any significant expansion of capacity would require the Company to
build, purchase or lease the New Facility. See "Risk Factors -- Dependence on
New Manufacturing Facility."
30
31
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state and local environmental protection laws and regulations relating
to the Company's use, handling, storage, discharge and disposal of certain
hazardous materials and hazardous and non-hazardous wastes. The Company has not
suffered any material adverse effect in complying with applicable environmental
regulations. However, environmental laws and regulations, especially those
relating to the use of hazardous materials or generation of hazardous wastes,
may become more stringent over time. There can be no assurance that the Company
has complied or will comply in all respects with environmental laws and
regulations, nor can there be any assurance that the Company will be able to
obtain all necessary permits that will be required under such laws and
regulations. Any modified environmental regulations, and any failure by the
Company with respect to any of the other matters described above, might subject
the Company to significant penalties, compliance expenses, or production
suspensions or delays, and might require the Company to acquire costly
equipment. See "Risk Factors -- Environmental Compliance."
31
32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and other key employees of the Company
are as follows:
NAME AGE POSITIONS
- ---------------------------- --- ---------------------------------------------------------
David A. Peterson........... 56 Chief Executive Officer, President and Director
Paul A. Harter.............. 30 Vice President-Operations
Richard A. Clark............ 31 Chief Financial Officer, Vice President-Finance and
Treasurer
William A. Hughes........... 33 Vice President-Product Development
Michael F. Brown............ 37 Vice President-Marketing
Paula J. Jarrett............ 35 Controller
Minor W. Jackson, III....... 45 Human Resource Development Manager
J. Michael LaPointe......... 42 Director of Information Services
Gerald G. Garbacz........... 58 Chairman of the Board of Directors
Daniel M. Junius............ 43 Director
Joseph A. Baute(1)(2)....... 68 Director
Sheldon A. Buckler(1)(2).... 65 Director
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
The following is a biographical summary of the experience of the executive
officers, key employees and directors of the Company.
David A. Peterson is a co-founder of the original operations of the Company
and has served as Chief Executive Officer, President and a director of the
Company since its incorporation on December 31, 1995. From December 1991 through
December 1995, Mr. Peterson served as General Manager of the Precision
Technologies division of Nashua, the predecessor of the Company, and from April
1991 until December 1991 he served as Vice President-Operations of the Thin Film
division of Nashua. From July 1986 until April 1991, Mr. Peterson served as Vice
President-Manufacturing of Disk-Tec (which was acquired by Nashua in July 1986
and which became the Precision Technologies division of Nashua). From June 1982
until July 1986 he served as Director of Operations of Disk-Tec.
Paul A. Harter has served as Vice President-Operations of the Company since
February 1996. From August 1994 until February 1996 Mr. Harter served as
Director of Operations of the Company. From July 1987 to August 1994, Mr. Harter
served the Company in various management and staff positions.
Richard A. Clark has served as Chief Financial Officer, Vice
President-Finance and Treasurer of the Company since March 1996. From May 1995
through March 1996, Mr. Clark served as Director of Internal Audit of Nashua.
From January 1992 to May 1995, Mr. Clark served as a Manager within the Business
Assurance practice of the accounting firm of Coopers & Lybrand L.L.P. From July
1988 to January 1992 Mr. Clark was a senior associate with Coopers & Lybrand
L.L.P. Mr. Clark is a certified public accountant.
William A. Hughes has served as Vice President-Product Development of the
Company since February 1996. Mr. Hughes has served the Company as Director of
Product Development from September 1995 until February 1996, Product Development
Manager from December 1993 to February 1996, Technical Supervisor from June 1989
until December 1993, and in a variety of other management and staff positions
from June 1983 until June 1989.
Michael F. Brown has served as Vice President-Marketing of the Company
since January 1996. From December 1995 until February 1996, Mr. Brown served as
Market Development Manager of the Company. From September 1991 to December 1995,
Mr. Brown was the Director of Sales and Marketing for Frisby Manufacturing Co.,
a precision-component manufacturer for the automotive and home appliance
industries.
32
33
From January 1986 to August 1991, Mr. Brown served as Manufacturer's
Representative of J.A. Shoemaker & Associates, a manufacturing company.
Paula J. Jarrett has served as Controller of the Company since June 1994.
From August 1989 to August 1993, Mrs. Jarrett served as Financial Manager of
Communications Data Group, Inc., a telecommunications data processing company.
From 1986 to 1989, Mrs. Jarrett was a senior auditor with the accounting firm of
KPMG Peat Marwick LLP. Mrs. Jarrett is a certified public accountant.
Minor W. Jackson, III has served as Human Resources Development Manager
since November 1995. From October 1988 to November 1995, Mr. Jackson served as
Director of Human Resources for Caradco, a division of Alcoa that manufactures
finished wood products ("Caradco").
J. Michael LaPointe has served as Director of Information Services of the
Company since October 1995. From February 1985 to October 1995, Mr. LaPointe
served Caradco in several positions, most recently as Forward Planning Manager.
Gerald G. Garbacz has served as a director of the Company since March 1996.
Mr. Garbacz has served as President and Chief Executive Officer of Nashua since
January 1996. From March 1992 until July 1994, Mr. Garbacz served as Chairman
and Chief Executive Officer of Baker & Taylor Inc., a distributor of books,
videos and software that was formerly a unit of W.R. Grace & Co. ("Grace"). From
May 1986 until March 1992, Mr. Garbacz served as an Executive Vice President and
a director of Grace, overseeing its specialty products businesses. Previously,
Mr. Garbacz was Chief Financial Officer for Phillips Industries, a manufacturer
of components for mobile housing. Mr. Garbacz is also a director of Handy &
Harman.
Daniel M. Junius has served as a director of the Company since January
1996. Mr. Junius has served as Vice President-Finance and Treasurer of Nashua
since September 1995 and as Treasurer of Nashua since 1985.
Joseph A. Baute has served as a director of the Company since March 1996.
Mr. Baute has served as a Director of Nashua since 1984, as Chairman of its
Board of Directors since April 1995, and in an interim capacity as its President
and Chief Executive Officer from November 1995 through December 1995. Mr. Baute
is not standing for election as a director of Nashua at the 1996 annual meeting
of Nashua's stockholders. From 1979 until his retirement in 1993, Mr. Baute
served as Chairman and Chief Executive Officer of Markem Corporation, an
information application systems company. Mr. Baute is a director of Houghton
Mifflin Company, State Street Boston Corporation, and several private
corporations. He is also a former director of the Federal Reserve Bank of Boston
and a former director and past Chairman of the Board of Directors of The New
England Council for Economic Development.
Sheldon A. Buckler, Ph.D., has served as a director of the Company since
March 1996. Since January 1995, Dr. Buckler has served as a director of Nashua.
From 1990 until his retirement in 1994, Dr. Buckler served as Vice Chairman of
the Board of Polaroid Corporation ("Polaroid"). Previously, Dr. Buckler served
Polaroid in a variety of capacities, including Vice President of Research,
Director of Chemical Research, and headed its Worldwide Industrial Imaging
Business. Dr. Buckler is also Chairman of the Board of Directors of Commonwealth
Energy Systems, a director of Parlex Corporation and Spectrum Information
Technologies, Inc., and a director of several privately held companies.
The executive officers of the Company are Messrs. Peterson, Harter, Clark,
Hughes and Brown.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of five
directors, all of whom have been elected or designated by Nashua. Following this
offering, the five directors will be divided into three classes. Mr. Peterson
will be in Class I and his term will expire at the annual meeting of
stockholders to be held in 1997. Messrs. Baute and Buckler will be in Class II
and their terms will expire at the annual meeting of stockholders to be held in
1998. Messrs. Garbacz and Junius will be in Class III and their terms will
expire at the annual meeting of stockholders to be held in 1999. Two individuals
not affiliated with the Company or Nashua are expected to be
33
34
added to the Board, to Classes I and II, respectively, within six months
following this offering. Officers of the Company are elected annually and serve
at the discretion of the Board of Directors.
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the firm to be appointed
as independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's year-end operating results and considers the adequacy of the
internal accounting procedures. The Compensation Committee reviews and
recommends the compensation arrangements for all officers, approves such
arrangements for other senior level employees and administers and takes such
other action as may be required in connection with certain compensation and
incentive plans of the Company, including the grant of stock options.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company, Nashua or of any affiliated
company ("Non-Employee Directors") will receive a fee of $750 per meeting of the
Board of Directors or any committee thereof. All directors are reimbursed for
their out-of-pocket expenses incurred in attending such meetings. The Company,
under its 1996 Stock Incentive Plan, also grants each Non-Employee Director, on
the election or re-election date of each such director, that number of shares of
Common Stock which is equal in value to $10,000 (subject to adjustment
annually), calculated with reference to the closing price of the Common Stock on
the trading day immediately prior to the date of grant, and an option to
purchase 1,000 shares of Common Stock exercisable at the same price. Messrs.
Baute and Buckler will receive their initial grants of stock and stock options
effective upon consummation of this offering, based on the initial public
offering price per share. See "-- 1996 Stock Incentive Plan."
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by Nashua
for services rendered to the Company for 1995 to each of the Company's executive
officers whose total salary and bonus exceeded $100,000 during 1995:
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION COMPENSATION
FISCAL -------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1) COMPENSATION(2)
- ---------------------------------- ------ -------- ------- ------------ ---------------
David A. Peterson................. 1995 $148,874 $83,567 11,500 $ 4,285
Chief Executive Officer
and President
- ---------------
(1) Mr. Peterson received options to purchase common stock of Nashua under
Nashua's incentive plans. These options will terminate six months following
consummation of the offering.
(2) Consists of $2,228 of employer matching contributions credited under
Nashua's savings plan and $2,057 of term life insurance premium payments.
34
35
STOCK OPTIONS GRANTED DURING 1995
The following table sets forth information concerning grants of stock
options to acquire shares of Nashua common stock made during 1995 to the
Company's chief executive officer. These Nashua options will terminate six
months following consummation of the offering.
STOCK OPTIONS GRANTED DURING 1995
PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS GRANTED NASHUA OPTIONS ASSUMED RATES OF STOCK PRICE
TO PURCHASE GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
COMMON STOCK EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME OF NASHUA(1) 1995 SHARE DATE 0% 5% 10%
- -------------------- --------------- ---------------- --------- ---------- --- -------- --------
David A. Peterson... 1,500(2) 0.5% $19 3/4 2/24/05 $ 0 $ 18,631 $ 47,215
10,000(3) 3.4% $17 7/8 4/01/05 $ 0 $112,415 $284,881
- ---------------
(1) All options granted contain certain change of control provisions.
(2) Options to purchase 750 shares are exercisable, and the remainder become
exercisable on February 23, 1997.
(3) Options to purchase 5,000 shares become exercisable on August 31, 1996, and
the remainder become exercisable on August 31, 1997.
BONUS PLAN
The Board of Directors of the Company expects to establish a cash incentive
plan for all of the Company's executive officers and key employees. This bonus
plan is expected to be based on the Company achieving certain financial
performance objectives.
1996 STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the "Stock Incentive Plan")
provides for grants of stock options intended to qualify for preferential tax
treatment ("Incentive Stock Options") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonstatutory stock options that do
not qualify for such treatment. Key employees of the Company are eligible for
awards under the Stock Incentive Plan in amounts and at prices determined by the
Compensation Committee, provided that the price will not be less than 100% of
the fair market value of the Common Stock on the date of grant.
In addition, each Non-Employee Director who is elected or re-elected to the
Board of Directors during the term of the Stock Incentive Plan will receive, on
the election or re-election date of such director, a "Formula Grant" consisting
of that number of unrestricted shares of Common Stock which is equal in value to
$10,000 (subject to adjustment annually), calculated with reference to the
closing price of the Common Stock on the trading day immediately prior to the
date of grant, and an option to purchase 1,000 shares of Common Stock
exercisable at the same price, which will become exercisable on the first
anniversary date of the grant date if the optionee remains a director on that
date.
The Stock Incentive Plan will be administered by the Compensation
Committee, which will be composed only of Directors who at the relevant time are
"outside directors" within the meaning of Section 162(m) of the Code. The
Compensation Committee will select participants (other than for Formula Grants)
and, in a manner consistent with the terms of the Stock Incentive Plan,
determine the number and duration of the options to be granted and the terms and
conditions of the option agreements. The Compensation Committee has the right to
alter, amend or revoke the Stock Incentive Plan.
The Stock Incentive Plan provides that each outstanding option will
immediately become fully exercisable upon a "Change in Control" of the Company,
as defined in the Stock Incentive Plan. A "Change in Control" includes the
acquisition by any third party (as hereinafter defined), directly or indirectly,
of more than 80% of the Common Stock outstanding at the time, without the prior
approval of the Company's Board of Directors. A "third party" for purposes of
the foregoing means any person other than the Company or a subsidiary or
employee benefit plan or trust maintained by the Company or any of its
subsidiaries, or Nashua,
35
36
together with any such person's "affiliates" and "associates" as defined in Rule
12b-2 under the Securities Exchange Act of 1934.
A total of 701,500 shares of Common Stock of the Company were initially
reserved for issuance under the Stock Incentive Plan. The Company has granted,
effective upon completion of this offering, to its directors, executive officers
and certain key employees, 1,540 shares and options to purchase 422,680 shares
of Common Stock at the initial public offering price per share. The Company has
granted to its executive officers and directors effective upon consummation of
this offering options to purchase an aggregate of 370,180 shares.
SHARES SUBJECT SHARES SUBJECT
TO ONE-YEAR TO PERFORMANCE- FORMULA GRANT TOTAL OPTION AND
NAME VESTING OPTIONS ACCELERATED OPTIONS SHARES UNRESTRICTED SHARES
- ------------------------------------- --------------- ------------------- ------------- -------------------
David A. Peterson.................... 84,180 52,600 -- 136,780
Paul A. Harter....................... 31,550 31,550 -- 63,100
William A. Hughes.................... 31,550 31,550 -- 63,100
Richard A. Clark..................... 21,050 31,550 -- 52,600
Michael F. Brown..................... 21,050 31,550 -- 52,600
Joseph A. Baute...................... 1,000 -- 770 1,770
Sheldon A. Buckler................... 1,000 -- 770 1,770
Of the shares listed in the foregoing table, none are deemed to be
beneficially owned (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission) by the persons listed above other than 770
shares each (less than 1% of total shares outstanding) owned by Messrs. Baute
and Buckler. Gerald G. Garbacz and Daniel M. Junius do not beneficially own any
shares of Common Stock of the Company (excluding shares owned by Nashua, of
which they are executive officers). Thus, the directors and executive officers
of the Company as a group may be deemed to beneficially own 1,540 shares of
Common Stock (less than 1%).
The options described in the foregoing table as "one-year vesting" options
will become exercisable on the first anniversary date of the option grant if the
optionee remains an employee or director of the Company on such date. The
options described in the foregoing table as "performance-accelerated" options
will become exercisable in tranches of 25% each based upon the Common Stock
trading, for a period of 20 consecutive trading days, at an average premium of
25%, 50%, 75% and 100%, respectively, above the initial public offering price,
if the optionee remains an employee of the Company on such date. However, if any
such performance goals are met prior to the first anniversary of the grant date,
the shares that would otherwise become exercisable thereby only become
exercisable on the first anniversary date of the grant date, if the optionee
remains an employee of the Company on such date. On the eighth anniversary of
the grant date, any remaining shares subject to a "performance-accelerated"
option will become exercisable, if the optionee remains an employee of the
Company on such date.
401(K) PLAN
The Company intends to implement a retirement savings plan (the "401(k)
Plan"), which will cover all full-time employees. Pursuant to the 401(k) Plan,
an employee may elect to reduce his or her current compensation by up to 15%
(subject to certain overall dollar limits) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan will allow employees with two
months continuous service to make certain tax-deferred voluntary contributions,
which the Company intends generally to match with a 50% contribution, but in any
event not to exceed 3% of an employee's base pay. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so
that contributions by employees, and income earned thereon, are not taxable to
employees until withdrawn from the 401(k) Plan. The administrator of the 401(k)
Plan will invest each employee's account at the direction of each such employee,
who can choose among certain investment alternatives provided.
36
37
SECURITY OWNERSHIP OF NASHUA COMMON STOCK BY CERION OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the beneficial
ownership (as defined in SEC Rule 13d-3) of Nashua common stock as of March 14,
1996, with respect to: (i) each director and executive officer of the Company;
and (ii) all directors and executive officers of the Company as a group.
NAME NUMBER PERCENT
------------------------------------------------------------------ ------- -------
David A. Peterson(1)(2)........................................... 5,897 *
Paul A. Harter(1)(3).............................................. 924 *
Richard A. Clark(4)............................................... 500 *
William A. Hughes(1)(5)........................................... 1,004 *
Michael F. Brown.................................................. -- --
Gerald G. Garbacz(6).............................................. 127,500 1.9%
Daniel M. Junius(7)............................................... 41,065 *
Joseph A. Baute(8)................................................ 5,640 *
Sheldon A. Buckler(9)............................................. 4,000 *
------- -------
All directors and executive officers of the Company
as a group (9 persons).......................................... 186,530 2.8%
- ---------------
* Represents less than one percent.
(1) Includes options to purchase shares of Nashua's common stock which are
either exercisable or will become exercisable within 60 days. These options
will terminate six months following consummation of the offering.
(2) Includes 647 shares held in trust under the Nashua Employees' Saving Plan.
(3) Includes 624 shares held in trust under the Nashua Employees' Saving Plan.
(4) Shares held in a retirement account of Mr. Clark's spouse. Mr. Clark
disclaims beneficial ownership of these shares.
(5) Includes 704 shares held in trust under the Nashua Employees' Saving Plan.
(6) Includes 120,000 restricted shares issued pursuant to Nashua's 1993 Stock
Incentive Plan.
(7) Includes 25,000 restricted shares issued pursuant to Nashua's 1993 Stock
Incentive Plan, 3,578 shares held in trust under the Nashua Employees'
Savings Plan, 12,250 shares Mr. Junius has a right to acquire through the
exercise of existing stock options, and 237 shares owned by his spouse, as
for which Mr. Junius disclaims beneficial ownership.
(8) Includes 2,000 shares Mr. Baute has a right to acquire through the exercise
of existing stock options.
(9) Includes 1,000 shares Dr. Buckler has a right to acquire through the
exercise of existing stock options.
37
38
OWNERSHIP OF COMMON STOCK BY NASHUA
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock immediately prior to the effective date
of the offering and as adjusted to reflect the sale of the shares of Common
Stock offered hereby with respect to the Selling Stockholder.
SHARES
BEFORE THE OFFERING OFFERED HEREBY AFTER THE OFFERING
------------------- -------------- -------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER NUMBER PERCENT
--------------------------------- ---------- ------- -------------- ---------- -------
Nashua Corporation(1)............ 5,400,000 100.0% 2,225,000 3,175,000 45.3%
44 Franklin St.
Nashua, NH 03061
- ---------------
(1) Owned indirectly through Cerion Holdings Inc., a wholly-owned subsidiary of
Nashua, which is located at 44 Franklin Street, Nashua, NH 03061. If the
over-allotment option is exercised in full by the Underwriters, Nashua will
sell a total of 2,801,000 shares of Common Stock and will own 2,599,000
shares (or approximately 37.0%) of the outstanding Common Stock.
INFORMATION CONCERNING NASHUA
AND ITS RELATIONSHIP WITH THE COMPANY
Prior to this offering, Nashua, which was organized in 1904 and is listed
on the New York Stock Exchange, indirectly owns 100% of the outstanding Common
Stock. Nashua conducts business in two segments in addition to the Company's
precision machining business: Commercial Products and Photofinishing. Its
Commercial Products segment manufactures and sells office and industrial imaging
supplies and industrial and commercial tape products to several types of
customers, including resellers, retailers and industrial end-users. Its
Photofinishing segment provides mail-order photofinishing services to amateur
photographers under the trade name York Photo Labs in the United States and
through subsidiaries in the European Community and Canada. Nashua had
consolidated revenues of $452.2 million in fiscal 1995.
Upon completion of the offering, Nashua will own 3,175,000 shares of Common
Stock, representing approximately 45.3% of the outstanding shares of Common
Stock (2,599,000 shares of Common Stock, representing approximately 37.0%, if
the Underwriters' over-allotment option is exercised in full). As a result,
Nashua may be able to control the vote on many matters submitted to a vote of
the stockholders, including the election of all directors, and may have the
ability to block the approval of mergers, consolidations, sale of substantially
all assets or other extraordinary corporate transactions. Immediately following
the consummation of the offering, two of the five members of the Board of
Directors of the Company will be executive officers of Nashua and two will be
outside directors of Nashua. It is anticipated that, within six months following
the offering, the Board of Directors will be increased from five to seven
members and that the resulting vacancies will be filled by individuals not
affiliated with the Company or Nashua. See "Risk Factors -- Control by Single
Stockholder."
Nashua has operated the business of the Company since its acquisition in
1986. During 1993, 1994 and 1995, the Company had sales of approximately
$13,284,000, $5,541,000 and $645,000, respectively, to divisions of Nashua.
During the three months ended March 31, 1995 and March 29, 1996, the Company had
sales of approximately $179,000 and $0, respectively, to divisions of Nashua.
The Company believes that the product prices for such sales were substantially
at market prices.
Employee fringe benefit expenses have been allocated to the Company by
Nashua based on Nashua's total benefits costs and the proportion of Nashua's
total salaries and wages represented by the Company's salaries and wages. In
addition, Nashua has historically allocated a portion of its domestic corporate
expenses and charges to its divisions, including the Company. Although the
Company believes that the basis used for allocating corporate services has been
reasonable, the terms of these transactions may have differed from those that
would have resulted from transactions among unrelated parties. Following the
completion of this offering, certain of the services provided by Nashua may
continue to be provided but in a modified form, as described below.
38
39
Nashua historically has performed cash management services for the Company.
The Company's cash flow is directed to Nashua, and Nashua in turn provides cash
to the Company to fund operating expenses and capital expenditures.
Simultaneously with the closing of this offering, this arrangement between the
companies will cease. Promptly thereafter, the Company and Nashua will determine
the respective cash flows from the Company to Nashua, and from Nashua to the
Company, during the period from January 1, 1996 through the closing date, and
will promptly settle any net amount due from one to the other.
As of the date of this Prospectus, the Company is an indirect, wholly-owned
subsidiary of Nashua.
Forms of the agreements and instruments summarized in this section have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part, and the following summaries are qualified in their entirety by
reference to the agreements as filed. The agreements will be executed
immediately prior to the closing of this offering.
Nashua Notes. As of January 1, 1996, Nashua converted the Company into a
wholly-owned subsidiary of Nashua, under an agreement pursuant to which Nashua
contributed all the assets of that business to the Company, in return for
assumption by the Company of the liabilities of that business and issuance to
Nashua of all of the Company's outstanding capital stock. As of March 1, 1996,
Cerion distributed a dividend to Nashua in the form of the First Nashua Note,
which is payable to Nashua in the principal amount of $10.0 million. The First
Nashua Note bears interest at the annual rate of 7.32% from March 1, 1996 to
September 30, 1996. Thereafter, until February 28, 1998 when the entire
principal amount of the First Nashua Note becomes due, interest accrues at a
rate equal to prime (as defined in the First Nashua Note) plus 2.5%. If the
First Nashua Note is paid in full on or before May 31, 1996, the lesser of
$183,000 or all interest accrued as of the date of payment will be forgiven.
Thereafter, the amount of prepayment discount on the First Nashua Note declines
each month through August 31, 1996. Any prepayment made by the Company will be
without penalty but, after August 31, 1996, will not have the benefit of any
prepayment discount. Interest on the First Nashua Note that accrues from March
1, 1996 through May 31, 1996 will not be due and payable until May 31, 1996.
Thereafter, interest is payable monthly.
As of March 29, 1996, the Company distributed a second dividend to Nashua
in the form of the Second Nashua Note in the principal amount of approximately
$1.1 million. The Second Nashua Note bears interest at the annual rate of 7.32%
and matures upon the earlier of the closing of this offering or July 31, 1996.
Interest on the Second Nashua Note will not be due and payable until the
maturity date of the indebtedness. The Second Nashua Note does not contain any
prepayment discounts.
Intercompany Agreement. Pursuant to an intercompany agreement between the
Company and Nashua (the "Intercompany Agreement"), the Company and Nashua will
cooperate in providing each other with certain financial information, and, to
the extent requested by the Company, Nashua agrees to continue to provide the
Company with certain management and administrative services, including legal,
tax, employee benefit and similar corporate staff services (collectively, the
"Nashua Services"), to the same extent as currently provided. Nashua may
delegate performance of the Nashua Services to any subsidiary, affiliate or
employee of Nashua or its subsidiaries or affiliates or to a third party, at the
sole discretion of Nashua. The Nashua Services will be provided, to the extent
requested by the Company, for a period ending on the first anniversary of the
date of the Intercompany Agreement. The Company will pay Nashua its actual costs
in providing the Nashua Services, as reasonably determined by Nashua. The
Intercompany Agreement provides that, to the extent allowed by Delaware law, the
Company will indemnify and release Nashua from any liability that might result
from the provision of these services, including services provided by a third
party.
The Company intends to arrange to obtain certain services that have been
provided by Nashua from third parties or from Company personnel. The Company
believes that when such arrangements are in place, such services will likely be
provided at rates that are somewhat higher than the rates currently charged by
Nashua. However, the Company believes that the effect of these higher costs will
not be material.
Tax Allocation Agreement. The Company is currently included in the
consolidated federal income tax returns of Nashua. In general, Nashua's tax
allocation policy provides that the consolidated or combined tax provision is
allocated among the entities in its consolidated group based principally upon
taxable income directly related to each entity. See Note 10 of Notes to the
Financial Statements. Upon completion of the offering contemplated hereby, the
Company will no longer be included in such consolidated or combined tax
39
40
returns. Instead, it will file its own federal, state and local income tax
returns and pay its own taxes on a separate company basis. Pursuant to a tax
allocation agreement between the Company and Nashua (the "Tax Allocation
Agreement"), however, the Company will remain obligated to pay to Nashua any
income taxes the Company would have had to pay if it had filed separate tax
returns for the tax period beginning on January 1, 1996, and ending on the date
of the consummation of the offering contemplated hereby (to the extent that it
has not previously paid such amounts to Nashua). In addition, if the tax
liability attributable to the Company for any previous tax period during which
the Company was included in a consolidated federal income tax return filed by
Nashua or a combined state return is adjusted as a result of any action taken by
any taxing authority or court, then the Company will pay to Nashua the amount of
any increase in such liability and Nashua will pay to the Company the amount of
any decrease in such liability (in either case together with interest and
penalties). The Company's tax liability for previous years will not be affected
by any increase or decrease in Nashua's tax liability, if such increase or
decrease is not directly attributable to the Company. After completion of the
offering contemplated hereby, the Company will continue to be subject under
existing federal regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any consolidated group
of which Nashua was the common parent. Pursuant to the Tax Allocation Agreement,
however, Nashua has agreed to indemnify the Company for any federal income tax
liability of Nashua or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required to pay, and the
Company has agreed to indemnify Nashua for any liability Nashua may incur in
respect of the Company's separate company taxes.
Registration Rights Agreement. In connection with the offering
contemplated hereby, the Company and Nashua will enter into a Registration
Rights Agreement (the "Registration Rights Agreement"), which, among other
things, will provide that, upon the request of Nashua, the Company will register
under the Securities Act any of the shares of Common Stock held by Nashua for
sale in accordance with Nashua's intended method of disposition thereof, and
will take such other actions as are necessary to permit the sale thereof in
various jurisdictions, subject to certain restrictions on, among other things,
the frequency of requested registrations, the amount of shares to be registered
and the duration of such rights. Subject to certain conditions, including the
release from or expiration of the 180-day lockup agreement with the
Underwriters, for a period of seven years following completion of the offering
contemplated hereby, Nashua may demand registration once in any twelve-month
period, as long as such demand covers at least 5% of the Common Stock then owned
by Nashua and as long as Nashua (along with its transferees) owns at least 5% of
the Common Stock at the time of such demand. Nashua also has a "piggyback"
right, for a period of seven years following completion of the offering
contemplated hereby, to include the shares of Common Stock held by it in certain
other registrations of common equity securities of the Company initiated by the
Company on its own behalf or on behalf of its other stockholders. Nashua has
agreed to pay offering expenses in connection with a registration made on its
demand, unless the Company causes shares to be registered for itself or a third
party in such registration, in which case the Company will pay any resulting
incremental expenses of registering shares not held by Nashua. In the event
Nashua exercises its "piggyback" registration rights, Nashua will pay any
resulting incremental expense of registering shares held by Nashua. Upon notice,
Nashua may transfer its rights under the Registration Rights Agreement to
purchasers or transferees of 20% or more of the initial shares of Common Stock
owned by Nashua under certain circumstances. The Registration Rights Agreement
contains certain indemnification and contribution provisions: (i) by Nashua for
the benefit of the Company and related persons; and (ii) by the Company for the
benefit of Nashua and related persons, as well as any potential underwriter.
The Company, its officers and directors and Nashua have agreed that,
subject to certain exceptions, for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representative, they will
not offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any Common Stock or securities convertible or exchangeable into, or
exercisable for, Common Stock (except Common Stock or securities issued pursuant
to the 1996 Stock Incentive Plan described in this Prospectus) or, in the case
of the officers and directors and Nashua, in any other manner transfer all or a
portion of the economic consequences associated with the ownership of any such
Common Stock, or file or cause to be filed any registration statement with the
Commission related to any of the foregoing. See "Shares Eligible for Future
Sale" and "Underwriting."
40
41
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.01 per share, and 100,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of the date of this Prospectus, there were 5,400,000 shares of Common
Stock outstanding, all held of record and beneficially by Nashua. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the shares of Common Stock offered by the Company and stock grants made under
the Company's 1996 Stock Incentive Plan, there will be 7,016,540 shares of
Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Holders of Common Stock do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of any outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
validly issued, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. Upon the closing
of this offering, there will be no shares of Preferred Stock outstanding.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 100,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. The Company has no current plan
to issue any shares of Preferred Stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Amended and Restated Certificate of Incorporation of the Company (the
"Charter") provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms,
effective upon consummation of the offering. A director may be removed only for
cause and then only by the vote of a majority of the shares entitled to vote for
the election of directors. See "Management -- Board of Directors."
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account factors in
addition to potential economic benefits to stockholders. Such factors may
include: (i) comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely negotiated
transaction or the estimated future value of the Company as an independent
entity; and (ii) the impact of such a transaction on the employees, suppliers
and customers of the Company and its effect on the communities in which the
Company operates.
41
42
The Charter and By-Laws provide that, effective upon consummation of the
offering, any action required or permitted to be taken by the stockholders of
the Company may be taken only at a duly called annual or special meeting of the
stockholders and that special meetings may be called only by the Chairman of the
Board of Directors, the President or a majority of the Board of Directors of the
Company. These provisions could have the effect of delaying until the next
annual stockholders meeting stockholder actions which are favored by the holders
of the outstanding voting securities of the Company, including actions to remove
directors. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired all or a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.
The Delaware General Corporation Law ("DGCL") provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Charter requires the affirmative vote of
the holders of at least 75% of the outstanding voting stock of the Company to
amend or repeal any of the foregoing Charter provisions or to reduce the number
of authorized shares of Common Stock and Preferred Stock. A 75% vote is also
required to amend or repeal the Company's By-Laws. Such stockholder vote would
in either case be in addition to any separate class vote that might in the
future be required pursuant to the terms of any Preferred Stock that might be
outstanding at the time any such amendments are submitted to stockholders. The
By-Laws may also be amended or repealed by a majority vote of the Board of
Directors.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual meeting
of stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
generally must be delivered not later than 90 days in advance of the anniversary
date of the release of the Company's proxy statement to stockholders in
connection with the prior year's annual meeting of stockholders. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting. Business transacted at a special meeting is limited to the purposes for
which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Charter and By-laws also contain
provisions indemnifying the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company expects to obtain, prior to the
consummation of the offering, a directors and officers liability insurance
policy which provides for indemnification of its directors and officers against
certain liabilities incurred in their capacities as such, which may include
liabilities under the Securities Act. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors.
The Company's Charter opts out of Section 203 of the DGCL. Subject to
certain exceptions, Section 203 would prohibit the Company, if it were subject
to Section 203, from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Chicago, Illinois.
42
43
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have outstanding a total
of approximately 7,016,540 shares of Common Stock. On the date of this
Prospectus, the 3,840,000 shares offered hereby will be eligible for sale in the
public market without restriction, unless such shares are acquired by affiliates
of the Company.
Rule 144 under the Securities Act applies to public sales of restricted
shares (shares issued without registration under the Securities Act) and sales
of any shares (whether or not restricted) by any affiliate of the issuer. Under
Rule 144, shares that have been held for at least three years and that are held
by non-affiliates may be sold in the public market at any time beginning on the
date of this Prospectus. Shares that have been held for at least two years may,
subject to certain conditions, be sold in the public market beginning 90 days
after the date of this Prospectus. In each case, the holding period of a prior
owner may be included, except as to shares purchased from an affiliate. Subject
to certain exceptions, if the shares have been held for at least two years but
for less than three years, or if the holder is an affiliate of the Company, the
sale is subject to the availability of current public information about the
Company, the sale must be made in a "broker's transaction" or transaction
directly with a market maker for the Common Stock, the seller must file a notice
on Form 144 prior to the sale, and the number of shares sold by the seller in
any three-month period may not exceed the greater of (i) 1% of the
then-outstanding shares of the Common Stock (approximately 70,165 shares
immediately after the offering) or (ii) the average weekly trading volume during
the four calendar weeks immediately preceding the date on which the required
notice is filed with the Securities and Exchange Commission.
REGISTRATION RIGHTS
In connection with the offering contemplated hereby, the Company and Nashua
will enter into a Registration Rights Agreement, which, among other things and
subject to certain conditions, will provide that, upon the request of Nashua,
the Company will register under the Securities Act the shares of Common Stock
owned by Nashua. See "Information Concerning Nashua and its Relationship with
the Company -- Registration Rights Agreement."
43
44
UNDERWRITING
The several Underwriters named below, for whom William Blair & Company,
L.L.C. is acting as the Representative, have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement by and among the
Company, Nashua and the Underwriters, to purchase from the Company and Nashua
the respective number of shares of Common Stock (excluding the over-allotment
shares) set forth opposite each Underwriter's name:
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
William Blair & Company, L.L.C. .................................. 1,700,000
Alex. Brown & Sons Incorporated................................... 95,000
Dean Witter Reynolds Inc.......................................... 95,000
Dillon, Read & Co. Inc. .......................................... 95,000
A.G. Edwards & Sons, Inc. ........................................ 95,000
Goldman, Sachs & Co. ............................................. 95,000
Hambrecht & Quist LLC............................................. 95,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 95,000
Montgomery Securities............................................. 95,000
Morgan Stanley & Co. Incorporated................................. 95,000
PaineWebber Incorporated.......................................... 95,000
Prudential Securities Incorporated................................ 95,000
Robertson, Stephens & Company LLC................................. 95,000
Salomon Brothers Inc.............................................. 95,000
C.L. King & Associates, Inc. ..................................... 95,000
George K. Baum & Company.......................................... 45,000
Brean Murray, Foster Securities Inc. ............................. 45,000
The Chicago Corporation........................................... 45,000
Dain Bosworth Incorporated........................................ 45,000
First of Michigan Corporation..................................... 45,000
Gabelli & Company, Inc. .......................................... 45,000
J.J.B. Hilliard, W. L. Lyons, Inc. ............................... 45,000
Howe Barnes Investments, Inc. .................................... 45,000
EVEREN Securities, Inc. .......................................... 45,000
McDonald & Company Securities, Inc. .............................. 45,000
Mesirow Financial, Inc. .......................................... 45,000
Needham & Company, Inc. .......................................... 45,000
Piper Jaffray Inc. ............................................... 45,000
Principal Financial Securities, Inc. ............................. 45,000
Sutro & Co. Incorporated.......................................... 45,000
Tucker Anthony Incorporated....................................... 45,000
Van Kasper & Company.............................................. 45,000
Wheat First Butcher Singer........................................ 45,000
---------
Total................................................... 3,840,000
=========
The nature of the Underwriters' obligations under the Underwriting
Agreement is such that all shares of the Common Stock offered hereby, excluding
shares covered by the over-allotment option granted to the Underwriters, must be
purchased if any are purchased. In the event of a default by any Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters pertaining to the Underwriting
Agreement may be increased or such Underwriting Agreement may be terminated.
The Representative has advised the Company and Nashua that the Underwriters
propose to offer the Common Stock to the public initially at the public offering
price set forth on the cover page of this Prospectus and to select dealers at
such price less a concession of not more than $0.50 per share. The Underwriters
may
44
45
allow, and such dealers may reallow, a concession not in excess of $0.10 per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed.
Nashua has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 576,000
shares of Common Stock to cover over-allotments, at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any such additional shares pursuant to this option, each
of the Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of shares of
Common Stock offered hereby.
The Company, its officers and directors and Nashua have agreed that,
subject to certain exceptions, for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representative, they will
not offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any Common Stock or securities convertible or exchangeable into, or
exercisable for, Common Stock (except Common Stock or securities issued pursuant
to the 1996 Stock Incentive Plan described in the Prospectus) or, in the case of
officers and directors and Nashua, in any other manner transfer all or a portion
of the economic consequences associated with the ownership of any such Common
Stock, or file or cause to be filed any registration statement with the
Commission related to any of the foregoing. The shares of Common Stock held by
Nashua have been pledged to secure certain indebtedness of Nashua to financial
institutions. The shares held by Nashua after this offering will continue to be
pledged to such financial institutions, which have agreed to be bound by the
foregoing lockup agreement. See "Shares Eligible for Future Sale."
There has been no public market for the shares of Common Stock prior to
this offering. The initial public offering price for the Common Stock has been
determined by negotiations among the Company, Nashua and the Representative.
Among the factors considered in determining the initial public offering price
were prevailing market and economic conditions, revenues and earnings of the
Company, estimates of the Company's business potential and prospects, the
present state of the Company's business operations, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuations of companies in related businesses.
The Company and Nashua have agreed to indemnify the Underwriters and their
controlling persons against certain liabilities, including liabilities under the
Act, or to contribute to payments the Underwriters may be required to make in
respect thereof.
The Underwriters do not intend, without customer authority, to confirm
sales of the shares offered hereby to accounts over which they exercise
discretionary authority.
The Representative from time to time performs investment banking services
for Nashua and its affiliates for which it receives customary fees.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company and Nashua by Bingham, Dana &
Gould LLP, Boston, Massachusetts. Certain legal matters relating to this
offering will be passed upon for the Underwriters by Sidley & Austin, Chicago,
Illinois.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
45
46
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended, with respect to the Common Stock offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional
Offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of all or any part thereof may be obtained upon payment of the prescribed fees
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
46
47
CERION TECHNOLOGIES INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE UNAUDITED THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND MARCH 29, 1996
INDEX TO THE FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................................... F-2
Financial Statements:
Statements of Operations............................................................ F-3
Balance Sheets...................................................................... F-4
Statements of Cash Flows............................................................ F-5
Notes to the Financial Statements..................................................... F-6
F-1
48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Cerion Technologies Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of Cerion Technologies Inc. (an indirect, wholly-owned
subsidiary of Nashua Corporation) (the "Company") at December 31, 1995 and 1994
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 15, 1996
F-2
49
CERION TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, -----------------------
------------------------------- MARCH 31, MARCH 29,
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
(UNAUDITED)
Net sales........................... $14,612 $14,553 $28,175 $ 5,028 $11,774
Cost of sales....................... 12,306 12,995 19,668 3,880 7,098
------- ------- ------- ------ -------
Gross profit...................... 2,306 1,558 8,507 1,148 4,676
Selling, general & administrative
expenses.......................... 1,651 1,731 2,537 508 1,476
------- ------- ------- ------ -------
Operating income (loss)........... 655 (173) 5,970 640 3,200
Interest expense.................... 94 115 316 84 120
------- ------- ------- ------ -------
Income (loss) before provision
(benefit) for income taxes..... 561 (288) 5,654 556 3,080
Provision (benefit) for income
taxes............................. 222 (105) 2,210 218 1,232
------- ------- ------- ------ -------
Net income (loss)................... $ 339 $ (183) $ 3,444 $ 338 $ 1,848
======= ======= ======= ====== =======
Net income per share................ $ 0.34
=======
Shares outstanding.................. 5,400
The accompanying notes are an integral part of the financial statements.
F-3
50
CERION TECHNOLOGIES INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------ MARCH 31, MARCH 29,
1994 1995 1995 1996
------ ------- --------- ---------
(UNAUDITED)
ASSETS
Current Assets:
Cash......................................... $ 99 $ 173 $ 17 $ 97
Restricted cash.............................. 27 -- 44 --
Accounts receivable, net of allowances for
doubtful accounts and customer returns of
$36, $30, $66 and $139, respectively...... 2,974 5,930 3,393 7,394
Accounts receivable -- Nashua................ -- -- -- 548
Inventories.................................. 421 312 459 673
Deferred income taxes and other assets....... 71 94 148 94
------ ------- ------ -------
Total current assets................. 3,592 6,509 4,061 8,806
Property, plant and equipment, net............. 3,950 5,365 3,765 6,686
Other assets................................... 4 -- 4 --
------ ------- ------ -------
$7,546 $11,874 $ 7,830 $15,492
====== ======= ====== =======
LIABILITIES, PARENT COMPANY INVESTMENT
AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses........ $ 921 $ 3,073 $ 1,202 $ 4,843
Current maturities of long-term debt......... 26 -- 26 --
Short-term debt.............................. -- -- -- 1,142
------ ------- ------ -------
Total current liabilities............ 947 3,073 1,228 5,985
Long-term debt................................. 316 -- 310 10,000
Deferred income taxes.......................... 162 343 175 343
Parent company investment...................... 6,121 8,458 6,117 --
Stockholder's equity:
Preferred Stock, par value $.01 per share,
100,000 shares authorized, none issued.... --
Common Stock, par value $.01 per share,
20,000,00 shares authorized; 5,400,000
shares issued and outstanding............. 54
Additional paid-in capital................... (890)
Retained earnings............................ --
-------
Total stockholder's equity
(deficit).......................... (836)
------ ------- ------ -------
$7,546 $11,874 $ 7,830 $15,492
====== ======= ====== =======
The accompanying notes are an integral part of the financial statements.
F-4
51
CERION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ----------------------
----------------------------- MARCH 31, MARCH 29,
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
(UNAUDITED)
Cash flows provided by (used in)
operating activities:
Net income (loss)....................... $ 339 $ (183) $ 3,444 $ 338 $ 1,848
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation.......................... 770 876 1,035 243 400
Deferred income taxes................. 87 55 158 15 --
Changes in operating assets and
liabilities:
Accounts receivable................ 216 (2,867) (2,956) (419) (1,464)
Inventories........................ (367) 163 109 (38) (361)
Accounts payable and accrued expenses.. (12) (25) 2,152 (80) 1,770
Other assets....................... -- -- 31 355 --
------- ------- ------- ----- -------
Net cash provided by (used in) operating
activities............................ 1,033 (1,981) 3,973 414 2,193
------- ------- ------- ----- -------
Cash flows used in investing activities:
Additions to property, plant and
equipment.......................... (1,927) (1,148) (2,564) (61) (1,721)
Proceeds from sale of assets.......... 60 4 114 -- --
------- ------- ------- ----- -------
Cash flows used in investing
activities............................ (1,867) (1,144) (2,450) (61) (1,721)
------- ------- ------- ----- -------
Cash flows provided by (used in)
financing activities:
Investment by (payments to) parent
company............................ 857 3,121 (1,107) (341) (548)
Repayment of borrowings............... (23) (22) (342) (6) --
------- ------- ------- ----- -------
Cash flows provided by (used in)
financing activities.................. 834 3,099 (1,449) (347) (548)
------- ------- ------- ----- -------
Increase (decrease) in cash............. -- (26) 74 6 (76)
Cash at beginning of year............... 125 125 99 11 173
------- ------- ------- ----- -------
Cash at end of year..................... $ 125 $ 99 $ 173 $ 17 $ 97
======= ======= ======= ===== =======
Supplemental disclosure of cash flow
information:
Interest paid......................... $ 93 $ 115 $ 316 $ 84 $ 120
The accompanying notes are an integral part of the financial statements.
F-5
52
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Business Definition
The business of Cerion Technologies Inc. (the "Company") has been operated
by Nashua Corporation ("Nashua" or the "Parent") since its acquisition in 1986.
As of December 31, 1995, Nashua converted the Company into a wholly-owned
subsidiary of Nashua and contributed to it the business of the Nashua Precision
Technologies division in return for the Company's stock and its assumption of
the liabilities of the business. The Company was renamed Cerion Technologies
Inc. on March 4, 1996.
The Company develops, manufactures and markets precision-machined aluminum
disk substrates that are used in the production of magnetic thin film disks for
hard disk drives of portable and desktop computers, network servers, add-on
storage devices and storage upgrades. The Company also produces organic
photoconductor drum substrates for laser printer cartridges. The Company
considers itself to operate in one business segment. Substantially all sales are
made in the U.S. and are denominated in U.S. dollars.
Basis of Presentation
The accompanying financial statements have been prepared as if the Company
had operated as an independent, stand alone entity for all periods presented.
Such financial statements have been prepared using the historical basis of
accounting and include all of the assets, liabilities, revenues and expenses of
the Company previously included in Nashua's consolidated financial statements;
however, certain adjustments have been made to reflect the operations of the
Company on a stand alone basis. Consequently, these statements include balances
for other assets and liabilities related to the Company that were previously
included in Nashua's consolidated financial statements except that there is no
allocation to the Company of Nashua's borrowings. However, an allocation of
Nashua's interest expense has been recorded as determined based upon the
Company's net assets as a proportion of Nashua's consolidated net assets.
Management believes that the basis for such allocation is reasonable. The
Company's results of operations are included in Nashua's Federal, state and
local income tax returns. See Note 12 for the definition of "Parent Company
Investment." In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 55 ("SAB 55"), these statements have been adjusted to
include certain corporate expenses incurred by the Parent on the Company's
behalf. The financial statements may not necessarily present the Company's
financial position and results of operations as if the Company were a stand
alone entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
The Company values all of its inventories at the lower of cost or market on
a first-in, first-out basis (FIFO).
Property, Plant and Equipment, Net
Property, plant and equipment is recorded at cost. Expenditures for
maintenance and repairs are charged to expense while the costs of significant
improvements are capitalized. Depreciation is provided using the straight-line
method. Upon retirement or sale, the cost of assets disposed and the related
accumulated depreciation are eliminated and related gains or losses reflected in
the statements of operations. The estimated useful lives of the assets are as
follows:
Buildings and improvements............................................ 10 to 30 years
Machinery and equipment............................................... 4 to 10 years
Furniture and fixtures................................................ 3 to 10 years
Shipping containers................................................... 2 years
F-6
53
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Sales of products and services are recorded based on product shipment to
customers.
Research, Development and Engineering
Included in selling, general and administrative expenses are research,
development and engineering expenditures of $813,000, $787,000, $809,000,
$211,000, and $362,000 for the years ended December 31, 1993, 1994, 1995, and
the three-month periods ended March 31, 1995 and March 29, 1996, respectively.
Research, development and engineering expenditures are charged to operations as
incurred.
Income Taxes
The results of the Company's operations have been included in the Federal
and state consolidated income tax returns of the Parent. The provision (benefit)
for income taxes included in these financial statements has been calculated as
if the Company were a stand alone taxpayer.
Prepaid or deferred income taxes result principally from the use of
different methods of depreciation for income tax and financial reporting
purposes, the recognition of expenses for financial reporting purposes in years
different from those in which the expenses are deductible for income tax
purposes and the recognition of the tax benefit of net operating losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1994 and 1995
and March 31, 1995 and March 29, 1996 and the reported amounts of net sales and
expenses during the three years in the period ended December 31, 1995 and the
three-month periods ended March 31, 1995 and March 29, 1996. Actual results
could differ from those estimates.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has decided to adopt SFAS 123 through
disclosure only.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The
impact of the adoption of SFAS 121 had no impact on the Company's financial
statements.
Net Income Per Share
Net income per share for the three month period ended March 29, 1996 is
determined by dividing net income applicable to common stock by the weighted
average number of common shares outstanding during the period.
Unaudited Interim Financial Statements
The unaudited interim financial statements have been prepared in conformity
with generally accepted accounting principles and include all adjustments which
are, in the opinion of management, necessary for a
F-7
54
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
fair presentation of the results for the interim periods presented. All such
adjustments are, in the opinion of management, of a normal recurring nature.
Results for the three months ended March 31, 1995 and March 29, 1996 are not
necessarily indicative of results to be expected for a full year. All data at
March 31, 1995 and March 29, 1996 and for each of the three-month periods then
ended are unaudited.
3. RELATED PARTY TRANSACTIONS AND ALLOCATIONS
Cash
The Company has utilized Nashua's centralized cash management services.
Under arrangements with Nashua, excess cash generated by the Company is retained
by Nashua.
Product Sales
During the years ended December 31, 1993, 1994, 1995 and three-month
periods ended March 31, 1995 and March 29, 1996, the Company had sales of
approximately $13,284,000, $5,541,000, $645,000, $179,000 and $0, respectively,
to divisions of Nashua. The amounts due from these divisions included in the
Parent Company Investment were approximately $538,000 at December 31, 1994 and
$643,000 at December 31, 1995. The Company believes that the product prices for
such sales were substantially at market prices.
Corporate Services
In accordance with SAB 55, Nashua has allocated a portion of its domestic
corporate expenses and charges to its divisions, including the Company. These
expenses have included management and corporate overhead; benefit
administration; risk management/insurance administration; tax and treasury/cash
management services; environmental services; litigation administration services;
and other support and executive functions. Allocations and charges were based on
either a direct cost pass through or a percentage allocation for such services
provided based on factors such as net sales, management time or headcount. Such
allocations and corporate charges totaled $68,000, $88,000, $227,000, $66,000,
and $102,000 for the years ended December 31, 1993, 1994, 1995, and the
three-month periods ended March 31, 1995 and March 29, 1996, respectively.
Domestic research and development expenses of the Parent related to the
Company's business and allocated to the Company in accordance with SAB 55
totaled $36,000, $48,000, $69,000, $20,000 and $42,000 for the years ended
December 31, 1993, 1994 and 1995, and the three months ended March 31, 1995 and
March 29, 1996, respectively, which are included in selling, general and
administrative expenses.
Management believes that the basis used for allocating corporate services
is reasonable. However, the terms of these transactions may differ from those
that would result from transactions among unrelated parties. Management believes
that related expenses that would have been incurred during the year ended
December 31, 1995 had the Company operated on a stand-alone basis would have
approximated $784,000 (unaudited).
Employee fringe benefit expenses are allocated to the Company based on
Nashua's total benefits costs and the proportion of Nashua's total salaries and
wages represented by the Company's salaries and wages. Fringe benefit costs,
which are reflected in cost of sales and selling, general and administrative
expenses, include employer FICA and unemployment taxes, medical insurance and
annual contributions made to the Nashua Corporation Retirement Plan for Salaried
Employees, the Nashua Corporation Hourly Employees Retirement Plan and the
Nashua Corporation Employees Savings' Plan (see Note 8). The Company was
allocated $741,000, $834,000, $1,193,000, $332,000 and $161,000 for the years
ended December 31, 1993, 1994, 1995, and the three-month periods ended March 31,
1995 and March 29, 1996, respectively, for these expenses. Management believes
the allocation method for fringe benefit costs is reasonable.
F-8
55
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
-------------------------- MARCH 31, MARCH 29,
1994 1995 1995 1996
----------- ---------- ----------- -----------
Raw materials.................. $ 278,000 $ 258,000 $ 312,000 $ 263,000
Work in progress............... 13,000 6,000 13,000 9,000
Finished goods................. 130,000 48,000 134,000 401,000
-------- -------- -------- --------
$ 421,000 $ 312,000 $ 459,000 $ 673,000
======== ======== ======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
----------------------------
1994 1995
----------- ----------
Land................................................... $ 185,000 $ 185,000
Buildings and improvements............................. 2,492,000 2,629,000
Machinery and equipment................................ 2,678,000 3,250,000
Furniture and fixtures................................. 118,000 113,000
Construction in progress............................... 182,000 888,000
Containers............................................. 270,000 730,000
---------- ----------
5,925,000 7,795,000
Less: accumulated depreciation......................... (1,975,000) (2,430,000)
---------- ----------
$ 3,950,000 $5,365,000
========== ==========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
Accounts payable -- trade................................... $399,000 $1,319,000
Container deposits.......................................... 116,000 710,000
Accrued payroll and benefits................................ 261,000 574,000
Bank overdraft.............................................. 88,000 380,000
Other....................................................... 57,000 90,000
-------- ----------
$921,000 $3,073,000
======== ==========
7. LONG-TERM DEBT
The outstanding long-term debt at December 31, 1994 represents a Small
Business Administration loan. This loan had an interest rate of 11.8% and was
payable in equal monthly installments of approximately $5,000. In May 1995, the
Company prepaid the entire balance of the loan. See Note 14 for a description of
the promissory note payable to Nashua in the principal amount of $10.0 million.
F-9
56
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE RETIREMENT PLANS
Retirement benefits are provided to the Company's employees through the
Nashua Corporation Employees' Savings Plan ("Savings Plan"), the Nashua
Corporation Hourly Employees Retirement Plan and the Nashua Corporation
Retirement Plan for Salaried Employees. The Savings Plan allows employees with
two months of continuous service to make certain tax-deferred voluntary
contributions which the Company generally matches with a 50% contribution,
limited to 3% of an employee's base pay.
The Retirement Plans are defined benefit plans. Guaranteed retirement
income levels are determined based on years of service and salary levels as
integrated with Social Security benefits. Employees are eligible under the
Retirement Plans after one year of continuous service and are 100% vested after
five years of service. Nashua's Retirement Plans are subject to Internal Revenue
Service and ERISA funding limitations. Assets of the plans are invested in
interest-bearing cash equivalents, fixed income securities and common stocks.
Total expense under the Savings and Retirement Plan is included in the
Company's financial statements through the fringe benefit allocations discussed
in Note 2. Nashua has not performed a separate actuarial calculation of the
status of the Retirement Plans for the Company. The Company expects to adopt a
plan similar to the Savings Plan after completion of the proposed public
offering.
9. LEASES
Lease agreements cover office equipment and automobiles under operating
lease arrangements. These leases have expiration dates through 1999. Rental
expense was approximately $78,000 in 1993, $72,000 in 1994 and $78,000 in 1995.
Future minimum rents payable under noncancelable leases with initial terms
exceeding one year are as follows: $30,000 in 1996 and $23,000 in 1997.
10. INCOME TAXES
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
-------- --------- ----------
Current:
Federal.................................... $114,000 $(137,000) $1,736,000
State...................................... 21,000 (23,000) 316,000
-------- --------- ----------
Total current.............................. 135,000 (160,000) 2,052,000
Deferred:
Federal.................................... 73,000 47,000 134,000
State...................................... 14,000 8,000 24,000
-------- --------- ----------
Total deferred............................. 87,000 55,000 158,000
-------- --------- ----------
Provision (benefit) for income taxes....... $222,000 $(105,000) $2,210,000
======== ========= ==========
F-10
57
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets are comprised of the following:
DECEMBER 31,
--------------------------
1994 1995
--------- ----------
Deferred tax liabilities:
Depreciation........................................... $ 162,000 $ 343,000
======== ========
Deferred tax assets:
Accrued vacation....................................... $ 32,000 $ 36,000
Inventory reserve...................................... 7,000 20,000
Bad debt reserve....................................... 14,000 20,000
Other.................................................. 20,000 18,000
-------- --------
$ 73,000 $ 94,000
======== ========
Reconciliations between income taxes computed using the Federal statutory
income tax rate and the Company's effective tax rate are as follows:
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
---- ----- ----
Federal statutory rate........................................ 35.0% (35.0)% 35.0%
State and local income taxes, net of federal tax benefit...... 2.9 (3.4) 3.9
Other, net.................................................... 1.7 1.9 0.2
---- ----- ----
Effective tax rate............................................ 39.6% (36.5)% 39.1%
==== ===== ====
11. STOCKHOLDER'S EQUITY
The Company, on December 31, 1995, initially issued 5,400,000 shares
(adjusted to give effect to the subsequent stock split described in Note 14) of
common stock, $.01 par value per share, to Nashua. In exchange, Nashua
contributed to it the business of the Nashua Precision Technologies division,
including the liabilities of the business.
PARENT COMPANY RETAINED
INVESTMENT COMMON STOCK PAID IN CAPITAL EARNINGS
-------------- ------------ --------------- -----------
Balances, December 31, 1995...... $ 8,458,000 $ -- $ -- $ --
Issuance of Common Stock......... (8,458,000) 54,000 8,404,000 --
Nashua Notes..................... -- (9,294,000) (1,848,000)
Net Income....................... 1,848,000
----------- ------- ------------ -----------
Balances, March 29, 1996......... $ -- $ 54,000 $ (890,000) $ --
=========== ======= ============ ===========
12. PARENT COMPANY INVESTMENT
Because the Company operated at various times as a division and as part of
a wholly-owned subsidiary of Nashua, its equity accounts have been combined and
presented as Parent Company Investment. Parent Company Investment also includes
balances related to intercompany transactions and other charges and
F-11
58
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
credits as more fully described in Note 2. No interest has been charged on
Parent Company Investment. A summary of changes in Parent Company Investment is
as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
---------- ---------- -----------
Beginning balance................................. $1,987,000 $3,183,000 $ 6,121,000
Net income (loss)................................. 339,000 (183,000) 3,444,000
Advances from (payments to) Parent, net........... 857,000 3,121,000 (1,107,000)
---------- ---------- -----------
Ending balance.................................... $3,183,000 $6,121,000 $ 8,458,000
========== ========== ===========
13. CONCENTRATION OF BUSINESS ACTIVITIES
Customer Concentration
During the year ended December 31, 1995 and the three-month period ended
March 29, 1996 the Company shipped most of its aluminum disk substrates to two
customers. These two customers represented approximately 45% and 41%, in the
year ended December 31, 1995 and approximately 38% and 46% in the three-month
period ended March 29, 1996, respectively, of net sales.
Concentration of Credit Risk
The Company sells substantially all of its production to customers in the
U.S. The Company performs ongoing credit evaluations of its customers. The
Company does not require collateral for its receivables and maintains an
allowance for potential credit losses.
Dependence on Supplier
The Company relies solely on one supplier for aluminum blanks used in the
manufacture of aluminum disk substrates. Aluminum blank purchases were
approximately $2,664,000, $3,252,000, $5,729,000, $1,298,000 and $2,746,000 for
the years ended December 31, 1994 and 1995 and the three-month periods ended
March 31, 1995 and March 29, 1996, respectively.
14. SUBSEQUENT EVENTS
Issuance of Notes Payable to the Parent
As of March 1, 1996, Cerion distributed a dividend to Nashua in the form of
a Promissory Note (the "First Nashua Note") payable to Nashua in the principal
sum of $10,000,000. The First Nashua Note bears interest at the annual rate of
7.32% from March 1, 1996 to September 30, 1996. Thereafter, until February 28,
1998 when the full amount of the First Nashua Note becomes due, interest accrues
at a rate equal to prime plus 2.5%. If the First Nashua Note is paid in full on
or before May 31, 1996, the lesser of $183,000 or all interest accrued as of the
date of payment will be forgiven. Thereafter, the amount of prepayment discount
on the First Nashua Note declines each month through August 31, 1996. Any
prepayment made by the Company will be without penalty but, after August 31,
1996, will not have the benefit of any prepayment discount. Interest on the
First Nashua Note that accrues from March 1, 1996 through May 31, 1996 will not
be due and payable until May 31, 1996. Thereafter, interest is payable monthly.
As of March 29, 1996, the Company distributed a second dividend to Nashua
in the form of a Promissory Note (the "Second Nashua Note") payable to Nashua in
the principal amount of $1.142 million. The Second Nashua Note bears interest at
the annual rate of 7.32% and matures upon the earlier of the closing of this
offering or July 31, 1996. Interest on the Second Nashua Note will not be due
and payable until the maturity date of the Second Nashua Note.
F-12
59
CERION TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
During March 1996, the Company effected a 1,800-for-one stock split. All
share data in the accompanying financial statements have been retroactively
restated to reflect the stock split.
Proposed Public Offering
On March 14, 1996, the Board of Directors approved the filing of a
registration statement with the Securities and Exchange Commission covering the
proposed issuance and sale by the Company and the proposed sale by the Parent of
the Company's Common Stock to the public.
1996 Stock Incentive Plan
In February 1996, the Board of Directors adopted the 1996 Stock Incentive
Plan (the "Plan") and reserved 701,500 shares of Common Stock, of which options
for 422,680 shares of Common Stock have been granted by the Company to certain
employees and directors effective upon completion of this offering, and an
estimated 1,540 shares have been granted to two directors effective upon
completion of this offering. The Plan provides for grants of incentive stock
options to employees and directors of the Company and grants of stock to
non-employee directors of the Company.
The options are separated into two categories with different vesting
provisions. The first category, one-year vesting options, will become
exercisable on the first anniversary date of the option grant if the optionee
remains an employee or director of the Company on such date. The second
category, performance-accelerated options, will become exercisable in tranches
of 25% each based upon the Common Stock trading, for a period of 20 consecutive
trading days, at an average premium of 25%, 50%, 75% and 100%, respectively,
above the initial public offering price, if the optionee remains an employee of
the Company on such date. However, if any such performance goals are met prior
to the first anniversary of the grant date, the shares that would otherwise
become exercisable thereby only become exercisable on the first anniversary date
of the grant date, if the optionee remains an employee of the Company on such
date. On the eighth anniversary of the grant date, any remaining shares subject
to a "performance-accelerated" option will become exercisable, if the optionee
remains an employee of the Company on such date.
In the event of a merger, consolidation, reverse merger or reorganization,
or certain other events constituting a "Change in Corporate Control" as defined
in the Plan, options outstanding under the Plan will automatically become fully
vested and will terminate if not exercised prior to such event.
No option granted under the Plan may be exercised after the expiration of
ten years from the date it was granted. The exercise price of options under the
Plan will equal the fair market value of the Common Stock on the date prior to
the grant. The Plan will terminate in January 2006, unless earlier terminated by
the Board of Directors.
F-13
60
Cerion manufactures precision-machined,
aluminum disk substrates, which are the
[photo] metallic platforms of magnetic thin film
disks used in hard disk drives of portable
and desktop computers, network servers and
add-on storage devices.
The Company also
manufactures OPC drum [photo]
substrates for desktop
laser printer cartridges.
61
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 12
Dividend Policy........................ 12
Capitalization......................... 13
Dilution............................... 14
Selected Financial Data................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 23
Management............................. 32
Ownership of Common Stock by Nashua.... 38
Information Concerning Nashua and its
Relationship with the Company........ 38
Description of Capital Stock........... 41
Shares Eligible for Future Sale........ 43
Underwriting........................... 44
Legal Matters.......................... 45
Experts................................ 45
Additional Information................. 46
Index to the Financial Statements...... F-1
------------------------
UNTIL JUNE 18, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,840,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
MAY 24, 1996
-------------------
WILLIAM BLAIR & COMPANY
- ------------------------------------------------------
- ------------------------------------------------------