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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 October 2, 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 -
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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 October 2, 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>
October 2, December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,361 $ 4,588
Accounts receivable, net of allowances for
doubtful accounts and customer
returns of $3,606 and $385, respectively 2,647 10,271
Inventories 1,145 726
Prepaid expenses and other assets 378 208
Income taxes refundable 324 --
Deferred income taxes 388 637
-------- -------
Total current assets 7,243 16,430
Property, plant and equipment, net 4,075 8,769
Other assets -- 66
-------- -------
$ 11,318 $25,265
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,200 $ 4,666
-------- -------
Total current liabilities 2,200 4,666
Deferred income taxes -- 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) (9,681) 1,484
-------- -------
Total stockholders' equity 9,118 20,233
-------- -------
$ 11,318 $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 Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
October 2, September 26, October 2, September 26,
1998 1997 1998 1997
---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Net sales $ 3,206 $ 6,701 $ 9,434 $ 22,071
Cost of sales 3,995 5,862 10,887 19,281
------- ------- -------- --------
Gross profit (loss) (789) 839 (1,453) 2,790
Selling, general and administrative expenses 814 1,100 2,601 3,117
Impairment loss 654 -- 7,004 --
Costs associated with ceasing operations 621 -- 621 --
------- ------- -------- --------
Operating loss (2,878) (261) (11,679) (327)
Interest income 32 91 145 282
------- ------- -------- --------
Loss before benefit for income taxes (2,846) (170) (11,534) (45)
Benefit for income taxes -- (215) (369) (165)
------- ------- -------- --------
Net income (loss) $(2,846) $ 45 $(11,165) $ 120
======= ======= ======== ========
Net income (loss) per share, basic
and diluted $ (0.40) $ 0.01 $ (1.58) $ 0.02
======= ======= ======== ========
Average common shares outstanding 7,055 7,028 7,045 7,023
</TABLE>
The notes are an integral part of the financial statements.
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CERION TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(unaudited)
October 2, September 26,
1998 1997
----------------- -------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $(11,165) $ 120
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 1,815 1,866
Deferred income taxes (117) (147)
Gain on disposal of property, plant and equipment (50) --
Impairment loss on property, plant and equipment 3,500 --
Write-off of customer receivable 3,304 --
Compensation expense and other non-cash charges 92 40
Changes in operating assets and liabilities:
Accounts receivable 4,320 (2,633)
Inventories (419) 513
Prepaid expenses and other assets (170) (27)
Income taxes refundable (324) --
Accounts payable and accrued expenses (2,466) 359
-------- -------
Net cash provided by (used in) operating activities (1,680) 91
-------- -------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment (597) (1,732)
Proceeds from sale of property, plant and equipment 50 --
Purchase of short-term investments -- (5,000)
Proceeds from sale of short-term investments -- 5,000
-------- -------
Cash flows used in investing activities (547) (1,732)
-------- -------
Cash flows used in financing activities:
Debt issuance costs -- (100)
-------- -------
Cash flows used in financing activities -- (100)
-------- -------
Decrease in cash (2,227) (1,741)
Cash at beginning of period 4,588 9,300
-------- -------
Cash at end of period $ 2,361 $ 7,559
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
Income taxes paid 476 80
</TABLE>
The notes are an integral part of the financial statements.
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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 Nine Months Ended
------------------ -----------------
October 2, September 26, October 2, September 26,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Common shares outstanding 7,054,593 7,028,337 7,045,459 7,022,732
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 would have matured March 7, 2000. The facility was
collateralized by all the Company's assets and the Company was able to borrow
against the facility based upon prescribed advance rates applied to certain of
the Company's accounts receivable and inventories. The Company terminated this
facility on September 30, 1998 in conjunction with its intention to cease
operations and seek shareholder approval to liquidate the Company.
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. The unamortized portion of these costs was
charged against income during the third quarter of 1998. Furthermore, the
Company paid an early termination fee of approximately $11,000 upon termination
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
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 ($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.
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
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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 took 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 second quarter of 1998. The customer filed for
Chapter 11 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.
4. Change in Depreciable Lives of Long-lived Assets
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. The change in useful lives of the Company's assets
resulted in an additional depreciation charge of approximately $500,000 during
the third quarter of 1998.
5. Costs Associated with Ceasing Operations
The Company incurred costs in conjunction with its decision to seek shareholder
approval for a plan of liquidation. These costs included severance costs
associated with the termination of two executive officers on October 2, 1998,
investment banking fees, unamortized loan origination costs and early
termination fees associated with the Company's credit facility.
6. Liquidity Matters
The Board of Directors has adopted a Liquidation Proposal which would include
the sale or distribution of all of the Company's assets, in whole or piecemeal,
and the adoption of a Plan of Complete Liquidation and Dissolution of the
Company ("the Plan"). On September 14, 1998, the Board of Directors approved the
Liquidation Proposal, including the Plan, subject to shareholder approval.
The Company's single line of business has been the manufacture of
precision-machined aluminum disk substrates, which are the metallic platforms of
magnetic thin-film disks used in the hard disk drives of portable and desk-top
computers, network servers, add-on storage devices and storage upgrades. The
market for these substrates and for storage media generally has been difficult,
in varying degrees, for approximately two years. Since the third quarter of
1996, the market for aluminum substrates has been marked as a general rule by
overcapacity, with resulting pressure on prices. This trend has been exacerbated
by vertical integration, which has resulted in certain companies that were
formerly significant customers of the Company acquiring their own substrate
manufacturing capacity and thus curtailing business with the Company.
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As a result of these difficult market conditions, the Company incurred
substantial losses in the second half of 1996, was modestly profitable in 1997
and has incurred further substantial losses in 1998. During 1998 and in
particular since the second quarter, the Company's results of operations and its
prospects have further worsened. Adverse industry conditions have persisted and
the Company suffered a further loss in customers. As a result, a single customer
accounted for nearly all of the Company's net sales in the second and third
quarters of 1998. Those factors influenced the Board of Directors in their
decision to approve the Plan and to suspend manufacturing operations on or about
November 15, 1998.
The Company will incur net operating losses and negative cash flows from
operating activities during the fourth quarter of 1998. The Company expects that
revenue will not exceed $1.8 million as a result of the decision to cease
operations on or about November 15, 1998. This expected level of revenue would
likely result in the Company incurring net operating losses in excess of $1.3
million in the fourth quarter. The Company's operating losses in 1998 have
eroded its capital position and liquidity, and the projected operating losses
will erode them further. Based on the assumed operating losses as outlined above
and assumed future expenses of liquidation, the Company believes it has
sufficient resources and liquidity to meet its financial obligations through the
liquidation of the Company's business operations.
7. Reclassification
Certain amounts on the Statement of Cash Flows related to the classification of
"Proceeds from shares issued" 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.
8. Other
The financial statements for the three month and nine month periods ended
October 2, 1998 and September 26, 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. Upon approval
of the plan of liquidation previously referred to in Note 6, the Company will
adopt the liquidation basis of accounting. 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 nine months ended October 2, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1998.
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 Company's intended liquidation.
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
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management's expectations. Key risk factors that could, in particular, have an
adverse impact on current and future performance include the Company's
announcement on September 15, 1998 of its intention to cease operations and seek
shareholder approval for an orderly plan of liquidation of the Company's assets
and uncertainties regarding both amounts that might be realized from the sale of
the Company's assets pursuant to that plan and the expenses that will be
incurred and liabilities that must be satisfied by the Company in carrying it
out.
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
October 30, 1998, its "market value of public float" was $828,568. Nasdaq
National Market personnel have notified the Company that, if the Company's
"market value of public float" remained below $5 million through October 30,
1998 as it did, the Company's common stock would be delisted from the National
Market as of November 3, 1998. On October 29, 1998, however, the company
requested a hearing with the Nasdaq National Market to appeal the delisting of
the Company's common stock, as a result of which the delisting has been
suspended at least temporarily.
Effective August 10, 1998, President and Chief Executive Officer David A.
Peterson assumed the position of chairman of Cerion's Board of Directors,
replacing Gerald G. Garbacz. By separate letters dated November 5, 1998, Mr.
Garbacz and Sheldon A. Buckler each resigned from the Company's Board of
Directors. Mr. Garbacz is the President, Chief Executive Officer and Chairman of
the Board of Nashua Corporation, which owns approximately 37% of the outstanding
shares of Cerion's Common Stock, while Mr. Buckler is a director of Nashua
Corporation. The Board of Directors has not decided whether to fill the
vacancies resulting from these resignations.
On September 15, 1998, the Company announced that it intends to cease operations
on or about November 15, 1998. The Company had announced on August 13, 1998 that
it was actively seeking a buyer for its business but those efforts had not to
date been successful. The Company's Board of Directors concluded that continued
existence as a small independent company entailed unacceptably high risks in
this period of overcapacity in the overall data storage industry and continued
operations beyond November 15, 1998 would not be in the best interest of the
Company's shareholders. As of the date of this report, it is the present
intention of the Company to seek approval from its shareholders for an orderly
liquidation of the Company's assets.
THREE MONTHS AND NINE MONTHS ENDED OCTOBER 2, 1998 AND SEPTEMBER 26, 1997
Net Sales. Net sales decreased $3.5 million, or 52.2%, to $3.2 million in
the three months ended October 2, 1998 from $6.7 million in the three months
ended September 26, 1997. Net sales decreased $12.6 million, or 57.3% to $9.4
million in the nine months ended October 2, 1998 from $22.1 million in the nine
months ended September 26, 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 all of 1998. The largest customer in 1997 represented 40.6% of
revenues in the first nine months of 1997 and 53.5% of third 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, who represented 35.9% of
revenues in the first nine months of 1997 and 46.2% of third 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 and third
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quarters of 1998 and approximately 4.6 million fewer parts sold in the first
nine months of 1998 versus the first nine months of 1997. The third largest
customer, representing 16.1% of revenue in the first nine months 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 representing nearly 100% of revenue
in the second and third quarters of 1998 and $6.7 million of revenue for the
first nine months of 1998.
In addition, average sales prices decreased significantly between the third
quarter of 1998 and 1997, resulting in an average sales price in the third
quarter of 1998 that was approximately 12% lower than in the third quarter of
1997.
Gross Profit (Loss). Gross profit decreased $1.6 million to $(789,000) in
the three months ended October 2, 1998 from $839,000 in the three months ended
September 26, 1997. Gross profit as a percentage of net sales decreased to
(24.6)% in the third quarter of 1998 as compared to 12.5% in the third quarter
of 1997. Gross profit decreased $4.2 million to $(1,453,000) in the nine months
ended October 2, 1998 from $2.8 million in the nine months ended September 26,
1997. Gross profit as a percentage of net sales decreased to (15.4%) in the
first nine months of 1998 compared to 12.6% in the first nine 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 third 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. Another
contributor to the lower gross profit in the third quarter included the
write-off of certain raw material and finished goods inventory. The inventory
related to one customer whose likelihood of placing any future orders was
diminishing. The Company recorded an additional charge for depreciation of
approximately $500,000 during the third quarter of 1998 upon changing the
estimated useful lives of the Company's long-lived assets to reflect the
remaining usefulness to the Company. The abbreviated useful lives resulting from
the Company's change is attributable to the Company's decision to cease
operations on or about November 15, 1998.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased $286,000, or 26.0%, to $814,000 in the three
months ended October 2, 1998 from $1.1 million in the three months ended
September 26, 1997. Selling, general and administrative expenses decreased
$516,000, or 16.6%, to $2.6 million in the nine months ended October 2, 1998
from $3.1 million in the nine months ended September 26, 1997. The reduction in
absolute spending results 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 25.4% in the third quarter of 1998
compared to 16.4% in the third 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 included a charge of $3.5
million related to the write-down of certain long-lived assets and a $2.85
million charge to establish a reserve for doubtful accounts receivable from one
customer. An additional charge of $654,000 was recorded 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. The customer filed for Chapter 11
bankruptcy protection on October 11, 1998.
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Costs Associated with Ceasing Operations. The Company incurred during the
third quarter of 1998 costs in conjunction with its decision to seek shareholder
approval for a plan of liquidation. These costs included severance costs
associated with the termination of two executive officers on October 2, 1998,
investment banking fees, unamortized loan origination costs and early
termination fees associated with the Company's credit facility.
Interest Income. Interest income consists of interest income from
short-term investments.
Benefit for Income Taxes. The Company recorded no benefit for income taxes
for the three months ended October 2, 1998 as compared to a benefit for income
taxes of $215,000 for the three months ended September 26, 1997. The Company's
effective tax rate was 0% and 126% in the third quarter of 1998 and 1997
respectively. The carrying value of the Company's net deferred tax assets equals
the estimated tax liability in the past that may be refunded from the carry back
of net operating losses.
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 provided by (used in) operating activities was $(1.7) million and
$91,000 in the nine months ended October 2, 1998 and September 26, 1996. Cash
used in operating activities increased significantly from the first nine months
of 1997 to the first nine months of 1998 primarily due to the increase in
operating losses excluding the impairment charges and costs associated with
ceasing operations, the increase in inventory over the third 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 1998. The
increase in cash used was partially offset by the decrease in accounts
receivable excluding the impairment allowance recorded in the second and third
quarters of 1998 as revenue in the past nine months decreased compared to the
previous nine months by 57%.
Net cash used in investing activities was $547,000 and $1.7 million in the first
nine months of 1998 and 1997, respectively. Cash used in investing activities in
1997 was primarily for purchases involved in manufacturing process automation.
In 1998, the primary investing activity was the purchase of a new pollution
control and recycling system in the first quarter. The Company's short-term
investments are comprised of investment grade commercial paper.
Net cash used in financing activities was $0 and $100,000 in the first nine
months of 1998 and 1997, respectively. Cash used by financing activities in the
first nine months of 1997 related to costs of obtaining the revolving credit
facility.
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
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meet its financial commitments through 1998 and the subsequent liquidation of
the Company's assets, although there can be no assurances that it will in fact
have such resources.
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 $0.5
million against its obligations after 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 took 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 second quarter of 1998. The customer filed for Chapter 11 bankruptcy
protection on October 11, 1998. As a result, 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.
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.
As noted in Part II, Item 5 below, the Company has announced its intention to
cease operations and seek shareholder approval for an orderly liquidation of the
Company's assets. Uncertainties arising from this announcement have and will
continue to adversely affect 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 October 2, 1998
and September 26, 1997 but were not included in the diluted earnings per share
computation because the exercise price exceeded the average market price for the
period.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
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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 October 2, 1998.
13
<PAGE> 13
The proceeds of $19,525,350 from the initial public offering had been utilized
as follows as of October 2, 1998:
<TABLE>
<S> <C>
Construction of plant, building and facilities $ 1,163,209
Purchase and installation of machinery and equipment 5,022,911
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 1,922,828
</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, the
Company canceled its capacity expansion plans, which included the new facility.
ITEM 5. OTHER INFORMATION
See "Recent Developments" in Item 2 above for a description of important recent
developments and events affecting the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
None.
B. Reports on Form 8-K
None.
14
<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: November 13, 1998 By: /s/ Richard A. Clark
-------------------------------------
Richard A. Clark
Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial and duly
authorized officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-02-1998
<EXCHANGE-RATE> 1
<CASH> 2,361
<SECURITIES> 0
<RECEIVABLES> 6,253
<ALLOWANCES> 3,606
<INVENTORY> 1,145
<CURRENT-ASSETS> 7,243
<PP&E> 12,372
<DEPRECIATION> 8,297
<TOTAL-ASSETS> 11,318
<CURRENT-LIABILITIES> 2,200
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 9,047
<TOTAL-LIABILITY-AND-EQUITY> 11,318
<SALES> 9,434
<TOTAL-REVENUES> 9,434
<CGS> 10,887
<TOTAL-COSTS> 10,887
<OTHER-EXPENSES> 6,722
<LOSS-PROVISION> 3,504
<INTEREST-EXPENSE> (145)
<INCOME-PRETAX> (11,534)
<INCOME-TAX> (369)
<INCOME-CONTINUING> (11,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,165)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
