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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1984
For the transition period from to
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Commission file number 0-28062
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CERION TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 02-0485458
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(State of incorporation) (I.R.S. Employer Identification Number)
1401 Interstate Drive
Champaign, Illinois 61821-1090
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (217) 359-3700
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 27, 1996
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Common Stock, par value $.01 7,016,184 shares
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PART 1 -FINANCIAL INFORMATION
ITEM 1 -FINANCIAL STATEMENTS
CERION TECHNOLOGIES INC.
BALANCE SHEETS
(dollars in thousands)
September 27, December 31,
1996 1995
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,104 $ 173
Short term investments 3,502
Accounts receivable 2,648 5,930
Inventories 1,994 312
Deferred income taxes and other assets 495 94
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Total current assets 14,743 6,509
Property, plant and equipment, net 9,636 5,365
Other assets 102 --
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$24,481 $11,874
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LIABILITIES, PARENT COMPANY INVESTMENT
AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 3,691 $ 3,073
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Total current liabilities 3,691 3,073
Deferred income taxes 343 343
Parent company investment -- 8,458
Shareholders' equity:
Preferred Stock, par value $.01 per share, 100,000
shares authorized, none issued -- --
Common Stock, par value $.01 per share, 20,000,000 70 --
shares authorized; 7,016,184 shares issued and
outstanding
Additional paid in capital 18,639 --
Retained earnings 1,738 --
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Total shareholders' equity 20,447 --
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$24,481 $11,874
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CERION TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
September 27, September 29, September 27, September 29,
1996 1995 1996 1995
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Net sales $5,522 $7,232 $30,736 $18,150
Cost of sales 4,954 5,101 20,515 13,264
------ ------ ------- -------
Gross profit 568 2,131 10,221 4,886
Selling, general and administrative expenses 1,446 653 4,306 1,645
------ ------ ------- -------
Operating income (loss) (878) 1,478 5,915 3,241
Interest income (expense) 99 (76) 61 (240)
------ ------ ------- -------
Income (loss) before provision (benefit)
for income taxes (779) 1,402 5,976 3,001
Provision (benefit) for income taxes (312) 548 2,391 1,173
------ ------ ------- -------
Net income (loss) $ (467) $ 854 $ 3,585 $ 1,828
====== ====== ======= =======
Net income (loss) per share $(0.07) $ 0.16 $ 0.58 $ 0.34
====== ====== ======= =======
Average common shares 7,016 5,400 6,157 5,400
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CERION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
-----------------
(unaudited)
September 27, September 29,
1996 1995
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Cash flows provided by (used in) operating activities:
Net income $ 3,585 $ 1,828
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 1,461 737
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable 3,282 (1,657)
Inventories (1,682) 22
Deferred income taxes and other assets (516) 91
Accounts payable and accrued expenses 619 989
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Net cash provided by operating activities 6,749 2,010
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Cash flows used in investing activities:
Additions to property, plant and equipment 5,719 (1,009)
Purchase of short-term investments (4,496) --
Proceeds from redemption of short term investments 994 --
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Cash flows used in investing activities (9,221) (1,009)
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Cash flows provided by (used in) financing activities:
Payments to parent company (779)
Repayment of borrowings (11,142) (315)
Dividends paid -- --
Proceeds from shares issued 19,545 --
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Cash flows provided by (used in) financing activities 8,403 (1,094)
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Increase (decrease) in cash 5,931 (93)
Cash at beginning of period 173 99
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Cash at end of period $ 6,104 $ 6
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ 74 $ 240
Taxes paid $ 192 $ --
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CERION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Earnings Per Common and Common Equivalent Share
-----------------------------------------------
Earnings per common and common equivalent share is computed based on the total
of the weighted average number of common shares and, as applicable, the weighted
average number of common equivalent shares outstanding during the period.
Three Months Ended
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September 27, September 29,
1996 1995
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Common shares outstanding 7,016,184 5,400,000
Common share equivalents None None
The increase in the common shares outstanding represents the issuance of
additional shares at the closing of the Company's initial public offering on May
30, 1996.
2. Revolving Credit Facility
-------------------------
On May 30, 1996, the Company entered into a three year, $15.0 million revolving
credit facility ("facility") with LaSalle National Bank. The facility is
collateralized by all the Company's assets and the Company may borrow against
the facility based upon prescribed advance rates applied to the Company's
accounts receivable; inventories, short-term investments and property, plant and
equipment.
The facility bears interest either at the banks prime rate or LIBOR plus 185
basis points. The facility's terms include a fee for the unused credit facility
equal to 1/4% applied to the amount of the facility not outstanding payable
monthly. The facility contains certain covenants including a limitation of
dividends, and the maintenance of certain financial ratios. No amounts were
outstanding under the facility as of September 27, 1996.
In connection with the obtaining of the facility, the Company paid a commitment
fee equal to 25 basis points (1/4%) of the total facility and other costs
totaling approximately $112,000. These costs are amortized over the term of the
facility.
The net loss reported for the three month period ended September 27, 1996
results in the Company being out of compliance with certain financial covenants
in its revolving credit facility with its lender. The Company expects to
renegotiate the terms of its facility. As the Company has no debt outstanding,
this development has only an effect to the Company in terms of future borrowing
requirements.
Other
- -----
The financial statements for the three month and nine month periods ended
September 27, 1996 and September 29, 1995 are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's
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discussion and analysis of financial condition and results of operations,
contained in the Company's Prospectus dated May 24, 1996. The results of
operations for the three months and nine months ended September 27, 1996 are not
necessarily indicative of the results for the entire fiscal year ending December
31, 1996.
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.
On May 30, 1996, the Company closed on the Initial Public Offering of its stock
with the sale of 4,416,000 shares of its Common Stock. Of the 4,416,000 shares
of Common Stock sold, 1,615,000 shares were sold by the Company and 2,801,000
were sold by Nashua Corporation. Nashua Corporation continues to own
approximately 37% of the Company's outstanding Common Stock.
The shares were sold to the public at $13.00 per share. The net proceeds to the
Company after the Underwriting Discount was $19,525,350.
On May 31, 1996, the Company repaid the two outstanding Promissory Notes issued
to Nashua Corporation in March 1996 having a combined principal sum of
$11,142,000. The prepayments were made without penalty. The Company received the
benefit of a prepayment discount of $183,000, representing accrued interest, by
paying the $10 million promissory note on or before May 31, 1996. The prepayment
discount is included in Interest Income for the nine months ended September 27,
1996.
On July 9, 1996, the Company announced that StorMedia Inc., a major customer,
had canceled all of its outstanding purchase orders with the Company, following
a significant loss of orders by StorMedia. The Company has no assurance that it
will receive any future orders from StorMedia. This cancellation had a negative
impact on the Company's performance in the third quarter of 1996 and could have
a negative impact on subsequent quarters. StorMedia accounted for approximately
7% and 34% of the Company's revenues for the three months ended September 27,
1996 and June 28, 1996, respectively, and 47% of its revenue for the fiscal year
ended December 31, 1995.
Employment Contracts
- --------------------
The Company entered into employment contracts with its executive officers that
provide for specified conditions and benefits of employment including; contract
length of either two or three years, salary continuation and benefits upon
termination of either two or one year, and a noncompete provision for a period
of one-year after final payment is made to the employee under the agreements.
The agreements provide for the employees to receive salary continuation equal to
three times salary in the event a change of control occurs as defined in the
agreements and employment termination occurs within three years of when such
change in control occurs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
FORWARD -LOOKING STATEMENTS -- SAFE HARBOR
- ------------------------------------------
This Report contains certain forward-looking statements, including the statement
below regarding the possible impact of cancellation of orders by a major
customer and backwards integration within the industry towards the manufacture
of aluminum disk substrates. Moreover, from time to time in both written
releases and reports and oral statements, the company and its senior management
may express expectations regarding future performance of the Company. All of
these "forward-looking statements" are inherently uncertain, and investors must
recognize that events may differ from Senior Management expectations. Key risk
factors that could, in particular, have an adverse impact on current and future
performance include the Company's dependence on a small number of customers, as
witnessed by the cancellation of orders in July 1996 by StorMedia Inc. (which
had been one of the Company's two largest customers), a trend toward vertical
integration among thin-film disk manufacturers that may reduce demand for the
Company's products, dependence on the intensely competitive and cyclical
hard-disk drive industry, absence of long-term purchase commitments from the
Company's customers and risk of excess industry capacity, particularly in light
of an apparent recent softening in demand for thin-film disks. See "Risk
Factors" beginning at Page 6 of the Company's Prospectus dated May 24, 1996 for
a more detailed discussion of factors (updated by the foregoing and other
discussion in this Report) that could affect the Company's performance and the
value of its common stock.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Net Sales. Net sales decreased $1.7 million, or 23.6%, to $5.5 million in
the three months ended September 27, 1996 from $7.2 million in the three months
ended September 29, 1995. This decrease of revenue in the three months ended
September 27, 1996 is attributable to the loss of sales volume with cancellation
of orders by a major customer and lower than expected orders from remaining
customers. The reduced orders are attributable to an apparent slowdown in
industry requirements and the expansion of capacity for the manufacture of
aluminum disk substrates by customers and potential customers, limiting current
overall order potential. The lower order volumes combined with the other factors
noted here resulted in lower average selling prices in the third quarter and
such prices are expected to continue to decrease in subsequent quarters.
Net sales increased $12.6 million, or 69.6%, to $30.7 million in the nine months
ended September 27, 1996 from $18.1 million in the nine months ended September
29, 1995. This growth during the beginning of the nine month period was
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 the
beginning of 1996. The increase in net sales consisted primarily of growth in
unit volume due to improved utilization of existing production capacity,
productivity gains and capital expenditures for additional capacity.
On July 9, 1996, the Company announced that StorMedia Inc., a major customer,
had canceled all of its outstanding purchase orders with the Company, following
a significant loss of orders by StorMedia. The Company has no assurance that it
will receive any future orders from StorMedia. This cancellation had a negative
impact on the Company's performance in the third quarter of 1996 and could have
a negative impact on subsequent quarters. StorMedia accounted for approximately
7% and 34% of the Company's
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revenues for the three months ended September 27, 1996 and June 28, 1996,
respectively, and 47% of its revenue for the fiscal year ended December 31,
1995.
Gross Profit. Gross profit decreased $1.5 million to $0.6 million in the
three months ended September 27, 1996 from $2.1 million in the three months
ended September 29, 1995. Gross profit as a percentage of net sales decreased to
10.3% in the third quarter of 1996 compared to 29.5% in the third quarter of
1995. The decrease in gross profit was attributable to the under utilization of
existing capacity and the spreading of higher fixed costs attributable to a
larger available production capacity over a substantially lower sales volume.
Gross profit also decreased due to lower average selling prices of the Company's
products in the third quarter of 1996 compared to the third quarter of 1995.
Gross profit increased $5.3 million to $10.2 million in the nine months ended
September 27, 1996 from $4.9 million in the nine months ended September 29,
1995. Gross profit as a percentage of net sales increased to 33.3% in the first
nine months of 1996 compared to 26.9% in the first nine months 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 during the first six months of 1996.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased $793,000, or 121%, to $1.4 million in the
three months ended September 27, 1996 from $656,000 in the three months ended
September 29, 1995. Selling, general and administrative expenses increased $2.7
million, or 162%, to $4.3 million in the nine months ended September 27, 1996
from $1.6 million in the nine months ended September 29, 1995. This increase was
primarily due to the costs of additional personnel to support the Company's
growth experienced in the first six months of 1996 (including the addition of
two executive officers), the costs associated with the Company becoming a
stand-alone company, and increased profit-sharing and performance-based bonus
expenses during the first six months of 1996. Selling, general and
administrative expenses as a percentage of net sales increased to 26.2% in the
third quarter of 1996 compared to 9.0% in the third quarter of 1995. The
increase in the percentage results from both growth in absolute spending and a
lower revenue base during the third quarter of 1996.
Interest Income. Interest income consists of interest income from
short-term investments.
Provision (Benefit) for Income Taxes. The Company recognized a benefit for
income taxes of $312,000 in the three months ended September 27, 1996 resulting
from operating losses compared to a provision for income taxes of $548,000 in
the three months ended September 29, 1995. The Company's effective tax rate was
40% in the third quarter of 1996 compared to 39% in the third quarter of 1995.
Fourth Quarter 1996. The Company expects that future operating results will
be impacted by industry vertical integration that reduces demand for its
products and will result in lower sales prices and gross margins. The Company
expects that the financial results for the fourth quarter of 1996 will not
exceed the results reported for the three months ended September 27, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund working capital
needs and capital expenditures in order to support the Company's sales growth
experienced in the first six months of 1996. During the periods presented, these
capital requirements have generally been satisfied by cash flows from
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operations. Nashua Corporation (previously owned 100% of Cerion until the
initial public offering which reduced Nashua's ownership to 37%) historically
has performed cash management services for the Company. The Company's cash flow
was directed to Nashua, and Nashua in turn provided cash to the Company to fund
operating expenses and capital expenditures. On May 31, 1996, this arrangement
ceased. Shortly thereafter, the Company and Nashua determined the respective
cash flows from the Company to Nashua, and from Nashua to the Company, during
the period from January 1, 1996 through May 30, 1996, and settled a net amount
due from Cerion to Nashua for approximately $200,000.
Net cash provided by operating activities was $6.7 million and $2.0 million in
the nine months ended September 27, 1996 and September 29, 1995, respectively.
The increase in cash provided by operating activities from the first nine months
of 1995 to the first nine months of 1996 was primarily due to increases in net
income and the decrease in accounts receivable from December 31, 1995 to
September 27, 1996 associated with the decline of the Company's net sales
experienced in the three months ended September 27, 1996. The increase in
accounts payable from December 31, 1995 to September 27, 1996 consisted of
increased trade payables associated with the overall growth in the business and
capital projects undertaken by the Company in connection with its expansion that
were begun in the second quarter.
Net cash used in investing activities was $9.2 million and $1.0 million in the
first nine months of 1996 and 1995, respectively. Cash used in investing
activities was primarily capital expenditures related to modifications of
existing equipment, purchases of new equipment and the purchase and redemption
of short-term investments. The newly purchased equipment increased both
manufacturing capacities and efficiencies. The Company's short-term investments
are comprised of investment grade commercial paper.
Net cash provided by financing activities increased in the first nine months of
1996 due to the proceeds from the initial public offering partially offset by
the repayment of the Company's indebtedness. Net cash provided by financing
activities was $8.4 million in the first nine months of 1996. In the first nine
months of 1995, net cash used by financing activities was $1.1 million.
The Company is currently renegotiating the terms of its revolving credit
facility with LaSalle National Bank because of being out of compliance with
certain financial covenants. As the Company has no debt outstanding, being out
of compliance has only an effect to the Company in terms of future borrowing
requirements. The Company's current levels of cash and cash equivalents combined
with short-term investments will be sufficient to meet near term cash
requirements of the Company including planned capital expenditures through the
end of 1996. The Company has put the construction of a second manufacturing
facility on hold at this time.
On May 30, 1996, the Company closed on the Initial Public Offering of its stock
with the sale of 4,416,000 shares of its Common Stock. Of the 4,416,000 shares
of Common Stock sold, 1,615,000 shares were sold by the Company and 2,801,000
were sold by Nashua Corporation. Nashua Corporation continues to own
approximately 37% of the Company's outstanding Common Stock.
The shares were sold to the public at $13.00 per share. The net proceeds to the
Company after the Underwriting Discount was $19,525,350.
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On May 31, 1996, the Company repaid the two outstanding Promissory Notes issued
to Nashua Corporation in March 1996 having a combined principal sum of
$11,142,000. The prepayments were made without penalty. The Company received the
benefit of a prepayment discount of $183,000, representing accrued interest, by
paying the $10 million promissory note on or before May 31, 1996. The prepayment
discount is included in Interest Income.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
On August 8, 1996, an individual plaintiff, Joshua Teitelbaum, initiated a
lawsuit against the Company, Nashua Corporation ("Cerion"), William Blair & Co.,
David A. Peterson, Paul A. Harter, Richard A. Clark and Gerald G. Garbacz in the
Circuit Court of Cook County, Illinois. The action purports to be on behalf of a
class consisting of all persons (other than the defendants) who purchased the
common stock of the Company between May 24, 1996 and July 9, 1996. The complaint
alleges that, in connection with the Company's initial public offering, the
defendants issued certain materially false and misleading statements and omitted
the disclosure of material facts regarding, in particular, certain significant
customer relationships. The complaint alleges that the defendants violated
sections 11, 12, and 15 of the 1993 Securities Act sections 12 and 13 of the
Illinois Blue Sky Law. The complaint seeks a declaration that the case may
proceed as a class action, damages, recission of the sale of the Company's
common stock by the Company, costs, attorneys fees, and other relief on behalf
of the individual plaintiff and the class. The Company believes the lawsuit to
be without merit and intends to vigorously defend against this action.
On September 4, 1996, an individual plaintiff, Philippe Olczyk, initiated a
lawsuit against the Company, Nashua Corporation, William Blair & Co., David A.
Peterson, Daniel M. Junius and Gerald G. Garbacz in the Circuit Court of Cook
County, Illinois. The action purports to be on behalf of a class consisting of
all persons (other than the defendants) who purchased the common stock of the
Company between May 24, 1996 and July 9, 1996. The complaint alleges that, in
connection with the Company's initial public offering, the defendants issued
certain materially false and misleading statements and omitted the disclosure of
material facts regarding, in particular, certain significant customer
relationships. The complaint alleges that the defendants violated the Illinois
Blue Sky Law and the Illinois Consumer Fraud and Deceptive Practices Act. The
complaint seeks declarations that the case may be maintained as a class action
and that the defendants violated the Illinois Consumer Fraud Act, actual
punitive damages, costs, attorneys fees, appointment of a trustee, and other
relief. The Company believes the lawsuit to be without merit and intends to
vigorously defend against this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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A. Exhibits
10.1 Employment Contract between Cerion Technologies Inc. and David Peterson
as President and Chief Executive Officer.
10.2 Form of Employment Contract between Cerion Technologies Inc. and the
four remaining executive officers of the Company.
11.1 Computation of Per Share Earnings
B. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERION TECHNOLOGIES INC.
--------------------------------
(Registrant)
Date: November 8, 1996 By: /s/ Richard A. Clark
-----------------------------
Richard A. Clark
Vice President-Finance,
Chief Financial Officer and
Treasurer
(principal financial and duly
authorized officer)
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