<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[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)
DELAWARE 02-0485458
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1401 INTERSTATE DRIVE, CHAMPAIGN, IL 61822-1065
-----------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(217) 359-3700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), 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-X 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 November 23, 1998, the aggregate market value of the voting stock held
by nonaffiliates totaled approximately $1,244,425 based on the closing stock
price as reported by The Nasdaq Stock Market.
On November 23, 1998, there were 7,054,593 shares of common stock, $.01
par value, of the registrant issued and outstanding.
Cerion Technologies Inc. (the "Company") is amending Exhibit 99.1,
"Financial Section of the 1997 Annual Report to Shareholders, pages 12 through
23", to its Form 10-K for the fiscal year ended December 31, 1997. The
modification includes two new "Subsequent Event" footnotes. The first,
"Subsequent Event - Liquidation", references the previously announced decision
of the Company's Board of Directors on September 14, 1998 to cease operations on
November 15, 1998 and seek shareholder approval for an orderly liquidation of
the Company's assets. The second, "Subsequent Event-Accounts Receivable and
Fixed Asset Write-Down During Fiscal 1998 (Unaudited)" describes charges taken
by the Company during the second and third quarters of 1998 related to the
Impairment Loss on Long-Lived Assets and Bad Debt Charges. (See Exhibit 99.1,
page 23 for each of these added disclosures.) Furthermore, the "Report of
Independent Accountants" included previously on page 23 of Exhibit 99.1 has been
modified to include an additional paragraph that refers the reader of the report
to the "Subsequent Event - Liquidation" footnote. (See Exhibit 99.1, pages 24-25
for the updated "Report of Independent Accountants".)
<PAGE> 2
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
List of Exhibits.
EXHIBIT
NUMBER DESCRIPTION
99.1 Financial Section of the 1997 Annual Report to Shareholders, pages 12
through 25, including financial statements modified for significant
post balance sheet events (Exhibit 99.1 originally filed as
Exhibit 99.1 of Form 10-K filed for the year ended December 31, 1997,
File Number 1-5492-1).
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERION TECHNOLOGIES INC.
(Registrant)
Date: December 3, 1998 By: /s/ RICHARD A. CLARK
---------------------------------------------
Richard A. Clark
Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial and duly authorized officer)
<PAGE> 1
EXHIBIT 99.1
FINANCIAL SECTION OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS, PAGES 12 THROUGH
25, INCLUDING FINANCIAL STATEMENTS MODIFIED FOR SIGNIFICANT POST BALANCE SHEET
EVENTS (EXHIBIT 99.1 ORIGINALLY FILED AS EXHIBIT 99.1 OF FORM 10-K FILED FOR THE
YEAR ENDED DECEMBER 31, 1997, FILE NUMBER 1-5492-1).
Cerion Technologies Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------
(In thousands, except per share data) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 31,810 $ 36,540 $ 28,175
Cost of sales 26,606 26,729 19,668
--------------------------------
Gross profit 5,204 9,811 8,507
Selling, general and administrative expenses 4,405 5,561 2,537
--------------------------------
Operating income 799 4,250 5,970
Interest income (expense) 366 169 (316)
--------------------------------
Income before provision for income taxes 1,165 4,419 5,654
Provision for income taxes 338 1,914 2,210
--------------------------------
Net income $ 827 $ 2,505 $ 3,444
--------------------------------
Net income per share, basic and diluted $ .12 $ .39 $ .64
Average shares outstanding 7,024 6,379 5,400
--------------------------------
</TABLE>
The notes are an integral part of the financial statements.
12
<PAGE> 2
Cerion Technologies Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands, except share and per share data) 1997 1996
- - ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,588 $ 9,300
Accounts receivable, net of allowances for doubtful
accounts and customer returns of $385 and $234, respectively 10,271 2,928
Inventories 726 1,046
Prepaid expenses and other assets 208 395
Deferred income taxes 637 273
------------------
Total current assets 16,430 13,942
Property, plant and equipment, net 8,769 9,391
Other assets 66 --
------------------
$25,265 $23,333
==================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 4,666 $ 3,694
------------------
Total current liabilities 4,666 3,694
Deferred income taxes 366 273
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, par value $.01 per share, 100,000
shares authorized, none issued -- --
Common Stock, par value $.01 per share, 20,000,000
shares authorized; 7,028,337 and 7,016,184 shares issued
and outstanding, respectively 70 70
Additional paid-in capital 18,679 18,639
Retained earnings 1,484 657
------------------
Total stockholders' equity 20,233 19,366
------------------
$25,265 $23,333
==================
</TABLE>
The notes are an integral part of the financial statements.
13
<PAGE> 3
Cerion Technologies Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
(In thousands) 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 827 $ 2,505 $ 3,444
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation 2,466 2,099 1,035
Loss on disposal of property, plant and equipment 201 - -
Deferred income taxes (271) (249) 158
Changes in operating assets and liabilities:
Accounts receivable (7,343) 3,002 (2,956)
Inventories 320 (734) 109
Accounts payable and accrued expenses 972 621 2,152
Prepaid expenses and other assets 187 (413) 31
-----------------------------------------
Net cash provided by (used in) operating activities (2,641) 6,831 3,973
-----------------------------------------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment (2,164) (6,107) (2,564)
Proceeds from sale of property, plant and equipment 153 - 114
Purchase of short-term investments (6,750) (4,496) -
Proceeds from redemption of short-term investments 6,750 4,496 -
-----------------------------------------
Cash flows used in investing activities (2,011) (6,107) (2,450)
-----------------------------------------
Cash flows provided by (used in) financing activities:
Payments to parent company - - (1,107)
Debt issuance costs (100) - -
Repayment of borrowings - (11,142) (342)
Proceeds from shares issued 40 19,545 -
-----------------------------------------
Cash flows provided by (used in) financing activities (60) 8,403 (1,449)
-----------------------------------------
Increase (decrease) in cash (4,712) 9,127 74
Cash at beginning of year 9,300 173 99
-----------------------------------------
Cash at end of year $ 4,588 $ 9,300 $ 173
-----------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ - $ 14 $ 316
Income taxes paid 236 226 -
-----------------------------------------
</TABLE>
The notes are an integral part of the financial statements.
14
<PAGE> 4
Cerion Technologies Inc.
Notes to the Financial Statements
Description of Business
Business Definition: Until its initial public offering in May 1996, the business
of Cerion Technologies Inc. (the "Company") had been operated by Nashua
Corporation ("Nashua" or the "Parent") since its acquisition in 1986 by Nashua.
As of December 31, 1995, Nashua converted the Company into a wholly owned
subsidiary of Nashua and contributed to it the business of the Nashua Precision
Technologies division in return for the Company's stock and its assumption of
the liabilities of the business. The Company was renamed Cerion Technologies
Inc. on March 4, 1996.
The Company develops, manufactures and markets precision-machined aluminum
disk substrates that are used in the production of magnetic thin-film disks for
hard disk drives of portable and desktop computers, network servers, add-on
storage devices and storage upgrades. The Company operates in one business
segment. All sales are denominated in U.S. dollars.
Basis of Presentation: The accompanying financial statements for the year ended
December 31, 1995 and the period January 1, 1996 through May 24, 1996, have been
prepared as if the Company had operated as an independent, stand-alone entity.
Such financial statements have been prepared using the historical basis of
accounting and include all of the assets, liabilities, revenues and expenses of
the Company previously included in Nashua's consolidated financial statements;
however, certain adjustments have been made to reflect the operations of the
Company on a stand-alone basis. Consequently, these statements include balances
for other assets and liabilities related to the Company that were previously
included in Nashua's consolidated financial statements except that there is no
allocation to the Company of Nashua's borrowings. However, an allocation of
Nashua's interest expense has been recorded as determined based upon the
Company's net assets as a proportion of Nashua's consolidated net assets.
Management believes that the basis for such allocations is reasonable. The
Company's results of operations were included in Nashua's federal, state and
local income tax returns through May 24, 1996. See "Parent Company Investment"
in the following notes. In accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 55 ("SAB 55"), these statements have been adjusted
to include certain corporate expenses incurred by the Parent on the Company's
behalf. The financial statements may not necessarily present the Company's
financial position and results of operations as if the Company were a
stand-alone entity. Beginning on May 24, 1996, the Company's financial
statements have been presented on a stand-alone basis.
Summary of Significant Accounting Policies
Inventories: The Company values all of its inventories at the lower of cost or
market on a first-in, first-out basis (FIFO).
Property, Plant and Equipment, Net: Property, plant and equipment is recorded at
cost. Expenditures for maintenance and repairs are charged to expense while the
costs of significant improvements are capitalized. Depreciation is provided
using the straight-line method. Upon retirement or sale, the cost of assets
disposed and the related accumulated depreciation are eliminated and related
gains or losses reflected in the statement of operations. The estimated useful
lives of the assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements 10 to 40 years
Machinery and equipment 4 to 10 years
Furniture and fixtures 3 to 10 years
Shipping containers 2 years
</TABLE>
Revenue Recognition: Sales of products are recorded based on product shipment to
customers.
15
<PAGE> 5
Cerion Technologies Inc.
Research, Development and Engineering: Included in selling, general and
administrative expenses are research, development and engineering expenditures
of $567,000, $1,071,000 and $648,000 for the years ended December 31, 1997, 1996
and 1995, respectively. Research, development and engineering expenditures are
charged to operations as incurred.
Income Taxes: The results of the Company's operations have been included in the
federal and state consolidated income tax returns of the Parent for the year
ended December 31, 1995 and the provision for income taxes has been calculated
as if the Company was a stand-alone taxpayer.
Prepaid or deferred income taxes result principally from the use of
different methods of depreciation for income tax and financial reporting
purposes, the recognition of expenses for financial reporting purposes in years
different from those in which the expenses are deductible for income tax
purposes and the recognition of the tax benefit of net operating losses.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1997 and 1996
and the reported amounts of net sales and expenses during the three years in the
period ended December 31, 1997. Actual results could differ from those
estimates.
Cash Equivalents: The Company considers all highly liquid investment instruments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 1997 and 1996, the Company held $4.6 million and
$7.4 million, respectively, of various commercial paper instruments carried at
cost, which approximated market.
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
adopted SFAS 123 through disclosure only.
Impairment of Long-Lived Assets: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). The initial adoption of SFAS 121 had no impact on
the Company's financial statements.
Net Income Per Share: In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). The adoption of SFAS 128 had no impact on the calculation of net
income per share for the periods presented. Net income per share for the periods
presented is determined by dividing the applicable net income by the weighted
average number of common shares outstanding during the period. For periods prior
to the initial public offering, the weighted average number of common shares
outstanding was assumed to be the number of shares issued to Nashua on December
31, 1995. Options to purchase shares were outstanding during the years ended
December 31, 1997 and 1996 but were not included in the diluted earnings per
share computation because the exercise price exceeded the average market price
for the period.
Reclassifications: Certain amounts within the footnotes related to the
classification of Research, Development and Engineering Expenses and Accounts
Payable and Accrued Expenses in the prior years' consolidated financial
statements have been reclassified to conform with the current year presentation.
These reclassifications had no effect on previously reported net income.
Related Party Transactions and Allocations
Cash: The Company utilized Nashua's centralized cash management services until
May 30, 1996. Under arrangements with Nashua, excess cash generated by the
Company was retained by Nashua until May 24, 1996.
16
<PAGE> 6
Cerion Technologies Inc.
Product Sales: During the years ended December 31, 1997, 1996 and 1995, the
Company had sales of approximately $0, $208,000 and $645,000, respectively, to
divisions of Nashua. There were no amounts due from these divisions at December
31, 1997 and 1996. The Company believes that the product prices for such sales
were at market prices.
Corporate Services: In accordance with SAB 55, Nashua has allocated a portion of
its domestic corporate expenses and charges to its divisions, including the
Company through May 24, 1996. These expenses included management and corporate
overhead; benefit administration; risk management/insurance administration; tax
and treasury/cash management services; environmental services; litigation
administration services; and other support and executive functions. Allocations
and charges for services were based on either a direct cost pass-through or a
percentage allocation based on factors such as net sales, management time or
headcount. Such allocations and corporate charges totaled $147,000 and $227,000
for the years ended December 31, 1996 and 1995, respectively. The allocation and
charges ceased on May 24, 1996.
Certain research and development expenses of the Parent related to the
Company's business were allocated to the Company in accordance with SAB 55.
These amounts totaled $70,000 and $69,000 for the years ended December 31, 1996
and 1995, respectively, and are included in selling, general and administrative
expenses.
Management believes that the basis used for allocating corporate services
was reasonable. However, the terms of these transactions may have differed from
those that would have resulted from transactions among unrelated parties.
Management believes that related expenses that would have been incurred during
the year ended December 31, 1995 had the Company operated on a stand-alone basis
would have approximated $784,000 (unaudited).
Employee fringe benefit expenses were allocated to the Company based on
Nashua's total benefits costs and the proportion of Nashua's total salaries and
wages represented by the Company's salaries and wages. Fringe benefit costs,
which are reflected in cost of sales and selling, general and administrative
expenses, include employer FICA and unemployment taxes, medical insurance and
annual accruals or contributions made for the Nashua Corporation Retirement Plan
for Salaried Employees, the Nashua Corporation Hourly Employees Retirement Plan
and the Nashua Corporation Employees' Savings Plan. See "Employee Retirement
Plans" in the following notes. The Company was allocated $168,000 and $290,000
for the years ended December 31, 1996 and 1995, respectively, for these
expenses. Management believes the allocation method for fringe benefit costs was
reasonable. Such allocation ceased on May 24, 1996.
Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 454,000 $ 442,000
Work in progress 24,000 19,000
Finished goods 248,000 585,000
---------------------------
$ 726,000 $1,046,000
---------------------------
</TABLE>
17
<PAGE> 7
Cerion Technologies Inc.
Property, Plant and Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 260,000 $ 260,000
Buildings and improvements 3,908,000 3,908,000
Machinery and equipment 8,594,000 7,571,000
Furniture and fixtures 310,000 302,000
Construction in progress 253,000 4,000
Containers 1,950,000 1,882,000
----------------------------
15,275,000 13,927,000
Less: accumulated depreciation (6,506,000) (4,536,000)
----------------------------
$ 8,769,000 $ 9,391,000
----------------------------
</TABLE>
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable -- trade $ 2,839,000 $ 1,802,000
Container deposits 18,000 585,000
Accrued payroll and benefits 925,000 727,000
Income taxes payable 304,000 58,000
Other 580,000 522,000
------------------------
$ 4,666,000 $ 3,694,000
------------------------
</TABLE>
Employee Retirement Plans
The Company adopted a defined contribution plan, the Cerion Technologies Inc.
Employees Savings Plan ("Savings Plan") as of May 24, 1996. The Savings Plan
allows full-time employees to become eligible in the month following employment
to make certain tax-deferred voluntary contributions that the Company generally
matches with a 50 percent contribution, limited to three percent of an
employee's base pay. The Company's expense for the defined contribution plan
totaled $145,000 in 1997 and $79,000 from May 24, 1996 through December 31,
1996.
Retirement benefits were provided to the Company's employees through the
Nashua Corporation Employees' Savings Plan ("Nashua Savings Plan"), the Nashua
Corporation Hourly Employees' Retirement Plan and the Nashua Corporation
Retirement Plan for Salaried Employees ("Retirement Plans") until May 24, 1996.
The Retirement Plans were defined benefit plans. Guaranteed retirement income
levels were determined based on years of service and salary levels as integrated
with Social Security benefits. Employees were eligible under the Retirement
Plans after one year of continuous service and were 100 percent vested after
five years of service. Nashua's Retirement Plans are subject to Internal Revenue
Service and ERISA funding limitations. Assets of the plans were invested in
interest-bearing cash equivalents, fixed income securities and common stocks.
Total expense under the Nashua Savings and Retirement Plans for the years
presented through May 24, 1996 is included in the Company's financial statements
through the fringe benefit allocations discussed in a prior note: "Related Party
Transactions and Allocations." The Company's employees were terminated from
future participation in the plan as of May 24, 1996. Nashua's Savings Plan had
similar terms and limitations as Cerion's Savings Plan.
18
<PAGE> 8
Cerion Technologies Inc.
Leases
Lease agreements cover warehouse space and office equipment under operating
lease arrangements. These leases have expiration dates through January 1, 2000.
Rental expense was approximately $70,000 in 1997, $92,000 in 1996 and $78,000 in
1995. Future minimum rents payable under noncancelable leases with initial terms
exceeding one year are as follows: $57,000 in 1998 and $54,000 in 1999.
Income Taxes
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 493,000 $ 1,783,000 $ 1,736,000
State 116,000 380,000 316,000
-----------------------------------------
Total current 609,000 2,163,000 2,052,000
Deferred:
Federal (244,000) (171,000) 134,000
State (27,000) (78,000) 24,000
-----------------------------------------
Total deferred (271,000) (249,000) 158,000
-----------------------------------------
Provision for income taxes $ 338,000 $ 1,914,000 $ 2,210,000
=========================================
</TABLE>
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 366,000 $ 273,000
------------------------
Deferred tax assets:
Accrued vacation $ 49,000 $ 63,000
Inventory reserve 90,000 187,000
Bad debt reserve 154,000 54,000
Accrued bonus 135,000 80,000
Accrued fees 160,000 25,000
Other 49,000 11,000
------------------------
637,000 420,000
Deferred tax asset valuation allowance - (147,000)
------------------------
$ 637,000 $ 273,000
========================
</TABLE>
Reconciliation between income taxes computed using the Federal statutory income
tax rate and the Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal tax benefit 5.0% 4.7% 3.9%
Tax asset valuation reserve (12.6)% 3.3% -
Other, net 1.6% 0.3% 0.2%
-------------------------
Effective tax rate 29.0% 43.3% 39.1%
=========================
</TABLE>
19
<PAGE> 9
Cerion Technologies Inc.
Stockholders' Equity
The Company, on December 31, 1995, initially issued 5,400,000 shares of Common
Stock, $.01 par value per share, to Nashua. In exchange, Nashua contributed to
the Company the business of the Nashua Precision Technologies Division,
including the liabilities of the business.
<TABLE>
<CAPTION>
Parent Company Common Paid-in Retained
Investment Stock Capital Earnings
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995 $ 8,458,000 $ - $ - $ -
Issuance of Common Stock (8,458,000) 54,000 8,404,000 -
Nashua Notes - - (9,294,000) (1,848,000)
Proceeds from initial public offering
and selling of 1,615,000 shares - 16,000 19,509,000 -
Issuance of Common Stock in lieu
of cash payment of directors' fees - - 20,000 -
Net income - - - 2,505,000
---------------------------------------------------------------
Balances, December 31, 1996 - 70,000 18,639,000 657,000
Issuance of Common Stock in lieu
of cash payment of directors' fees - - 40,000 -
Net income - - - 827,000
---------------------------------------------------------------
Balances, December 31, 1997 $ - $ 70,000 $ 18,679,000 $ 1,484,000
===============================================================
</TABLE>
Issuance of Notes Payable to the Parent: As of March 1, 1996, Cerion distributed
a dividend to Nashua in the form of a Promissory Note (the "First Nashua Note")
payable to Nashua in the principal sum of $10,000,000. The First Nashua Note had
an annual interest rate of 7.32 percent from March 1, 1996 to September 30,
1996.
As of March 29, 1996, the Company distributed a second dividend to Nashua
in the form of a Promissory Note (the "Second Nashua Note") payable to Nashua in
the principal amount of $1,142,000. The Second Nashua Note had an annual
interest rate of 7.32 percent. On May 31, 1996, the Company repaid the two
outstanding Promissory Notes having a combined principal sum of $11,142,000.
Stock Split: During March 1996, the Company effected a 1,800-for-one stock
split. All share data in the accompanying financial statements have been
retroactively restated to reflect the stock split.
On May 30, 1996, the Company closed its initial public offering of its
stock with the sale of 4,416,000 shares of its Common Stock. Of the 4,416,000
shares of Common Stock sold, 1,615,000 shares were sold by the Company and
2,801,000 were sold by Nashua. Nashua continues to own approximately 37 percent
of the Company's outstanding Common Stock. The shares were sold to the public at
$13.00 per share. The net proceeds to the Company after the Underwriting
Discount was $19,525,350.
Parent Company Investment
Because the Company operated at various times as a division and as part of a
wholly owned subsidiary of Nashua, its equity accounts have been combined and
presented as Parent Company Investment as of December 31, 1995. Parent Company
Investment also includes balances related to intercompany transactions and other
charges and credits as more fully described in a prior note: "Summary of
Significant Accounting Policies." No interest has been charged on Parent Company
Investment. A summary of changes in Parent Company Investment is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1995
-------------------------------
<S> <C> <C>
Beginning balance $ 8,458,000 $ 6,121,000
Net income - 3,444,000
Issuance of Common Stock (8,458,000) -
Payments to Parent, net - (1,107,000)
-------------------------------
Ending balance $ - $ 8,458,000
-------------------------------
</TABLE>
20
<PAGE> 10
Cerion Technologies Inc.
Concentration of Business Activities
Customer Concentration: During the years ended December 31, 1997 and 1996, the
Company shipped the majority of its aluminum disk substrates to three customers.
These three customers represented approximately 29 percent, 10 percent and 44
percent, in the year ended December 31, 1996 and approximately 41 percent, 43
percent and two percent in the year ended December 31, 1997, respectively, of
net sales.
Concentration of Credit Risk: The Company sells in excess of 50 percent of its
production to customers in the U.S., with approximately 43 percent of 1997 and
11 percent of 1996 sales being made to companies located in the Pacific Rim. The
Company performs periodic credit evaluations of its customers. The Company does
not require collateral for its receivables and maintains an allowance for
potential credit losses.
Dependence on Supplier: The Company relies solely on one supplier for aluminum
blanks used in the manufacture of aluminum disk substrates. Aluminum blank
purchases were approximately $7,642,000, $8,536,000 and $5,729,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
1996 Stock Incentive Plan
In February 1996, the Board of Directors adopted the 1996 Stock Incentive Plan
(the "Plan") and reserved 701,500 shares of Common Stock. The Plan provides for
grants of incentive stock options to employees and directors of the Company and
grants of stock to non-employee directors of the Company.
The options are separated into two categories with different vesting
provisions. The first category, one-year vesting options, will become
exercisable on the first anniversary date of the option grant if the optionee
remains an employee or director of the Company on such date. The second
category, performance-accelerated options, will become exercisable in tranches
of 25 percent each based upon the Common Stock trading, for a period of 20
consecutive trading days, at an average premium of 25 percent, 50 percent, 75
percent and 100 percent, respectively, above the exercise price, if the optionee
remains an employee of the Company on such date. However, if any 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.
In the event of a merger, consolidation, reverse merger or reorganization,
or certain other events constituting a "Change in Corporate Control" as defined
in the Plan, options outstanding under the Plan automatically will become fully
vested and will terminate if not exercised prior to such event.
No option granted under the Plan may be exercised after the expiration of
ten years from the date it was granted. The exercise price of options under the
Plan will equal the fair market value of the Common Stock on the date prior to
the grant. The Plan will terminate in January 2006, unless earlier terminated by
the Board of Directors.
Had compensation cost been determined on the basis of fair value pursuant
to SFAS 123, net income and net income per share for 1997 would have been
$73,000 and $.01, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants: dividend yield of zero
percent for all years, expected volatility of 77 percent, risk-free interest
rate of 6.3 percent and expected life of 5.9 years.
21
<PAGE> 11
Cerion Technologies Inc.
A summary of the status of the Company's stock options under the incentive plan
follows:
<TABLE>
<CAPTION>
Outstanding Options Price Exercisable
Options per Share Options
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 0 - -
Options granted 422,680 $ 13.00 None
Options forfeited 52,500 13.00 None
--------------------------------------------
December 31, 1996 370,180 13.00 None
Options granted 389,090 2.25-4.13 None
Options forfeited 374,180 4.13-13.00 None
--------------------------------------------
December 31, 1997 385,090 $ 2.25-4.13 None
============================================
</TABLE>
Revolving Credit Facility
The Company secured on March 7, 1997 a $7.5 million revolving credit facility
("facility") that matures March 7, 2000. The facility is collateralized by all
the Company's assets and the Company may borrow against the facility based upon
prescribed advance rates applied to certain of the Company's accounts receivable
and inventories. Availability under the facility as of December 31, 1997 totaled
$3.2 million.
The facility bears interest at the bank's prime rate plus 1/4 percent. The
facility's terms include a fee for the unused portion of the credit facility
equal to 3/8 percent per annum, payable monthly. The facility contains certain
covenants including the maintenance of certain financial ratios.
In connection with obtaining the facility, the Company paid a commitment
fee equal to 100 basis points of the total facility and other costs totaling
approximately $90,000 in 1997. These costs are being amortized over the term of
the facility.
Legal Proceedings
In August and September 1996, two individual plaintiffs initiated lawsuits
against the Company, Nashua, certain directors and officers of the Company, and
the Company's underwriter, on behalf of classes consisting of all persons who
purchased the Common Stock of the Company between May 24, 1996 and July 9, 1996.
In March 1997, the two individual plaintiffs, joined by a third plaintiff,
initiated a consolidated complaint with substantially the same allegations. In
October 1997, the court dismissed the complaint and provided for the plaintiffs
to file an amended complaint. The plaintiffs filed an amended complaint in
December 1997. The amended complaint alleges that, in connection with the
Company's initial public offering, the defendants issued certain materially
false and misleading statements and omitted the disclosure of material facts, in
particular, certain matters concerning significant customer relationships. The
complaints seek damages and injunctive relief. The Company believes this lawsuit
is without merit and it has substantial defenses and intends to vigorously
defend against this action.
Liquidity Matters
During the second half of 1996 and throughout 1997, industry market supply
exceeded demand, resulting in significant pricing and volume reductions and net
losses for each of the last two quarters of 1996 and close to break-even
performance for the first three quarters of 1997. No assurance can be given that
further backwards integration by thin-film media manufacturers or other industry
factors will not result in canceled orders or further volume reductions beyond
levels experienced in the second half of 1996 and 1997. Additionally, the
Company does not believe current market conditions will support substantial
price increases in the foreseeable future. Unless the Company achieves
substantial cost improvements, increased demand and no further price reductions
that exceed cost reductions beyond year-end levels, the Company could incur net
operating 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 may exhaust all or substantially all of its cash
resources and borrowing availability under its credit facility (See the
"Revolving Credit
22
<PAGE> 12
Cerion Technologies Inc.
Facility" note for a description of the borrowing limitations under the
Company's credit facility). In such event, the Company would be required to
pursue other alternatives to improve liquidity, including further cost
reductions, sales of assets, the deferral of certain capital expenditures and
obtaining additional sources of funds. Furthermore, 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
sooner than would otherwise happen. No assurances can be given that the Company
will be able to pursue such alternatives successfully.
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 customer's liquidity. This customer's outstanding balance due
to the Company exceeds on 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.
Subsequent Event - Liquidation
On September 14, 1998, the Company's Board of Directors voted to cease
operations on or about November 15, 1998 and seek approval from its shareholders
for an orderly liquidation of the Company's assets.
Subsequent Event - Accounts Receivable and Fixed Asset
Write-Down During Fiscal 1998 (Unaudited)
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"), the Company recorded a non-cash accounting charge
in the second quarter of 1998 related to the impairment of certain long-lived
assets. The Company considered continuing operating losses, continuing negative
cash flows, a likelihood of future reductions in market pricing for the
Company's product and significant reductions in potential future orders from the
Company's existing customer base, in the second quarter to be its primary
indicators of potential impairment. Accordingly, the Company recognized a charge
of $3.5 million, net of tax, to write down the carrying amounts of its
long-lived assets to fair value. The loss is calculated as the difference
between the carrying value of property, plant and equipment and the fair value
of these assets based on the estimated sales value between willing buyers and
sellers.
As a result of the Board of Director's decision to sell the Company and
subsequent decision to cease operations on or about November 15, 1998, the
Company revised the estimated remaining useful lives of its long-lived assets
during the third quarter of 1998. The composite remaining useful lives of the
Company's long-lived assets approximated 5 years prior to the Company's decision
to cease operations. The Company's decision to cease operations reduced the
useful lives of the assets to approximately 19 weeks as of the beginning of the
third quarter and as such the Company will depreciate the assets to the
estimated salvage value of the assets over this period. Prior to the Board's
decision, the Company intended to utilize the assets to consume 100% of the
assets carrying value, and as such did not utilize a salvage value when
determining the depreciation.
During the first quarter of 1998, one of the Company's then 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 customer's liquidity. The customer made payments of $0.7
million against its obligations since the customer became delinquent, leaving a
balance of $3.4 million. Due to the lack of adherence in the second quarter to
the payment plan established in the first quarter and the resulting heightened
risk of uncollectibility of the receivable, the Company took a charge in the
second quarter of 1998 of $2.85 million, net of tax, in order to reduce the
receivable to the expected recoverable value in the second quarter of 1998. The
customer filed for Chapter 11
23
<PAGE> 13
Cerion Technologies Inc.
bankruptcy protection on October 11, 1998. Accordingly, the Company took an
additional charge of $654,000 in the third quarter to reduce the carrying value
of the receivable to zero and to record a liability for amounts received from
this customer during the customary preference period which is 90 days prior to
filing bankruptcy.
Quarterly Operating Results and Common Stock Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter Year
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $ 8,266 $ 7,104 $ 6,701 $ 9,739 $ 31,810
Gross profit 1,004 947 839 2,414 5,204
Operating income (loss) 22 (87) (261) 1,125 799
Net income 66 9 45 707 827
Net income per common share .01 -- .01 .10 .12
Market bid price:
High 6.88 4.38 3.00 3.44 6.88
Low 3.63 2.63 1.94 1.97 1.94
1996
Net sales $ 11,774 $ 13,440 $ 5,521 $ 5,805 $ 36,540
Gross profit (loss) 4,676 4,984 560 (409) 9,811
Operating income (loss) 3,200 3,592 (879) (1,663) 4,250
Net income (loss) 1,848 2,204 (467) (1,080) 2,505
Net income (loss) per common share (1) .34 .36 (.07) (.15) .39
Market bid price:
High N/A 19.50 11.25 9.19 19.50
Low N/A 8.00 2.25 2.75 2.25
1995
Net sales $ 5,028 $ 5,890 $ 7,232 $ 10,025 $ 28,175
Gross profit 1,148 1,607 2,131 3,621 8,507
Operating income 640 1,123 1,478 2,729 5,970
Net income 338 636 854 1,616 3,444
Net income per common share (1) .06 .12 .16 .30 .64
</TABLE>
N/A information not applicable as the Company's stock began trading on NASDAQ on
May 24, 1996.
The Company's stock is traded on the Nasdaq National Market. At March 9, 1998,
there were approximately 2,500 record holders of Cerion's Common Stock.
(1) Earnings per share data prior to May 30, 1996 assumes shares issued to
Nashua on December 31, 1995 were outstanding.
Report of Independent Accountants
To the Board of Directors and Stockholders of Cerion Technologies Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of Cerion Technologies Inc. at December 31, 1997 and 1996 and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the
24
<PAGE> 14
Cerion Technologies Inc.
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the "Subsequent Event - Liquidation" note to the financial
statements, the Company's Board of Directors on September 14, 1998 voted to
cease operations on or about November 15, 1998 and to seek approval from its
shareholders for an orderly liquidation of the Company's assets. No amounts in
the accompanying financial statements have been adjusted as a result of the
Board of Directors' decision.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 2, 1998,
except as to the "Subsequent Event - Liquidation" note,
which is as of September 14, 1998
25
