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.
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.
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.
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.
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.
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.
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.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
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.
Item 6. Selected Consolidated Financial Data
Item 7.
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.
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
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).
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.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Part III - -------------------------------------------------------------------- Item 10.
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.
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.
Item 11.
Item 11. Executive Compensation
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
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.
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:
Item 13.
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.
Part IV - ------------------------------------------------------------------------ Item 14.
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: 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. } }
CERAMICS PROCESS SYSTEMS CORPORATION
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.
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
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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 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.
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 -----------
(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.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ceramics Process Systems Corporation - -------------------------------------------------------------------------
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.
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.
(8) Convertible Notes Payable -------------------------
Convertible notes payable consist of the following at December 28, 1996
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:
(9) Accrued Expenses ----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ceramics Process Systems Corporation - -------------------------------------------------------------------------
(10) Income Taxes ------------
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.
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 --------------------------------------
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.