CPS TECHNOLOGIES CORP/DE/ — Interim / Quarterly Report 1997

May 12, 1997

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended September 28, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-16088 CERAMICS PROCESS SYSTEMS CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 04-2832509 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 111 South Worcester Street P.O. Box 338 Chartley, Massachusetts 02712 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: 508-222-0614 Former Name, Former Address and Former Fiscal Year if Changed since Last Report: Not Applicable. 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 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding as of November 1, 1996: 7,917,504. CERAMICS PROCESS SYSTEMS CORPORATION Form 10-Q For The Fiscal Quarter Ended September 28, 1996 Index PART I: FINANCIAL INFORMATION Page Item 1: Consolidated Financial Statements 3-8 Consolidated Balance Sheets as of September 28, 1996 and December 30, 1995 3-4 Consolidated Statements of Operations for the fiscal quarters and nine-month periods ended September 28, 1996 and September 30, 1995 5 Consolidated Statements of Cash Flows for the nine-month periods ended September 28, 1996 and September 30, 1995 6 Notes to Consolidated Financial Statements 7-8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8-9 PART II: OTHER INFORMATION Items 1-6 10 Signatures 12 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS

CERAMICS PROCESS SYSTEMS CORPORATION Notes to Consolidated Financial Statements (Unaudited) (1) Nature of Business Ceramics Process Systems Corporation ("the Company"), incorporated on June 19, 1984, is engaged in the design, development, and manufacture of advanced ceramic and composite products for the electronics and defense industries. (2) Interim Consolidated Financial Statements As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles. The accompanying financial statements for the fiscal quarters and nine-month periods ended September 28, 1996 and September 30, 1995 are unaudited. In the opinion of management, the unaudited consolidated financial statements of CPS reflect all adjustments necessary to present fairly the financial position and results of operations for such periods. The consolidated financial statements include the accounts of CPS and its wholly-owned subsidiary, CPS Superconductor Corporation. All significant intercompany balances and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. (3) Net Loss per Share Net loss per share is computed based on the weighted average number of common shares outstanding during the period. Common stock equivalents pertaining to stock options and convertible notes payable were not considered in the calculations of net loss per share since their effect would be antidilutive.

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The Company incurred a net loss in the third fiscal quarter of 1996 in the amount of $131 thousand, versus a net loss of $275 thousand in the third fiscal quarter of 1995. The Company's cash balance at September 28, 1996 and December 30, 1995 was $52 thousand and $32 thousand, respectively. The Company's financial performance improved in the fiscal quarter ended September 28, 1996, versus the fiscal quarter ended September 30, 1995, due to a $336 thousand increase in product shipments, partially offset by a corresponding $207 thousand increase in associated cost of sales during this same time period. Additionally, selling, general, and administrative expenses decreased $12 thousand in the third fiscal quarter of 1996 versus the third fiscal quarter of 1995. The Company's entire operations are currently housed in a leased facility in Chartley, Massachusetts. The Company is operating in the Chartley facility as a tenant at will. Through the first nine months of 1996, the Company has financed its working capital requirements through sales of its products and cash received in the second and third fiscal quarters of 1996 from a license agreement entered into by the Company and a customer. The Company expects that for the remainder of 1996 it will continue to be able to fund its recurring working capital requirements through operations. During the year certain notes payable 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. Results of Operations The Company's total revenue was $581 thousand and $1,379 thousand for the fiscal quarter and nine-month period ended September 28, 1996, respectively, while total revenue for the fiscal quarter and nine-month period ended September 30, 1995 was $245 thousand and $906 thousand, respectively. Revenue recognized in the fiscal quarters ended September 28, 1996 and September 30, 1995 was derived solely from product sales. The increase in product sales in the third fiscal quarter of 1996 versus the similar 1995 time period amounted to $336 thousand and resulted from increased customer demand in 1996. The increase in total revenue for the first nine months of 1996 versus the first nine months of 1995, in the amount of $473 thousand, resulted from a $390 thousand increase in product sales, from $904 thousand for the first nine months of 1995, to $1,294 thousand for the first nine months of 1996, and an $83 thousand increase in license revenue for the first nine months of 1996 versus the first nine months of 1995, from $2 thousand for the first nine months of 1995, to $85 thousand for the first nine months of 1996. The increase in license revenue for the nine-month period ended September 28, 1996 versus the nine-month period ended September 30, 1995 was due to the receipt of $85 thousand in revenue from a license agreement entered into by the Company and a customer in the second fiscal quarter of 1996. The Company's gross margin on product sales was a positive gross margin of $27 thousand and a negative gross margin of $39 thousand for the fiscal quarter and nine-month period ended September 28, 1996, respectively, versus negative gross margins of $102 thousand and $232 thousand for the fiscal quarter and nine-month periods ended September 30, 1995, respectively. The improvement in gross margins resulted from increased sales volume and sales of higher margin products in 1996. Selling, general, and administrative expenses were $104 thousand and $339 thousand for the fiscal quarter and nine-month period ended September 28, 1996, respectively, versus selling, general, and administrative expenses of $116 thousand and $504 thousand for the fiscal quarter and nine-month period ended September 30, 1995, respectively. The decrease in selling, general, and administrative expenses in 1996 versus similar time periods in 1995 was due to personnel reductions made in the third fiscal quarter of 1995 and tighter controls over administrative costs in 1996. Other income (expense) principally consisted of interest expense accrued on the Company's outstanding notes payable. Total interest expense for the fiscal quarter and nine-month period ended September 28, 1996 amounted to $59 thousand and $178 thousand, respectively. Total interest expense for the fiscal quarter and nine-month period ended September 30, 1995 amounted to $58 thousand and $158 thousand, respectively. The cumulative effect of these revenues and costs resulted in net losses of $131 thousand, or $0.02 per share, and $442 thousand, or $0.06 per share, for the fiscal quarter and nine-month period ended September 28, 1996, respectively, and net losses of $275 thousand, or $0.04 per share, and $885 thousand, or $0.12 per share, for the fiscal quarter and nine-month period ended September 30, 1995, respectively. PART II OTHER INFORMATION Item 1 through Item 2: None Item 3: Defaults upon Senior Securities Certain notes payable held by the Company matured in 1996. The Company defaulted on payment of principal and interest of these notes payable at their maturity dates. Although the Company seeks to modify the original maturity dates of these notes payable with the respective noteholders, there is no assurance that the notes will be modified on terms acceptable to the Company. The default of these notes payable at September 28, 1996, is summarized as follows:

Item 4 through Item 5: None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Ceramics Process Systems Corporation (Registrant) Date: May 1, 1997 /s/Grant C. Bennett Grant C. Bennett President and Director (Principal Executive Officer)