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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AS AMENDED)
File by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c)
or Rule 14a-12
CERION TECHNOLOGIES INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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CERION TECHNOLOGIES INC.
1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61822
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 29, 1998
Notice is hereby given that a Special Meeting of Stockholders of Cerion
Technologies Inc. (the "Company") will be held at the Union League Club, 65 West
Jackson Street, Chicago, Illinois, on December 29, 1998 at 10:00 a.m., Central
Time, for the following purposes:
1. To consider and act upon the Liquidation Proposal, including
adoption of a Plan of Complete Liquidation and Dissolution
substantially in the form attached as Appendix A to the Proxy
Statement, dated December 3, 1998.
2. To consider and transact such other business as may properly
be brought before the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on November 13,
1998 as the record date for determining the stockholders of the Company having
the right to notice of, and the right to vote at, this meeting.
Please vote, date, sign and return the Proxy in the enclosed postage
prepaid envelope at your earliest convenience. If you return the Proxy, you may
nevertheless attend the meeting and vote your shares in person.
SAM ERWIN
Secretary
December 3, 1998
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IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER OR NOT
YOU ATTEND THE MEETING, PLEASE VOTE, DATE,
SIGN AND RETURN THE PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
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CERION TECHNOLOGIES INC.
1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61822
PROXY STATEMENT
GENERAL
The Board of Directors of Cerion Technologies Inc. ("CERION" or the
"COMPANY"), a Delaware corporation, whose principal executive offices are
located at 1401 Interstate Drive, Champaign, Illinois 61822, is distributing
this Proxy Statement and soliciting the accompanying Proxy for use at the
Special Meeting of Stockholders of Cerion (the "MEETING") to be held on December
29, 1998 at 10:00 a.m., Central Time at the Union League Club, 65 West Jackson
Street, Chicago, Illinois, and at any adjournment thereto.
Shares represented by duly executed Proxies in the enclosed form that
are received by the Company prior to the Meeting will be voted as instructed in
the Proxy on each matter submitted to the vote of stockholders. If any duly
executed Proxy is returned without voting instructions, the persons named as
proxies thereon intend to vote all shares represented by that Proxy (i) FOR the
proposal to approve the sale of all of the Company's assets and adopt the Plan
of Complete Liquidation and Dissolution attached as Appendix A to this Proxy
Statement (the "LIQUIDATION PROPOSAL") and (ii) in the discretion of the persons
named on the Proxy with respect to any other matters properly brought before the
Meeting.
The Board of Directors is proposing for approval by the stockholders at
the Meeting the Liquidation Proposal, which includes the sale or distribution of
all of the Company's assets and adoption of a Plan of Complete Liquidation and
Dissolution of the Company (the "PLAN"), a copy of which is attached as Appendix
A to this Proxy Statement. Under the Liquidation Proposal, the Board of
Directors will endeavor to sell or convert into cash all of the assets of the
Company (other than cash and cash equivalents), including inventory, real
estate, fixed assets, plant and equipment, accounts receivable and certain
intellectual property relating to the Company's business. The Board of Directors
will not seek to sell the Company, in whole or in part, to the Company's
officers, directors, beneficial owners of stock or other affiliates. While the
Board of Directors would prefer to sell the Company's business as a whole, its
lack of success in doing so despite substantial efforts over an extended period
have led the Company to conclude that such a sale is extremely unlikely,
although it would be permitted under the Liquidation Proposal.
The Liquidation Proposal would eventually result in the complete
liquidation of all of the Company's assets. If the Liquidation Proposal is
approved, the Board of Directors will cause the Company to file a certificate of
dissolution, wind up the Company's affairs, attempt to convert all Company
assets into cash or cash equivalents, pay or attempt to adequately provide for
the payment of all of the Company's known obligations and liabilities and
distribute pro rata in one or more liquidating distributions to or for the
benefit of the Company's stockholders, as of the applicable record date(s), all
of the Company's cash.
If assets of the Company remain undistributed to its stockholders by
December 31, 2000 (the "FINAL DISTRIBUTION DATE"), those assets would be
transferred to a liquidating trust (the "LIQUIDATING TRUST") for the pro rata
benefit of the stockholders of the Company of record on the Final Distribution
Date. Approval of the Liquidation Proposal will constitute stockholder approval
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of the Plan and of the possible appointment by the Board of Directors of one or
more trustees of the Liquidating Trust (the "LIQUIDATING TRUSTEES") and the
execution of a liquidating trust agreement with the Liquidating Trustees on such
terms and conditions as the Board of Directors shall determine in its absolute
discretion. In addition, approval of the Liquidation Proposal will constitute
stockholder approval of any and all sales of assets of the Company approved by
the Board of Directors or, if applicable, the Liquidating Trustees. See
"Approval of Liquidation Proposal" for a more complete description.
Certain directors and officers of the Company may have an interest in
approval of the Liquidation Proposal. Three executive officers of the Company
(including David A. Peterson, a director) have employment contracts with the
Company that provide that these officers would be entitled to a severance
benefit equal to three times the sum of their annual salary and bonus (subject
to reduction, however, to avoid certain excise taxes) if their employment is
terminated or they resign under certain conditions following a "Change of
Control", which would include stockholder approval of the Liquidation Proposal,
or a sale of the Company. Also, the chief executive officer of Nashua
Corporation, which owns 36.8% of the outstanding shares of Common Stock and
which is a co-defendant with the Company in certain securities litigation, was a
director of the Company when the Board of Directors approved the Liquidation
Plan, although subsequently he resigned as a director. These matters are
discussed below under "Liquidation Analysis and Estimates," "Interest of Certain
Persons," "Certain Compensation Arrangements," "Certain Claims" and "Share
Ownership of Certain Beneficial Owners."
The Board of Directors does not know of any matter other than the
Liquidating Proposal that may be brought before the Meeting. In the event that
any other matter should come before the Meeting, the persons named on the Proxy
will have discretionary authority to vote all Proxies not marked to the contrary
with respect to such matters in accordance with their best judgment.
Each Proxy executed and returned by a stockholder may be revoked by
delivering written notice of such revocation to the Secretary of Cerion or by
executing and delivering to the Secretary a Proxy bearing a later date, at any
time at or before the Meeting except as to any matters upon which, prior to such
revocation, a vote shall have been cast pursuant to the authorization conferred
by such Proxy, or by a vote cast in person at the Meeting. Presence at the
Meeting does not itself revoke a Proxy previously given.
This Proxy Statement is being mailed to stockholders on or about
December 3, 1998.
VOTING SECURITIES
The only outstanding class of voting securities of Cerion is Common
Stock, $.01 par value (the "COMMON STOCK"), each share of which entitles the
holder thereof to one vote. Only stockholders of record at the close of business
on November 13, 1998, are entitled to vote at the Meeting and at any adjournment
thereof. As of the close of business on such date, there were 7,054,593 shares
of the Company's Common Stock outstanding. The holders of a majority of the
issued and outstanding stock entitled to vote, present in person or by proxy,
constitute a quorum for the transaction of business. Any stockholders voting by
proxy to abstain with respect to the Liquidation Proposal will be counted as
present for quorum purposes, while broker non-votes will not be counted as
present.
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Information regarding all persons known to be the beneficial owners of
more than 5% of the outstanding Common Stock, including Nashua Corporation,
which owns 36.8% of the outstanding Common Stock, appears below under the
caption "Share Ownership of Certain Beneficial Owners."
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information concerning the Company may be inspected and copies may be obtained
(at prescribed rates) at public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500
W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
electronically filed documents, including reports, proxy and information
statements and other information regarding the Company, can be obtained from the
Commission's Web site at http://www.sec.gov. The Company's Common Stock is
listed on the Nasdaq National Market, and reports, proxy statements and other
information concerning the Company can also be inspected the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, Washington,
D.C. 20006.
The Company previously distributed to stockholders its Annual Report on
Form 10-K for its fiscal year ended December 31, 1997 ("FORM 10-K"), and has
subsequently publicly filed Forms 10-Q for its fiscal quarters ended April 3,
1998, July 3, 1998 and October 2, 1998 ("THIRD QUARTER FORM 10-Q"). The Company
will provide without charge to each person to whom a copy of this Proxy
Statement is delivered a copy of any or all of the foregoing documents (other
than exhibits). Requests for such documents should be directed to Cerion
Technologies Inc., 1401 Interstate Drive, Champaign, Illinois 61822, Attention:
Richard A. Clark, Vice President- Finance, Chief Financial Officer and
Treasurer.
Attached to this Proxy Statement, and made a part hereof, are copies of
the Form 10-K as Appendix C, Exhibit 99.1 to the Form 10-K (as amended) as
Appendix D, Exhibit 99.2 to the Form 10-K as Appendix E and the Third Quarter
Form 10-Q as Appendix F.
FORWARD-LOOKING STATEMENTS - SAFE HARBOR
This Proxy Statement and the documents referred to above contain
certain "forward-looking" statements, including among others the statements
regarding the possibility of finding a buyer or buyers for assets of the
Company, the potential value of any assets of the Company, the amount and nature
of liabilities of or that may be asserted against the Company, the timing and
amount of any distributions to stockholders pursuant to the Liquidation
Proposal, industry conditions and prospects and the Company's operating results
for the fourth quarter of 1998. Without limiting the foregoing, words such as
"anticipates", "believes", "expects", "intends", "plans" and similar expressions
are intended to identify "forward-looking" statements.
All of these "forward-looking" statements are inherently uncertain, and
stockholders 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 the Company's ability to effect
the Liquidation Proposal on a timely basis and on the amount of any
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distributions that may be made to stockholders pursuant to the Liquidation
Proposal include the Company's inability to date to find any buyer for the
Company as a going concern despite significant efforts to do so (leading the
Company to conclude that the prospects for any such sale are extremely
unlikely), depressed conditions in the industry in which the Company operates
that have persisted for approximately two years and seem likely to continue, and
the existence of certain contingent liabilities of the Company, including a
securities law class action.
As discussed below under "Liquidation Analysis and Estimates," based on
management's present estimates, the Company expects to be able to distribute net
proceeds from the Liquidation Proposal to the Company's shareholders.
NONETHELESS, THERE CAN BE NO ASSURANCE THAT THERE WILL BE ANY SUCH
DISTRIBUTIONS, LET ALONE AS TO THEIR AMOUNT OR WHEN IT OR THEY MIGHT OCCUR.
APPROVAL OF LIQUIDATION PROPOSAL
GENERAL
The Board of Directors has adopted a Liquidation Proposal, which would
include the sale or distribution of all of the Company's assets, and adoption of
a Plan of Complete Liquidation and Dissolution of the Company. The Liquidation
Proposal, including the Plan, was approved by the Board of Directors, subject to
stockholder approval, on September 14, 1998. A copy of the Plan is attached as
Appendix A to this Proxy Statement. The material features of the Liquidation
Proposal, including the Plan, are summarized below. This summary does not claim
to be complete and is subject in all respects to the provisions of the Plan.
STOCKHOLDERS ARE URGED TO READ THE PLAN IN ITS ENTIRETY.
BACKGROUND AND REASONS FOR THE LIQUIDATION PROPOSAL
On May 30, 1996, the Company closed the initial public offering of its
common stock, realizing net proceeds of $19,525,350. On May 31, 1996, in
accordance with its expected use of proceeds described in its Prospectus dated
May 24, 1996, the Company prepaid (principal plus interest) the two outstanding
Promissory Notes (the "NASHUA NOTES") issued to Nashua Corporation ("NASHUA"),
in a combined total amount of $11,341,402. The prepayments were made without
penalty. The Company received the benefit of a prepayment discount of $183,000,
representing part of the accrued interest, by paying the $10 million Nashua Note
on or before May 31, 1996. After payment of the Nashua Notes, $8,183,948
remained of the proceeds to the Company of the initial public offering. In
addition to the amounts it received upon payment of the Nashua Notes, Nashua
also realized net proceeds, before expenses, of $26,900,250 in this offering,
from the sale of a portion of the outstanding shares of the Company owned by
Nashua. See "Share Ownership of Certain Beneficial Owners" below for information
regarding Nashua's current stock ownership in the Company.
Following payment of the Nashua Notes, the Company used the remaining
proceeds from the initial public offering to fund the Company's working capital
requirements, including selling, general and administrative expenses, and
capital expenditures in respect of modifications to the Company's existing
equipment, purchases of new equipment to increase manufacturing capacity and
efficiency, and construction of additional building space and facilities at its
existing location. The Company also purchased short-term investments (investment
grade commercial paper) with its available cash.
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At the time of its initial public offering, the Company intended to use
approximately $9 to $12 million of its net proceeds (plus funds available to it
under the revolving credit facility that the Company entered into simultaneously
with the closing of the initial public offering) to build, purchase or lease a
"New Facility" as described in its Prospectus dated May 24, 1996. In the second
half of 1996, however, the Company decided not to proceed at that time with
plans to build or purchase a "New Facility," for a combination of reasons
relating to the decline in the Company's sales attributable to an industry
downturn, including the absence of long-term purchase commitments from the
Company's customers, the cancellation in July 1996 by StorMedia Incorporated
("STORMEDIA"), a major customer, of all of its then outstanding purchase orders
with the Company, and an increasing risk of excess capacity in the supply of
disk substrates, including the impact of vertically-integrated hard disk
manufacturers. In addition, the Company achieved improved utilization of its
existing production capacity, productivity gains and additional capacity as a
result of its capital expenditures with respect to its existing facilities.
The Company's single line of business is 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
for approximately two years. Since the third quarter of 1996, the market for
aluminum substrates has been marked 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 Cerion
acquiring their own substrate manufacturing capacity and thus curtailing
business with the Company.
As a result of these difficult market conditions, the Company incurred
substantial losses in the second half of 1996, was only marginally profitable in
1997 and has incurred further significant losses in 1998.
These conditions led the Board of Directors of the Company to undertake
a strategic analysis of the Company's viability as an independent entity in the
first half of 1997. The Board of Directors retained Advest, Inc. ("ADVEST") to
assist it in this analysis on March 31, 1997, after interviews with several
other investment banking firms. As a result of this strategic analysis, the
Board of Directors decided at a meeting on May 28, 1997 to engage Advest to
assist the Company in approaching on a confidential basis six larger businesses
identified by the Board of Directors, with a view to determining any interest in
a possible investment in, joint venture with or acquisition of the Company. The
Company and representatives of Advest had various discussions with these six
businesses at various times in the second half of 1997 and the first half of
1998, including fairly extensive discussions with three of these businesses and
one in particular. Nevertheless, all these discussions terminated without any of
these companies making a definite proposal to Cerion for such a transaction.
During 1998, the Company's results of operations and, in the opinion of
the Board of Directors, its prospects have further worsened. Adverse industry
conditions have persisted, while the Company suffered a further loss in
customers and a delinquency in a significant amount of accounts receivable from
a formerly significant customer. As discussed below, a single customer accounted
for nearly all of the Company's net sales in the second and third quarters of
1998.
Management of the Company believes that, at least over the near term,
the market for significant purchases of its products has been effectively
reduced to three potential customers - MMC Technologies, Inc. ("MAXMEDIA"),
Trace Storage Technologies Inc. ("TRACE"), and International Business Machines
Corporation ("IBM"). The primary cause for this small number of
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potential customers is the move by a number of thin-film disk manufacturers in
1996 and 1997 to vertically integrate by adding internal disk substrate
manufacturing capacity. Moreover, while thin-film disk manufacturers with that
internal capacity have in the past purchased substrates from the Company,
management believes that, now and for the foreseeable future, they are likely to
have excess internal substrate manufacturing capacity, so that they would have
no need to obtain additional substrates from independent producers such as the
Company.
Before it ceased manufacturing operations, the Company had been
dependent on one customer - MaxMedia - for nearly 100% of its revenue since the
second quarter of 1998. MaxMedia's order backlog with the Company totaled
approximately $1.7 million as of September 17, 1998 and it had informed the
Company prior to that date of its uneasiness, in light of the Company's
continuing losses and other factors, as to the Company's ability to continue as
a going concern and supply aluminum disk substrates.
The Company's only other customer that accounted for more than 5% of
revenue in any quarter in 1998 - Trace represented nearly 94% of the Company's
revenue in the first quarter of 1998. However, Trace suspended shipments by the
Company in the first quarter of 1998, when orders from its own customers were
dramatically reduced due to the worsening oversupply of thin-film media in the
data storage industry. Trace did not purchase any substrates from the Company in
the second or third quarters of 1998 and does not appear likely to purchase any
for the balance of 1998.
The Company was chosen by IBM early in the Company's third fiscal
quarter 1998 to begin qualification of its aluminum disk substrates, as a
possible second supplier supplementing IBM's current sole supplier, Kobe Steel,
Ltd. and its subsidiaries ("KOBE"). Although successful qualification may result
in future orders from IBM, there can be no assurance that future orders would
result. Furthermore, the qualification process would require the successful
integration of the Company's aluminum disk substrates into IBM thin film media
products, which would involve a variety of uncertainties. Successful
qualification, in any event, would probably take in excess of 6 months because
of the multiple phases of the process. Thus, orders, if any, upon successful
qualification would not have been expected until early 1999, at the earliest.
As a result of the continuing oversupply of aluminum disk substrate
capacity, the Company experienced pricing pressure from its sole significant
customer, MaxMedia. Specifically, average selling prices were correctly expected
to be approximately 6% lower in the third quarter of 1998 than in the second
quarter. Furthermore, at the time of the meetings of the Company's Board of
Directors in August and September 1998 referred to below, the Company had
committed to further price reductions for MaxMedia that were expected to
decrease average selling prices by at least 4% in the fourth quarter of 1998.
The Company believes that its primary competitor - Kobe - has a
significant cost advantage in that approximately 40% of its total substrate
manufacturing capacity is located in Malaysia, where labor costs are much lower
than those incurred by the Company in central Illinois. Management of the
Company believes that this cost advantage allows Kobe to continue to lower
prices to gain market share and secure its dominant position within the
independent aluminum disk substrate market.
At the time of the August and September 1998 Board meetings, the
Company expected that it would incur net operating losses and negative cash
flows from operating activities during the third and fourth quarters of 1998.
The Company expected that revenue would not exceed $4 million in either of these
quarters, based upon maintaining current order volumes with its only current
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customer, MaxMedia. These expected levels of revenue would be likely to result
in the Company incurring net operating losses in excess of $1.3 million in each
of the third and fourth quarters, were the Company to have operated at then
current levels through yearend. Furthermore, any significant reduction in
expected revenues from MaxMedia would have caused a significant increase in
projected net operating losses, which would exhaust the Company's cash resources
sooner than would otherwise happen.
(In fact, in part as a result of the Company's cessation of
manufacturing operations on November 15, 1998, the Company incurred net
operating losses of approximately $1.6 million for its quarter ended October 2,
1998, before giving effect to an additional charge of approximately $654,000
with respect to the receivable from StorMedia referred to in Note (a) under
"Liquidation Analysis and Estimates - Estimated Values of Assets of the Company"
below, and approximately $600,000 in special expenses related to that decision
and the Liquidation Proposal.)
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 an assumed continuance of the levels of revenue and operating losses at
present projected by management of the Company for the fourth quarter of 1998,
as indicated above, the Company believes that it would have exhausted its
present cash resources in the first quarter of 1999 if it did not, as discussed
below, terminate operations before then.
As noted above, worsening industry conditions during the second quarter
resulted in pricing pressure from the Company's sole significant customer during
that quarter, MaxMedia, as a result of which prices during that quarter were
significantly lower than management had anticipated at the end of the first
quarter. Moreover, management of the Company concluded that, as a result of
market conditions at the end of the second quarter, product prices would
probably be considerably lower for the balance of 1998 than management had
previously anticipated.
The conditions and developments discussed above have had an adverse
impact on the trading price of the Company's Common Stock. As a result, the
Company was notified by Nasdaq National Market personnel that it no longer
satisfied the listing requirement that it maintain a minimum "market value of
public float" of $5 million, and that if the "public float" remained below $5
million through October 30, 1998, as it did, the Common Stock would be delisted
from the National Market as of November 3, 1998. Based on the reported closing
price of the Common Stock on the Nasdaq National Market on November 23, 1998 of
$0.28 per share, the Company had a "public float" of approximately $2 million as
of that date. On October 29, 1998, 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 delisting has been suspended at least temporarily.
In light of all of the foregoing developments (to the extent then
known), including the lack of result from the discussions assisted by Advest
with the six larger businesses identified by the Board of Directors, the Board
met on August 10, 1998 to consider further its strategic analysis. It received a
presentation by a representative of Advest, who reviewed developments since the
original strategic analysis and evaluated possible current alternatives. The
Board of Directors concluded at this meeting that continued existence as a small
independent company might entail an unacceptably high risk during this period of
prolonged industry overcapacity. Accordingly, the Board of Directors decided to
intensify efforts to sell the Company or its assets and the Company publicly
announced on August 13, 1998 that it was actively seeking a buyer.
On behalf of the Company, Advest contacted both those businesses with
which it had had discussions previously and others, some outside the disk drive
industry. While one business
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initially expressed interest and engaged in discussions with the Company, it
subsequently informed the Company prior to the Board of Directors meeting on
September 14, 1998 that it had decided not to pursue an acquisition of the
Company. Other parties contacted Advest or the Company directly in the wake of
the August 13, 1998 public announcement, but those discussions too led to no
definite proposal. The failure of the Company to obtain any serious indication
of interest from any potential buyer of the Company as a whole has, in the
Company's view, rendered it extremely unlikely that such a buyer can be found,
although such a sale would be permitted under the Liquidation Proposal. (The
Company did receive a proposal from a company that was interested in pursuing a
so-called "back-door IPO," under which a business unrelated to that of Cerion in
which the proposing company had a significant interest would have been merged
into Cerion, in return for the issuance of new shares that would have
constituted a substantial majority of total Cerion shares outstanding to that
company and the other stockholders of the unrelated business. The Board of
Directors of Cerion decided not to pursue such a proposal.)
In light of the failure of efforts to find a buyer for the Company as a
going concern, the Board of Directors unanimously decided at a meeting held on
September 14, 1998 to adopt the Liquidation Proposal, subject to stockholder
approval. The Board of Directors concluded that the Liquidation Proposal was
likely to produce more value for the Company's stockholders than continuing to
operate indefinitely while attempting to find a buyer for the Company as a going
concern. See "Recommendation of the Board of Directors" below.
The Board of Directors of the Company authorized management to cease
manufacturing operations on November 15, 1998, in light of the Company's
continuing operating losses discussed above, and that cessation occurred.
Management believes that any expense savings that would have been realized from
an earlier termination of manufacturing operations would have been exceeded by
increased severance costs associated with the federal Worker Adjustment and
Retraining Notification Act ("WARN ACT"). The WARN Act requires notification 60
calendar days in advance of certain plant closings and major layoffs, and the
Company gave such a notification to its employees on September 16, 1998.
As a result of the cessation of manufacturing operations, the Company's
former and potential customers have arranged to find other sources for those
products they might otherwise have obtained from the Company. If the Liquidation
Proposal is not approved, there can be no assurances that the Company would be
able to obtain further business from those customers or other customers.
OPINION OF ADVEST, INC.
Advest was retained by the Company to render an opinion as to whether
liquidating the Company at the earliest opportunity is fair, from a financial
point of view, to the stockholders of the Company as compared to continuing to
operate the Company while attempting to sell it as a going concern. The Company
did not impose any limitations upon Advest with respect to the investigations
made, procedures followed or factors considered in rendering its opinion. The
management of the Company cooperated fully with Advest in connection with its
analysis.
Advest has delivered to the Board of Directors of the Company its
written opinion (the "FAIRNESS OPINION"), dated as of the date of this Proxy
Statement. The Fairness Opinion is substantially identical to an oral opinion
delivered by Advest to the Board of Directors of the Company at its meeting held
September 14, 1998. The Fairness Opinion concludes that, as of such date, the
decision to liquidate the Company is fair to the Company's stockholders from a
financial
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point of view, as compared to continuing to operate indefinitely while
continuing to attempt to sell the Company as a going concern. In reaching this
conclusion, Advest determined that the range of values expected to be obtained
by liquidation exceeds the present value of (a) the Company's projected net
operating cash flow and (b) the value of any eventual sale of the Company (which
reflects the risk that the Company would survive until a sale could be
accomplished and the risk of accomplishment of any sale).
The full text of the Fairness Opinion is attached as Appendix B to this
Proxy Statement. The material features of the Fairness Opinion are summarized
below. This summary does not claim to be complete in all respects. STOCKHOLDERS
ARE URGED TO READ THE FAIRNESS OPINION IN ITS ENTIRETY.
In rendering its opinion, Advest, among other things:
- - Reviewed and analyzed information available as of the date of the
Fairness Opinion, including (i) business and financial information
for the Company; (ii) various analyses performed by Company
management; (iii) other relevant and appropriate information,
financial studies, analyses and industry projections including
financial, economic, market and industry data; and (iv) other
information furnished by the Company.
- - Met with members of senior management of the Company to discuss
the market, business operations, historical financial results and
future prospects of the Company.
In performing its analysis, Advest assumed and relied upon the
accuracy, completeness and reasonableness, without independent verification, of
the financial projections and other information provided to it by the Company.
Advest did not make or seek to obtain current appraisals of the Company's assets
in connection with its analysis, although it did read appraisals for equipment
and real estate that the Company possessed. It also made numerous assumptions
with respect to industry outlook, general business and economic conditions,
estimated net sale proceeds of certain assets, expected ranges of future
operating losses and other matters, many of which are beyond the control of the
Company.
With respect to the Company's viability as an independent entity,
Advest noted the following unfavorable conditions in the Fairness Opinion:
- - The data storage industry has been subject to oscillations of
under and over capacity with resultant price instability,
including a long term trend of price decreases for aluminum
substrates.
- - The market for aluminum substrates has undergone a rapid and
broadly-based vertical integration, whereby actual and potential
customers for the Company's products obtained their own production
capacity and the Company's few customers have been reduced to one.
In its market, the Company is notably alone in not having any
strategic partners or alliances.
- - The Company's sole significant customer from the second quarter of
1998 onwards, MaxMedia, indicated concerns about relying on the
Company as a vendor given the Company's deteriorating financial
condition. Orders from two potential customers would not be
placed, if at all, until late 1998 or sometime in 1999.
9
<PAGE> 13
- - The Company's competitors, operating in Asia, enjoy a significant
cost advantage as compared to the Company's sole manufacturing
facility in Illinois.
- - The Company's recent financial performance and outlook are poor.
Sales for the first half of 1998 were only $6.2 million and the
Company reported a loss at the gross margin level of $665,000,
while the net loss was $8.3 million. At the time of the meetings
of the Company's Board of Directors in August and September, 1998,
the Company expected to incur net operating losses in excess of
$1.3 million in each of the third and fourth quarters of 1998. In
the six months ended July 3, 1998, the Company suffered an erosion
of over $4 million in its net working capital position, and
experienced a cash burn rate of approximately $300,000 per month.
- - In addition to the impact to the Company of overcapacity in the
substrate market and continuing downward price pressures,
alternative materials are increasingly being used in place of
aluminum for disk drive substrates, putting the Company at risk of
technical obsolescence.
Since June, 1997, Advest has conducted an aggressive but unsuccessful
campaign (a) to find a buyer of the Company as a going concern, or (b) to
arrange a significant investment by or other strategic relationship with a
larger company. Most recently, the Company has imposed no limitations on
Advest's efforts to sell the Company. As factors contributing to the lack of a
buyer for the Company, Advest cites the Company's poor financial performance and
outlook, the unfavorable economic conditions in Asia and the deteriorating
conditions in the hard disk drive industry generally. Although the
attractiveness of the Company as an acquisition target might be improved if and
when the current overcapacity in the substrate market subsides and the situation
in Asia improves, Advest cautions that the likelihood and timing of both events
are difficult to predict. It also notes that, in the meantime, the Company is
experiencing (and is expected to continue to experience) negative cash flows
that will erode shareholder value.
Advest also reviewed a study (performed by Company management) of
several operating scenarios as alternatives to liquidation: (a) continue
operating at current expense levels; (b) implement severe cuts in staffing,
wages and benefits in an attempt to stay alive until the substrate market and
the Company's prospects improve; or (c) move the Company's manufacturing
capacity to a lower cost location, such as Mexico. Each alternative was examined
using low, medium and high sales projections for the Company's product. Although
certain of these scenarios resulted in some positive cash flow over the next two
years, most showed negative or minimal cash flow and some required external
financing which is not expected to be available. None of the alternatives proved
to be significantly different than liquidation in terms of cash flow and
estimated value of the business two years out.
Advest has consented to the use of the Fairness Opinion in this Proxy
Statement. However, the Fairness Opinion does not constitute a recommendation to
any stockholder as to how he, she or it should vote at the Meeting.
Advest was selected by the Board of Directors based upon its view of
Advest's qualifications, expertise, experience and familiarity with the
Company's situation (based on Advest's prior strategic analysis of the Company's
viability as an independent entity and its ongoing efforts to sell the Company).
As an integral part of its investment banking business, Advest arranges business
combinations on behalf of buyers and sellers. It also forms opinions as to the
values of businesses for pricing mergers and acquisitions, and the fairness
thereof. Advest has no present or contemplated financial interest in the Company
or in any related party.
10
<PAGE> 14
Advest has been paid $100,000 for its strategic analysis and
presentation to the Board of Directors and $30,000 during the course of its
attempts to sell the Company. If Advest had succeeded in arranging a sale of the
Company, it would have been paid a "success fee" of $450,000. Since a sale
resulting in a "success fee" did not occur, Advest has been paid $250,000 in
conjunction with rendering its Fairness Opinion. The compensation due Advest is
not dependent on the findings of the Fairness Opinion.
LIQUIDATION ANALYSIS AND ESTIMATES
Management of the Company has estimated the following potentially
realizable values or ranges of realizable values for its assets, estimated
liabilities and estimated costs of liquidation after the Company ceases
operations. These estimates reflect the impact of projected operating losses
through the date the Company ceased manufacturing operations, November 15, 1998.
There can be no assurance, however, that the Company will be able to dispose of
any of the assets below for or within the indicated values or ranges (or at
all), and the Company has not sought current, independent appraisals for any of
its assets.
<TABLE>
<CAPTION>
(in thousands $)
<S> <C>
(i) ESTIMATED VALUES OF ASSETS OF THE COMPANY
Cash and cash equivalents $3,040
Accounts Receivables (a) 2,605
Refundable income taxes 494
Other assets 369
Land and Building (b) 1,700 - 2,000
Machinery and equipment (c) 2,000 - 2,886
Intellectual property (d) 0 - 500
--------
Total assets 10,208 - 11,894
(ii) ESTIMATED LIABILITIES OF THE COMPANY
Amounts payable to vendors 450
Accrued expenses (primarily payroll and vacation pay) 992
Severance costs (e) 1,334
-----
Total estimated liabilities 2,776
(iii) ESTIMATED OPERATING COSTS DURING LIQUIDATION (F)
Payroll and benefits for liquidation personnel 750
Insurance, utilities and real estate taxes 350
Legal, audit and other professional fees 252
Commission on sale of assets 285 - 450
Other costs 350
----
Total estimated operating costs 1,987 - 2,152
-------------
(iv) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
TO SHAREHOLDERS $5,445 - $6,966
===============
(v) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
PER OUTSTANDING COMMON SHARE (G) $0.77 - $0.99
=============
</TABLE>
11
<PAGE> 15
-------------------
(a) The Company has a total receivable of $3.6 million from
StorMedia. The Company has established reserves equaling the
total amount owed, so that no portion of this receivable is
reflected in the estimated value. StorMedia filed for Chapter
11 bankruptcy protection on or about October 11, 1998. A
reserve for $3.1 million was established by the Company at the
end of its fiscal quarter ended July 3, 1998, following
termination in late May 1998 of negotiations that the Company
believed made it probable that the entire amount of this
receivable would be recovered by the Company. The balance of
$0.5 million was reserved against following the Chapter 11
filing referred to above.
(b) The estimated value was based upon recent sales of buildings
or asking prices for buildings currently for sale in the same
geographical locale as the Company.
(c) The aggregate estimated value is based upon management's
assessment of recoverable value upon the liquidation of
equipment utilized in its operations. The estimated values are
based upon expected prices that a willing buyer may pay for
used equipment similar to the Company's. Furthermore,
management compared the estimated fair value to a 1996
appraisal of the equipment, prepared in conjunction with the
Company obtaining a revolving credit facility in 1996, to
assess the reasonableness of management's aggregate estimated
value.
(d) Management estimated the value that may be obtained by selling
its intellectual property, which consists of proprietary
knowledge regarding grinding systems including the chemical
etching of aluminum disk substrates, stone formulations and
related applications, and grinder design.
(e) The estimated severance costs liability is the estimated
amount specified by employment contracts between the Company
and three of its executive officers entered into in 1996.
Those employment contracts provide that upon termination of
employment under certain circumstances, including a sale or
liquidation of the Company, the employee would receive
severance equal to three times the sum of his annual salary
and bonus. These severance payments are subject to reduction
to the extent necessary to avoid excise taxes under Section
280G of the Internal Revenue Code, which is reflected in the
estimated amount shown. The estimated costs also include
severance payments made to two officers terminated in
September 1998, pursuant to similar employment contracts.
(f) The estimate of operating costs during liquidation (which
includes all costs presently known or intended by management
of the Company) is based upon management's estimate that it
will require approximately six months from the date that the
Company ceases manufacturing operations to dismantle and sell
the majority of the Company's assets. Furthermore, management
has included an estimate of administrative costs to dissolve
the Company and, if necessary, transfer the remaining assets
and liabilities into a Liquidating Trust.
12
<PAGE> 16
(g) Based on 7,054,593 shares outstanding as of November 13, 1998.
Disregards shares subject to outstanding options, since
exercise prices are substantially in excess of recent trading
prices for the Common Stock. (The lowest exercise price of any
outstanding option is $1.84 per share.)
THE METHODS USED BY THE BOARD OF DIRECTORS AND MANAGEMENT IN ESTIMATING
THE VALUES AND VALUE RANGES OF THE COMPANY'S ASSETS ARE INEXACT AND MAY NOT
APPROXIMATE VALUES ACTUALLY REALIZED. THE BOARD OF DIRECTORS' ASSESSMENT ASSUMES
THAT THE ESTIMATES OF THE COMPANY'S LIABILITIES AND OPERATING COSTS ARE
ACCURATE, BUT THOSE ESTIMATES ARE SUBJECT TO NUMEROUS UNCERTAINTIES BEYOND THE
COMPANY'S CONTROL AND ALSO DO NOT REFLECT ANY CONTINGENT LIABILITIES THAT MAY
MATERIALIZE. FOR ALL THESE REASONS, THERE CAN BE NO ASSURANCE THAT THE ACTUAL
NET PROCEEDS DISTRIBUTED TO SHAREHOLDERS IN LIQUIDATION WILL NOT BE
SIGNIFICANTLY LESS THAN THE ESTIMATED AMOUNT SHOWN. MOREOVER, NO ASSURANCE CAN
BE GIVEN THAT ANY AMOUNTS TO BE RECEIVED BY THE COMPANY'S STOCKHOLDERS IN
LIQUIDATION WILL EQUAL OR EXCEED THE PRICE OR PRICES AT WHICH THE COMMON STOCK
HAS RECENTLY TRADED OR MAY TRADE IN THE FUTURE.
Since the terms of any disposition of assets pursuant to the
Liquidation Proposal have not been determined, the Company has concluded that
pro forma financial information concerning the Liquidation Proposal cannot be
presented in any meaningful fashion. The following table, however, sets forth a
reconciliation of relevant portions of the estimates set forth above under
"Liquidation Analysis and Estimates" with the Company's stockholders equity, as
set forth in its unaudited consolidated balance sheet as of October 2, 1998:
<TABLE>
<CAPTION>
(in thousands $)
Low High
<S> <C> <C>
Total stockholders equity as of October 2, 1998 $ 9,118 $ 9,118
(Reduction) Increase in the carrying value of property,
plant and equipment as of October 2, 1998
compared to the estimated fair value (375) 1,311
Estimated Operating Costs during liquidation (1,987) (2,152)
Estimated Operating Losses subsequent to
October 2, 1998 (1,311) (1,311)
------- -------
ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION
TO SHAREHOLDERS $ 5,445 $ 6,966
======= =======
</TABLE>
INTEREST OF CERTAIN PERSONS
David A. Peterson, a director and the Chairman, President and Chief
Executive Officer of the Company, entered into an Employment Contract with the
Company in 1996 that entitles him to certain severance benefits, the amount of
which depend on whether his employment terminates before or after a "Change of
Control" of the Company as defined in that contract. Stockholder approval of the
Liquidation Proposal would constitute such a "Change of Control," as would any
sale of the Company. Thus, it is anticipated that, if Mr. Peterson's employment
terminates in 1999 following stockholder approval of the Liquidation Proposal,
he would be entitled to a severance benefit of approximately $611,000, which
would be payable within 30 days after the date of his termination.
13
<PAGE> 17
Gerald G. Garbacz, a director of the Company until his resignation on
November 4, 1998, is chief executive officer of Nashua Corporation, which, as
discussed below under "Share Ownership of Certain Beneficial Owners," owns 36.8%
of the outstanding shares of Common Stock. Nashua Corporation is also a
co-defendant with the Company in certain securities litigation, as discussed
below under "Certain Claims."
In addition to the employment contract with Mr. Peterson, the
employment contracts between the Company and two of its other executive officers
(also entered into in 1996) have substantially identical provisions for
severance benefits in the event of certain terminations of employment after a
"Change of Control." It is anticipated that, if the employment of these two
officers terminates in 1999 following stockholder approval of the Liquidation
Proposal, they would be entitled to severance benefits approximating $700,000 in
the aggregate.
Pursuant to the Plan, the Company may, in the absolute discretion of
the Board of Directors, pay to the Company's officers, directors, or any of
them, compensation or additional compensation above their regular compensation,
in money or other property, in recognition of any extraordinary efforts they, or
any of them, may undertake in connection with the implementation of the Plan.
The Board of Directors does not intend, however, to authorize any payment to any
of the three executive officers referred to above other than payments required
under their employment contracts. The Company also has no present intention of
paying any special compensation to directors or other officers of the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the Liquidation
Proposal is in the best interests of the Company and its stockholders.
Accordingly, the Board of Directors unanimously approved the Liquidation
Proposal at a meeting held on September 14, 1998. In arriving at this
conclusion, the Board considered a number of factors, including the alternatives
to the Liquidation Proposal and the future prospects of the Company, as well as
the opinion of Advest attached as Appendix B and summarized above, which is
substantially identical to oral advice given by Advest at the September 14, 1998
Board meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE LIQUIDATION PROPOSAL.
If the Liquidation Proposal is not approved by the stockholders, the
Board of Directors will explore the alternatives then available for the future
of the Company.
PRINCIPAL PROVISIONS OF THE PLAN
Distributions. The Company or the Liquidating Trust will make
distributions of Available Cash pro rata to stockholders at such time or times
and in such amounts as determined by the Board of Directors or the Liquidating
Trustees. "AVAILABLE CASH" means the cash held by the Company or the Liquidating
Trust after deduction for the expenses of the operation of the Company or the
Liquidating Trust and a contingency reserve in an amount determined by the Board
of Directors or the Liquidating Trustees to be sufficient to satisfy any
liabilities, expenses and obligations of the Company or the Liquidating Trust
not otherwise paid or provided for and that could be recovered against the
stockholders to the extent of the amounts distributed to them by the Company or
the Liquidating Trust (the "CONTINGENCY RESERVE").
14
<PAGE> 18
The Company cannot predict the timing of the distributions. It is the
present intention of the Board of Directors, however, that any Available Cash
will be distributed to the stockholders as promptly as practicable following the
Final Record Date (as defined below). Nevertheless, no distributions will be
made until the Board of Directors or Liquidating Trustees have determined the
amount of the Contingency Reserve.
The Board of Directors believes that the Company and the Liquidating
Trust will have sufficient assets to pay the current and future obligations of
the Company and the Liquidating Trust and to make distributions to the
stockholders, but there can be no assurance to that effect. The amount of the
distributions will depend on the accounts payable and other liabilities of the
Company existing on the date of the approval of the Liquidating Proposal, the
expenses of operation of the Company and the Liquidating Trust that accrue
following approval of the Liquidation Proposal, and the amount of any claims
that may be asserted against the Company or the Liquidating Trust. The expenses
of operation of the Company and the Liquidating Trust will include professional
fees and other expenses of liquidation and could be substantial. The Company
does not anticipate that property, other than cash, will be distributed to the
stockholders by the Company or the Liquidating Trust.
Terms of the Liquidating Trust. The Board of Directors will determine
whether and when to transfer assets of the Company to the Liquidating Trust, but
if all of the Company's assets are not sold or distributed prior to the Final
Distribution Date, the Company must transfer all the remaining assets of the
Company (including the Contingency Reserve) to the Liquidating Trust. The
purpose of the Liquidating Trust will be to liquidate any non-cash assets held
by the Liquidating Trust and distribute the proceeds of all Available Cash to
the stockholders of record on the Final Record Date. The Liquidating Trust will
be required to pay the expenses of its operations and all unsatisfied expenses,
liabilities and obligations of the Company. Such expenses, liabilities and
obligations will be paid initially out of the Contingency Reserve, but if the
Contingency Reserve is exhausted, such expenses, liabilities and obligations
will be paid out of the other assets held by the Liquidating Trust.
If assets are transferred to the Liquidating Trust, each stockholder on
the Final Record Date will receive an interest (an "INTEREST") in the
Liquidating Trust pro rata to its interest in the outstanding Common Stock on
that date. All distributions from the Liquidating Trust will be made pro rata in
accordance with the Interests. The Interests will not be transferable except by
operation of law or upon death. Because the Interests will not be transferable,
it is anticipated that the Liquidating Trust will not be required to comply with
the periodic reporting and proxy statement requirements of the Exchange Act. The
Liquidating Trustees will, however, maintain books and records of the
Liquidating Trust, which will be available for inspection by holders of
Interests, in accordance with law.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as Liquidating Trustees of the Liquidating Trust
and to cause the Company to enter into a Liquidating Trust agreement with such
Liquidating Trustees on such terms and conditions as may be approved by the
Board of Directors. It is anticipated that the Board of Directors will select
such Liquidating Trustees on the basis of the experience of such individual or
entity in administering and disposing of assets and discharging liabilities of
the kind to be held by the Liquidating Trust and the ability of such individual
or entity to serve the best interests of the stockholders of the Company.
Approval of the Liquidation Proposal will constitute the approval by the
stockholders of any such appointment and the execution of a liquidating trust
agreement with the Liquidating Trustees.
15
<PAGE> 19
As the stockholders of the Company will be deemed to have received a
liquidating distribution equal to their pro rata share of the value of the net
assets transferred to the Liquidating Trust (see "Certain Federal Income Tax
Consequences" below), the transfer to the Liquidating Trust of assets could
result in immediate tax liability to the holders of Interests without their
readily being able to realize the value of such Interests to pay such taxes or
otherwise.
Possible transfer of assets to the Liquidating Trust is only a
contingency plan to provide for the possibility that the Company may not be able
to convert all assets into cash or satisfy all liabilities before the Final
Distribution Date. Therefore, the Board has not finally determined the detailed
terms or structure for the Liquidation Trust, which would be determined by the
Board at a future date.
Contingency Reserve. Under Delaware law, the Company is required, in
connection with its dissolution, to pay or provide for payment of all of its
expenses, liabilities and obligations. These include known liabilities and
obligations of the Company accrued through the date of the approval of the
Liquidation Proposal, expenses to be incurred by the Company following approval
of the Liquidation Proposal in connection with the winding-up and dissolution of
the Company, any expenses to be incurred in connection with the operations of
the Liquidating Trust, claims that have been asserted against the Company but
that have not been settled or reduced to judgment and claims that have not yet
been asserted but may be asserted in the future. Known liabilities and
obligations of the Company include severance and other employer-related costs,
accounts payable and professional fees. Claims that have been or may be asserted
may include, among others, a class action alleging securities law violations.
See "Certain Claims" below.
Following approval of the Liquidation Proposal by the stockholders and
prior to any distribution of Available Cash to stockholders, the Board of
Directors will set aside from all other assets of the Company a Contingency
Reserve to fund all then known liabilities and obligations of the Company and
the expenses expected to be incurred by the Company or the Liquidating Trust in
connection with its windup and dissolution, including the anticipated
operational expenses of the Company or the Liquidating Trust and other possible
claims against the Company or the Liquidating Trust. The Company is currently
unable to estimate with precision the amount of the Contingency Reserve, and the
estimated operating costs set forth above under "Liquidation Analysis and
Estimates" are for illustrative purposes only. The Contingency Reserve will
initially be based upon the assessment and estimates of the Board of Directors
of the Company's known liabilities and obligations, future operating expenses
and possible claims.
After the Contingency Reserve is established, the Board of Directors or
the Liquidating Trustees, as the case may be, may increase or decrease the
Contingency Reserve based on their then current estimate and assessment of the
operating expenses of the Company and/or the Liquidating Trust, the probable
value of any known claims against the Company or the Liquidating Trust and the
possibility of any then unknown claims being asserted against the Company or the
Liquidating Trust. Any increase in the amount of the Contingency Reserve will be
funded from the cash assets of the Company or the Liquidating Trust, as the case
may be, and will reduce the amount available for distribution to the
stockholders. The amount of any decrease in the Contingency Reserve would
increase the assets available for distribution to the stockholders. After all
expenses, liabilities and obligations of the Company and the Liquidating Trust
have been satisfied and the Board of Directors or the Liquidating Trustees, as
the case may be, determines that any future claims against the Company or the
Liquidating Trust are not probable of occurrence, any remaining funds in the
Contingency Reserve will be distributed pro rata to holders of Interests in the
Liquidating Trust.
16
<PAGE> 20
In the event the Company fails to create an adequate Contingency
Reserve for payment of expenses, liabilities and obligations, or should that
Contingency Reserve and the assets held by the Liquidating Trust be exceeded by
the amount ultimately found payable in respect of the Company's expenses,
liabilities and obligations, each stockholder could be held liable to the
Company's creditors for repayment of the stockholder's pro rata share of such
excess, but limited to the amounts previously received by the stockholder from
the Company or the Liquidating Trust. In addition, if a court holds at any time
that the Company or the Liquidating Trust has failed to make adequate provision
for expenses, liabilities and obligations, or if the amount ultimately required
to be paid in that respect exceeds the amount available from the Contingency
Reserve and the assets of the Liquidating Trust, a creditor of the Company could
seek an injunction against the making of distributions under the Plan on the
ground that the amounts to be distributed are needed to provide for the payment
of the Company's expenses, liabilities and obligations. Any such action could
delay or substantially diminish the cash distributions to be made to the
stockholders under the Plan.
Disposition of Certain Assets. The Plan gives to the Board of Directors
of the Company the power to sell all the assets of the Company on such terms and
in such manner as determined by the Board of Directors and to transfer remaining
assets to the Liquidating Trust, to be sold by the Liquidating Trustees. The
prices at which the Company or the Liquidating Trust may be able to sell those
assets will depend on factors that may be beyond the control of the Company or
the Liquidating Trust and may not be as high as the prices that could be
obtained if the Company were not in liquidation. Approval of the Liquidation
Proposal will constitute approval of any such sales.
Certain Compensation Arrangements. Pursuant to the Plan, the Company
may, in the absolute discretion of the Board of Directors, pay to the Company's
present or former officers, directors, employees, agents and representatives, or
any of them, compensation or additional compensation above their regular
compensation, in money or other property, in recognition of any extraordinary
efforts they, or any of them, may undertake in connection with the
implementation of the Plan. See also "Certain Claims" below.
Closing of Transfer Books. The Company will close its transfer books on
the earliest date (the "FINAL RECORD DATE") to occur of (i) the close of
business on the record date fixed by the Board of Directors for the final
liquidating distribution to stockholders, (ii) the close of business on the date
of the transfer of the Company's remaining assets to the Liquidating Trust, and
(iii) the date on which the Company ceases to exist under Delaware law
(following any post-dissolution continuation period under that law). After the
Final Record Date, the Company will not record any further transfers of Common
Stock and will not issue any new stock certificates, other than replacement
certificates. It is anticipated that no further trading of the Company's shares
will occur after the Final Record Date, and it is possible that trading will
effectively terminate before then. All liquidating distributions from the
Liquidating Trust or the Company on or after the Final Record Date will be made
to the stockholders pro rata according to their holdings of Common Stock as of
the Final Record Date. Subsequent to the Final Record Date, the Company may, at
its election, require stockholders to surrender certificates representing their
shares of Common Stock in order to receive distributions. Stockholders should
not forward their stock certificates before receiving instructions to do so. If
surrender of stock certificates is required, all distributions otherwise payable
by the Liquidating Trust or the Company, if any, to stockholders who have not
surrendered their stock certificates may be held in trust for such stockholders,
without interest, until the surrender of their certificates (subject to escheat
pursuant to the laws relating to unclaimed property). If a stockholder's
certificate evidencing the Common Stock has been lost, stolen or destroyed, the
stockholder may be required to furnish the Company with satisfactory evidence of
the loss, theft or destruction thereof, together with surety bond or other
indemnity, as a condition to the receipt of any distribution. Any interim
liquidating distribution from the Company prior to the final
17
<PAGE> 21
distribution date will be made as of a record date prior to that interim
distribution that will be established by the Board of Directors.
Indemnification. Pursuant to the Plan, the Company will indemnify its
officers, directors, employees, agents and representatives for actions taken in
connection with the Plan and the winding up of the affairs of the Company. The
Company's obligation to indemnify such persons may also be satisfied out of
assets of the Liquidating Trust. The Liquidating Trust will similarly be
authorized to indemnify the Liquidating Trustees and any employees, agents or
representatives of the Liquidating Trust for actions taken in connection with
the operations of the Liquidating Trust. Any claims arising in respect of such
indemnification will be satisfied out of the assets of the Liquidating Trust.
Dissolution of the Company. If the stockholders approve the Liquidation
Proposal, the Company will subsequently file a Certificate of Dissolution with
the Secretary of State of Delaware dissolving the Company (the "CERTIFICATE OF
DISSOLUTION"). The dissolution of the Company will become effective, in
accordance with Delaware law, upon the filing of the Certificate of Dissolution
with the Secretary of State of the State of Delaware or upon such later date as
may be specified in the Certificate of Dissolution. Under Delaware law, the
Company will continue to exist for three years after the dissolution becomes
effective or for such longer period as the Delaware Court of Chancery shall
direct, for the purposes of prosecuting and defending suits, whether civil,
criminal or administrative, by or against it, and enabling the Company gradually
to settle and close its business, to dispose of and convey its property, to
discharge its liabilities and to distribute to the stockholders any remaining
assets, but not for the purpose of continuing the business for which the Company
was organized.
Following the filing of the Certificate of Dissolution, the Board of
Directors will cause notices of dissolution to be sent to all known creditors of
the Company, and will publish notice of the Company's dissolution as required by
and otherwise comply with Delaware law. Except for the requirements of Delaware
law and the Exchange Act in connection with the Meeting of stockholders to vote
on the Liquidation Proposal, and except for the filing of the Certificate of
Dissolution and any required filings under federal or state tax laws, no federal
or state regulatory requirements must be complied with or approvals obtained in
connection with the dissolution.
UNDER DELAWARE LAW, IN THE EVENT THE COMPANY FAILS TO CREATE AN
ADEQUATE CONTINGENCY RESERVE FOR PAYMENT OF ITS EXPENSES AND LIABILITIES, OR
SHOULD SUCH CONTINGENCY RESERVE (AND THE ASSETS HELD BY ANY LIQUIDATING TRUST)
BE EXCEEDED BY THE AMOUNT ULTIMATELY FOUND TO BE PAYABLE IN RESPECT OF THE
COMPANY'S EXPENSES AND LIABILITIES, EACH STOCKHOLDER COULD BE HELD LIABLE FOR
THE PAYMENT TO THE COMPANY'S CREDITORS OF SUCH STOCKHOLDER'S PRO RATA SHARE OF
SUCH EXCESS, BUT LIMITED TO THE AMOUNTS PREVIOUSLY RECEIVED BY SUCH STOCKHOLDER
FROM THE COMPANY (AND FROM ANY LIQUIDATING TRUST). ACCORDINGLY, IN THAT EVENT A
STOCKHOLDER COULD BE REQUIRED TO RETURN ALL DISTRIBUTIONS PREVIOUSLY MADE AND
THUS WOULD RECEIVE NOTHING FROM THE COMPANY AS A RESULT OF THE LIQUIDATION
PROPOSAL. MOREOVER, IN THE EVENT A STOCKHOLDER HAS PAID TAXES ON AMOUNTS
PREVIOUSLY RECEIVED, A REPAYMENT OF ALL OR A PORTION OF SUCH AMOUNT COULD RESULT
IN A SITUATION IN WHICH A STOCKHOLDER MAY INCUR A NET TAX COST IF THE REPAYMENT
OF THE AMOUNT DISTRIBUTED DOES NOT CAUSE A REDUCTION IN TAXES PAYABLE IN AN
AMOUNT EQUAL TO THE AMOUNT OF THE TAXES PAID ON AMOUNTS PREVIOUSLY DISTRIBUTED.
THE ANTICIPATED TAX TREATMENT OF THE LIQUIDATION PROPOSAL IS SET FORTH
UNDER "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" BELOW. NO RULING HAS BEEN
REQUESTED FROM THE INTERNAL REVENUE SERVICE (THE "IRS") WITH RESPECT TO THE
ANTICIPATED TAX TREATMENT OF THE LIQUIDATION PROPOSAL, AND THE COMPANY WILL NOT
SEEK AN OPINION OF COUNSEL WITH RESPECT TO THE ANTICIPATED
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<PAGE> 22
TAX TREATMENT. THE FAILURE TO OBTAIN A RULING FROM THE IRS OR AN OPINION OF
COUNSEL RESULTS IN LESS CERTAINTY THAT THE ANTICIPATED TAX TREATMENT SUMMARIZED
THEREIN WILL BE OBTAINED. IF ANY OF THE CONCLUSIONS STATED UNDER "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" PROVE TO BE INCORRECT, THE RESULT COULD BE
INCREASED TAXATION AT THE CORPORATE AND/OR STOCKHOLDER LEVEL, THUS REDUCING THE
BENEFIT TO THE STOCKHOLDERS AND THE COMPANY FROM THE LIQUIDATION.
AMENDMENT AND ABANDONMENT
Under the Plan, if the Board of Directors determines that liquidation
and dissolution are not in the best interests of the Company or its
stockholders, the Board of Directors may direct that the Plan be abandoned. The
Company nevertheless may cause the performance, without further stockholder
approval, of any contract for the sale of assets executed before then which the
Board of Directors considers in the best interests of the Company. The Board of
Directors also may amend or modify the Plan if it determines such action to be
in the best interests of the Company or its stockholders, without the necessity
of further stockholder approval.
CONDUCT OF THE COMPANY FOLLOWING ADOPTION OF THE LIQUIDATION PROPOSAL
Following stockholder approval of the Liquidation Proposal, the Company
expects to begin winding-up its affairs, including the attempted sale or
liquidation of all of the Company's remaining non-cash assets, payment of or
provision for its obligations, liabilities and expenses and compliance with law,
and, if necessary, transfer of any remaining assets to the Liquidating Trust.
The Board of Directors will not seek to sell the Company, in whole or in part,
to the Company's officers, directors, beneficial owners of stock or other
affiliates.
CERTAIN CLAIMS
The Company has certain known liabilities and contingent liabilities,
for which it is or may be liable in the future. To the extent liabilities are
known and estimable, the Company has included its current estimate in its
summary of estimated liabilities and operating costs included in "Liquidation
Analysis and Estimates" above. The following is an outline of the various
principal liabilities of and claims against the Company.
- - THE WARN ACT. This law provides "protection to workers, their
families and communities by requiring employers to provide
notification sixty calendar days in advance of plant closings and
mass layoffs." To comply, the Company notified its employees on
September 16, 1998 of its intention to cease operations on or
about November 15, 1998. The Company operated during this period
and the related costs of operation, including payroll, have been
included as a reduction in the "Estimated Net Proceeds Available
for Distribution to Shareholder" included in "Liquidation Analysis
and Estimates" above.
- - EMPLOYMENT CONTRACTS. The Company has Employment Agreements with
three executive officers and the aggregate severance payments
under these Agreements are estimated in "Liquidation Analysis and
Estimates" above.
- - SECURITIES LITIGATION. The Company currently has a securities
litigation matter pending against it that might result in
significant liability - two consolidated claims initiated in 1996
and pending in the Circuit Court of Cook County, Illinois, in
which plaintiffs
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<PAGE> 23
purporting to represent a class consisting of persons who
purchased the Company's Common Stock between May 24, 1996 and July
9, 1996 allege various securities law violations against the
Company, Nashua Corporation (of which Gerald G. Garbacz, a former
director of the Company, is chief executive officer), William
Blair & Co. and certain directors and officers of the Company
(including Mr. Garbacz), as described in greater detail in the
Third Quarter Form 10-Q. On May 6, 1998, the Cook County Circuit
Court dismissed these actions 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 this lawsuit to be without merit and no
estimate of costs related to this matter has been included in the
estimated liabilities and operating costs included in "Liquidation
Analysis and Estimates" above. If plaintiffs' pending appeal of
this lawsuit's dismissal is granted and the Circuit Court's
dismissal order is reversed, the Company could incur significant
costs in connection with this lawsuit, which would reduce amounts
otherwise distributable to stockholders pursuant to the
Liquidation Proposal.
TERMINATED EMPLOYEE LITIGATION. The employment of Michael F.
Brown, who had been the Company's Vice President-Marketing, was
terminated by the Company in September 1998. Mr. Brown was party
to an employment contract, entered into in 1996, substantially
similar to the employment contracts described above under
"Interest of Certain Persons," providing for certain severance
benefits if his employment terminated after a "Change of Control,"
with lesser benefits in the event of a termination before a Change
of Control. The Company paid Mr. Brown $119,108 upon his
termination, which was the amount provided for by his contract for
termination before a Change of Control. On November 10, 1998, Mr.
Brown filed suit against the Company in the Circuit Court of
Champaign County, Illinois. The complaint alleges that Mr. Brown
should have received the higher severance benefit payable for
termination after a Change of Control, resulting in alleged
damages to Mr. Brown of $300,000.
The Company believes this lawsuit to be without merit and no
estimate of costs related to this matter has been included in the
estimated liabilities and operating costs included in "Liquidation
Analysis and Estimates" above. In the event that plaintiff
prevails, however, any amounts that he recovers would reduce
amounts otherwise distributable to stockholders pursuant to the
Liquidation Proposal.
LISTING AND TRADING OF THE COMMON STOCK
The Company will close its transfer books on the Final Record Date (as
described above) and at such time cease recording stock transfers and issuing
stock certificates (other than replacement certificates). Accordingly, it is
expected that trading in the shares will cease on or shortly after such date,
and trading may effectively terminate before then. To the extent the Company
makes interim liquidating distributions to stockholders prior to the Final
Record Date, the Common Stock will continue to trade, but the market price of
the Common Stock will likely decline as a result of such distributions.
As noted above, the Company's "market value of public float," based on
its reported closing Common Stock price of $0.28 on November 23, 1998, was
approximately $2 million, which is below the minimum $5,000,000 "public float"
required under Nasdaq National Market listing maintenance criteria. Nasdaq
National Market personnel notified the Company that if its "public
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<PAGE> 24
float" remained below $5,000,000 through October 30, 1998, as it did, the Common
Stock would be delisted from the National Market as of November 3, 1998. On
October 29, 1998, 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 delisting has been suspended at least temporarily.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's capital stock in connection
with the transactions contemplated by the Liquidation Proposal, or to any
similar rights of dissenters under Delaware law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal
income tax consequences of the Liquidation Proposal, including the Plan, to the
Company and its stockholders, but does not purport to be a complete analysis of
all the potential tax effects. The discussion addresses neither the tax
consequences that may be relevant to particular categories of investors subject
to special treatment under certain federal income tax laws (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and foreign
individuals and entities) nor any tax consequences arising under the laws of any
state, local or foreign jurisdiction.
The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "CODE"), Treasury Regulations, administrative rulings and judicial
decisions now in effect, all of which are subject to change at any time, either
prospectively or retrospectively, by legislative, administrative or judicial
action. The following discussion has no binding effect on the IRS or the courts
and assumes that the Company will liquidate in accordance with the Plan.
Distributions pursuant to the Plan may occur at various times and in more than
one tax year. No assurances can be given that the tax treatment described herein
will remain unchanged through each distribution. No ruling has been requested
from the IRS with respect to the anticipated tax treatment of the Plan, and the
Company will not seek an opinion of counsel with respect to the anticipated tax
treatment summarized herein. There can be no assurance that the Liquidating
Trust will be treated as a liquidating trust for federal income tax purposes or
that the distributions made pursuant to the Plan will be treated as liquidating
distributions. There can be no assurance that the Company's determination of the
fair market value of any property distributed will not be challenged, or that,
if challenged, will be upheld. If any of the conclusions stated herein proves to
be incorrect, the result could be increased taxation at the Company and/or the
stockholder level, thus reducing the benefit to the stockholders and the Company
from the liquidation.
Consequences to the Company. After the approval of the Liquidation
Proposal and until the liquidation is complete, the Company will continue to be
subject to tax on its taxable income. The Company will generally recognize
taxable gain or loss on sales of its property pursuant to the Plan. Upon any
liquidating distribution of property to stockholders or to the Liquidating
Trust, the Company will generally recognize gain or loss as if such property
were sold to the stockholders and/or the Liquidating Trust. The amount of any
such gain or loss will be the difference between (i) the Company's adjusted tax
basis for each asset and (ii) the amount of consideration received for that
asset (reduced by the costs of the transaction allocable to that asset) in the
case of a sale, or the asset's fair market value in the case of a liquidating
distribution.
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<PAGE> 25
It is anticipated that the net taxable income recognized by the Company
as a result of the sale of the assets will not create a current regular federal
income tax liability for the Company because of the Company's anticipated level
of operating losses and expenses for the fiscal year ending December 31, 1998.
Consequences to Stockholders. The stockholders will not recognize any
gain or loss as a result of the sale by the Company of its assets. As a result
of receiving a liquidating distribution from the Company, a stockholder will
recognize gain or loss equal to the difference between (i) the sum of the amount
of money and the fair market value of property (other than money) distributed to
such stockholder directly or to the Liquidating Trust on the stockholder's
behalf, and (ii) such stockholder's adjusted tax basis for his or her shares of
Common Stock. A stockholder's adjusted tax basis in his or her shares will
depend upon various factors, including the stockholder's cost and the amount and
nature of any distributions received with respect thereto. Any gain or loss
should be capital gain or loss provided that the shares are capital assets in
the hands of the stockholder and will be long-term capital gain or loss if held
by the stockholder for more than one year. Long-term capital gain realized by a
stockholder that is an individual, estate or trust may be eligible for reduced
tax rates. The adjusted tax basis of any property other than cash received by
each stockholder upon the complete liquidation of the Company will be the fair
market value of the property at the time of the distribution.
The Company will provide stockholders and the IRS with a statement of
the amount of cash and the fair market value of any property distributed to the
stockholders during that year (as determined by the Company), at such time and
in such manner as required by the Treasury Regulations.
The Liquidating Trust. If the Company transfers assets to the
Liquidating Trust, stockholders will be treated for tax purposes at the time of
transfer as having received their pro rata share of money and the fair market
value of property other than money transferred to the Liquidating Trust, reduced
by the amount of known liabilities assumed by the Liquidating Trust or to which
the property transferred is subject. The Liquidating Trust itself should not be
subject to tax, assuming that it is treated as a liquidating trust for federal
income tax purposes. After formation of the Liquidating Trust, stockholders must
take into account for federal income tax purposes their pro rata portion of any
income, expense, gain or loss recognized by the trust. As a result of the
transfer of property to the Liquidating Trust and the ongoing operations of the
Liquidating Trust, stockholders should be aware that they may be subject to tax
whether or not they have received any actual distributions from the Liquidating
Trust with which to pay such tax.
As indicated above, the Company has not obtained any IRS ruling as to
the tax status of the Liquidating Trust, and there can be no assurance that the
IRS will agree with the Company's conclusion that the Liquidating Trust should
be treated as a liquidating trust for federal income tax purposes. If it were
determined that the Liquidating Trust should be classified for federal income
tax purposes as an association taxable as a corporation (as a result of a change
in law, changes in the IRS ruling guidelines or administrative positions, a
change in facts or otherwise), income and losses of the Liquidating Trust would
be reflected on its own tax return rather than being passed through to the
stockholders and the Liquidating Trust would be required to pay federal income
taxes at corporate tax rates. Furthermore, much of the above discussion would no
longer be accurate. For instance, all or a portion of any distribution made to
the stockholders from the Liquidating Trust could be treated as a dividend
subject to tax at ordinary income tax rates.
22
<PAGE> 26
Taxation of Non-United States Stockholders. Foreign corporations or
persons who are not citizens or residents of the United States should consult
their tax advisors with respect to the U.S. and non-U.S. tax consequences of the
Plan.
STATE AND LOCAL INCOME TAX CONSEQUENCES
The Company may be subject to liability for state and local taxes with
respect to the sale of assets. Stockholders may also be subject to liability for
state and local taxes with respect to the receipt of liquidating distributions
and their interests in the Liquidating Trust. State and local tax laws may
differ in various respects from federal income tax law. Stockholders should
consult their tax advisors with respect to the state and local tax consequences
of the Plan.
THE FOREGOING SUMMARY OF CERTAIN INCOME TAX CONSEQUENCES IS INCLUDED
FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO ANY
STOCKHOLDER. THE TAX CONSEQUENCES OF THE PLAN MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF THE STOCKHOLDER. THE COMPANY RECOMMENDS THAT EACH
STOCKHOLDER CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
THE PLAN.
REQUIRED VOTE
Approval of the Liquidation Proposal requires the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock of the
Company. Abstentions and broker non-votes will have the same effect as votes
against the Liquidation Proposal.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the number of shares and percentage of
Cerion's outstanding Common Stock deemed to be beneficially owned as of
September 28, 1998, by (i) all persons known to Cerion to be the beneficial
owners of more than 5% of its common stock, (ii) each director of the Company
and (iii) the directors and officers of the Company as a group. Unless otherwise
indicated, the beneficial owners have sole voting and investment power with
respect to all shares owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
OF BENEFICIAL OUTSTANDING
OWNERSHIP SHARES
<S> <C> <C>
NAME OF BENEFICIAL OWNER (a)
Nashua Corporation.................... 2,599,000 (b) 36.8%
State of Wisconsin Investment Board... 686,200 (c) 9.8%
David A. Peterson (d)................. 88,300 1.2%
Osmund M. Fundingsland (e)............ 9,688 0.1%
Ross W. Manire (e).................... 8,936 0.1%
Gerard V. Schenkkan................... 4,848 0.1%
Ronald D. Verdoorn.................... 4,848 0.1%
Directors and Officers as a group
(7 persons) (f)....................... 200,821 2.8%
</TABLE>
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<PAGE> 27
- --------------------------------------------------------------------------------
(a) Information as to the interests of the directors and officers has been
furnished in part by them. The inclusion of information concerning shares
held by or for their spouses or children or by corporations in which they
have an interest does not constitute an admission by such nominees of
beneficial ownership thereof. Unless otherwise indicated, all persons have
sole voting and dispositive power as to all shares they are shown as
owning.
(b) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated February 13, 1998. By virtue of its
substantial ownership position in the Company, Nashua Corporation accounts
for its pro rata share of the Company's results of operations using the
equity method.
(c) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated January 20, 1998.
(d) Includes 86,300 shares Mr. Peterson has a right to acquire within 60 days
of November 17, 1998 through the exercise of stock options.
(e) Includes 1,000 shares this Director has a right to acquire within 60 days
of November 17, 1998 through the exercise of stock options.
(f) Includes 169,850 shares which the directors and officers of Cerion have the
right to acquire within 60 days of November 17, 1998 through exercises of
stock options.
MISCELLANEOUS
The cost of solicitation of proxies will be borne by Cerion. In
addition to the use of the mails, proxies may be solicited by directors,
officers and regular employees of Cerion, without extra compensation, by
telephone or by other means of communication. Arrangements will also be made
with brokerage houses, banks and other custodians, nominees and fiduciaries for
the forwarding of solicitation material to the beneficial owners of the Common
Stock held of record by such persons, and the Company may reimburse such persons
for their reasonable out-of-pocket expenses.
SAM ERWIN
Secretary
Champaign, Illinois
December 3, 1998
24
<PAGE> 28
PROXY PROXY
CERION TECHNOLOGIES INC.
1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61822
SPECIAL MEETING OF STOCKHOLDERS, DECEMBER 29, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
The undersigned hereby appoints David A. Peterson, Richard A. Clark and Sam
Erwin, and each of them, attorneys with full power of substitution, to vote, as
designated below, all shares of Common Stock of Cerion Technologies Inc. (the
"Company") of the undersigned, at the Special Meeting of Stockholders, to be
held on December 29, 1998 and at any and all adjournments thereof.
PLEASE VOTE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY
IN THE INCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
<PAGE> 29
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
1. To approve the Liquidation Proposal described in the
Company's Proxy Statement, dated December 3, 1998
(the "Proxy Statement"). FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. In their discretion, on such other business as may
properly be brought before the meeting or any
adjournment thereof.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR ITEM 1. WHERE NO
DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
FOR ITEM 1.
The undersigned acknowledges receipt of the
Notice of Special Meeting of Shareholders and
of the Proxy Statement.
Dated: ________________________
Signature(s) ___________________________________
________________________________________________
Please sign exactly as your name appears. Joint
owners should each sign personally. Where
applicable, indicate your official position or
representative capacity.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
PLEASE VOTE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY
IN THE ENCLOSED ENVELOPE.
<PAGE> 30
APPENDIX A
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF
CERION TECHNOLOGIES INC.
This Plan of Complete Liquidation and Dissolution (the "Plan") is
intended to accomplish the complete liquidation and dissolution of Cerion
Technologies Inc., a Delaware corporation (the "Company"), in accordance with
the Delaware General Corporation Law and Section 331 of the Internal Revenue
Code of 1986, as amended (the "Code"), as follows:
1. The Board of Directors of the Company (the "Board of Directors") has
adopted this Plan and called a meeting of the Company's stockholders (the
"Stockholders") to take action on the Plan. If, at said meeting of the
Stockholders, a majority of the outstanding common stock, par value $.01 per
share (the "Common Stock"), votes for the adoption of this Plan, the Plan shall
constitute the adopted Plan of the Company as of the date on which such
Stockholder approval is obtained (the "Adoption Date").
2. After the Adoption Date, the Company shall not engage in any
business activities except to the extent necessary to preserve the values of its
assets, wind up its business and affairs, and distribute its assets in
accordance with this Plan. No later than thirty (30) days following the Adoption
Date, the Company shall file Form 966 with the Internal Revenue Service.
3. From and after the Adoption Date, the Company shall complete the
following corporate actions:
(a) The Company shall determine whether and when to (i) transfer
the Company's property and assets (other than cash, cash
equivalents and accounts receivable) to a liquidating trust
(established pursuant to Section 6 hereof), or (ii) collect,
sell, exchange or otherwise dispose of all of its property and
assets in one or more transactions upon such terms and
conditions as the Board of Directors, in its absolute
discretion, deems expedient and in the best interests of the
Company and the Stockholders. In connection with such
collection, sale, exchange and other disposition, the Company
shall collect or make provision for the collection of all
accounts receivable, debts and claims owing to the Company.
(b) The Company shall pay or, as determined by the Board of
Directors, make reasonable provision to pay, all claims and
obligations of the Company, including all contingent,
conditional or unmatured claims known to the Company and all
claims which are known to the Company but for which the
identity of the claimant is unknown.
(c) The Company shall distribute pro rata to the Stockholders, all
available cash including the cash proceeds of any sale,
exchange or disposition, except such cash, property or assets
as are required for paying or making reasonable provision for
the claims and obligations of the Company. Such distribution
may occur all at once or in a series of distributions and
shall be in cash, in such amounts, and at such time or times,
as the Board of Directors or the Trustees (as defined in
Section 6 hereof), in their absolute discretion, may
determine. If and to the extent deemed necessary,
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<PAGE> 31
appropriate or desirable by the Board of Directors or the
Trustees, in their absolute discretion, the Company may
establish and set aside a reasonable amount (the "Contingency
Reserve") to satisfy claims against the Company, including,
without limitation, tax obligations, and all expenses of the
sale of the Company's property and assets, of the collection
and defense of the Company's property and assets, and of the
liquidation and dissolution provided for in this Plan. The
Contingency Reserve may consist of cash and/or property.
4. The distributions to the Stockholders pursuant to Sections 3, 6 and
7 hereof shall be in complete redemption and cancellation of all of the
outstanding Common Stock of the Company. As a condition to receipt of any
distribution to the Stockholders, the Board of Directors or the Trustees, in
their absolute discretion, may require the Stockholders to (i) surrender their
certificates evidencing the Common Stock to the Company or its agent for
recording of such distributions thereon or (ii) furnish the Company with
evidence satisfactory to the Board of Directors or the Trustees of the loss,
theft or destruction of their certificates evidencing the Common Stock, together
with such surety bond or other security or indemnity as may be required by and
satisfactory to the Board of Directors or the Trustees ("Satisfactory Evidence
and Indemnity"). As a condition to receipt of any final distribution to the
Stockholders, the Board of Directors or the Trustees, in their absolute
discretion, may require the Stockholders to (i) surrender their certificates
evidencing the Common Stock to the Company or its agent for cancellation or (ii)
furnish the Company with Satisfactory Evidence and Indemnity. The Company will
finally close its stock transfer books and discontinue recording transfers of
Common Stock on the earliest to occur of (i) the close of business on the record
date fixed by the Board of Directors for the final liquidating distribution,
(ii) the close of business on the date on which the remaining assets of the
Company are transferred to the Trust or (iii) the date on which the Company
ceases to exist under the Delaware General Corporation Law (following any
post-dissolution continuation period thereunder), and thereafter certificates
representing Common Stock will not be assignable or transferable on the books of
the Company except by will, intestate succession, or operation of law.
5. If any distribution to a Stockholder cannot be made, whether because
the Stockholder cannot be located, has not surrendered its certificates
evidencing the Common Stock as required hereunder or for any other reason, the
distribution to which such Stockholder is entitled (unless transferred to the
Trust established pursuant to Section 6 hereof) shall be transferred, at such
time as the final liquidating distribution is made by the Company, to the
official of such state or other jurisdiction authorized by applicable law to
receive the proceeds of such distribution. The proceeds of such distribution
shall thereafter be held solely for the benefit of and for ultimate distribution
to such Stockholder as the sole equitable owner thereof and shall be treated as
abandoned property and escheat to the applicable state or other jurisdiction in
accordance with applicable law. In no event shall the proceeds of any such
distribution revert to or become the property of the Company.
6. If deemed necessary, appropriate or desirable by the Board of
Directors, in its absolute discretion, in furtherance of the liquidation and
distribution of the Company's assets to the Stockholders, as a final liquidating
distribution or from time to time, the Company shall transfer to one or more
liquidating trustees, for the benefit of the Stockholders (the "Trustees"),
under a liquidating trust (the "Trust"), any assets of the Company which are (i)
not reasonably susceptible to distribution to the Stockholders, including
without limitation non-cash assets and assets held on behalf of the Stockholders
(a) who cannot be located or who do not tender their certificates evidencing the
Common Stock to the Company or its agent as herein above required or (b) to whom
distributions may not be made based upon restrictions under contract or law,
including, without limitation, restrictions of the federal securities laws and
regulations promulgated thereunder or (ii)
2
<PAGE> 32
held as the Contingency Reserve. The Board of Directors is hereby authorized to
appoint one or more individuals, corporations, partnerships or other persons, or
any combination thereof, including, without limitation, any one or more
officers, directors, employees, agents or representatives of the Company, to act
as the initial Trustee or Trustees for the benefit of the Stockholders and to
receive any assets of the Company. Any Trustees appointed as provided in the
preceding sentence shall succeed to all right, title and interest of the Company
of any kind and character with respect to such transferred assets and, to the
extent of the assets so transferred and solely in their capacity as Trustees,
shall assume all of the liabilities and obligations of the Company, including,
without limitation, any unsatisfied claims and unascertained or contingent
liabilities. Further, any conveyance of assets to the Trustees shall be deemed
to be a distribution of property and assets by the Company to the Stockholders
for the purposes of Section 3 of this Plan. Any such conveyance to the Trustees
shall be in trust for the Stockholders of the Company. The Company, subject to
this Section 6 and as authorized by the Board of Directors, in its absolute
discretion, may enter into a liquidating trust agreement with the Trustees, on
such terms and conditions as the Board of Directors, in its absolute discretion,
may deem necessary, appropriate or desirable. Adoption of this Plan by a
majority of the outstanding Common Stock shall constitute the approval of the
Stockholders of any such appointment and any such liquidating trust agreement as
their act and as a part hereof as if herein written.
7. Whether or not a Trust shall have been previously established
pursuant to Section 6, in the event it should not be feasible for the Company to
make the final distribution to the Stockholders of all assets and properties of
the Company prior to December 31, 2000, then, on or before such date, the
Company shall be required to establish a Trust and transfer any remaining assets
and properties (including, without limitation, any uncollected claims,
contingent assets and the Contingency Reserve) to the Trustees as set forth in
Section 6.
8 After the Adoption Date, the officers of the Company shall, at such
time as the Board of Directors, in its absolute discretion, deems necessary,
appropriate or desirable, obtain any certificates required from the Delaware tax
authorities and, upon obtaining such certificates, the Company shall file with
the Secretary of State of the State of Delaware a certificate of dissolution
(the "Certificate of Dissolution") in accordance with the Delaware General
Corporation Law.
9. Adoption of this Plan by holders of a majority of the outstanding
Common Stock shall constitute the approval of the Stockholders of the sale,
exchange or other disposition in liquidation of all of the property and assets
of the Company, whether such sale, exchange or other disposition occurs in one
transaction or a series of transactions, and shall constitute ratification of
all contracts for sale, exchange or other disposition which are conditioned on
adoption of this Plan.
10. In connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the absolute discretion of the
Board of Directors, pay any brokerage, agency, professional and other fees and
expenses of persons rendering services to the Company in connection with the
collection, sale, exchange or other disposition of the Company's property and
assets and the implementation of this Plan.
11. In connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the absolute discretion of the
Board of Directors, pay to the Company's officers, directors, employees, agents
and representatives, or any of them, compensation or additional compensation
above their regular compensation, in money or other property, in recognition of
the extraordinary efforts they, or any of them, will be required to undertake,
or actually undertake, in connection with the implementation of this Plan.
Adoption of this Plan by a
3
<PAGE> 33
majority of the outstanding Common Stock shall constitute the approval of the
Company's stockholders of the payment of any such compensation.
12. The Company shall continue to indemnify its officers, directors,
employees, agents and representatives in accordance with its certificate of
incorporation, as amended, and by-laws and any contractual arrangements, for
actions taken in connection with this Plan and the winding up of the affairs of
the Company. The Company's obligation to indemnify such persons may also be
satisfied out of the assets of the Trust. The Board of Directors and the
Trustees, in their absolute discretion, are authorized to obtain and maintain
insurance as may be necessary or appropriate to cover the Company's obligations
hereunder.
13. Notwithstanding authorization or consent to this Plan and the
transactions contemplated hereby by the Stockholders, the Board of Directors may
modify, amend or abandon this Plan and the transactions contemplated hereby
without further action by the Stockholders to the extent permitted by the
Delaware General Corporation Law.
14. The Board of Directors of the Company is hereby authorized, without
further action by the Stockholders, to do and perform or cause the officers of
the Company, subject to approval of the Board of Directors, to do and perform,
any and all acts, and to make, execute, deliver or adopt any and all agreements,
resolutions, conveyances, certificates and other documents of every kind which
are deemed necessary, appropriate or desirable, in the absolute discretion of
the Board of Directors, to implement this Plan and the transactions contemplated
hereby, including, without limiting the foregoing, all filings or acts required
by any state or federal law or regulation to wind up its affairs.
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<PAGE> 34
APPENDIX B
[Letterhead of Advest, Inc.]
December 3, 1998
Board of Directors
Cerion Technologies Inc.
1401 Interstate Drive
Champaign, IL 61821-1090
Gentlemen:
You have requested the opinion (the "Opinion") of Advest, Inc., through its
Investment Banking department ("Advest"), as to whether the decision to
undertake the liquidation of Cerion Technologies, Inc. (the "Company") at the
earliest opportunity (the "Liquidation") is fair to the shareholders of the
Company from a financial point of view as of the date of this letter as compared
to continuing to operate while continuing to attempt to sell the Company as a
going concern.
INFORMATION REVIEWED
In connection with our review of the Liquidation and in arriving at our Opinion,
we have reviewed and analyzed information available as of the date of this
letter including: (i) business and financial information for the Company; (ii)
various analyses performed by Company management; and (iii) such other
information, financial studies, analyses, and industry projections deemed by
Advest to be relevant and appropriate including, but not limited to, financial,
economic, market, and industry data. We have reviewed other information
furnished to Advest by the Company and have met with members of senior
management of the Company to discuss the market, business operations, historical
financial results, and future prospects of the Company. The management of the
Company cooperated fully with Advest in connection with its analysis.
ADVEST'S UNDERTAKINGS ON BEHALF OF THE COMPANY
Advest was retained on March 31, 1997 after the Company had conducted interviews
with several other investment banking firms. The objective of that engagement
was to provide information and the analysis of an independent third party to
assist the Company in evaluating the strategic alternatives available the
Company. Advest presented its analysis to the Board of Directors of the Company
on May 28, 1997.
That analysis discussed the then current situation of the data storage industry
in general and the resultant implications for the Company as a supplier to that
industry. The data storage industry in general had suffered oscillations of over
and under capacity with resultant price instability. In addition, a long term
trend of price decreases for increasingly technological superior products was
significant. This pricing trend directly translated into a similar price decline
for the aluminum substrates that are the Company's sole significant product.
The Company's sole significant product is aluminum substrates. The Company buys
blank aluminum discs and mills the inside and outside diameters to specified
dimensions and produces smooth finishes on the two faces of the discs with
etching and grinding operations. These are
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<PAGE> 35
just the first production steps in the manufacture of hard disk drives.
Subsequent operations are: nickel plating and polishing the disks, the
application of the actual storage media to the disk, and the final assembly of
the hard disk drive. The Company sells its "finished" product (in reality an
intermediate and preliminary stage of production) both to vertically integrated
companies lacking grinding capacity and to other companies involved in producing
intermediate production steps.
The market for ground aluminum substrates had undergone rapid changes with the
broad adoption of strategies of vertical integration, whereby the actual and
potential customers of the Company obtained their own capacity for the
production of substrates. This left only a few customers available to the
Company for sales as a primary vendor and an unstable market for "merchant"
product whereby the Company competed with other suppliers and with vertically
integrated customers with temporary excess substrate capacity to provide
substrates to vertically integrated customers with temporary production problems
or capacity imbalances.
In addition, many of these vertically integrated companies and the Company's
prime competitor in the merchant market, a subsidiary of Kobe Steel, Ltd.
("Kobe"), a large Japanese company, had manufacturing locations in Asia with
resultant significant cost advantages over the Company with its sole
manufacturing location in central Illinois. This fact, combined with the long
term price decline trend, meant the Company was at a competitive disadvantage in
pricing its product and, furthermore, had to aggressively pursue continual cost
reductions in an attempt to stay ahead of the price decline curve. That price
decline curve indicated that the Company's cost to produce its product would
exceed the sales price obtainable in the marketplace within a period of
approximately two to five years unless the Company was able to achieve continued
cost reductions. The range in time is a result of varying estimates of the price
decline rate and the range of sales volume obtainable by the Company, and thus
the percentage of capacity utilized and resultant ability of the Company to
spread its fixed costs over more or less units produced.
Adding further pressure on the substrate market was the excess capacity, both
existing and projected. The 1997 demand for substrates was projected to be 435
million by a leading industry commentator, TrendFocus. In contrast, the Company
estimated an industry capacity of 640 million units, an overcapacity situation
of 47%.
The rate of growth of shipments was slowing and user requirements for storage
were growing at a slowing rate. In addition, technological advances enabled the
disk drive makers to provide enhanced storage capabilities with fewer disks,
exacerbating the overcapacity situation in the industry.
In addition, alternate materials for substrates, such as glass and carbon
compounds, were making increasing inroads on the market, decreasing the demand
for aluminum substrates. Such alternative substrates were moving up the disk
sizes and had captured a large portion of the drives below 3.5 inch in diameter.
Since almost all of the Company's shipments were of 3.5 inch substrates, the
Company was thus exposed to technological obsolescence if the makers of such
alternate substrates could capture the 3.5 inch market. In addition, longer
range technological threats existed from alternate storage technologies not
utilizing rotating disks, such as holography.
In its market, the Company was notably alone in not having any strategic
partners or in being part of a group which could capture profit margins over
several stages of production. Its main competitor, Kobe, was part of a large
Japanese company which also manufactured the raw aluminum blanks.
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<PAGE> 36
Advest recommended that the Company undertake an effort to find a strategic
partner or a buyer to reduce the risk situation then facing the Company as a
small independent company with a relatively weak strategic position in a
volatile market with an uncertain outlook.
Advest was retained on June 2, 1997 to attempt to sell the Company or to arrange
a significant investment or other strategic relationship with parties that had
been identified and approved in advance by the Board of Directors of the
Company. Advest was not otherwise limited in its efforts to sell the Company.
Advest conducted an aggressive campaign on the Company's behalf, eventually
contacting six companies. Of these, three companies expressed initial interest
and Advest conducted a series of presentations customized to each company and
entered into extended discussions. One company moved quite far in the process,
but the acquisition failed to obtain the necessary support by the overseas
headquarters of that company, due in part to the steadily deteriorating
conditions in Asia and in the disk drive industry. Such efforts by Advest to
sell the Company have continued up to this date.
Advest's engagement letter was amended on August 10, 1998 after a meeting of the
Board of Directors of the Company on that date at which meeting a decision was
made to publicly announce that the Company was for sale immediately following
the release of the Company's financial performance for the quarter ended July 3,
1998. In preparation for such meeting, Advest assisted the Company in the
evaluation of a Liquidation and presented its analysis at that meeting. Advest
was instructed to continue its efforts to sell the Company and to assist the
Company in discussions with parties who may be interested in buying selected
assets of the Company. The Board of Directors also requested that Advest be
prepared to render a Fairness Opinion in the event of any subsequent decision to
Liquidate. On August 13, 1998 the Company publicly announced that it was
actively seeking a buyer, that it had hired Advest as its investment banker, and
that the Board of Directors of the Company had "concluded that a small
independent company may face unacceptably high risks due to the current period
of overcapacity in the data storage industry".
Advest was instructed by the Board of Directors of the Company that the time
period for finding a buyer was relatively short, given the then current and
projected negative cash flow for the Company and the poor prospects for
increased sales for the next several quarters. At that time, the Board of
Directors of the Company indicated that they would seriously consider adopting a
plan of Liquidation if a buyer could not be identified in the near-term future.
No limitations were imposed on Advest for this process.
Advest contacted both the parties who had been interested previously and others,
some outside the disk drive industry. One party, a unit of a large public
company, initially expressed interest and visited the Company for a tour and a
detailed presentation, but subsequently informed Advest that it had, after
deliberation, decided not to pursue an acquisition of the Company in whole or in
part. In addition, the public announcement that the Company was actively seeking
a buyer produced several calls from parties that initially expressed interest,
but upon review resulted in no interest in pursuing the matter further. Advest
discussed the situation anew with its Japanese affiliate with respect to the
possibility of arranging a sale with an Asian company and was advised that the
current economic climate in Asia meant that there was little likelihood of
arranging a sale and that the mode of doing business in Asia when combined with
the current economic situation in Asia meant that even ascertaining if there was
interest would take an extended period of time. Advest, however, proceeded to
contact Asian companies in the storage industry to ensure that they were
appraised of the fact that the Company was actively seeking a buyer and were
provided information on the Company and its proprietary processes. At this date,
no party has indicated any continuing interest in pursuing an acquisition of the
Company as a going concern. (The Company also received a proposal from a company
that was interested in pursuing a so-called "back-door IPO." Under that
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<PAGE> 37
proposal, a business unrelated to that of the Company in which the proposing
company had a significant interest would have been merged into the Company. In
return, the proposing company and the other stockholders of the unrelated
business would have been issued new shares in the Company that would have
constituted a substantial majority of total Company shares outstanding. The
Company's Board of Directors decided not to pursue such a proposal.)
Advest was paid a fee of $100,000 for its strategic analysis and presentation to
the Board of Directors and received payments of $30,000 from the Company during
the course of its attempts to sell the Company. If Advest had succeeded in
closing a sale of the Company, it would have received a Success Fee of $450,000.
Advest received a fee of $250,000 in conjunction with the rendering of this
Opinion since a sale resulting in a Success Fee did not occur.
Advest has no present or contemplated financial interest in the Company, or in
any related party. The compensation received by Advest from this engagement is
not dependent on the findings of this Opinion.
THE DECISION TO LIQUIDATE
Advest has concluded that the Company has been exposed to the market for a
considerable period of time and that the likely buyers have been contacted or
have otherwise been made aware of the fact that the Company has been actively
seeking a buyer for over a year, particularly given the relatively small number
of companies in the disk drive industry. In addition, the public announcement of
an active sale process has alerted other potential buyers. The Company's poor
financial performance and outlook has been a factor in the lack of finding a
buyer, as has been the deteriorating conditions in Asia and in the hard disk
drive industry generally, with widespread overcapacity and price pressures. The
attractiveness of the Company as an acquisition target might be improved if and
when the current overcapacity in the substrate market subsides and the situation
in Asia improves, both of which events are difficult to project as to their
likelihood and timing. The Company will, however, face a continuing severe cost
disadvantage to Asian producers. The Company has experienced, is currently
experiencing, and is expected to experience in the immediate future, negative
cash flow which is eroding shareholder value.
At the time the Company ceased manufacturing operations on November 15, 1998, it
had only one customer, MMC Technologies, Inc. ("Maxmedia"), and that customer
had indicated concerns about relying on the Company as a vendor given the
Company's deteriorating financial condition. There appear to be only two other
potential customers left available to the Company, other than episodic merchant
market demand. One, Trace Storage Technologies, Inc. ("Trace"), is not expected
to resume purchasing until some time in 1999, if ever, since it has experienced
difficulties in the market accompanied by a sharp decline in the demand for its
products. The other, International Business Machines Corporation ("IBM"), may
order some product from the Company, but such orders would be subject to the
Company qualifying its product, a process than can take up to six months.
Significant order volume from IBM, if any, would not have been expected until
the second half of 1999. Although the potential exists for substantial orders
from IBM, the range of potential volumes for the Company as a second source,
when combined with the expected level of orders from Maxmedia are not expected
to produce financial results that compensate the Company's shareholders for the
significant risks involved. To continue to have operated at negative cash flows
with one customer in the hope that the Company would qualify with IBM and that
IBM would order significant volumes from the Company would have exposed the
Company to the very real risk that its cash and working capital would be eroded
to the point that cessation of operations would have been required anyway. Given
the poor financial condition and outlook for the Company and the data storage
industry, it is unlikely that financing could be obtained for the Company, and
any
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<PAGE> 38
financing, if arranged, would significantly dilute the ownership position of
the Company's current shareholders.
COMPANY FINANCIAL PERFORMANCE
For 1997, the Company reported net income of $827 thousand on sales of $31.8
million. However, sales for the first half of 1998 were only $6.2 million and
the Company reported a loss at the gross margin level of $665 thousand, while
the net loss was $8.3 million (of which $6.4 million was the result of the
establishment or reserves against asset values). The Company suffered an erosion
of over $4 million its net working capital position from December 31, 1997 to
June 30, 1998.
Prior to ceasing manufacturing operations, the Company experienced a cash burn
rate of approximately $300 thousand a month.
The Company incurred net operating losses of approximately $1.6 million for its
quarter ended October 2, 1998 (before giving effect to an additional charge of
approximately $654,000 with respect to the receivable from StorMedia referred to
below and prior to an additional charge of $621,000 for costs associated with
ceasing operations). Prior to its decision to cease manufacturing operations on
November 15, 1998, the Company expected to incur net operating losses in excess
of $1.3 million in each of the third and fourth quarters of 1998.
COMPANY STOCK MARKET PRICING AND NASDAQ NOTIFICATION OF POTENTIAL DELISTING
The Company's poor financial performance and outlook has resulted in a continued
deterioration of its stock price. Its stock price, once as high as $19.50, was
$0.69 as of the close of business on September 11, 1998 (prior to public
announcement by the Company of the proposed Liquidation). Trading volumes have
similarly shrunk. The NASDAQ notified the Company that it no longer satisfies
the listing requirements in that its public float was under $5 million and that
if such float remained under $5 million through October 30, 1998, as it did, the
Common Stock would be delisted from the National Market as of November 3, 1998.
At the closing price of $0.69 on September 11, 1998 (prior to public
announcement by the Company of the proposed Liquidation), the total equity
market capitalization of the Company was $4.9 million. At the closing price of
$0.28 on November 23, 1998, the total equity market capitalization of the
Company was approximately $2 million.
On October 29, 1998, the Company requested a hearing with the NASDAQ National
Market to appeal delisting of the Company's Common Stock, as a result of which
delisting has been suspended at least temporarily.
OTHER ALTERNATIVES EXAMINED BY THE COMPANY
Prior to the August 10, 1998 board meeting, Company management undertook a study
of the feasibility of several operating alternatives: (i) continued operation at
current expense levels, (ii) severe cuts in staffing, wages, and benefits, an
attempt to stay alive until the substrate market and prospects for the Company
improved; (iii) move the manufacturing capacity to a lower cost location such as
Mexico. Each alternative was examined under high, medium, and low projections
for the Company's achievable sales.
Although certain of these scenarios resulted in some positive cash flow over the
next two years, most showed negative or minimal net cash flow and some required
external financing which is not
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<PAGE> 39
expected to be available. The most optimistic combination of factors resulted in
a total net cash flow plus estimated value of the business in two years that was
not significantly different from the projected result in two years of a
Liquidation now and investing the resultant net proceeds in "risk free"
securities, i.e. U.S. Treasuries. All such scenarios left little or no room for
contingencies, showed negative cash flow for the immediate future, and exposed
the Company to the possible loss of key personnel. The Company would remain at a
cost disadvantage which may make it impossible to compete with Asian companies,
with a potential market of only a few customers, in a market that is subjected
to technological obsolescence.
ESTIMATED NET LIQUIDATION PROCEEDS
Company management has prepared an estimated Liquidation scenario which results
in an estimated future net proceeds distributable to the shareholders of
approximately $5.4 to $7.0 million. This amount excludes $3.6 million in
accounts receivable from StorMedia, a past customer, which has been reserved
against for accounting purposes. Further collection on this receivable may be
possible, although StorMedia filed for Chapter 11 bankruptcy protection on or
about October 11, 1998. The estimated Liquidation proceeds are thus likely to be
in excess of the market capitalization of $4.9 million as of September 11, 1998
(prior to public announcement by the Company of the proposed Liquidation).
CONTINGENT AND LIMITING CONDITIONS
Our Opinion is subject to the following contingent and limiting conditions: (i)
information, estimates, and opinions supporting this Opinion were obtained from
sources considered reliable; however, no liability for such sources is assumed
by Advest; (ii) the Company and their representatives have warranted to Advest
that the information supplied to Advest was complete and accurate to the best of
their knowledge and not misleading and that this Opinion will be used only in
compliance with all applicable laws and regulations; (iii) possession of this
Opinion, or a copy thereof, does not carry with it the right of publication of
all or any part of it, nor may it be used for any purpose by any but the Company
without the previous written consent of Advest, and, in any event, only with
proper attribution; (iv) this Opinion applies to this situation only, and may
not be used out of the context presented herein; (v) our Opinion is necessarily
based upon conditions as they existed and could be evaluated as of the date of
this letter; (vi) our Opinion relies upon the reported financial statements,
budgets, and projections for the Company and would necessarily be modified if
the results, budget, or projections were substantially different than presented.
In performing our analysis we have relied upon, without independent verification
the financial projections, estimates and other information provided to Advest by
the Company for the operation of the Company with respect to their accuracy,
completeness, and reasonableness.
Advest did not make or seek to obtain current appraisals of the Company's assets
in connection with its analysis, although it did read such appraisals for
equipment and real estate as the Company provided. Our analysis is based on
numerous assumptions with respect to industry outlook, general business and
economic conditions, estimated net sale proceeds of certain assets, expected
ranges of future operating losses, and other matters, many of which are beyond
the control of the Company. Any such assumption is not necessarily indicative of
actual outcomes or results that may occur, and such actual outcome may be
significantly more or less favorable than assumed.
Our Opinion is directed solely at the fairness from a financial point of view of
the decision to undertake the Liquidation as compared to continuing to operate
while continuing to attempt to sell the Company as a going concern, and does not
constitute a recommendation to any shareholder as to
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<PAGE> 40
how such shareholder should vote at any shareholders' meeting. No limitations
were imposed by the Company on Advest with respect to the investigations made,
procedures followed, or factors considered by Advest in rendering its Opinion.
The Company has indicated that it will not require Advest to update this
Opinion. Accordingly, Company shareholders should be aware that they may not
place any reliance on this Opinion to the extent of any material changes since
December 3, 1998 in the facts, assumptions, securities market conditions, or
actual or projected results of operations of the Company.
CONSENT
Advest consents to a description and inclusion of the Opinion in the documents
required to be filed with the appropriate regulatory authorities and distributed
to the Company's stockholders in connection with the Liquidation and to
references to Advest in such documents provided that any such descriptions and
references are reasonably acceptable to Advest. The Opinion is solely for the
use and benefit of the Company and its shareholders and may not be relied upon
by third parties.
CONCLUSION
Advest, as an integral part of its investment banking business, arranges
business combinations on behalf of buyers and sellers and arranges financing for
clients through public and private placements of debt and equity securities.
Advest also forms opinions as to the values of businesses and their securities
for pricing mergers and acquisitions; for formal opinions of fairness and
solvency for complex transactions; in conjunction with our financing efforts;
for recapitalizations, including bankruptcy situations and the structuring of
ESOPs; for a wide variety of corporate financial planning purposes; for estate
tax filings; and also for disputes and litigation situations as experts in
corporate finance. Advest has been working with the Company since March 31,
1997, both in an analysis/advice mode and in actively seeking buyers for the
Company, and we believe that we are qualified to offer our expert opinion based
on our experience and the information obtained in that regard and based on our
previous professional experience and qualifications.
In evaluating the fairness of a decision between alternate courses of action,
one must evaluate, among other factors, the relative present values of the cash
flows and future values, which reflect the time and risk factors embedded in the
differing courses of action. With respect to the Liquidation, we conclude that
the range of values expected to be obtained is in excess of the present value of
net operating cash flow and the present value of any eventual sale of the
Company. That present value of cash flows and eventual sale reflect the risks:
that the Company could obtain those cash flows, survive until such a sale could
be accomplished, and could accomplish such a sale.
In reviewing our analysis within the context of the Liquidation, and in view of
the risk profile of the Company within the context of its industry and the
outlook for that industry, we are of the Opinion that the decision undertake a
Liquidation is fair to the shareholders of the Company from a financial point of
view as of the date of this letter as compared to continuing to operate while
continuing to attempt to sell the Company as a going concern. We gave an oral
opinion to the Board of Directors of the Company at their meeting on September
14, 1998 which was substantially identical to this written opinion.
Very Truly Yours,
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ADVEST, INC.
- ---------------------
William A. Lundquist
Managing Director
Advest Investment Banking
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APPENDIX C
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-5492-1
CERION TECHNOLOGIES INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 02-0485458
(State of or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
1401 INTERSTATE DRIVE
CHAMPAIGN, ILLINOIS 61821
(217) 359-3700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
On March 9, 1998, the aggregate market value of the voting stock held by
nonaffiliates totaled approximately $14,729,300 based on the closing stock price
as reported by The Nasdaq Stock Market.
On March 9, 1998, there were 7,034,051 shares of common stock, $.01 par
value, of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 1997 Annual Report to Shareholders are incorporated by
reference herein and filed as Exhibits hereto.
================================================================================
<PAGE> 43
CERION TECHNOLOGIES INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Facilities and Properties................................... 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 26
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K....................................................... 28
Signatures............................................................ 31
</TABLE>
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 as discussed in greater detail
in Item 7 below. Such statements are inherently uncertain and actual results
could differ materially from the Company's expectations. Specifically, such
results are subject to certain risks and uncertainties, including without
limitation those discussed in "Matters Affecting Future Results" in Item 7 below
and those discussed in the Company's 1997 Annual Report to Shareholders in the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (which section is filed as Exhibit 99.1 hereto and hereby
incorporated by reference herein). Such forward-looking statements speak only as
of the date on which they are made, and the Company cautions not to place undue
reliance on such statements. The Company disclaims any duty to update any such
statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Cerion Technologies Inc. ("Cerion" or "the Company") manufactures
precision-machined aluminum disk substrates, which are the metallic platforms of
magnetic thin-film disks used in the hard disk drives of portable and desktop
computers, network servers, add-on storage devices and storage upgrades. The
Company's manufacturing and engineering expertise, together with its proprietary
manufacturing processes and equipment, enable it to supply customers with high
product volumes and consistent quality while meeting increasingly stringent
product tolerances. See "Matters Affecting Future Results" in Item 7 below for
discussion regarding matters that may affect the Company's future performance.
INDUSTRY BACKGROUND
Fluctuating Market Conditions. The markets in which the Company sells its
aluminum disk substrates have shown rapid but fluctuating growth in demand over
the last five years, but increased demand also has generated a rapid growth in
production capacity. Periods of shortage have alternated recently with periods
of oversupply. During the latter half of 1996 and throughout 1997 and continuing
since then, the market appears to have been dominated by oversupply and
consequently, pricing pressures. Although the Company's strategy during 1996 and
1997 was to compete on quality more than on price, during the latter half of
1996 and throughout 1997 the Company was nevertheless forced to compete
increasingly on price, even on those products meeting the tightest
specifications. These changing market forces had a significant impact on the
Company's sales and margins.
Growth in Demand. The introduction of increasingly powerful
microprocessors and more memory intensive software, combined with the
development and growth of multimedia computing applications and Internet usage,
have stimulated demand for PCs in both the home and business markets. In
addition, the applications currently being developed for PCs require greater
storage capacity, sharply increasing the demand for high-capacity disk drives.
The market demand for aluminum substrates used for thin-film disks in disk
drives has been growing rapidly, stimulated by demand for PCs, storage upgrades
and add-ons to existing computers and the growing use of sophisticated network
servers. According to TrendFOCUS in 1997, an industry publication, the number of
thin-film disks produced worldwide in 1993, 1994, 1995, 1996 and 1997 was 134
million, 186 million, 256 million, 344 million and 417 million, respectively,
and projected at 450 million in 1998, which would represent a compound annual
growth rate of approximately 28 percent over this six-year period.
Although the average storage capacity per disk drive has increased
significantly, the average number of disks per drive has remained relatively
constant, primarily as a result of significant advances in technology and in the
storage capacity of thin-film disks. The Company believes that success in the
disk drive industry will continue to depend on the ability of the disk drive
manufacturers, together with their suppliers of critical components, such as
thin-film disks and disk substrates, to keep pace with these advances. As a
result, thin-film disk manufacturers are likely to continue to require more
stringent smoothness and flatness tolerances and higher quality levels from
their aluminum disk substrate suppliers.
Growth in Supply. Aluminum disk substrates are produced by independent
producers, including the Company and Kobe Steel, Ltd. ("Kobe") through its
subsidiaries and by vertically integrated thin-film disk manufacturers including
Seagate Technologies, Inc. ("Seagate"), Komag, Inc. ("Komag"), StorMedia
Incorporated ("StorMedia") and HMT Technology Corporation ("HMT"). During 1996
and 1997, StorMedia and HMT began to move towards vertically integrated
production. In 1996, HMT acquired a facility in Oregon for aluminum disk
substrate production. StorMedia announced in 1996 it would produce aluminum disk
substrates at a new manufacturing facility in Singapore and in December 1997
acquired Akashic Memories Corporation ("Akashic"), which had significant
production capacity to produce substrates. HMT and StorMedia represented 2
percent and 43 percent, respectively, of the Company's revenue in 1997 and 44
percent and 29 percent, respectively, in 1996. While Cerion has been able to
sell substrates to
3
<PAGE> 45
certain of these vertically integrated companies, it has lost revenues from
others, including a significant amount of revenues lost from one vertically
integrated company, HMT. Even as the demand has increased for smoothness,
flatness and uniformity, pricing pressures have increased substantially during
the latter half of 1996 through 1997 and are expected to continue into 1998,
even for disks meeting the most stringent specifications.
Changes in Aluminum Disk Substrate Performance Characteristics. A
thin-film disk is composed of a substrate, generally aluminum, which must be
flat, smooth and free of surface defects. This base substrate is then coated
with very thin layers of nickel and magnetic material, which create the disk's
magnetic properties. Minor deviations in the tolerance or qualities of the
aluminum substrate can cause significant numbers of disks to be rejected,
creating significant yield loss to thin-film disk manufacturers.
The increased demand for high-performance disk drives has resulted in
increased pressures for aluminum substrate manufacturers to tighten their
specifications for smoothness, flatness and uniformity. These qualities
contribute to improved disk performance in the following ways: (i) the flatter
the disk, the less risk that the recording head will "crash" against the surface
of the disk, thus increasing the performance and reliability of the finished
product; (ii) with a smoother original substrate, thin-film disk manufacturers
are able to spend less time and use less material on the smoothing of the nickel
plating layer that is applied on the aluminum substrate, resulting in cost
efficiencies; and (iii) a smoother disk facilitates storage of information at
higher densities, thus increasing the disk's memory capability.
THE CERION STRATEGY
Cerion focuses on providing value-added engineering and technological
solutions that meet the demands of the memory disk substrate markets requiring
precision finishing of aluminum. The Company's strategy is to combine
engineering expertise, innovative manufacturing techniques and proprietary
equipment to provide a high volume of advanced, precision-machined aluminum disk
substrates of consistent, high quality at competitive prices.
In the latter half of 1996 and throughout 1997, market conditions,
dominated by oversupply and growth in vertical integration by thin-film disk
manufacturers, forced the Company to pursue "commodity" products with less
stringent tolerances for a significant portion of its aluminum disk substrate
production to maintain market share. The Company believes that similar market
conditions will exist into the foreseeable future. Differentiation in the areas
of service, and responsiveness to short-term demand swings will be required to
maintain the Company's current market share. The Company will continue a
long-term focus on continual improvement by striving to provide products meeting
more demanding specifications for flatness, smoothness and uniformity. These
products will be focused on meeting the typically more stringent demands of
"high-end" drive applications. In addition, the Company expects that market
conditions will require it to offer customized products to meet each customer's
specific product parameters. The Company's continued strategic focus will be to
maintain and grow relative market share through an emphasis on continual product
improvement.
The Company has sought to be a supplier to the "high end" of the disk
market for the following reasons: (i) those customers that demand the highest
quality and most stringent tolerances have the greatest ability to benefit from
the value added by the Company's core competencies -- engineering skills,
proprietary manufacturing processes and proprietary equipment; and (ii) the
Company believes that, unlike the "lower end," less-exacting segment of the disk
market, suppliers in the high end of the market compete substantially on quality
as well as on price. Although, providing the best product may not result in
higher market prices, it may prove to cushion sporadic swings in market demand
as the Company's customers may choose to maintain a constant supply of the
highest quality substrate.
The key elements of the Company's strategy are as follows:
- Focus on Manufacturing Cost Improvement. The reduction in market demand
for the Company's products in the second half of 1996, driven by
backwards integration by its largest customer, cancellation of orders by
its second largest customer and a general oversupply of capacity
throughout
4
<PAGE> 46
the industry, required the Company to shift from supplying primarily
"high-end" products to providing the market customized products that are
categorized by both "high-end" and "low-end" to maintain market share in
1997. The Company expects that its 1998 revenue will be from products
that vary in product parameters that could be categorized by both
"low-end" and "high-end." Thus, Cerion is focused on bringing
manufacturing costs in line with new pricing standards in the industry.
This focus requires innovative manufacturing process changes designed to
increase output from existing labor and equipment resources. One element
of the strategy is the automation of additional processing steps, which
currently is under evaluation.
- Development of "High-End" Products. The Company believes it is a leader
in developing new products exceeding current industry requirements. For
example, the Company's innovations in proprietary processes, such as
chemical etching, resulted in the manufacture of substrates capable of
meeting increasingly stringent tolerance requirements. In addition,
Cerion's proprietary grinding technology has led to the development of
the Company's newest product, its FFX Super Smooth ("FFX") disk, which is
substantially smoother than aluminum disk substrates commercially
available. The FFX disk is not currently being sold to any customers but
is an example of the Company's focus on developing products ahead of
market requirements, increasing the likelihood that the Company's
products will be designed into new disk media for higher-capacity disk
drives.
- Continue to Improve Proprietary Manufacturing Processes and Production
Equipment. The Company seeks to continue to improve its manufacturing
processes and equipment to increase efficiency and production capacity
and to improve product quality. The Company believes its proprietary
equipment enables Cerion to achieve significant cost savings and to
reduce the capital required to expand capacity. In addition, the Company
believes that continuing advances in these areas have helped Cerion to
develop manufacturing expertise that may give it a competitive advantage.
- Maintain Strict Control of Manufacturing Process. The Company's
real-time statistical monitoring of its manufacturing processes results
in greater product uniformity and higher production yields, and provides
its customers with more detailed statistical information regarding
product consistency, which can improve production yields of Cerion's
customers relative to competing substrates. In addition, product
uniformity is an essential factor in the supplier qualification process
of disk drive manufacturers. The Company's quality system is ISO 9001
registered.
PRODUCTS
The Company currently manufactures products within one category, aluminum
disk substrates, which represented at least 95 percent of net sales for the last
three years, and historically (prior to 1997) a second category, OPC drum
substrates. Cerion's aluminum disks are the base, or substrate, for the memory
disk in a hard disk drive. The Company's current aluminum disk substrate
products consist of 130mm (5 1/4 inch), 95mm (3 1/2 inch), 84 mm (3 inch) and
65mm (2 1/2 inch) diameter disks. The 95mm product, which accounts for
substantially all of the Company's current disk substrate sales, is used
primarily in the hard disk drives of desktop computers, network servers and
add-on storage devices. The 65mm diameter product is used primarily in laptop
computers. The Company's aluminum disk substrates have evolved significantly
over time. For example, the Company's 95mm product, which the Company has been
selling since 1987 for thin-film disk applications, has been enhanced over time
to incorporate greatly improved characteristics for smoothness, flatness and
dimensional variations.
Most laser printers and certain office copiers contain an organic
photoconductor ("OPC") imaging drum which accepts an electric charge that
attracts toner for transfer to paper. These OPC drums use a precision-machined
aluminum substrate onto which a photo-reactive coating is applied. OPC drums are
incorporated into laser printer cartridges that are consumed during operation
and replaced on a regular basis. The Company has not produced any OPC drums for
sale since the latter part of 1996.
5
<PAGE> 47
MANUFACTURING PROCESSES AND PROPRIETARY EQUIPMENT
The Company's manufacturing methods are derived from careful attention to
the practice of continuous improvement and statistical methods of data analysis.
Together with its engineering expertise and internally developed proprietary
equipment, the Company believes its manufacturing and processing methods provide
it with lower capital equipment costs relative to certain of its competitors, as
well as superior yields and product quality. In the application of these
processes, the Company has arranged its manufacturing operation in a cellular
manner. The Company staffs each cell with a team of cross-trained employees.
These teams monitor the productivity of their individual cells and are trained
to prevent and, if necessary, correct quality problems within their cells. In
addition, teams are encouraged to suggest process improvements. These individual
manufacturing cells are built around equipment necessary for most process steps,
thus allowing each cell to operate, in many respects, as a mini-factory. This
cellular approach substantially reduces in-process inventory, facilitates more
effective communication, and improves both quality and productivity.
The following diagram summarizes the stages in the Company's aluminum disk
substrate manufacturing process:
<TABLE>
<CAPTION>
STAGE DESCRIPTION
----- -----------
<C> <S>
Raw aluminum blanks are received by the Company and
Raw Material Preparation sorted by individual thickness to a resolution of
.0001 of an inch.
Blanks are chemically etched to reduce thickness
Chemical Etching variation and remove the hard oxide layer on the
surface, making the disks easier to grind.
The inner and outer diameters of the disks are
Edge and Chamfer Machining machined to exacting tolerances and are finished to
specific chamfer angles.
The disks are subjected to high temperatures to
Annealing release stresses built up during the preceding
machining step.
Very fine abrasive grinding stones are applied to
Grinding the disk to produce the final surface finish,
thickness and flatness either in a one-step or
two-step process.
</TABLE>
Even though there are extensive quality checks throughout the process, some
parameters can be checked only after the grinding stage. Those parameters
include visual quality, surface finish, thickness and flatness.
The Company's real-time statistical monitoring of its processes results in
greater product uniformity and higher production yields, and provides its
customers with more detailed statistical information regarding product
consistency.
The greater uniformity of the Company's products can improve the customers'
individual production yields relative to competing aluminum disk substrates.
Proprietary real-time tracking systems allow the Company to pinpoint where in
the manufacturing process a defect may have occurred, so that any disks affected
may be isolated and removed. It also provides for feedback to the operators in
order to eliminate the source of the defect immediately.
The Company's study of its customers' manufacturing processes has led to
the adoption of certain manufacturing and processing methods that the Company
believes to be unique. For instance, Cerion has pioneered the use of chemical
etching in the manufacture of aluminum disk substrates. This process was
developed in collaboration with the University of Illinois chemical engineering
department and certain of the Company's suppliers. Today, substantially all the
aluminum disk substrates produced by the Company are chemically etched.
6
<PAGE> 48
Proprietary Equipment and Processes
The Company has developed proprietary equipment and processes that allow it
to produce aluminum disk substrates within narrow specifications of smoothness,
flatness and uniformity. For example, the Company has internally developed and
built proprietary grinding machines for its own use, that the Company believes
provide it with both a cost advantage and a superior substrate over that
produced by commercially available grinders. The capital cost of the Company's
custom-built proprietary grinding machine is less than 25 percent of the list
price of comparable grinders from a leading manufacturer.
The Company's internally developed and manufactured proprietary abrasive
stones used in the grinding process are significantly less expensive than
typical commercially available alternatives. In-house control of grinding stone
fabrication enables the Company to produce superior products with less machining
time and allows for the custom fabrication of grinding stones for specific
products. Custom fabrication of grinding stones has enabled Cerion to pioneer
its new FFX product, which has a mirror-like surface with an average surface
roughness of less than 20 angstroms (a unit of length equal to one ten-millionth
of a millimeter), as opposed to the 80 angstrom average of the current disk
substrates sold by the Company.
Employee Participation
Cerion believes that a critical component of its program of continuous
process improvements and quality control is the active participation of its
employees in these efforts. Employee teams are aware of production targets and
meet regularly to discuss and evaluate process improvements. As incentive to
such involvement, the Company distributed 4 percent of its pre-tax operating
earnings to its employees (other than executive officers) as profit sharing when
the Company had positive operating performance.
To facilitate process improvements, the Company encourages employees to
pursue their own ideas by providing a procedure in which an employee writes a
detailed description of a process improvement that is then reviewed by key
engineering, manufacturing, training, maintenance and safety personnel. If
approved, the Company provides support, such as process or safety engineering,
to the employee, who is then responsible for implementation of his or her
suggestion on a trial basis. At the end of the trial period, the employee
prepares a report, including results and recommendations, and if the trial is
successful, a change notification document is issued. Upon approval of key
areas, the change is implemented system-wide. The Company assigns a training
instructor full time to facilitate employee team meetings to review process
improvement issues.
The Company places significant emphasis on training and education. Cerion
provides a tuition payment benefit available to all employees. In addition, the
Company's hourly pay system works on a pay-for-skills basis. Employees are
certified to pre-set standards in various skills relating to their job
assignments. As the employees earn additional certifications, their pay
increases. Classroom training in statistics, decision-making, business basics,
teamwork and systems-thinking are being added to this skill certification
system. The Company believes these practices foster a Company-wide dedication,
sense of common ownership and increased skills that contribute to higher product
quality and manufacturing yields.
CUSTOMERS AND MARKETING
Aluminum disk substrates represented over 95 percent of the Company's sales
in 1996 and 100 percent in 1997. During 1997, Cerion shipped the majority of its
aluminum disk substrates to two companies, StorMedia Incorporated ("StorMedia")
and Trace Storage Technologies Inc. ("Trace"), representing approximately 41
percent and 43 percent, respectively, of the Company's net sales. During the
fourth quarter of 1997, the Company shipped substantially all its aluminum disk
substrates to two companies, Trace and StorMedia representing approximately 59
percent and 41 percent, respectively. Cerion's customer base, and each
customer's relative importance, has fluctuated significantly and the Company
believes it will continue to do so. In addition, as is customary in the
industry, Cerion's sales generally are made pursuant to purchase orders that are
subject to cancellation, modification or rescheduling generally without
penalties. In the past, certain orders have been canceled or deferred.
7
<PAGE> 49
The Company, which has produced aluminum disk substrates since 1982,
emerged in 1994 from a primarily captive supplier relationship with Nashua
Corporation's ("Nashua") Computer Products Divisions. Since the sale by Nashua
of that division in 1994, Cerion has expanded its customer and product base in
response to growth in market demand for substrates, and it continues its efforts
to broaden this customer base in the aluminum disk substrate market.
Nevertheless, the Company believes that its dependence on a small number of
customers will continue. Consequently, the loss of, or reduction in demand from,
one or more aluminum disk substrate customers through backwards integration,
consolidation, adverse financial circumstances, production disruptions or
otherwise, does from time to time have a material adverse effect on the
Company's business, results of operations and financial condition.
Cerion, like other suppliers to the thin-film disk industry, is required to
work closely with thin-film disk manufacturers in order to meet their
specifications and to become qualified as a supplier. Qualifying aluminum disk
substrates requires the Company to work extensively with the customer to meet
product specifications. Therefore, customers often require a significant number
of product presentations and demonstrations as well as substantial interaction
with the Company's senior management before making a purchasing decision.
Accordingly, Cerion's products typically have a lengthy sales cycle during which
the Company may expend substantial financial resources and management time and
effort with no assurance that a sale will result.
To meet these demands, the Company uses a system of multi-tiered
communication for sales, marketing and customer service. Senior management of
the Company, as well as production, operation and engineering personnel,
directly market and interact with their counterparts at the Company's customers.
The Company believes that this multi-tiered approach has resulted in strong,
active relationships with both customers and suppliers and has helped Cerion
pursue close technical collaboration with its customers during the design phase
of new products and throughout the products' subsequent life cycle.
SOURCES OF SUPPLY
The Company relies on Alcoa Memory Products, Inc. ("Alcoa") as its primary
source of supply for the aluminum disk blanks used in producing substrates. A
limited number of suppliers provide certain chemicals used in the Company's
manufacturing processes. These chemicals often are customized to meet the
Company's needs. Cerion has no long-term supply agreement with Alcoa or any of
its other suppliers. The Company's reliance on Alcoa and its chemical suppliers
therefore entails risk. If their products were to become unavailable or
available in significantly reduced quantities or increased prices, it would have
a significant impact on the Company's operating results. Locating and qualifying
a substitute supplier could be a time-consuming and uncertain process. Changing
suppliers for certain materials could require that the product be requalified
with the customer. Moreover, a substitute supplier might be reluctant to
undertake such a project without a significant commitment by the Company to
higher prices or future purchases.
Cerion believes, however, that the advantage of working closely with these
suppliers may offset the foregoing risks. For example, Alcoa works closely with
the Company to optimize Alcoa's production processes to meet Cerion's
specifications.
COMPETITION
The disk industry is characterized by intense competition. The Company
believes that the principal competitive factors affecting its business are
product availability, quality and price. The Company believes that a majority of
the machined aluminum disk substrates are supplied by vertically integrated
thin-film media and disk drive manufacturers, such as Seagate, Komag, StorMedia
and HMT, and that the balance is supplied by independent aluminum disk substrate
manufacturers such as Cerion. Shortage of supply in the past has influenced disk
drive manufacturers and thin-film disk manufacturers to vertically integrate
substrate manufacturing into their own operations.
Cerion's direct competitors include both independent aluminum disk
substrate manufacturers such as Kobe (which is much larger and has substantially
greater production capacity than the Company), and vertically integrated
companies that perform additional manufacturing processes on the substrates.
These
8
<PAGE> 50
vertically integrated companies include manufacturers of hard disk drives. These
competitors operate in both the United States and overseas. The Company believes
that all its competitors have significantly greater financial, technical, and
marketing resources. Furthermore, certain of these competitors have the
advantage of being supplied by affiliated companies with the aluminum blanks
used for their aluminum disk substrates.
Intense competition by companies otherwise focused on other segments of the
hard disk drive industry began in 1996 and continued throughout 1997 because of
these companies adding or growing internal aluminum disk substrate manufacturing
capacity that exceeded internal usage requirements, as the hard disk drive
industry experienced a slowdown in growth in the latter half of 1996 which is
expected to continue throughout at least the first half of 1998. The following
specific actions by the Company's customers in 1996 and 1997 illustrates the
impact backwards integration has had on the Company. In the first half of 1996,
StorMedia, the Company's largest customer in 1997, announced that it would
produce aluminum disk substrates as part of the production of nickel plated and
polished substrates at a new manufacturing facility in Singapore. Furthermore,
StorMedia completed in December 1997 its acquisition of Akashic, which has
significant production capacity to produce substrates. In addition, HMT acquired
a facility in 1996 in Oregon for aluminum disk substrate production, as well as
for nickel plating and polishing. HMT expanded the capacity of this facility and
as a result regular shipments to HMT were reduced to zero in December 1996.
Several other disk drive and thin-film disk manufacturers, including Seagate and
Komag, Inc., produce aluminum disk substrates internally for their own use.
Moreover, backwards integrated companies could make their aluminum disk
substrates available for distribution in the market as direct competitors of the
Company. Any of these changes would reduce the already small number of current
and potential customers and increase competition for the remaining market. Such
competition could materially adversely affect the Company's business, results of
operations and financial condition. In addition, because of the limited number
of potential customers in the disk drive industry, the loss of one or more of
its customers through backwards integration, consolidations, adverse financial
circumstances or otherwise, has during 1996 and 1997 and could again have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Asian economic conditions that occurred in 1997 have impacted the
Company's competitive position in primarily two ways. First, certain of the
Company's competitors have experienced a reduction in cost of raw materials and
labor costs that are obtained from Asian economies. The Company has not realized
any benefit from the reduction in such raw material costs because the Company's
primary suppliers are located in the United States. Additionally, the Asian
domestic markets have softened in terms of demand which has resulted in
under-utilized capacity of aluminum disk substrate production being made
available to export to the United States. These factors have created new
entrants to the competitive United States market and have increased the ability
of these new entrants to drive pricing downward to gain market share.
The Company believes that both the independent aluminum disk substrate
producers and certain vertically integrated disk drive manufacturers have been
attempting to increase aluminum disk substrate manufacturing capacity. These
efforts, together with the Company's own efforts in 1996 and 1997 to increase
production, have resulted in significant additional capacity for the aluminum
disk substrates. This additional capacity has resulted in industry capacity in
excess of demand. In addition, Cerion has experienced increased competition,
which has materially adversely affected the Company's business, results of
operations and financial condition.
BACKLOG
Cerion's sales generally are made pursuant to supply agreements, purchase
orders and releases that are subject to cancellation, modification or
rescheduling, generally without penalty. The Company's backlog of supply
agreements and purchase orders requesting delivery in the following quarter was
approximately $2.7 million as of December 31, 1997, $3.7 million as of December
31, 1996, and $7.9 million as of December 31, 1995. Because these purchase
orders may be canceled, modified or rescheduled by customers on short notice and
generally without penalty, the Company does not believe that its backlog as of
any particular date should be considered indicative of sales for any future
period.
9
<PAGE> 51
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing processes, product
designs and internally developed equipment as proprietary and seeks to protect
its proprietary rights through a combination of employee and third-party
non-disclosure agreements, internal security procedures and trade secret laws.
Because patent protection requires public disclosure of a process or design,
which gives potentially valuable knowledge to a competitor even if the patent is
issued, Cerion evaluates the advantages and disadvantages of seeking patent
protection for its proprietary processes and designs versus continuing to rely
on trade secret protections. To date, the Company has generally opted to protect
its proprietary rights as trade secrets but may file patent applications in the
future.
Although Cerion intends to defend its proprietary interests, there can be
no assurance that these measures will be successful. The Company believes,
however, that because of the rapid pace of change in manufacturing processes and
product design in the aluminum disk substrate industry, legal protections of its
proprietary rights are less significant factors in the Company's success than
the innovative skills, experience and technical competence of its employees.
The Company attempts to ensure that its products and processes do not
infringe patents and other proprietary rights of third parties. Nevertheless,
there can be no assurance that such a claim will not arise at some future date.
If a patent claim were to arise, the Company may be required to seek a patent
license from a third party. Although patent holders commonly offer such
licenses, no assurance can be given that licenses would be offered or that the
terms of any offered licenses would be acceptable to the Company. If a patent
license were to become necessary, the failure to obtain such a license could
cause Cerion to incur substantial liabilities and possibly suspend use of the
process or equipment utilizing the patented invention.
EMPLOYEES
On March 5, 1998 the Company reduced its workforce by 110 employees
representing approximately 30 percent of the Company's full-time workforce. The
workforce reduction was necessitated to align production capacity with expected
future order volume. As of March 13, 1998, Cerion had 255 full-time employees
located at its facility in Champaign, Illinois, with approximately 228 in
manufacturing and research, development and engineering, and the remainder in
administration and marketing. None of Cerion's employees is represented by a
labor union. The Company believes that attracting and motivating skilled
technical talent and managing turnover is vital to its success.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to certain
federal, state and local environmental protection laws and regulations relating
to Cerion's use, handling, storage, discharge and disposal of certain hazardous
materials and hazardous and non-hazardous wastes. The Company has not suffered
any material adverse effect in complying with applicable environmental
regulations. However, environmental laws and regulations, especially those
relating to the use of hazardous materials or generation of hazardous wastes,
may become more stringent over time. There can be no assurance that Cerion has
complied or will comply in all respects with environmental laws and regulations,
nor can there be any assurance that the Company will be able to obtain all
necessary permits that will be required under such laws and regulations. Any
modified environmental regulations, and any failure by the Company with respect
to any of the other matters described above, might subject Cerion to significant
penalties, compliance expenses, or production suspensions or delays, and might
require the Company to acquire costly equipment.
ITEM 2. FACILITIES AND PROPERTIES
The Company's headquarters and manufacturing facility are located in one
49,000 square foot building in Champaign, Illinois. At this Company-owned
facility, Cerion operates 20 manufacturing cells for aluminum disk substrates.
10
<PAGE> 52
Cerion also has an option to purchase 3.1 acres of land adjacent to its
headquarters. In addition, the Company leases 12,000 square feet in Urbana,
Illinois for cleaning and storage of shipping containers and for storage of
finished goods and raw materials.
The Company's existing facility is operating three shifts per day, five
days per week and is using all remaining manufacturing space at this facility.
Any significant expansion of capacity would require Cerion to return to a seven
days per week manufacturing schedule, or if this was insufficient, to build,
purchase or lease a new facility.
ITEM 3. LEGAL PROCEEDINGS
On August 8, 1996, an individual plaintiff, Joshua Tietelbaum, initiated a
lawsuit against the Company, Nashua Corporation ("Nashua"), William Blair & Co.
("Blair") and certain Cerion directors and officers in the Circuit Court of Cook
County, Illinois. On September 4, 1996, a second individual plaintiff, Philippe
Olczyk, initiated a similar lawsuit against the Company, Nashua, Blair and
certain Cerion directors in the Circuit Court of Cook County, Illinois. Both
lawsuits purport to be brought on behalf of a class consisting of all persons
(other than the defendants) who purchased the common stock of Cerion between May
24, 1996 and July 9, 1996.
These two cases were consolidated before the same judge. On March 24, 1997,
Teitelbaum and Olcyzk, joined by a third plaintiff, Robert K. Pickup, filed a
Consolidated Amended Class Action Complaint ("Consolidated Complaint") against
the Company, Nashua, Blair, and certain Cerion directors and officers. The
Consolidated Complaint supersedes the prior complaints and also purports to be
on behalf of a class consisting of all persons (other than the defendants) who
purchased the common stock of Cerion between May 24, 1996 and July 9, 1996. The
Consolidated Complaint alleges that, in connection with the Cerion initial
public offering, the defendants issued certain materially false and misleading
statements and omitted the disclosure of material facts regarding, in
particular, certain significant customer relationships. The Consolidated
Complaint alleges that the defendants violated sections 11, 12(a)(2), and 15 of
the 1933 Securities Act, section 13 of the Illinois Blue Sky Law, and the
Illinois Consumer Fraud and Deceptive Practices Act. The Consolidated Complaint
seeks a declaration that the case may proceed as a class action, damages and
rescission of the sale of Cerion common stock by Cerion and Nashua, to the
extent purchasers still hold Cerion shares, or rescissory damages, if they sold
their Cerion stock; attorneys fees and costs; and other relief.
On October 9, 1997, the Circuit Court of Cook County, Illinois dismissed
the class action lawsuit filed against all defendants providing the Plaintiffs
with the option to file an amended complaint in which they may attempt to state
a claim against the Company and the other defendants. On December 5, 1997, the
Plaintiffs filed an amended complaint against the same defendants with
substantially similar alleged claims. The Company believes the Amended
Consolidated Complaint to be without merit and is defending vigorously against
the amended case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of the Company's security holders.
11
<PAGE> 53
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on The Nasdaq National Stock Market under the symbol "CEON."
The following table sets forth the high and low bid prices as reported by The
Nasdaq National Stock Market for the periods indicated beginning on May 24,
1996, the first day of trading, after the Company completed its initial public
offering:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter.......................................... $ 6.88 $3.63
Second Quarter......................................... 4.38 2.63
Third Quarter.......................................... 3.00 1.94
Fourth Quarter......................................... 3.44 1.97
1996
Second Quarter......................................... $19.50 $8.00
Third Quarter.......................................... 11.25 2.25
Fourth Quarter......................................... 9.19 2.75
</TABLE>
On March 9, 1998, the closing price of the Company's Common Stock as
reported by The Nasdaq National Stock Market was $2.094 per share. There were
approximately 2,500 shareholders of the Common Stock of the Company as of such
date. Cerion has not paid cash dividends on its Common Stock and does not intend
to do so in the foreseeable future.
There has been no change in the information required by paragraphs (f)(2)
through (f)(4) of Item 701 of Regulation S-K from that previously reported by
the Company on Form S-R, except as follows with respect to the Company's use of
net offering proceeds to the Company from its initial public offering after
deducting previously reported expenses, as of December 31, 1997.
The proceeds of $19,525,350 from the initial public offering were utilized
as follows as of December 31, 1997:
<TABLE>
<S> <C>
Construction of plant, building and facilities.............. $ 1,163,208
Purchase and installation of machinery and equipment........ 4,426,290
Purchase of real estate..................................... 75,000
Repayment of indebtedness -- First Nashua Note.............. 1,156,429
Repayment of indebtedness -- Second Nashua Note............. 10,184,973
Working capital, including cash and cash equivalents........ 2,519,450
</TABLE>
Cash and cash equivalents included in working capital will continue to be
used for general corporate purposes.
In the Company's Prospectus, dated May 24, 1996, the Company stated that it
planned to use approximately $9.0 to $12.0 million of the proceeds of the
offering to build, purchase or lease a new facility and related equipment. As a
result of a change in market conditions during the second half of 1996 and
throughout 1997, the Company canceled its capacity expansion plans, which
included the new facility.
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<PAGE> 54
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1997. The information presented
should be read in conjunction with the financial statements included elsewhere
in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1995(1) 1996 1997
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................ $14,612 $14,553 $28,175 $28,175 $36,540 $31,810
Cost of sales........................ 12,306 12,995 19,668 19,668 26,729 26,606
------- ------- ------- ------- ------- -------
Gross profit....................... 2,306 1,558 8,507 8,507 9,811 5,204
Selling, general & administrative
expenses........................... 1,651 1,731 2,537 3,510 5,561 4,405
------- ------- ------- ------- ------- -------
Operating income (loss)............ 655 (173) 5,970 4,997 4,250 799
Interest income (expense)............ (94) (115) (316) (1,129) 169 366
------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes...... 561 (288) 5,654 3,868 4,419 1,165
Provision (benefit) for income
taxes.............................. 222 (105) 2,210 1,512 1,914 338
------- ------- ------- ------- ------- -------
Net income (loss).................... $ 339 $ (183) $ 3,444 $ 2,356 $ 2,505 $ 827
======= ======= ======= ======= ======= =======
Net income per share, basic and
diluted............................ $ .06 $ (.03) $ .64 $ .44 $ .39 $ .12
Average common shares outstanding.... 5,400 5,400 5,400 5,400(2) 6,379 7,024
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ (27) $2,645 $ 3,436 $10,248 $11,764
Total assets........................... 4,629 7,546 11,874 23,333 25,265
Short-term debt........................ 23 26 -- -- --
Long-term debt......................... 342 316 -- -- --
Stockholders' equity(3)................ 3,182 6,121 8,458 19,366 20,233
</TABLE>
- ---------------
(1) The pro-forma statement of operations data presents the results of the
Company after giving effect to the following, as if each had occurred as of
January 1, 1995: (i) interest expense of $1.1 million (less $304,000
allocated interest expense to the Company) related to dividends to Nashua in
the form of certain promissory notes payable to Nashua in the aggregate
original principal amount of approximately $11.1 million; (ii) the
elimination of a $227,000 corporate charge paid to Nashua; and (iii) the
inclusion of $1.2 million in estimated selling, general and administrative
expenses that would have been incurred if the Company were an independent
public company during 1995.
(2) Reflects shares outstanding as of December 31, 1995, giving effect to a
stock split. See Stockholders' Equity and Parent Company Investment Notes to
the Financial Statements.
(3) Represents parent company investment at December 31, 1993, 1994 and 1995 and
stockholders' equity at December 31, 1996 and 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required not included hereunder by this item may be found in
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing in the 1997 Annual Report to
Shareholders, and is incorporated herein by reference. (1)
13
<PAGE> 55
MATTERS AFFECTING FUTURE RESULTS
This Report contains certain forward-looking statements, including the
statement below regarding the possible impact of cancellation of orders by a
major customer and backwards integration within the industry towards the
manufacture of aluminum disk substrates. Moreover, from time to time in both
written releases and reports and oral statements, the Company and its Senior
Management may express expectations regarding future performance of the Company.
All of these "forward-looking statements" are inherently uncertain, and
investors must recognize that actual events could cause actual results to differ
materially from the Company's expectations. Key risk factors that could, in
particular, have an adverse impact on current and future performance include the
Company's dependence on a small number of customers, as witnessed by the
cancellation of orders in July 1996 by one of the Company's two largest
customers, a trend towards vertical integration among thin-film disk
manufacturers that may reduce demand for the Company's products, as evidenced by
the Company's largest customer in 1996 and the Company's largest customer in
1997, dependence on the intensely competitive and cyclical hard-disk drive
industry, absence of long-term purchase commitments from the Company's customers
and risk of excess industry capacity.
Dependence on a Small Number of Customers. Aluminum disk substrates, all
sales of which were to thin-film disk manufacturers, represented over 95 percent
of the Company's sales in 1997 and 1996. The Company's aluminum disk substrate
customers in 1997 were primarily Trace, StorMedia, Seagate and HMT, which
represented approximately 43%, 41%, 11% and 2%, respectively, of the Company's
aluminum disk substrate sales. There are a relatively small number of thin-film
disk manufacturers worldwide. Because many of these thin-film disk manufacturers
supply all or part of their aluminum disk substrate needs either through captive
suppliers or vertically integrated operations, the Company believes that its
dependence in this business on a few customers will continue in the future. The
Company's customer base, and each customer's relative importance, fluctuated
significantly during 1997 and may continue to fluctuate. The loss of one or more
of the Company's customers or potential customers through consolidations,
adverse financial circumstances or otherwise, could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company's customers and the overall disk drive and component market has
experienced a prolonged period of volatility and oversupply during the past 18
months beginning in the second quarter of 1996. A chronology of market events
that have impacted the Company highlights the impact that changes in market
conditions and customer manufacturing strategies have on the Company's operating
performance. In the first half of 1996, the Company's largest customer in 1997,
StorMedia, announced that it would produce aluminum disk substrates, as part of
the production of nickel plated and polished substrates, at a new manufacturing
facility in Singapore. Subsequent to this announcement, in July of 1996 the
Company announced the cancellation of subsequent orders from StorMedia because
of a loss of orders from StorMedia's largest customer, not because of
StorMedia's internal capability to manufacture aluminum disk substrates in
Singapore. However, in 1997 StorMedia made the Company its sole external source
of aluminum disk substrates, allowing StorMedia to become the Company's largest
customer. Furthermore, StorMedia completed in December 1997 its acquisition of
Akashic, which has significant production capacity to produce substrates. In
addition, HMT acquired a facility in Oregon for aluminum disk substrate
production, as well as for nickel plating and polishing. HMT expanded the
capacity of this facility and regular shipments to HMT ceased in December 1996.
The internal production of aluminum disk substrates in 1996 by the
Company's principal customers resulted in the reduction or elimination of
purchases from the Company and could result in further reduction or elimination
of purchases from the Company or the sale by such customers of aluminum disk
substrates in competition with the Company. Moreover, the decision by one or
more of the Company's customers to move to a single supply source could
materially adversely affect the Company if the Company were not chosen as the
single supply source. Similarly, a decision by one or more of the Company's
customers to expand its base of suppliers could result in that customer reducing
its purchases from the Company and materially adversely affect the Company's
business, results of operations and financial condition.
14
<PAGE> 56
There also has been a trend toward consolidation in the disk drive
industry, which the Company expects may continue. If any of the Company's
customers or competitors were to combine, it would result, among other things,
in a reduction of the number of their suppliers or increased pricing pressures,
which could materially adversely affect the Company's business, operating
results and financial condition.
There can be no assurance that the Company's current customers will
continue to place orders with the Company, that orders by existing customers
will continue at the levels of previous periods or that customers will not
cancel existing orders (which they did in 1996 and may generally do without
penalty), nor can there be any assurance that the Company will be able to obtain
orders from new customers. The level of orders for aluminum disk substrates also
depends on the production levels of thin-film disk manufacturers, which may be
subject to disruptions and delays as well as fluctuations in market demand. The
loss of one or more of the Company's current customers or a significant
reduction in the level of their orders could materially adversely affect the
Company's business, operating results and financial condition.
Dependence on Intensely Competitive and Cyclical Hard Disk Drive Industry;
Price Reductions. The demand for the Company's aluminum substrates for
thin-film disks depends solely upon the demand for hard disk drives, which in
turn depends on the demand for new personal computers, storage upgrades and
add-ons to existing computers and the growing use of sophisticated network
servers. The disk drive industry is cyclical and historically has experienced
periods of oversupply and reduced production levels, resulting in significantly
reduced demand for thin-film disks, as well as pricing pressures as evidenced by
recent market price reductions as much as 28 percent for the Company's aluminum
disk substrates in the 18 months ended December 1997. The effect of these cycles
on suppliers, including manufacturers of thin-film disks and aluminum disk
substrates, has been magnified by the hard disk manufacturers' practice of
ordering components, including thin-film disks, in excess of their current needs
during periods of rapid growth. As announced by several of the hard drive and
thin-film media manufacturers in the fourth quarter of 1997 and first quarter of
1998, the market is changing with a period of over-production causing a
supply/demand imbalance within the industry. Although the media segment of the
disk drive industry experienced in excess of 20 percent annual growth in 1997,
several disk drive manufacturers initiated cutbacks in production plans for 1998
in response to supply/demand imbalances within the industry which has reduced
demand in the first quarter of 1998 and possibly for a longer period. There can
be no assurance that growth in the disk industry will continue at recent rates
or at all, that the level of demand for disk drives will not decline, or that
future demand will be sufficient to support existing and future capacity. In
addition, the growth rate of personal computer unit sales may decline, which may
adversely affect the demand for hard disk drives. A decline in demand for hard
disk drives could further reduce the Company's sales of its product line and
have a material adverse effect on the Company's business, operating results and
financial condition.
Absence of Long-Term Purchase Commitments. As is customary in this
industry, the Company's sales are usually made pursuant to purchase orders that
are subject to cancellation, modification or rescheduling, generally without
penalties. Customers typically provide the Company with forecasts of expected
requirements for the next three- to six-month period in the past; prior to the
third quarter of 1996, and submit purchase orders or releases 14 to 60 days in
advance of shipment dates. However, beginning in late 1996, customers began only
forecasting four to six weeks in advance. In the past, certain forecasts of the
Company's customers have failed to materialize or have been altered and delivery
schedules have been deferred. For instance, in 1994 and 1996, sharp reductions
in two large customers' orders adversely affected the Company's results of
operations. Changes in forecasts, rescheduling and quantity reductions may
result in inventory losses and under-utilization of production capacity. From
time to time, customers have changed certain specifications or standards for
their products, resulting in lower production yields, higher manufacturing costs
and lower productivity and margins than anticipated by the Company.
Risk of Excess Industry Capacity. The Company believes that both
independent aluminum disk substrate manufacturers and vertically integrated
companies are attempting to increase aluminum substrate manufacturing capacity.
The Company increased its own manufacturing capacity in 1996 and 1997, through
equipment expansion and manufacturing process changes that improved the output
capacity of existing equipment and some or most of the vertically integrated,
thin-film disk or hard drive manufacturers did the same in 1996 and 1997 and are
expected to continue in the future, including the Company's largest customer
15
<PAGE> 57
in 1996; HMT and largest customer in 1997; StorMedia. These efforts may result
in significant additional capacity in the industry. The Company has faced
increased pricing pressures since the latter half of 1996, with price reductions
that averaged 28 percent in the eighteen months ending December 1997 for the
Company's products. To the extent the efforts described above result in industry
capacity in excess of levels of demand, the Company has experienced and will
continue to experience increased levels of competition and increased pricing
pressures, which are likely to have a material adverse effect on the Company's
business, results of operations and financial condition.
Intense Competition Among Manufacturers of Aluminum Disk
Substrates. Cerion's direct competitors include both independent aluminum disk
substrate manufacturers such as Kobe (which is much larger and has substantially
greater production capacity than the Company) and vertically integrated
companies that perform additional manufacturing processes on the substrates.
These vertically integrated companies include manufacturers of hard disk drives.
These competitors operate in both the United States and overseas. The Company
believes that all its competitors have significantly greater financial,
technical, and marketing resources. Furthermore, certain of these competitors
have the advantage of being supplied by affiliated companies with the aluminum
blanks used for their aluminum disk substrates.
Intense competition by companies otherwise focused on other segments of the
hard disk drive industry began in 1996 and continued throughout 1997 because of
these companies adding or growing internal aluminum disk substrate manufacturing
that exceeded internal usage requirements, as the hard disk drive industry
experienced a slowdown in growth in the latter half of 1996 which is expected to
continue throughout at least the first half of 1998. The following specific
actions by the Company's customers in 1996 and 1997 illustrates the impact
backwards integration has had on the Company. In the first half of 1996,
StorMedia, the Company's largest customer in 1997, announced that it would
produce aluminum disk substrates as part of the production of nickel plated and
polished substrates at a new manufacturing facility in Singapore. Furthermore,
StorMedia completed in December 1997 its acquisition of Akashic, which has
significant production capacity to produce substrates. In addition, HMT acquired
a facility in 1996 in Oregon for aluminum disk substrate production, as well as
for nickel plating and polishing. HMT expanded the capacity of this facility and
as a result regular shipments to HMT were reduced to zero in December 1996.
Several other disk drive and thin-film disk manufacturers, including Seagate and
Komag, produce aluminum disk substrates internally for their own use. Moreover,
Seagate, StorMedia, HMT, Komag and several other industry participants currently
produce aluminum disk substrates internally for their own use, and the Company
believes that a majority of the thin-film disk market currently is supplied by
such vertically integrated manufacturers. These companies could make their
products available for distribution into the market as direct competitors of the
Company. Additionally, one of the Company's principal current aluminum disk
substrate customers announced in 1996 that they will produce aluminum disk
substrates for internal use and achieved this internal capability through the
purchase of Akashic in December 1997. Any of these changes could reduce the
already small number of current and potential customers for the Company's
products and increase competition for the remaining market.
The Asian economic conditions that occurred in 1997 have impacted the
Company's competitive position in primarily two ways. First, certain of the
Company's competitors have experienced a reduction in cost of raw materials and
labor costs that are obtained from Asian economies. The Company has not realized
any benefit from the reduction in such raw material costs because the Company's
primary suppliers are located in the United States. Additionally, the Asian
domestic markets have softened in terms of demand which has resulted in
under-utilized capacity of aluminum disk substrate production being made
available to export to the United States. These factors have created new
entrants to the competitive United States market and have increased the ability
of these new entrants to drive pricing downward to gain market share.
The Company believes that both the independent aluminum disk substrate
producers and certain vertically integrated disk drive manufacturers have been
attempting to increase aluminum disk substrate manufacturing capacity. These
efforts, together with the Company's own efforts in 1996 and 1997 to increase
production, have resulted in significant additional capacity for the aluminum
disk substrates. This additional capacity has resulted in industry capacity in
excess of demand. In addition, Cerion has experienced increased
16
<PAGE> 58
competition, which has materially adversely affected the Company's business,
results of operations and financial condition.
Moreover, the disk industry is characterized by intense price competition.
Although the Company's products compete on the basis of availability and
quality, price also is an important competitive factor as evidenced by market
price reductions as much as 28 percent for the Company's products in the 18
months ended December 1997. Any increase in price competition will have a
material adverse effect on the Company's gross margins and on its business,
operating results and financial condition. There can be no assurance that the
Company will be able to continue to compete successfully with existing or new
competitors.
Although the Company believes its products are competitive, the Company
also believes that certain factors have had a negative impact on its products'
competitiveness. The Company currently lacks the capability to nickel plate and
polish its substrates, a capability considered important by certain customers.
Moreover, the Company's manufacturing facility in Illinois is a significant
distance from its principal customers. The Company's manufacturing process also
is more labor intensive than a number of its competitors and, as a result, may
be more adversely affected by rising labor costs.
Lengthy Qualification Process for New Products and Changes in Manufacturing
Processes. The Company is required to work closely with manufacturers in the
thin-film disk industry in order to become qualified as a supplier. In addition,
changes in products or, in certain cases, manufacturing processes, also may
require additional customer qualification. Qualifying aluminum disk substrates
requires the Company to work extensively with the customer to meet product
specifications. Therefore, customers often require a significant number of
product presentations and demonstrations as well as substantial interaction with
the Company's senior management before making a purchasing decision.
Accordingly, the Company's products typically have a lengthy sales cycle during
which the Company may expend substantial financial resources and management time
and effort with no assurance that a sale will result. In the event the Company's
products do not become qualified for a particular product development program on
a timely basis, the Company could be excluded as a supplier of aluminum disk
substrates for such program entirely or could become a secondary source of
supply for such program, which typically results in lower sales. In addition,
the Company may be prevented or delayed from making certain manufacturing
process improvements due to the qualification process. Such failure to become
qualified or timely qualified could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Suppliers. The Company relies on Alcoa Memory Products, Inc.
a subsidiary of Aluminum Company of America, Incorporated ("Alcoa"), as its
primary supplier of the aluminum blanks used by it for producing aluminum disk
substrates. It also relies on a limited number of suppliers for certain
materials used in its aluminum disk substrate manufacturing processes, including
etching chemicals and coolants. The Company does not have any long-term supply
contracts with Alcoa or any of its other major suppliers. Changing suppliers for
certain materials would be expensive and require long lead times. For certain
materials, a change in supplier could result in the Company being required to
requalify its products with certain of its customers. Any significant
limitations on the supply of raw materials could disrupt, limit or halt the
Company's production of aluminum disk substrates and could have a material
adverse effect on the Company's business, operating results and financial
condition. Further, a significant increase in the price of one or more of these
components also could materially adversely affect the Company's business,
results of operations and financial condition.
Future Capital Needs. Based upon anticipated cash flows from operating
activities, remaining proceeds from the initial public offering completed in
1996 and credit availability, the Company believes that it has the liquidity and
capital resources needed to meet its financial commitments through 1998. Unless
the Company achieves substantial cost improvements, increased demand and no
further price reductions beyond the cost reductions achieved in the future, the
Company may incur net losses and negative cash flows from operating activities.
Without such cost improvements and increased demand, at present cost levels and
planned capital expenditures of approximately $3.0 million annually, the Company
over an extended period of time could exhaust all or substantially all of its
cash resources and borrowing availability under its credit facility. In such
event, the Company would be required to pursue other alternatives to improve
liquidity, including further cost
17
<PAGE> 59
reductions, sales of assets, the deferral of certain capital expenditures and
obtaining additional sources of funds. No assurance can be given that the
Company will be able to successfully pursue such alternatives. During the first
quarter of 1998, one of the Company's significant customers became delinquent in
the payment of outstanding accounts receivable totaling $4.1 million. This
delinquency occurred because of the customer experiencing significant operating
losses and negative cash flow from operations that strained the customers
liquidity. This customer's outstanding balance due to the Company exceeds an
average of approximately 110 days compared to normal trade terms provided to
this customer of 60 days. Future payment of this amount by the customer is
expected to be structured payments over a time frame not to exceed one year.
This anticipated structuring of future payments will reduce the Company's
liquidity and financial flexibility. Furthermore, in the event that this
customer's financial position worsens during the payment period, the risk of
default increases. Thus, any significant default by customers on the payment of
outstanding amounts due to the Company could cause a significant reduction in
liquidity and may exhaust the Company's cash resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item may be found in the Financial section
of the 1997 Annual Report to Shareholders on pages 12 through 23, and is
incorporated herein by reference.(1)
- ---------------
(1) The Company's 1997 Annual Report to Shareholders is not to be deemed filed
as part of this report except for those parts thereof specifically
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
David A. Peterson(3)......................... 58 Chief Executive Officer, President and Director
Michael F. Brown............................. 39 Vice President-Marketing
Richard A. Clark(3).......................... 33 Chief Financial Officer, Vice President-Finance
and Treasurer
Paul A. Harter(3)............................ 32 Vice President-Operations
William A. Hughes............................ 35 Vice President-Product Development
Gerald G. Garbacz(2)(3)...................... 61 Chairman of the Board of Directors
Joseph A. Baute(2)........................... 70 Director
Sheldon A. Buckler(1)........................ 66 Director
Osmund M. Fundingsland(1).................... 54 Director
Daniel M. Junius(1)(3)....................... 46 Director
Ross W. Manire(2)............................ 46 Director
Gerard V. Schenkkan.......................... 42 Director
Ronald D. Verdoorn........................... 48 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Individual is named as a defendant in the Consolidated Amended Class Action
Complaint as discussed in Item 3 of this document
18
<PAGE> 60
The following is a biographical summary of the experience of the executive
officers, key employees and existing directors of the Company.
David A. Peterson is a co-founder of the original operations of the Company
and has served as Chief Executive Officer, President and a director of the
Company since its incorporation on December 31, 1995. From December 1991 through
December 1995, Mr. Peterson served as President and General Manager of the
Precision Technologies division of Nashua, the predecessor of the Company. From
April 1991 until December 1991 he served as Vice President-Operations of the
Thin-film unit of the Computer Products Division of Nashua. From July 1986 until
April 1991, Mr. Peterson served as Vice President-Manufacturing of Disk-Tec
(acquired by Nashua in July 1986 and became the Precision Technologies division
of Nashua). From June 1982 until July 1986 he served as Director of Operations
of Disk-Tec.
Michael F. Brown has served as Vice President-Marketing of the Company
since January 1996. From December 1995 until February 1996, Mr. Brown served as
Market Development Manager of the Company. From September 1991 to December 1995,
Mr. Brown was the Director of Sales and Marketing for Frisby Manufacturing Co.,
a precision-component manufacturer for the automotive and home appliance
industries. From January 1986 to August 1991, Mr. Brown served as Manufacturer's
Representative of J.A. Shoemaker & Associates, a manufacturing company.
Richard A. Clark has served as Chief Financial Officer, Vice
President-Finance and Treasurer of the Company since March 1996. From May 1995
through March 1996, Mr. Clark served as Director of Internal Audit of Nashua.
From January 1992 to May 1995, Mr. Clark served as Manager within the Business
Assurance practice of the accounting firm of Coopers & Lybrand L.L.P. From July
1988 to January 1992, Mr. Clark was a Senior Associate with Coopers & Lybrand
L.L.P. Mr. Clark is a certified public accountant.
Paul A. Harter has served as Vice President-Operations of the Company since
February 1996. From August 1994 until February 1996 Mr. Harter served as
Director of Operations of the Company. From July 1987 to August 1994, Mr. Harter
served the Company in various management and staff positions.
William A. Hughes has served as Vice President-Product Development of the
Company since February 1996. Mr. Hughes has served the Company as Director of
Product Development from September 1995 until February 1996, Product Development
Manager from December 1993 to February 1996, Technical Supervisor from June 1989
until December 1993, and in a variety of other management and staff positions
from June 1983 until June 1989.
Gerald G. Garbacz has served as director of the Company since January 1996.
Mr. Garbacz has been President , Chief Executive Officer and the Chairman of the
Board of Nashua Corporation since January 1996. From 1994 through 1995, Mr.
Garbacz was a private investor. He was Chairman and Chief Executive Officer of
Baker & Taylor Inc., an information distribution company from 1992 to 1994. He
is also a Director of Handy & Harman Inc.
Joseph A. Baute has served as a director of the Company since March 1996.
Mr. Baute served as a Director of Nashua from 1984 through June 1996, as
Chairman of its Board of Directors from April 1995 through June 1996, and in an
interim capacity as its President and Chief Executive Officer from November 1995
through December 1995. From 1979 until his retirement in 1993, Mr. Baute served
as Chairman and Chief Executive Officer of Markem Corporation, an information
application systems company. Mr. Baute is a director of Houghton Mifflin
Company, State Street Boston Corporation, INSO Corporation, Metrika Systems and
several private corporations. He also is a former director and Chairman of the
Federal Reserve Bank of Boston and a former director and past Chairman of the
Board of Directors of the The New England Council for Economic Development.
Sheldon A. Buckler has served as a director of the Company since March
1996. Mr. Buckler has been Chairman of the Board of Commonwealth Energy System
since May 1995. He was Vice Chairman of the Board of Polaroid Corporation from
1990 until his retirement in 1994. He also is a Director of Nashua Corporation,
ASECO Corporation, PARLEX Corporation, Commonwealth Energy Corporation and
Spectrum Information Technologies, Inc.
19
<PAGE> 61
Osmund M. Fundingsland has served as a director of the Company since
February 1997 and has been the Chief Executive Officer of OSF International, a
sales marketing consulting company, since its inception in 1995. From 1983
through 1994, Mr. Fundingsland was an Executive Vice-President of Applied
Magnetics Corporation, an independent manufacturer of magnetic recording heads
and head stack assemblies for disk drives. Mr. Fundingsland is a director of the
ISERA group, a software company. He also serves on the board of directors for
the International Disk Drive Equipment and Materials Association (IDEMA).
Daniel M. Junius has served as a director of the Company since January
1996. Mr. Junius has served as Vice President-Finance and Chief Financial
Officer of Nashua Corporation since 1995 and as Treasurer of Nashua since 1985.
Ross W. Manire has served as a director since February 1997. Mr. Manire has
been a Senior Vice President of the Carrier Systems Business Unit at 3Com since
the merger of 3Com Corporation and U.S. Robotics Corporation in June 1997. Mr.
Manire served as Senior Vice President and General Manager of the Networks
Systems Division of U.S. Robotics, Inc. from May 1995 through June 1997 and
served as its Senior Vice President-Operations and Chief Financial Officer from
early 1993 through May 1995. U.S. Robotics, Inc. was an international designer,
manufacturer and marketer of high-performance information access products. 3Com
is a supplier of local area network and wide area network systems for the large
enterprise, small business, home and service provider markets. Mr. Manire also
is a director of AT Financial Corp. and EA Industries, Inc.
Gerard V. Schenkkan has served as a director of the Company since March
1998. Mr. Schenkkan has been Vice President and General Manager of the Optical
Storage Business Unit of Quantum Corporation since November 1997. He also served
as Vice President of Corporate Development at Quantum Corporation from July 1996
until late 1997. From 1993 through 1996, Mr. Schenkkan was Marketing Manager of
the Storage Systems Division of Hewlett-Packard Company. Quantum Corporation
designs and manufactures storage products and is one of the largest global
suppliers of hard disk drives.
Ronald D. Verdoorn has served as a director of the Company since March
1998. Mr. Verdoorn has been a consultant since 1997. Mr. Verdoorn served as
Executive Vice President and Chief Operating Officer of the Storage Products
Group Media and LSI at Seagate Technologies, Inc. from 1995 through 1997. Mr.
Verdoorn was Senior Vice President of Worldwide Manufacturing Operations at
Seagate Technologies, Inc. from 1992 through 1995. Seagate Technologies, Inc.
develops and manufacturers advanced information technology, including disk and
tape storage devices, magnetic recording heads and media, precision motors,
microelectronics, and data access and management software. Mr. Verdoorn is also
a director of EA Industries, Inc. and Marvell.
The executive officers of the Company are Messrs. Peterson, Brown, Clark,
Harter and Hughes. Officers are elected on an annual basis to serve at the
discretion of the Board of Directors.
BOARD OF DIRECTORS STRUCTURE INTO CLASSES
The Board of Directors of Cerion Technologies Inc. is divided into three
classes. The Class II Directors' term will expire at the Meeting and the Class
III and Class I Directors' terms will expire in 1999 and 2000, respectively. All
Directors elected at this and future Annual Meetings of Stockholders will be
elected for three-year terms. All directors will hold office until their
successors have been duly elected and qualified. Prior to the Meeting, Ross W.
Manire, David A. Peterson and Gerard V. Schenkkan were the Class I Directors;
Sheldon A. Buckler, Osmund M. Fundingsland and Joseph A. Baute were the Class II
Directors; and Gerald G. Garbacz, Daniel M. Junius and Ronald D. Verdoorn were
the Class III Directors. Mr. Baute's term as director will expire at the Annual
Meeting.
The nominees for Class II Directors are Sheldon A. Buckler and Osmund M.
Fundingsland. Mr. Buckler and Mr. Fundingsland currently are serving as Class II
Directors of the Company. Shares represented by all proxies received by the
Board of Directors and not so marked as to withhold authority to vote for Mr.
Buckler and Mr. Fundingsland will be voted FOR the election of both nominees.
Messrs. Buckler and Fundingsland would be elected to hold office until the
Annual Meeting of Shareholders to be held in 2001 and until their
20
<PAGE> 62
respective successors are duly elected and qualified. Both of these nominees
have indicated their willingness to serve, if elected; however, if either should
be unable or unwilling to serve, the proxies will be voted for the election of a
substitute nominee designated by the Board of Directors or for fixing the number
of directors at a lesser number.
The following table sets forth for each nominee to be elected at the
Meeting and for each director whose term of office will extend beyond the
Meeting, his age, the position(s) currently held by each nominee or director
with the Company, the year such nominee or director was first elected a
director, the year each nominee's or director's term will expire and the class
of director of each nominee or director.
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM CLASS OF
NOMINEE OR DIRECTOR'S NAME AGE POSITION(S) HELD SINCE WILL EXPIRE DIRECTOR
-------------------------- --- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Gerald G. Garbacz..................... 61 Chairman of the Board 1996 1999 III
of Directors
Daniel M. Junius...................... 45 Director 1996 1999 III
Ronald D. Verdoorn.................... 42 Director 1998 1999 III
Sheldon A. Buckler.................... 66 Director 1996 1998 II
Osmund M. Fundingsland................ 54 Director 1997 1998 II
Ross W. Manire........................ 46 Director 1997 2000 I
David A. Peterson..................... 58 President, Chief 1996 2000 I
Executive Officer
and Director
Gerard V. Schenkkan................... 48 Director 1998 2000 I
</TABLE>
COMPLIANCE WITH SECTION 16(a) of the Securities and Exchange Act
The Company is not aware of any failure to file on a timely basis the forms
required by Section 16(a) of the Exchange Act during the most recent fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid
to the person who served as Cerion's Chief Executive Officer during 1997 and
Cerion's other executive officers who earned a salary and bonus in excess of
$100,000 in 1997 and 1996:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------- LONG-TERM
NAME AND OTHER ANNUAL COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY $ BONUS $ COMPENSATION $ OPTIONS # COMPENSATION(1)
------------------ ---- -------- ------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David A. Peterson.......... 1997 $163,070 $144,193 $ -- 128,390 $7,736
President & Chief 1996 160,611 -- -- 136,780 5,340
Executive Officer 1995 148,874 83,567 -- 11,500(2) 4,285
Michael F. Brown........... 1997 112,127 66,095 -- 51,300 3,413
Vice President-Marketing 1996 110,434(3) -- 56,636(4) 52,600 2,884
Richard A. Clark........... 1997 112,127(3) 66,095 -- 51,300 3,372
Vice President-Finance 1996 85,567 -- 117,427(5) 52,600 1,280
Paul A. Harter............. 1997 91,732(3) 54,074 -- 56,550 1,574
Vice President-Operations 1996 91,318 -- -- 63,100 3,334
William A. Hughes.......... 1997 92,771(3) 54,074 -- 56,550 3,488
Vice President-Product 1996 99,972 -- -- 63,100 5,446
Development
</TABLE>
- ---------------
(1) In 1997, Messrs. Peterson, Brown, Clark, Harter and Hughes earned (i)
$4,575, $2,988, $2,988, $1,434 and $2,470, respectively, as contributions to
the Company's Employees' Saving Plan; (ii) $2,430, $225,
21
<PAGE> 63
$184, $140, and $143, respectively, as life insurance premiums and income;
(iii) $731, $200, $200, $0, and $0, respectively, as taxable club membership
dues; and (iv) $0, $0, $0, $0 and $875 as a car allowance. In 1996, Messrs.
Peterson, Brown, Clark, Harter and Hughes earned (i) $2,660, $2,660, $1,234,
$3,194 and $3,360, respectively, as contributions to the Company's
Employees' Savings Plan; (ii) $2,430, $224, $46, $140 and $140,
respectively, as life insurance premiums and income; (iii) $250, $0, $0, $0
and $0, respectively, as taxable club membership dues; and (iv) $0, $0, $0,
$0 and $1,946, respectively, as a car allowance.
(2) In 1995, Nashua (the then-parent of the Company) granted Mr. Peterson
options to purchase common stock of Nashua under Nashua's incentive plan.
The options terminated unexercised six months following the Company's
initial public offering.
(3) Messrs. Brown, Clark, Harter and Hughes first became executive officers in
1996.
(4) Includes moving expense reimbursements of $35,893 and tax equalization
payments of $20,743.
(5) Includes moving expense reimbursements of $70,550 and tax equalization
payments of $46,877.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information as to options granted
during fiscal 1997 to the individuals listed in the Summary Compensation Table.
<TABLE>
<CAPTION>
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (5)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION -----------------------
GRANTED IN 1997 ($/SHARE)(4) DATE 5% 10%
---------- ---------- ------------ ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David A. Peterson........... 128,390(1) 33.0% $2.25 - 4.13 2/3/07 & 7/22/07 $252,613 $640,170
Michael F. Brown............ 51,300(2) 13.2% 2.25 - 4.13 2/3/07 & 7/22/07 102,148 258,864
Richard A. Clark............ 51,300(2) 13.2% 2.25 - 4.13 2/3/07 & 7/22/07 102,148 258,864
Paul A. Harter.............. 56,550(3) 14.5% 2.25 - 4.13 2/3/07 & 7/22/07 109,577 277,690
William A. Hughes........... 56,550(3) 14.5% 2.25 - 4.13 2/3/07 & 7/22/07 109,577 277,690
</TABLE>
- ---------------
(1) Options to purchase 60,000 and 26,300 shares will become exercisable on
February 3, 1998 and July 22, 1998, respectively, if Mr. Peterson remains in
the employ of the Company. Options to purchase 42,090 shares are
"performance-accelerated" options. These options will become exercisable in
tranches of 25% each based upon the Common Stock trading, for a period of 20
consecutive trading days, at an average premium of 25%, 50%, 75% and 100%,
respectively, above the exercise price, if the optionee remains an employee
of the Company on such date. However, if such performance goals are met
prior to the first anniversary of the grant date, the shares that would
otherwise become exercisable thereby only become exercisable on the first
anniversary date of the grant date, if the optionee remains an employee of
the Company on such date. On the eighth anniversary of the grant date, any
remaining shares subject to a "performance-accelerated" option will become
exercisable, if the optionee remains an employee of the Company on such
date.
(2) Options to purchase 25,000 and 15,775 shares each will become exercisable on
February 3, 1998 and July 22, 1998, respectively, if Messrs. Brown and Clark
remain in the employ of the Company. Options to purchase 10,525 shares are
"performance-accelerated" options subject to the conditions described in
footnote (1).
(3) Options to purchase 25,000 and 15,775 shares each will become exercisable on
February 3, 1998 and July 22, 1998 respectively if Messrs. Harter and Hughes
remain in the employ of the Company. Options to purchase 15,775 shares are
"performance-accelerated" options subject to the conditions described in
footnote (1).
(4) The one year vesting options granted on February 3, 1997 were granted at
$4.13. The one year vesting options and performance-accelerated options
granted on July 22, 1997 were granted at $2.25.
(5) In accordance with SEC rules, also shown are the hypothetical gains or
"option spreads," on the pre-tax basis, that would exist for the respective
options. These gains are based on assumed rates of annual
22
<PAGE> 64
compound stock price appreciation of 5% and 10% from the date the options
were granted over the full option term. To put this data into perspective,
the resulting Cerion stock prices for the grants expiring on February 3,
2007 and July 22, 2007 would be $6.73 and $3.67, respectively, at a 5% rate
of appreciation and $10.71 and $5.84, respectively, at a 10% rate of
appreciation. The amounts reflected in the table may not accurately reflect
or predict the actual value of the stock options.
OPTION EXERCISES IN FISCAL YEAR 1997 AND VALUE OF OPTIONS AT END OF FISCAL 1997
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT IN-THE-MONEY, OPTIONS
SHARES ACQUIRED VALUE FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)
---- --------------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
David A. Peterson.... 0 $0 0/128,390 $0/$0
Michael F. Brown..... 0 $0 0/ 51,300 $0/$0
Richard A. Clark..... 0 $0 0/ 51,300 $0/$0
Paul A. Harter....... 0 $0 0/ 56,550 $0/$0
William A. Hughes.... 0 $0 0/ 56,550 $0/$0
</TABLE>
SEVERANCE BENEFITS
The Company has entered into employment agreements with executive officers
Messrs. Peterson, Brown, Clark, Harter and Hughes in order to ensure their
continued service to Cerion in the event of an attempt by a person or group of
persons to gain control of Cerion. Such employment agreements provide that upon
termination of employment under certain circumstances within three years of a
"change in control" as defined in these agreements, the employee would receive
severance pay equal to three times the sum of his annual salary and bonus for
Messrs. Peterson, Brown, Clark, Harter and Hughes. In addition, if within three
years following the "change in control", Messrs. Peterson, Brown, Clark, Harter
or Hughes elect to terminate employment for "good reason" (as defined), he would
receive the above described severance pay. These severance payments are subject
to reduction to the extent necessary to avoid excise taxes under Section 280G of
the Internal Revenue Code.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company, Nashua or of any affiliated
company ("Non-Employee Directors") will receive a fee of $750 per meeting of the
Board of Directors or any committee thereof. All directors are reimbursed for
their out-of-pocket expenses incurred in attending such meetings. The Company,
under its 1996 Stock Incentive Plan, also grants each Non-Employee Director, on
the election or re-election date of each such director, that number of shares of
Common Stock which is equal in value to $10,000 (subject to adjustment
annually), calculated with reference to the closing price of the Common Stock on
the trading day immediately prior to the date of grant, and an option to
purchase 1,000 shares of Common Stock exercisable at the same price.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"). The
Committee, which is composed of three independent directors, establishes and
administers the Company's executive compensation policies and plans, and
administers the Company's stock option plan. The Committee considers internal
and external information in determining officers' compensation, including input
from independent compensation consultants and outside survey data.
23
<PAGE> 65
Compensation Philosophy
The Company's compensation policies for executive officers are based on the
belief that the interests of executives should be closely aligned with those of
the Company's shareholders. The Compensation policies are designed to achieve
the following objectives:
- Offer compensation opportunities that attract highly qualified
executives, reward outstanding initiative and achievement, and retain the
leadership and skills necessary to build long-term shareholder value.
- Maintain a significant portion of executives' total compensation at risk,
tied to both the annual and long-term financial performance of the
Company and the creation of shareholder value.
- Further the Company's short and long-term strategic goals and values by
aligning compensation with business objectives and individual
performance.
Compensation Program
The Company's executive compensation program has three major integrated
components: base salary, annual incentive awards, and long-term incentives.
Base Salary. Base salary levels for executive officers are determined
annually by reviewing the competitive pay practices of companies of similar size
and market capitalization, the skills, performance level, and contribution to
the business of individual executives, and the needs of the Company. Overall,
the Company believes that base salaries for executive officers are approximately
competitive with median base salary levels for similar positions in similar
companies, but the Committee has not attempted to aim for any specific range of
any particular group of companies.
Annual Incentive Awards. The Company's executive officers are eligible to
receive annual cash bonus awards designed to motivate executives to attain
short-term and longer-term corporate and individual management goals. The
Committee establishes the annual incentive opportunity for each executive
officer in relation to his or her base salary. Awards under this program are
based on the attainment of specific Company performance measures established by
the Committee early in the fiscal year. For 1997 and 1998, the formula for these
bonuses was determined as a function of net income and cash flow objectives,
thus establishing a direct link between executive pay and Company profitability.
The Company's financial performance in 1997 met the objectives set by the
Committee, as such, awards were earned.
Long-Term Incentives. The Committee believes that stock options are an
excellent vehicle for compensating its officers and employees. The Company
provides long-term incentives through its 1996 Stock Incentive Plan, the purpose
of which is to create a direct link between executive compensation and increases
in shareholder value. Stock options are granted at fair market value and vest in
installments, generally over two years. When determining option awards for an
executive officer, the Committee considers the executive's current contribution
to Company performance, the anticipated contribution to meeting the Company's
long-term strategic performance goals, and industry practices and norms, but
without using any specific targets or criteria. Long-term incentives granted in
prior years and existing levels of stock ownership also are taken into
consideration, but the Committee has no specific ownership target. Because the
receipt of value by an executive officer under a stock option is dependent upon
an increase in the price of the Company's Common Stock, this portion of the
executives' compensation is directly aligned with an increase in shareholder
value.
Chief Executive Officer Compensation
Mr. Peterson's base salary, annual incentive award and long-term incentive
compensation are determined by the Committee based upon the same factors as
those employed by the Committee for executive officers generally. Mr. Peterson's
current annual base salary is $168,000 subject to annual review and adjustment
by the Board of Directors of the Company. Mr. Peterson also may be entitled to
an annual cash bonus depending on the Company's achievement of certain
performance objectives, including certain milestones in earnings and cash flows
during a fiscal year, as compared to the preceding fiscal year. Any such cash
bonus shall be
24
<PAGE> 66
computed on a formula basis established by the Committee. For the year ending
December 31, 1997, Mr. Peterson was paid a cash bonus totaling $144,188, or 88.4
percent of his 1997 base salary.
Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to certain executives of public companies. Having
considered the requirements of Section 162(m), the Committee believes that
grants made pursuant to the Company's Stock Incentive Plan meet the requirement
that such grants be "performance based" and are, therefore, exempt from the
limitations on deductibility. Historically, the combined salary and bonus of
each executive officer has been well below the $1 million limit. The Committee's
present intention is to comply with Section 162(m) unless the Committee feels
that required changes would not be in the best interest of the Company or its
shareholders.
Respectfully Submitted by the
Compensation Committee
Sheldon A. Buckler, Chairman
Daniel M. Junius
Osmund M. Fundingsland
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Sheldon A. Buckler, Daniel M.
Junius and Osmund M. Fundingsland. No member of the Compensation Committee was
or is an officer or employee of the Company.
25
<PAGE> 67
PERFORMANCE GRAPHS
The following graph compares the cumulative total returns for Cerion's
Common Stock with the comparable returns for Standard and Poor's SmallCap 600
Index and the Standard and Poor's Computers (Hardware) Index for the period
beginning May 24, 1996 and ending December 31, 1997.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
CERION S&P COMPUTERS
Measurement Period TECHNOLOGIES SMALLCAP (HARDWARE)- PEER
(Fiscal Year Covered) INC 500 INDEX 500 GROUP
<S> <C> <C> <C> <C>
May 96 100 100 100 100
1996 34.21 104.12 115.00 182.54
1997 10.36 130.76 168.33 112.50
</TABLE>
Standard & Poor's Compustat-1-15-98
This graph assumes the investment of $100 in Cerion's Stock, the Standard
and Poor's SmallCap 600 Index and the Standard and Poor's Computers (Hardware)
Index and a Peer Group of eight companies within the data storage segment of the
computer industry as of May 24, 1996 (the date on which Cerion's Common Stock
was first registered with the SEC and began trading) and assumes dividends were
reinvested. Additional measurement points are at the remaining fiscal quarter
ends for the year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the number of shares and percentage of Cerion's
common stock beneficially owned by all persons known to Cerion to be the
beneficial owners of more than 5% of its common stock, as of March 9, 1998.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE COMMON STOCK
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING
------------------------ ----------------------- ------------
<S> <C> <C>
Nashua Corporation......................................... 2,599,000(b) 37.0%
State of Wisconsin Investment Board........................ 686,200(a) 9.8%
</TABLE>
- ---------------
(a) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated January 20, 1998.
(b) Based on information reported in a Schedule 13G filed with the Securities
and Exchange Commission dated February 13, 1998. Shares are owned by a
wholly owned subsidiary of Nashua.
26
<PAGE> 68
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table shows the number of shares and percentage of Cerion's
Common Stock deemed to be beneficially owned by each director and nominee for
director, each executive officer named in the Summary Compensation Table above
and by all directors and officers of Cerion as a group, as of March 27, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF SHARES
NAME BENEFICIAL OWNERSHIP(a) OUTSTANDING
---- ----------------------- -----------------
<S> <C> <C>
David A. Peterson(e)...................................... 62,000 0.9%
Michael F. Brown(f)....................................... 25,100 0.3%
Richard A. Clark(f)....................................... 27,650 0.4%
Paul A. Harter(f)......................................... 25,000 0.3%
William A. Hughes(f)...................................... 25,300 0.3%
Gerald G. Garbacz......................................... 4,000 0.1%
Joseph A. Baute(c)........................................ 5,925 0.1%
Sheldon A. Buckler(c)..................................... 9,925 0.1%
Osmund M. Fundingsland(b)................................. 4,265 0.1%
Daniel M. Junius(d)....................................... 2,500 *
Ross W. Manire(b)......................................... 8,936 0.1%
Gerard V. Schenkkan....................................... 4,848 0.1%
Ronald D. Verdoorn........................................ 4,848 0.1%
Directors and Officers as a group (13 persons(g).......... 210,297 2.9%
</TABLE>
- ---------------
(a) Information as to the interests of the respective nominees has been
furnished in part by them. The inclusion of information concerning shares
held by or for their spouses or children or by corporations in which they
have an interest does not constitute an admission by such nominees of
beneficial ownership thereof. Unless otherwise indicated, all persons have
sole voting and dispositive power as to all shares they are shown as owning.
(b) Includes 1,000 shares each Non-Employee Director (Directors who are not
employees of the Company, Nashua or of any affiliated company) has a right
to acquire within 60 days of April 6, 1998 through the exercise of stock
options.
(c) Includes 2,000 shares each Non-Employee Director has a right to acquire
within 60 days of April 6, 1998 through the exercise of stock options.
(d) Includes 1,500 shares held in a retirement account of Mr. Junius's spouse.
Mr. Junius disclaims beneficial ownership of these shares.
(e) Includes 60,000 shares Mr. Peterson has a right to acquire within 60 days of
April 6, 1998 through the exercise of stock options.
(f) Includes 25,000 shares each Executive officer has a right to acquire within
60 days of April 6, 1998 through the exercise of stock options.
(g) Includes 166,000 shares which the directors and officers of Cerion have the
right to acquire within 60 days of April 6, 1998 through exercises of stock
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No information is required with respect to this item because no such
relationships or related transactions existed in 1997.
27
<PAGE> 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-K
1. FINANCIAL STATEMENTS
The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:
- Balance Sheets as of December 31, 1997 and 1996
- Statements of Operations for the years ended December 31, 1997, 1996
and 1995
- Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995
- Notes to Financial Statements
- Quarterly Financial Information (unaudited)
- Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULE
- Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.
28
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANT ON
FINANCIAL STATEMENT SCHEDULE
----------------------------
To the Board of Directors of
Cerion Technologies Inc.
Our audits of the financial statements referred to in our report dated February
2, 1998 appearing in the 1997 Annual Report to Stockholders of Cerion
Technologies Inc. (which report and financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 2, 1998
29
<PAGE> 71
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1(a) Capital Contribution Agreement.
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(a) Amended and Restated By-Laws of Cerion Technologies Inc.
4.1(a) Specimen Certificate for shares of Cerion Technologies
Inc.'s Common Stock.
10.1(a) Form of Tax Allocation Agreement between Cerion Technologies
Inc. and Nashua Corporation.
10.2(a) Form of Registration Rights Agreement between Cerion
Technologies Inc. and Nashua Corporation.
10.3(a) Form of Intercompany Agreement between Cerion Technologies
Inc. and Nashua Corporation.
10.4(a) 1996 Stock Incentive Plan.
10.5(a) Form of One-Year Vesting Option Agreement.
10.6(a) Form of Performance-Accelerated Option Agreement.
10.7(c) Financing Agreement, dated as of March 7, 1997 between
Cerion Technologies Inc., and The CIT Group/Business Credit,
Inc.
10.8(c) Mortgage, Security Agreement, Financing Statement and
Assignment of Rents and Leases by and between Cerion
Technologies Inc. and The CIT Group/Business Credit, Inc.
10.9(b) Employment Contract between Cerion Technologies Inc. and
David Peterson as President and Chief Executive Officer.
10.10(b) Form of Employment Contract between Cerion Technologies Inc.
and the four remaining executive officers of the Company
indicated therein.
24 Powers of Attorney
27 Financial Data Schedule (EDGAR version only).
99.1 Financial Section of the 1997 Annual Report to Shareholders,
pages 12 through 23.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations section of the 1997 Annual Report
to Shareholders, pages 8 through 11.
</TABLE>
- ---------------
(a) Incorporated by Reference to Form S-1 filed on March 21, 1996 amended on
April 25, 1996, File No. 333-2590.
(b) Incorporated by Reference to Form 10-Q filed for the quarter ended September
27, 1996 (Exhibits 10.9, and 10.10 originally filed as Exhibits 10.1 and
10.2, respectively).
(c) Incorporated by Reference to Form 10-K filed for the year ended December 31,
1996 (Exhibits 10.7 and 10.8 originally filed as Exhibits 10.7 and 10.8,
respectively.)
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1997.
30
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CERION TECHNOLOGIES INC.
By /s/ RICHARD A. CLARK
------------------------------------
RICHARD A. CLARK
VICE PRESIDENT-FINANCE, CHIEF
FINANCIAL OFFICER AND
TREASURER
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ DAVID A. PETERSON President and Chief Executive March 27, 1998
- --------------------------------------------------- Officer (Principal Executive
DAVID A. PETERSON Officer) and Director
/s/ RICHARD A. CLARK Chief Financial Officer, Vice March 27, 1998
- --------------------------------------------------- President-Finance, and Treasurer
RICHARD A. CLARK (Principal Financial and
Accounting Officer)
/s/ JOSEPH A. BAUTE* Director
- ---------------------------------------------------
JOSEPH A. BAUTE
/s/ SHELDON A. BUCKLER* Director
- ---------------------------------------------------
SHELDON A. BUCKLER
/s/ OSMUND M. FUNDINGSLAND* Director
- ---------------------------------------------------
OSMUND M. FUNDINGSLAND
/s/ GERALD G. GARBACZ* Director
- ---------------------------------------------------
GERALD G. GARBACZ
/s/ DANIEL M. JUNIUS* Director
- ---------------------------------------------------
DANIEL M. JUNIUS
/s/ ROSS W. MANIRE* Director
- ---------------------------------------------------
ROSS W. MANIRE
/s/ GERARD SCHENKKAN* Director
- ---------------------------------------------------
GERARD SCHENKKAN
/s/ RONALD VERDOORN* Director
- ---------------------------------------------------
RONALD VERDOORN
By /s/ RICHARD A. CLARK March 27, 1998
----------------------------------------------
*RICHARD A. CLARK
AS ATTORNEY-IN-FACT
</TABLE>
31
<PAGE> 73
SCHEDULE II
CERION TECHNOLOGIES INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C - ADDITIONS COLUMN D COLUMN E
-------- -------- -------------------- -------- --------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -------------------------------------- ---- ---- -- ----- ----
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND CUSTOMER RETURNS
Year ended December 31, 1997.......... $234 $151 $0 $ 0 $385
Year ended December 31, 1996.......... 51 187 0 4 234
Year ended December 31, 1995.......... 36 21 0 6 51
INVENTORY VALUATION RESERVE
Year ended December 31, 1997.......... $469 $ 0 $0 $(244)(1) $225
Year ended December 31, 1996.......... 50 419 0 0 469
Year ended December 31, 1995.......... 19 31 0 0 50
DEFERRED TAX ASSET
VALUATION ALLOWANCE
Year ended December 31, 1997.......... $147 $ 0 $0 $(147)(2) $ 0
Year ended December 31, 1996.......... 0 147 0 0 147
Year ended December 31, 1995.......... 0 0 0 0 0
</TABLE>
- ---------------
(1) Adjustment due to sale of previously reserved inventory.
(2) Adjustment due to revaluation of realizable tax benefit.
32
<PAGE> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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
<PAGE> 88
APPENDIX E
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS, PAGES 8
THROUGH 11.
<TABLE>
<CAPTION>
Cerion Technologies Inc.
Five-Year Financial Review
(In thousands, except per share data, price
range, number of employees and percentages) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Net sales $31,810 $36,540 $28,175 $14,553 $14,612
Gross margin percentage 16.4% 26.9% 30.2% 10.7% 15.8%
Selling, general and administrative
expenses as a percentage of sales 13.8% 15.2% 9.0% 11.9% 11.3%
Operating income (loss) before interest expense
(income) and taxes as a percentage of sales 3.7% 11.6% 21.2% (1.2)% 4.5%
Income (loss) as a percentage of sales 2.6% 6.9% 12.2% (1.3)% 2.3%
Effective tax rate 29.0% 43.3% 39.1% (36.5)% 39.6%
Income (loss) before provision (benefit) $ 1,165 $ 4,419 $ 5,654 $ (288) $ 561
for income taxes
Net income (loss) 827 2,505 3,444 (183) 339
Net income per share, basic and diluted (1) .12 .39 .64 (.03) .06
Financial Position
Working capital $11,764 $10,248 $ 3,436 $ 2,645 $ (27)
Total assets 25,265 23,333 11,874 7,546 4,629
Long-term debt -- -- -- 316 342
Total debt -- -- -- 342 365
Stockholders' equity 20,233 19,366 8,458 6,121 3,182
Stockholders' equity per common share 2.88 3.04 -- -- --
Other Selected Data
Investment in plant and equipment $ 2,164 $ 6,107 $ 2,564 $ 1,148 $ 1,927
Depreciation and amortization 2,466 2,099 1,035 876 770
Return on average stockholders' equity 4.2% 18.0% 47.2% (3.9)% 13.1%
Common Stock price range:
High bid $ 6.88 $ 19.50 -- -- --
Low bid 1.94 2.25 -- -- --
Year-end closing price 1.97 6.50 -- -- --
Number of employees 374 357 437 211 244
Average common and common equivalent shares 7,024 6,379 5,400 5,400 5,400
</TABLE>
(1) Earnings per share data prior to May 30, 1996 assumes shares issued to
Nashua Corporation on December 31, 1995 were outstanding.
7
<PAGE> 89
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Nashua Corporation ("Nashua") operated the business from the time of its
acquisition in 1986 either as a division or wholly owned subsidiary until May
24, 1996, the date of Cerion Technologies Inc.'s ("Cerion" or "the Company")
initial public offering that reduced Nashua's ownership to approximately 37
percent.
Results of Operations -- 1997 Compared to 1996
Net Sales: Net sales decreased 12.9 percent, or $4.7 million, to $31.8 million
in 1997 from $36.5 million in 1996. The decrease in net sales resulted from
average sales prices decreasing significantly between 1996 and 1997, resulting
in an average sales price in 1997 that was approximately 24 percent lower than
1996. The lower average sales price was offset by a 14 percent increase in unit
volume shipped. Net sales for the Company was concentrated with four customers
that represented 43 percent, 41 percent, 11 percent and 2 percent in 1997,
respectively, and 10 percent, 29 percent, 6 percent and 44 percent in 1996,
respectively. The reduction in unit volume to our largest customer in 1996 began
gradually in the second half of 1996 as it expanded its internal manufacturing
capacity for aluminum disk substrates.
Gross Profit: Gross profit decreased $4.6 million to $5.2 million in 1997 from
$9.8 million in 1996. Gross profit as a percentage of net sales decreased to
16.4 percent in 1997 compared to 26.9 percent in 1996. The decrease in gross
profit in 1997 compared to 1996 was attributable to the 24 percent decrease in
average sales price offset by higher unit volumes shipped and the spreading of
fixed costs over a higher sales volume. Furthermore, the Company's continual
efforts to reduce manufacturing costs through process automation, eliminating an
entire step in our manufacturing process for approximately half of our products
in the second half of 1997 and continuous process improvement efforts to reduce
manufacturing time for the manufacturing steps for the remaining products have
resulted in approximately four percent lower manufacturing costs.
Selling, General & Administrative Expenses: Selling, general and administrative
expenses decreased 20.8 percent, or $1.2 million, to $4.4 million in 1997 from
$5.6 million in 1996, representing 13.8 percent and 15.2 percent of net sales,
respectively. The decrease was due primarily to higher nonrecurring costs
included in 1996 including the relocation costs for two executive officers and
costs associated with transitioning the Company from a division within Nashua
Corporation to a stand-alone company. Furthermore, lower spending associated
with a decrease in the work force, reduced research and development spending and
lower freight costs because of customer mix contributed to the reduction in
costs. Selling, general and administrative expenses in 1997 included a $250,000
charge related to the write off of equipment no longer utilized to produce
aluminum organic photoconductor drum substrates for laser printer cartridges, a
product line the Company exited in 1997.
Interest (Income) Expense: Interest income consists of interest income from
short-term investments. Interest expense consists primarily of interest expense
allocated to the Company by Nashua through May 24, 1996 (at which time the
Company was a division or subsidiary of Nashua). See Related Party Transactions
and Allocations in the Notes to the Financial Statements.
Provision for Income Taxes: Provision for income taxes was $338,000 in 1997
compared to $1.9 million in 1996. The Company's effective tax rate was 29.0
percent in 1997 compared to 43.3 percent in 1996, as a percentage of income
before provision for income taxes. The establishment of a valuation reserve for
the Company's deferred tax assets in 1996 increased the Company's effective tax
rate in 1996. Uncertainty regarding the utilization of the net deferred tax
asset resulted in the establishment of the valuation reserve. The reserve was
reversed in 1997 after the uncertainty concerning the utilization of the net
deferred tax asset was removed. The reserve reversal reduced the Company's
effective tax rate.
Results of Operations -- 1996 Compared to 1995
Net Sales: Net sales grew 29.4 percent to $36.5 million in 1996 compared to
$28.2 million in 1995. The growth experienced during the first six months of
1996 was attributable primarily to growth in the market for aluminum substrates,
growth of net sales to the Company's existing customers and the addition of a
significant new customer in the beginning of 1996. The second half of 1996
8
<PAGE> 90
demonstrated the volatility within the market when, in July, Cerion announced a
major customer had canceled all of its outstanding purchase orders with the
Company, following a significant loss of orders by that customer. Furthermore,
the Company's largest customer gradually began decreasing orders to zero in the
second half of 1996 as it expanded its internal manufacturing capacity to
produce aluminum disk substrates. Revenue in the third and fourth quarters of
1996 equaled only 45 percent of revenue in the first and second quarters of
1996. Selling prices decreased significantly during the second half of 1996
contributing to an average sales price that in the second half of 1996 was
approximately 13 percent lower than the second half of 1995.
Gross Profit: Gross profit increased 15.3 percent, or $1.3 million, to $9.8
million in 1996 from $8.5 million in 1995. The increase in gross profit was due
to increases in volume, improved utilization of existing manufacturing capacity
and the spreading of fixed costs over a substantially higher sales volume during
the first six months of 1996, offset by a dramatic decrease in net sales in the
second half of 1996 from the comparable 1995 period. Gross profit as a
percentage of sales decreased to 26.9 percent in 1996 compared to 30.2 percent
in 1995. The decrease in gross margin was attributable to the underutilization
of existing capacity that was expanded in the first half of 1996 and the
spreading of higher fixed costs attributable to larger available production
capacity over a substantially lower sales volume in the second half of 1996.
Gross profit also decreased from lower average selling prices of the Company's
products in the second half of 1996.
Selling, General & Administrative Expenses: Selling, general and administrative
expenses increased approximately $3.1 million in 1996 to $5.6 million, compared
to $2.5 million in 1995, representing 15.2 percent and 9.0 percent of net sales,
respectively. This increase primarily was due to the costs of additional
personnel to support the Company's growth experienced in the first six months of
1996 (including the addition of two executive officers), the costs associated
with the Company becoming a stand-alone entity and increased profit-sharing and
performance-based bonus expenses during the first six months of 1996. The
increase in the percentage results from both growth in absolute spending and a
lower revenue base during the third and fourth quarters of 1996.
Interest (Income) Expense: Interest income consists of interest income from
short-term investments. Interest expense consists primarily of interest expense
allocated to the Company by Nashua through May 24, 1996 (at which time the
Company was a division or subsidiary of Nashua). See Related Party Transactions
and Allocations in the Notes to the Financial Statements.
Provision for Income Taxes: Provision for income taxes was $1.9 million in 1996
compared to $2.2 million in 1995. The Company's effective tax rate was 43.3
percent in 1996 compared to 39.1 percent in 1995 primarily because of an
increase in nondeductible items as a percentage of income before provision for
income taxes and the establishment of a valuation reserve for the Company's
deferred tax assets.
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. During the periods presented, these capital requirements generally
were satisfied by cash flows from operations, except in 1997 when these
requirements were supplemented from the proceeds of the Company's initial public
offering.
Nashua (which previously owned 100 percent of Cerion until the
Company's initial public offering in May 1996, which reduced Nashua's ownership
to approximately 37 percent) historically had performed cash management services
for the Company. The Company's cash flow was directed to Nashua, and Nashua in
turn provided cash to the Company to fund operating expenses and capital
expenditures. On May 31, 1996, this arrangement ceased. Shortly thereafter, the
Company and Nashua determined the respective cash flows from the Company to
Nashua, and from Nashua to the Company, during the period from January 1, 1996
through May 30, 1996, and settled a net amount due from Cerion to Nashua of
approximately $200,000.
Net cash provided by (used in) operating activities was $(2.6) million,
$6.8 million and $4.0 million in 1997, 1996 and 1995, respectively. The decrease
in cash provided by operating activities from 1996 to 1997 was attributable to a
reduction in net income and an increase in accounts receivable due to
significantly higher revenues in the last half of 1997 compared to the last half
of 1996. Furthermore, the Company's accounts receivable collection slowed in the
fourth quarter of 1997 compared to 1996, contributing to the higher level of
accounts receivable at December 31, 1997. The increase in cash provided by
operating activities from 1995 to 1996 was attributable to a reduction in
9
<PAGE> 91
accounts receivable offset by increased inventories due to significantly lower
revenues in the last half of 1996 compared to the last half of 1995 combined
with increased depreciation from capital equipment additions in 1995 and 1996.
The increase in accounts payable from December 31, 1995 to December 31, 1996 was
due to the growth in the business and capital projects undertaken by the Company
in connection with its expansion of capacity. The increase in accounts payable
from 1996 to 1997 was associated with the overall growth of the business in the
second half of 1997.
Net cash used in investing activities was $2.0 million, $6.1 million
and $2.5 million in 1997, 1996 and 1995, respectively. Cash used in investing
activities was primarily for capital expenditures related to modifications of
existing equipment and purchases of new equipment. The newly purchased equipment
increased both manufacturing capacities and efficiencies. The Company's
short-term investments are comprised of investment grade commercial paper.
Net cash provided by (used in) financing activities was $(60,000), $8.4
million and $(1.4) million in 1997, 1996 and 1995, respectively. Net cash
provided by financing activities increased in 1996 due to proceeds from the
initial public offering partially offset by the repayment of indebtedness. On
May 30, 1996, the Company closed its initial public offering 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.
On May 31, 1996, the Company repaid the two outstanding Promissory
Notes issued to Nashua Corporation in March 1996 having a combined principal sum
of $11,142,000. The prepayments were made without penalty.
Based upon anticipated cash flows from operating activities, remaining
proceeds from the initial public offering completed in 1996 and credit
availability, the Company believes that it has the liquidity and capital
resources needed to meet its financial commitments through 1998. Unless the
Company achieves substantial cost improvements, increased demand and no further
price reductions that exceed cost reductions beyond year-end levels, the Company
could incur net losses and negative cash flows from operating activities.
Without such cost improvements and increased demand, at present cost levels and
planned capital expenditures of approximately $3.0 million annually, the Company
over an extended period of time may exhaust all or substantially all of its cash
resources and borrowing availability under its credit facility. In such event,
the Company would be required to pursue other alternatives to improve liquidity,
including further cost 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 assurance 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 an average of approximately 110 days compared to normal
trade terms provided to this customer of 60 days. Future payment of this amount
by the customer is expected to be structured payments over a time frame not to
exceed one year. This anticipated structuring of future payments will reduce the
Company's liquidity and financial flexibility. Furthermore, in the event that
this customer's financial position worsens during the payment period, the risk
of default increases.
Inflation
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
Matters Affecting Future Results
This Report contains certain "forward-looking" statements, including, but not
limited to the statements regarding the possible impact of cancellation of
orders by a major customer and backwards integration within the industry towards
the manufacture of aluminum disk substrates. Moreover, from time to time in both
written releases and reports and oral statements, the Company and its senior
management may express expectations regarding future performance of the Company.
All of these "forward-looking" statements are inherently uncertain, and
investors must recognize that actual events could cause actual results to differ
materially from 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
10
<PAGE> 92
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.
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 and
throughout 1997, in which available market supply exceeded demand and
significant pricing reductions caused the Company to incur net losses in each of
the last two quarters of 1996 and operate at essentially breakeven performance
for the first three quarters of 1997, are worsening in 1998. Despite the
Company's profitablity in the fourth quarter of 1997, 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 first half of 1998. 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
substantial price increases. Thus, any improvement in operating performance will
require cost improvements and/or order volume increases to occur. 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. 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 an average of 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.
The Company's gross margin percentage is largely a function of product
mix sold in any period. Various other factors, including unit volumes, 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. Additionally, increased depreciation
resulting from the significant capital spending in 1995 through 1997 and planned
capital spending in 1998, will negatively impact gross margins in future
periods. The planned 1998 capital spending is focused in the area of
manufacturing process changes to reduce product cost.
Reduction in demand from either a reduction in market requirements,
further backwards integration by thin-film media manufacturers or a sudden loss
of one or more customers 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.
11
<PAGE> 93
APPENDIX F
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 -
-------------
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
1
<PAGE> 94
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.
2
<PAGE> 95
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.
3
<PAGE> 96
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.
4
<PAGE> 97
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
5
<PAGE> 98
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.
6
<PAGE> 99
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
7
<PAGE> 100
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
8
<PAGE> 101
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.
9
<PAGE> 102
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
10
<PAGE> 103
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.
11
<PAGE> 104
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.
12
<PAGE> 105
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.
13
<PAGE> 106
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)
14
