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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 1998
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1984
For the transition period from _____________________ to _____________________
Commission file number
-------
CERION TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 02-0485458
- ------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
1401 Interstate Drive
Champaign, Illinois 61822-1065
- --------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (217) 359-3700
-----------------------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding As Of July 3, 1998
- ---------------------------- ------------------------------
Common Stock, par value $.01 7,054,593 shares
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PART 1 -FINANCIAL INFORMATION
---------------------
ITEM 1 -FINANCIAL STATEMENTS
--------------------
CERION TECHNOLOGIES INC.
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
July 3, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,952 $ 4,588
Accounts receivable, net of allowances for
doubtful accounts and customer
returns of $3,152 and $385, respectively 3,645 10,271
Inventories 1,872 726
Prepaid expenses and other assets 439 208
Income taxes refundable 292 -
Deferred income taxes 841 637
-------- -------
Total current assets 10,041 16,430
Property, plant and equipment, net 4,886 8,769
Other assets 49 66
-------- -------
$ 14,976 $25,265
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,617 $ 4,666
-------- -------
Total current liabilities 2,617 4,666
Deferred income taxes 395 366
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; 7,054,593 and 7,028,337 shares
issued and outstanding, respectively 71 70
Additional paid-in capital 18,728 18,679
Retained earnings (accumulated deficit) (6,835) 1,484
-------- -------
Total stockholders' equity 11,964 20,233
-------- -------
$ 14,976 $25,265
======== =======
</TABLE>
The notes are an integral part of the financial statements.
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CERION TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,354 $ 7,104 $ 6,228 $ 15,370
Cost of sales 3,642 6,157 6,893 13,419
------- ------- ------- --------
Gross profit (288) 947 (665) 1,951
Selling, general and administrative expenses 914 1,034 1,787 2,016
Impairment loss 6,350 - 6,350 -
------- ------- ------- --------
Operating loss (7,552) (87) (8,802) (65)
Interest income 47 102 114 190
------- ------- ------- --------
Income (loss) before provision (benefit)
for income taxes (7,505) 15 (8,688) 125
Provision (benefit) for income taxes 104 6 (369) 50
------- ------- ------- --------
Net income (loss) $(7,609) $ 9 $(8,319) $ 75
======= ======= ======= ========
Net income (loss) per share, basic and diluted $ (1.08) $ - $ (1.18) $ 0.01
======= ======= ======= ========
Average common shares outstanding 7,048 7,022 7,041 7,020
</TABLE>
The notes are an integral part of the financial statements.
2
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CERION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
(unaudited)
July 3, June 27,
1998 1997
------- -------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $(8,319) $ 75
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 996 1,266
Deferred income taxes (175) -
Gain on disposal of property, plant and equipment (50) -
Impairment loss on property, plant and equipment 3,500 -
Write-off of customer receivable 2,850 -
Changes in operating assets and liabilities:
Accounts receivable 3,776 (1,779)
Inventories (1,146) 491
Prepaid expenses and other assets (231) (110)
Income taxes refundable (292) -
Accounts payable and accrued expenses (2,049) (1,045)
------- -------
Net cash used in operating activities (1,140) (1,102)
------- -------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment (596) (449)
Proceeds from sale of property, plant and equipment 50 3,000
Purchase of short-term investments - (4,750)
------- -------
Cash flows used in investing activities (546) (2,199)
------- -------
Cash flows provided by (used in) financing activities:
Debt issuance costs - (100)
Proceeds from shares issued 50 40
------- -------
Cash flows provided by (used in) financing activities 50 (60)
------- -------
Decrease in cash (1,636) (3,361)
Cash at beginning of period 4,588 9,300
------- -------
Cash at end of period $ 2,952 $ 5,939
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ - $ -
Income taxes paid 476 84
</TABLE>
The notes are an integral part of the financial statements.
3
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CERION TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
1. EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS
Earnings per common and common share equivalents are computed based on the
weighted average number of common shares and, as applicable, the weighted
average number of common share equivalents outstanding during the periods
presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Common shares outstanding 7,048,157 7,022,082 7,040,942 7,019,898
Common share equivalents None None None None
</TABLE>
2. 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. (As noted below, however, the Company at present is precluded
from borrowing under the facility.)
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. The Company is
in violation of one of its financial covenants of the revolving credit facility
and is currently discussing the necessary amendment with its lender. No amounts
were outstanding under the facility as of July 3, 1998.
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.
3. IMPAIRMENT LOSS
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 related to the impairment of certain long-lived assets. The Company
considered continuing operating losses, continuing negative cash flows, 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 ($3.5 million net
of tax, or $.50 per share) 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 SFAS 121 charge, depreciation and amortization expense
related to these assets will decrease in future periods.
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 has made payments of $0.5
million against its
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obligations since the customer became delinquent, leaving a balance of $3.6
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 has taken a charge of $2.85
million ($2.85 million net of tax, or $.40 per share) in order to reduce the
receivable to the expected recoverable value.
4. LIQUIDITY MATTERS
During the second half of 1996, throughout 1997 and continuing into the first
half of 1998, industry market supply exceeded demand, resulting in significant
pricing and volume reductions and net losses for each of the last two quarters
of 1996, close to break-even performance for the first three quarters of 1997
and a net loss in the first two quarters of 1998. 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 sales volume reductions
below levels experienced in the second half of 1996, 1997 and through the first
half of 1998. Additionally, the Company does not believe current market
conditions will support any price increases in the foreseeable future. Moreover,
it is expected that price decreases as much as 10% over the next twelve months
may occur. Unless the Company achieves substantial additional cost improvements
and increased demand, the Company is likely to continue to incur net operating
losses and negative cash flows from operating activities. Without such cost
improvements and increased demand, the Company over the next several quarters is
likely to exhaust all or substantially all of its cash resources and any
borrowing availability under its credit facility (See the "Revolving Credit
Facility" note for a description of the borrowing limitations under the
Company's credit facility, which at the date of this report, precludes any
borrowing availability). In such event, the Company would be required to pursue
other alternatives to improve liquidity. Furthermore, any significant
cancellation of existing orders or reduction of orders by the Company's
principal remaining customer, or 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 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 has made
payments of $0.5 million against its obligations since the customer became
delinquent, leaving a balance of $3.6 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
has taken a charge in the second quarter of 1998 of $2.85 million ($2.85
million net of tax, or $.40 per share) in order to reduce the receivable to the
expected recoverable value. In the event that this customer's financial
position worsens prior to full payment of the balance, the risk of default
increases.
5. OTHER
The financial statements for the three month and six month periods ended July 3,
1998 and June 27, 1997 are prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial statements and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. These financial
statements should be read in conjunction with the financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Form 10-K filed
on March 27, 1998. The results of operations for the three months and six months
ended July 3, 1998 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending December 31, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR
This Report contains certain "forward-looking" statements, including, but not
limited to the statements regarding the possible impact of cancellation or
reduction of orders by major customers 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 senior management'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, a trend toward backwards integration among thin-film disk
manufacturers that may continue to reduce demand for the Company's products,
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. See "Matters Affecting Future Results" included in
the Company's Form 10-K dated March 27, 1998 for a more detailed discussion of
factors that could affect the Company's performance and the value of its Common
Stock.
With respect to "forward-looking" statements contained herein, we urge our
shareholders to read Cerion's Form 10-K filed with the Securities and Exchange
Commission.
RECENT DEVELOPMENTS
Nasdaq National Market listing maintenance criteria require listed issuers such
as the Company to maintain a "market value of public float" of at least $5
million. Based on the reported closing price of the Company's common stock on
July 31, 1998, its "market value of public float" was $4,544,810. Nasdaq
National Market personnel have notified the Company that, if the Company's
"market value of public float" remains below $5 million through October 30,
1998, the Company's common stock will be delisted from the National Market as of
November 3, 1998.
Effective August 10, 1998, President and Chief Executive Officer David A.
Peterson assumed the position of chairman of Cerion's Board of Directors.
Mr. Peterson replaces Gerald G. Garbacz, who will remain on the Board.
On August 13, 1998, the Company announced that it is actively seeking a buyer
for its business. The Company's Board of Directors has concluded that continued
existence as a small independent company may entail unacceptably high risks in
this period of overcapacity in the overall data storage industry.
THREE MONTHS AND SIX MONTHS ENDED JULY 3, 1998 AND JUNE 27, 1997
Net Sales. Net sales decreased $3.7 million, or 52.8%, to $3.4 million in
the three months ended July 3, 1998 from $7.1 million in the three months ended
June 27, 1997. Net sales decreased $9.1 million, or 59.5% to $6.2 million in the
six months ended July 3, 1998 from $15.4 million in the six months ended June
27, 1997. The decrease in net sales resulted from the Company's three largest
customers in 1997 decreasing their orders in the last part of 1997 and first
portion of 1998. The largest customer in 1997 represented 34.9% of revenues in
the first half of 1997 and 45.0% of second quarter revenues in 1997. In the
fourth quarter of 1997, this customer purchased substrate manufacturing capacity
sufficient to cover their requirements, resulting in no sales to them in 1998.
The second largest customer, which represented 31.5% of revenues in the first
half of 1997 and 39.3% of second quarter revenues in 1997, had excess inventory
in stock, thereby reducing their requirements for substrates in the first
quarter of 1998. This resulted in substantially no sales to this customer in the
second quarter of 1998 and approximately 2.2 million fewer parts sold in the
first half of 1998 versus the first half of 1997. The third largest customer,
representing 23.1% of revenue in the first half of 1997 and 10.9% of revenue in
the second quarter of 1997, decreased their purchase orders to zero in the
second quarter of 1997 as their substrate requirements fell within the capacity
they possessed within their existing substrate manufacturing capacity. These
decreases in net sales were partially offset by sales to a new customer of $3.4
million in the second quarter of 1998 and $3.5 million for the first half of
1998. This new customer accounted for nearly all net sales in the second quarter
of 1998.
In addition, average sales prices decreased significantly between the second
quarter of 1998 and 1997, resulting in an average sales price in the second
quarter of 1998 that was approximately 7% lower than the second quarter of 1997.
Gross Profit (Loss). Gross profit decreased $1.2 million to $(288,000) in
the three months ended July 3, 1998 from $947,000 in the three months ended June
27, 1997. Gross profit as a percentage of net
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sales decreased to (8.6)% in the second quarter of 1998 as compared to 13.3% in
the second quarter of 1997. Gross profit decreased $2.6 million to $(665,000) in
the six months ended July 3, 1998 from $2.0 million in the six months ended June
27, 1997. Gross profit as a percentage of net sales decreased to (10.7)% in the
first six months of 1998 compared to 12.7% in the first six months of 1997. The
decrease in gross profit was attributable to the underutilization of existing
capacity which had been expanded in the first half of 1996 and the spreading of
higher fixed costs, due to a larger available production capacity, over a lower
sales volume in the second quarter of 1998. Gross profit also decreased as a
result of lower average selling prices of the Company's products in the first
half of 1998 as compared to the first half of 1997.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased $120,000, or 11.6%, to $914,000 in the three
months ended July 3, 1998 from $1,034,000 in the three months ended June 27,
1997. Selling, general and administrative expenses decreased $229,000, or 11.4%,
to $1.8 million in the six months ended July 3, 1998 from $2.0 million in the
six months ended June 27, 1997. The reduction in absolute spending resulted from
lower shipping costs attributable to lower sales volume, and no profit sharing
or bonuses in 1998 due to the Company not achieving its operating targets.
Selling, general and administrative expenses as a percentage of net sales
increased to 27.3% in the second quarter of 1998 compared to 14.6% in the second
quarter of 1997. The increase in the percentage resulted from lower net sales.
Impairment Loss. An impairment loss of $6.4 million was recorded in the
second quarter of 1998. The non-cash accounting charge includes a charge of $3.5
million related to the write-down of certain long-lived assets and a $2.9
million charge to establish a reserve for doubtful accounts receivable from one
customer.
Interest Income. Interest income consists of interest income from
short-term investments.
Provision (Benefit) for Income Taxes. Provision for income taxes was
$104,000 for the three months ended July 3, 1998 as compared to a provision for
income taxes of $6,000 for the three months ended June 27, 1997. The Company's
effective tax rate was (1)% and 40% in the second quarter of 1998 and 1997
respectively. The provision for income taxes in the second quarter of 1998
resulted from the establishment of a valuation reserve for the Company's
deferred tax assets of $3.1 million. This reserve reduces the carrying value of
the deferred tax assets to the estimated tax paid in the past that may be
refunded from the utilization of net operating losses.
Quarterly Results. The Company's revenues and earnings may fluctuate
significantly from quarter to quarter based on a variety of factors, including
(i) the timing and size of new and recurring orders from customers, (ii) the
introduction and marketing of new products by the Company's competitors, (iii)
changes in demand for the Company's products, (iv) general economic conditions
within the data storage industry, (v) changes in pricing by the Company or its
competitors, (vi) order cancellations, modifications, quantity adjustments and
shipment rescheduling, (vii) changes in product mix, and (viii) manufacturing
yields and the level of utilization of the Company's production capacity. The
impact of these and other factors on the Company's expense levels are based, in
part, on its expectations as to future sales. Because the Company's sales are
generally made pursuant to purchase orders that are subject to cancellation,
modification, quantity reduction or rescheduling generally without penalty, the
Company's backlog as of any particular date may not be indicative of sales for
any future period, and changes to purchase orders could cause the Company's net
sales to fall below expected levels. If sales levels are below expectations,
operating results are likely to be materially adversely affected. Furthermore,
net income may be disproportionately affected by a reduction in net sales
because a proportionately smaller amount of the Company's expenses varies with
its sales.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements in 1997 were to fund working
capital needs and capital expenditures related to manufacturing process
automation. The Company's principal capital requirements in 1998 have been to
fund working capital needs and capital expenditures related to a pollution
control and recycling system. During the periods presented, these capital
requirements generally were satisfied by cash flows from operations in certain
periods and from the remaining proceeds of the Company's initial public offering
that occurred in 1996.
Net cash used in operating activities was $1.1 million in the six months ended
July 3, 1998 and June 27, 1997. Cash used in operating activities increased
slightly from the first half of 1997 to the first half of 1998 primarily due to
the decrease in net income excluding the impairment charges, the increase in
inventory over the second quarter of 1998 resulting from the building of
inventory levels, and the decrease in accounts payable and accrued expenses as a
result of lower revenue levels in the first quarter of 1998. The increase in
cash used was primarily offset by the decrease in accounts receivable excluding
the impairment allowance recorded in the second quarter of 1998 as revenue in
the past six months decreased compared to the previous six months.
Net cash used in investing activities was $546,000 and $2.2 million in the first
six months of 1998 and 1997, respectively. Cash used in investing activities in
1997 was primarily for the purchase of short-term investments and the initial
purchases involved in manufacturing process automation. In 1998, the primary
investing activity was the purchase of a new pollution control and recycling
system which the Company expects will reduce manufacturing costs through
recycling of supplies. The Company's short-term investments are comprised of
investment grade commercial paper.
Net cash provided by financing activities was $50,000 in the first six months of
1998 and was related to the issuance of common stock in lieu of cash payment of
Board of Directors fees. In the first six months of 1997, net cash used by
financing activities was $60,000 and related to costs of obtaining the revolving
credit facility, offset by the issuance of common stock in lieu of cash payment
of Board of Directors fees.
Based upon anticipated cash flows from operating activities and remaining
proceeds from the initial public offering completed in 1996, the Company
believes that it has the liquidity and capital resources needed to meet its
financial commitments through 1998. Unless the Company achieves substantial
additional cost improvements and increased demand, the Company is likely to
continue to incur net operating losses and negative cash flows from operating
activities. Without such cost improvements and increased demand, the Company
over the next several quarters is likely to exhaust all or substantially all of
its cash resources and any borrowing availability under its credit facility. (At
present, the Company is precluded from borrowing under its credit facility.) In
such event, the Company would be required to pursue other alternatives to
improve liquidity. Furthermore, any significant cancellation of existing orders
or reduction of orders by the Company's principal remaining customer, or 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.
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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 has made
payments of $0.5 million against its obligations since the customer became
delinquent, leaving a balance of $3.6 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
has taken a charge in the second quarter of 1998 of $2.85 million ($2.85
million net of tax, or $.40 per share) in order to reduce the receivable to the
expected recoverable value. In the event that this customer's financial
position worsens prior to full payment of the balance, the risk of default
increases.
OUTLOOK
Cerion does not provide forecasts of future financial performance. The
statements contained in this Outlook are based upon current expectations. These
statements are "forward-looking"; actual events could cause actual results to
differ materially.
Adverse industry conditions during the second half of 1996, throughout 1997 and
continuing into the first half of 1998, in which available market supply
exceeded demand and significant pricing and volume reductions caused the Company
to incur net losses in each of the last two quarters of 1996, operate at
essentially breakeven performance for the first three quarters of 1997 and incur
a net loss in the first two quarters of 1998 are worsening in 1998. Cerion
expects that a combination of factors affecting the industry, including the
acquisition of aluminum substrate capabilities by certain of the Company's
customers and an oversupply of aluminum disk substrates in the market, could
significantly and adversely affect the Company's performance in the third and
fourth quarters of 1998 and beyond. There can be no assurance that these or
other factors will not continue to negatively impact the Company's performance
in subsequent quarters. Such losses and breakeven performance have and will
impair the Company's liquidity and available sources of liquidity and may
continue to affect the Company adversely until significant product cost
improvements are achieved, combined with increased sales volumes to return to
sustainable profitability. See "Liquidity and Capital Resources."
The Company does not believe current market conditions will support any price
increases in the forseeable future. Moreover, it is expected that price
decreases as much as 10% over the next twelve months may occur. Thus, any
improvement in operating performance will require cost improvements and/or order
volume increases to occur. Unless the Company achieves substantial additional
cost improvements and increased demand, the Company is likely to continue to
incur net operating losses and negative cash flows from operating activities.
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The Company's gross margin percentage is largely a function of product mix sold
in any period. Various other factors, including unit volumes, and costs and
yield issues associated with initiating production on new processes also will
continue to affect the amount of cost of sales and the variability of the gross
margin percentage in future quarters.
Reduction in demand from either a reduction in market requirements, further
backwards integration by thin-film media manufacturers or a loss of or reduction
in orders from the Company's principal present customer will significantly
impact the Company's operating performance. Volatility in demand for the
Company's products will have a substantial impact on the Company's operating
performance because of the fixed cost element of the Company's manufacturing
costs relative to total costs. As noted in Part II, Item 5 below, the Company
has announced that it is seeking a buyer for its business. Uncertainties arising
from this announcement could adversely affect orders and results of operations.
FINANCIAL ACCOUNTING STANDARDS NO. 128
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 (loss) per
share for the periods presented. Net income (loss) per share for the periods
presented is determined by dividing the applicable net income (loss) by the
weighted average number of common shares outstanding during the period. Options
to purchase shares were outstanding during the quarters ended July 3, 1998 and
June 27, 1997 but were not included in the diluted earnings per share
computation because the exercise price exceeded the average market price for the
period.
FINANCIAL ACCOUNTING STANDARDS NO. 130
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the presentation of comprehensive income, which
represents the change in equity of the Company from transactions and other
events and circumstances from nonowner sources. Comprehensive income includes
all changes in equity except those resulting from investments by owners and
distributions to owners. SFAS 130 is effective for financial statements issued
for periods beginning after December 15, 1997 and requires restatement of all
prior-period financial statements presented. The adoption of SFAS 130 had no
impact on the Company's net income (loss) as presented on the Statements of
Operations.
FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its lack of use of derivative instruments, the
adoption of SFAS 133 will have no impact on the Company's results of operations
or its financial position.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
10
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 1996, an individual plaintiff, Joshua Teitelbaum, initiated a
lawsuit against Cerion Technologies Inc. ("Cerion" or 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. On May 6, 1998, the Circuit Court of Cook
County, Illinois dismissed the amended class action lawsuit with prejudice. On
June 5, 1998, the plaintiffs filed a notice of appeal of the Court's ruling in
the Appellate Court of Illinois. The Company believes the Amended Consolidated
Complaint to be without merit and will continue to defend vigorously against the
complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 July 3, 1998.
11
<PAGE> 13
The proceeds of $19,525,350 from the initial public offering were utilized as
follows as of July 3, 1998:
Construction of plant, building and facilities $ 1,163,209
Purchase and installation of machinery and equipment 5,022,120
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 1,923,619
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, the
Company canceled its capacity expansion plans, which included the new facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On May 28, 1998, at the Company's Annual Meeting of Shareholders, the Company's
stockholders met to consider and vote upon the following proposal:
(1) A proposal to elect two Class II directors to hold office for a
three-year term and until their respective successors have been duly
qualified and elected.
Results with respect to the voting on the above proposal were as follows:
Proposal 1: Sheldon A. Buckler
FOR - 6,227,042 WITHHOLD AUTHORITY - 30,960
--- --------- ------------------ ------
Osmund M. Fundingsland
FOR - 6,226,542 WITHHOLD AUTHORITY - 31,460
--- --------- ------------------ ------
ITEM 5. OTHER INFORMATION
Effective August 10, 1998, President and Chief Executive Officer David A.
Peterson assumed the position of chairman of Cerion's Board of Directors. Mr.
Peterson replaces Gerald G. Garbacz, who will remain on the board.
On August 13, 1998, the Company announced that it is actively seeking a buyer
for its business. The Company's Board of Directors has concluded that continued
existence as a small independent company may entail unacceptably high risks in
this period of overcapacity in the overall data storage industry.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
None.
B. Reports on Form 8-K
None.
12
<PAGE> 14
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: AUGUST 14, 1998
By: /s/ Richard A. Clark
------------------------------
Richard A. Clark
Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial and duly authorized officer)
13
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