CPS TECHNOLOGIES CORP/DE/ — Annual Report 1999

Apr 6, 1999

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) Registrants 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 registrants 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 Companys 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 Companys 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 Companys 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 Companys total revenue was derived from manufactured products and 8.5% from licensing fees and in fiscal 1996, 96% of the Companys 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 Companys 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 customersblueprints 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 Companys 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 Companys 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 Companys customers typically purchase prototype and evaluation quantities of the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Registrants Common Stock and Related Stockholder Matters On December 26, 1998, the Company had 836 shareholders. The high and low closing bid prices of the Companys 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 Companys earnings and financial condition. The Companys 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. Managements 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 Companys 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 Companys 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 vendorsprices 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 Companys operations or business in the future. Item 8. Financial Statements and Supplementary Data See Index to the Companys 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 ARDs 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 Companys 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 $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation Other All Other Compen- Options/ LTIP Compensa- Name & Position Year Salary Bonus sation SARs Payouts tion - ---------------------- -------- ----- ------- -------- ------- --------- ($) ($) ($) (#) ($) ($) 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 Companys 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 Companys 1992 Director Option Plan (theDirector Plan), Directors who are neither officers nor employees of the Company (theOutside Directors) are entitled to receive stock options as compensation for their services as Directors. A non-statutory stock option (theinitial 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 (thereelection 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 1989 S-1 Registration Statement -- (1)10.3 1992 Director Stock Option Plan is incorporated by reference to Exhibit 10.5 to the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.