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37
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 28, 1996
- -------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the transition period from
to
Commission file number: 0-16088
CERAMICS PROCESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2832509
- ------------------------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
Identification No.)
of incorporation or organization)
111 South Worcester Street, P.O. Box 338
Chartley, Massachusetts 02712
(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code: 508-222-0614
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value, $0.01 per share
- ----------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period than the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant was $2,157,614 based on the
average of the reported closing bid and asked prices for the
Common Stock on January 23, 1997 as reported on the OTC
Bulletin Board.
Number of shares of Common Stock outstanding as of January 23,
1997: 7,917,504 shares.
Documents incorporated by reference.
2
Part I
- -----------------------------------------------------------------------
Item 1. Business.
Ceramics Process Systems Corporation (the "Company" or
"CPS") develops, manufactures, and markets advanced metal-
matrix composite and ceramic components used to house and
interconnect microelectronic devices. These components are
typically in the form of housings, packages, lids, substrates,
thermal planes, or heat sinks. The Company's products are used
in applications where thermal management is important such as
power amplifiers for wireless communications, power modules for
motor controllers, and transmit and receive modules for radar
and electronic warfare.
The Company's products are manufactured by proprietary
processes the Company has developed such as the
QuicksetTMInjection Molding Process ("Quickset Process") and
the QuickCastTM Pressure Infiltration Process ("QuickCast
Process").
Although the Company's focus is the microelectronics
market, the Company participates in other markets through
licensing its technology to corporations who manufacture and
sell products in these other markets.
In fiscal 1996, 96% of the Company's total revenue was
derived from manufactured products, and 4% from licensing fees,
versus fiscal 1995 and fiscal 1994 in which 99%, 0%, and less
than 1%, and 97%, 3%, and less than 1%, respectively, of total
revenues was derived from manufactured products, research
contracts, and licensing fees, respectively.
The Company was incorporated in Massachusetts in 1984.
The Company reincorporated in Delaware in April 1987, through
merger into its wholly-owned Delaware subsidiary organized for
purposes of the reincorporation. In July 1987, the Company
completed its initial public offering of 1.5 million shares of
its Common Stock.
Markets and Products
- --------------------
The manufacture of microelectronic systems is comprised of
three key steps: (1) the integration of transistors into
integrated circuits ("ICs"), (2) the integration of ICs on
boards or modules, and (3) the integration of boards and
modules into systems. The Company produces products for the
second and third steps described above - products used to
integrate ICs on boards, and used to integrate boards and
modules into systems.
The Company believes that as the complexity, speed, and
density of electronic devices continues to increase, the market
will grow for advanced packaging and interconnecting products
which have a thermal coefficient of expansion match to ICs, and
which provide for the efficient removal of heat from the system
while providing the necessary mechanical and electrical
properties.
The metal-matrix composite aluminum silicon carbide ("Al-
SiC"), manufactured using the Company's proprietary processes,
is a material system which meets all these requirements and
which is finding acceptance in the marketplace as a replacement
for copper, copper-tungsten, copper-moly, and graphite. The
Company's aluminum nitride ("AlN") ceramic components, and high-
purity aluminum oxide ("Al2O3") ceramic components are used in
applications where high thermal conductivity and high circuit
density are required, respectively.
3
In fiscal 1996, Motorola Corporation, Olin Aegis, and
Texas Instruments accounted for 56%, 16%, and 13% of total
revenues, respectively. In fiscal 1995 and fiscal 1994, these
same companies accounted for 27%, 8%, and 21%, and 1%, 4%, and
23% respectively, of total revenue. In fiscal 1996, 36% of the
Company's total revenue resulted from defense-related business
and 64% was from commercial or non-defense related business.
Strategic Partnerships In Other Market Areas
- --------------------------------------------
In addition to its primary focus in the microelectronics
market, the Company participates in other markets through
licensing its technology to corporations who manufacture and
sell products in these other markets.
Companies who are licensees of CPS technology include
Texas Instruments, Carpenter Technology Corporation
("CarTech"), Aluminum Corporation of America ("Alcoa"), and
Vesuvius International ("Vesuvius"). In fiscal 1996, CPS
recognized $.085 million from license agreements with these
companies.
In 1991, CPS and Sopretac, a subsidiary of Vallourec of
Boulogne, France, established a joint venture, Metals Process
Systems ("MPS") to market on a worldwide basis licenses to use
the Quickset Process for metal injection molding. At December
30, 1995 the Company owned 40% of the voting stock in MPS (see
Patents and Trade Secrets), and Sopretac owned 60%. The
Company accounted for its investment in MPS under the equity
method and did not recognize any income or dividends from the
joint venture in 1996. In 1996, the Company's ownership
interest in MPS was reduced to less than 1%, based on
additional investment in MPS by Sopretac.
Research and Development
- ------------------------
All of the research, development and engineering costs
incurred for the years 1994 through 1996 pertained to partially
externally funded research and development contracts. In
fiscal 1996 and fiscal 1995, the Company did not incur any
costs for research and development. In fiscal 1994, the
Company incurred research, development and engineering costs in
the amounts of $0.04 million.
Availability of Raw Materials
- -----------------------------
The Company uses a variety of raw materials from numerous
domestic and foreign suppliers. These materials are primarily
ceramic and metal powders and chemicals. Other than certain
precious metals, of which little is used by the Company, the
raw materials used by the Company are available from domestic
and foreign sources and none is believed to be scarce or
restricted for national security reasons.
Patents and Trade Secrets
- -------------------------
As of December 28, 1996 the Company had 17 United States
patents. The Company also had several international patent
applications pending. The Company's licensees have rights to
use certain patents as defined in their respective license
agreements. The Company has granted co-ownership of five of
its patents and licensing rights to MPS in exchange for its
equity ownership in MPS. Under terms of the agreement, MPS has
the exclusive right to use such patents in the area of metal
powders and the Company has the exclusive right to use such
patents in all other areas, provided, however, that MPS has
granted to the Company a non-exclusive license to use the
patents in the area of metal powders.
4
The Company intends to continue to apply for domestic and
foreign patent protection in appropriate cases. In other
cases, the Company believes it may be better served by reliance
on trade secret protection. In all cases, the Company intends
to seek protection for its technological developments to
preserve its competitive position.
Backlog and Contracts
- ---------------------
As of December 28, 1996, the Company had a product backlog
of $2.07 million, compared with a product backlog of $0.9
million at December 30, 1995. The Company shipped 54% of the
year-end 1995 product backlog in 1996.
Competition
- -----------
The Company has developed and expects to continue to
develop products for a number of different markets and will
encounter competition from different producers of ceramic and
non-ceramic products. PCC Composites, Lanxide Electronic
Products, and Alcoa are the Company's primary competitors in
the metal matrix composite business. Kyocera Corporation and
Toshiba Corporation of Japan are the primary competitors in the
aluminum nitride component business. Kyocera Corporation and
ACX Corporation are the primary competitors in the aluminum
oxide component business.
The Company believes that the principal competitive
factors in its markets include technical competence, product
performance, quality, reliability, price, corporate reputation,
and strength of sales and marketing resources. The Company
believes its proprietary processes, reputation, and the price
at which it can offer products for sale will enable it to
compete successfully in the advanced microelectronics markets.
However, many of the American and foreign companies now
producing or developing products for the advanced ceramic
market have far greater financial and sales and marketing
resources than the Company, which may enable them to develop
and market products which would compete against those developed
by the Company.
Government Regulation
- ---------------------
The Company produces non-nuclear, non-medical hazardous
waste in its development and manufacturing operations. The
disposal of such waste is governed by state and federal
regulations.
Various customers, vendors, and collaborative development
agreement partners of the Company may reside abroad, thereby
possibly involving export and import of raw materials,
intermediate products, and finished products, as well as
potential technology transfer abroad under the respective
collaborative development agreements. These types of
activities are regulated by the Bureau of Export Administration
of the United States Department of Commerce.
The Company performs and solicits various contracts from
the United States government agencies and also sells to other
government contractors.
5
Employees
- ---------
As of year-end 1996, the Company and its wholly-owned
subsidiary, CPS Superconductor Corporation ("CPSS"), had 25
full-time employees, of whom 21 were engaged in manufacturing
and engineering, and 4 in administration. The Company also
employs temporary employees as needed to support production and
program requirements.
None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with
its employees to be excellent.
Item 2. Properties.
In February, 1994, the Company relocated its corporate
headquarters, manufacturing operations, engineering activities,
and research and development laboratories to a leased facility
in Chartley, Massachusetts. The Company is operating at the
Chartley facility as a tenant at will. Prior to its relocation
to Chartley, the Company was headquartered in a leased facility
in Milford, Massachusetts.
During 1993, the Company also entered into a five year
lease for a facility in Hopkinton, Massachusetts. In 1994, the
Company used the Hopkinton facility for storage and
warehousing. In 1995, the Company reached an agreement with
the lessor to terminate the lease effective January 31, 1995.
The Company's rental expense for operating leases was $68
thousand, $68 thousand, and $147 thousand in 1996, 1995 and
1994, respectively.
Item 3. Legal Proceedings.
The Company is not a party to any litigation which could
have a material adverse effect on the Company or its business
and is not aware of any pending or threatened material
litigation against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the year ended December 28, 1996.
Part II
- ------------------------------------------------------------------
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
On January 23, 1997, the Company had 301 shareholders of
record. The high and low closing bid prices of the Company's
common stock for each quarter during the years ended December
28, 1996 and December 30, 1995 are shown below.
- -------------------------------------------------------------
1996 1995
--------------- --------------
High Low High Low
---- ---- ---- ----
1st Quarter 7/16 5/32 1/2 3/8
2nd Quarter 11/16 1/8 1/2 3/8
3rd Quarter 11/16 3/8 1/2 3/8
4th Quarter 5/8 5/16 7/16 5/16
- -------------------------------------------------------------
6
The Company has never paid cash dividends on its Common
Stock. The Company currently plans to reinvest its earnings,
if any, for use in the business and does not intend to pay cash
dividends in the foreseeable future. Future dividend policy
will depend, among other factors, upon the Company's earnings
and financial condition.
The Company's Common Stock is traded on the Over-the-
Counter Bulletin Board under the symbol CPSX.
Item 6. Selected Consolidated Financial Data
The following selected financial data of the Company
should be read in conjunction with the consolidated financial
statements and related notes filed as part of this Annual
Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
For the Fiscal Year: 1996 1995 1994 1993 1992
- --------------------------------------------------------------------
Summary of Operations
- ---------------------
Revenue $ 2,007 $ 1,387 $ 1,192 $ 4,164 $ 5,002
Operating Expenses 2,201 2,221 3,071 4,113 7,809
------ ------- ------- ------- -------
Operating Income (Loss) (194) (834) (1,879) 51 (2,807)
Net Other Income (Expense) (217) (274) (38) 0 48
------ ------ ------ ------ ------
Net Income (Loss) $ (411) $(1,108) $(1,917) $ 51 $(2,759)
====== ====== ====== ====== ======
Net Income (Loss)
Per Common Share $ (0.05) $ (0.14) $ (0.25) $ 0.01 $ (0.40)
====== ====== ====== ====== ======
Weighted Average Number
of Common Shares
Outstanding 7,781* 7,675* 7,581* 7,620 6,982*
====== ====== ====== ====== ======
- --------------------------------------------------------------------
Year-end Position
- -----------------
Working Capital(Deficit) $(3,200) $(2,736) $( 165) $ 51 $ 129
Total Assets $ 795 $ 526 $ 932 $ 1,112 $ 2,121
Long-term Obligations $ 88 $ 0 $ 1,620 $ 8 $ 224
Stockholders' Equity
(Deficit) $(2,905) $(2,493) $(1,458) $ 449 $ 378
* Stock options and stock purchase warrants are not included as
their effect is antidilutive.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Annual Report on Form 10-K contains forward-looking
statements that involve a number of risks and uncertainties.
7
There are a number of factors that could cause the Company's
actual results to differ materially from those forecasted or
projected in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements
which may be made to reflect events or changed circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
Responsibility For Financial Statements
- ---------------------------------------
Management has prepared and is responsible for the
consolidated financial statements and information included in
this report. These financial statements were prepared in
accordance with generally accepted accounting principles which
are consistently applied. The Company maintains accounting and
control systems to assure its records accurately and
appropriately reflect the operations of the Company, based on
management's best available information and judgment.
The Company's independent accountants, Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), provide an independent, objective
assessment of the degree to which management fulfills it
responsibility for fairness in financial reporting. They
evaluate the Company's financial accounting for operations and
apply such tests and procedures as they deem necessary to reach
and express an opinion on the financial statements. The report
of Coopers & Lybrand, which includes an explanatory paragraph,
is included in this report.
Risks and Uncertainties
- -----------------------
The Company manufactures its products to customer
specifications and currently sells it products to a limited
number of customers and in limited industries. Generally such
customers have not been recurring in recent years. A
significant portion of the Company's revenues has historically
been generated from no greater than three customers and from
customers in the defense industry. As discussed in Notes 2, 7
and 8 to the Notes to Consolidated Financial Statements, the
Company has incurred cumulative losses since its inception. In
addition, the Company in 1995 and 1996 defaulted on interest
and principal repayments of certain notes payable that have
matured. Although the Company seeks to modify the original
terms of these notes, it is unable to repay the matured
balances at this time and there is no assurance that the notes
will be modified on terms acceptable to the Company.
The Company financed its 1996 recurring working capital
requirements in large part to (1) payments received from a
license agreement entered into in 1996 by the Company and a
customer; (2) sales to a single customer which accounted for a
substantial portion of the Company's increased product revenues
in 1996; and (3) $0.1 million of capital lease financing
obtained by the Company and used to acquire essential
production equipment. However, there is no assurance that the
Company will continue to be able to meet its operating cash
requirements in 1997.
Results of Operations
- ---------------------
Revenue
- -------
Total revenue of $2.01 million in 1996 reflects an
increase of $0.62 million, or 45%, from 1995 total revenue of
$1.4 million. Ninety-six percent of total revenue in 1996 and
8
over 97% of total revenue in 1995 consisted of sales of
manufactured products; revenue earned under license agreements
in 1996 and 1995 amounted to $85 thousand and $2 thousand,
respectively.
The increase in product sales in 1996 versus the prior
year was attributable primarily to an increase in sales to one
customer. Total revenue of $1.4 million in 1995 reflected an
increase of 16% from 1994 total revenue of $1.2 million. The
increase in product sales in 1995 versus 1994 was attributable
primarily to the Company being fully operational in 1995,
whereas the Company was in the process of relocating to
Chartley, Massachusetts, over the first nine months of 1994.
The relocation resulted in a series of operational
inefficiencies and disruptions which had an adverse effect on
product sales and related gross margins in 1994.
Operating Costs
- ---------------
Total operating costs were $2.2 million, $2.2 million, and
$3.1 million, for the fiscal years 1996, 1995, and 1994,
respectively. Other operating expenses of $0.4 million,
incurred in the fit-up of a building in connection with the
Company's relocation to Chartley, Massachusetts in February,
1994, were included with total operating costs in 1994.
Cost of sales for the years 1996, 1995, and 1994, amounted
to $1.7 million, $1.6 million, and $1.8 million, respectively.
Research, development and engineering costs pertaining to
collaborative development revenue amounted to no costs, no
costs and $.04 million, for the years 1996, 1995, and 1994,
respectively, and selling, general and administrative costs
amounted to $0.5 million, $0.6 million, and $0.8 million, for
these same years respectively.
The $0.1 million increase in cost of sales in 1996 versus
1995 is primarily attributable to higher sales volume in 1996.
The $0.2 million reduction in cost of sales in 1995 versus 1994
is primarily due to the Company being fully operational in
1995, whereas the Company was in the process of relocating to
Chartley, Massachusetts over the first nine months of 1994.
The Company had no collaborative development agreements in
1996. The decrease in research, development and engineering
expenses of $0.04 million from 1994 to 1995 reflected reduced
activity under collaborative development agreements over these
respective years.
The decrease in selling, general and administrative
expenses of $0.1 million from 1995 to 1996 was primarily
attributable to reduced salary costs. Selling, general and
administrative expenses decreased $0.2 million in 1995 compared
to 1994, primarily due to reduced accounting and legal
expenses.
Net Other Expenses
- ------------------
The Company had net other expense of $217 thousand, $274
thousand, and $38 thousand for the fiscal years 1996, 1995, and
1994, respectively. The decrease in net other expense in 1996
compared to 1995 is due to higher interest rates on certain
balances in deficit offset by a reduction in amounts paid to
MPS (See Note 12 to the Notes to Consolidated Financial
Statements). The increase in net other expense in 1995 compared
to 1994 was primarily due to an increase in interest expense
accrued on a larger average principal balance of interest
bearing debt agreements and amounts paid to MPS (See Note 12).
9
Income Taxes
- ------------
The Company neither paid nor accrued income taxes in 1996,
1995, or 1994, due to its tax losses in those years.
Certain provisions of the Internal Revenue Code limit the
annual utilization of net operating loss carryforwards if, over
a three-year period, a greater than 50% change in ownership
occurs. The Company may have exceeded the 50% ownership charge
in 1996 under Section 382 of the Internal Revenue Code,
therefore, the amount of annual net operating losses available
to offset future taxable income may be limited. The Company has
not yet determined the valuation necessary to determine the
limitation, therefore, the amount of the annual limitation is
not yet determinable.
Liquidity and Cash Reserves
- ---------------------------
Cash on hand at December 28, 1996 totaled $113 thousand,
an increase of $81 thousand from the 1995 year end balance of
$32 thousand.
In 1994 and 1995, the Company issued notes and convertible
notes in the amount of $2.4 million to finance its working
capital obligations and building fit-up costs (See Notes 7, 8,
and 14 to the Notes to Consolidated Financial Statements).
Certain of these notes and convertible notes matured in 1995
and 1996. The Company defaulted on principal and interest
repayments of these obligations, and is currently unable to
repay this debt. Although the Company seeks to modify the
original terms of the notes and convertible notes, there is no
assurance that these obligations can be modified on terms
acceptable to CPS.
Although the Company was able to finance its operating
cash requirements in 1996, there is no assurance that the
Company will be able to continue to meet its operating cash
requirements in 1997.
In February, 1997, the Financial Accounting Standards
Board issued Statement No. 128 ("SFAS 128"), "Earnings per
Share", which is effective for fiscal years ending after
December 15, 1997, including interim periods. SFAS 128
requires the presentation of basic and diluted earnings per
share (EPS). Basic EPS, which replaces primary EPS, excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS under the existing rules. SFAS
128 requires restatement of all prior-period earnings per share
data presented after the effective date. The Company will
adopt SFAS 128 in 1997 and has not yet determined the impact of
adoption.
Inflation
- ---------
Inflation had no material effect on the results of
operations or financial condition during 1996, 1995, or 1994.
There can be no assurance, however, that inflation will not
affect the Company's operations or business in the future.
Item 8. Financial Statements and Supplementary Data
See Index to the Company's Financial Statements and the
accompanying financial statements and notes which are filed as
part of this Annual Report on Form 10-K.
10
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III
- --------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Directors of the Company are elected annually and hold
office until the next annual meeting of stockholders and until
their respective successors are duly elected and qualified.
The executive officers of the Company are appointed by the
Board of Directors and hold office until their respective
successors are duly elected and qualified.
The Directors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Grant C. Bennett 41 President,
Chief Executive
Officer,
Treasurer
and Director
H. Kent Bowen 54 Director
Francis J. Hughes, Jr. 46 Director
Mr. Grant C. Bennett has held the positions of President,
Chief Executive Officer and Director of the Company since
September, 1992. Prior to that time, he served as Vice
President-Marketing and Sales of the Company from November,
1985 to September, 1992. Before joining CPS, Mr. Bennett was a
consultant at Bain & Company, a Boston-based management
consulting firm.
Dr. H. Kent Bowen has served as a Professor at Harvard
Business School since July, 1992. Prior to that time, he held
the position of Ford Professor of Engineering at the
Massachusetts Institute of Technology ("MIT") from 1981 to
1992. Dr. Bowen served as Co-Director of the Leaders for
Manufacturing Program at MIT from 1991 through July, 1992. Dr.
Bowen has been a Director of the Company since 1984 and served
as Chairman of the Board of Directors of the Company from 1984
to August, 1988.
Mr. Francis J. Hughes, Jr. has served as President of
American Research and Development Corporation ("ARD"), a
venture capital firm, since 1992. Mr. Hughes joined ARD's
predecessor organization in 1982, and became Chief Operating
Officer in 1990. Mr. Hughes served as General Partner (or
general partner of the general partner) of the following
venture capital funds: ARD I, L.P., ARD II, L.P. (since July,
1985), ARD III, L.P. (since April, 1988) and Hospitality
Technology Fund, L.P. (since June, 1991). Mr. Hughes has
served as a Director of the Company since 1993. Mr. Hughes is
also a director of RF Monolithics, Inc., and Texas Micro, Inc.
There are no family relationships between or among any
executive officers or Directors of the Company.
11
Item 11. Executive Compensation
The following table sets forth certain information with
respect to the annual and long-term compensation of the
Company's Chief Executive Officer for the three fiscal years
ended December 28, 1996. No other executive officer of the
Company serving on the last day of fiscal year 1996 received
total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Other All Other
Compen- Options/ LTIP Compensa-
Name & Principal Position Year Salary Bonus sation SAR's Payouts tion
- ------------------------- ---- ------ ----- ------- -------- ------- ---------
($) ($) ($) (#) ($) ($)
Grant C. Bennett..........1996 $95,550 $ 0 $ 0 $ 0 $ 0 $ 0
President and Chief 1995 $92,925 $ 0 $ 0 $ 0 $ 0 $ 0
Executive Officer 1994 $91,000 $ 0 $ 0 $ 0 $ 0 $ 0
The Company's President and Chief Executive Officer did
not receive option grants during fiscal year 1996. During
fiscal year 1996 no options were exercised by him, and at the
end of the fiscal year 1996 no options were held by him. The
following table summarizes option exercises by him and the
value of options held by him at the end of the fiscal year
1996.
Directors' Fees
- ---------------
Under the terms of the Company's 1992 Director Option Plan
(the "Director Plan"), Directors who are neither officers nor
employees of the Company (the "Outside Directors") are entitled
to receive stock options as compensation for their services as
Directors. A non-statutory stock option (the "initial option")
to purchase up to 4,000 shares of Common Stock was granted on
May 1, 1992 to each eligible Director who was then serving as a
Director, and shall be granted to each other eligible Director
upon his or her initial election as a Director. Also, each
eligible Director is entitled to receive a non-statutory stock
option (the "reelection option") to purchase up to 2,000 shares
of Common Stock on each subsequent date that he or she is
reelected as a Director of the Company. In addition, under the
terms of the Plan, the Director serving as Chairman of the
Board and each Director serving on a standing committee of the
Board is entitled to receive an option to an additional 500
shares as part of his initial option and each reelection
option. Options vest in 12 equal monthly installments
beginning one month from the date of grant, provided that 2,000
shares of each initial option vest immediately. No options
were granted to Directors under the Director Plan in 1994. At
December 28, 1996, options to purchase 35,500 shares of Common
Stock were outstanding under the Director Plan.
Outside Directors may receive expense reimbursements for
attending Board and Committee Meetings. Directors who are
officers or employees of the Company do not receive any
additional compensation for their services as Directors.
Severance Benefit Program
- -------------------------
Effective June 1, 1989, the Board of Directors adopted the
Company's Severance Benefit Program (the "Severance Program")
for certain employees and officers selected from time to time
by the Compensation Committee. The Severance Program, which
12
extends through May, 1998, provides that upon "Involuntary
Termination" of a participating employee (a "Participant"),
such Participant will (i) continue to receive 50% of his then
current annual base salary for a period of six months from the
termination date, (ii) receive a lump sum payment at the time
of termination equal to the Participant's unused vacation pay,
and (iii) for a period not to exceed six months, continue to
receive benefits in all group benefit plans of the Company in
which such Participant participated immediately prior to
termination, at a cost to the Participant no greater than the
cost at the time of termination. "Involuntary Termination" is
defined in the Severance Program as the (a) involuntary
termination of employment, other than for "cause" or due to
disability or death, or (b) voluntary termination of employment
as a result of reduction in the Participant's salary, other
than a reduction which is related primarily to the economic
performance or prospects of the Company, and which is not
applied to an individual Participant. "Cause" is defined in
the Severance Program as willful engaging of a Participant in
conduct that is materially injurious to the Company.
In order to receive benefits under the Severance Program,
the Participant may not (i) become employed by, render any
services for, act on behalf of, or have any interest, direct or
indirect, in any business which competes, directly or
indirectly, with the Company, or (ii) recruit or solicit any
employee of the Company to terminate his or her employment or
relationship with the Company.
Mr. Bennett is currently participating in the Severance
Program. No amounts were paid under the Severance Program in
1996.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information, as of
January 23, 1997, with respect to the beneficial ownership of
the Company's Common Stock by (i) each person known by the
Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each Director of the Company,
(iii) each Executive Officer of the Company named above in the
Summary Compensation Table, and (iv) all Directors and Officers
as a group:
13
Percentage of
Common Stock Shares of
Name and Address Beneficially Common Stock
of Beneficial Owner Owned (1) Outstanding
- ------------------- ------------ -------------
Ampersand Specialty Materials
Ventures Limited Partnership
("ASMV")
55 William Street, Suite 240
Wellesley, MA 02181 1,668,666 (2) 17.4%
Waco Partners
c/o Wechsler & Co., Inc.
105 South Bedford Road, Suite 310
Mount Kisco, NY 10549 1,950,423 (3) 20.4%
American Research and
Development III, L.P.
("ARD III")
45 Milk Street
Boston, MA 02109 1,181,899 (4) 14.3%
American Research and
Development I, L.P.
("ARD I")
45 Milk Street
Boston, MA 02109 990,802 (5) 12.1%
Techno Venture Management Corp.
("TVM")
101 Arch Street, Suite 1950
Boston, MA 02110 501,726 (6) 6.1%
Grant C. Bennett 1,646,167 20.8%
H. Kent Bowen None *
Francis J. Hughes, Jr. 2,177,201 (7) 25.4%
All Directors and Officers as a
group (four persons) 3,825,185 (8) 44.5%
*Less than 1% of the total number of outstanding shares of
Common Stock.
(1) The inclusion herein of any shares of Common Stock deemed
beneficially owned does not constitute an admission of
beneficial ownership of those shares. Unless otherwise
indicated, each stockholder referred to above has sole voting
and investment power respect to the shares listed.
(2) Includes an aggregate of 1,668,666 shares of Common Stock
issuable upon conversion of the Convertible Notes held by
Ampersand Specialty Materials Ventures Limited Partnership
("ASMV")(including principal and interest thereon), convertible
within 60 days after January 23, 1997 (See "Certain
Transactions"). Includes options, exercisable within 60 days
after January 23, 1997, to purchase an aggregate of 15,000
shares held by General Partners of a partnership that controls
ASMV, as to which shares the General partners disclaim
beneficial ownership.
14
(3) Includes an aggregate of 1,620,822 shares of Common Stock
issuable upon conversion of the Convertible Notes held by Waco
Partners (including principal and interest thereon),
convertible within 60 days after January 23, 1997.
(4) Excludes 688,500 shares of Common Stock owned by American
Research & Development I, L.P. ("ARD I"), an entity under
common control with American Research and Development III, L.P.
("ARD III"). Excludes an option to purchase 4,500 shares of
Common Stock, exercisable within 60 days after January 23,
1997, held by Francis J. Hughes, Jr. a Director of the Company
and General Partner of a partnership which controls ARD III.
Includes an aggregate of 360,430 shares of Common Stock
issuable upon conversion of the Convertible Notes held by ARD
III (including principal and interest thereon), convertible
within 60 days after January 23, 1997 (See "Certain
Transactions"). Includes options to purchase 4,800 shares of
Common Stock exercisable within 60 days after January 23, 1997.
(5) Excludes 821,469 shares of Common Stock owned by ARD III,
an entity under common control with ARD I. Excludes an option
to purchase 4,500 shares of Common Stock, exercisable within 60
days after January 23, 1997, held by Mr. Hughes, a Director of
the Company and former General Partner of a partnership which
controls ARD I. Includes an aggregate of 302,302 shares of
Common Stock issuable upon conversion of the Convertible Notes
held by ARD I (including principal and interest thereon),
convertible within 60 days after January 23, 1997 (See "Certain
Transactions"). Includes options to purchase 4,200 shares of
Common Stock exercisable within 60 days after January 23, 1997.
(6) Includes an aggregate of 251,726 shares of Common Stock
issuable upon conversion of the Convertible Notes held by
Techno Venture Management Corp. ("TVM")(including principal and
interest thereon), convertible within 60 days after January 23,
1997 (See "Certain Transactions").
(7) Includes 688,500 shares of Common Stock owned by ARD I and
821,469 shares of Common Stock owned by ARD III, as to which
shares Mr. Hughes disclaims beneficial ownership. Mr. Hughes,
a Director of the Company, is a General Partner of partnerships
which control ARD I and ARD III. Includes an aggregate of
662,732 shares of Common Stock issuable upon conversion of the
Convertible Notes held by ARD I and ARD III (including
principal and interest thereon), convertible within 60 days
after January 23, 1997 (See "Certain Transactions"); Mr. Hughes
disclaims beneficial ownership of these shares. Includes
options to purchase 4,500 shares of Common Stock held by Mr.
Hughes which are exercisable within 60 days after January 23,
1997. Includes options to purchase an aggregate of 9,000
shares of Common Stock, exercisable within 60 days after
January 23, 1997, held by ARD I and ARD III.
(8) Includes (a) an aggregate of 1,509,969 shares of Common
Stock owned by affiliates of Directors, as to which shares
they disclaim beneficial ownership, (b) includes an aggregate
of 662,732 shares of Common Stock issuable upon conversion of
the Convertible Notes held by affiliates of Directors
(including principal and interest thereon), convertible within
60 days January 23, 1997 (See "Certain Transactions"), as to
which shares the Directors disclaim beneficial ownership, and
(c) an aggregate of 6,317 shares of Common Stock which officers
and Directors have the right to acquire under outstanding stock
options exercisable within 60 days after January 23, 1997, and
(d) an aggregate of 9,000 shares of Common Stock which a
Director has the right to acquire under outstanding stock
options exercisable within 60 days after January 23, 1997, as
to which shares the Director disclaims beneficial ownership.
15
Item 13. Certain Relationships and Related Transactions
In February, 1991, the Company transferred to Metals
Process Systems ("MPS"), a French societe anonyme, certain
licensing rights and a co-ownership interest in certain of the
Company's patents, for 49% of the voting stock of MPS. Under
the terms of the transfer agreement, MPS shall have the
exclusive right to use such patents in the area of metal
powders and the Company shall have the exclusive right to use
such patents in all other areas, provided, however that MPS has
granted to the Company a non-exclusive license to use the
patents in the area of metal powders. In 1993, this equity
position was adjusted to 40%, based on additional capital
contributions to MPS by the Company and Sopretac, the co-owner
of the joint venture. The Company's investment was recorded
under the equity method. To date the Company's investments in
MPS have been written down to zero as the Company's share of
MPS' losses have exceeded its investment. In 1995 the Company
contributed approximately $60,000 to MPS, which, based on CPS'
share of MPS' losses, was also charged to operations in 1995.
In 1996, CPS' equity interest was reduced to 1% based upon
additional investment by Vallourec in MPS.
In 1994, the Company issued convertible subordinated notes
to affiliates of Directors and other persons known by the
Company to beneficially own more than 5% of the outstanding
shares of the Company. Below is a summary of the notes,
including shares of the Company's Common Stock issuable upon
conversion, within 60 days after January 23, 1997, of the note
principal and related interest.
Per
Annum Shares Issuable Upon Conversion
Principal Principal Within 60 Days After
Amount Amount January 23, 1997
-------------------------------
Principal Interest
--------- --------
Noteholder ($) (#) (#) (#)
ASMV $660,000 10% 1,320,000 333,666
Waco Partners $750,000 10% 1,500,000 120,822
ARD III $141,440 10% 282,880 72,750
ARD I $118,560 10% 237,120 60,982
TVM $100,000 10% 200,000 51,726
Affiliates of
Directors as
a group $260,000 10% 520,000 133,732
16
Part IV
- ------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as part of this Form 10-K.
1. Financial Statements
--------------------
The financial statements filed as part of this
Form 10-K are listed on the Index to Consolidated
Financial Statements on page 21 of this Form 10-K.
2.a. Exhibits
--------
The exhibits to this Form 10-K are listed on the
Exhibit Index on pages 18-20 of this Form 10-K.
2.b. Reports on Form 8-K
-------------------
None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CERAMICS PROCESS SYSTEMS CORPORATION
By: /s/ Grant C. Bennett
--------------------------
Grant C. Bennett
President
Date: May 12, 1997
Pursuant to the Requirements of the Securities Act of 1934,
this report has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
- -------------------- ------------------------ --------------
/s/ Grant C. Bennett President, Treasurer and Director}
- -------------------------- (Principal Executive Officer) }
Grant C. Bennett }
}
}
}
/s/ H. Kent Bowen Director }
- -------------------------- }
H. Kent Bowen } May 12,
} 1997
}
}
/s/ Francis J. Hughes, Jr. Director }
- -------------------------- }
Francis J. Hughes, Jr. }
}
18
CERAMICS PROCESS SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
3.1** Restated Certificate of Incorporation of the
Company, as amended, is incorporated herein by
reference to Exhibit 3 to the Company's
Registration Statement on Form 8-A
(File No. 0-16088) --
3.2** By-laws of the Company, as amended, are
incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form
S-1 (File No. 33-14616)(the "1987 S-1Registration
Statement") --
4.1** Specimen certificate for shares of Common Stock of
the Company is incorporated herein by reference to
Exhibit 4 to the 1987 S-1 Registration Statement --
4.2** Description of Capital Stock contained in the
Restated Certificate of Incorporation of the
Company, as amended, filed as Exhibit 3.1 --
(1)10.1** 1984 Stock Option Plan of the Company, as amended,
is incorporated herein by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1988 --
(1)10.2** 1989 Stock Option Plan of the Company, is
incorporated by reference to Exhibit 10.6 to the
Company's 1989 S-1 Registration Statement --
(1)10.3** 1992 Director Stock Option Plan is incorporated by
reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991 --
10.4** Participation Agreement, dated February 14, 1991,
between the Company and Sopretac, a French societe
anonyme, is incorporated by reference to Exhibit
10.10 to the Company's Annual Report on Form 10-K
for the year ended December 28, 1991 --
(1)10.5** Retirement Savings Plan, effective September 1,
1987 is incorporated by reference to Exhibit 10.35
to the Company's 1989 S-1 Registration Statement --
(1)10.6** Severance Benefit Program, effective June 1, 1989,
is incorporated by reference to Exhibit 10.36 to
the Company's S-1 Registration Statement --
19
10.7** Research and Development Agreement, dated as of
June 26, 1991, between the Company and Carpenter
Technology Corporation ("CarTech") is
incorporated by reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the year
ended December 28, 1991 --
10.8** Option and License Agreement, dated as of June 26,
1991, between the Company and CarTech is
incorporated by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year
ended December 28, 1991 --
10.9** License Agreement, dated as of December 11, 1992,
between the Company and CarTech is incorporated by
reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.10** Amendment to Research and Development Agreement,
dated as of December 11, 1992, between the Company
and CarTech is incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.11** Amendment to Option and License Agreement, dated as
of December 11, 1992, between the Company and
CarTech is incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1993 --
10.12** BancBoston lease line of credit, dated December 23,
1991, between the Company and The First National
Bank of Boston is incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on
Form 10-K for the year ended December 28, 1991 --
10.13** Amendment to BancBoston lease line of credit, dated
December 31, 1992, between the Company and the
First National Bank of Boston is incorporated by
reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended
January 2, 1993 --
10.14** Form of 10% Convertible Subordinated Note Due June
30, 1995 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.22 to the Company's
Annual Report for the fiscal year ended January 1,
1994 --
10.15** 10% Convertible Subordinated Note Due April 21,
2001 between the Company and Waco Partners and
related Subordinated Convertible Note Purchase
Agreement between the Company and Wechsler & Co.,
Inc. is incorporated by reference to Exhibit 10.21
to the Company's Annual Report for the fiscal year
ended December 31, 1994 --
20
10.16** 10% Convertible Subordinated Note Due January 31,
1996 and related Common Stock Purchase Warrant
between the Company and Ampersand Specialty
Materials Ventures Limited Partnership is
incorporated by reference to Exhibit 10.22 to the
Company's Annual Report for the fiscal year ended
December 31, 1994 --
10.17** Form of 10% Convertible Subordinated Note Due April
24, 1996 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.23 to the Company's
Annual Report for the fiscal year ended December
31, 1994 --
10.18** Senior Secured Promissory Note Due March 30, 1996
and related Security Agreement between the Company
and Aavid Thermal Technologies, Inc. is
incorporated by reference to Exhibit 10.24 to the
Company's Annual Report for the fiscal year ended
December 31, 1994 --
10.19** Secured Line of Credit Note Due June 30, 1996 and
related Security Agreement between the Company and
Kilburn Isotronics, Inc. --
10.20** Amended and Restated Promissory Note dated July
31, 1996 between the Company and Texas Instruments
Incorporated --
11.1 Computation of Earnings (Loss) Per Share 38
21** Subsidiaries of the Registrant are incorporated
herein by reference to Exhibit 22 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1988 --
23.1 Consent of Independent Accountants 39
** Incorporated herein by reference.
(1) Management Contract or compensatory plan or arrangement
filed as an exhibit to this Form pursuant to Items 14(a) and
14(c) of Form 10-K.
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
CERAMICS PROCESS SYSTEMS CORPORATION
Page
- ------------------------------------------------------------
Report of Independent Accountants 22
Consolidated Balance Sheets as of December 28, 1996 and
December 30, 1995 23
Consolidated Statements of Operations for the years ended
December 28, 1996, December 30, 1995,
and December 31, 1994 25
Consolidated Statements of Stockholders' Deficit for
the years ended December 28, 1996,
December 30, 1995, and December 31, 1994 26
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, December 30, 1995,
and December 31, 1994 27
Notes to Consolidated Financial Statements 28
All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.
22
REPORT OF INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------
The Board of Directors and Stockholders
Ceramics Process Systems Corporation
We have audited the consolidated financial statements of
Ceramics Process Systems Corporation listed in the index on
page 21 of this Form 10-K. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ceramics Process Systems Corporation as
of December 28, 1996 and December 30, 1995, and the
consolidated results of its operations and cash flows for each
of the three years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company's need for additional capital and its
cumulative losses from operations raise substantial doubt about
its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 27, 1997
23
CONSOLIDATED BALANCE SHEETS
Ceramics Process Systems Corporation
- ---------------------------------------------------------------------------
ASSETS
December 28, December 30,
1996 1995
------------ ------------
Current Assets:
Cash $ 113,331 $ 32,127
Accounts receivable, trade 141,035 211,575
Inventories (Note 2) 156,445 29,026
Prepaid expenses 1,340 10,824
Other current assets 0 475
--------- ----------
Total current assets 412,151 284,027
--------- ----------
Property and equipment (Notes 2 & 4):
Production equipment 1,018,055 941,512
Office equipment 60,403 65,529
Leased Equipment 126,948 0
--------- ---------
1,205,406 1,007,041
Less accumulated depreciation and
amortization 819,377 765,635
Less accumulated amortization
of leased equipment 5,290 0
--------- ---------
Net property and equipment 380,739 241,406
--------- ---------
Deposits 2,337 953
--------- ---------
Total Assets $ 795,227 $ 526,386
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
24
CONSOLIDATED BALANCE SHEETS (continued)
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 28, December 30,
1996 1995
------------ ------------
Current Liabilities:
Accounts payable $ 128,762 $ 176,494
Accrued expenses (Note 9) 789,766 473,257
Customer deposits 355,987 --
Notes payable (Note 7) 450,000 500,000
Current portion of convertible notes
payable (Note 8):
Related parties 260,000 920,000
Other 1,610,000 950,000
Current portion of obligations under
capital leases (Note 4) 17,383 --
----------- -----------
Total current liabilities 3,611,898 3,019,751
Obligations under capital leases
less current portion 87,999 --
----------- -----------
Total Liabilities 3,699,897 3,019,751
----------- -----------
Commitments (Notes 2,4,7 and 8)
Stockholders' Deficit
(Notes 5 and 8):
Common stock, $0.01 par value.
Authorized 15,000,000 shares; issued
7,780,766 shares in 1996 and
7,780,766 shares in 1995 77,808 77,808
Preferred stock, $0.01 par value.
Authorized 5,000,000 shares;
no shares issued and outstanding -- --
Additional paid-in capital 30,457,384 30,457,384
Accumulated deficit (33,379,027) (32,967,722)
----------- -----------
(2,843,835) (2,432,530)
Less treasury stock, at cost,
22,883 common shares in 1996
and 22,883 common shares in 1995 (60,835) (60,835)
----------- -----------
Total Stockholders' Deficit (2,904,670) (2,493,365)
----------- -----------
Total Liabilities and
Stockholders' Deficit $ 795,227 $ 526,386
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
25
CONSOLIDATED STATEMENTS OF OPERATIONS
Ceramics Process Systems Corporation
Years Ended
-------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ ------------
Revenue:
Product Sales $1,922,006 $ 1,385,022 $ 1,156,912
Collaborative development
agreements (Note 6) -- -- 32,143
License agreements 85,000 2,000 2,500
---------- ----------- -----------
Total Revenue 2,007,006 1,387,022 1,191,555
---------- ----------- -----------
Costs and expenses:
Cost of sales 1,686,148 1,635,592 1,767,300
Research, development and
engineering -- -- 36,065
Selling, general and
administrative 515,346 585,129 834,337
Other operating expenses
(Note 14) -- -- 432,850
---------- ----------- -----------
Total costs and expenses 2,201,494 2,220,721 3,070,552
---------- ----------- -----------
Operating income (loss) (194,488) (833,699) (1,878,997)
---------- ----------- -----------
Other income (expense):
Interest income -- 1,289 1,556
Interest expense (248,500) (216,347) (89,998)
Gain (loss) on disposal of
equipment 27,043 (666) 50,696
Other income (expense) 4,640 (58,098) --
---------- ----------- -----------
Net other income (expense) (216,817) (273,822) (37,746)
========== =========== ===========
Net loss $ (411,305) $(1,107,521) $(1,916,743)
========== =========== ===========
Net loss per common
share $ (0.05) $ (0.14) $ (0.25)
========== =========== ===========
Weighted average number of
common shares outstanding 7,780,766 7,674,534 7,581,000
========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the years ended December 28, 1996, December 30, 1995
and December 31, 1994
Ceramics Process Systems Corporation
Common stock
--------------- Additional Total
Number Par paid-in Accumulated Treasury Stockholders'
of shares Value capital deficit stock deficit
--------- ----- ---------- ----------- -------- -------------
Balance at
January 1, 1994 7,590,076 $75,901 $30,377,018 $(29,943,458) $(60,835) $ 448,626
Stock options exercised 20,710 207 10,148 -- -- 10,355
Net loss -- -- -- (1,916,743) -- (1,916,743)
--------- ------- ----------- ------------ -------- -----------
Balance at December 31,
1994 7,610,786 76,108 30,387,166 (31,860,201) (60,835) (1,457,762)
Common stock issued in
settlement of
interest obligation 169,980 1,700 70,218 -- -- 71,918
Net loss -- -- -- (1,107,521) -- (1,107,521)
--------- ------- ----------- ------------ -------- -----------
Balance at December 30,
1995 7,780,766 77,808 30,457,384 (32,967,722) (60,835) (2,493,365)
Net loss -- -- -- (411,305) -- (411,305)
--------- ------- ----------- ------------ -------- -----------
Balance at December 28,
1996 7,780,766 $77,808 $30,457,384 $(33,379,027) $(60,835) $(2,904,670)
========= ======= =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ceramics Process Systems Corporation
Years Ended
------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ --------------
Cash flows from operating
activities:
Net loss $(411,304) $(1,107,521) $(1,916,743)
Adjustments to reconcile
net loss to cash provided
by (used in) used in
operating activities:
Depreciation 108,070 104,531 105,820
Amortization 5,290 11,517 43,217
Loss(gain)on disposal of
equipment (27,043) 666 (50,696)
Loss on investment -- 65,893 --
Changes in assets and liabilities:
Accounts receivable, trade 70,540 31,553 264,393
Inventories (127,419) 27,100 27,406
Prepaid expenses 9,484 17,319 (1,519)
Other current assets 475 24,044 (24,519)
Accounts payable (47,732) 7,871 (34,030)
Accrued expenses 214,558 257,993 95,027
Due to customer 51,950 -- (176,528)
Deferred revenue 355,987 (6,300) --
--------- ----------- -----------
Net cash provided by (used in)
operating activities 202,856 (565,334) (1,668,166)
--------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets 27,500 8,040 50,696
Additions to property and equipment (147,768) (41,327) (100,995)
Investment in joint venture -- (65,893) --
Deposits (1,384) 1,670 29,971
--------- ----------- -----------
Net cash used in investing
activities (121,652) (97,510) (20,328)
--------- ----------- -----------
Cash flows from financing activities:
Principal payments for capital lease
obligations -- (7,532) (28,691)
Proceeds from issuance of notes
payable -- 450,000 1,870,000
Proceeds from issuance of common
stock -- -- 10,355
--------- ----------- -----------
Net cash provided by
financing activities -- 442,468 1,851,664
--------- ----------- -----------
Net increase (decrease) in cash 81,204 (220,376) 163,170
Cash at beginning of year 32,127 252,503 89,333
--------- ----------- -----------
Cash at end of year $ 113,331 $ 32,127 $ 252,503
========= =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- --------------------------------------------------------------------------
(1) Nature of Business
------------------
Ceramics Process Systems Corporation develops,
manufactures, and markets advanced metal-matrix composite
and ceramic components used to house and interconnect
microelectronic devices.
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Principles of Consolidation
---------------------------
The consolidated financial statements
include the accounts of Ceramics Process Systems
Corporation and its wholly-owned subsidiary, CPS
Superconductor Corporation ("CPSS"). All significant
intercompany balances and transactions have been
eliminated in consolidation.
(b) Basis of Presentation
---------------------
The accompanying financial statements
have been presented on a going concern basis which
contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business.
The Company has continued to incur
losses from operations and has experienced cumulative
losses from operations since its inception. In
addition, as discussed in Notes 7 and 8,
substantially all of the Company's notes and
convertible notes payable obligations have matured,
and in 1995 and 1996, the Company defaulted on the
related principal repayments and interest
obligations.
In 1996, the Company entered into a
license agreement which provides for the use of
certain of its patented technology and the sale of
its products. Also, sales to a single customer
contributed to a significant portion of product
revenue in 1996. Amounts received from this
customer, payments received under the license
agreement, and capital lease financing obtained by
the Company funded working capital requirements in
1996. Additionally, the Company continues to
aggressively market the products it manufactures, and
seeks to modify the original terms of its notes and
convertible notes payable.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ---------------------------------------------------------------------------
There is no assurance that revenues from the license
agreement or sales to the significant customer noted
above will continue. Also, there is no assurance
that the notes and convertible notes payable can be
modified on terms acceptable to the Company.
(c) Inventories
-----------
Inventories are stated at the lower of
cost or market. Cost is determined using the first-
in, first-out (FIFO) method. Year end inventory
balances consisted of the following:
December 28, December 30,
1996 1995
------------ ------------
Raw materials $ 39,412 $ 7,399
Work-in-process 85,933 8,970
Finished goods 31,100 12,657
-------- -------
$156,445 $29,026
======== =======
(d) Property and Equipment
----------------------
Property and equipment are stated at
cost. Depreciation of equipment is calculated on a
straight-line basis over the estimated useful life,
generally five years. Amortization under capital
leases is calculated on a straight-line basis over
the life of the lease. Depreciation of leasehold
improvements is calculated using the straight-line
method over the lease term or the estimated useful
lives, whichever is shorter. Upon retirement, the
cost and related accumulated depreciation or
amortization are removed from their respective
accounts. Any gains or losses are included in the
results of operations in the period in which they
occur.
(e) Revenue Recognition
-------------------
The Company recognizes product revenue
generally upon shipment. Revenue related to research
and development contracts is recognized on the
percentage-of-completion basis, which is generally
based on the relationship of incurred costs to total
estimated costs on each contract. Revenue related to
license agreements is recognized upon receipt of the
license payment or over the license period, if the
Company has continuing obligations under the
agreement. Advance payments in excess of revenue
recognized are recorded as customer deposits.
(f) Research and Development Costs
------------------------------
There were no research and development costs in
fiscal year 1996 and 1995. In prior periods research
and development costs were charged to expense as
incurred.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- --------------------------------------------------------------------------
(g) Income Taxes
------------
The Company accounts for income taxes
in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 proscribes the asset and
liability method which requires the recognition of
deferred tax assets and liabilities for the expected
future tax consequences of temporary differences
between tax and financial statement basis of assets
and liabilities, measured using enacted tax rates
expected to be in effect in the period which the
temporary differences reverse.
(h) Net Loss Per Share
------------------
Net loss per share is calculated based
on the weighted average number of common shares
outstanding during the year. Stock options and stock
purchase warrants are not considered in the
calculations of net loss per share since their effect
would be antidilutive.
In February, 1997, the Financial Accounting Standards
Board issued Statement No. 128 ("SFAS 128"),
"Earnings per Share", which is effective for fiscal
years ending after December 15, 1997, including
interim periods. SFAS 128 requires the presentation
of basic and diluted earnings per share (EPS). Basic
EPS, which replaces primary EPS, excludes dilution
and is computed by dividing income available to
common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur
if securities or other contracts to issue common
stock were exercised or converted into common stock
or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS under the
existing rules. SFAS 128 requires restatement of all
prior-period earnings per share data presented after
the effective date. The Company will adopt SFAS 128
in 1997 and has not yet determined the impact of
adoption.
(i) Use of Estimates in the Preparation of
Financial Statements
--------------------------------------
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from these estimates.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ---------------------------------------------------------------------------
(j) Risks and Uncertainties
-----------------------
The Company manufactures its products
to customer specifications and currently sells its
products to a limited number of customers in a
limited number of industries. Generally such
customers have not been recurring in recent years. A
significant portion of the Company's revenues has
historically been generated from no greater than
three customers and from customers in the defense
industry. Financial instruments which potentially
subject the Company to concentrations of credit risk
consist of trade accounts receivable. The Company
has not incurred significant losses on its accounts
receivable in the past.
(k) Financial Instruments
---------------------
A substantial portion of the Company's
borrowings have been financed by significant
stockholders of the Company, some of which have
reduced their ownership interest in 1996. In
addition, the Company is in default of a significant
portion of its notes payable and convertible notes
payable. As a result of the Company's defaults and
the uncertainties surrounding the Company's ability
to continue as a going concern, it is not practicable
to estimate the fair value of the Company's notes
payable and convertible notes payable.
(l) Fiscal Year-End
---------------
The Company's fiscal year end is the
last Saturday in December or the first Saturday in
January, which results in a 52- or 53-week year.
Fiscal years 1996, 1995, and 1994, consisted of 52
weeks.
(m) Dividend Policy
---------------
Dividends are declared at the
discretion of the Company's Board of Directors. To
date, no cash dividends have been declared. Any
earnings are reinvested in the Company.
(3) Supplemental Cash Flow Information
----------------------------------
The Company acquired equipment through capital lease
obligations in 1996 in the amount of $111,079, and did not
acquire equipment through capital lease obligations in
1995 or 1994. Additionally, the Company paid interest
amounting to $5,891, $3,901, and $10,687 in 1996, 1995 and
1994, respectively.
(4) Leases
------
At December 28, 1996 the Company had production
equipment with a cost of $126,948 and accumulated
amortization of $5,290 under capital leases. At December
30, 1995 the Company had no property under capital leases.
At December 31, 1994, the Company had production equipment
with a cost of $82,927 and accumulated amortization of
$71,409 under capital leases.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
Future payments required under capital lease obligations
are as follows at December 28, 1996:
1997 $ 28,898
1998 $ 28,898
1999 $ 28,898
2000 $ 28,898
2001 $ 22,923
--------
Total future minimum lease payments $138,515
========
Less amount representing interest $ 33,133
--------
Present value of net future lease payments $105,382
Less current portion $ 17,383
--------
Long-term obligation under capital leases $ 87,999
========
In 1989, the Company entered into a ten-year lease for a
facility in Milford, Massachusetts. In 1993, the Company
reached an agreement with the lessor to terminate its
lease effective January 31, 1994. In February, 1994, the
Company relocated its operations to Chartley,
Massachusetts (See Note 14). The Company is currently
operating at the Chartley facility as a tenant at will.
During 1993, the Company entered into an operating lease
agreement for an office, manufacturing, and research
facility in Hopkinton, Massachusetts. The Company did not
relocate to this facility, but in 1994 used it for
purposes of storage and warehousing. In 1995, the Company
reached an agreement with the lessor to terminate the
lease effective January 31, 1995.
Total rental expense for operating leases was $67,500,
$67,500, and $146,789, in 1996, 1995 and 1994.
(5) Stock-Based Compensation Plans
------------------------------
The Company has adopted the disclosure requirements of
Statements of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation". The
Company continues to recognize compensation costs using
the intrinsic value based method described in Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". No compensation costs were
recognized in 1996, 1995, and 1994.
In 1996, the Company maintained two stock option plans
affording employees and other persons affiliated with the
Company, excluding non-employee Directors, the opportunity
to purchase shares of its common stock. In August, 1994,
one of the stock option plans expired and no new grants
are currently available under it. Under the remaining
plan, the Board of Directors may grant incentive stock
options to officers and other key employees of the
Company. Additionally, the remaining plan permits the
Board of Directors to issue non-qualified stock options to
officers and other key employees and consultants of the
Company.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
All incentive stock options are granted at the fair market
value of the stock or in the case of certain optionees, at
110% of such fair market value at the time of the grant.
Such options are exercisable in installments following a
minimum period of employment and expire within ten years
from the date granted. All non-qualified stock options
are granted a price not less than 50% of the fair market
value at the time of the grant. Options vest over various
periods not exceeding 5 years.
In addition, during 1992 the Company adopted the 1992
Director Option Plan (the "Director Plan") to compensate
outside directors for their services. Under the Director
Plan, eligible directors are initially granted options to
purchase up to 4,000 shares of the Company's common stock,
and are granted options to purchase up to 2,000 shares of
the Company's common stock upon re-election as a director.
Additionally, directors serving on standing committees of
the Board are granted options to purchase up to 500 shares
of the Company's common stock. No options to purchase
shares of the Company's common stock under the Director
Plan were granted in 1996, 1995 or 1994. At December 28,
1996, options to purchase 35,500 shares of Common Stock
were outstanding under the Director Plan.
In April, 1996 and June 1995 the Company granted 330,461
and 400,390 options at the then current fair market value
of $0.18 and $0.44, respectively with similar terms and
conditions to existing option holders in exchange for the
previously issued options.
As of December 28, 1996, the total remaining number of
remaining shares authorized for issuance under these stock
option plans amounted to 521,532.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- --------------------------------------------------------------------------
The following is a summary of stock option activity for
all of the above plans for the fiscal years 1996, 1995 and
1994.
1996 1995 1994
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 447,267 $0.93 565,083 $1.57 626,909 $1.53
Granted at fair
market value 330,461 0.18 400,390 0.44 - -
Exercised - - - - (20,710) 0.50
Canceled (346,767) 0.52 (518,206) 1.24 (41,116) 1.61
------- ----- ------- ----- ------- -----
Outstanding at end
of year 430,961 $0.68 447,267 $0.93 565,083 $1.57
======= ===== ======= ===== ======= =====
Options exercisable
at year-end 100,500 $2.34 251,453 $1.32 474,443 $1.51
The following table summarizes information about stock options
outstanding at December 28, 1996:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Range Remaining Weighted Weighted
of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (in years) Price Exercisable Price
------------- ----------- ----------- -------- ----------- ---------
$0.18 330,461 9.25 $0.18 - -
0.75 - 0.875 17,500 6.71 0.79 17,500 $0.79
1.25 - 3.75 83,000 5.16 2.67 83,000 2.67
------- -------
$0.18 - $3.75 430,961 8.36 $0.68 100,500 $2.34
======= =======
Had compensation cost related to the stock options
granted in fiscal 1996 and 1995 been determined at the
fair value on the date of grant in accordance with SFAS
123, the impact on pro forma net loss and pro forma net
loss per share for both years would have been immaterial.
(6) Research and Development Agreements
-----------------------------------
In 1996 and 1995, the Company recognized no revenue or
related costs from research and development agreements.
For fiscal year 1994 the Company recognized revenue from
research and development agreements in the amounts of
$32,143, and incurred research and development costs
relating to this revenue in the amount of $36,065.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- --------------------------------------------------------------------------
Substantially all of the revenue and costs associated
with research and development agreements in 1994 were the
result of collaborative development agreements with The
Office of Naval Research ("ONR") and Carpenter Technology
Corporation ("CarTech").
(7) Notes Payable
-------------
Notes payable consist of the following at December 28, 1996.
In 1995, the Company obtained financing under two
agreements with separate parties, the terms and conditions
of which are summarized as follows:
Note Payable 1
Note payable dated March 31, 1995 due
March 30, 1996, with interest payable at a
rate of 10% per year. The Company is in
default of this note effective March 30,
1996 and is accruing interest from that
date at the default rate of 15% per year.
The note is collateralized by accounts
receivable, inventory, property and
equipment. $250,000
Note Payable 2
Note payable dated July 19, 1995, as
amended July 31, 1996, with interest
payable at a rate of 10% per year due in
installments on September 27, 1996,
December 27, 1996 and March 28, 1997 and
unpaid principal and interest is due on
July 31, 1997. $200,000
--------
$450,000
========
(8) Convertible Notes Payable
-------------------------
Convertible notes payable consist of the following at
December 28, 1996
Note Payable 1
Unsecured notes payable dated February 16,
1994 with five parties, due June 30, 1995
plus interest at 10% per annum. $ 250,000
Note Payable 2
Unsecured note payable dated April 21,
1994, due April 21, 2001; interest at 10%
per annum is due semi-annually on
September 30 and March 31. $ 500,000
Note Payable 3
Unsecured note payable dated July 20,
1994, due January 31, 1996 plus interest
at 10% per annum. $ 120,000
Note Payable 4
Unsecured notes payable dated October 26,
1994 with six parties, due April 24, 1996
plus interest at 10% per annum. $1,000,000
----------
$1,870,000
==========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------
At December 28, 1996, the Company was in default of Notes
Payable 1, 2, 3 and 4. $260,000 and $920,000 of the
principal balance of the convertible notes payable at
December 28, 1996 and December 30, 1995 respectively
represent amounts due to holders of greater than 10% of
the Company's common stock for which the related accrued
interest and interest expense as of and for the years
ended December 28, 1996 and December 30, 1995 amounted to
$60,740 and $25,929 and $120,489 and $92,000 respectively.
Conversion privileges provided in the notes payable allow
for the conversion of any unpaid principal throughout the
term of each note, at the option of the note holders, for
one share of the Company's common stock for each $0.50 of
unpaid principal. The convertible notes are subordinated
to all other indebtedness of the Company.
Conversion privileges provided in Note Payable 1, Note
Payable 3, and Note Payable 4 allow for the conversion of
any unpaid interest throughout the note terms, at the
option of the note holders, for one share of the Company's
common stock for each $0.50 of unpaid principal. At the
option of the Company, interest due under Note Payable 2
may be paid in shares of the Company's common stock at a
conversion price of the lesser of $0.50 per share or 90%
of the average closing bid price of the Company's common
stock during the twenty consecutive trading days ending
five business days immediately preceding the date on which
any interest payment is due (See Note 3). 4,500,736
shares of common stock at December 28, 1996 are reserved
for the conversion of convertible notes and related
interest.
Principal maturities for notes payable and convertible
notes payable, if these were not in default, are as
follows at December 28, 1996:
Currently $1,620,000
1997 200,000
1998 0
1999 0
2000 0
Thereafter 500,000
----------
$2,320,000
==========
(9) Accrued Expenses
----------------
Accrued expenses consist of the following:
December 28, December 30,
1996 1995
------------ ------------
Accrued legal and accounting $161,267 $150,549
Accrued interest (Note 3 and 7) 445,450 219,839
Accrued payroll 79,170 67,364
Accrued other 103,879 35,505
-------- --------
$789,766 $473,257
======== ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- -------------------------------------------------------------------------
(10) Income Taxes
------------
Deferred tax assets and liabilities are as follows:
December 28, December 30,
1996 1995
------------ -------------
Net operating losses $ 12,180,000 $ 12,000,000
Vacation and other accrued
expenses 78,000 11,000
Depreciation (88,000) (85,000)
Total 12,170,000 11,926,000
Valuation allowance (12,170,000) (11,926,000)
------------ ------------
$ -- $ --
============ ============
Due to the uncertainty related to the realization of the
net deferred tax asset, a full valuation allowance has
been provided. At December 28, 1996, the Company had net
operating loss carryforwards of approximately $34,000,000
available to offset future income for U.S. Federal income
tax purposes, and $8,000,000 for state income tax
purposes. These operating loss carryforwards expire at
various dates from the years 2000 through 2011 for federal
income tax purposes and the years 1997 through 2001 for
state income tax purposes.
Certain provisions of the Internal Revenue Code limit the
annual utilization of net operating loss carryforwards if,
over a three-year period, a greater than 50% change in
ownership occurs. The Company may have exceeded the 50%
ownership change in 1996 under Section 382 of the Internal
Revenue Code, therefore, the amount of annual net
operating losses available to offset future taxable income
may be limited. The Company has not yet determined the
valuation necessary to determine the limitation,
therefore, the amount of the annual utilization
(11) Retirement Savings Plan
-----------------------
Effective September 1, 1987, the Company established The
Retirement Savings Plan (the "Plan") under the provisions
of Section 401 of the Internal Revenue Code. Employees,
as defined in the Plan, are eligible to participate in the
Plan after 180 days of employment. Under the terms of the
Plan, the Company may match employee contributions under
such method as described in the Plan and as determined
each year by the Board of Directors. Through December 28,
1996, no employer matching contributions had been made to
the Plan.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- --------------------------------------------------------------------------
(12) Joint Venture
-------------
In February 1991, the Company formed a joint venture
company, Metals Process Systems ("MPS"), headquartered in
Boulogne, France, with Sopretac, a Vallourec Group
Company, to market and license jointly-held technology for
use with powdered metals to third parties. The Company
contributed certain proprietary technology to the venture
in exchange for a 49% equity position. The Company's
investment was recorded under the equity method. To date
the Company's investments in MPS have been written down to
zero as the Company's share of MPS' losses have exceeded
its investment. In 1995 the Company contributed
approximately $60,000 to MPS, which, based on CPS' share
of MPS' losses, was also charged to operations in 1995. In
1996, CPS' equity interest was reduced to 1% based upon
additional investment by Vallourec in MPS.
(13) Significant Customers and Export Sales
--------------------------------------
Significant customers in 1996, 1995, and 1994 were as
follows:
Significant Significant
Customer Customer
Year ended December 28, 1996 A 56%
B 16%
C 13%
Year ended December 30, 1995 A 27%
C 21%
D 11%
Year ended December 31, 1994 C 23%
D 19%
Export sales were 0%, 2%, and 4% of total revenue in 1996,
1995, and 1994 respectively, and represented sales to
Europe and Japan.
(14) Other Operating Expenses
------------------------
In connection with the Company's relocation to Chartley,
Massachusetts in February, 1994 (See Note 4), costs
totaling $432,850 were incurred in the fit-up of the
Chartley building. These previously capitalized costs
were expensed in their entirety in the fourth quarter of
1994.