Back to GetFilings.com
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 26, 1998
- -------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from to
Commission file number: 0-16088
CERAMICS PROCESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2832509
- ------------------------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
111 South Worcester Street, P.O. Box 338
Chartley, Massachusetts 02712
- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant`s telephone no., including area code: 508-222-0614
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value, $0.01 per share
- ----------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
than the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant`s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the Form 10-K. [ ]
The aggregate market value of the voting Common Stock held by non-
affiliates of the Registrant was $6,430,925 based on the average of the
reported closing bid and asked prices for the Common Stock on March 1,
1999 as reported on the OTC Bulletin Board.
Number of shares of Common Stock outstanding as of March 1,
1999: 12,285,969 shares.
Documents incorporated by reference.
Part I
- -----------------------------------------------------------------------
Item 1. Business.
Ceramics Process Systems Corporation (the `Company` or `CPS`)
serves the wireless communications, satellite communications, motor
controller and other microelectronic markets by developing,
manufacturing, and marketing advanced metal-matrix composite and ceramic
components to house, interconnect and thermally manage microelectronic
devices. The Company`s products are typically in the form of housings,
packages, lids, substrates, thermal planes, or heat sinks, and are used
in applications where thermal management and or weight are important
considerations.
The Company`s products are manufactured by proprietary processes the
Company has developed including the QuicksetTM Injection Molding Process
(`Quickset Process`) and the QuickCastTM Pressure Infiltration Process
(`QuickCast Process`).
Although the Company`s focus is in microelectronics markets, the
Company participates in other markets through licensing its technology to
corporations who manufacture and sell products in other markets. In
fiscal 1998, 86.7% of the Company's total revenue was derived from
manufactured products and 13.3% from licensing fees, in fiscal 1997 91.5%
of the Company`s total revenue was derived from manufactured products and
8.5% from licensing fees and in fiscal 1996, 96% of the Company`s total
revenue was derived from manufactured products and 4% from licensing fees.
The Company was incorporated in Massachusetts in 1984. The Company
reincorporated in Delaware in April 1987, through merger into its wholly-
owned Delaware subsidiary organized for purposes of the reincorporation.
In July 1987, the Company completed its initial public offering of 1.5
million shares of its Common Stock.
Markets and Products
- --------------------
MARKETS
The Company`s primary markets are original equipment manufacturers
in the wireless communications, satellite communications, and motor
controller markets.
Wireless Communications Market
The demand for wireless telecommunications services such as cellular
and Personal Communications Systems (`PCS`) has grown significantly during
the past decade, driven by reduced costs for wireless handsets, a more
favorable regulatory environment, increasing competition among service
providers and a greater availability of services and microwave spectrum.
In developing countries wireless telephone networks are being
installed as an alternative to installing or upgrading traditional
wireline networks. The growth in wireless communications has required,
and will continue to require, substantial investment by service providers
in infrastructure equipment such as basestations. The Company provides
components for housing, interconnecting and thermal management of
microelectronic devices to wireless communications infrastructure
equipment manufacturers.
Satellite Communications Market
Satellites provide several advantages over earth-based facilities
for many telecommunications applications. Satellites enable high-speed
communications service where there is no earth-based alternative
available which is often the case for military operations and for
communications services in developing countries. Another advantage is
that the cost to provide services via satellite does not increase with
the distance between sending and receiving stations. The cost of
providing services via satellite can be less than the cost of installing
copper or fiber optic networks.
Demand for satellite telecommunications services for both military
and commercial applications is increasing. Some satellite applications
have both military and commercial applications such as the Global
Positioning System. Commercial applications include satellite based
mobile telephone services, direct-to-home television services, and
direct-to-home internet services. Military and commercial entities have
announced plans to deploy over 1,000 satellites during the next decade. The
Company provides components for housing, interconnecting and thermal
management of microelectronic devices to satellite subsystem and satellite
manufacturers.
Motor Controller Market
The use of power modules to control electric motors of all sizes is
growing. This growth is the result of several factors including emerging
high-power applications which demand power controllers such as hybrid and
electric vehicles, and cost declines in power modules which increasingly
make variable speed drives cost effective. Power semiconductors are a very
significant portion of the cost of variable speed drives, and the cost of
the module housing and thermal management system are also significant;
declines in the costs of all these components is driving increased use of
variable speed drives.
For example, worldwide approximately 50 million AC induction motors
greater than one-half horsepower are installed every year. Today only a
small percentage of these motors use variable speed drives because of
costs; as costs decline industry observers predict increased use of
variable speed drives. The Company provides components for housing,
interconnecting and thermal management of microelectronic devices to motor
controller manufacturers.
PRODUCTS
All markets described above have a common need for thermal
management of electronic devices to improve system performance and
reliability. A second element which many segments within these markets
have in common is the need for lightweight components, particularly for
applications which are air-borne, space-based, or transportation related.
Using its proprietary process technology, the Company produces metal-matrix
composites with superior thermal properties and which are very lightweight
to house and interconnect microelectronic devices. Each of
these products is produced to customers` blueprints to meet customers`
specific requirements. Typical form factors are housings, packages,
lids, substrates, thermal planes, and heat sinks.
The manufacture of microelectronic systems is comprised of three key
steps: (1) the integration of transistors into integrated circuits
(`ICs`), (2) the integration of ICs on boards or modules, and (3) the
integration of boards and modules into systems. The Company produces
products for the second and third steps described above - products used
to integrate ICs on boards, and used to integrate boards and modules into
systems.
As the complexity, speed, and density of electronic devices
continues to increase, the market increasingly demands housing and
interconnecting products which have a thermal coefficient of expansion
match to ICs, and which provide for the efficient removal of heat from
the system while providing the necessary mechanical and electrical
properties.
The metal-matrix composite aluminum silicon carbide (`Al-SiC`),
manufactured using the Company`s proprietary processes, is a material
system which meets all these requirements and which is finding acceptance
in the marketplace as a replacement for copper, copper-tungsten, copper-
moly, and graphite. In addition, the Company`s aluminum nitride (`AlN`)
ceramic components are used in applications where very high thermal
conductivity is required.
CUSTOMERS
The Company sells to major United States microelectronics systems
houses. The Company`s customers typically purchase prototype and
evaluation quantities of the Company`s products over a one to three year
period before entering into recurring production.
In fiscal 1998, the Company's three largest customers accounted for
72%, 13%, and 6% of total revenues, respectively. In fiscal 1997, these
same companies accounted for 56%, 9%, and 9% of total revenues. In fiscal
1998, 94% of the Company`s total revenues were from commercial business,
and 6% were from defense-related business.
Strategic Partnerships In Other Market Areas
- --------------------------------------------
In addition to its primary focus in microelectronics markets, the
Company participates in other markets through licensing its technology to
corporations who manufacture and sell products in these other markets.
In 1991, CPS and Sopretac, a subsidiary of Vallourec of Boulogne,
France, established a joint venture, Metals Process Systems (`MPS`), to
market on a worldwide basis licenses to use the Quickset Process for
metal injection molding. At December 30, 1995 the Company owned 40% of
the voting stock in MPS (see Patents and Trade Secrets), and Sopretac
owned 60%. In 1996, the Company`s ownership interest in MPS was reduced
to less than 1%, based on additional investment in MPS by Sopretac. The
Company accounted for its investment in MPS under the equity method and
did not recognize any income or dividends from the joint venture in 1998.
Research and Development
- ------------------------
The Company continues to perform product development under prototype
manufacturing agreements with customers. The Company had no externally
funded collaborative research and development agreements in 1998, 1997, or
1996.
Availability of Raw Materials
- -----------------------------
The Company uses a variety of raw materials from numerous domestic
and foreign suppliers. These materials are primarily aluminum ingots,
ceramic powders and chemicals. Other than certain precious metals, of
which little is used by the Company, the raw materials used by the
Company are available from domestic and foreign sources and none is
believed to be scarce or restricted for national security reasons.
Patents and Trade Secrets
- -------------------------
As of December 26, 1998 the Company had 11 United States patents.
The Company also has several international patents covering the same
subject matter as the U.S. patents. The Company`s licensees have rights to
use certain patents as defined in their respective license agreements. The
Company has granted co-ownership of five of its patents and licensing
rights to MPS in exchange for its equity ownership in MPS. Under terms of
the agreement, MPS has the exclusive right to use such patents in the area
of metal powders and the Company has the exclusive right to use such
patents in all other areas, provided, however, that MPS has granted to the
Company a non-exclusive license to use the patents in the area of metal
powders.
The Company intends to continue to apply for domestic and foreign
patent protection in appropriate cases. In other cases, the Company
believes it may be better served by reliance on trade secret protection.
In all cases, the Company intends to seek protection for its
technological developments to preserve its competitive position.
Backlog and Contracts
- ---------------------
As of December 26, 1998, the Company had a product backlog of $1.27
million compared with a product backlog of $2.07 million at December 27,
1997. The Company shipped 100% of the year-end 1997 product backlog in
1998.
Competition
- -----------
The Company has developed and expects to continue to develop
products for a number of different markets and will encounter competition
from different producers of metal matrix composites and ceramic products.
The Company believes that the principal competitive factors in its
markets include technical competence, product performance, quality,
reliability, price, corporate reputation, and strength of sales and
marketing resources. The Company believes its proprietary processes,
reputation, and the price at which it can offer products for sale will
enable it to compete successfully in the advanced microelectronics
markets. However, many of the American and foreign companies now
producing or developing metal matrix composites have far greater
financial and sales and marketing resources than the Company, which may
enable them to develop and market products which would compete against
those developed by the Company.
Government Regulation
- ---------------------
The Company produces non-nuclear, non-medical hazardous waste in its
development and manufacturing operations. The disposal of such waste is
governed by state and federal regulations. Various customers, vendors,
and collaborative development agreement partners of the Company may
reside abroad, thereby possibly involving export and import of raw
materials, intermediate products, and finished products, as well as
potential technology transfer abroad under collaborative development
agreements. These types of activities are regulated by the Bureau of
Export Administration of the United States Department of Commerce.
The Company performs and solicits various contracts from the United
States government agencies and also sells to other government
contractors.
Employees
- ---------
As of December 26, 1998, the Company and its wholly-owned subsidiary,
CPS Superconductor Corporation (`CPSS`), had 40 full-time employees, of
whom 35 were engaged in manufacturing and engineering, and 5 in sales and
administration. The Company also employs temporary employees as needed
to support production and program requirements.
None of the Company`s employees is covered by a collective
bargaining agreement. The Company considers its relations with its
employees to be excellent.
Item 2. Properties.
The Company's 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.
The Company`s rental expense for operating leases was $82 thousand,
$68 thousand and $68 thousand in 1998, 1997 and 1996, 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 26, 1998.
Part II
- ------------------------------------------------------------------
Item 5. Market for Registrant`s Common Stock and Related
Stockholder Matters
On December 26, 1998, the Company had 836 shareholders. The high and
low closing bid prices of the Company`s common stock for each quarter
during the years ended December 26, 1998 and December 27, 1997 are shown
below.
1998 1997
--------------- --------------
High Low High Low
---- ---- ---- ----
1st Quarter $2.71 $2.00 $0.50 $0.31
2nd Quarter $2.62 $1.38 $0.87 $0.34
3rd Quarter $1.96 $1.25 $1.50 $0.62
4th Quarter $1.53 $1.25 $2.62 $1.38
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: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
Summary of Operations
- ---------------------
Revenue $5,525 $4,589 $2,007 $1,387 $1,192
Operating Expenses 3,722 2,993 2,201 2,221 3,071
------ ------ ------ ------ ------
Operating Income (Loss) 1,803 1,596 (194) (834) (1,879)
Net Other Income (Expense) (131) (219) (217) (274) (38)
------ ------ ------ ------ ------
Net Income (Loss) $1,672 $ 1,377 $ (411) $(1,108) $(1,917)
====== ====== ====== ====== ======
Net Income (Loss) Per
Basic Common Share $ 0.16 $ 0.18 $ (0.05) $ (0.14) $(0.25)
====== ====== ====== ====== ======
Weighted Average Basic
Number of Common Shares
Outstanding 10,566 7,799 7,781 7,675 7,581
====== ====== ====== ====== ======
Net Income (Loss) Per
Diluted Common Share $ 0.14 $ 0.13 $ (0.05) $ (0.14) $(0.25)
====== ====== ====== ====== ======
Weighted Average Diluted
Number of Common Shares
Outstanding 12,547 12,280 7,781 7,675 7,581
====== ====== ====== ====== ======
- --------------------------------------------------------------------------
Year-end Position
- -----------------
Working Capital (Deficit) $1,782 $(1,788) $(3,200) $(2,736) $ (165)
Total Assets 2,984 1,905 795 526 932
Long-term Obligations 125 310 88 - 1,620
Stockholders' Equity
(Deficit) $2,389 $(1,520) $(2,905) $(2,493) $(1,458)
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. 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.
Results of Operations
- ---------------------
Revenue
- -------
Total revenue increased $936 thousand or 20% to $5.52 million in 1998
from $4.59 million in 1997. Total revenue of $4.59 million in 1997
reflects an increase of $2.58 million or 128% over total revenue of $2.01
million in 1996. The increase in revenue from 1997 to 1998 is due to
increased customer demand resulting in an increase in product shipments of
$590 thousand, and increased revenues from licensing activities of $347
thousand. The increase in revenue from 1996 to 1997 is primarily the
result of a shift in product sales mix from small prototyping runs to
recurring production of several products. Because metal-matrix composites
are relatively new materials, the Company`s customers often take one to
three years to evaluate prototypes and modify their designs to take
advantage of the benefits metal-matrix composites offer before purchasing
production quantities. In 1997, several products, primarily for wireless
communications applications, made this transition from prototyping
quantities to production quantities.
Operating Costs
- ---------------
Total operating costs were $3.7 million, $3.0 million, and $2.2
million for the fiscal years 1998, 1997, and 1996, respectively.
Cost of sales for the years 1998, 1997, and 1996 were $3.0 million
$2.5 million, and $1.7 million, respectively. Selling, general and
administrative costs were $0.7 million, $0.5 million, and $0.5 million
for these same years, respectively.
The $0.5 million increase in cost of sales in 1998 versus 1997 is
attributable to higher sales volume in 1998. The $0.8 million increase in
cost of sales in 1997 versus 1996 is attributable to higher sales volume in
1997. Unit shipments in 1997 were 337% higher than unit shipments in 1996
while cost of sales increased only 47%, reflecting a shift in mix from
small prototyping runs to recurring production of several products.
Gross margins on product revenue declined to 37% in 1998 from 41% in
1997 primarily due to increased manufacturing overhead expenses the Company
believes are needed to support future growth. Gross margins increased to
41% in 1997 from 12% in 1996 as more products entered into recurring
production and manufacturing efficiencies improved as processes operated on
a consistent daily basis, labor content per part declined as capital
equipment was installed, and the cost of raw materials per unit shipped
declined as the Company took advantage of reductions in vendors` prices as
a result of higher quantity usage.
The 1998 selling, general and administrative expenses of $685
increased 33% from 1997 selling, general and administrative expenses of
$517 primarily as a result of increased salary and travel expense. The
Company added personnel in the sales function in 1998 and the Company
expects to continue to increase headcount in the sales function as it
expends greater efforts on building it's customer base. Selling, general
and administrative expenses of $0.5 million were consistent from 1997 to
1996.
The Company continues to perform product development under prototype
manufacturing agreements with customers. The Company had no externally
funded collaborative research and development agreements in 1998, 1997 or
1996
Net Other Expenses
- ------------------
The Company had net other expenses of $0, $219 thousand and $217
thousand for the fiscal years 1998, 1997 and 1996 respectively. The
decrease in net other expense in 1998 compared to 1997 is primarily due to
reduced interest expense as a result of extinguishing debt or conversion of
debt to equity in 1998. Additionally, interest income increased due to
higher cash balances. Net other expenses were similar in amount in 1997
and 1996, and were primarily interest expense.
Income Taxes
- ------------
The Company's Federal income taxes expense in 1998 was $57,126 which
includes alternative minimum taxes for fiscal 1997 of $21,060 and taxes for
fiscal 1998 of $36,066. The Company did not accrue or pay Federal income
taxes in 1996 due to its tax losses in that year.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that they did not exceed the 50% ownership change in the three-
year period ending December 26, 1998, therefore, as of year-end 1998 all
net operating loss carryforwards are available to offset future taxable
income.
Liquidity and Cash Reserves
- ---------------------------
Cash on hand increased $938 thousand or 167% to $1,499 thousand at
fiscal year end 1998 from $561 thousand at fiscal year end 1997. In 1998,
operations generated net cash of $1,266 thousand, investing activities
generated net cash of $55 thousand, and financing activities, primarily
payment of debt principal, consumed net cash of $383 thousand. Cash
generated by operations increased in 1998 from 1997 primarily because of
increased product and licensing revenues in 1998 compared to 1997.
Cash on hand of $561 at fiscal year end 1997 reflects an increase of
$448 thousand or 396% over cash on hand of $113 at fiscal year end 1996. In
1997, operations generated net cash of $784 thousand, investing activities,
primarily the purchase of capital equipment, consumed net cash of $215
thousand, and financing activities, primarily payment of debt principal,
consumed net cash of $120 thousand. Cash generated by operations increased
in 1997 from 1996 primarily because of increased product and licensing
revenues in 1997 compared to 1996.
In 1998 and 1997 the Company financed its operations through funds
generated from operations. Prior to 1997, the Company financed its
operations primarily through, debt, contract research and development
revenues, license fees, an equity placement, and sale of products. In 1994
and 1995, the Company issued notes and convertible notes in the amount of
$2.4 million to finance its working capital obligations and building
renovations cost. In 1997, the Company paid down several notes. In 1998,
the Company converted the remaining notes into equity. Specifically, in
1998 the Company issued 3,740,000 shares of common stock upon conversion of
note principal in the amount of $1,870,000, the Company issued 723,916
shares of common stock upon conversion of accrued interest in the amount of
$361,958, and the Company paid accrued interest in cash in the amount of
$160,542.
The Company believes it will be able to finance its working capital
obligations and capital expenditures for production equipment through funds
generated from operations throughout 1999. The Company continues to sell
to a limited number of customers and loss of any one of these customers
could cause the Company to require external financing.
As of year-end 1998 the Company has no notes outstanding.
Newly Issued Accounting Changes
- -------------------------------
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transactions and, if it is, the
type of hedge transaction. The statement is effective for fiscal years
beginning after June 15, 1999. The Company will adopt FAS No. 133 for its
fiscal year ending December 30, 2000.
Year 2000 Issue
- ---------------
The Company has identified three areas of possible exposure to Year
2000 problems: 1) Application programs (financial, CAD/CAM and management
information programs) used by the company, 2) Embedded programs in
production and analytical equipment used by the Company, and 3) Programs
used by vendors, customers and other third parties with whom the Company
conducts business.
The Company has completed an assessment of its exposure in each of
these three areas and has developed a plan and timetable to address issues
identified. The assessment indicated the area of greatest risk is the area
of application programs. In the process of addressing the Year 2000 issue,
the Company has concurrently sought to upgrade certain computer systems to
provide greater functionality. In 1998, the Company made capital
expenditures of $84 thousand to purchase and install new financial,
accounting, and selected manufacturing computer systems which are Year 2000
compliant and which provide greater functionality . For the application
programs which the Company does not intend to replace but which are not
currently Year 2000 compliant, the Company has identified patches and
upgrades which the company is implementing through the first half of 1999.
Regarding the second area, the Company is testing production and
analytical equipment one machine at a time to determine where Year 2000
problems exist, and to implement upgrades and or other remedies for
problems identified. The Company's timetable calls for completion of this
process by the end of the first half of 1999. If upgrades or other
remedies are not possible for certain equipment, the Company believes it
can replace the capital equipment in an orderly manner without disrupting
production. The Company does not currently believe any capital equipment
will need to be replaced, but there is no guarantee this will be the case.
The Company does not believe the cost of upgrades will be material, but
there is no guarantee this will be the case.
Regarding the third area, the Company is interviewing vendors and
customers to determine their exposure to Year 2000 issues. The Company is
developing a contingency plan in the event of noncompliance by its
customers and vendors. The contingency plan will be in place by the end of
the third fiscal quarter of 1999.
Inflation
- ---------
Inflation had no material effect on the results of operations or
financial condition during 1998, 1997 or 1996. There can be no
assurance, however, that inflation will not affect the Company`s
operations or business in the future.
Item 8. Financial Statements and Supplementary Data
See Index to the Company`s Financial Statements and the accompanying
financial statements and notes which are filed as part of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
- --------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Directors of the Company are elected annually and hold office until
the next annual meeting of stockholders and until their respective
successors are duly elected and qualified. The executive officers of the
Company are appointed by the Board of Directors and hold office until
their respective successors are duly elected and qualified.
The Directors and executive officers of the Company are as
follows:
Name Age Position
- ---- --- --------
Grant C. Bennett 44 President
Chief Executive
Officer,
Treasurer
and Director
Michael Bernique 55 Director
H. Kent Bowen 57 Director
Francis J. Hughes, Jr. 48 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.
Mr. Michael Bernique served as President, Satellite Data Networks
Group of General Instrument Corporation from 1996 to 1998, as Senior Vice
President, North American Sales and Vice President and General Manager,
Transmission Products Division of DSC Communications from 1993 to 1996, and
in a variety of positions with Motorola from 1986 to 1993, including Vice
President Domestic Operations, Cellular Infrastructure. Mr. Bernique was
elected to the Company's Board of Directors in 1999. Mr. Bernique is also
a director of RF Monolithics, Inc.
Dr. H. Kent Bowen has served as a Professor at Harvard Business
School since July, 1992. Prior to that time, he held the position of
Ford Professor of Engineering at the Massachusetts Institute of
Technology (`MIT`) from 1981 to 1992. Dr. Bowen served as Co-Director of
the Leaders for Manufacturing Program at MIT from 1991 through July,
1992. Dr. Bowen has been a Director of the Company since 1984 and served
as Chairman of the Board of Directors of the Company from 1984 to August,
1988. Dr. Bowen is also a director of General Signal Corporation.
Mr. Francis J. Hughes, Jr. has served as President of American
Research and Development Corporation (`ARD`), a venture capital firm,
since 1992. Mr. Hughes joined ARD`s predecessor organization in 1982,
and became Chief Operating Officer in 1990. Mr. Hughes served as General
Partner of the following venture capital funds: ARD I, L.P., ARD II,
L.P. (since July, 1985), ARD III, L.P. (since April, 1988), Hospitality
Technology Fund, L.P. (since June, 1991) and Egan-Managed Capital, L.P.
(since February, 1997). Mr. Hughes has served as a Director of the
Company since 1993. Mr. Hughes is also a director of RF Monolithics,
Inc., and Texas Micro, Inc.
There are no family relationships between or among any executive
officers or Directors of the Company.
Item 11. Executive Compensation
The following table sets forth certain information with respect to
the annual and long-term compensation of the Company`s Chief Executive
Officer for the three fiscal years ended December 26, 1998. No other
executive officer of the Company serving on the last day of fiscal year
1998 received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Other All Other
Compen- Options/ LTIP Compensa-
Name & Position Year Salary Bonus sation SAR`s Payouts tion
- ---------------------- -------- ----- ------- -------- ------- ---------
($) ($) ($) (#) ($) ($)
Grant C. Bennett 1998 $104,026 $0 $0 0 $0 $0 $0
President and 1997 $100,163 $0 $0 0 $0 $0 $0
Chief Executive 1996 $ 95,550 $0 $0 0 $0 $0 $0
Officer
The Company`s President and Chief Executive Officer did not receive
option grants during fiscal year 1998. During fiscal year 1998 no
options were exercised by him, and at the end of the fiscal year 1998 no
options were held by him.
Directors` Fees
- ---------------
Under the terms of the Company`s 1992 Director Option Plan (the
`Director Plan`), Directors who are neither officers nor employees of the
Company (the `Outside Directors`) are entitled to receive stock options
as compensation for their services as Directors. A non-statutory stock
option (the `initial option`) to purchase up to 4,000 shares of Common
Stock was granted on May 1, 1992 to each eligible Director who was then
serving as a Director, and shall be granted to each other eligible
Director upon his or her initial election as a Director. Also, each
eligible Director is entitled to receive a non-statutory stock option
(the `reelection option`) to purchase up to 2,000 shares of Common Stock
on each subsequent date that he or she is reelected as a Director of the
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 1998. At December 26, 1998, 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 1,
1999, 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:
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 1,837,810 15.0%
Waco Partners
c/o Wechsler & Co., Inc.
105 South Bedford Road, Suite 310
Mount Kisco, NY 10549 1,669,980 13.6%
American Research and
Development III, L.P.
(`ARD III`)
30 Federal Street
Boston, MA 02110-2508 1,219,191 (2) 9.9%
American Research and
Development I, L.P.
(`ARD I`)
30 Federal Street
Boston, MA 02110-2508 1,021,884 (3) 8.3%
Grant C. Bennett (Director & Officer) 1,642,331 13.4%
Michael Bernique (Director) None *
H. Kent Bowen (Director) None *
Francis J. Hughes, Jr. (Director) 2,245,575 (4) 18.3%
All Directors and Officers as a
group (three persons) 3,887,906 (5) 31.6%
*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) Total of 1,219,191 shares includes 1,216,471 shares owned by ARD III
and options to purchase 2,720 shares of common stock exercisable within 60
days after March 1, 1999. Excludes shares described in Footnote 3 below,
and excludes options to purchase 4,500 shares of common stock held by Mr.
Hughes which are exercisable within 60 days after March 1, 1999.
(3) Total of 1,021,884 shares includes 1,019,604 shares owned by ARD I
and options to purchase 2,280 shares of common stock exercisable within 60
days after March 1, 1999. Excludes shares described in Footnote 2 above,
and excludes options to purchase 4,500 shares of common stock held by Mr.
Hughes which are exercisable within 60 days after March 1, 1999.
(4) Total of 2,245,575 includes a) 1,216,471 shares of Common Stock owned
by ARD III, 1,019,604 shares of common stock owned by ARD I, options to
purchase 2,720 shares of common stock exercisable within 60 days after
March 1, 1999 owned by ARD III and options to purchase 2,280 shares of
Common Stock exercisable within 60 days after March 1, 1999 owned by ARD I,
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) and, b) options to purchase 4,500 shares of common stock
held by Mr. Hughes which are exercisable within 60 days after March 1, 1999
(5) Total of 3,887,906 includes 2,245,575 shares and options described in
Footnote 4 above, and 1,642,331 shares owned by Mr. Bennett, a director and
officer of the Company.
Item 13. Certain Relationships and Related Transactions
In 1994, the Company issued convertible subordinated notes to
affiliates of Directors and other persons know by the Company to
beneficially own more than 5% of the outstanding shares of the Company. In
1998 all remaining notes were converted into equity and accrued interest
was paid in cash or converted into equity as summarized below. There were
no notes outstanding as of December 26, 1998.
Shares Issued Upon Conversion of
Principal and Shares Issued or cash
Paid for Accrued Interest in 1998
Per ---------------------------------
Annum Principal Interest Interest
Principal Interest Conversion Conversion Payment
Amount Rate Shares Shares Cash
Noteholder ($) (%) ---------- ---------- ---------
ASMV $660,000 10% 1,320,000 517,810 -
Waco Partners $750,000 10% 1,500,000 - $132,260
ARD III $141,440 10% 282,880 112,122 -
ARD I $118,560 10% 237,120 93,984 -
Affiliates of
Directors as
a group $260,000 10% 520,000 206,106 -
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.
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: March 26, 1998
Pursuant to the Requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- -------------------- ------------------------ ------------
/s/ Grant C. Bennett President, Treasurer and Director}
- -------------------------- (Principal Executive Officer) }
Grant C. Bennett }
}
}
}
/s/ Michael Bernique Director }
- -------------------------- }
Michael Bernique } March 26,
} 1998
}
}
/s/ H. Kent Bowen Director }
- -------------------------- }
H. Kent Bowen }
}
}
}
/s/ Francis J. Hughes, Jr. Director }
- -------------------------- }
Francis J. Hughes, Jr. }
}
CERAMICS PROCESS SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
3.1** Restated Certificate of Incorporation of the
Company, as amended, is incorporated herein by
reference to Exhibit 3 to the Company`s
Registration Statement on Form 8-A
(File No. 0-16088) --
3.2** By-laws of the Company, as amended, are
incorporated herein by reference to Exhibit 3.2
to the Company`s Registration Statement on Form
S-1 (File No. 33-14616)(the `1987 S-1Registration
Statement`) --
4.1** Specimen certificate for shares of Common Stock of
the Company is incorporated herein by reference to
Exhibit 4 to the 1987 S-1 Registration Statement --
4.2** Description of Capital Stock contained in the
Restated Certificate of Incorporation of the
Company, as amended, filed as Exhibit 3.1 --
(1)10.1** 1984 Stock Option Plan of the Company, as amended,
is incorporated herein by reference to Exhibit
10(b) to the Company`s Annual Report on Form 10-K
for the year ended December 31, 1988 --
(1)10.2** 1989 Stock Option Plan of the Company, is
incorporated by reference to Exhibit 10.6 to the
Company`s 1989 S-1 Registration Statement --
(1)10.3** 1992 Director Stock Option Plan is incorporated by
reference to Exhibit 10.5 to the Company`s Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991 --
10.4** Participation Agreement, dated February 14, 1991,
between the Company and Sopretac, a French societe
anonyme, is incorporated by reference to Exhibit
10.10 to the Company`s Annual Report on Form 10-K
for the year ended December 28, 1991 --
(1)10.5** Retirement Savings Plan, effective September 1,
1987 is incorporated by reference to Exhibit 10.35
to the Company`s 1989 S-1 Registration Statement --
(1)10.6** Severance Benefit Program, effective June 1, 1989,
is incorporated by reference to Exhibit 10.36 to
the Company`s S-1 Registration Statement --
10.7** Research and Development Agreement, dated as of
June 26, 1991, between the Company and Carpenter
Technology Corporation (`CarTech`) is
incorporated by reference to Exhibit 10.17 to the
Company`s Annual Report on Form 10-K for the year
ended December 28, 1991 --
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 --
10.16** 10% Convertible Subordinated Note Due January 31,
1996 and related Common Stock Purchase Warrant
between the Company and Ampersand Specialty
Materials Ventures Limited Partnership is
incorporated by reference to Exhibit 10.22 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.17** Form of 10% Convertible Subordinated Note Due April
24, 1996 and related Common Stock Purchase Warrant
between the Company and noteholder is incorporated
by reference to Exhibit 10.23 to the Company`s
Annual Report for the fiscal year ended December
31, 1994 --
10.18** Senior Secured Promissory Note Due March 30, 1996
and related Security Agreement between the Company
and Aavid Thermal Technologies, Inc. is
incorporated by reference to Exhibit 10.24 to the
Company`s Annual Report for the fiscal year ended
December 31, 1994 --
10.19** Secured Line of Credit Note Due June 30, 1996 and
related Security Agreement between the Company and
Kilburn Isotronics, Inc. --
10.20** Amended and Restated Promissory Note dated July
31, 1996 between the Company and Texas Instruments
Incorporated --
21** Subsidiaries of the Registrant are incorporated
herein by reference to Exhibit 22 to the Company`s
Annual Report on Form 10-K for the year ended
December 31, 1988 --
23.1 Consent of PricewaterhouseCoopers LLP
** Incorporated herein by reference.
(1) Management Contract or compensatory plan or arrangement filed as an
exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
CERAMICS PROCESS SYSTEMS CORPORATION
Page
- ------------------------------------------------------------
Report of Independent Accountants 22
Consolidated Balance Sheets as of December 26, 1998 and
December 27, 1997 23-24
Consolidated Statements of Operations for the years ended
December 26, 1998, December 27, 1997,
and December 28, 1996 25
Consolidated Statements of Stockholders` Equity (Deficit)
for the years ended December 26, 1998,
December 27, 1997 and December 28, 1996 26-27
Consolidated Statements of Cash Flows for the years ended
December 26, 1998, December 27, 1997,
and December 28, 1996 28
Notes to Consolidated Financial Statements 30
All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.
Report of Independent Accountants
- ------------------------------------------------------------------------
To the Board of Directors and Stockholders
Ceramics Process Systems Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Ceramics Process Systems Corporation (the "Company")
at December 26, 1998 and December 27, 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 26, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 8, 1999
CONSOLIDATED BALANCE SHEETS
Ceramics Process Systems Corporation
ASSETS
December 26, December 27,
1998 1997
-------- --------
Current assets:
Cash & cash equivalents $ 1,498,774 $ 561,166
Accounts receivable 547,134 626,121
Inventories 204,200 123,325
Prepaid expenses 1,830 15,528
------------ ------------
Total current assets 2,251,938 1,326,140
Property & equipment:
Production equipment 1,569,021 1,470,253
Office equipment 155,232 70,404
Accumulated depreciation
and amortization (1,000,637) (967,161)
------------ ------------
Net property and equipment 723,616 573,496
------------ ------------
Deposits 8,772 5,072
------------ ------------
Total assets
$ 2,984,326 $ 1,904,708
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS (continued)
Ceramics Process Systems Corporation
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
December 26, December 27,
1998 1997
-------- ------
Current liabilities:
Accounts payable $ 96,753 $ 154,657
Accrued expenses 184,032 677,109
Deferred revenue 142,266 163,430
Notes payable -- 206,962
Current portion of convertible notes payable:
Related parties -- 260,000
Other -- 1,610,000
Current portion of capital lease
obligations 46,959 42,205
---------- --------
Total current liabilities 470,010 3,114,363
Long term portion:
Notes payable -- 137,868
Capital lease obligations 125,155 172,114
---------- --------
Total liabilities 595,165 3,424,345
---------- --------
Stockholders' Equity (Deficit)
Common stock, $0.01 par value,
authorized 15,000,000 shares; issued
12,308,852 shares at December 26, 1998
and 7,824,582 shares at December 27, 1997 123,089 78,246
Additional paid-in capital 32,656,353 30,464,833
Accumulated deficit (30,329,446) (32,001,881)
Less treasury stock, at cost, 22,883
common shares (60,835) (60,835)
---------- --------
Total stockholders'equity (deficit) 2,389,161 (1,519,637)
---------- --------
Total liabilities & stockholders'
equity (deficit) $ 2,984,326 $ 1,904,708
============ ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Ceramics Process Systems Corporation
For the years ended
December 26, December 27, December 28,
1998 1997 1996
------------ ------------ ------------
Revenue:
Product sales $4,787,790 $4,197,912 $1,922,006
License revenues 737,504 391,001 85,000
---------- ---------- ----------
Total revenue 5,525,294 4,588,913 2,007,006
---------- ---------- ----------
Operating expenses:
Cost of sales 3,037,351 2,475,140 1,686,148
Selling, general, and
administrative 684,658 517,362 515,346
---------- ---------- ----------
Total operating expenses 3,722,009 2,992,502 2,201,494
---------- ---------- ----------
Operating income (loss) 1,803,285 1,596,411 (194,488)
---------- ---------- ----------
Other income (expense):
Interest income 41,455 3,581 --
Interest expense (132,202) (237,968) (248,500)
Other income 90,774 15,122 31,683
---------- ---------- ----------
Income (loss) before taxes 1,803,312 1,377,146 (411,305)
Provision for taxes (130,877) -- --
---------- ---------- ----------
Net income (loss) $1,672,435 $1,377,146 $ (411,305)
========== ========== ==========
Net income (loss) per
basic common share $0.16 $0.18 $(0.05)
========== ========== ==========
Weighted average
number of basic common
shares outstanding 10,565,961 7,799,279 7,780,766
=========== ========== ==========
Net income (loss) per
diluted common share $0.14 $0.13 $(0.05)
========== ========== ==========
Weighted average number
of diluted common
shares outstanding 12,547,427 12,279,643 7,780,766
=========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 26, 1998, December 27, 1997 and December 28, 1996
Ceramics Process Systems Corporation
Common stock
----------------- Additional
Number Par Paid-in Accumulated
Treasury Stockholders'
of shares Value capital deficit
stock equity
(deficit)
------- ------- ------- ------- ---
- ---- -------
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 -- -- (411,305)
- -- (411,305)
Stock Options
Exercised 43,816 438 7,449 --
- -- 7,887
Net income -- -- -- 1,377,146
- -- 1,377,146
------- ------- ------- ------- ----
- --- -------
Balance at
December 27, 1997 7,824,582 438 7,449 965,841
- -- 973,728
Common stock issued
in debt conversion 4,463,916 44,639 2,187,319 --
- -- 2,231,958
Stock Options
Exercised 20,354 204 4,201 --
- -- 4,405
Net income -- -- -- 1,672.435
- -- 1,672,435
------- ------- ------- ------- ----
- --- ---------
Balance at
December 26, 1998 12,308,852 $123,089 $32,656,353 $(30,329,446)
$(60,835) $2,389,161
========== ======== =========== ============
========= ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ceramics Process Systems
Dec. 26, Dec. 27, Dec 28,
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $1,672,435 $1,377,146 $(411,304)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
Depreciation 146,234 115,994 108,070
Amortization 36,600 36,500 5,290
Gain on disposal of equipment (53,800) -- (27,043)
Changes in assets and liabilities:
Accounts receivable, trade 78,987 (485,086) 70,540
Inventories (80,875) 33,120 (127,419)
Prepaid expenses 13,698 (14,188) 9,484
Other current assets 475
Accounts payable (57,904) 25,895 (47,732)
Accrued expenses (131,120) (112,657) 214,558
Due to customer 51,950
Deferred revenue (21,164) (192,557) 355,987
Net cash provided by ----------- ----------- ---------
operating activities 1,603,091 784,167 202,856
----------- ----------- ----------
Cash flows from investing activities:
Additions to property and equipment (332,954) (212,827) (147,768)
Proceeds on disposal of property and
equipment 53,800 27,500
Deposits (3,700) (2,735) (1,384)
Net cash used in investing ----------- ----------- ----------
activities (282,854) (215,562) (121,652)
----------- ----------- ----------
Cash flows from financing activities:
Principal payment of capital lease (42,204) (23,487)
obligations
Principal payments of notes payable (344,830) (105,170) --
Proceeds from issuance of common stock 4,405 7,887 --
Net cash used in ----------- ----------- ----------
financing activities (382,629) (120,770) --
----------- ----------- ----------
Net increase in cash 937,608 447,835 81,204
Cash and cash equivalent at beginning
of period 561,166 113,331 32,127
Cash and cash equivalent at end ----------- ----------- ----------
of period $1,498,774 $ 561,166 $113,331
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ceramics Process Systems Corporation
- ------------------------------------------------------------------------
(1) Nature of Business
------------------
Ceramics Process Systems Corporation serves the wireless
communications, satellite communications, motor controller and other
microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house,
interconnect, and thermally manage microelectronic devices.
(2) Summary of Significant Accounting Policies
------------------------------------------
(2)(a) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Ceramics Process Systems Corporation and its wholly-owned subsidiary, CPS
Superconductor Corporation (`CPSS`). All significant intercompany
balances and transactions have been eliminated in consolidation.
(2)(b) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(2)(c) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Year end
inventory balances consisted of the following:
26-Dec-98 27-Dec-97
--------- ---------
Raw materials $ 107,259 $ 11,097
Work-in-process 96,941 112,228
--------- ---------
$ 204,200 $123,325
========= =========
(2)(d) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation of
equipment is calculated on a straight-line basis over the estimated
useful life, generally five years. Amortization under capital leases is
calculated on a straight-line basis over the life of the lease.
Depreciation of leasehold improvements is calculated using the straight-
line method over the lease term or the estimated useful lives, whichever
is shorter. Upon retirement, the cost and related accumulated
depreciation or amortization are removed from their respective accounts.
Any gains or losses are included in the results of operations in the
period in which they occur.
(2)(e) Revenue Recognition
-------------------
The Company recognizes product revenue generally upon shipment.
Revenue related to license agreements is recognized upon receipt of the
license payment or over the license period, if the Company has continuing
obligations under the agreement. Revenue related to research and
development contracts is recognized on the percentage-of-completion
basis, which is generally based on the relationship of incurred costs to
total estimated costs on each contract. Advance payments in excess of
revenue recognized are recorded as customer deposits.
(2)(f) Research and Development Costs
------------------------------
The Company continues to perform product development under prototype
manufacturing agreements with customers. In fiscal 1998 and fiscal 1997,
the Company did not incur any costs for research and development and did
not perform any externally funded research and development programs. In
prior periods research and development costs were charged to expense as
incurred.
(2)(g) Income Taxes
------------
The Company accounts for income taxes utilizing the asset and
liability method which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between tax and financial statement basis of assets and
liabilities, measured using enacted tax rates expected to be in effect in
the period which the temporary differences reverse.
(2)(h) Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted net income per common share is calculated by dividing
net income by the sum of the weighted average number of common shares plus
additional common shares that would have been outstanding if potential
dilutive common shares had been issued for granted stock option and stock
purchase rights.
(2)(i) Comprehensive Income
--------------------
The Company has adopted Financial Accounting Standards Board
Statement No. 130 (`FAS 130`) `Reporting Comprehensive Income` effective
for fiscal years beginning after December 15, 1997. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. FAS 130
requires that all components of comprehensive income shall be reported in
the financial statements in the period in which they are recognized.
Furthermore, a total amount for comprehensive income shall be displayed in
the financial statement where the components of other comprehensive income
are reported. The Company has no items of comprehensive income, and
therefore net income is equal to comprehensive income.
(2)(j) Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transactions and, if it is, the
type of hedge transaction. The statement is effective for fiscal years
beginning after June 15, 1999. The Company will adopt FAS No. 133 for its
fiscal year ending December 30, 2000.
(2)(k) Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(2)(l) Risks and Uncertainties
-----------------------
The Company manufactures its products to customer specifications and
a significant portion of the Company`s revenues have historically been
generated from three customers. Financial instruments which potentially
subject the Company to concentrations of credit risk consist of trade
accounts receivable. The Company has not incurred significant losses on
its accounts receivable in the past.
(2)(m) Financial Instruments
---------------------
Although the Company has no borrowings outstanding as of year-end
1998, in the past a substantial portion of the Company's borrowings have
been financed by significant stockholders of the Company, one of which
reduced its ownership interest in 1996. The Company was in default of a
significant portion of its convertible notes payable at year-end 1997; in
1998 these convertible notes payable were converted into equity.
(2)(n) Fiscal Year-End
---------------
The Company`s fiscal year end is the last Saturday in December or
the first Saturday in January, which results in a 52- or 53-week year.
Fiscal years 1998, 1997, and 1996, consisted of 52 weeks.
(3) Supplemental Cash Flow Information
----------------------------------
The Company acquired equipment through capital lease obligations in
1997 in the amount of $135,160 and in 1996 in the amount of $111,079.
Additionally, the Company paid interest on leases amounting to $20,710,
$15,196, and $5,891 in 1998, 1997, and 1996, respectively. In 1998 the
Company issued 3,740,000 shares of common stock upon conversion of note
principal in the amount of $1,870,000, the Company issued 723,916 shares of
common stock upon conversion of accrued interest in the amount of $361,958,
and the Company paid accrued interest in cash in the amount of $160,542. In
1998 the Company's Federal income taxes expense was $57,126 which includes
alternative minimum taxes for fiscal 1997 of $21,060 and taxes for fiscal
1998 of $36,066. The Company did not accrue or pay Federal income taxes in
1996 due to its tax losses in that year.
(4) Leases
------
At December 26, 1998 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $78,390 under capital
leases. At December 27, 1997 the Company had production equipment with a
cost of $262,108 and accumulated amortization of $41,790 under capital
leases.
Future payments required under capital lease
obligations are as follows at December 26, 1998:
1999 $ 62,916
2000 62,916
2001 56,940
2002 21,497
--------
Total future minimum lease payments 204,269
--------
Less amount representing interest 32,155
--------
Present value of net future lease payments 172,114
Less current portion 46,959
--------
Long-term obligation under capital leases $ 125,155
========
The Company is operating at its Chartley facility as a tenant-at-
will. Total rental expense for operating leases was $82,000
for 1998,and $67,500 each year for 1997 and 1996, respectively.
(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 1998, 1997, and 1996.
In 1998, Company employees exercised options for 20,354 shares of
common stock at market prices between $0.18 and $0.625.
In 1998, the Company maintained two stock option plans affording
employees and other persons affiliated with the Company, excluding non-
employee Directors, the opportunity to purchase shares of its common
stock. In August, 1994, one of the stock option plans expired and no new
grants are currently available under it. Under the remaining plan, the
Board of Directors may grant incentive stock options to officers and
other key employees of the Company. Additionally, the remaining plan
permits the Board of Directors to issue non-qualified stock options to
officers and other key employees and consultants of the Company.
All incentive stock options are granted at the fair market value of
the stock or in the case of certain optionees, at 110% of such fair
market value at the time of the grant. Such options are exercisable in
installments following a minimum period of employment and expire within
ten years from the date granted. All non-qualified stock options are
granted at a price not less than 50% of the fair market value at the time
of the grant. Options vest over various periods not exceeding 5 years.
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 1998, 1997 or 1996. At December 26, 1998, options to
purchase 20,500 shares of Common Stock were outstanding under the
Director Plan.
In 1998 the Company granted 51,000 options at the current fair
market values of $1.44 to $2.375. In 1997, and 1996 the Company granted
109,000 and 330,461 options at the then current fair market value of $0.18
and $1.50, respectively, with similar terms and conditions to existing
option holders in exchange for the previously issued options.
As of December 26, 1998, the total remaining number of shares
authorized for issuance under these stock option plans amounted to
411,862.
The following is a summary of stock option activity for all of the
above plans for the fiscal years 1998, 1997 and 1996.
1998 1997 1996
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------ ------------------ ------------------
Outstanding at
beginning of
year 374,386 $ 0.93 430,961 $ 0.68 447,267 $ 0.93
Granted at fair
market value 51,000 $ 2.04 109,000 $ 1.00 330,461 $ 0.18
Excerised (20,354) $ 0.22 (43,816) $ 0.18
Cancelled (66,334) $ 2.57 (121,759) $ 0.41 (346,767) $ 0.52
------------------ ------------------ ------------------
Outstanding at
end of year 338,698 $ 0.81 374,386 $ 0.93 430,961 $ 0.68
================== ================== ==================
Options exercisable
at year-end 176,734 $ 0.60 165,461 $ 1.44 100,500 $ 2.34
The following table summarizes information about stock options
outstanding at December 26, 1998:
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
- -------- ----------- ----------- -------- ----------- --------
$0.18 204,198 7.25 $0.18 129,234 $0.18
0.625 - 0.875 12,000 3.39 0.80 12,000 0.80
1.312 - 1.50 59,000 8.96 1.36 16,333 1.35
2.188 - 3.75 63,500 7.46 2.35 19,167 2.68
------- -------
$0.18 - $3.75 338,698 7.45 $0.81 176,734 $0.60
======== ========
The fair value of each option grant under SFAS 123 is estimated on the
date of grant using the Black-Scholes option-pricing model. The following
table presents the annualized weighted average values of the significant
assumptions used to estimate the fair values of the options:
1998 1997 1996
---- ---- ----
Options issued 51,000 59,000 222,886
Risk-free interest rate 5.52% 6.27% 6.31%
Expected life in years 7 7 7
Expected volatility 88% 80% 80%
Expected dividends 0 0 0
All options are granted at the fair market value on the date of
grant.
Had compensation cost for the Company`s two employee stock option
plans been recorded based on the fair value of awards at grant date
consistent with the alternative method prescribed by SFAS 123, the
Company`s pro forma net income (loss) for 1998, 1997, and 1996 would have
been $1,632,788, $1,362,316, and $(419,108), respectively. Diluted
income (loss) per share for 1998, 1997 and 1996 would have been $0.14,
$0.13, and $(0.05), respectively. The pro forma amounts include
amortized fair values attributable to options granted after December 15,
1994 only and therefore, are not likely to be representative of the
effects on reported net income for future years.
(6) Notes Payable
- -------------
Notes payable consisted of the following at December 27, 1997:
Note Payable 1
Note payable dated March 31, 1995 as
amended October 1, 1997, with interest payable
at a rate of 10% per year; due in installments
on January 1, 1998, April 1, 1998, July 1,
1998, October 1, 1998 and December 31, 1998.
The note is collateralized by accounts
receivable, inventory, property and
equipment. $218,750
Note Payable 2
Note payable dated July 19, 1995, as
amended July 31, 1996 and July 31, 1997,
with interest payable at a rate of 10% per
year due in installments on March 29, 1998,
June 26, 1998, September 25, 1998,
December 24, 1998, March 26, 1999 and
June 25, 1999. 126,080
--------
$344,830
========
In 1998, Notes Payable 1 and 2 were paid in cash and no Notes Payable
were outstanding as of December 26, 1998.
(7) Convertible Notes Payable
-------------------------
Convertible notes payable consisted of the following at
December 27, 1997:
Convertible Note Payable 1
Unsecured notes payable dated February 16,
1994 with five parties, due June 30, 1995
plus interest at 10% per annum. $ 250,000
Convertible Note Payable 2
Unsecured note payable dated April 21,
1994, due April 21, 2001; interest at 10%
per annum is due semi-annually on
September 30 and March 31. 500,000
Convertible Note Payable 3
Unsecured note payable dated July 20,
1994, due January 31, 1996 plus interest
at 10% per annum. 120,000
Convertible Note Payable 4
Unsecured notes payable dated October 26,
1994 with six parties, due April 24, 1996
plus interest at 10% per annum. 1,000,000
----------
$1,870,000
==========
At December 27, 1997, the Company was in default of Convertible
Notes Payable 1, 2, 3 and 4. The Company cured all conditions of default
in the first fiscal quarter of 1998.
$260,000 of the principal balance of the convertible notes payable at
December 27, 1997 represent amounts due to holders of greater than 10% of
the Company's common stock for which the related accrued interest and
interest expense as of December 27, 1997 was $86,667 and $25,929
respectively.
In 1998 all Convertible Notes Payable were converted into common
stock of the Company and no Notes Payable were outstanding as of December
26, 1998.
(8) Accrued Expenses
------------
Accrued expenses consist of the following:
December 26, December 27,
1998 1997
-------- --------
Accrued legal and accounting $ 47,500 $ 33,190
Accrued interest -- 526,294
Accrued payroll 107,383 108,242
Accrued other 29,149 172,813
-------- --------
$ 184,032 $840,539
======== ========
(9) Income Taxes
------------
Deferred tax assets and liabilities are as follows:
December 26, December 27,
1998 1997
------------ ------------
Net operating losses $10,851,000 $11,410,000
Vacation and other accrued
expenses 79,000 79,000
Depreciation (99,000) (93,000)
------------ ------------
Total 10,831,000 11,396,000
Valuation allowance (10,831,000) (11,396,000)
----------- -----------
-- --
============ ============
Due to the uncertainty related to the realization of the net
deferred tax asset, a full valuation allowance has been provided. At
December 26, 1998, the Company had net operating loss carryforwards of
approximately $31,000,000 available to offset future income for U.S.
Federal income tax purposes, and $4,200,000 for state income tax
purposes. These operating loss carryforwards expire at various dates from
the years 2000 through 2011 for federal income tax purposes and the years
1998 through 2001 for state income tax purposes.
Certain provisions of the Internal Revenue Code limit the annual
utilization of net operating loss carryforwards if, over a three-year
period, a greater than 50% change in ownership occurs. The Company
believes that it did not exceed the 50% ownership change in the three-
year period ending at year-end 1998 therefore as of year-end 1998 all net
operating loss carryforwards are available to offset future taxable
income.
(10) Retirement Savings Plan
-----------------------
Effective September 1, 1987, the Company established the Retirement
Savings Plan (the `Plan`) under the provisions of Section 401 of the
Internal Revenue Code. Employees, as defined in the Plan, are eligible
to participate in the Plan after 30 days of employment. Under the terms
of the Plan, the Company may match employee contributions under such
method as described in the Plan and as determined each year by the Board
of Directors. Through December 26, 1998, no employer matching
contributions had been made to the Plan.
(11) Significant Customers and Segment Information
---------------------------------------------
Significant customers in 1998, 1997, and 1996 were as follows:
Significant Significant
Customer Customer
Year ended December 26, 1998 A 72%
B 13%
C 6%
D 1%
Year ended December 28, 1997 A 56%
B 9%
C 9%
D 10%
Year ended December 30, 1996 A 61%
B 0%
C 10%
D 17
All of the Company's long-lived assets and operations are located in
the United States. Revenue generated from overseas customers accounted for
13%, 1% and 0% for 1998, 1997, and 196 respectively.
(12) Earnings Per Share
------------------
SFAS 128 requires the following reconciliation of the basic and
diluted EPS calculations.
For the years ended
Dec. 26, 1998 Dec. 27, 1997 Dec. 28, 1996
------------- ------------- -------------
Basic EPS Computation:
Numerator:
Net income (loss) $ 1,672,435 $ 1,377,146 $ (411,305)
Denominator:
Weighted average
common shares
outstanding 10,565,961 7,799,279 7,780,766
Basic EPS $ 0.16 $ 0.18 $(0.05)
Diluted EPS Computation:
Numerator:
Net income (loss) $ 1,672,435 $ 1,377,146 $(411,305)
Interest on
convertible debt 87,290 186,489 --
----------- ----------- ----------
Total net income
(loss) $ 1,759,725 $ 1,563,635 $(411,305)
Denominator:
Weighted average
common shares
outstanding 10,565,961 7,799,279 7,780,766
Stock options 204,749 191,040 --
Interest converted 359,292 -- --
Convertible debt 1,417,425 4,289,324 --
----------- ----------- ----------
Total Shares 12,547,427 12,279,643 7,780,766
Diluted EPS $ 0.14 $ 0.13 $ (0.05)