CERION TECHNOLOGIES INC, 10-K405, 1998-03-27

CERION TECHNOLOGIES INC
10-K405, 1998-03-27
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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 31, 1997 COMMISSION FILE NUMBER 1-5492-1

CERION TECHNOLOGIES INC.
(Exact name of registrant as specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 02-0485458
(State of or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>

1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61821
(217) 359-3700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

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 $.01 per share

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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)

On March 9, 1998, the aggregate market value of the voting stock held by
nonaffiliates totaled approximately $14,729,300 based on the closing stock price
as reported by The Nasdaq Stock Market.

On March 9, 1998, there were 7,034,051 shares of common stock, $.01 par
value, of the registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the 1997 Annual Report to Shareholders are incorporated by
reference herein and filed as Exhibits hereto.

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CERION TECHNOLOGIES INC.
1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

<TABLE>
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PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Facilities and Properties................................... 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 18

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 26
Item 13. Certain Relationships and Related Transactions.............. 27

PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K....................................................... 28
Signatures............................................................ 31
</TABLE>

This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed in greater detail
in Item 7 below. Such statements are inherently uncertain and actual results
could differ materially from the Company's expectations. Specifically, such
results are subject to certain risks and uncertainties, including without
limitation those discussed in "Matters Affecting Future Results" in Item 7 below
and those discussed in the Company's 1997 Annual Report to Shareholders in the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (which section is filed as Exhibit 99.1 hereto and hereby
incorporated by reference herein). Such forward-looking statements speak only as
of the date on which they are made, and the Company cautions not to place undue
reliance on such statements. The Company disclaims any duty to update any such
statements.

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PART I

ITEM 1. BUSINESS

GENERAL

Cerion Technologies Inc. ("Cerion" or "the Company") manufactures
precision-machined aluminum disk substrates, which are the metallic platforms of
magnetic thin-film disks used in the hard disk drives of portable and desktop
computers, network servers, add-on storage devices and storage upgrades. The
Company's manufacturing and engineering expertise, together with its proprietary
manufacturing processes and equipment, enable it to supply customers with high
product volumes and consistent quality while meeting increasingly stringent
product tolerances. See "Matters Affecting Future Results" in Item 7 below for
discussion regarding matters that may affect the Company's future performance.

INDUSTRY BACKGROUND

Fluctuating Market Conditions. The markets in which the Company sells its
aluminum disk substrates have shown rapid but fluctuating growth in demand over
the last five years, but increased demand also has generated a rapid growth in
production capacity. Periods of shortage have alternated recently with periods
of oversupply. During the latter half of 1996 and throughout 1997 and continuing
since then, the market appears to have been dominated by oversupply and
consequently, pricing pressures. Although the Company's strategy during 1996 and
1997 was to compete on quality more than on price, during the latter half of
1996 and throughout 1997 the Company was nevertheless forced to compete
increasingly on price, even on those products meeting the tightest
specifications. These changing market forces had a significant impact on the
Company's sales and margins.

Growth in Demand. The introduction of increasingly powerful
microprocessors and more memory intensive software, combined with the
development and growth of multimedia computing applications and Internet usage,
have stimulated demand for PCs in both the home and business markets. In
addition, the applications currently being developed for PCs require greater
storage capacity, sharply increasing the demand for high-capacity disk drives.
The market demand for aluminum substrates used for thin-film disks in disk
drives has been growing rapidly, stimulated by demand for PCs, storage upgrades
and add-ons to existing computers and the growing use of sophisticated network
servers. According to TrendFOCUS in 1997, an industry publication, the number of
thin-film disks produced worldwide in 1993, 1994, 1995, 1996 and 1997 was 134
million, 186 million, 256 million, 344 million and 417 million, respectively,
and projected at 450 million in 1998, which would represent a compound annual
growth rate of approximately 28 percent over this six-year period.

Although the average storage capacity per disk drive has increased
significantly, the average number of disks per drive has remained relatively
constant, primarily as a result of significant advances in technology and in the
storage capacity of thin-film disks. The Company believes that success in the
disk drive industry will continue to depend on the ability of the disk drive
manufacturers, together with their suppliers of critical components, such as
thin-film disks and disk substrates, to keep pace with these advances. As a
result, thin-film disk manufacturers are likely to continue to require more
stringent smoothness and flatness tolerances and higher quality levels from
their aluminum disk substrate suppliers.

Growth in Supply. Aluminum disk substrates are produced by independent
producers, including the Company and Kobe Steel, Ltd. ("Kobe") through its
subsidiaries and by vertically integrated thin-film disk manufacturers including
Seagate Technologies, Inc. ("Seagate"), Komag, Inc. ("Komag"), StorMedia
Incorporated ("StorMedia") and HMT Technology Corporation ("HMT"). During 1996
and 1997, StorMedia and HMT began to move towards vertically integrated
production. In 1996, HMT acquired a facility in Oregon for aluminum disk
substrate production. StorMedia announced in 1996 it would produce aluminum disk
substrates at a new manufacturing facility in Singapore and in December 1997
acquired Akashic Memories Corporation ("Akashic"), which had significant
production capacity to produce substrates. HMT and StorMedia represented 2
percent and 43 percent, respectively, of the Company's revenue in 1997 and 44
percent and 29 percent, respectively, in 1996. While Cerion has been able to
sell substrates to
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certain of these vertically integrated companies, it has lost revenues from
others, including a significant amount of revenues lost from one vertically
integrated company, HMT. Even as the demand has increased for smoothness,
flatness and uniformity, pricing pressures have increased substantially during
the latter half of 1996 through 1997 and are expected to continue into 1998,
even for disks meeting the most stringent specifications.

Changes in Aluminum Disk Substrate Performance Characteristics. A
thin-film disk is composed of a substrate, generally aluminum, which must be
flat, smooth and free of surface defects. This base substrate is then coated
with very thin layers of nickel and magnetic material, which create the disk's
magnetic properties. Minor deviations in the tolerance or qualities of the
aluminum substrate can cause significant numbers of disks to be rejected,
creating significant yield loss to thin-film disk manufacturers.

The increased demand for high-performance disk drives has resulted in
increased pressures for aluminum substrate manufacturers to tighten their
specifications for smoothness, flatness and uniformity. These qualities
contribute to improved disk performance in the following ways: (i) the flatter
the disk, the less risk that the recording head will "crash" against the surface
of the disk, thus increasing the performance and reliability of the finished
product; (ii) with a smoother original substrate, thin-film disk manufacturers
are able to spend less time and use less material on the smoothing of the nickel
plating layer that is applied on the aluminum substrate, resulting in cost
efficiencies; and (iii) a smoother disk facilitates storage of information at
higher densities, thus increasing the disk's memory capability.

THE CERION STRATEGY

Cerion focuses on providing value-added engineering and technological
solutions that meet the demands of the memory disk substrate markets requiring
precision finishing of aluminum. The Company's strategy is to combine
engineering expertise, innovative manufacturing techniques and proprietary
equipment to provide a high volume of advanced, precision-machined aluminum disk
substrates of consistent, high quality at competitive prices.

In the latter half of 1996 and throughout 1997, market conditions,
dominated by oversupply and growth in vertical integration by thin-film disk
manufacturers, forced the Company to pursue "commodity" products with less
stringent tolerances for a significant portion of its aluminum disk substrate
production to maintain market share. The Company believes that similar market
conditions will exist into the foreseeable future. Differentiation in the areas
of service, and responsiveness to short-term demand swings will be required to
maintain the Company's current market share. The Company will continue a
long-term focus on continual improvement by striving to provide products meeting
more demanding specifications for flatness, smoothness and uniformity. These
products will be focused on meeting the typically more stringent demands of
"high-end" drive applications. In addition, the Company expects that market
conditions will require it to offer customized products to meet each customer's
specific product parameters. The Company's continued strategic focus will be to
maintain and grow relative market share through an emphasis on continual product
improvement.

The Company has sought to be a supplier to the "high end" of the disk
market for the following reasons: (i) those customers that demand the highest
quality and most stringent tolerances have the greatest ability to benefit from
the value added by the Company's core competencies -- engineering skills,
proprietary manufacturing processes and proprietary equipment; and (ii) the
Company believes that, unlike the "lower end," less-exacting segment of the disk
market, suppliers in the high end of the market compete substantially on quality
as well as on price. Although, providing the best product may not result in
higher market prices, it may prove to cushion sporadic swings in market demand
as the Company's customers may choose to maintain a constant supply of the
highest quality substrate.

The key elements of the Company's strategy are as follows:

- Focus on Manufacturing Cost Improvement. The reduction in market demand
for the Company's products in the second half of 1996, driven by
backwards integration by its largest customer, cancellation of orders by
its second largest customer and a general oversupply of capacity
throughout

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the industry, required the Company to shift from supplying primarily
"high-end" products to providing the market customized products that are
categorized by both "high-end" and "low-end" to maintain market share in
1997. The Company expects that its 1998 revenue will be from products
that vary in product parameters that could be categorized by both
"low-end" and "high-end." Thus, Cerion is focused on bringing
manufacturing costs in line with new pricing standards in the industry.
This focus requires innovative manufacturing process changes designed to
increase output from existing labor and equipment resources. One element
of the strategy is the automation of additional processing steps, which
currently is under evaluation.

- Development of "High-End" Products. The Company believes it is a leader
in developing new products exceeding current industry requirements. For
example, the Company's innovations in proprietary processes, such as
chemical etching, resulted in the manufacture of substrates capable of
meeting increasingly stringent tolerance requirements. In addition,
Cerion's proprietary grinding technology has led to the development of
the Company's newest product, its FFX Super Smooth ("FFX") disk, which is
substantially smoother than aluminum disk substrates commercially
available. The FFX disk is not currently being sold to any customers but
is an example of the Company's focus on developing products ahead of
market requirements, increasing the likelihood that the Company's
products will be designed into new disk media for higher-capacity disk
drives.

- Continue to Improve Proprietary Manufacturing Processes and Production
Equipment. The Company seeks to continue to improve its manufacturing
processes and equipment to increase efficiency and production capacity
and to improve product quality. The Company believes its proprietary
equipment enables Cerion to achieve significant cost savings and to
reduce the capital required to expand capacity. In addition, the Company
believes that continuing advances in these areas have helped Cerion to
develop manufacturing expertise that may give it a competitive advantage.

- Maintain Strict Control of Manufacturing Process. The Company's
real-time statistical monitoring of its manufacturing processes results
in greater product uniformity and higher production yields, and provides
its customers with more detailed statistical information regarding
product consistency, which can improve production yields of Cerion's
customers relative to competing substrates. In addition, product
uniformity is an essential factor in the supplier qualification process
of disk drive manufacturers. The Company's quality system is ISO 9001
registered.

PRODUCTS

The Company currently manufactures products within one category, aluminum
disk substrates, which represented at least 95 percent of net sales for the last
three years, and historically (prior to 1997) a second category, OPC drum
substrates. Cerion's aluminum disks are the base, or substrate, for the memory
disk in a hard disk drive. The Company's current aluminum disk substrate
products consist of 130mm (5 1/4 inch), 95mm (3 1/2 inch), 84 mm (3 inch) and
65mm (2 1/2 inch) diameter disks. The 95mm product, which accounts for
substantially all of the Company's current disk substrate sales, is used
primarily in the hard disk drives of desktop computers, network servers and
add-on storage devices. The 65mm diameter product is used primarily in laptop
computers. The Company's aluminum disk substrates have evolved significantly
over time. For example, the Company's 95mm product, which the Company has been
selling since 1987 for thin-film disk applications, has been enhanced over time
to incorporate greatly improved characteristics for smoothness, flatness and
dimensional variations.

Most laser printers and certain office copiers contain an organic
photoconductor ("OPC") imaging drum which accepts an electric charge that
attracts toner for transfer to paper. These OPC drums use a precision-machined
aluminum substrate onto which a photo-reactive coating is applied. OPC drums are
incorporated into laser printer cartridges that are consumed during operation
and replaced on a regular basis. The Company has not produced any OPC drums for
sale since the latter part of 1996.

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MANUFACTURING PROCESSES AND PROPRIETARY EQUIPMENT

The Company's manufacturing methods are derived from careful attention to
the practice of continuous improvement and statistical methods of data analysis.
Together with its engineering expertise and internally developed proprietary
equipment, the Company believes its manufacturing and processing methods provide
it with lower capital equipment costs relative to certain of its competitors, as
well as superior yields and product quality. In the application of these
processes, the Company has arranged its manufacturing operation in a cellular
manner. The Company staffs each cell with a team of cross-trained employees.
These teams monitor the productivity of their individual cells and are trained
to prevent and, if necessary, correct quality problems within their cells. In
addition, teams are encouraged to suggest process improvements. These individual
manufacturing cells are built around equipment necessary for most process steps,
thus allowing each cell to operate, in many respects, as a mini-factory. This
cellular approach substantially reduces in-process inventory, facilitates more
effective communication, and improves both quality and productivity.

The following diagram summarizes the stages in the Company's aluminum disk
substrate manufacturing process:

<TABLE>
<CAPTION>
STAGE DESCRIPTION
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<C> <S>
Raw aluminum blanks are received by the Company and
Raw Material Preparation sorted by individual thickness to a resolution of
.0001 of an inch.

Blanks are chemically etched to reduce thickness
Chemical Etching variation and remove the hard oxide layer on the
surface, making the disks easier to grind.

The inner and outer diameters of the disks are
Edge and Chamfer Machining machined to exacting tolerances and are finished to
specific chamfer angles.

The disks are subjected to high temperatures to
Annealing release stresses built up during the preceding
machining step.

Very fine abrasive grinding stones are applied to
Grinding the disk to produce the final surface finish,
thickness and flatness either in a one-step or
two-step process.
</TABLE>

Even though there are extensive quality checks throughout the process, some
parameters can be checked only after the grinding stage. Those parameters
include visual quality, surface finish, thickness and flatness.

The Company's real-time statistical monitoring of its processes results in
greater product uniformity and higher production yields, and provides its
customers with more detailed statistical information regarding product
consistency.

The greater uniformity of the Company's products can improve the customers'
individual production yields relative to competing aluminum disk substrates.
Proprietary real-time tracking systems allow the Company to pinpoint where in
the manufacturing process a defect may have occurred, so that any disks affected
may be isolated and removed. It also provides for feedback to the operators in
order to eliminate the source of the defect immediately.

The Company's study of its customers' manufacturing processes has led to
the adoption of certain manufacturing and processing methods that the Company
believes to be unique. For instance, Cerion has pioneered the use of chemical
etching in the manufacture of aluminum disk substrates. This process was
developed in collaboration with the University of Illinois chemical engineering
department and certain of the Company's suppliers. Today, substantially all the
aluminum disk substrates produced by the Company are chemically etched.

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Proprietary Equipment and Processes

The Company has developed proprietary equipment and processes that allow it
to produce aluminum disk substrates within narrow specifications of smoothness,
flatness and uniformity. For example, the Company has internally developed and
built proprietary grinding machines for its own use, that the Company believes
provide it with both a cost advantage and a superior substrate over that
produced by commercially available grinders. The capital cost of the Company's
custom-built proprietary grinding machine is less than 25 percent of the list
price of comparable grinders from a leading manufacturer.

The Company's internally developed and manufactured proprietary abrasive
stones used in the grinding process are significantly less expensive than
typical commercially available alternatives. In-house control of grinding stone
fabrication enables the Company to produce superior products with less machining
time and allows for the custom fabrication of grinding stones for specific
products. Custom fabrication of grinding stones has enabled Cerion to pioneer
its new FFX product, which has a mirror-like surface with an average surface
roughness of less than 20 angstroms (a unit of length equal to one ten-millionth
of a millimeter), as opposed to the 80 angstrom average of the current disk
substrates sold by the Company.

Employee Participation

Cerion believes that a critical component of its program of continuous
process improvements and quality control is the active participation of its
employees in these efforts. Employee teams are aware of production targets and
meet regularly to discuss and evaluate process improvements. As incentive to
such involvement, the Company distributed 4 percent of its pre-tax operating
earnings to its employees (other than executive officers) as profit sharing when
the Company had positive operating performance.

To facilitate process improvements, the Company encourages employees to
pursue their own ideas by providing a procedure in which an employee writes a
detailed description of a process improvement that is then reviewed by key
engineering, manufacturing, training, maintenance and safety personnel. If
approved, the Company provides support, such as process or safety engineering,
to the employee, who is then responsible for implementation of his or her
suggestion on a trial basis. At the end of the trial period, the employee
prepares a report, including results and recommendations, and if the trial is
successful, a change notification document is issued. Upon approval of key
areas, the change is implemented system-wide. The Company assigns a training
instructor full time to facilitate employee team meetings to review process
improvement issues.

The Company places significant emphasis on training and education. Cerion
provides a tuition payment benefit available to all employees. In addition, the
Company's hourly pay system works on a pay-for-skills basis. Employees are
certified to pre-set standards in various skills relating to their job
assignments. As the employees earn additional certifications, their pay
increases. Classroom training in statistics, decision-making, business basics,
teamwork and systems-thinking are being added to this skill certification
system. The Company believes these practices foster a Company-wide dedication,
sense of common ownership and increased skills that contribute to higher product
quality and manufacturing yields.

CUSTOMERS AND MARKETING

Aluminum disk substrates represented over 95 percent of the Company's sales
in 1996 and 100 percent in 1997. During 1997, Cerion shipped the majority of its
aluminum disk substrates to two companies, StorMedia Incorporated ("StorMedia")
and Trace Storage Technologies Inc. ("Trace"), representing approximately 41
percent and 43 percent, respectively, of the Company's net sales. During the
fourth quarter of 1997, the Company shipped substantially all its aluminum disk
substrates to two companies, Trace and StorMedia representing approximately 59
percent and 41 percent, respectively. Cerion's customer base, and each
customer's relative importance, has fluctuated significantly and the Company
believes it will continue to do so. In addition, as is customary in the
industry, Cerion's sales generally are made pursuant to purchase orders that are
subject to cancellation, modification or rescheduling generally without
penalties. In the past, certain orders have been canceled or deferred.

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The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua
Corporation's ("Nashua") Computer Products Divisions. Since the sale by Nashua
of that division in 1994, Cerion has expanded its customer and product base in
response to growth in market demand for substrates, and it continues its efforts
to broaden this customer base in the aluminum disk substrate market.
Nevertheless, the Company believes that its dependence on a small number of
customers will continue. Consequently, the loss of, or reduction in demand from,
one or more aluminum disk substrate customers through backwards integration,
consolidation, adverse financial circumstances, production disruptions or
otherwise, does from time to time have a material adverse effect on the
Company's business, results of operations and financial condition.

Cerion, like other suppliers to the thin-film disk industry, is required to
work closely with thin-film disk manufacturers in order to meet their
specifications and to become qualified as a supplier. Qualifying aluminum disk
substrates requires the Company to work extensively with the customer to meet
product specifications. Therefore, customers often require a significant number
of product presentations and demonstrations as well as substantial interaction
with the Company's senior management before making a purchasing decision.
Accordingly, Cerion's products typically have a lengthy sales cycle during which
the Company may expend substantial financial resources and management time and
effort with no assurance that a sale will result.

To meet these demands, the Company uses a system of multi-tiered
communication for sales, marketing and customer service. Senior management of
the Company, as well as production, operation and engineering personnel,
directly market and interact with their counterparts at the Company's customers.
The Company believes that this multi-tiered approach has resulted in strong,
active relationships with both customers and suppliers and has helped Cerion
pursue close technical collaboration with its customers during the design phase
of new products and throughout the products' subsequent life cycle.

SOURCES OF SUPPLY

The Company relies on Alcoa Memory Products, Inc. ("Alcoa") as its primary
source of supply for the aluminum disk blanks used in producing substrates. A
limited number of suppliers provide certain chemicals used in the Company's
manufacturing processes. These chemicals often are customized to meet the
Company's needs. Cerion has no long-term supply agreement with Alcoa or any of
its other suppliers. The Company's reliance on Alcoa and its chemical suppliers
therefore entails risk. If their products were to become unavailable or
available in significantly reduced quantities or increased prices, it would have
a significant impact on the Company's operating results. Locating and qualifying
a substitute supplier could be a time-consuming and uncertain process. Changing
suppliers for certain materials could require that the product be requalified
with the customer. Moreover, a substitute supplier might be reluctant to
undertake such a project without a significant commitment by the Company to
higher prices or future purchases.

Cerion believes, however, that the advantage of working closely with these
suppliers may offset the foregoing risks. For example, Alcoa works closely with
the Company to optimize Alcoa's production processes to meet Cerion's
specifications.

COMPETITION

The disk industry is characterized by intense competition. The Company
believes that the principal competitive factors affecting its business are
product availability, quality and price. The Company believes that a majority of
the machined aluminum disk substrates are supplied by vertically integrated
thin-film media and disk drive manufacturers, such as Seagate, Komag, StorMedia
and HMT, and that the balance is supplied by independent aluminum disk substrate
manufacturers such as Cerion. Shortage of supply in the past has influenced disk
drive manufacturers and thin-film disk manufacturers to vertically integrate
substrate manufacturing into their own operations.

Cerion's direct competitors include both independent aluminum disk
substrate manufacturers such as Kobe (which is much larger and has substantially
greater production capacity than the Company), and vertically integrated
companies that perform additional manufacturing processes on the substrates.
These
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vertically integrated companies include manufacturers of hard disk drives. These
competitors operate in both the United States and overseas. The Company believes
that all its competitors have significantly greater financial, technical, and
marketing resources. Furthermore, certain of these competitors have the
advantage of being supplied by affiliated companies with the aluminum blanks
used for their aluminum disk substrates.

Moreover, backwards integrated companies could make their aluminum disk
substrates available for distribution in the market as direct competitors of the
Company. Any of these changes would reduce the already small number of current
and potential customers and increase competition for the remaining market. Such
competition could materially adversely affect the Company's business, results of
operations and financial condition. In addition, because of the limited number
of potential customers in the disk drive industry, the loss of one or more of
its customers through backwards integration, consolidations, adverse financial
circumstances or otherwise, has during 1996 and 1997 and could again have a
material adverse effect on the Company's business, results of operations and
financial condition.

The Asian economic conditions that occurred in 1997 have impacted the
Company's competitive position in primarily two ways. First, certain of the
Company's competitors have experienced a reduction in cost of raw materials and
labor costs that are obtained from Asian economies. The Company has not realized
any benefit from the reduction in such raw material costs because the Company's
primary suppliers are located in the United States. Additionally, the Asian
domestic markets have softened in terms of demand which has resulted in
under-utilized capacity of aluminum disk substrate production being made
available to export to the United States. These factors have created new
entrants to the competitive United States market and have increased the ability
of these new entrants to drive pricing downward to gain market share.

The Company believes that both the independent aluminum disk substrate
producers and certain vertically integrated disk drive manufacturers have been
attempting to increase aluminum disk substrate manufacturing capacity. These
efforts, together with the Company's own efforts in 1996 and 1997 to increase
production, have resulted in significant additional capacity for the aluminum
disk substrates. This additional capacity has resulted in industry capacity in
excess of demand. In addition, Cerion has experienced increased competition,
which has materially adversely affected the Company's business, results of
operations and financial condition.

BACKLOG

Cerion's sales generally are made pursuant to supply agreements, purchase
orders and releases that are subject to cancellation, modification or
rescheduling, generally without penalty. The Company's backlog of supply
agreements and purchase orders requesting delivery in the following quarter was
approximately $2.7 million as of December 31, 1997, $3.7 million as of December
31, 1996, and $7.9 million as of December 31, 1995. Because these purchase
orders may be canceled, modified or rescheduled by customers on short notice and
generally without penalty, the Company does not believe that its backlog as of
any particular date should be considered indicative of sales for any future
period.

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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards elements of its manufacturing processes, product
designs and internally developed equipment as proprietary and seeks to protect
its proprietary rights through a combination of employee and third-party
non-disclosure agreements, internal security procedures and trade secret laws.
Because patent protection requires public disclosure of a process or design,
which gives potentially valuable knowledge to a competitor even if the patent is
issued, Cerion evaluates the advantages and disadvantages of seeking patent
protection for its proprietary processes and designs versus continuing to rely
on trade secret protections. To date, the Company has generally opted to protect
its proprietary rights as trade secrets but may file patent applications in the
future.

Although Cerion intends to defend its proprietary interests, there can be
no assurance that these measures will be successful. The Company believes,
however, that because of the rapid pace of change in manufacturing processes and
product design in the aluminum disk substrate industry, legal protections of its
proprietary rights are less significant factors in the Company's success than
the innovative skills, experience and technical competence of its employees.

The Company attempts to ensure that its products and processes do not
infringe patents and other proprietary rights of third parties. Nevertheless,
there can be no assurance that such a claim will not arise at some future date.
If a patent claim were to arise, the Company may be required to seek a patent
license from a third party. Although patent holders commonly offer such
licenses, no assurance can be given that licenses would be offered or that the
terms of any offered licenses would be acceptable to the Company. If a patent
license were to become necessary, the failure to obtain such a license could
cause Cerion to incur substantial liabilities and possibly suspend use of the
process or equipment utilizing the patented invention.

EMPLOYEES

On March 5, 1998 the Company reduced its workforce by 110 employees
representing approximately 30 percent of the Company's full-time workforce. The
workforce reduction was necessitated to align production capacity with expected
future order volume. As of March 13, 1998, Cerion had 255 full-time employees
located at its facility in Champaign, Illinois, with approximately 228 in
manufacturing and research, development and engineering, and the remainder in
administration and marketing. None of Cerion's employees is represented by a
labor union. The Company believes that attracting and motivating skilled
technical talent and managing turnover is vital to its success.

ENVIRONMENTAL REGULATION

The Company's operations and manufacturing processes are subject to certain
federal, state and local environmental protection laws and regulations relating
to Cerion's use, handling, storage, discharge and disposal of certain hazardous
materials and hazardous and non-hazardous wastes. The Company has not suffered
any material adverse effect in complying with applicable environmental
regulations. However, environmental laws and regulations, especially those
relating to the use of hazardous materials or generation of hazardous wastes,
may become more stringent over time. There can be no assurance that Cerion has
complied or will comply in all respects with environmental laws and regulations,
nor can there be any assurance that the Company will be able to obtain all
necessary permits that will be required under such laws and regulations. Any
modified environmental regulations, and any failure by the Company with respect
to any of the other matters described above, might subject Cerion to significant
penalties, compliance expenses, or production suspensions or delays, and might
require the Company to acquire costly equipment.

ITEM 2. FACILITIES AND PROPERTIES

The Company's headquarters and manufacturing facility are located in one
49,000 square foot building in Champaign, Illinois. At this Company-owned
facility, Cerion operates 20 manufacturing cells for aluminum disk substrates.

10
<PAGE> 11

Cerion also has an option to purchase 3.1 acres of land adjacent to its
headquarters. In addition, the Company leases 12,000 square feet in Urbana,
Illinois for cleaning and storage of shipping containers and for storage of
finished goods and raw materials.

The Company's existing facility is operating three shifts per day, five
days per week and is using all remaining manufacturing space at this facility.
Any significant expansion of capacity would require Cerion to return to a seven
days per week manufacturing schedule, or if this was insufficient, to build,
purchase or lease a new facility.

ITEM 3. LEGAL PROCEEDINGS

On August 8, 1996, an individual plaintiff, Joshua Tietelbaum, initiated a
lawsuit against the Company, Nashua Corporation ("Nashua"), William Blair & Co.
("Blair") and certain Cerion directors and officers in the Circuit Court of Cook
County, Illinois. On September 4, 1996, a second individual plaintiff, Philippe
Olczyk, initiated a similar lawsuit against the Company, Nashua, Blair and
certain Cerion directors in the Circuit Court of Cook County, Illinois. Both
lawsuits purport to be brought on behalf of a class consisting of all persons
(other than the defendants) who purchased the common stock of Cerion between May
24, 1996 and July 9, 1996.

These two cases were consolidated before the same judge. On March 24, 1997,
Teitelbaum and Olcyzk, joined by a third plaintiff, Robert K. Pickup, filed a
Consolidated Amended Class Action Complaint ("Consolidated Complaint") against
the Company, Nashua, Blair, and certain Cerion directors and officers. The
Consolidated Complaint supersedes the prior complaints and also purports to be
on behalf of a class consisting of all persons (other than the defendants) who
purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. The
Consolidated Complaint alleges that, in connection with the Cerion initial
public offering, the defendants issued certain materially false and misleading
statements and omitted the disclosure of material facts regarding, in
particular, certain significant customer relationships. The Consolidated
Complaint alleges that the defendants violated sections 11, 12(a)(2), and 15 of
the 1933 Securities Act, section 13 of the Illinois Blue Sky Law, and the
Illinois Consumer Fraud and Deceptive Practices Act. The Consolidated Complaint
seeks a declaration that the case may proceed as a class action, damages and
rescission of the sale of Cerion common stock by Cerion and Nashua, to the
extent purchasers still hold Cerion shares, or rescissory damages, if they sold
their Cerion stock; attorneys fees and costs; and other relief.

On October 9, 1997, the Circuit Court of Cook County, Illinois dismissed
the class action lawsuit filed against all defendants providing the Plaintiffs
with the option to file an amended complaint in which they may attempt to state
a claim against the Company and the other defendants. On December 5, 1997, the
Plaintiffs filed an amended complaint against the same defendants with
substantially similar alleged claims. The Company believes the Amended
Consolidated Complaint to be without merit and is defending vigorously against
the amended case.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of the Company's security holders.

11
<PAGE> 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on The Nasdaq National Stock Market under the symbol "CEON."
The following table sets forth the high and low bid prices as reported by The
Nasdaq National Stock Market for the periods indicated beginning on May 24,
1996, the first day of trading, after the Company completed its initial public
offering:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter.......................................... $ 6.88 $3.63
Second Quarter......................................... 4.38 2.63
Third Quarter.......................................... 3.00 1.94
Fourth Quarter......................................... 3.44 1.97
1996
Second Quarter......................................... $19.50 $8.00
Third Quarter.......................................... 11.25 2.25
Fourth Quarter......................................... 9.19 2.75
</TABLE>

On March 9, 1998, the closing price of the Company's Common Stock as
reported by The Nasdaq National Stock Market was $2.094 per share. There were
approximately 2,500 shareholders of the Common Stock of the Company as of such
date. Cerion has not paid cash dividends on its Common Stock and does not intend
to do so in the foreseeable future.

There has been no change in the information required by paragraphs (f)(2)
through (f)(4) of Item 701 of Regulation S-K from that previously reported by
the Company on Form S-R, except as follows with respect to the Company's use of
net offering proceeds to the Company from its initial public offering after
deducting previously reported expenses, as of December 31, 1997.

The proceeds of $19,525,350 from the initial public offering were utilized
as follows as of December 31, 1997:

<TABLE>
<S> <C>
Construction of plant, building and facilities.............. $ 1,163,208
Purchase and installation of machinery and equipment........ 4,426,290
Purchase of real estate..................................... 75,000
Repayment of indebtedness -- First Nashua Note.............. 1,156,429
Repayment of indebtedness -- Second Nashua Note............. 10,184,973
Working capital, including cash and cash equivalents........ 2,519,450
</TABLE>

Cash and cash equivalents included in working capital will continue to be
used for general corporate purposes.

In the Company's Prospectus, dated May 24, 1996, the Company stated that it
planned to use approximately $9.0 to $12.0 million of the proceeds of the
offering to build, purchase or lease a new facility and related equipment. As a
result of a change in market conditions during the second half of 1996 and
throughout 1997, the Company canceled its capacity expansion plans, which
included the new facility.

12
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1997. The information presented
should be read in conjunction with the financial statements included elsewhere
in this report.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1995(1) 1996 1997
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................ $14,612 $14,553 $28,175 $28,175 $36,540 $31,810
Cost of sales........................ 12,306 12,995 19,668 19,668 26,729 26,606
------- ------- ------- ------- ------- -------
Gross profit....................... 2,306 1,558 8,507 8,507 9,811 5,204
Selling, general & administrative
expenses........................... 1,651 1,731 2,537 3,510 5,561 4,405
------- ------- ------- ------- ------- -------
Operating income (loss)............ 655 (173) 5,970 4,997 4,250 799
Interest income (expense)............ (94) (115) (316) (1,129) 169 366
------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes...... 561 (288) 5,654 3,868 4,419 1,165
Provision (benefit) for income
taxes.............................. 222 (105) 2,210 1,512 1,914 338
------- ------- ------- ------- ------- -------
Net income (loss).................... $ 339 $ (183) $ 3,444 $ 2,356 $ 2,505 $ 827
======= ======= ======= ======= ======= =======
Net income per share, basic and
diluted............................ $ .06 $ (.03) $ .64 $ .44 $ .39 $ .12
Average common shares outstanding.... 5,400 5,400 5,400 5,400(2) 6,379 7,024
</TABLE>

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ (27) $2,645 $ 3,436 $10,248 $11,764
Total assets........................... 4,629 7,546 11,874 23,333 25,265
Short-term debt........................ 23 26 -- -- --
Long-term debt......................... 342 316 -- -- --
Stockholders' equity(3)................ 3,182 6,121 8,458 19,366 20,233
</TABLE>

- ---------------
(1) The pro-forma statement of operations data presents the results of the
Company after giving effect to the following, as if each had occurred as of
January 1, 1995: (i) interest expense of $1.1 million (less $304,000
allocated interest expense to the Company) related to dividends to Nashua in
the form of certain promissory notes payable to Nashua in the aggregate
original principal amount of approximately $11.1 million; (ii) the
elimination of a $227,000 corporate charge paid to Nashua; and (iii) the
inclusion of $1.2 million in estimated selling, general and administrative
expenses that would have been incurred if the Company were an independent
public company during 1995.

(2) Reflects shares outstanding as of December 31, 1995, giving effect to a
stock split. See Stockholders' Equity and Parent Company Investment Notes to
the Financial Statements.

(3) Represents parent company investment at December 31, 1993, 1994 and 1995 and
stockholders' equity at December 31, 1996 and 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information required not included hereunder by this item may be found in
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing in the 1997 Annual Report to
Shareholders, and is incorporated herein by reference. (1)

13
<PAGE> 14

MATTERS AFFECTING FUTURE RESULTS

This Report contains certain forward-looking statements, including the
statement below regarding the possible impact of cancellation of orders by a
major customer and backwards integration within the industry towards the
manufacture of aluminum disk substrates. Moreover, from time to time in both
written releases and reports and oral statements, the Company and its Senior
Management may express expectations regarding future performance of the Company.
All of these "forward-looking statements" are inherently uncertain, and
investors must recognize that actual events could cause actual results to differ
materially from the Company's expectations. Key risk factors that could, in
particular, have an adverse impact on current and future performance include the
Company's dependence on a small number of customers, as witnessed by the
cancellation of orders in July 1996 by one of the Company's two largest
customers, a trend towards vertical integration among thin-film disk
manufacturers that may reduce demand for the Company's products, as evidenced by
the Company's largest customer in 1996 and the Company's largest customer in
1997, dependence on the intensely competitive and cyclical hard-disk drive
industry, absence of long-term purchase commitments from the Company's customers
and risk of excess industry capacity.

Dependence on a Small Number of Customers. Aluminum disk substrates, all
sales of which were to thin-film disk manufacturers, represented over 95 percent
of the Company's sales in 1997 and 1996. The Company's aluminum disk substrate
customers in 1997 were primarily Trace, StorMedia, Seagate and HMT, which
represented approximately 43%, 41%, 11% and 2%, respectively, of the Company's
aluminum disk substrate sales. There are a relatively small number of thin-film
disk manufacturers worldwide. Because many of these thin-film disk manufacturers
supply all or part of their aluminum disk substrate needs either through captive
suppliers or vertically integrated operations, the Company believes that its
dependence in this business on a few customers will continue in the future. The
Company's customer base, and each customer's relative importance, fluctuated
significantly during 1997 and may continue to fluctuate. The loss of one or more
of the Company's customers or potential customers through consolidations,
adverse financial circumstances or otherwise, could have a material adverse
effect on the Company's business, results of operations and financial condition.

The Company's customers and the overall disk drive and component market has
experienced a prolonged period of volatility and oversupply during the past 18
months beginning in the second quarter of 1996. A chronology of market events
that have impacted the Company highlights the impact that changes in market
conditions and customer manufacturing strategies have on the Company's operating
performance. In the first half of 1996, the Company's largest customer in 1997,
StorMedia, announced that it would produce aluminum disk substrates, as part of
the production of nickel plated and polished substrates, at a new manufacturing
facility in Singapore. Subsequent to this announcement, in July of 1996 the
Company announced the cancellation of subsequent orders from StorMedia because
of a loss of orders from StorMedia's largest customer, not because of
StorMedia's internal capability to manufacture aluminum disk substrates in
Singapore. However, in 1997 StorMedia made the Company its sole external source
of aluminum disk substrates, allowing StorMedia to become the Company's largest
customer. Furthermore, StorMedia completed in December 1997 its acquisition of
Akashic, which has significant production capacity to produce substrates. In
addition, HMT acquired a facility in Oregon for aluminum disk substrate
production, as well as for nickel plating and polishing. HMT expanded the
capacity of this facility and regular shipments to HMT ceased in December 1996.

The internal production of aluminum disk substrates in 1996 by the
Company's principal customers resulted in the reduction or elimination of
purchases from the Company and could result in further reduction or elimination
of purchases from the Company or the sale by such customers of aluminum disk
substrates in competition with the Company. Moreover, the decision by one or
more of the Company's customers to move to a single supply source could
materially adversely affect the Company if the Company were not chosen as the
single supply source. Similarly, a decision by one or more of the Company's
customers to expand its base of suppliers could result in that customer reducing
its purchases from the Company and materially adversely affect the Company's
business, results of operations and financial condition.

14
<PAGE> 15

There also has been a trend toward consolidation in the disk drive
industry, which the Company expects may continue. If any of the Company's
customers or competitors were to combine, it would result, among other things,
in a reduction of the number of their suppliers or increased pricing pressures,
which could materially adversely affect the Company's business, operating
results and financial condition.

There can be no assurance that the Company's current customers will
continue to place orders with the Company, that orders by existing customers
will continue at the levels of previous periods or that customers will not
cancel existing orders (which they did in 1996 and may generally do without
penalty), nor can there be any assurance that the Company will be able to obtain
orders from new customers. The level of orders for aluminum disk substrates also
depends on the production levels of thin-film disk manufacturers, which may be
subject to disruptions and delays as well as fluctuations in market demand. The
loss of one or more of the Company's current customers or a significant
reduction in the level of their orders could materially adversely affect the
Company's business, operating results and financial condition.

Dependence on Intensely Competitive and Cyclical Hard Disk Drive Industry;
Price Reductions. The demand for the Company's aluminum substrates for
thin-film disks depends solely upon the demand for hard disk drives, which in
turn depends on the demand for new personal computers, storage upgrades and
add-ons to existing computers and the growing use of sophisticated network
servers. The disk drive industry is cyclical and historically has experienced
periods of oversupply and reduced production levels, resulting in significantly
reduced demand for thin-film disks, as well as pricing pressures as evidenced by
recent market price reductions as much as 28 percent for the Company's aluminum
disk substrates in the 18 months ended December 1997. The effect of these cycles
on suppliers, including manufacturers of thin-film disks and aluminum disk
substrates, has been magnified by the hard disk manufacturers' practice of
ordering components, including thin-film disks, in excess of their current needs
during periods of rapid growth. As announced by several of the hard drive and
thin-film media manufacturers in the fourth quarter of 1997 and first quarter of
1998, the market is changing with a period of over-production causing a
supply/demand imbalance within the industry. Although the media segment of the
disk drive industry experienced in excess of 20 percent annual growth in 1997,
several disk drive manufacturers initiated cutbacks in production plans for 1998
in response to supply/demand imbalances within the industry which has reduced
demand in the first quarter of 1998 and possibly for a longer period. There can
be no assurance that growth in the disk industry will continue at recent rates
or at all, that the level of demand for disk drives will not decline, or that
future demand will be sufficient to support existing and future capacity. In
addition, the growth rate of personal computer unit sales may decline, which may
adversely affect the demand for hard disk drives. A decline in demand for hard
disk drives could further reduce the Company's sales of its product line and
have a material adverse effect on the Company's business, operating results and
financial condition.

Absence of Long-Term Purchase Commitments. As is customary in this
industry, the Company's sales are usually made pursuant to purchase orders that
are subject to cancellation, modification or rescheduling, generally without
penalties. Customers typically provide the Company with forecasts of expected
requirements for the next three- to six-month period in the past; prior to the
third quarter of 1996, and submit purchase orders or releases 14 to 60 days in
advance of shipment dates. However, beginning in late 1996, customers began only
forecasting four to six weeks in advance. In the past, certain forecasts of the
Company's customers have failed to materialize or have been altered and delivery
schedules have been deferred. For instance, in 1994 and 1996, sharp reductions
in two large customers' orders adversely affected the Company's results of
operations. Changes in forecasts, rescheduling and quantity reductions may
result in inventory losses and under-utilization of production capacity. From
time to time, customers have changed certain specifications or standards for
their products, resulting in lower production yields, higher manufacturing costs
and lower productivity and margins than anticipated by the Company.

Risk of Excess Industry Capacity. The Company believes that both
independent aluminum disk substrate manufacturers and vertically integrated
companies are attempting to increase aluminum substrate manufacturing capacity.
The Company increased its own manufacturing capacity in 1996 and 1997, through
equipment expansion and manufacturing process changes that improved the output
capacity of existing equipment and some or most of the vertically integrated,
thin-film disk or hard drive manufacturers did the same in 1996 and 1997 and are
expected to continue in the future, including the Company's largest customer
15
<PAGE> 16

in 1996; HMT and largest customer in 1997; StorMedia. These efforts may result
in significant additional capacity in the industry. The Company has faced
increased pricing pressures since the latter half of 1996, with price reductions
that averaged 28 percent in the eighteen months ending December 1997 for the
Company's products. To the extent the efforts described above result in industry
capacity in excess of levels of demand, the Company has experienced and will
continue to experience increased levels of competition and increased pricing
pressures, which are likely to have a material adverse effect on the Company's
business, results of operations and financial condition.

Intense Competition Among Manufacturers of Aluminum Disk
Substrates. Cerion's direct competitors include both independent aluminum disk
substrate manufacturers such as Kobe (which is much larger and has substantially
greater production capacity than the Company) and vertically integrated
companies that perform additional manufacturing processes on the substrates.
These vertically integrated companies include manufacturers of hard disk drives.
These competitors operate in both the United States and overseas. The Company
believes that all its competitors have significantly greater financial,
technical, and marketing resources. Furthermore, certain of these competitors
have the advantage of being supplied by affiliated companies with the aluminum
blanks used for their aluminum disk substrates.

Intense competition by companies otherwise focused on other segments of the
hard disk drive industry began in 1996 and continued throughout 1997 because of
these companies adding or growing internal aluminum disk substrate manufacturing
that exceeded internal usage requirements, as the hard disk drive industry
experienced a slowdown in growth in the latter half of 1996 which is expected to
continue throughout at least the first half of 1998. The following specific
actions by the Company's customers in 1996 and 1997 illustrates the impact
backwards integration has had on the Company. In the first half of 1996,
StorMedia, the Company's largest customer in 1997, announced that it would
produce aluminum disk substrates as part of the production of nickel plated and
polished substrates at a new manufacturing facility in Singapore. Furthermore,
StorMedia completed in December 1997 its acquisition of Akashic, which has
significant production capacity to produce substrates. In addition, HMT acquired
a facility in 1996 in Oregon for aluminum disk substrate production, as well as
for nickel plating and polishing. HMT expanded the capacity of this facility and
as a result regular shipments to HMT were reduced to zero in December 1996.
Several other disk drive and thin-film disk manufacturers, including Seagate and
Komag, produce aluminum disk substrates internally for their own use. Moreover,
Seagate, StorMedia, HMT, Komag and several other industry participants currently
produce aluminum disk substrates internally for their own use, and the Company
believes that a majority of the thin-film disk market currently is supplied by
such vertically integrated manufacturers. These companies could make their
products available for distribution into the market as direct competitors of the
Company. Additionally, one of the Company's principal current aluminum disk
substrate customers announced in 1996 that they will produce aluminum disk
substrates for internal use and achieved this internal capability through the
purchase of Akashic in December 1997. Any of these changes could reduce the
already small number of current and potential customers for the Company's
products and increase competition for the remaining market.

16
<PAGE> 17

competition, which has materially adversely affected the Company's business,
results of operations and financial condition.

Moreover, the disk industry is characterized by intense price competition.
Although the Company's products compete on the basis of availability and
quality, price also is an important competitive factor as evidenced by market
price reductions as much as 28 percent for the Company's products in the 18
months ended December 1997. Any increase in price competition will have a
material adverse effect on the Company's gross margins and on its business,
operating results and financial condition. There can be no assurance that the
Company will be able to continue to compete successfully with existing or new
competitors.

Although the Company believes its products are competitive, the Company
also believes that certain factors have had a negative impact on its products'
competitiveness. The Company currently lacks the capability to nickel plate and
polish its substrates, a capability considered important by certain customers.
Moreover, the Company's manufacturing facility in Illinois is a significant
distance from its principal customers. The Company's manufacturing process also
is more labor intensive than a number of its competitors and, as a result, may
be more adversely affected by rising labor costs.

Lengthy Qualification Process for New Products and Changes in Manufacturing
Processes. The Company is required to work closely with manufacturers in the
thin-film disk industry in order to become qualified as a supplier. In addition,
changes in products or, in certain cases, manufacturing processes, also may
require additional customer qualification. Qualifying aluminum disk substrates
requires the Company to work extensively with the customer to meet product
specifications. Therefore, customers often require a significant number of
product presentations and demonstrations as well as substantial interaction with
the Company's senior management before making a purchasing decision.
Accordingly, the Company's products typically have a lengthy sales cycle during
which the Company may expend substantial financial resources and management time
and effort with no assurance that a sale will result. In the event the Company's
products do not become qualified for a particular product development program on
a timely basis, the Company could be excluded as a supplier of aluminum disk
substrates for such program entirely or could become a secondary source of
supply for such program, which typically results in lower sales. In addition,
the Company may be prevented or delayed from making certain manufacturing
process improvements due to the qualification process. Such failure to become
qualified or timely qualified could have a material adverse effect on the
Company's business, operating results and financial condition.

Dependence on Suppliers. The Company relies on Alcoa Memory Products, Inc.
a subsidiary of Aluminum Company of America, Incorporated ("Alcoa"), as its
primary supplier of the aluminum blanks used by it for producing aluminum disk
substrates. It also relies on a limited number of suppliers for certain
materials used in its aluminum disk substrate manufacturing processes, including
etching chemicals and coolants. The Company does not have any long-term supply
contracts with Alcoa or any of its other major suppliers. Changing suppliers for
certain materials would be expensive and require long lead times. For certain
materials, a change in supplier could result in the Company being required to
requalify its products with certain of its customers. Any significant
limitations on the supply of raw materials could disrupt, limit or halt the
Company's production of aluminum disk substrates and could have a material
adverse effect on the Company's business, operating results and financial
condition. Further, a significant increase in the price of one or more of these
components also could materially adversely affect the Company's business,
results of operations and financial condition.

Future Capital Needs. Based upon anticipated cash flows from operating
activities, remaining proceeds from the initial public offering completed in
1996 and credit availability, the Company believes that it has the liquidity and
capital resources needed to meet its financial commitments through 1998. Unless
the Company achieves substantial cost improvements, increased demand and no
further price reductions beyond the cost reductions achieved in the future, the
Company may incur net losses and negative cash flows from operating activities.
Without such cost improvements and increased demand, at present cost levels and
planned capital expenditures of approximately $3.0 million annually, the Company
over an extended period of time could exhaust all or substantially all of its
cash resources and borrowing availability under its credit facility. In such
event, the Company would be required to pursue other alternatives to improve
liquidity, including further cost

17
<PAGE> 18

reductions, sales of assets, the deferral of certain capital expenditures and
obtaining additional sources of funds. No assurance can be given that the
Company will be able to successfully pursue such alternatives. During the first
quarter of 1998, one of the Company's significant customers became delinquent in
the payment of outstanding accounts receivable totaling $4.1 million. This
delinquency occurred because of the customer experiencing significant operating
losses and negative cash flow from operations that strained the customers
liquidity. This customer's outstanding balance due to the Company exceeds an
average of approximately 110 days compared to normal trade terms provided to
this customer of 60 days. Future payment of this amount by the customer is
expected to be structured payments over a time frame not to exceed one year.
This anticipated structuring of future payments will reduce the Company's
liquidity and financial flexibility. Furthermore, in the event that this
customer's financial position worsens during the payment period, the risk of
default increases. Thus, any significant default by customers on the payment of
outstanding amounts due to the Company could cause a significant reduction in
liquidity and may exhaust the Company's cash resources.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to this item may be found in the Financial section
of the 1997 Annual Report to Shareholders on pages 12 through 23, and is
incorporated herein by reference.(1)
- ---------------
(1) The Company's 1997 Annual Report to Shareholders is not to be deemed filed
as part of this report except for those parts thereof specifically
incorporated by reference.

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

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
David A. Peterson(3)......................... 58 Chief Executive Officer, President and Director
Michael F. Brown............................. 39 Vice President-Marketing
Richard A. Clark(3).......................... 33 Chief Financial Officer, Vice President-Finance
and Treasurer
Paul A. Harter(3)............................ 32 Vice President-Operations
William A. Hughes............................ 35 Vice President-Product Development
Gerald G. Garbacz(2)(3)...................... 61 Chairman of the Board of Directors
Joseph A. Baute(2)........................... 70 Director
Sheldon A. Buckler(1)........................ 66 Director
Osmund M. Fundingsland(1).................... 54 Director
Daniel M. Junius(1)(3)....................... 46 Director
Ross W. Manire(2)............................ 46 Director
Gerard V. Schenkkan.......................... 42 Director
Ronald D. Verdoorn........................... 48 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

(3) Individual is named as a defendant in the Consolidated Amended Class Action
Complaint as discussed in Item 3 of this document

18
<PAGE> 19

The following is a biographical summary of the experience of the executive
officers, key employees and existing directors of the Company.

David A. Peterson is a co-founder of the original operations of the Company
and has served as Chief Executive Officer, President and a director of the
Company since its incorporation on December 31, 1995. From December 1991 through
December 1995, Mr. Peterson served as President and General Manager of the
Precision Technologies division of Nashua, the predecessor of the Company. From
April 1991 until December 1991 he served as Vice President-Operations of the
Thin-film unit of the Computer Products Division of Nashua. From July 1986 until
April 1991, Mr. Peterson served as Vice President-Manufacturing of Disk-Tec
(acquired by Nashua in July 1986 and became the Precision Technologies division
of Nashua). From June 1982 until July 1986 he served as Director of Operations
of Disk-Tec.

Michael F. Brown has served as Vice President-Marketing of the Company
since January 1996. From December 1995 until February 1996, Mr. Brown served as
Market Development Manager of the Company. From September 1991 to December 1995,
Mr. Brown was the Director of Sales and Marketing for Frisby Manufacturing Co.,
a precision-component manufacturer for the automotive and home appliance
industries. From January 1986 to August 1991, Mr. Brown served as Manufacturer's
Representative of J.A. Shoemaker & Associates, a manufacturing company.

Richard A. Clark has served as Chief Financial Officer, Vice
President-Finance and Treasurer of the Company since March 1996. From May 1995
through March 1996, Mr. Clark served as Director of Internal Audit of Nashua.
From January 1992 to May 1995, Mr. Clark served as Manager within the Business
Assurance practice of the accounting firm of Coopers & Lybrand L.L.P. From July
1988 to January 1992, Mr. Clark was a Senior Associate with Coopers & Lybrand
L.L.P. Mr. Clark is a certified public accountant.

Paul A. Harter has served as Vice President-Operations of the Company since
February 1996. From August 1994 until February 1996 Mr. Harter served as
Director of Operations of the Company. From July 1987 to August 1994, Mr. Harter
served the Company in various management and staff positions.

William A. Hughes has served as Vice President-Product Development of the
Company since February 1996. Mr. Hughes has served the Company as Director of
Product Development from September 1995 until February 1996, Product Development
Manager from December 1993 to February 1996, Technical Supervisor from June 1989
until December 1993, and in a variety of other management and staff positions
from June 1983 until June 1989.

Gerald G. Garbacz has served as director of the Company since January 1996.
Mr. Garbacz has been President , Chief Executive Officer and the Chairman of the
Board of Nashua Corporation since January 1996. From 1994 through 1995, Mr.
Garbacz was a private investor. He was Chairman and Chief Executive Officer of
Baker & Taylor Inc., an information distribution company from 1992 to 1994. He
is also a Director of Handy & Harman Inc.

Joseph A. Baute has served as a director of the Company since March 1996.
Mr. Baute served as a Director of Nashua from 1984 through June 1996, as
Chairman of its Board of Directors from April 1995 through June 1996, and in an
interim capacity as its President and Chief Executive Officer from November 1995
through December 1995. From 1979 until his retirement in 1993, Mr. Baute served
as Chairman and Chief Executive Officer of Markem Corporation, an information
application systems company. Mr. Baute is a director of Houghton Mifflin
Company, State Street Boston Corporation, INSO Corporation, Metrika Systems and
several private corporations. He also is a former director and Chairman of the
Federal Reserve Bank of Boston and a former director and past Chairman of the
Board of Directors of the The New England Council for Economic Development.

Sheldon A. Buckler has served as a director of the Company since March
1996. Mr. Buckler has been Chairman of the Board of Commonwealth Energy System
since May 1995. He was Vice Chairman of the Board of Polaroid Corporation from
1990 until his retirement in 1994. He also is a Director of Nashua Corporation,
ASECO Corporation, PARLEX Corporation, Commonwealth Energy Corporation and
Spectrum Information Technologies, Inc.

19
<PAGE> 20

Osmund M. Fundingsland has served as a director of the Company since
February 1997 and has been the Chief Executive Officer of OSF International, a
sales marketing consulting company, since its inception in 1995. From 1983
through 1994, Mr. Fundingsland was an Executive Vice-President of Applied
Magnetics Corporation, an independent manufacturer of magnetic recording heads
and head stack assemblies for disk drives. Mr. Fundingsland is a director of the
ISERA group, a software company. He also serves on the board of directors for
the International Disk Drive Equipment and Materials Association (IDEMA).

Daniel M. Junius has served as a director of the Company since January
1996. Mr. Junius has served as Vice President-Finance and Chief Financial
Officer of Nashua Corporation since 1995 and as Treasurer of Nashua since 1985.

Ross W. Manire has served as a director since February 1997. Mr. Manire has
been a Senior Vice President of the Carrier Systems Business Unit at 3Com since
the merger of 3Com Corporation and U.S. Robotics Corporation in June 1997. Mr.
Manire served as Senior Vice President and General Manager of the Networks
Systems Division of U.S. Robotics, Inc. from May 1995 through June 1997 and
served as its Senior Vice President-Operations and Chief Financial Officer from
early 1993 through May 1995. U.S. Robotics, Inc. was an international designer,
manufacturer and marketer of high-performance information access products. 3Com
is a supplier of local area network and wide area network systems for the large
enterprise, small business, home and service provider markets. Mr. Manire also
is a director of AT Financial Corp. and EA Industries, Inc.

Gerard V. Schenkkan has served as a director of the Company since March
1998. Mr. Schenkkan has been Vice President and General Manager of the Optical
Storage Business Unit of Quantum Corporation since November 1997. He also served
as Vice President of Corporate Development at Quantum Corporation from July 1996
until late 1997. From 1993 through 1996, Mr. Schenkkan was Marketing Manager of
the Storage Systems Division of Hewlett-Packard Company. Quantum Corporation
designs and manufactures storage products and is one of the largest global
suppliers of hard disk drives.

Ronald D. Verdoorn has served as a director of the Company since March
1998. Mr. Verdoorn has been a consultant since 1997. Mr. Verdoorn served as
Executive Vice President and Chief Operating Officer of the Storage Products
Group Media and LSI at Seagate Technologies, Inc. from 1995 through 1997. Mr.
Verdoorn was Senior Vice President of Worldwide Manufacturing Operations at
Seagate Technologies, Inc. from 1992 through 1995. Seagate Technologies, Inc.
develops and manufacturers advanced information technology, including disk and
tape storage devices, magnetic recording heads and media, precision motors,
microelectronics, and data access and management software. Mr. Verdoorn is also
a director of EA Industries, Inc. and Marvell.

The executive officers of the Company are Messrs. Peterson, Brown, Clark,
Harter and Hughes. Officers are elected on an annual basis to serve at the
discretion of the Board of Directors.

BOARD OF DIRECTORS STRUCTURE INTO CLASSES

The Board of Directors of Cerion Technologies Inc. is divided into three
classes. The Class II Directors' term will expire at the Meeting and the Class
III and Class I Directors' terms will expire in 1999 and 2000, respectively. All
Directors elected at this and future Annual Meetings of Stockholders will be
elected for three-year terms. All directors will hold office until their
successors have been duly elected and qualified. Prior to the Meeting, Ross W.
Manire, David A. Peterson and Gerard V. Schenkkan were the Class I Directors;
Sheldon A. Buckler, Osmund M. Fundingsland and Joseph A. Baute were the Class II
Directors; and Gerald G. Garbacz, Daniel M. Junius and Ronald D. Verdoorn were
the Class III Directors. Mr. Baute's term as director will expire at the Annual
Meeting.

The nominees for Class II Directors are Sheldon A. Buckler and Osmund M.
Fundingsland. Mr. Buckler and Mr. Fundingsland currently are serving as Class II
Directors of the Company. Shares represented by all proxies received by the
Board of Directors and not so marked as to withhold authority to vote for Mr.
Buckler and Mr. Fundingsland will be voted FOR the election of both nominees.
Messrs. Buckler and Fundingsland would be elected to hold office until the
Annual Meeting of Shareholders to be held in 2001 and until their

20
<PAGE> 21

respective successors are duly elected and qualified. Both of these nominees
have indicated their willingness to serve, if elected; however, if either should
be unable or unwilling to serve, the proxies will be voted for the election of a
substitute nominee designated by the Board of Directors or for fixing the number
of directors at a lesser number.

The following table sets forth for each nominee to be elected at the
Meeting and for each director whose term of office will extend beyond the
Meeting, his age, the position(s) currently held by each nominee or director
with the Company, the year such nominee or director was first elected a
director, the year each nominee's or director's term will expire and the class
of director of each nominee or director.

<TABLE>
<CAPTION>
DIRECTOR YEAR TERM CLASS OF
NOMINEE OR DIRECTOR'S NAME AGE POSITION(S) HELD SINCE WILL EXPIRE DIRECTOR
-------------------------- --- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Gerald G. Garbacz..................... 61 Chairman of the Board 1996 1999 III
of Directors
Daniel M. Junius...................... 45 Director 1996 1999 III
Ronald D. Verdoorn.................... 42 Director 1998 1999 III
Sheldon A. Buckler.................... 66 Director 1996 1998 II
Osmund M. Fundingsland................ 54 Director 1997 1998 II
Ross W. Manire........................ 46 Director 1997 2000 I
David A. Peterson..................... 58 President, Chief 1996 2000 I
Executive Officer
and Director
Gerard V. Schenkkan................... 48 Director 1998 2000 I
</TABLE>

COMPLIANCE WITH SECTION 16(a) of the Securities and Exchange Act

The Company is not aware of any failure to file on a timely basis the forms
required by Section 16(a) of the Exchange Act during the most recent fiscal
year.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the annual and long-term compensation paid
to the person who served as Cerion's Chief Executive Officer during 1997 and
Cerion's other executive officers who earned a salary and bonus in excess of
$100,000 in 1997 and 1996:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------- LONG-TERM
NAME AND OTHER ANNUAL COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY $ BONUS $ COMPENSATION $ OPTIONS # COMPENSATION(1)
------------------ ---- -------- ------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David A. Peterson.......... 1997 $163,070 $144,193 $ -- 128,390 $7,736
President & Chief 1996 160,611 -- -- 136,780 5,340
Executive Officer 1995 148,874 83,567 -- 11,500(2) 4,285
Michael F. Brown........... 1997 112,127 66,095 -- 51,300 3,413
Vice President-Marketing 1996 110,434(3) -- 56,636(4) 52,600 2,884
Richard A. Clark........... 1997 112,127(3) 66,095 -- 51,300 3,372
Vice President-Finance 1996 85,567 -- 117,427(5) 52,600 1,280
Paul A. Harter............. 1997 91,732(3) 54,074 -- 56,550 1,574
Vice President-Operations 1996 91,318 -- -- 63,100 3,334
William A. Hughes.......... 1997 92,771(3) 54,074 -- 56,550 3,488
Vice President-Product 1996 99,972 -- -- 63,100 5,446
Development
</TABLE>

- ---------------
(1) In 1997, Messrs. Peterson, Brown, Clark, Harter and Hughes earned (i)
$4,575, $2,988, $2,988, $1,434 and $2,470, respectively, as contributions to
the Company's Employees' Saving Plan; (ii) $2,430, $225,
21
<PAGE> 22

$184, $140, and $143, respectively, as life insurance premiums and income;
(iii) $731, $200, $200, $0, and $0, respectively, as taxable club membership
dues; and (iv) $0, $0, $0, $0 and $875 as a car allowance. In 1996, Messrs.
Peterson, Brown, Clark, Harter and Hughes earned (i) $2,660, $2,660, $1,234,
$3,194 and $3,360, respectively, as contributions to the Company's
Employees' Savings Plan; (ii) $2,430, $224, $46, $140 and $140,
respectively, as life insurance premiums and income; (iii) $250, $0, $0, $0
and $0, respectively, as taxable club membership dues; and (iv) $0, $0, $0,
$0 and $1,946, respectively, as a car allowance.

(2) In 1995, Nashua (the then-parent of the Company) granted Mr. Peterson
options to purchase common stock of Nashua under Nashua's incentive plan.
The options terminated unexercised six months following the Company's
initial public offering.

(3) Messrs. Brown, Clark, Harter and Hughes first became executive officers in
1996.

(4) Includes moving expense reimbursements of $35,893 and tax equalization
payments of $20,743.

(5) Includes moving expense reimbursements of $70,550 and tax equalization
payments of $46,877.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information as to options granted
during fiscal 1997 to the individuals listed in the Summary Compensation Table.

<TABLE>
<CAPTION>
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (5)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION -----------------------
GRANTED IN 1997 ($/SHARE)(4) DATE 5% 10%
---------- ---------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David A. Peterson........... 128,390(1) 33.0% $2.25 - 4.13 2/3/07 & 7/22/07 $252,613 $640,170
Michael F. Brown............ 51,300(2) 13.2% 2.25 - 4.13 2/3/07 & 7/22/07 102,148 258,864
Richard A. Clark............ 51,300(2) 13.2% 2.25 - 4.13 2/3/07 & 7/22/07 102,148 258,864
Paul A. Harter.............. 56,550(3) 14.5% 2.25 - 4.13 2/3/07 & 7/22/07 109,577 277,690
William A. Hughes........... 56,550(3) 14.5% 2.25 - 4.13 2/3/07 & 7/22/07 109,577 277,690
</TABLE>

- ---------------
(1) Options to purchase 60,000 and 26,300 shares will become exercisable on
February 3, 1998 and July 22, 1998, respectively, if Mr. Peterson remains in
the employ of the Company. Options to purchase 42,090 shares are
"performance-accelerated" options. These options will become exercisable in
tranches of 25% each based upon the Common Stock trading, for a period of 20
consecutive trading days, at an average premium of 25%, 50%, 75% and 100%,
respectively, above the exercise price, if the optionee remains an employee
of the Company on such date. However, if such performance goals are met
prior to the first anniversary of the grant date, the shares that would
otherwise become exercisable thereby only become exercisable on the first
anniversary date of the grant date, if the optionee remains an employee of
the Company on such date. On the eighth anniversary of the grant date, any
remaining shares subject to a "performance-accelerated" option will become
exercisable, if the optionee remains an employee of the Company on such
date.

(2) Options to purchase 25,000 and 15,775 shares each will become exercisable on
February 3, 1998 and July 22, 1998, respectively, if Messrs. Brown and Clark
remain in the employ of the Company. Options to purchase 10,525 shares are
"performance-accelerated" options subject to the conditions described in
footnote (1).

(3) Options to purchase 25,000 and 15,775 shares each will become exercisable on
February 3, 1998 and July 22, 1998 respectively if Messrs. Harter and Hughes
remain in the employ of the Company. Options to purchase 15,775 shares are
"performance-accelerated" options subject to the conditions described in
footnote (1).

(4) The one year vesting options granted on February 3, 1997 were granted at
$4.13. The one year vesting options and performance-accelerated options
granted on July 22, 1997 were granted at $2.25.

(5) In accordance with SEC rules, also shown are the hypothetical gains or
"option spreads," on the pre-tax basis, that would exist for the respective
options. These gains are based on assumed rates of annual

22
<PAGE> 23

compound stock price appreciation of 5% and 10% from the date the options
were granted over the full option term. To put this data into perspective,
the resulting Cerion stock prices for the grants expiring on February 3,
2007 and July 22, 2007 would be $6.73 and $3.67, respectively, at a 5% rate
of appreciation and $10.71 and $5.84, respectively, at a 10% rate of
appreciation. The amounts reflected in the table may not accurately reflect
or predict the actual value of the stock options.

OPTION EXERCISES IN FISCAL YEAR 1997 AND VALUE OF OPTIONS AT END OF FISCAL 1997

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT IN-THE-MONEY, OPTIONS
SHARES ACQUIRED VALUE FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)
---- --------------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
David A. Peterson.... 0 $0 0/128,390 $0/$0
Michael F. Brown..... 0 $0 0/ 51,300 $0/$0
Richard A. Clark..... 0 $0 0/ 51,300 $0/$0
Paul A. Harter....... 0 $0 0/ 56,550 $0/$0
William A. Hughes.... 0 $0 0/ 56,550 $0/$0
</TABLE>

SEVERANCE BENEFITS

The Company has entered into employment agreements with executive officers
Messrs. Peterson, Brown, Clark, Harter and Hughes in order to ensure their
continued service to Cerion in the event of an attempt by a person or group of
persons to gain control of Cerion. Such employment agreements provide that upon
termination of employment under certain circumstances within three years of a
"change in control" as defined in these agreements, the employee would receive
severance pay equal to three times the sum of his annual salary and bonus for
Messrs. Peterson, Brown, Clark, Harter and Hughes. In addition, if within three
years following the "change in control", Messrs. Peterson, Brown, Clark, Harter
or Hughes elect to terminate employment for "good reason" (as defined), he would
receive the above described severance pay. These severance payments are subject
to reduction to the extent necessary to avoid excise taxes under Section 280G of
the Internal Revenue Code.

COMPENSATION OF DIRECTORS

Directors who are not employees of the Company, Nashua or of any affiliated
company ("Non-Employee Directors") will receive a fee of $750 per meeting of the
Board of Directors or any committee thereof. All directors are reimbursed for
their out-of-pocket expenses incurred in attending such meetings. The Company,
under its 1996 Stock Incentive Plan, also grants each Non-Employee Director, on
the election or re-election date of each such director, that number of shares of
Common Stock which is equal in value to $10,000 (subject to adjustment
annually), calculated with reference to the closing price of the Common Stock on
the trading day immediately prior to the date of grant, and an option to
purchase 1,000 shares of Common Stock exercisable at the same price.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"). The
Committee, which is composed of three independent directors, establishes and
administers the Company's executive compensation policies and plans, and
administers the Company's stock option plan. The Committee considers internal
and external information in determining officers' compensation, including input
from independent compensation consultants and outside survey data.

23
<PAGE> 24

Compensation Philosophy

The Company's compensation policies for executive officers are based on the
belief that the interests of executives should be closely aligned with those of
the Company's shareholders. The Compensation policies are designed to achieve
the following objectives:

- Offer compensation opportunities that attract highly qualified
executives, reward outstanding initiative and achievement, and retain the
leadership and skills necessary to build long-term shareholder value.

- Maintain a significant portion of executives' total compensation at risk,
tied to both the annual and long-term financial performance of the
Company and the creation of shareholder value.

- Further the Company's short and long-term strategic goals and values by
aligning compensation with business objectives and individual
performance.

Compensation Program

The Company's executive compensation program has three major integrated
components: base salary, annual incentive awards, and long-term incentives.

Base Salary. Base salary levels for executive officers are determined
annually by reviewing the competitive pay practices of companies of similar size
and market capitalization, the skills, performance level, and contribution to
the business of individual executives, and the needs of the Company. Overall,
the Company believes that base salaries for executive officers are approximately
competitive with median base salary levels for similar positions in similar
companies, but the Committee has not attempted to aim for any specific range of
any particular group of companies.

Annual Incentive Awards. The Company's executive officers are eligible to
receive annual cash bonus awards designed to motivate executives to attain
short-term and longer-term corporate and individual management goals. The
Committee establishes the annual incentive opportunity for each executive
officer in relation to his or her base salary. Awards under this program are
based on the attainment of specific Company performance measures established by
the Committee early in the fiscal year. For 1997 and 1998, the formula for these
bonuses was determined as a function of net income and cash flow objectives,
thus establishing a direct link between executive pay and Company profitability.
The Company's financial performance in 1997 met the objectives set by the
Committee, as such, awards were earned.

Long-Term Incentives. The Committee believes that stock options are an
excellent vehicle for compensating its officers and employees. The Company
provides long-term incentives through its 1996 Stock Incentive Plan, the purpose
of which is to create a direct link between executive compensation and increases
in shareholder value. Stock options are granted at fair market value and vest in
installments, generally over two years. When determining option awards for an
executive officer, the Committee considers the executive's current contribution
to Company performance, the anticipated contribution to meeting the Company's
long-term strategic performance goals, and industry practices and norms, but
without using any specific targets or criteria. Long-term incentives granted in
prior years and existing levels of stock ownership also are taken into
consideration, but the Committee has no specific ownership target. Because the
receipt of value by an executive officer under a stock option is dependent upon
an increase in the price of the Company's Common Stock, this portion of the
executives' compensation is directly aligned with an increase in shareholder
value.

Chief Executive Officer Compensation

Mr. Peterson's base salary, annual incentive award and long-term incentive
compensation are determined by the Committee based upon the same factors as
those employed by the Committee for executive officers generally. Mr. Peterson's
current annual base salary is $168,000 subject to annual review and adjustment
by the Board of Directors of the Company. Mr. Peterson also may be entitled to
an annual cash bonus depending on the Company's achievement of certain
performance objectives, including certain milestones in earnings and cash flows
during a fiscal year, as compared to the preceding fiscal year. Any such cash
bonus shall be

24
<PAGE> 25

computed on a formula basis established by the Committee. For the year ending
December 31, 1997, Mr. Peterson was paid a cash bonus totaling $144,188, or 88.4
percent of his 1997 base salary.

Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to certain executives of public companies. Having
considered the requirements of Section 162(m), the Committee believes that
grants made pursuant to the Company's Stock Incentive Plan meet the requirement
that such grants be "performance based" and are, therefore, exempt from the
limitations on deductibility. Historically, the combined salary and bonus of
each executive officer has been well below the $1 million limit. The Committee's
present intention is to comply with Section 162(m) unless the Committee feels
that required changes would not be in the best interest of the Company or its
shareholders.

Respectfully Submitted by the
Compensation Committee
Sheldon A. Buckler, Chairman
Daniel M. Junius
Osmund M. Fundingsland

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are Sheldon A. Buckler, Daniel M.
Junius and Osmund M. Fundingsland. No member of the Compensation Committee was
or is an officer or employee of the Company.

25
<PAGE> 26

PERFORMANCE GRAPHS

The following graph compares the cumulative total returns for Cerion's
Common Stock with the comparable returns for Standard and Poor's SmallCap 600
Index and the Standard and Poor's Computers (Hardware) Index for the period
beginning May 24, 1996 and ending December 31, 1997.

[GRAPHIC OMITTED]

<TABLE>
<CAPTION>
CERION S&P COMPUTERS
Measurement Period TECHNOLOGIES SMALLCAP (HARDWARE)- PEER
(Fiscal Year Covered) INC 500 INDEX 500 GROUP
<S> <C> <C> <C> <C>
May 96 100 100 100 100
1996 34.21 104.12 115.00 182.54
1997 10.36 130.76 168.33 112.50
</TABLE>

Standard & Poor's Compustat-1-15-98

This graph assumes the investment of $100 in Cerion's Stock, the Standard
and Poor's SmallCap 600 Index and the Standard and Poor's Computers (Hardware)
Index and a Peer Group of eight companies within the data storage segment of the
computer industry as of May 24, 1996 (the date on which Cerion's Common Stock
was first registered with the SEC and began trading) and assumes dividends were
reinvested. Additional measurement points are at the remaining fiscal quarter
ends for the year ended December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table shows the number of shares and percentage of Cerion's
common stock beneficially owned by all persons known to Cerion to be the
beneficial owners of more than 5% of its common stock, as of March 9, 1998.

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE COMMON STOCK
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING
------------------------ ----------------------- ------------
<S> <C> <C>
Nashua Corporation......................................... 2,599,000(b) 37.0%
State of Wisconsin Investment Board........................ 686,200(a) 9.8%
</TABLE>

- ---------------
(a) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated January 20, 1998.

(b) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated February 13, 1998. Shares are owned by a
wholly owned subsidiary of Nashua.

26
<PAGE> 27

SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS

The following table shows the number of shares and percentage of Cerion's
Common Stock deemed to be beneficially owned by each director and nominee for
director, each executive officer named in the Summary Compensation Table above
and by all directors and officers of Cerion as a group, as of March 27, 1998.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF SHARES
NAME BENEFICIAL OWNERSHIP(A) OUTSTANDING
---- ----------------------- -----------------
<S> <C> <C>
David A. Peterson(e)...................................... 62,000 0.9%
Michael F. Brown(f)....................................... 25,100 0.3%
Richard A. Clark(f)....................................... 27,650 0.4%
Paul A. Harter(f)......................................... 25,000 0.3%
William A. Hughes(f)...................................... 25,300 0.3%
Gerald G. Garbacz......................................... 4,000 0.1%
Joseph A. Baute(c)........................................ 5,925 0.1%
Sheldon A. Buckler(c)..................................... 9,925 0.1%
Osmund M. Fundingsland(b)................................. 4,265 0.1%
Daniel M. Junius(d)....................................... 2,500 *
Ross W. Manire(b)......................................... 8,936 0.1%
Gerard V. Schenkkan....................................... 4,848 0.1%
Ronald D. Verdoorn........................................ 4,848 0.1%
Directors and Officers as a group (13 persons(g).......... 210,297 2.9%
</TABLE>

- ---------------
(a) Information as to the interests of the respective nominees has been
furnished in part by them. The inclusion of information concerning shares
held by or for their spouses or children or by corporations in which they
have an interest does not constitute an admission by such nominees of
beneficial ownership thereof. Unless otherwise indicated, all persons have
sole voting and dispositive power as to all shares they are shown as owning.

(b) Includes 1,000 shares each Non-Employee Director (Directors who are not
employees of the Company, Nashua or of any affiliated company) has a right
to acquire within 60 days of April 6, 1998 through the exercise of stock
options.

(c) Includes 2,000 shares each Non-Employee Director has a right to acquire
within 60 days of April 6, 1998 through the exercise of stock options.

(d) Includes 1,500 shares held in a retirement account of Mr. Junius's spouse.
Mr. Junius disclaims beneficial ownership of these shares.

(e) Includes 60,000 shares Mr. Peterson has a right to acquire within 60 days of
April 6, 1998 through the exercise of stock options.

(f) Includes 25,000 shares each Executive officer has a right to acquire within
60 days of April 6, 1998 through the exercise of stock options.

(g) Includes 166,000 shares which the directors and officers of Cerion have the
right to acquire within 60 days of April 6, 1998 through exercises of stock
options.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

No information is required with respect to this item because no such
relationships or related transactions existed in 1997.

27
<PAGE> 28

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of Form 10-K

1. FINANCIAL STATEMENTS

The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:

- Balance Sheets as of December 31, 1997 and 1996

- Statements of Operations for the years ended December 31, 1997, 1996
and 1995

- Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995

- Notes to Financial Statements

- Quarterly Financial Information (unaudited)

- Report of Independent Accountants

2. FINANCIAL STATEMENT SCHEDULE

- Schedule II - Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.

28
<PAGE> 29

REPORT OF INDEPENDENT ACCOUNTANT ON
FINANCIAL STATEMENT SCHEDULE
----------------------------

To the Board of Directors of
Cerion Technologies Inc.

Our audits of the financial statements referred to in our report dated February
2, 1998 appearing in the 1997 Annual Report to Stockholders of Cerion
Technologies Inc. (which report and financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.

PRICE WATERHOUSE LLP
Chicago, Illinois
February 2, 1998

29
<PAGE> 30

3. LIST OF EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1(a) Capital Contribution Agreement.
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(a) Amended and Restated By-Laws of Cerion Technologies Inc.
4.1(a) Specimen Certificate for shares of Cerion Technologies
Inc.'s Common Stock.
10.1(a) Form of Tax Allocation Agreement between Cerion Technologies
Inc. and Nashua Corporation.
10.2(a) Form of Registration Rights Agreement between Cerion
Technologies Inc. and Nashua Corporation.
10.3(a) Form of Intercompany Agreement between Cerion Technologies
Inc. and Nashua Corporation.
10.4(a) 1996 Stock Incentive Plan.
10.5(a) Form of One-Year Vesting Option Agreement.
10.6(a) Form of Performance-Accelerated Option Agreement.
10.7(c) Financing Agreement, dated as of March 7, 1997 between
Cerion Technologies Inc., and The CIT Group/Business Credit,
Inc.
10.8(c) Mortgage, Security Agreement, Financing Statement and
Assignment of Rents and Leases by and between Cerion
Technologies Inc. and The CIT Group/Business Credit, Inc.
10.9(b) Employment Contract between Cerion Technologies Inc. and
David Peterson as President and Chief Executive Officer.
10.10(b) Form of Employment Contract between Cerion Technologies Inc.
and the four remaining executive officers of the Company
indicated therein.
24 Powers of Attorney
27 Financial Data Schedule (EDGAR version only).
99.1 Financial Section of the 1997 Annual Report to Shareholders,
pages 12 through 23.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations section of the 1997 Annual Report
to Shareholders, pages 8 through 11.
</TABLE>

- ---------------
(a) Incorporated by Reference to Form S-1 filed on March 21, 1996 amended on
April 25, 1996, File No. 333-2590.

(b) Incorporated by Reference to Form 10-Q filed for the quarter ended September
27, 1996 (Exhibits 10.9, and 10.10 originally filed as Exhibits 10.1 and
10.2, respectively).

(c) Incorporated by Reference to Form 10-K filed for the year ended December 31,
1996 (Exhibits 10.7 and 10.8 originally filed as Exhibits 10.7 and 10.8,
respectively.)

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the quarter ended December
31, 1997.

30
<PAGE> 31

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.

CERION TECHNOLOGIES INC.

By /s/ RICHARD A. CLARK
------------------------------------
RICHARD A. CLARK
VICE PRESIDENT-FINANCE, CHIEF
FINANCIAL OFFICER AND
TREASURER

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ DAVID A. PETERSON President and Chief Executive March 27, 1998
- --------------------------------------------------- Officer (Principal Executive
DAVID A. PETERSON Officer) and Director

/s/ RICHARD A. CLARK Chief Financial Officer, Vice March 27, 1998
- --------------------------------------------------- President-Finance, and Treasurer
RICHARD A. CLARK (Principal Financial and
Accounting Officer)

/s/ JOSEPH A. BAUTE* Director
- ---------------------------------------------------
JOSEPH A. BAUTE

/s/ SHELDON A. BUCKLER* Director
- ---------------------------------------------------
SHELDON A. BUCKLER

/s/ OSMUND M. FUNDINGSLAND* Director
- ---------------------------------------------------
OSMUND M. FUNDINGSLAND

/s/ GERALD G. GARBACZ* Director
- ---------------------------------------------------
GERALD G. GARBACZ

/s/ DANIEL M. JUNIUS* Director
- ---------------------------------------------------
DANIEL M. JUNIUS

/s/ ROSS W. MANIRE* Director
- ---------------------------------------------------
ROSS W. MANIRE

/s/ GERARD SCHENKKAN* Director
- ---------------------------------------------------
GERARD SCHENKKAN

/s/ RONALD VERDOORN* Director
- ---------------------------------------------------
RONALD VERDOORN

By /s/ RICHARD A. CLARK March 27, 1998
----------------------------------------------
*RICHARD A. CLARK
AS ATTORNEY-IN-FACT
</TABLE>

31
<PAGE> 32

SCHEDULE II

CERION TECHNOLOGIES INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C - ADDITIONS COLUMN D COLUMN E
-------- -------- -------------------- -------- --------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -------------------------------------- ---- ---- -- ----- ----
<S> <C> <C> <C> <C> <C>

ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND CUSTOMER RETURNS
Year ended December 31, 1997.......... $234 $151 $0 $ 0 $385
Year ended December 31, 1996.......... 51 187 0 4 234
Year ended December 31, 1995.......... 36 21 0 6 51

INVENTORY VALUATION RESERVE
Year ended December 31, 1997.......... $469 $ 0 $0 $(244)(1) $225
Year ended December 31, 1996.......... 50 419 0 0 469
Year ended December 31, 1995.......... 19 31 0 0 50

DEFERRED TAX ASSET
VALUATION ALLOWANCE
Year ended December 31, 1997.......... $147 $ 0 $0 $(147)(2) $ 0
Year ended December 31, 1996.......... 0 147 0 0 147
Year ended December 31, 1995.......... 0 0 0 0 0
</TABLE>

- ---------------
(1) Adjustment due to sale of previously reserved inventory.

(2) Adjustment due to revaluation of realizable tax benefit.

<PAGE> 1
EXHIBIT 24

POWER OF ATTORNEY
-----------------

I, the undersigned Director and/or Officer of Cerion Technologies Inc.
(the "Company"), hereby severally constitute and appoint Richard A. Clark, Vice
President-Finance, Chief Financial Officer and Treasurer, my true and lawful
attorney and agent to sign for me, and in my name and in the capacity or
capacities indicated below (A) the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.