<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CERADYNE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 3297 33-0055414
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
--------------
JOEL P. MOSKOWITZ
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
CERADYNE, INC.
3169 RED HILL AVENUE
COSTA MESA, CALIFORNIA 92626
(714) 549-0421
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
--------------
COPIES TO:
ROBERT E. RICH, ESQ. MATTHEW P. CAMERON JAY RAINS, ESQ. PAUL E.
THULLEN, ESQ. HURDLOW, ESQ. JEFFREY T. BAGLIO, ESQ.
STRADLING, YOCCA, CARLSON & RAUTH GRAY CARY WARE & FREIDENRICH
660 NEWPORT CENTER DRIVE, SUITE 1600 4365 EXECUTIVE DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660 SAN DIEGO, CALIFORNIA 92121
(714) 725-4000 (619) 677-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE(1)(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value......... 1,380,000 shares $5.44 $7,507,200 $2,588
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</TABLE>
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(1) Includes 180,000 shares of Common Stock issuable upon exercise of an
option granted to the Underwriters to cover over-allotments.
(2) The offering price is estimated solely for the purpose of calculating the
amount of the registration fee payable to the Securities and Exchange
Commission (the "Commission"), in accordance with Rule 457(c), on the
basis of the average of the high and low prices for the Common Stock as
reported by the Nasdaq National Market on August 28, 1995, which was $5.44
per share.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
CERADYNE, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS LOCATION OR CAPTION
-------------------------------- ------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus.... Facing Page; Cross Reference Sheet; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus... Inside Front Page of Prospectus; Outside
Back Cover Page of Prospectus; Available
Information
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Charges... Summary; Risk Factors
4. Use of Proceeds.............. Summary; Use of Proceeds
5. Determination of Offering
Price....................... Front Cover Page of Prospectus;
Underwriting
6. Dilution..................... Not Applicable
7. Selling Security Holders..... Not Applicable
8. Plan of Distribution......... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to
be Registered............... Summary; Price Range of Common Stock and
Dividend Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts
and Counsel................. Not Applicable
11. Information with Respect to
the Registrant.............. Summary; The Company; Risk Factors; Use of
Proceeds; Price Range of Common Stock and
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Legal
Matters; Experts; Consolidated Financial
Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1995
1,200,000 SHARES
LOGO(R)
Logo of Ceradyne(R), Inc. appears here
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Ceradyne,
Inc. The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol CRDN. On August 31, 1995, the last sale price of the Common
Stock as reported on the Nasdaq National Market was $5.75 per share. See "Price
Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 5 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.............. $ $ $
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Total (3).............. $ $ $
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</TABLE>
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(1) Does not include (i) a non-accountable expense allowance to the
Representatives of the Underwriters, and (ii) the sale by the Company to
the Representatives of the Underwriters of five-year warrants to purchase
up to 60,000 shares of Common Stock at an exercise price of $ per share
(120% of the per share price to the public). See "Underwriting" for
information concerning indemnification of the Underwriters and other
matters.
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 180,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $ , Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Van Kasper & Company, San Francisco, California on or about
, 1995.
VAN KASPER & COMPANY CRUTTENDEN ROTH
INCORPORATED
, 1995
<PAGE>
Photo depicting Ceramic Orthodontic Brackets
. Ceradyne produces Transtar(R) translucent orthodontic ceramic brackets as
part of its strategic relationship with 3M/Unitek Corporation. Shown:
Typical placement of ceramic brackets during treatment.
Drawing depicting Cathodes for Television
. The Company has developed a ceramic-impregnated dispenser cathode to be
used for large screen television, projection television and high definition
television (HDTV). Shown: Back end of color television tube uses three
cathodes.
Examples of Military Armor
. Ceradyne's lightweight ceramic armor utilizes its Ceralloy(R) ceramic
plates bonded to a laminate backing to stop up to .50 caliber machine gun
bullets for helicopter and personnel protection. Shown: Military armored
vest.
[PICTURES]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
THE COMPANY
Ceradyne, Inc. ("Ceradyne" or the "Company") develops, manufactures and
markets advanced technical ceramic products and components for industrial,
defense, consumer and microwave applications. In many high performance
applications, products made of advanced technical ceramics meet specifications
that similar products made of metals or plastics cannot achieve. Advanced
technical ceramics can withstand extremely high temperatures, combine hardness
with light weight, are highly resistant to corrosion and wear, and have
excellent electrical insulation capability and other special electronic
properties.
Ceradyne's technology was originally developed primarily for defense and
aerospace applications which have historically represented a substantial
portion of its business. As a result of the end of the "Cold War," one of the
Company's major defense contracts was cancelled and the Company experienced
reductions in certain other defense-related business. As a result, the Company
began to rely more heavily on the development of new applications and markets,
domestic and international, for its advanced technical ceramic technology,
while continuing to serve its historical customer base which continued to
account for a substantial portion of the Company's business. The Company's
international sales have increased in each of the last three years.
From a peak of $25.6 million in 1987, the Company's revenues declined to a
low of $15.9 million in 1993. Management believes that the Company's financial
recovery commenced in the fourth quarter of 1994 due to an increase in new
bookings and the divesture of an historically unprofitable operation. Revenues
began to increase in the second quarter of 1994, and have continued to increase
in each of the last five fiscal quarters ending with the quarter ending June
30, 1995. In addition, the Company returned to profitability in each of the
first two quarters of fiscal 1995, and at June 30, 1995, the Company's total
backlog had increased to $24.8 million, up from $13.2 million a year earlier.
The Company includes in backlog unfilled firm orders as well as unexercised
options since, historically, most options have been exercised. See "Business--
Backlog" and "Risk Factors--Dependence on United States Government and Risk of
Contract Termination" for a discussion of the categories and components of the
Company's backlog.
The Company continues to derive a substantial portion of its revenues from
its traditional products, such as lightweight ceramic armor for military
helicopters and microwave tube products. Management expects that newer products
developed or being developed by the Company for defense, industrial and
consumer applications will represent a growing share of its business. Examples
of these newer products include (i) lightweight ceramic armor vests for
military personnel; (ii) a modified translucent ceramic orthodontic bracket
which is sold to Unitek Corporation, a subsidiary of 3M, under an exclusive
marketing agreement and (iii) wear resistant components for industrial
machinery, such as paper making equipment, made from the Company's Ceralloy(R)
147 silicon nitride advanced technical ceramic. Additionally, the Company's
ceramic-impregnated dispenser cathode is in early limited production for next
generation large screen and projection television. The Company believes this
product has applications in high-definition television (HDTV) and enhanced
resolution CRT monitors. There can be no assurance, however, of wide market
acceptance of this product.
The Company has a strategic relationship with the Ford Motor Company,
pursuant to which Ford has acquired a 19.2% equity interest in the Company, and
transferred ceramic-related technology to the Company with a long-term
objective of developing ceramic components for automobile engines. The
Company's efforts in automotive and diesel applications are still in the
experimental stage and the Company's ability to generate significant revenues
from these applications is uncertain and may not occur for several years, if at
all.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................. 1,200,000 shares
Common Stock to be outstanding after
the offering......................... 7,474,634 shares(1)
Use of proceeds....................... Capital expenditures, repayment of debt,
working capital and other general
corporate purposes.
Nasdaq National Market symbol......... CRDN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30,
------------------------- ---------------
1992 1993 1994 1994 1995
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................... $18,727 $15,987 $17,996 $8,729 $11,136
Gross profit........................ 2,196 1,195 1,861 1,073 2,912
Income (loss) from operations....... (1,946) (2,569) (1,938) (824) 964
Net income (loss)................... (1,997) (2,597) (1,866) (747) 804
Net income (loss) per share(2)...... $ (.33) $ (.42) $ (.30) $ (.12) $ .13
Weighted average shares
outstanding(2)..................... 6,133 6,169 6,238 6,233 6,389
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
MARCH JUNE
31, 30,
1995 1995
------ ------
<S> <C> <C>
Net sales........................................................ $5,379 $5,757
Net income....................................................... 351 454
Net income per share--primary.................................... $0.06 $0.07
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------
DECEMBER 31, AS
1994 ACTUAL ADJUSTED (3)
------------ ------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 5,053 $ 5,970 $11,527
Total assets.................................. 16,862 18,666 24,223
Current portion of long-term debt............. 1,029 1,832 1,332
Stockholders' equity.......................... 11,602 12,489 18,046
</TABLE>
--------
(1) Excludes 435,900 shares of Common Stock issuable upon exercise of
outstanding stock options as of June 30, 1995 at a weighted average
exercise price of $2.45 per share.
(2) Net income (loss) per share amounts have been computed using the weighted
average number of shares of Common Stock and Common Stock equivalents (when
dilutive) outstanding during the periods. See Note 1 of Notes to
Consolidated Financial Statements.
(3) As adjusted to give effect to the receipt by the Company of the estimated
net proceeds from the sale of the 1,200,000 shares offered hereby at an
assumed public offering price of $5.44 per share, and the application by
the Company of the estimated net proceeds. See "Use of Proceeds."
----------------
Ceradyne(R), the Ceradyne logo and Ceralloy(R) are major trademarks of the
Company. This Prospectus also includes other trademarks of Ceradyne and
trademarks of other companies.
4
<PAGE>
THE COMPANY
The Company is incorporated under the laws of the State of Delaware. As used
in this Prospectus, the "Company" and "Ceradyne" refer to Ceradyne, Inc., a
Delaware corporation, and its predecessor corporations. The principal
executive offices of the Company are located at 3169 Red Hill Avenue, Costa
Mesa, California 92626 and the Company's telephone number at that location is
(714) 549-0421.
RISK FACTORS
Prospective investors should carefully consider the factors set forth below,
in addition to the other information contained or incorporated by reference in
this Prospectus, in evaluating an investment in the Common Stock offered
hereby.
HISTORY OF OPERATING LOSSES
For the six month period ended June 30, 1995 the Company returned to
profitability after sustaining net losses from fiscal 1987 through fiscal 1994
totalling approximately $21.4 million. The Company's operating losses resulted
from a number of factors, including a decline in revenues due in part to
reduced government spending on defense related products, which historically
have represented the majority of the Company's business and are expected to
represent a substantial portion of the Company's business in the foreseeable
future. Also contributing to the Company's losses was a decline in sales of
the Company's translucent ceramic orthodontic bracket, from peak revenues of
$6.2 million in fiscal 1988 to $.4 million in fiscal 1994, due in part to
excess inventory levels accumulated by the Company's exclusive distributor of
this product, Unitek Corporation, a subsidiary of Minnesota Mining & Mfg. Co.
("3M/Unitek"), and also in part to resistance by some orthodontists to use the
product because of technical problems experienced with earlier versions of the
bracket. To maintain profitability and achieve revenue growth, the Company
must, among other things, successfully address new opportunities for armor
applications, including the development of capacity to successfully
manufacture ceramic body armor in volume; achieve significant sales of a new
version of its transluscent orthodontic bracket product, which is currently
under development; and continue to upgrade its technologies and commercialize
products and services incorporating such technologies. There can be no
assurance, however, that the Company will be able to sustain or improve its
level of profitability in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IMPORTANCE OF NEW PRODUCTS; LIMITED VOLUME MANUFACTURING EXPERIENCE FOR
PRODUCTS UNDER DEVELOPMENT
The Company believes that its future prospects will depend to a large extent
on the success of products which currently provide little revenue or which are
still under development. These products include, in particular, lightweight
ceramic armor vests for military personnel, the Company's ceramic-impregnated
dispenser cathode for television and other cathode ray tube ("CRT")
applications, improved versions of the Company's translucent ceramic
orthodontic bracket, and ceramic components for automobile and diesel engines.
Although the Company received its initial production order in January 1995 for
lightweight ceramic armor vests, the Company has previously produced only
prototype quantities of this vest and has never manufactured it in the volumes
required to fulfill this order. As a result, there can be no assurance that
the Company will be able to manufacture these vests in a timely manner or on a
profitable basis. Wide customer acceptance of the Company's CRT cathode and
the Company's ability to manufacture this cathode profitably will depend in
part on achieving significant manufacturing cost reductions, the Company's
ability to manufacture these components in high volumes at acceptable
production yields, and satisfying extensive customer testing and qualification
procedures, which often take many months or years to complete. Should the
Company be unable to achieve such cost reductions, manufacture with acceptable
product yields or satisfy customer testing and qualification procedures, the
Company's prospects and operating results may be materially and adversely
affected. The Company has recently introduced a metal-lined version of its
translucent ceramic orthodontic bracket and plans to introduce another version
of this product in early 1996, both of which are designed to improve the
performance and market acceptance of this product. The metal-lined bracket is
more difficult and costly to produce than earlier versions of this bracket and
there can be no assurance that the Company will be able to produce this
version in high
5
<PAGE>
volume at acceptable yields or that either of these new designs will achieve
market acceptance or result in increased sales of this product. The Company's
efforts in producing ceramic components for automobile and diesel engines are
still in the experimental stage, with future success substantially dependent
on achieving significant cost reductions and developing high volume
manufacturing capability while maintaining high quality levels. Furthermore,
lead times for the introduction of new materials and components into
production automobiles are typically several years. The market for ceramic
automotive and diesel components is new and evolving, and advanced technical
ceramics are not currently used in any significant automotive applications.
Accordingly, demand and market acceptance for such products are subject to a
high level of uncertainty. As a result of these factors, the Company believes
that the use of ceramic components in high volume production automobile or
diesel engines cannot be predicted and will not occur for several years, if at
all. See "Business--Market Applications."
MANAGEMENT OF GROWTH
The Company is experiencing a period of new product introductions that have
placed, and will continue to place, a significant strain on its resources,
including personnel. A significant portion of the Company's backlog relates to
a single order for ceramic armor vests for the United States military, and
fulfillment of such order will require the Company to manufacture the product
in volumes significantly greater than the Company has historically achieved
for such products. In addition, the Company believes that future growth is
significantly dependent on introductions of other new products applying the
Company's core advanced technical ceramics technologies. The Company expects
that management of this transition will continue to place a strain on the
Company's management, operational and financial resources. The Company's
ability to manage growth effectively, particularly given the increasingly
international scope of its operations, will require it to add manufacturing
capacity and personnel, continue to implement and improve its operational,
financial and management information systems as well as to develop the
management skills of its managers and supervisors and to train, motivate and
manage its employees. These demands are expected to require the addition of
new management personnel and the development of additional expertise by
existing management personnel. The Company's failure to effectively manage
growth could have a material adverse effect on the Company's results of
operations. See "Business--Market Applications," "--Backlog" and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of Joel P. Moskowitz, its Chairman, Chief Executive Officer and President, and
a principal stockholder of the Company, as well as other principal members of
its management, the loss of whose services could have a material adverse
effect upon the business and financial condition of the Company. The Company
is also dependent on other key personnel, and on its ability to continue to
attract, retain and motivate highly qualified personnel. The competition for
such employees is intense, and there can be no assurance that the Company will
be able to recruit and retain such personnel. Mr. Moskowitz has an employment
agreement with the Company which expires in July 1999, but no other employee
has an agreement for a specified term of employment with the Company. See
"Management."
COMPETITION
The markets for applications of advanced technical ceramics are competitive.
The Company believes the principal competitive factors in these markets are
product performance, material's specifications, application engineering
capabilities, customer support, reputation and price. Many of the Company's
competitors, both domestic and international, have greater financial,
marketing and technical resources than Ceradyne. The Company's competitors
often are divisions of larger companies with each of Ceradyne's product lines
subject to completely different competitors. Some of the competitors of the
Company include Kyocera Corporation's Industrial Ceramics Group in industrial
ceramic products, Vesuvius McDaniel Co. in fused silica ceramics, and Simula
Inc. and Brunswick Corp. in defense products. In many applications the Company
also competes with manufacturers of non-ceramic materials. The principal
competition for the Company's new cathode are oxide cathodes manufactured in-
house by the television manufacturers who are the Company's targeted customers
for
6
<PAGE>
this product. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors or that
competition will not have a material adverse effect on the Company's results
of operations and financial condition. See "Business--Competition."
ENVIRONMENTAL CONCERNS
The Company is subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous materials. Certain of
the Company's products are produced using beryllium oxide, which is highly
toxic in powder form. This powder, if inhaled, can cause chronic beryllium
disease ("CBD") in a small percentage of the population. In recent years the
Company has been sued by several former employees and a family member of one
such former employee alleging that they had contracted CBD as a result of
exposure to beryllium oxide powders used in the Company's products. Although
these claims have been settled without material liability to the Company, a
current employee of the Company and his wife sued, alleging the employee
contracted CBD as a result of exposure to beryllium oxide powder during the
course of his employment. There can be no assurance that the Company will
avoid liability to persons who contract CBD as a result of exposure to
beryllium oxide while employed with the Company. While the Company believes
that it is in material compliance with all existing applicable environmental
statutes and regulations, any failure by the Company to comply with statutes
and regulations presently existing or enacted in the future could subject it
to liabilities or the suspension of production. Furthermore, there can be no
assurance that claims against the Company related to exposure to beryllium
oxide powder will be covered by insurance or that, if covered, the amount of
insurance will be sufficient to cover any potential adverse judgment. See
"Business--Environmental Concerns and Litigation."
DEPENDENCE ON UNITED STATES GOVERNMENT AND RISK OF CONTRACT TERMINATION
Of the Company's $24.8 million total backlog at June 30, 1995, approximately
$18.0 million, or 73%, represents orders for lightweight ceramic armor for
defense applications. This amount includes unfilled firm orders and
unexercised options for lightweight ceramic armor for military helicopters of
approximately $5.3 million and $3.1 million, respectively, or a total of
approximately $8.4 million, and unfilled firm orders and unexercised options
for lightweight ceramic armor vests for military personnel of approximately
$3.5 million and $6.1 million, respectively, or a total of approximately $9.6
million. The contract for armor vests and some of the contracts for helicopter
armor are directly or indirectly with agencies of the United States
government. The Company anticipates that it will continue to depend heavily on
direct or indirect sales to government agencies for a significant percentage
of the Company's revenues for the foreseeable future. In recent years, budgets
of many government agencies have been reduced, causing certain customers and
potential customers for the Company's products to re-evaluate their needs.
Such budget reductions are expected to continue over at least the next several
years. Future reductions in United States government spending on defense-
related products could have a material adverse effect on the Company's
prospects and operating results.
Under U.S. law, the Company's defense-related contracts may be cancelled for
convenience at any time without cause by the government, with reimbursement to
the Company only for its actual expenses incurred. The Company has in the past
experienced the cancellation of a significant government order, which had a
material adverse effect on the Company's operating results. There can be no
assurance that the Company will not experience similar cancellations in the
future, and any such cancellations could adversely affect the Company's
operating results. See "Backlog."
RELIANCE ON 3M/UNITEK RELATIONSHIP
The Company developed its translucent ceramic orthodontic bracket pursuant
to a joint development agreement with 3M/Unitek, and sells this product only
to 3M/Unitek pursuant to an exclusive marketing agreement which expires in
2007. Consequently, the Company depends entirely on the marketing and sales
efforts of 3M/Unitek for the sales of this product. The Company also depends
on customer and technical feedback from 3M/Unitek for the design of
improvements to the bracket. Early versions of this product were not well
accepted by some orthodontists due in part to resistance to change from using
traditional stainless steel brackets and to certain technical problems
experienced by some users of the earlier versions of the Company's
7
<PAGE>
translucent ceramic orthodontic bracket. Designs recently introduced and
designs scheduled for early 1996 introduction are intended to improve certain
features of earlier versions of the bracket, but there can be no assurance
that these new products will receive wide market acceptance. Furthermore, no
assurance can be given that 3M/Unitek will devote substantial marketing
efforts to sales of the Company's orthodontic products, or that it will not
re-assess its commitment to the Company's technologies or develop its own
competitive technology. Any failure by 3M/Unitek to actively market the
Company's orthodontic product, or any failure of such product to achieve
market acceptance, would materially and adversely impact the Company's
prospects and results of operations. See "Risk Factors--Importance of New
Products; Limited Volume Manufacturing Experience for Products Under
Development" and "Business--Strategic Relationships."
DEPENDENCE ON INTERNATIONAL SALES
Shipments to customers outside of North America accounted for approximately
25% and 26% of the Company's sales in fiscal 1994 and the first six months of
fiscal 1995, respectively. The Company anticipates that international
shipments will continue to account for a significant portion of its sales.
Certain of these revenues have been derived from sales to foreign government
agencies and may be subject to risks similar to those set forth in "Risk
Factors--Dependence on United States Government and the Risk of Contract
Termination."
There are a number of risks inherent in the Company's international business
activities, including unexpected changes in regulatory requirements, tariffs
and other trade barriers, longer account receivable payment cycles,
potentially adverse tax consequences, and the burdens of compliance with
foreign laws. Additionally, the Company does not engage in hedging activities
to protect against the risk of currency fluctuations. Fluctuations in currency
exchange rates could cause sales denominated in U.S. dollars to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. Furthermore, future
international activity may result in foreign currency denominated sales which
may result in gains and losses on the conversion to U.S. dollars of accounts
receivable and accounts payable arising from international operations which
may contribute significantly to fluctuations in the Company's results of
operations. The Company historically has denominated export sales in United
States dollars. There can be no assurance, however, that the aforementioned
factors will not have an adverse effect on the revenues from the Company's
future international sales and, consequently, the Company's results of
operations. Some of the Company's products may not be exported to certain
foreign countries without an export license obtained from the United States
government. The Company has and may in the future experience difficulty in
obtaining licenses to export its products to certain countries. Failure to
obtain such licenses could have a material adverse effect on the Company's
sales and prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Ceradyne Strategy" and "--
Marketing and Customers."
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, trademarks,
and other intellectual property law, nondisclosure agreements and other
protective measures to preserve its proprietary rights pertaining to its
products and production processes. Such protection, however, may not preclude
competitors from developing products or processes similar or superior to the
Company's. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its proprietary rights, there can be no assurance that these
efforts will be successful. Furthermore, there can be no assurance that the
Company's products or processes are not in violation of the patent rights of
third parties, or that any of the Company's patents will not be challenged,
invalidated or circumvented. See "Business--Patents, Licenses and Trademarks."
SIGNIFICANT FLEXIBILITY IN APPLYING NET PROCEEDS OF OFFERING
The Company has not designated any specific use for a substantial portion of
the net proceeds from the sale of the Common Stock offered hereby. Rather, the
Company currently intends to use the net proceeds primarily
8
<PAGE>
for general corporate purposes. See "Use of Proceeds." Accordingly, management
will have significant flexibility in applying the net proceeds of this
offering. Failure to utilize the net proceeds within a reasonable period of
time may result in a dilution of the Company's earnings per share, which could
have a material adverse effect on the price of the Company's Common Stock.
CONCENTRATION OF STOCK OWNERSHIP; ANTITAKEOVER EFFECTS OF DELAWARE LAW
Upon completion of this offering, the Company's directors and executive
officers and Ford will, in the aggregate, beneficially own approximately 37.5%
of the outstanding Common Stock. As a result, these stockholders, acting
together, would be able to exercise significant influence over matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Principal Stockholders." In addition, Section 203 of the
General Corporation Law of Delaware prohibits the Company from engaging in
certain business combinations with interested stockholders, as defined by
statute. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders, and
therefore could adversely affect the price of the Company's Common Stock. See
"Description of Capital Stock--Delaware Law."
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced substantial price volatility and
such volatility may occur in the future, particularly as a result of quarter
to quarter variations in the actual or anticipated financial results of the
Company, announcements by the Company, its competitors or its customers,
actual or anticipated changes in government defense spending, reports or
recommendations by securities industry analysts. In addition, the stock market
has experienced extreme price and volume fluctuations which have affected the
market price of the common stock of many technology companies in particular
and which have at times been unrelated to operating performance of the
specific companies whose stock is traded. Broad market fluctuations, as well
as economic conditions generally, may adversely affect the market price of the
Company's Common Stock. In addition, in the past the Company has not
experienced significant trading volume in its Common Stock, has not been
actively followed by stock market analysts and has limited market-making
support from broker-dealers. If greater market-making support is not
generated, supported by broader analyst coverage, resulting in greater average
trading volume in the Company's Common Stock, there can be no assurance that
an adequate trading market will exist to sell large positions in the Company's
Common Stock. See "Price Range of Common Stock and Dividend Policy."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, assuming a public offering price of $5.44 per share and after
deducting the estimated underwriting discount and offering expenses, are
estimated to be approximately $5.6 million. The Company intends to use up to
approximately $2.0 million of the net proceeds to purchase tooling and
equipment in order to develop additional manufacturing capacity, primarily for
sintered reaction bonded silicon nitride (SRBSN) products, at the Company's
Costa Mesa, California facility, and for dispenser cathodes for CRT
applications, at the Company's Lexington, Kentucky facility. In addition, a
portion of the net proceeds will be used for repayment of outstanding
indebtedness under the Company's credit facility (which included approximately
$1.4 million under a revolving line of credit as of June 30, 1995, and $1.1
million under a term loan) of which approximately $500,000 under the revolving
line of credit will be repaid immediately. Repayment of any additional amounts
outstanding under the credit facility would result in prepayment penalties
under the current terms of the credit facility. The remainder of the net
proceeds will be used for working capital and other general corporate
purposes.
A portion of the proceeds may also be used by the Company to acquire or
invest in businesses, assets, technologies or product lines that complement
the Company's existing businesses. While from time to time the Company
evaluates potential acquisitions of such businesses, assets, technologies or
product lines, there is no present understanding or agreement with respect to
any such acquisitions.
Pending use, the Company intends to invest the net proceeds from this
offering in short-term, interest-bearing instruments, including government
obligations and money market instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the price range of high and low last sale
prices per share for the Common Stock on the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year ended December 31, 1993
First Quarter............................................ 2 3/4 2 1/4
Second Quarter........................................... 3 2
Third Quarter............................................ 4 5/16 2
Fourth Quarter........................................... 4 2 1/2
Year ended December 31, 1994
First Quarter............................................ 3 5/8 2 5/8
Second Quarter........................................... 3 1/2 1 1/2
Third Quarter............................................ 3 1 3/4
Fourth Quarter........................................... 3 1/4 2
Year ended December 31, 1995
First Quarter............................................ 3 3/8 2 1/4
Second Quarter........................................... 5 7/8 3
Third Quarter (through August 30, 1995).................. 5 7/8 4 3/4
</TABLE>
The present policy of the Company is to retain earnings for the operation
and expansion of its business. The Company has never paid cash dividends, and
does not anticipate that it will do so in the foreseeable future. In addition,
the Company's credit agreement restricts the payment of cash dividends.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1995, and as adjusted to reflect the sale by the Company of 1,200,000
shares of Common Stock pursuant to this offering and the receipt and
application by the Company of the estimated net proceeds therefrom, assuming a
public offering price of $5.44 per share and after deducting the estimated
underwriting discount and estimated offering expenses. The capitalization
information set forth in the table below is qualified by the more detailed
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus and should be read in conjunction with such Consolidated Financial
Statements and Notes.
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt......................... $ 1,832 $ 1,332
======= =======
Long-term debt, net of current portion.................... $ 787 $ 787
------- -------
Stockholders' equity:
Common Stock, $.01 par value; 12,000,000 shares
authorized, 6,274,634 shares outstanding, actual;
7,474,634 shares outstanding, as adjusted(1)........... 30,512 36,069
Accumulated deficit..................................... (18,023) (18,023)
------- -------
Total stockholders' equity............................ 12,489 18,046
------- -------
Total capitalization................................ $13,276 $18,833
======= =======
</TABLE>
--------
(1) Excludes 435,900 shares of Common Stock issuable upon exercise of
outstanding stock options as of June 30, 1995 at a weighted average
exercise price of $2.45 per share.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1993 and 1994
and for the years ended December 31, 1992, 1993 and 1994 are derived from
financial statements of the Company which have been audited by Arthur Andersen
LLP, which are included elsewhere in this Prospectus. The selected
consolidated financial data of the Company as of December 31, 1990, 1991 and
1992 and for the years ended December 31, 1990 and 1991 are derived from
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, which are not included in this Prospectus. The selected
consolidated financial data of the Company for the six month periods ended
June 30, 1994 and 1995, and as of June 30, 1995, are derived from unaudited
financial statements included elsewhere herein and, in the opinion of the
Company, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results for the six months ended June 30, 1995 are not necessarily
indicative of the results to be expected for the full year ending December 31,
1995. The following information should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $23,131 $21,886 $18,727 $15,987 $17,996 $ 8,729 $11,136
Cost of product sold.... 18,385 18,877 16,531 14,792 16,135 7,656 8,224
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 4,746 3,009 2,196 1,195 1,861 1,073 2,912
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling............... 1,664 1,593 1,465 1,372 1,502 801 751
General and
administrative....... 2,436 2,345 2,465 2,392 2,297 1,096 1,197
Royalty............... 253 240 212 -- -- -- --
------- ------- ------- ------- ------- ------- -------
4,353 4,178 4,142 3,764 3,799 1,897 1,948
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations........... 393 (1,169) (1,946) (2,569) (1,938) (824) 964
Other income (expense):
Other income.......... 280 319 160 212 366 216 2
Interest expense...... (302) (255) (211) (240) (294) (139) (162)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision (credit)
for taxes on income.. 371 (1,105) (1,997) (2,597) (1,866) (747) 804
Provision for taxes on
income(1).............. -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)..... $ 371 $(1,105) $(1,997) $(2,597) $(1,866) $ (747) $ 804
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share(2)............... $ .06 $ (.18) $ (.33) $ (.42) $ (.30) $ (.12) $ .13
Weighted average shares
outstanding(2)......... 6,418 6,178 6,133 6,169 6,238 6,233 6,389
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 7,404 $ 7,805 $ 6,808 $ 5,630 $ 5,053 $ 5,727 $ 5,970
Total assets............ 23,556 22,317 20,567 18,130 16,862 18,316 18,666
Long-term debt, net of
current portion........ 1,319 1,774 1,413 1,367 905 1,246 787
Stockholders' equity.... 18,637 17,734 15,813 13,443 11,602 12,705 12,489
</TABLE>
--------
(1) The Company makes no provision for income taxes due to the existence of a
tax net operating loss carryforward of approximately $14 million at
December 31, 1994. See Note 5 of Notes to Consolidated Financial
Statements.
(2) Net income (loss) per share amounts have been computed using the weighted
average number of shares of Common Stock and Common Stock equivalents
(when dilutive) outstanding during the periods. See Note 1 of Notes to
Consolidated Financial Statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ceradyne develops, manufactures and markets advanced technical ceramic
products and components for industrial, defense, consumer and microwave
applications. The Company's technology was developed primarily for defense and
aerospace applications which have historically represented a substantial
portion of its business. With the end of the "Cold War," one of the Company's
major defense contracts was cancelled and the Company experienced reductions
in certain other defense-related business. As a result, the Company began to
rely more heavily on the development of new applications and markets for its
technology, while continuing to serve its historical customer base which
continued to account for a substantial portion of the Company's business.
From a peak of $25.6 million in 1987, the Company's revenues declined to a
low of $15.9 million in 1993. Management believes that the Company's financial
recovery commenced in the fourth quarter of 1994 due to an increase in new
bookings and the divesture of an historically unprofitable operation. Revenues
began to increase in the second quarter of 1994, and have continued to
increase in each of the last five fiscal quarters ending with the quarter
ending June 30, 1995. In addition, the Company returned to profitability in
each of the first two quarters of fiscal 1995, and at June 30, 1995, the
Company's total backlog had increased to $24.8 million, up from $13.2 million
a year earlier. The Company includes in backlog unfilled firm orders as well
as unexercised options since, historically, most options have been exercised.
See "Business--Backlog" and "Risk Factors--Dependence on United States
Government and Risk of Contract Termination."
The Company's cost of goods sold includes the cost of materials, direct
labor expenses and manufacturing overhead expenses. The Company's business
requires that it maintain a relatively high fixed manufacturing overhead. As a
result, the Company's gross profit, in absolute dollars and as a percentage of
net sales, is greatly impacted by the Company's sales volume and the
corresponding absorption of fixed manufacturing overhead expenses.
Furthermore, due to the customized nature of many of its products, the Company
is frequently required to devote resources to sustaining engineering expenses,
which are also included in cost of goods sold and are generally expensed as
incurred.
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three years ended December 31, 1994 and the six month periods
ended June 30, 1994 and 1995 are contained in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------------ -------------------
1992 1993 1994 1994 1995
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of product sold........... 88.27 92.53 89.66 87.71 73.85
------ ------ ------ -------- --------
Gross profit................. 11.73 7.47 10.34 12.29 26.15
------ ------ ------ -------- --------
Operating expenses:
Selling...................... 7.82 8.58 8.35 9.18 6.74
General and administration... 13.16 14.96 12.76 12.55 10.75
Royalty...................... 1.14 -- -- -- --
------ ------ ------ -------- --------
22.12 23.54 21.11 21.73 17.49
------ ------ ------ -------- --------
Income (loss) from operations.. (10.39) (16.07) (10.77) (9.44) 8.66
Other income (expense):
Other income................. 0.86 1.33 2.03 2.47 0.01
Interest expense............. (1.13) (1.50) (1.63) (1.59) (1.45)
------ ------ ------ -------- --------
(0.27) (0.17) 0.40 0.88 (1.44)
Income (loss) before provision
for taxes on income........... (10.66) (16.24) (10.37) (8.56) 7.22
Provision for taxes............ -- -- -- -- --
------ ------ ------ -------- --------
Net income (loss).............. (10.66)% (16.24)% (10.37)% (8.56)% 7.22%
====== ====== ====== ======== ========
</TABLE>
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
Net Sales. Net sales for the six months ended June 30, 1995 were $11.1
million, which represents a 27.6% increase over $8.7 million in net sales for
the corresponding period of the prior year. This increase was primarily due to
a 63% (or $1.6 million) increase in sales of the Company's industrial products
(consisting of a $1.0 million increase in fused silica ceramic products and a
$600,000 increase in industrial wear products) as well as an increase in sales
in substantially all of the Company's other product lines.
International sales have and will continue to be an important part of the
Company's business, representing 26.2% of the Company's net sales for the
period ending June 30, 1995, up from 21.9% for the comparable period of the
prior year, due primarily to shipments of microwave tube products and CRT
cathode products. The Company intends to increase its efforts to expand sales
in the international market.
Gross Profit. The Company's gross profit percentage was 26.1% of net sales
for the six months ended June 30, 1995 compared to 12.3% of net sales for the
six months ended June 30, 1994. This increase was primarily attributable to a
greater absorption of fixed manufacturing overhead over a significantly
increased sales volume during the period, improvements in manufacturing
productivity, increased sales of products with greater profit margins and the
divestiture in the fourth quarter of 1994 of the Company's ceramic-to-metal
operations which contributed a negative gross margin during the six months
ended June 30, 1994.
During the fiscal quarter ended June 30, 1995 the Company renegotiated the
lease for its West Coast facility, reducing both leased space and rent. This
reduction of approximately $350,000 per year, the majority of which will
reduce manufacturing overhead expense, commences in November 1995.
Operating Expense. Operating expenses were $1.9 million for the period ended
June 30, 1995, an increase of 2.7% from the comparable period of the prior
year, and represented 17.5% of net sales compared to 21.7% of net sales for
the six months ended June 30, 1994. The improvement as a percentage of net
sales was due to increased sales for the period ended June 30, 1995.
Selling expenses were $751,000 for the six months ended June 30, 1995, a
decrease of 6.2% from the comparable period of the prior year. This decrease
in aggregate selling expenses was due primarily to the sale by the Company in
the fourth quarter of 1994 of a product line which historically had required a
relatively higher commitment of selling expenses. While actual amounts
expended will depend upon a variety of factors, the Company anticipates that
selling expenses will increase during the remainder of fiscal 1995 and in
future years as the Company increases its marketing efforts both domestically
and internationally.
General and administrative expenses were $1.2 million for the six months
ended June 30, 1995, a 9.2% increase from the comparable period of the prior
year. This increase was primarily due to the payment of employee incentive
bonuses indexed to the Company's profitability during the six months ended
June 30, 1995.
Given the nature of the Company's business, management believes that the
present aggregate dollar level of operating expense, which has not changed
materially over the last several years, is necessary to support the Company at
its current sales level, as well as that experienced in the recent past. On
the other hand, management believes that the Company should be able to
significantly increase its sales without corresponding increases in selling,
general and administrative expenses.
Other Income. Other income decreased to $2,000 for the six months ended June
30, 1995 compared to $216,000 for the six months ended June 30, 1994. During
the latter period the Company had recorded other income from the finalization
of a contract cancellation, the settlement of a contract claim and license
fees received in excess of an amount accrued in prior periods.
Interest Expense. For the six months ended June 30, 1995 interest expense
was $162,000, a 16.5% increase for the comparable period of the prior year,
primarily attributable to higher interest rates.
14
<PAGE>
Income Taxes. The Company has made no provision for income taxes due to the
existence of approximately $14 million in a tax net operating loss
carryforward available as of December 31, 1994. Subject to certain limitations
and differences between federal and state tax laws, the Company expects to
apply this carryforward against any tax liability in 1995 and in future years
until such tax net operating loss carryforward is fully utilized.
Net Income. Reflecting all of the matters discussed above, net income was
$804,000 (or $.13 per share) for the six month period ended June 30, 1995
compared to a loss of $747,000 (or $.12 per share) for the comparable period
of the prior year.
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Net Sales. Net sales for the year ended December 31, 1994 were $17.9
million, a 12.5% increase over net sales of $15.9 million for the year ended
December 31, 1993. Net sales in 1993 reflected a 14.4% decrease compared to
net sales of $18.7 million for the year ended December 31, 1992.
The increase in net sales in 1994 was due primarily to a 39.5% (or $1.2
million) increase in sales of lightweight ceramic armor for helicopters and,
to a lesser extent, increased sales of wear-resistant products for industrial
applications. The decrease in net sales in 1993 was due primarily to a 352.1%
(or $1.3 million) decrease in sales of translucent ceramic orthodontic
brackets because of reduced demand, due to excess inventory held by the
Company's exclusive customer, 3M/Unitek. In addition, in 1993 net sales were
adversely affected by the termination of a strategic weapons system program in
August 1992 and a decline in the sales of most microwave tube products due to
cutbacks in defense programs.
International sales represented 25.5%, 18.1% and 13.9% of total net sales in
1994, 1993 and 1992, respectively. These year-to-year increases reflect the
Company's increasing emphasis on developing international markets.
Gross Profit. The 1994 increase in gross profit percentage to 10.3% of net
sales primarily reflects increased manufacturing overhead expense absorption
due to higher sales, improved manufacturing productivity and a change in sales
mix in favor of more profitable products. Conversely, the decrease in gross
profit percentage in 1993 to 7.5% of net sales was primarily attributable to
manufacturing overhead expense being spread over a much lower sales volume and
a less favorable profit margin profile in the Company's sales mix.
Operating Expenses. Operating expenses for the year ended December 31, 1994
were $3.8 million, an increase of less than 1% over operating expenses for the
year ended December 31, 1993. The 1993 level represented a decrease of 8.3%
compared to 1992 operating expenses of $4.1 million. These expenses
represented 21.1%, 23.5% and 22.1% of net sales in 1994, 1993 and 1992,
respectively.
15
<PAGE>
The slight increase in 1994 operating expenses was primarily attributable to
greater selling expenses associated with increased marketing activities. The
decrease in 1993 operating expenses was due primarily to the cessation of the
amortization of certain royalty expenses, reduced selling expenses resulting
from reductions in marketing personnel and advertising, as well as reduced
general and administrative expenses as a result of head count reductions.
Other Income. Other income was $366,000 for the year ended December 31, 1994
a 72.6% increase over other income of $212,000 for the year ended December 31,
1993. The 1993 level represented a 32.5% increase over 1992 other income of
$160,000. The increase in 1994 resulted from income recorded as a result of a
contract cancellation, the settlement of a contract claim and receipt of
licensing fees in excess of an amount accrued in prior periods. The increase
in 1993 resulted primarily from income recorded as a result of a contract
cancellation.
Interest Expense. Interest expense was $294,000 for the year ended December
31, 1994, a 22.5% increase over interest expense of $240,000 for the year
ended December 31, 1993, which in turn was a 13.7% increase over interest
expense of $211,000 for the year ended December 31, 1992. The steady increase
in interest expense is due to a combination of increasing interest rates and
increased borrowing under the Company's credit facilities.
Income Taxes. The Company adopted the provisions of the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
effective the first quarter of 1993. The adoption of this statement did not
have a material effect on the Company's financial position or results of
operations.
Net Income. As a result of all of the items discussed above, the net loss
for the year ended December 31, 1994 was $1.9 million (or $.30 per share),
representing a 26.9% improvement over the net loss of $2.6 million (or $.42
per share) for the year ended December 31, 1993. The 1993 net loss was 30.0%
greater than the 1992 net loss of approximately $2 million (or $.33 per
share).
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its operating and capital requirements from cash flow from
operating activities and borrowings under its credit facilities. After
producing a negative cash flow from operating activities in 1992 ($35,000) and
1993 ($380,000), the Company produced $736,000 in cash flow from operating
activities in 1994 and $89,000 for the six months ended June 30, 1995.
The Company has a revolving credit agreement with an asset-based lender for
the purpose of financing the Company's working capital needs. The credit
facility, which expires on November 29, 1996, is limited to $4.0 million, and
is composed of two parts--a $1,585,600 term loan and a $2,414,400 revolving
line of credit. Under both parts of the credit facility, borrowings are tied
to availability formulas: 80% of the appraised value of fixed assets for the
term loan, 75% of eligible trade receivables, and 25% of eligible inventory
(up to $250,000) for the revolving line of credit. The term loan and the
revolving line of credit are secured by all of the Company's assets and
require the Company, among other things, to maintain certain financial ratios
and limit capital expenditures. Borrowings under the credit facility totaled
approximately $2.5 million at June 30, 1995.
At June 30, 1995, the Company had short-term cash resources (i.e., cash and
cash equivalents) equal to $302,000. Management believes that the net proceeds
from this offering, funds generated from operations and the ability to borrow
under the revolving credit facility will be sufficient to finance anticipated
capital and operating requirements for at least the next twelve months.
However, the Company may find it necessary to seek additional sources of
financing to support its capital needs, for additional working capital,
potential investments, acquisitions or otherwise. There is no assurance that
such financing would be available on commercially acceptable terms or at all.
Total property and equipment expenditures for 1995 are expected to be
approximately $1.0 million.
16
<PAGE>
BUSINESS
OVERVIEW
Ceradyne develops, manufactures and markets advanced technical ceramic
products and components for industrial, defense, consumer and microwave
applications. In many high performance applications, products made of advanced
technical ceramics meet specifications that similar products made of metals or
plastics cannot achieve. Advanced technical ceramics can withstand extremely
high temperatures, combine hardness with light weight, are highly resistant to
corrosion and wear, and have excellent electrical insulation capability and
other special electronic properties.
Ceradyne's technology was developed primarily for defense and aerospace
applications which have historically represented a substantial portion of its
business. As a result of the end of the "Cold War," one of the Company's major
defense contracts was cancelled and the Company experienced reductions in
certain other defense-related business. As a result, the Company began to rely
more heavily on the development of new applications and markets for its
advanced technical ceramic technology, while continuing to serve its
historical customer base which continued to account for a substantial portion
of the Company's business. Although the Company continues to derive a
substantial portion of its revenues from its traditional products, such as
lightweight ceramic armor for military helicopters and products for microwave
tube applications, management expects that newer products developed or being
developed by the Company for defense, industrial and consumer applications
will represent a growing share of the Company's business. Examples of these
newer products include:
. Lightweight ceramic armor vests for military personnel.
. A metal-lined version of the Company's translucent ceramic orthodontic
bracket which it sells to Unitek Corporation, a subsidiary of Minnesota
Mining & Mfg. Co. ("3M/Unitek"), under an exclusive marketing agreement.
. Wear resistant components for industrial machinery, such as paper making
equipment, made from the Company's Ceralloy(R) 147 silicon nitride
advanced technical ceramic.
. Ceramic-impregnated dispenser cathodes for large-screen television and
projection television. This product is in an early limited production
phase with no assurance of wide market acceptance. The Company believes
this product also may have applications in high definition television
("HDTV") and exhanced resolution CRT monitors.
INDUSTRY BACKGROUND
Developments in industrial processing, military systems, microwave
electronics, consumer electronics and orthodontics have generated a demand for
high performance materials with certain properties not readily available in
metals or plastics. In certain high performance applications, this demand has
been met by products made of advanced technical ceramics.
The following table compares certain favorable properties of selected
advanced technical ceramics commonly used by the Company with those of other
selected materials.
<TABLE>
<CAPTION>
MELTING POINT CHEMICAL DENSITY
(DEGREES HARDNESS RESISTANCE ELECTRICAL (GMS PER
MATERIALS FAHRENHEIT) (VICKERS SCALE) TO ACIDS PROPERTIES CC)
<S> <C> <C> <C> <C> <C>
Advanced technical 2,500 to 6,900 1,600 to 7,000 Excellent From conductors to 2.5 to 4.5
ceramics excellent insulators
------------------------------------------------------------------------------------------------
High strength alloy 2,500 to 2,700 250 to 900 Fair Conductors 7.0 to 9.0
steel
------------------------------------------------------------------------------------------------
High performance 275 to 750 5 to 10 Good to Good to excellent 1.0 to 2.0
plastics Excellent insulators
</TABLE>
17
<PAGE>
Ceramics such as earthenware, glass, brick and tile have been made for
centuries and are still in common use today. The inertness and lasting
qualities of ceramics are illustrated by the artifacts uncovered intact in
modern times. Almost all traditional ceramics, including those of ancient
times, were based on clay. In recent years, significant advances have been
made in ceramic technology through the application of specialized processes to
produce man-made ceramic powders. In the 1950's and 1960's, developments in
aluminum oxide and other oxides provided ceramics that were excellent
electrical insulators and were capable of withstanding high temperatures. In
the 1970's, these and other developments resulted in the ability to
manufacture advanced technical ceramics with great strength at elevated
temperatures and reduced brittleness, historically a primary limitation of
ceramics. The industry that has emerged from these advances is known as
advanced technical (or structural) ceramics.
The properties of advanced technical ceramics present a compelling case for
their use in a wide array of applications. However, manufacturing costs
associated with the production of these materials need to be reduced in order
to accelerate the use of advanced technical ceramics as a direct replacement
for metals, plastics or other ceramics. A portion of these costs are related
to the need for diamond grinding finished components to exacting tolerances.
Industry cost reduction efforts have included the production of blanks or feed
stock to "near net shape" configurations, thus reducing the need for final
finishing. Manufacturers are also seeking to reduce costs through the use of
high volume automated processing and finishing equipment and techniques, and
to achieve economies of scale in areas such as powder processing, blank
fabrication, firing, finishing and inspection.
The automobile industry is particularly sensitive to initial as well as life
cycle costs. Although the current state of the art of advanced technical
ceramics suggests potential automotive acceptance, the cost factors currently
will not permit automobile related production. The industry goal is to bring
advanced technical ceramics' costs down as close as possible to the cost of
equivalent current metal parts.
CERADYNE STRATEGY
The Company's strategy is to capitalize on its existing technologies,
developed originally for defense and aerospace applications, to broaden its
product and customer base through increased marketing efforts both
domestically and internationally. The Company is focusing on additional
customer opportunities for existing products, and on emerging markets and
products which require or can benefit from the physical, chemical or
electronic properties of advanced technical ceramics. The Company believes
that this strategy will depend more on increased marketing efforts to promote
its existing products and technologies than it will on pure research and
development of new products.
Ceradyne seeks to increase sales of its traditional products primarily
through expanded domestic and global marketing efforts. Examples of these
products and market applications include:
. Lightweight ceramic armor for military helicopters.
. Industrial ceramics utilizing fused silica ceramics for the glass
tempering and steel making markets.
. Microwave cathodes, microwave absorbing Ceralloy(R) ceramics and samarium
cobalt magnets for use in microwave power tubes in communications, radar
and electronic countermeasure applications.
As part of the Company's strategy to leverage its existing technologies, the
Company expects much of its future growth to come from products which are
currently in early production or still in development. There can be no
assurance, however, that products still under development will be successfully
completed, or that any of these newer products, including those already in
production, will achieve wide market acceptance. The following table
illustrates these newer and planned products and the markets for which they
are intended.
18
<PAGE>
<TABLE>
<CAPTION>
MARKET TECHNICAL DEMANDS CERADYNE'S
OPPORTUNITY OF MARKET STRATEGIC RESPONSE
------------------------------------------------------------------------------------------
INDUSTRIAL
------------------------------------------------------------------------------------------
<S> <C> <C>
Wear resistant compo- Failure of industrial equipment is Ceralloy(R) 147 Sintered
nents required on the often caused by premature wearing Reaction Bonded Silicon
rubbing or cutting sur- out of surfaces due to abrasive Nitride (SRBSN) industrial
faces of industrial ma- action. Examples include paper wear parts and cutting
chinery, such as in pa- making where the pulp slurry runs tool inserts are designed
per making equipment, at 5000 feet per minute, or in to replace hard metal or
centrifuges, and cutting metal cutting where as much as even oxide ceramic wear
tool inserts. .125 inch depth of cut are removed surfaces, resulting in
in a single pass. greater productivity,
quality and longer
"uptime."
------------------------------------------------------------------------------------------
DEFENSE
------------------------------------------------------------------------------------------
Lightweight armor for As tactical conflicts as well as Ceralloy(R) 546 (boron
military and law terrorist and other activities carbide) or Ceralloy(R)
enforcement personnel. result in the increased use of 146 (silicon carbide)
automatic weapons, it has become backed with Kevlar(TM),
necessary to stop bullets as great Spectra(TM) or other
as a .50 caliber machine gun laminates are designed to
round. However, vests or other provide lightweight
armor must be light enough in ballistic protection
weight to allow freedom of greater than Kevlar alone
movement without undue fatigue. at an acceptable weight.
Missile nose cones Next generation tactical missiles The Company's advanced
(radomes). (Standard Missile Block IV and technical ceramic radomes
PAC-3) will be required to fly at are designed to address
extremely high velocities, tight demanding specifications
turning radii, and severe weather of next generation missile
conditions. These operating nose cones.
conditions may preclude the use of
conventional polymer materials.
------------------------------------------------------------------------------------------
CONSUMER
------------------------------------------------------------------------------------------
Orthodontic brackets. Traditional stainless steel Ceradyne's Transtar(R)
orthodontic ceramic brackets are translucent orthodontic
often considered unsightly. brackets are inert, pick
Substitute clear plastic materials up the color of the
can be weak and may stain. Some patient's teeth and allow
orthodontic patients prefer the orthodontist to
aesthetically pleasing brackets correct the patient's
which can be affixed to each tooth bite. The Company and its
to support the archwire. marketing partner,
3M/Unitek, plan to
introduce an enhanced
version of this ceramic
bracket in 1996.
Large screen To achieve sharper, brighter Ceradyne's CRT ceramic-
televisions, projection pictures in next generation impregnated dispenser
televisions, HDTV, and television picture tubes, it may cathodes are designed to
other cathode ray tube be necessary to increase current offer the television
(CRT) applications. density (amperes/cm/2) from manufacturer increased
currently used oxide cathodes. power levels compared to
Television manufacturers may conventional cathodes. The
require extra power as size of Company is now in early
picture and number of pixels limited production for a
increase. large projection
television and a wide
screen 29" consumer
television.
------------------------------------------------------------------------------------------
AUTOMOTIVE
------------------------------------------------------------------------------------------
Automobile internal In order to achieve diesel engine Ceradyne's Ceralloy(R) 147
combustion engine and life of one million miles and SRBSN is a candidate for a
diesel engine valve automobile engine life of over variety of engine compo-
train and other engine 100,000 miles without major nents including bucket
components. maintenance, it may be necessary tappet inserts,
to replace metal engine components engine valves, clevis pins
with longer lasting, lighter and fuel injection pump
weight, higher temperature parts. The Company is in
resistant parts at acceptable unit prototype development of
costs. parts for Detroit Diesel
Corp., Catepillar Inc.,
and Ford Motor Company.
Volume production orders
may not occur for several
years, if at all, and will
depend on significant cost
reduction and other fac-
tors.
------------------------------------------------------------------------------------------
</TABLE>
As part of the Company's strategy, management intends to establish
additional sales representative and distributor relationships, particularly in
international markets. The Company will also seek to develop strategic product
development or marketing relationships with other manufacturing companies or
key customers whose expertise, marketing or financial resources will assist
the Company in accomplishing these objectives.
19
<PAGE>
STRATEGIC RELATIONSHIPS
The Company has established two strategic relationships which have been, and
the Company expects will continue to be, important factors in the Company's
efforts to develop and expand its advanced technical ceramic technology into
new products and markets. These relationships are described below.
Ford Motor Company Joint Product Development Program. Ceradyne completed a
series of transactions with the Ford Motor Company ("Ford") in March 1986 with
a long-term objective of developing ceramic components for automobiles. Key to
this venture was the transfer of technology developed by Ford relating to
technical ceramics, including a portfolio of United States and corresponding
foreign patents and patent applications, and the investment of $10 million in
the Company in exchange for Common Stock which eventually resulted in an
ownership interest in Ceradyne of approximately 20%. Ford and the Company also
entered into a joint development program pursuant to which Ceradyne has been
applying its experience and expertise in technical ceramics to develop this
technology into commercial products with a view to eventually developing
components for automobile engines. Through fiscal 1994, Ford has contributed
to the Company, on a cost sharing basis, a total of $2.9 million in cash and
equipment under this joint development program. The technology acquired from
Ford and the efforts of this joint development program have led to the
development of Ceradyne's Ceralloy(R) 147 sintered reaction bonded silicon
nitride (SRBSN) advanced technical ceramic, from which the Company now
produces a line of industrial wear components and has made prototype parts for
evaluation and testing in internal combustion and diesel engines. See "Risk
Factors--Importance of New Products; Limited Volume Manufacturing Experience
for Products Under Development," "Business--Market Applications-Industrial,"
"--Market Applications-Automotive Market," and "--Manufacturing Processes-
Sintering and Reaction Bonding of Silicon Nitride" and "Certain Transactions."
3M/Unitek Orthodontic Bracket Joint Program. In 1986, Ceradyne entered into
a joint development and supply agreement with 3M/Unitek, for the development
of a translucent ceramic bracket for orthodontic appliances commonly known as
braces. Under this agreement, 3M/Unitek, which is a major manufacturer of
stainless steel orthodontic brackets, provided Ceradyne with information
regarding the functional specifications and properties which ceramic brackets
would be required to satisfy. Based on this information and utilizing its
experience with translucent ceramics originally produced by Ceradyne for
defense electronic countermeasure applications, Ceradyne developed, and in
1987 began manufacturing, translucent ceramic brackets. These brackets
cosmetically blend with the natural color of the patient's teeth while
performing the structural functions formerly performed by traditional
stainless steel brackets. See "Risk Factors--Importance of New Products;
Limited Volume Manufacturing Experience for Products Under Development," "--
Reliance on 3M/Unitek Relationship," "Business--Market Applications-Consumer"
and "--Manufacturing Processes-Fabrication of Translucent Ceramics
(Transtar(R))."
Ceradyne and 3M/Unitek have obtained and jointly own two United States
patents covering the basic use of translucent ceramics for an orthodontic
bracket. 3M/Unitek has an exclusive right to market brackets based on this
technology until 2007, provided that 3M/Unitek purchases at least 50% of its
requirements for the brackets from Ceradyne and pays a royalty to Ceradyne
based on 3M/Unitek's net selling price for any brackets that Unitek
manufactures. During the term of the agreement, Ceradyne may sell the brackets
only to 3M/Unitek. To date, 3M/Unitek has purchased all of its requirements
from the Company and has not manufactured any brackets itself. See "Business--
Patents, Licenses and Trademarks."
MARKET APPLICATIONS
The Company's products can be categorized by the principal market
applications they address: (i) industrial, (ii) defense, (iii) consumer, (iv)
microwave tube products and (v) automotive. These markets accounted for
approximately 29.2%, 24.6%, 3.7%, 41.1% and 1.4%, respectively, of the
Company's net sales for fiscal 1994 and 37.5%, 18.4%, 9.3%, 33.7% and 1.2%,
respectively, of net sales for the six months ended June 30, 1995. Set forth
below is a description of the Company's principal products itemized by market:
INDUSTRIAL
Industrial Wear Components. Ceradyne's industrial wear components are made
primarily of its Ceralloy(R) 147 sintered reaction bonded silicon nitride
(SRBSN). These SRBSN ceramic components are generally
20
<PAGE>
incorporated in industrial machinery where severe abrasive conditions exist
which wear out vital components. The Ceradyne wear resistant parts are used to
replace conventional wear materials such as tungsten carbide or ceramics such
as alumina or zirconia. Often these parts are incorporated in high wear areas
at the original equipment manufacturer's plant. Applications include metal
cutting tool inserts, paper and can making equipment, abrasive blasting
nozzles as well as custom applications.
Tempered Glass Furnace Components and Metallurgical and Industrial Tooling.
Fused silica ceramic is a ceramic which does not materially expand when
heated, nor materially contract when cooled. Therefore, it is used to produce
industrial tooling and molds where complicated shapes and dimensions must be
maintained over a wide range of temperatures. Such applications include the
forming and shaping of titanium metal, used in the manufacture of aircraft.
Other applications take advantage of fused silica's excellent thermal shock
resistance and inertness when in contact with glass. These applications
include components for equipment used in the fabrication of flat plate and
tempered glass or contoured shapes such as automobile windshields. Fused
silica ceramic shapes of up to 14 feet in length are produced in the Company's
facility located near Atlanta, Georgia.
DEFENSE
Lightweight Ceramic Armor. Although armor has progressed through the
centuries from animal skin shields to metal armored suits, to Kevlar(TM) vests
(for light arms), to heavy steel plate, the requirements for light weight and
maximum projectile stopping capability vary little. Ceradyne has developed and
is producing lightweight ceramic armor capable of protecting against threats
as great as .50 caliber armor piercing machine gun bullets at 50% of the
equivalent steel plate weight. Utilizing hot pressed Ceralloy(R) ceramic, the
Company's armor plates are laminated with either Kevlar(TM), Spectra(TM) or
fiberglass and formed into a wide variety of shapes, structures and
components. To date, ceramic armor manufactured by the Company has been used
principally for military helicopter crew seats and airframe panels. The
Company currently supplies ceramic armor systems for the following helicopter
programs: the Blackhawk helicopter manufactured by Sikorsky Aircraft, the
Apache helicopter manufactured by McDonnell-Douglas Helicopters, Inc., the
Cobra helicopter manufactured by the Bell Helicopter division of Textron Inc.,
and the Sea King helicopter manufactured by Westland Helicopters. See "Risk
Factors--Dependence on United States Government and Risk of Contract
Termination."
The Company received its first production contract for ceramic armor vests
for military personnel in January 1995. This order, from the Defense Logistics
Agency of the United States government, includes $3.5 million in vests which
the Company expects to ship over the next 12 to 18 months and unexercised
options for up to an additional $6.1 million in vests. These options, if
exercised, are to be shipped over an additional 24 month period. The Company
believes it is a leader in producing lightweight ceramic armor for military
helicoptors. See "Risk Factors--Dependence on United States Government and
Risk of Contract Termination."
Missile Nose Cones (Radomes). The Company produces conical shaped, precision
machined ceramic components, which are designed to be mounted by its customers
on the front end of tactical missiles. These nose cones, or radomes, are
designed for applications where the velocities and operating environments are
severe enough that the thermal shock and erosion resistance, high strength and
microwave transparency properties of advanced technical ceramics are required.
Revenues from sales of radomes have not been material to date. However,
radomes manufactured by the Company have been qualified for the Standard
Missile Block IV missile program and are currently undergoing early testing
for the PAC-3 missile program.
CONSUMER
Ceramic Orthodontic Brackets. In the orthodontic process of correcting a
patient's teeth alignment, typically small (about 1/4") stainless steel
brackets are adhered to each individual tooth in order to serve as a guide to
the archwire which is the wire that sets into each bracket. The cosmetic
appearance of all this metal is often considered quite unattractive. Ceradyne,
together with its marketing partner, 3M/Unitek, have developed and are
marketing ceramic orthodontic brackets made of Ceradyne's translucent ceramic,
Transtar(R). The translucency of this ceramic bracket, together with the
classical ceramic properties of hardness, chemical inertness and
imperviousness, have resulted in a cosmetic substitute for traditional
stainless steel brackets. These products are generally sold as aesthetic
alternatives to conventional metal brackets and have been in production since
1987.
21
<PAGE>
Ceradyne is in advanced stages of development of an enhanced Transtar(R)
bracket design whereby a small metal channel is placed in the archwire slot
allowing for easier sliding between the wire and bracket. Ceradyne and
3M/Unitek plan to introduce this new design in 1996. See "Risk Factors--
Importance of New Products; Limited Volume Manufacturing Experience for
Products Under Development" and "--Reliance on 3M/Unitek Relationship."
CRT (Television) Ceramic-Impregnated Dispenser Cathodes. Cathodes are the
tiny elements in an electron gun of a television tube that, when heated, emit
a stream of electrons. This electron stream strikes the phosphors (pixels) on
the inside glass of the tube, causing them to excite and glow creating a
picture when viewed from the outside. Dispenser cathodes, which are the most
efficient type of cathode, typically have been used for microwave tube
applications, but historically have not been cost effective for televisions.
The Company has developed a cathode design and manufacturing process which
enables the Company to produce a high current density ceramic-impregnated
dispenser cathode for CRT applications at a fraction of the cost of microwave
tube ceramic-impregnated dispenser cathodes. The Company's process and
equipment are designed to produce these cathodes at a very rapid rate with a
current density (measured in amperes/cm/2/) significantly greater than
conventional oxide cathodes currently used in televisions. These CRT dispenser
cathodes are intended for large screen televisions, projection televisions,
HDTV and other high-end CRT applications, and are currently being used by two
manufacturers in limited production high-end television sets. Any potential
production volume use of the Company's CRT cathode will require extensive
customer evaluation and may be limited by cost factors. There can be no
assurance that the Company will obtain large volume orders for this product.
See "Risk Factors--Importance of New Products; Limited Volume Manufacturing
Experience for Products Under Development."
MICROWAVE TUBE PRODUCTS
Microwave Ceramic-Impregnated Dispenser Cathodes. The Company manufacturers
ceramic-impregnated dispenser cathodes which are used in microwave tubes for
applications in radar, satellite communications, electronic countermeasures
and other uses. Dispenser cathodes, when heated, provide the stream of
electrons which are magnetically focused into an electron beam. The power of
Microwave frequency signals which interact with this beam of electrons are
substantially increased. Microwave dispenser cathodes are primarily composed
of a porous tungsten matrix impregnated with ceramic oxide compounds.
Samarium Cobalt Permanent Magnets. The Company's samarium cobalt magnets are
sold as components primarily for microwave tube applications. Electron beams
in microwave tubes generated by the dispenser cathodes described above can be
controlled by the magnetic force provided by these powerful permanent magnets.
The magnets are generally small sub-components of microwave traveling wave
tubes.
Precision Ceramics. Ceradyne produces a wide variety of hot pressed
Ceralloy(R) ceramic compositions, precision diamond ground to close
tolerances, primarily for microwave tube applications. The interior cavities
of microwave tubes often require ceramic components capable of operating at
elevated temperatures and in high vacuums.
AUTOMOTIVE MARKET
Internal Combustion and Diesel Engine Components. The demand for higher
performance, more efficient and more durable engines for heavy duty diesel
trucks and automobiles creates additional opportunities for advanced technical
ceramics. For instance, the Company believes that if engines could be produced
using certain advanced technical ceramic components, they could be lighter and
longer lasting than those using metal components and could operate at higher
temperatures, with reduced cooling and lubrication requirements. As a result,
engines would use less fuel, achieve more complete combustion, thereby
reducing emissions, and be less costly to maintain. Because of these potential
benefits, industry-wide efforts are being made to develop advanced technical
ceramic technology to replace critical steel components in diesel and
automobile engines.
Ceradyne has provided a limited number of prototype parts made of
Ceralloy(R) 147 SRBSN materials for evaluation and testing in internal
combustion and diesel engines. Ceradyne has no production contracts to
22
<PAGE>
produce any ceramic components for automotive or diesel engine use. However,
Ceradyne is engaged in a joint program with Ford to develop ceramic components
for automobile engines, and with a heavy-duty diesel engine manufacturer to
develop silicon nitride engine valves and clevis pins for a diesel engine.
Ford is not obligated to purchase any minimum quantities of components
developed under this program, and Ceradyne's efforts in this area are still in
the experimental stage with future success greatly dependent on achieving cost
reductions while maintaining high quality levels. The Company believes that
use of ceramic components in high volume production automobile or diesel
engines will not occur for several years, if at all. See "Risk Factors--
Importance of New Products; Limited Volume Manufacturing Experience for
Products Under Development."
OTHER
Utilizing its advanced technical ceramics technologies and facilities, the
Company also manufactures a number of other products related to the foregoing
markets, such as dispenser cathodes for ion laser applications, samarium
cobalt permanent magnets for motors and instruments, and other precision
advanced technical ceramics. None of these products provides a material amount
of revenue to the Company.
MARKETING AND CUSTOMERS
Each of Ceradyne's three manufacturing locations maintains an autonomous
sales and marketing force promoting their individual products. The Company has
more than 10 employees directly involved in marketing and has agreements with
more than 25 manufacturers' representatives in the United States and other
countries who are compensated as a percent of sales in their territory.
Ceradyne is focusing much of its marketing effort outside the United States
through direct involvement of senior management personnel from the Company's
U.S. facilities in concert with local manufactures' representatives. Revenues
from export sales represented approximately 14%, 18%, 25% and 26% of total net
sales in fiscal years 1992, 1993 and 1994 and the first six months of fiscal
1995, respectively.
Generally, the Company sells components to prime contractors or original
equipment manufacturers. To a lesser extent, Ceradyne sells its products
directly to the end user. The Company sells its translucent ceramic
orthodontic brackets only to 3M/Unitek pursuant to an exclusive marketing
agreement with that customer. See "Risk Factors--Reliance on 3M/Unitek
Relationship" and "Business--Strategic Relationships." Varian Associates,
Inc., which purchases microwave tube products from the Company, accounted for
approximately 13% of the Company's total net sales in fiscal 1994, and no
customer accounted for more than 10% of total net sales in the first six
months of fiscal 1995.
The Company continues to explore various domestic and international
marketing, and other relationships to increase its sales and market
penetration. Furthermore, Ceradyne is attempting to create long-term
relationships with its customers to promote a smoother, more predictable flow
of orders and shipments by entering into multi-year agreements or exclusive
relationships where possible.
MANUFACTURING PROCESSES
Ceradyne has a number of manufacturing processes which are dedicated to
specific products and markets. These processes and the product applications
are described below.
Hot Pressing. The Company's hot pressing process is generally used to
fabricate ceramic plates for lightweight ceramic armor. Ceradyne has developed
and constructed induction heated furnaces capable of operating at temperatures
exceeding 4000(degrees)F in inert atmospheres at pressures up to 5000 lbs. per
square inch. This equipment enables Ceradyne to fabricate parts more than 20
inches in diameter, which is considered large for advanced technical ceramics.
Through the use of multiple cavity dies and special tooling, the Company can
produce a number of parts in one furnace during a single heating and pressing
cycle.
Ceradyne procures its raw materials as fine powders from several outside
suppliers. After processing by the Company, the powders are either loaded
directly into the hot pressing molds or are shaped into preforms prior to
loading into the hot pressing molds. The powders are placed in specially
prepared graphite tooling, most of which
23
<PAGE>
is produced by Ceradyne. Heat and pressure are gradually applied to the
desired level, carefully maintained and finally reduced. The furnace is
removed from the press while cooling to permit the press to be used with
another furnace. For most products, about 20 hours are required to perform
this cycle. The resultant ceramic product generally has mechanical, chemical
and electrical properties of a quality approaching that only theoretically
obtainable. Almost all products are then finished by diamond grinding to meet
precise dimensional specifications.
Sintering of Fused Silica Ceramics. Sintering of fused silica ceramics is
the process Ceradyne uses to fabricate fused silica ceramic shapes for
applications in glass tempering furnaces, metalurgical tooling and other
industrial uses. To fabricate fused silica ceramic shapes, fused silica
powders are made into unfired shapes through slip casting or other ceramic
compaction processes. These unfired "green" shapes are fired as they move
through a continuously operated 150 foot long tunnel kiln at temperatures up
to 2500(degrees)F. The final shapes are often marketed in the "as fired"
condition or, in some cases, precision diamond ground to achieve specific
dimensional tolerances or surface finishes required by certain customers. See
"Business--Manufacturing Processes-Diamond Grinding."
Ceramic-Impregnated Dispenser Cathode Fabrication. Ceramic-impregnated
dispenser cathode fabrication is used to produce cathodes for microwave power
tube applications and cathode ray tube ("CRT") cathodes for televisions. To
produce ceramic-impregnated dispenser cathodes, both tungsten metal powders
and ceramic powders are used. The tungsten metal powders are isostatically
pressed in polymer tooling, removed and fired in special atmospheres at
temperatures in excess of 4000(degrees)F. The tungsten billets are machined
into precision shapes with exacting tolerances. The tungsten machined shapes
are impregnated with a ceramic composite and fired at high temperatures in
special atmospheres. The ceramic impregnated components are assembled and
furnace brazed.
Final processing includes the insertion of a metal heating element within a
ceramic insulating compound and the addition of an extremely thin layer of
precious metals to the surface. The Company's final quality inspection often
includes a test of the cathode's electron emitting capabilities at normal
operating temperatures. In order to produce high volume, inexpensive CRT
cathodes for television and other CRT applications, the Company has developed
and built high speed automated assembly equipment capable of producing a
cathode approximately every 6.5 seconds. To date, however, the Company has not
produced CRT cathodes in sustained high volumes. See "Risk Factors--Importance
of New Products; Limited Volume Manufacturing Experience for Products Under
Development."
Sintering and Reaction Bonding of Silicon Nitride. Sintering and reaction
bonding of silicon nitride results in the Company's Ceralloy(R) 147 SRBSN,
which is used in industrial and automotive applications. Ceradyne SRBSN is
based on technology acquired from Ford. See "Business--Strategic
Relationships." This SRBSN process begins with relatively inexpensive high
purity elemental silicon (Si) powders, which contrasts sharply with most other
manufacturing techniques which start with relatively more expensive silicon
nitride (Si/3/N/4/) powders.
After additives are incorporated by milling and spray drying, the silicon
powders are formed into shapes through conventional ceramic processing such as
dry pressing. These shapes are then fired in a nitrogen atmosphere which
converts the silicon part to a silicon nitride part. At this step (reaction
bonding), the silicon nitride is pressure sintered in an inert atmosphere
increasing the strength of the component three fold. As a result of SRBSN
processing, the ceramic crystals grow in an intertwining "needle-like" fashion
which the Company has named NeedleLok(TM). Ceradyne's NeedleLok(TM) structure
results in a tough, high fracture energy part. The process is economical due
to the low cost of the starting powders and can be used to produce extremely
high production volumes of parts due to the use of conventional pressing
processes.
Fabrication of Translucent Ceramics (Transtar(R)). Ceradyne produces
translucent aluminum oxide (Transtar(R)) components primarily for use as
orthodontic ceramic brackets. The high purity powders are purchased from
outside vendors and processed by dedicated conventional ceramic mechanical dry
presses. The formed blanks are then fired in a segregated furnace in a
hydrogen atmosphere at 1800(degrees)C until the ceramics enter to a
24
<PAGE>
strong translucent condition. These fired aesthetic appearing brackets then
have certain critical features diamond ground into them. The final step is a
proprietary treatment of the bonding side in order to permit a sound
mechanical seal when bound to the patient's teeth.
Diamond Grinding. Many of Ceradyne's advanced technical ceramic products
must be finished by diamond grinding because of their extreme hardness. The
Company's finished components typically are machined to tolerances of ^.001
inch and occasionally are machined to tolerances up to ^.0001 inch. To a
limited extent, the Company also performs diamond grinding services for
customers independently of its other manufacturing processes to specifications
provided by the customer. The Company's diamond grinding department can
perform surface grinding, diameter grinding, ultrasonic diamond grinding,
diamond lapping, diamond slicing and honing. The equipment includes manual,
automatic and computer numerically controlled (CNC) grinders. The CNC grinders
have been specially adapted by the Company for precision grinding of ceramic
contours to exacting tolerances.
Fabrication of Samarium Cobalt Permanent Magnets. The fabrication of
samarium cobalt permanent magnets results in various magnet shapes which are
primarily used in microwave tube applications. The Company procures premixed
samarium cobalt powder either as SmCo/5/ or Sm/2/Co/1//7/ compositions. The
powders are then milled and formed into the final configuration by pressing in
a magnetic field using a specially designed magnet press. These "pre-fired" or
"green" magnets are then sintered at 2000(degrees)F in helium or vacuum. The
magnets may then be subsequently diamond ground and characterized as to each
individual magnet's strength.
Raw Materials. The starting raw materials for Ceradyne's manufacturing
operations are generally fine, man-made powders available from several
domestic and foreign sources. Except for beryllium oxide powder, raw
materials, such as Kevlar(TM), graphite, metal components and other ancillary
items are readily available from several commercial sources. Although
beryllium oxide powder is available from only one domestic source, the Company
has not experienced any difficulty in obtaining this powder and has
substantially reduced its use of this material. See "Business--Environmental
Concerns and Litigation."
Quality Control. Ceradyne products are made to a number of exacting
specifications. In order to meet both internal quality criteria and customer
requirements, the Company has implemented a number of quality assurance and
in-process statistical process control programs. These quality programs are
implemented separately at each of Ceradyne's three manufacturing locations.
ENGINEERING AND RESEARCH
Ceradyne's engineering and research efforts consist primarily of application
engineering in response to customer requirements. These efforts are directed
to the creation of new products, the modification of existing products to fit
specific customer needs, or the development of enhanced ceramic process
technology. The Company is also engaged in internally-funded research to
improve and reduce the cost of production and to develop new products. Costs
associated with application engineering and internally-funded research are
generally expensed as incurred and are included in cost of product sales.
Costs associated with Company-funded research were approximately $250,000,
$400,000, $360,000 and $100,000 in 1992, 1993, 1994 and the first six months
of 1995, respectively.
COMPETITION
Ceradyne competes on the basis of product performance, material's
specifications, application engineering capabilities, customer support,
reputation and price. Competitive pressures vary in each specific product
market, depending on the product and program. In many instances, the
competitors are well-known companies with greater financial, marketing and
technical resources than Ceradyne. Ceradyne intends to continue to focus on
selected business areas in which it can exploit its technological,
manufacturing and marketing strengths. Some of Ceradyne's competitors often
are divisions of larger companies with each of Ceradyne's product lines
subject to completely different competitors. Some of the competitors of the
Company include Kyocera Corporation's Industrial Ceramics Group in industrial
ceramic products, Vesuvius McDaniel Co. in fused silica ceramics, and
25
<PAGE>
Simula Inc. and Brunswick Corp. in defense products. In many applications the
Company also competes with manufacturers of non-ceramic materials. The
principal competition for the Company's new CRT cathode are oxide cathodes
manufactured in-house by the television manufacturers who are the Company's
targeted customers for this product. For future automotive applications, there
is a wide range of both current and potential domestic and international
competitors. See "Risk Factors--Competition".
BACKLOG
Ceradyne records an item as backlog when it receives a contract or purchase
order indicating the number of units to be purchased, the purchase price,
specifications and other customary terms and conditions. Ceradyne customarily
includes unexercised options as a separate item in its backlog because the
purchase orders are given on the basis of the total order, including options.
Although there can be no assurance that options will be exercised, Ceradyne's
experience has been that, with the exception of one significant strategic
weapons systems contract that was cancelled in 1992, substantially all options
or equivalents have been exercised at the prices set forth in the original
contract. At June 30, 1995, backlog consisted of unfilled firm orders of
approximately $14.3 million and unexercised options of approximately $10.5
million, for a total of approximately $24.8 million, compared with a backlog
at June 30, 1994, which consisted of unfilled firm orders of approximately
$8.8 million, and unexercised options of approximately $4.4 million for a
total of approximately $13.2 million. Typically, firm orders are scheduled to
be shipped within 12 to 18 months from receipt of order.
The Company's backlog at June 30, 1995 includes unfilled firm orders and
unexercised options for lightweight ceramic armor for military helicopters of
approximately $5.3 million and $3.1 million, respectively, or a total of
approximately $8.4 million, and unfilled firm orders and unexercised options
for lightweight ceramic armor vests for military personnel of approximately
$3.5 million and $6.1 million, respectively, or a total of approximately $9.6
million. The contract for armor vests and some of the contracts for helicopter
armor are directly or indirectly with agencies of the United States
government. Under U.S. law, such contracts may be cancelled for convenience at
any time without cause by the government, with reimbursement to the Company
only for its actual expenses incurred. See "Risk Factors--Dependence on United
States Government and Risk of Contract Termination."
FACILITIES
The Company serves its markets from three manufacturing facilities across
the United States. The Company's West Coast operations, located in Costa Mesa,
California, primarily produces armor and orthodontic products, and houses the
Company's SRBSN research and development activities. The Company's cathode
development and production are handled through its Semicon Associates division
located in Lexington, Kentucky. Fused silica products, including missile
radomes, are produced at the Company's Thermo Materials division located in
Scottdale, Georgia. These three facilities comprise approximately 70,000,
35,000 and 85,000 square feet, respectively. The Company's Costa Mesa and
Scottdale facilities are held under long-term leases which expire in October
2000 and December 2000, respectively. The Company owns its Lexington, Kentucky
facilities.
26
<PAGE>
Ceradyne's current manufacturing structure is summarized in the following
table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
FACILITY LOCATION PRODUCTS
--------------------------------------------------------------------------------
<S> <C>
Costa Mesa, California . Lightweight ceramic armor
Approximately 70,000 . Orthodontic ceramic brackets
square feet . Ceralloy(R) 147 SRBSN wear parts
. Precision ceramics
. Ceralloy(R) 147 SRBSN diesel/automotive engine
parts (R&D)
-------------------------------------------------------------------------------
Lexington, Kentucky . Microwave ceramic-impregnated dispenser cathodes
Approximately 35,000 . CRT (television) ceramic-impregnated dispenser
square feet cathodes
. Ion laser ceramic-impregnated dispenser cathodes
. Samarium cobalt magnets
-------------------------------------------------------------------------------
Scottdale, Georgia . Glass tempering rolls (fused silica ceramics)
Approximately 85,000 . Metallurgical tooling (fused silica ceramics)
square feet . Missile radomes (fused silica ceramics)
. Castable and other fused silica products
-------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL CONCERNS AND LITIGATION
Certain of the Company's products are produced using beryllium oxide, which
is highly toxic in powder form. This powder, if inhaled, can cause chronic
beryllium disease ("CBD") in a small percentage of the population. The Company
has implemented handling procedures and employee awareness programs in order
to comply with standards adopted by the Environmental Protection Agency and
the Occupational Safety and Health Administration. In recent years, however,
three former employees and a family member of one such former employee sued
the Company alleging that they had contracted CBD as a result of working with
beryllium oxide powders used in the Company's products. These claims were
covered by insurance, and all have been resolved without material liability to
the Company. In December 1994, a current employee and his wife filed suit
against the Company in the Superior Court of the State of California, County
of Orange, alleging that he contracted CBD as a result of exposure to
beryllium oxide powder during the course of his employment. Defense of this
case has been tendered to the Company's insurance carriers. This case is in
the early stages of discovery. However, based upon information currently
available, the Company believes that the employee's claim will be covered by
insurance and that the resolution of this matter will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance, however, that this claim or other claims related to
exposure to beryllium oxide powder will be covered by insurance or that, if
covered, the amount of insurance will be sufficient to cover any potential
adverse judgment. Moreover, since the symptoms of CBD may take many years to
manifest themselves, there can be no assurance that there will not be future
claims for CBD filed by others against the Company. See "Risk Factors--
Environmental Concerns."
PATENTS, LICENSES AND TRADEMARKS
The Company relies primarily on trade secrecy to protect compositions and
processes that it believes are proprietary. In certain cases, the disclosure
of information concerning such compositions or processes in issuing a patent
could be competitively disadvantageous. However, management believes that
patents are important for technologies where trade secrecy alone is not a
reliable source of protection. Accordingly, Ceradyne has applied for, or been
granted, several United States patents relating to compositions, products or
processes that management believes are proprietary, including lightweight
ceramic armor.
27
<PAGE>
Two U.S. patents have been issued to the Company relating to translucent
ceramics for orthodontic brackets. The earliest of these patents expires in
2007. These patents are co-invented and co-owned by Ceradyne and 3M/Unitek.
Ceradyne and 3M/Unitek have granted licenses to eight companies whose ceramic
orthodontic brackets infringe the Ceradyne-3M/Unitek patents, wherein those
companies pay royalties to Ceradyne and 3M/Unitek based on sales of their
orthodontic ceramic brackets for the remaining life of the patents. See "Risk
Factors--Reliance on 3M/Unitek Relationship" and "Business--Strategic
Relationships."
Ceradyne has been issued two U.S. patents and has one patent pending
relating to its CRT ceramic-impregnated dispenser cathode and has applied for
corresponding foreign patents in various foreign countries. The earliest of
these patents expires in 2006.
Through its association with Ford, Ceradyne acquired in excess of 80 U.S.
patents, of which 37 are still active, and corresponding foreign patents and
applications relating to technical ceramics for automotive technology. The
last of these patents will expire in August 2007. See "Business--Strategic
Relationships" and "Certain Transactions."
"Ceralloy(R)," the name of Ceradyne's technical ceramics, "Ceradyne(R)" and
the Ceradyne logo, comprising the stylized letters "CD(R)," are major
trademarks of the Company which have been registered in the United States and
various foreign countries. The Company also has other trademarks, including
"Transtar(R)," "Semicon(R)," "Thermo(R)," "Isomolded(R)" and "NeedleLok(TM) ."
EMPLOYEES
At June 30, 1995, Ceradyne employed approximately 220 persons, including
nine employees with undergraduate or graduate degrees in ceramic engineering.
Management considers its employee relations to be excellent. The Company has
not experienced difficulty in attracting personnel. None of the Company's
employees are represented by a labor union.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joel P. Moskowitz....... 56 Chairman of the Board, President and Chief Executive Officer
James F. Gardner........ 48 Vice President, Finance; Chief Financial Officer and Secretary
Louis R. Falce.......... 66 Executive Vice President, Cathodes
David M. Bowling........ 42 Vice President
Earl E. Conabee......... 58 Vice President
James N. Cuppy.......... 38 Vice President
Donald A. Kenagy........ 53 Vice President
David P. Reed........... 40 Vice President
Leonard M. Allenstein... 57 Director
Richard A. Alliegro..... 65 Director
Frank Edelstein......... 69 Director
Norman A. Gjostein...... 64 Director
William P. Lanphear IV.. 48 Director
Milton L. Lohr.......... 70 Director
Melvin A. Shader........ 70 Director
</TABLE>
--------
Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present. Mr. Moskowitz currently serves as Chairman of the Board,
President and Chief Executive Officer of the Company, which positions he has
held since 1983. Mr. Moskowitz currently serves on the Board of Trustees of
Alfred University. Mr. Moskowitz obtained a B.S. in Ceramic Engineering from
Alfred University in 1961 and an M.B.A. from the University of Southern
California in 1966.
James F. Gardner joined the Company in June 1988 and has served as Vice
President, Finance, Chief Financial Officer and Secretary since September
1988. Prior to joining the Company, Mr. Gardner served for four years as Vice
President, Finance and Secretary of SensorMedics Corporation, a manufacturer
of cardiopulmonary and critical care medical devices. From 1979 to 1984, Mr.
Gardner was Vice President of Finance at Control Components, Incorporated, a
manufacturer of critical service, velocity control valves. Mr. Gardner
received an M.B.A. from Ohio University in 1970, a B.S.B.A. from John Carroll
University in 1969, and is a Certified Public Accountant.
Louis R. Falce joined the Company in 1985 and has served as Vice President
since January 1987, and as Executive Vice President, Cathodes since July 1995.
Mr. Falce is responsible for the marketing of cathodes for the Company's
Semicon Associates division, and for the development and marketing of the
Company's CRT cathode for television and other CRT applications. Prior to
joining the Company, Mr. Falce served for ten years in various scientific and
engineering positions at Hughes Aircraft Company. Mr. Falce received B.S.
degrees in Chemistry and Industrial Management from Rutgers University in
1952.
David M. Bowling joined Ceradyne in October 1986 when the Company acquired
Semicon Associates, where he served as Controller. Mr. Bowling joined Semicon
Associates in 1983. He was appointed to the position of Vice President of the
Company in October 1994. Mr. Bowling serves as President of the Company's
Semicon Associates division and is responsible for the overall operations of
Semicon Associates. Mr. Bowling received a B.S. in Business Administration in
1975 from Union College.
Earl E. Conabee joined the Company in July 1985, and has served as Vice
President of the Company since June 1986. Mr. Conabee serves as Vice President
of Marketing for the Company's Thermo Materials division, where he is
responsible for the overall marketing and sales effort for fused silica
ceramics. Prior to joining the
29
<PAGE>
Company, Mr. Conabee served as General Manager of Ceramatec, a manufacturer of
technical ceramics, from 1983 to 1985, and as Director of Refinery Operations
for Englehard Minerals Corporation from 1973 to 1983. Mr. Conabee obtained a
B.S. in Ceramic Engineering from Alfred University in 1960.
James N. Cuppy joined Ceradyne in October 1986 when the Company acquired
Semicon Associates, has served as a Vice President of the Company since
October 1994 and serves as Vice President of Operations of the Company's
Semicon Associates division. Mr. Cuppy had worked at Semicon Associates since
1981, and from 1978 to 1981 he was employed by General Instrument Corp. as a
process engineer. Mr. Cuppy's formal education is in Mechanical Engineering at
the California State University at Hayward and Business Administration at the
University of Kentucky.
Donald A. Kenagy joined the Company in December 1986 when the Company
acquired Thermo Materials, and has served as Vice President of the Company
since July 1991. Mr. Kenagy is currently President of the Company's Thermo
Materials division, and as such is responsible for the operations, finances
and marketing of Thermo Materials. Mr. Kenagy joined Thermo Materials in 1972.
Mr. Kenagy received a B.S. in Ceramic Technology from Penn State in 1963, an
M.S. in Metallurgy from the Massachusetts Institute of Technology in 1965, and
Met. Eng. degree from MIT in 1968.
David P. Reed joined the Company in November 1983, and has served as Vice
President since January 1988. Mr. Reed is responsible for the operations,
finances and marketing of the Company's Costa Mesa, California operations.
Prior to joining the Company, Mr. Reed served as Manager, Process Engineering
for the Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed
obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an
M.S. in Ceramic Engineering from the University of Illinois in 1978.
Leonard M. Allenstein has served on the Board of Directors of the Company
since 1983. Mr. Allenstein has been a private investor and businessman for
more than the past five years. Mr. Allenstein was a founder and general
partner of Bristol Restaurants, which owns and operates restaurants in the
Southern California area, from 1978 until December 1986.
Richard A. Alliegro has served on the Board of Directors of the Company
since 1992. Mr. Alliegro retired from Norton Company in 1990 after 33 years,
where his last position was Vice President, Refractories and Wear, for
Norton's Advanced Ceramics operation. He served as President of Lanxide
Manufacturing Co., a subsidiary of Lanxide Corporation, from May 1990 to
February 1993. Mr. Alliegro currently is the owner of AllTec Consulting, Inc.,
a ceramic technology consulting firm. Mr. Alliegro obtained B.S. and M.S.
degrees in Ceramic Engineering from Alfred University in 1951 and 1952,
respectively, and serves as a member of the Board of Trustees of that
university.
Frank Edelstein has served as a director of the Company since 1984. Mr.
Edelstein has been a Vice President of Gordon + Morris Group (a spinoff of
Kelso & Company), an investment banking firm, since November 1986, and from
1979 to November 1986 he was Chairman of the Board of International Central
Bank & Trust Company, which was acquired by Continental Insurance Co. in July
1983. Mr. Edelstein is currently a director of Arkansas Best Corp., IHOP Corp.
and DMI, Incorporated.
Dr. Norman A. Gjostein was appointed a director on February 6, 1995 to fill
a vacancy on the Board of Directors, and was elected to a full term on the
Board of Directors at the Company's Annual Meeting on July 24, 1995. Dr.
Gjostein has held various management positions on the Research Staff of the
Ford Motor Company since 1973. Presently he is Director of the Scientific
Research Laboratory, which includes research activities in CAE, advanced
materials and manufacturing systems. Dr. Gjostein earned B.S. and M.S. degrees
in Metallurgical Engineering from the Illinois Institute of Technology, and
M.S. and Ph.D degrees in Metallurgical Engineering from Carnegie-Mellon
University.
William P. Lanphear IV has served as a director of the Company since 1994.
He is currently Senior Vice President and member of the board of directors of
Bridgestone Multimedia Group, Inc., which is a publisher of family-oriented
video, audio and software products distributed through mass merchandisers and
specialty
30
<PAGE>
channels. From 1989 through 1993, Mr. Lanphear was Chairman and Chief
Executive Officer of Ephyx, Inc., a publisher of home entertainment software.
Mr. Lanphear obtained a B.A. in 1969 from Albian College, an M.S. in Nuclear
Engineering in 1970 from the University of Illinois, and an M.B.A. in 1972
from Harvard Graduate School of Business.
Milton L. Lohr served as a director of the Company from 1986 until October
1988, when he resigned to accept a position as Deputy Undersecretary of
Defense for Acquisitions, and thereafter was re-elected as a director of the
Company in July 1989 after leaving that position in May 1989. Mr. Lohr is
currently the President of Defense Development Corporation, a defense-related
research and development company. Mr. Lohr previously held the position of
Senior Vice President of Titan Systems, a defense-related research and
development company, from 1986 to 1988, and was founder and President of
Defense Research Corporation, a defense consulting firm, from 1983 to 1986.
Mr. Lohr served from 1969 to 1983 as Executive Vice-President of Flight
Systems, Inc., a firm engaged in aerospace and electronic warfare systems. Mr.
Lohr has over thirty-five years experience in government positions and
aerospace and defense management, and currently serves as a panel member of
the President's Science Advisory Committee, a member of the Office of the
Secretary of Defense, Army Science Board, as well as other ad hoc government
related assignments.
Melvin A. Shader has served as a director of the Company since 1984. Dr.
Shader retired in 1991 from TRW, Inc., where he was Vice President, Business
Development and Vice President, International at the Space and Defense Sector
of TRW, Inc. Dr. Shader had been with TRW, Inc. since 1970. From 1969 to 1970,
Dr. Shader was Director of Planning in the Information Network Division of
Computer Sciences Corp. and from 1954 to 1968, he was an executive with
International Business Machines Corp.
Directors are elected annually and hold office until the next annual meeting
of stockholders and until their successors have been elected and qualified.
The Company has agreed to nominate a representative of Ford for election as a
director pursuant to an agreement made in March 1986, pursuant to which
agreement Ford has acquired a total of 1,207,299 shares of the Company's
Common Stock. Joel P. Moskowitz and members of his family have agreed to vote
a portion of their shares of the Company's Common Stock, if necessary, for the
election of Ford's nominee. Dr. Norman Gjostein is Ford's current
representative. See "Certain Transactions." Officers serve at the discretion
of the Board of Directors except for Mr. Moskowitz, who serves pursuant to a
five-year employment agreement which expires in July 1999. See "Management--
Compensation of Executive Officers."
31
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table shows certain information concerning the compensation of
the Chief Executive Officer and each other executive officer of the Company
whose aggregate compensation for services in all capacities rendered during
the year ended December 31, 1994 exceeded $100,000 (collectively, the "Named
Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
-------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#)
--------------------------- ---- -------- ----- ------------
<S> <C> <C> <C> <C>
Joel P. Moskowitz....................... 1994 $150,709 $-- --
Chairman of the Board 1993 164,902 -- --
Chief Executive Officer and President 1992 178,356 -- --
David P. Reed........................... 1994 $101,418 -- 10,000
Vice President 1993 97,353 -- --
1992 96,015 -- --
James F. Gardner........................ 1994 $101,999 -- --
Vice President, Finance 1993 101,999 -- --
Chief Financial Officer and Secretary 1992 105,346 -- 500
</TABLE>
Option Grants in Last Fiscal year
The following table sets forth certain information concerning grants of
options to each of the Named Executive Officers during the year ended December
31, 1994. In addition, in accordance with the rules and regulations of the
Securities and Exchange Commission, the following table sets forth the
hypothetical gains or "option spreads" that would exist for the options. Such
gains are based on assumed rates of annual compound stock appreciation of 5%
and 10% from the date on which the options were granted over the full term of
the options. The rates do not represent the Company's estimate or projection
of future Common Stock prices, and no assurance can be given that any
appreciation will occur or that the rates of annual compound stock
appreciation assumed for the purposes of the following table will be achieved.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
PERCENT OF APPRECIATION
TOTAL OPTIONS FOR OPTION
GRANTED TO EXERCISE TERM(2)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------
NAME (NO. OF SHARES(1)) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ------------------ ------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joel P. Moskowitz....... -- -- -- -- -- --
David P. Reed........... 10,000 9.2% $2.25 12/28/04 $14,340 $33,500
James F. Gardner........ -- -- -- -- -- --
</TABLE>
--------
(1) The per share exercise price of all options granted is the fair market
value of the Company's Common Stock on the date of grant. Options have a
term of 10 years and become exercisable in five equal installments, each
of which vests at the end of each year after the grant date.
(2) The potential realizable value is calculated from the exercise price per
share, assuming the market price of the Company's Common Stock appreciates
in value at the stated percentage rate from the date of grant to the
expiration date. Actual gains, if any, are dependent on the future market
price of the Common Stock.
32
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information regarding option
exercises during the year ended December 31, 1994 by the Named Executive
Officers, the number of shares covered by both exercisable and unexercisable
options as of December 31, 1994 and the value of unexercised in-the-money
options held by the Named Executive Officers as of December 31, 1994:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END AT FISCAL YEAR END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel P. Moskowitz....... -- -- -- -- -- --
David P. Reed........... -- -- 22,300 22,200 $1,050 $7,950
James F. Gardner........ -- -- 26,500 1,000 (2) (2)
</TABLE>
--------
(1) Based upon the closing price of the Common Stock on December 31, 1994, as
reported by the Nasdaq National Market ($2.375 per share).
(2) The closing price of the Common Stock on December 31, 1994 was below the
exercise price per share. Therefore, the value of the options was $0.
Employment Agreement. In July 1994, the Company entered into a five-year
employment agreement with Mr. Moskowitz, pursuant to which he will serve as
Chairman of the Board of Directors, Chief Executive Officer and President of
the Company. The agreement provides for a base salary at the rate of $175,000
per year; however, Mr. Moskowitz voluntarily agreed to accept a reduced salary
at the rate of $150,000 per year through March 31, 1995 to aid the Company in
its cost-cutting efforts. His annual base salary was reinstated to $175,000 as
of April 1, 1995. Under the agreement, if Mr. Moskowitz' employment is
terminated by the Company (other than as a result of death, incapacity or for
"good cause" as defined in the agreement) or if Mr. Moskowitz elects to resign
for "good reason" (as defined in the agreement), Mr. Moskowitz will be
entitled to receive severance pay in an amount equal to his annual base
salary, at the rate in effect on the date of termination, payable on normal
pay dates for the remainder of the term of the agreement. "Good reason"
includes a "change in control" of the Company, a removal of Mr. Moskowitz from
any of his current positions with the Company without his consent, or a
material change in Mr. Moskowitz' duties, responsibilities or status without
his consent. A "change in control" of the Company shall be deemed to occur if
(1) there is a consolidation or merger of the Company where the Company is not
the surviving corporation and the shareholders prior to such transaction do
not continue to own at least 80% of the common stock of the surviving
corporation, (2) there is a sale of all or substantially all of the assets of
the Company, (3) the stockholders approve a plan for the liquidation or
dissolution of the Company, (4) any person becomes the beneficial owner,
directly or indirectly, of 30% or more of the Company's outstanding Common
Stock or (5) if specified changes in the composition of the Company's Board of
Directors occur.
COMPENSATION OF DIRECTORS
Directors are paid fees for their services on the Board of Directors in such
amounts as are determined from time to time by the Board. Until July 31, 1994,
a fee of $500 per month plus $1000 for each Board meeting attended was paid to
each non-employee director other than the Ford representative and Mr.
Lanphear, who did not receive a fee. These fees terminated as of July 31, 1994
by agreement of the Board, but may be reinstated in the future if the Board
deems appropriate. In 1994, options to purchase 10,000 shares of Common Stock
at the then-current market price of $2.00 per share were granted to each of
Messrs. Allenstein, Alliegro, Edelstein, Lohr and Shader as compensation for
their service as directors.
COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has established Audit, Compensation and Stock Option
Committees. The Compensation Committee's function is to review and make
recommendations to the Board regarding executive
33
<PAGE>
officers' compensation. This committee is composed of Messrs. Edelstein,
Alliegro, Shader and Lohr. The Audit Committee meets with the Company's
independent accountants to review the Company's financial condition and
internal accounting controls. This committee is composed of Messrs. Edelstein,
Shader and Lohr. The Stock Option Committee is composed of Messrs. Moskowitz
and Gjostein. This committee administers the Company's 1994 Stock Incentive
Plan and the 1995 Employee Stock Purchase Plan. Dr. Gjostein is serving as
Ford's representative of the Board of Directors. See "Certain Transactions."
The Company does not have a standing nominating committee.
On September 20, 1994, the Company obtained a loan in the amount of $100,000
from Joel P. Moskowitz, the Chairman of the Board of Directors, Chief
Executive Officer and President of the Company, as well as a member of the
Compensation Committee and Stock Option Committee. The loan bore interest at
the rate of prime plus 3.6% and was for a period not to exceed 120 days. The
loan was repaid in full by December 31, 1994.
COMPENSATION PLANS
1994 Stock Incentive Plan
The Ceradyne, Inc. 1994 Stock Incentive Plan (the "1994 Plan") was adopted
by the Board of Directors on April 11, 1994 and approved by the Company's
stockholders on July 18, 1994. An amendment to the 1994 Plan was adopted by
the Company's Board of Directors on April 24, 1995 and approved by the
Company's stockholders on July 24, 1995. The 1994 Plan is designed to enhance
the Company's ability to attract and retain the services of qualified persons
upon whose judgment, initiative and efforts the successful conduct and
development of the Company's business largely depends, by providing them with
an opportunity to participate in the ownership of the Company and thereby have
an interest in the success and increased value of the Company. Options may be
granted to employees, officers and directors (including non-employee officers
and directors), consultants and other service providers of the Company and of
present or future subsidiaries of the Company. Effective as of July 24, 1995,
options to purchase a total of up to 350,000 shares of Common Stock may be
granted under the 1994 Plan. The 1994 Plan provides for appropriate
adjustments in the number and kind of shares subject to the 1994 Plan and to
outstanding options in the event of stock splits, stock dividends or certain
other similar changes in the capital structure of the Company. Options may be
granted either as "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or as nonqualified
stock options.
The 1994 Plan is administered by the Stock Option Committee (the
"Committee") of the Board of Directors, which selects the recipients of
options. The Committee also determines the number of shares, the exercise
price, the term, any conditions on exercise, the consequences of any
termination of employment, and other terms of each option. The term of options
may not exceed ten years from the date of grant (five years in the case of an
incentive stock option granted to a person who owns more than 10% of the
combined voting power of all classes of stock of the Company). The option
exercise price may not be less than 100% of fair market value per share of the
Common Stock on the date of grant (110% of fair market value in the case of an
incentive stock option granted to a person who owns more than 10% of the
combined voting power of all classes of stock of the Company).
The option price is payable in full upon exercise, and payment may be made
in cash, or in the discretion of the Committee by delivery of shares of Common
Stock (valued at their fair market value at the time of exercise), the
optionee's promissory note in a form and on terms acceptable to the Committee,
the cancellation of indebtedness of the Company to the optionee, the waiver of
compensation due or accrued to the optionee for services rendered, a "same day
sale" commitment from the optionee and a broker-dealer that is a member of the
National Association of Securities Dealers, Inc. ("NASD Dealer"), a "margin"
commitment from the optionee and an NASD Dealer whereby the optionee
irrevocably elects to exercise the option and to pledge the shares purchased
to the NASD Dealer in a margin account as security for a loan from the NASD
Dealer in the
34
<PAGE>
amount of the exercise price and whereby the NASD Dealer irrevocably commits
upon receipt of such shares to forward the exercise price to the Company, or
by any combination of the foregoing methods of payment.
Options granted under the 1994 Plan may not be transferred by an optionee
other than by will or by the laws of descent and distribution.
The Board of Directors has the right at any time to terminate or amend the
1994 Plan, but no such action may terminate options already granted or
otherwise substantially affect or impair the rights of any optionee under an
outstanding option without the optionee's consent. Unless sooner terminated by
the Board of Directors, the 1994 Plan will terminate on April 11, 2004.
1995 Employee Stock Purchase Plan
The Ceradyne, Inc. 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors on April 24, 1995 and approved by the
Company's stockholders on July 24, 1995. The purposes of the Purchase Plan are
to provide to employees an incentive to join and remain in the service of the
Company and its subsidiaries, to promote employee morale and to encourage
employee ownership of the Common Stock by permitting them to purchase shares
at a discount through payroll deductions. The Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Code. A
total of 100,000 shares of Common Stock may be sold under the Purchase Plan.
The number and type of shares subject to the Purchase Plan, and the number and
type of shares subject to and the purchase price of outstanding rights to
purchase shares under the Purchase Plan, shall be appropriately adjusted in
the event of any subdivision or combination of outstanding shares, the payment
of a stock dividend, the reclassification or exchange of shares or a similar
change in the capital structure of the Company. Every employee of the Company
who customarily works more than 20 hours per week and more than five months
per year will be eligible to participate in offerings made under the Purchase
Plan if on the offering date such employee has been employed by the Company
for at least 30 days. Employees of any subsidiary of the Company may also
participate in the Purchase Plan at the discretion of the Board of Directors.
An employee may not participate in an offering under the Purchase Plan if he
or she owns shares of stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or of any parent or
subsidiary of the Company. As of June 9, 1995, approximately 220 employees
were eligible to participate in the Purchase Plan.
The Purchase Plan is administered by a committee consisting of at least two
directors appointed by the Board of Directors (the "Committee"). The Board has
delegated administration of the Purchase Plan to the Stock Option Committee.
Subject to the provision of the Purchase Plan, the Committee has full
authority to implement, administer and make all determinations necessary under
the Purchase Plan.
Each offering under the Purchase Plan will commence on such date (the
"Offering Date") and shall continue for such period (the "Offering Period") as
the Committee in its discretion shall designate from time to time. Unless the
Committee designates otherwise, offerings will be made once each year and each
Offering Period will be for a period of 12 months.
Eligible employees who elect to participate in an offering will purchase
shares of Common Stock through regular payroll deductions in an amount of not
less than 1% nor more than 15% of base pay, as designated by the employee. For
this purpose, "base pay" includes all salaries and regular hourly wages, but
does not include bonuses, commission, overtime pay, or other special payments,
fees or allowances. Shares of Common Stock will be purchased automatically on
the last day of the Offering Period (the "Purchase Date") at a price equal to
the lower of 85% of the fair market value of the shares on the Offering Date
or 85% of the fair market value of the shares as of the Purchase Date. A
participant may withdraw from an offering at any time prior to the Purchase
Date and receive a refund of his payroll deductions, without interest. A
participant's rights in the Purchase Plan are nontransferable.
35
<PAGE>
A maximum of 750 shares may be purchased by a participant in any one
offering. Furthermore, no employee may purchase stock in an amount which would
permit his rights under the Purchase Plan (and any similar purchase plans of
the Company and any parent and subsidiaries of the Company) to accrue at a
rate which exceeds $25,000 in fair market value, determined as of the Offering
Date, for each calendar year.
The Board of Directors may at any time amend, suspend or terminate the
Purchase Plan; provided that any amendment that would (1) increase the
aggregate number of shares authorized for sale under the Purchase Plan (except
pursuant to adjustments provided for in the Purchase Plan), or (2) change the
standards of eligibility for participation, shall not be effective unless
approved by the shareholders within 12 months of the adoption of such
amendment by the Board. Unless previously terminated by the Board, the
Purchase Plan will terminate on April 24, 2005.
CERTAIN TRANSACTIONS
On March 11, 1986, the Company sold 526,316 shares of its Common Stock to
the Ford Motor Company ("Ford") at a price of $19.00 per share, for a total
purchase price of $10,000,000. At the same time, the Company and Ford created
a new corporation, Ceradyne Advanced Products, Inc. ("CAPI"), and entered into
agreements involving a broad-based technology transfer, licensing and joint
development program. Under the agreements, Ford contributed technology and a
portfolio of United States and foreign patents relating to technical ceramics
to CAPI in exchange for 80% of CAPI's capital stock, and Ceradyne acquired the
remaining 20% of CAPI in exchange for $200,000. The technology and patents
contributed by Ford were developed in the Ford research laboratories over a
15-year period. Under the March 11, 1986 agreements, the Company was granted
an option to acquire Ford's 80% interest in CAPI in exchange for an additional
680,983 shares of Ceradyne Common Stock, which the Company exercised effective
February 12, 1988. As a result, Ceradyne now owns 100% of CAPI and Ford owns a
total of 1,207,299 shares of the Company's Common Stock. The Company and Ford
also entered into a joint development agreement which includes a commitment by
Ford to contribute up to $5,000,000, on a matching value basis with Ceradyne,
for the development by Ceradyne of technical ceramic products oriented towards
the automotive market. Through December 31, 1994, Ford agreed to fund a total
of $2,854,000 in cash and equipment pursuant to this agreement.
So long as Ford continues to own 5% or more of the Company's outstanding
Common Stock, Ceradyne has agreed to use its best efforts to cause one person
designated by Ford to be elected a member of the Ceradyne Board of Directors
and, under certain circumstances in the event the Company issues additional
shares of its Common Stock in a public or private transaction, to permit Ford
to purchase, at the same price and terms upon which sold by the Company in
such transaction, additional shares of Ceradyne Common Stock to enable Ford to
maintain its percentage ownership of the Company. Ford has notified the
Company that it does not intend to exercise this purchase right in connection
with this offering.
In connection with the sale of stock to Ford, Joel P. Moskowitz, Chairman of
the Board, Chief Executive Officer and President of the Company, and members
of his immediate family agreed to vote shares of the Company's Common Stock
owned by them in favor of the election of Ford's nominee to the Board of
Directors. However, they may first vote that number of shares that is
necessary to assure the election of Joel P. Moskowitz as a director of the
Company, and any shares that are not necessary to assure the election of Mr.
Moskowitz and a Ford nominee to the Board of Directors may be voted by them
without restriction.
Reference is hereby made to the transaction described under "Management--
Compensation Committee Interlocks and Insider Participation."
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of June 30, 1995, and as adjusted to reflect the sale of 1,200,000 shares
of Common Stock by the Company by (i) each person or entity known to the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each of the Company's named executive officers and directors and
(iii) all directors and executive officers of the Company as a group. The
information as to each person or entity has been furnished by such person or
entity, and each person or entity has sole voting power and sole investing
power with respect to all shares beneficially owned by such person or entity
except as otherwise indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES OUTSTANDING(2)
NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY ------------------------------
OWNERS OWNED(1) BEFORE OFFERING AFTER OFFERING
------------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Joel P. Moskowitz.................. 1,264,494 20.2% 16.9%
3169 Red Hill Avenue
Costa Mesa, CA 92626(3)
Ford Motor Company................. 1,207,299 19.2% 16.2%
The American Road
Dearborn, MI 48121
R.B. Haave Assoc., Inc.(4)......... 797,723 12.7% 10.7%
270 Madison Ave.
New York, NY 10016
Dimensional Fund Advisors, Inc.(5). 345,000 5.5% 4.6%
1299 Ocean Avenue
Suite 650
Santa Monica, CA 90401
Leonard M. Allenstein(6)........... 150,000 2.4% 2.0%
Richard A. Alliegro(7)............. 21,000 * *
Frank Edelstein(8)................. 13,900 * *
Dr. Norman A. Gjostein............. -- * *
William P. Lanphear IV............. 10,000 * *
Milton L. Lohr(9).................. 15,000 * *
Melvin A. Shader(10)............... 14,000 * *
David P. Reed(11).................. 24,550 * *
James F. Gardner(12)............... 31,250 * *
All current executive officers and
directors as a group
(15 persons including the persons
named above(13)).................. 1,629,794 25.3% 21.3%
</TABLE>
--------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days of
June 30, 1995, are deemed beneficially owned and outstanding for computing
the percentage of the person holding such securities, but are not
considered outstanding for computing the percentage of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 100,200 shares of Common Stock held by Mr. Moskowitz as custodian
for his son, as to which shares Mr. Moskowitz disclaims beneficial
ownership.
(4) Based upon information contained in a statement on Schedule 13G, dated
January 22, 1991, and amended by a filing dated January 3, 1995, filed
with the Securities and Exchange Commission by R.B. Haave Associates,
Inc., all shares of Common Stock are owned by advisory clients of R.B.
Haave Associates, Inc.
(5) Based upon information contained in a statement on Schedule 13G, dated
January 9, 1990, as amended by a filing dated January 30, 1995, filed with
the Securities and Exchange Commission by Dimensional Fund
37
<PAGE>
Advisors, Inc. ("Dimensional"). The Schedule 13G states that Dimensional, a
registered investment advisor, is deemed to have beneficial ownership of
345,000 shares of Common Stock as of December 31, 1994, all of which shares
are held in various accounts with respect to which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of such
shares.
(6) Includes 10,000 shares of Common Stock which may be acquired by Mr.
Allenstein upon exercise of stock options which are presently exercisable
or will become exercisable within 60 days of June 30, 1995.
(7) Includes 20,000 shares of Common Stock which may be acquired by Mr.
Alliegro upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of June 30, 1995.
(8) Includes 12,500 shares of Common Stock which may be acquired by Mr.
Edelstein upon exercise of stock options which are presently exercisable
or will become exercisable within 60 days of June 30, 1995.
(9) Includes 15,000 shares of Common Stock which may be acquired by Mr. Lohr
upon exercise of stock options which are presently exercisable or will
become exercisable within 60 days of June 30, 1995.
(10) Includes 8,000 shares of Common Stock which may be acquired by Dr. Shader
upon exercise of stock options which are presently exercisable or will
become exercisable within 60 days of June 30, 1995.
(11) Includes 22,300 shares of Common Stock which may be acquired by Mr. Reed
upon exercise of stock options which are presently exercisable or will
become exercisable within 60 days of June 30, 1995.
(12) Includes 26,500 shares of Common Stock which may be acquired by Mr.
Gardner upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of June 30, 1995.
(13) Includes an aggregate of 176,400 shares of Common Stock which may be
acquired by such persons upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of June
30, 1995.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company consists of 12,000,000 shares of
Common Stock, par value $.01 per share. As of August 14, 1995, there were
6,274,634 shares of Common Stock outstanding held of record by approximately
600 stockholders. There will be 7,474,634 shares of Common Stock outstanding
after giving effect to the sale of the shares of Common Stock offered by the
Company hereby.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. The holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors. In
the event of liquidation, dissolution or winding up of the Company, the
holders of shares of Common Stock shall be entitled to receive on a pro rata
basis all of the remaining assets of the Company available for distribution to
its stockholders. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and shares of Common Stock to be issued pursuant
to this offering will be fully paid and nonassessable.
REGISTRATION RIGHTS
Pursuant to a Stock Sale Agreement dated March 11, 1986, the Company has
granted to Ford certain registration rights with respect to 526,316 shares of
Common Stock owned by Ford. These registration rights entitle Ford to
participate in any registration proposed to be made by the Company of its
Common Stock (except for a registration relating to an employee stock option
or purchase plan). The Company will pay all expenses associated with
registrations pursuant to this agreement. However, Ford is required to bear
all underwriting discounts and sales commissions applicable to the shares of
Common Stock sold by Ford.
38
<PAGE>
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, a statute designed to impede hostile takeovers. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless either (i) prior to the date at which
the person becomes an interested stockholder, the Board of Directors approves
such transaction or business combination, (ii) the stockholder acquires more
than 85% of the outstanding voting stock of the corporation (excluding shares
held by directors who are officers or held in certain employee stock plans)
upon consummation of such transaction, or (iii) the business combination is
approved by the Board of Directors and by two-thirds of the outstanding voting
stock of the corporation (excluding shares held by the interested stockholder)
at a meeting of stockholders (and not by written consent). A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to such interested stockholder. For purposes of Section 203,
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Company's Common Stock is
American Stock Transfer and Trust Co.
39
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") acting through their
Representatives, Van Kasper & Company and Cruttenden Roth Incorporated, have
severally agreed on the terms and subject to the conditions of an Underwriting
Agreement with the Company to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF SHARES
------------------- ---------
<S> <C>
Van Kasper & Company............................................
Cruttenden Roth Incorporated....................................
---------
Total......................................................... 1,200,000
=========
</TABLE>
The shares of Common Stock are being offered by the Underwriters named
herein, subject to receipt and acceptance by them, to their right to reject
any order in whole or in part, and to certain other conditions. The
Underwriters are committed to purchase all of the above shares of Common Stock
if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the offering
price set forth on the cover page of this Prospectus and to certain dealers at
that price less a concession not in excess of $ per share, and that the
Underwriters and such dealers may reallow to certain dealers, including any
Underwriters, a discount not in excess of $ per share. After the initial
offering, the public offering price, concessions and reallowance to dealers
may be changed by the Representatives as a result of market conditions or
other factors.
Certain of the Underwriters, and certain dealers, may have engaged in
"passive market-making" activities in the Common Stock of the Company on
Nasdaq pursuant to the rules of the Securities and Exchange Commission.
Because the Nasdaq market-makers for the Common Stock include Underwriters and
prospective Underwriters accounting for more than 30% of the recent trading
volume of the Common Stock, the rules permit Underwriters and dealers, during
the two business day period ending immediately prior to the date of this
Prospectus, to continue to make a market in the Common Stock, so long as bids
and transactions are at prices which do not exceed the then-highest
independent bid price for the security, net purchases by the market-makers do
not exceed prescribed limits, and the market-makers comply with the other
provisions of the passive market-making rule. Passive market-making may
stabilize the market price of the Common Stock at a level which might
otherwise not prevail, and, if commenced, may be discontinued at any time.
The Company has granted an option to the Underwriters, exercisable by the
Representatives within 30 days after the date of this Prospectus, to purchase
up to 180,000 additional shares of Common Stock at the initial offering price,
less underwriting discounts and commissions. The Representatives may exercise
the over-allotment option solely for the purpose of covering over-allotments,
if any, incurred in the sale of the shares of Common Stock offered hereby. To
the extent that the over-allotment option is exercised, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of the additional shares as the number of shares to be purchased
and offered by that Underwriter in the above table bears to the total.
Upon completion of this offering, the Company will sell to the
Representatives warrants to purchase up to 60,000 shares of Common Stock. The
warrants will be exercisable upon the completion of this offering at a per
share exercise price equal to 120% of the public offering price, subject to
adjustment in certain events, and will expire five years from the date of the
Prospectus. For a period of one year after the completion of this offering,
the warrants are transferable only between the Representatives and officers of
the Representatives and thereafter
40
<PAGE>
will be freely transferable. The holders of shares of Common Stock acquired
upon exercise of the warrants have the right to include such shares in any
future registration statements filed by the Company and to demand one
registration for the shares. For the term of the warrants, the holders of the
warrants are given the opportunity to profit from a rise in the market price
of the Common Stock with a resulting reduction in the interest of the
Company's stockholders upon exercise of the warrants.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of one and one-quarter percent of the total proceeds of the
offering.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company, all of its executive officers and directors who own Common
Stock and certain beneficial owners of the Common Stock have agreed not to,
directly or indirectly, offer to sell, contract to sell, sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable for shares of Common Stock for a period of 90 days after the date
of this Prospectus without the prior written consent of the Representatives.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
Newport Beach, California. Certain legal matters arising in connection with
this offering will be passed upon for the Underwriters by Gray Cary Ware &
Freidenrich, A Professional Corporation, San Diego, California.
EXPERTS
The consolidated financial statements of the Company at December 31, 1994
and 1993, and for each of the three years in the period ended December 31,
1994, included in this Prospectus and in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such periodic reports,
proxy statements and other information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C.; 219 South Dearborn Street, Chicago,
Illinois; 26 Federal Plaza, New York, New York; and 5757 Wilshire Boulevard,
Suite 500 East, Los Angeles, California; and copies of such material may be
obtained from the Public Reference Section of the Commission at 451 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto filed with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W.,
41
<PAGE>
Washington, D.C. 20549 and copies may be obtained at prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference to the exhibit for a more complete
description of the matter involved.
42
<PAGE>
CERADYNE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets at December 31, 1993 and 1994, and at June 30,
1995..................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1992, 1993 and 1994, and for the Six Months Ended June 30, 1994 and 1995. F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1992, 1993 and 1994, and for the Six Months Ended June 30,
1995..................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1992, 1993 and 1994, and for the Six Months Ended June 30, 1994 and 1995. F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ceradyne, Inc.:
We have audited the accompanying consolidated balance sheets of CERADYNE,
INC. (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ceradyne, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
March 6, 1995
F-2
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND JUNE 30, 1995
ASSETS (NOTE 2)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 94 $ -- $ 302
Accounts receivable, net of allowances of
approximately $204, $199
and $157 for doubtful accounts in 1993, 1994 and
1995 respectively (Note 2)...................... 2,625 2,891 3,684
Receivable from related parties (Note 11)........ 21 6 10
Inventories (Notes 1 and 2)...................... 5,634 5,736 6,432
Production tooling............................... 378 243 310
Prepaid expenses and other....................... 91 21 149
------- ------- -------
Total current assets........................... 8,843 8,897 10,887
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 1 and
2)
Land............................................. 422 422 422
Buildings and improvements....................... 1,825 1,825 1,825
Lease rights..................................... 2,659 2,659 2,659
Machinery and equipment.......................... 15,098 14,083 14,483
Leasehold improvements........................... 1,296 1,118 1,135
Office equipment................................. 1,339 1,344 1,363
Construction in progress......................... 3 -- 119
------- ------- -------
22,642 21,451 22,006
------- ------- -------
Less accumulated depreciation and amortization... 16,511 16,410 17,050
------- ------- -------
6,131 5,041 4,956
------- ------- -------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, net of
accumulated amortization of $1,131, $1,286 and
$1,364 in 1993, 1994 and 1995, respectively
(Notes 1 and 11)................................ 2,544 2,389 2,311
------- ------- -------
OTHER ASSETS, net of accumulated amortization of
$426, $503 and $526 in 1993, 1994 and 1995,
respectively (Note 1)........................... 612 535 512
------- ------- -------
Total assets................................... $18,130 $16,862 $18,666
======= ======= =======
</TABLE>
See accompanying notes to consolidated statements.
F-3
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994 AND JUNE 30, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 2)..... $ 1,306 $ 1,029 $ 1,832
Accounts payable............................... 1,013 1,930 1,531
Accrued expenses:
Payroll and payroll related.................. 430 433 548
Other........................................ 464 452 1,006
------- ------- -------
Total current liabilities.................. 3,213 3,844 4,917
------- ------- -------
LONG-TERM DEBT (Note 2).......................... 1,367 905 787
------- ------- -------
DEFERRED REVENUE (Note 1)........................ 107 511 473
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 1, 8, 9, and 11):
Common Stock, $.01 par value:
Authorized--12,000,000 shares
Outstanding--6,231,079 shares in 1993,
6,243,734 shares in 1994 and 6,274,634 in
1995........................................ 30,404 30,429 30,512
Accumulated deficit............................ (16,961) (18,827) (18,023)
------- ------- -------
Total stockholders' equity..................... 13,443 11,602 12,489
------- ------- -------
Total liabilities and stockholders' equity. $18,130 $16,862 $18,666
======= ======= =======
</TABLE>
See accompanying notes to consolidated statements.
F-4
<PAGE>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1992 1993 1994 1994 1995
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Notes 1 and 7).......... $18,727 $15,987 $17,996 $8,729 $11,136
COST OF PRODUCT SALES.............. 16,531 14,792 16,135 7,656 8,224
------- ------- ------- ------ -------
Gross profit................... 2,196 1,195 1,861 1,073 2,912
------- ------- ------- ------ -------
OPERATING EXPENSES:
Selling.......................... 1,465 1,372 1,502 801 751
General and administrative....... 2,465 2,392 2,297 1,096 1,197
Royalty (Note 3)................. 212 0 0 0 0
------- ------- ------- ------ -------
4,142 3,764 3,799 1,897 1,948
------- ------- ------- ------ -------
Income (loss) from operations.. (1,946) (2,569) (1,938) (824) 964
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Other income, net................ 160 212 366 216 2
Interest expense................. (211) (240) (294) (139) (162)
------- ------- ------- ------ -------
(51) (28) 72 77 (160)
------- ------- ------- ------ -------
Income (loss) before provision
for income taxes.............. (1,997) (2,597) (1,866) (747) 804
PROVISION FOR INCOME TAXES (Note
5)................................ -- -- -- -- --
------- ------- ------- ------ -------
Net income (loss)................ $(1,997) $(2,597) $(1,866) $ (747) $ 804
======= ======= ======= ====== =======
NET INCOME (LOSS) PER COMMON AND
EQUIVALENT SHARE (Note 1)......... $ (0.33) $ (0.42) $ (0.30) $(0.12) $ 0.13
======= ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated statements.
F-5
<PAGE>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
NUMBER ACCUMULATED
OF SHARES AMOUNT DEFICIT
--------- ------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1991........................ 6,121,521 $30,101 $(12,367)
Issuance of common stock........................ 14,514 50
Exercise of stock options....................... 9,500 26
Net loss........................................ -- -- (1,997)
--------- ------- --------
BALANCE, December 31, 1992........................ 6,145,535 30,177 (14,364)
Issuance of common stock........................ 10,644 20
Exercise of stock options....................... 74,900 207
Net loss........................................ -- -- (2,597)
--------- ------- --------
BALANCE, December 31, 1993........................ 6,231,079 30,404 (16,961)
Issuance of common stock........................ 9,655 8
Exercise of stock options....................... 3,000 17
Net loss........................................ -- -- (1,866)
--------- ------- --------
BALANCE, December 31, 1994........................ 6,243,734 30,429 (18,827)
Exercise of stock options....................... 30,900 83
Net income...................................... -- -- 804
--------- ------- --------
BALANCE, June 30, 1995 (unaudited)................ 6,274,634 $30,512 $(18,023)
========= ======= ========
</TABLE>
See accompanying notes to consolidated statements.
F-6
<PAGE>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS
31, ENDED
------------------------- -------------
1992 1993 1994 1994 1995
------- ------- ------- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................. $(1,997) $(2,597) $(1,866) $(747) $804
Adjustments to reconcile net (loss)
income (used in) provided by
operating activities:
Depreciation and amortization.... 2,007 1,694 1,577 738 741
Gain on sale of property, plant
and equipment................... -- -- 103 -- --
Decrease (increase) in accounts
receivable, net................. 640 691 (266) (201) (793)
Decrease (increase) in
receivables from related
parties......................... (86) 133 15 12 (4)
Decrease (increase) in
inventories..................... (470) (237) (344) (705) (696)
Decrease (increase) in production
tooling......................... 115 37 135 71 (67)
Decrease (increase) in prepaid
expenses and other assets....... (197) 182 70 (87) (128)
(Decrease) increase in accounts
payable......................... (183) (33) 917 596 (399)
(Decrease) increase in accrued
expenses........................ 243 (143) (9) 55 669
(Decrease) increase in deferred
revenue......................... (107) (107) 404 274 (38)
------- ------- ------- ------ -----
Net cash provided by (used in)
operating activities................ (35) (380) 736 6 89
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment............... -- -- 140 -- --
Purchases of property, plant and
equipment......................... (514) (349) (256) (56) (555)
------- ------- ------- ------ -----
Net cash used in investing
activities.......................... (514) (349) (116) (56) (555)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net...... 76 227 25 9 83
Net borrowings (payments) on long-
term borrowings................... 95 216 (739) (1) 685
Proceeds from capital leases....... 123 -- -- -- --
------- ------- ------- ------ -----
Net cash provided by (used in)
financing activities................ 294 443 (714) 8 768
------- ------- ------- ------ -----
(Decrease) increase in cash and cash
equivalents......................... (255) (286) (94) (42) 302
Cash and cash equivalents, beginning
of period........................... 635 380 94 94 --
------- ------- ------- ------ -----
Cash and cash equivalents, end of
period.............................. $ 380 $ 94 $ -- $ 52 $ 302
======= ======= ======= ====== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid...................... $ 211 $ 240 $ 294 $ 139 $ 162
Income taxes paid.................. $ 28 $ 26 $ 22 $ -- $ --
</TABLE>
See accompanying notes to consolidated statements.
F-7
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(INFORMATION AT JUNE 30, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The consolidated financial statements include the financial statements of
Ceradyne, Inc. and its subsidiaries (the Company). All material intercompany
accounts and transactions have been eliminated.
b. Interim Financial Information
The financial statements at June 30, 1995 and for the six months ended June
30, 1994 and 1995 are unaudited, but include all adjustments (consisting only
of normal recurring adjustments) which the Company considers necessary for a
fair presentation of the financial position at such dates and the operating
results and cash flows for those periods. Results for interim periods are not
necessarily indicative of results to be expected for the entire year.
c. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Inventory costs include the cost of material, labor and manufacturing
overhead. The following is a summary of inventory by component:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................... $2,560,000 $1,984,000 $2,424,000
Work-in-process......................... 2,469,000 3,090,000 3,120,000
Finished goods.......................... 605,000 662,000 888,000
---------- ---------- ----------
$5,634,000 $5,736,000 $6,432,000
========== ========== ==========
</TABLE>
d. Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are provided
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements............... 20 years
Lease rights............................. Term of lease and renewal option
Machinery and equipment.................. 3 to 12 years
Leasehold improvements................... Term of lease
Office equipment......................... 5 years
</TABLE>
Maintenance, repairs and minor renewals are charged to expense as incurred.
Repairs and maintenance expense was $482,000 in 1992, $437,000 in 1993,
$370,000 in 1994 and was $189,000 for the six months ended June 30, 1994 and
$190,000 for the six months ended June 30, 1995. Additions and improvements
are capitalized. When assets are disposed of, the applicable costs and
accumulated depreciation and amortization are removed from the accounts and
any resulting gain or loss is included in the results of operations.
F-8
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
e. Sales Recognition
Sales are recorded as of the date shipments are made to or goods are
accepted by customers for production contracts. Revenue is recognized using
the percentage-of-completion method for cost plus fixed fee, government
sponsored, research and development contracts. For the years ended December
31, 1992, 1993, 1994 and for the six months ended June 30, 1994 and 1995,
revenues from cost plus fixed fee contracts were less than 10 percent of net
sales.
f. Deferred Revenue
As part of the sales in October 1989 of the wholly-owned subsidiary,
Ceradyne Specialty Products, Inc., the Company received proceeds of $785,000
for an option to issue a license attributable to certain technology and an
agreement not to compete for a period of five years. These proceeds have been
reflected as Deferred Revenue in the accompanying balance sheets. During 1992,
1993, and 1994, the Company included $107,000 as other income in the financial
statements. For the six months ended June 30, 1994 and 1995, the Company
included $53,000 and $-0- as other income in the financial statements,
respectively. The revenue was fully recognized at December 31, 1994.
In September 1994, the Company entered into an agreement which waived the
minimum production per quarter requirement as well as the minimum rework lot
quantity for the translucent bracket. In consideration for entering into this
contract, the Company received a cash fee of $250,000. The fee has been
deferred at December 31, 1994 and is being recognized at the rate of $.40 per
part on the first 625,000 pieces sold. At June 30, 1995, $103,500 of the fee
had been recognized.
In September 1994, the Company finalized an agreement to manufacture and
supply a specific cathode to a third party at reduced prices. In consideration
for entering into this contract, the Company received a cash fee of $261,000.
The fee was deferred at December 31, 1994 and will be recognized over the life
of the agreement. At June 30, 1995, none of the fee had been recognized.
g. Net (Loss) Income Per Share
The number of shares used in computing primary net (loss) income per share
equals the total of the weighted average number of shares outstanding during
the periods plus common stock equivalents relating to options. Common stock
equivalents relating to options issued under the 1983 Stock Option Plan (as
amended), the 1994 Stock Incentive Plan and 1985 Employee Stock Purchase Plan
(see Note 8) represent additional shares which may be issued in connection
with their exercise, reduced by the number of shares which could be
repurchased with the proceeds at the average market price per share. Common
stock equivalents relating to options are not included when their effect is
antidilutive. The following is a summary of the number of shares entering into
the computation of net (loss) income per common equivalent share:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of
shares outstanding.......... 6,133,000 6,169,000 6,238,000 6,233,000 6,253,000
Common stock equivalents:
Employee Stock Purchase
Plan...................... -- -- -- -- 12,000
Stock options.............. -- -- -- -- 124,000
--------- --------- --------- --------- ---------
Number of shares............. 6,133,000 6,169,000 6,238,000 6,233,000 6,389,000
========= ========= ========= ========= =========
</TABLE>
F-9
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
g. Cost in Excess of Net Assets Acquired
Costs in excess of net assets acquired from the Company's acquisitions are
being amortized over a 20 to 30 year period.
h. Deferred Start-up Costs
Start-up costs incurred to establish the technological feasibility of a new
product to be sold or otherwise marketed are charged to expense in the period
incurred. Costs incurred subsequent to establishing technological feasibility
but prior to commercial sales to customers are capitalized and amortized over
the estimated economic life of the product. Amortization will be computed,
once shipments commence, using the greater of the ratio of current revenues to
anticipated current and future revenues or the straight-line method. During
the years ended December 31, 1992, 1993 and 1994 and the six months ended June
30, 1995, there were no deferred costs capitalized. These costs, totaling
$338,000, are included in Other Assets. No amortization expense was charged to
operations for the years ended December 31, 1992, 1993 and 1994 and the six
months ended June 30, 1994 and 1995, respectively. Revenues and associated
amortization are expected to commence late in 1995.
2. DEBT AND BANK BORROWING ARRANGEMENTS
Long-term debt consisted of the following at December 31, 1993 and 1994 and
at June 30, 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994 JUNE 30, 1995
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to asset-based lender, bearing
interest at the institution's prime rate
(9.00 percent at June 30, 1995) plus 3.6
percent, payable in monthly installments
of $26,428................................ $2,270,000 $1,755,000 $2,536,000
Four contract capital leases, bearing
interest between 5.38 percent and 11.64
percent, payable in monthly installments
of $14,432 expiring from July 1995 through
September 1996, secured by equipment with
a net book value of $502,000 at December
31, 1993, $315,000 at December 31, 1994
and $227,000 at June 30, 1995 ............ 403,000 179,000 83,000
---------- ---------- ----------
2,673,000 1,934,000 2,619,000
Less--current portion...................... 1,306,000 1,029,000 1,832,000
---------- ---------- ----------
Long-term debt............................. $1,367,000 $ 905,000 $ 787,000
========== ========== ==========
</TABLE>
Payments due on the Company's long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR
ENDING AMOUNT
------ ----------
<S> <C>
1995 $1,029,000
1996 350,000
1997 317,000
1998 238,000
----------
$1,934,000
==========
</TABLE>
F-10
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
On September 22, 1994, the Company amended its existing revolving credit
agreement with an asset-based lender for the purpose of financing the
Company's working capital needs. The facility, limited to $4,000,000, is
composed of two parts: a $1,585,600 (previously $1,553,300) five-year term
loan dated September 22, 1993 and a $2,414,400 (previously $2,446,700)
revolving line of credit expiring on November 29, 1996. Included in the
revolving line of credit is a foreign accounts receivable sub-limit which is
the lesser of $500,000 or 33.3% of the total outstanding borrowings against
"eligible domestic accounts." Borrowings under both sections of the facility
are tied to availability formulas--eighty percent (80%) of the appraised value
of fixed assets for the term loan, and for the revolving line of credit,
seventy-five percent (75%) of eligible trade receivables and twenty-five
percent (25%) of eligible inventory (up to $250,000). The term loan and the
revolving line of credit are secured by all of the Company's assets and
require the Company, among other things, to maintain certain financial ratios
and limit capital expenditures. The Corporation is in compliance with the loan
covenants at June 30, 1995. The interest rate under this credit facility is
equal to the lender's prime rate (nine percent (9.0%) at June 30, 1995) plus
three and six-tenths percent (3.6%). A one and one-half percent (1.5%)
facility fee is payable annually on the total value of the credit facility.
3. DEFERRED EXPENSE
Effective January 1, 1983, the Company was formed by acquisition from the
former parent company. In connection with the acquisition, the Company agreed
to pay its former parent a royalty equal to the greater of three percent
(3.0%) of annual net sales during a 10-year period or graduated annual minimum
installments. The royalty was subject to prepayment for an amount equal to the
difference between $3,000,000 and the royalties already paid. In June 1986,
the Company exercised its prepayment option for the sum of $1,755,000.
The prepayment was capitalized as deferred expense and was amortized on a
straight-line basis over the remaining term of the original agreement. The
deferred expense was fully amortized on December 31, 1992.
4. LOAN FROM OFFICER
On September 20, 1994, the Company obtained a loan from an officer in the
amount of $100,000. The loan bore interest at the rate of prime plus three and
six-tenths percent and was for a period of time not to exceed one hundred
twenty days. Payment of principal and interest can be made prior to maturity
without any prepayment penalty. The loan was repaid in full by December 31,
1994.
5. INCOME TAXES
Effective the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
The new standard provides revised criteria for the recognition of net deferred
tax assets. The Company's net deferred tax asset, which is approximately
$7,000,000 at June 30, 1995, relates to its tax net operating loss
carryforward of approximately $14 million and tax credit carryforward and has
been offset with a valuation allowance since there is uncertainty regarding
the Company's ability to recognize this tax benefit since the benefit is
dependent upon the Company's ability to continue to generate future taxable
income.
F-11
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
The components of the Company's net deferred income tax asset as of December
31, 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
Inventory reserves.............................. $ 463,500 $ 359,800
Contingency reserves............................ 140,700 118,400
Deferred revenue................................ 39,600 189,200
Vacation accrual................................ 138,000 120,800
Bad debt allowance.............................. 166,500 159,000
Net operating loss carryforward................. 4,909,900 5,606,800
Tax credit carryforwards........................ 332,000 332,000
Other........................................... 109,800 114,000
----------- -----------
6,300,000 7,000,000
Valuation allowance............................. (6,300,000) (7,000,000)
----------- -----------
Net deferred tax asset........................ $ 0 $ 0
=========== ===========
</TABLE>
The effective income tax rate for the years ended December 31, 1993 and 1994
and for the six months ended June 30, 1995 differs from the federal statutory
federal income tax rate due to the limitation of net operating loss benefits.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its manufacturing facilities under
noncancellable operating leases. the Company incurred rental expenses under
these leases of $812,000, $876,000, $915,000 for the years ended December 31,
1992, 1993 and 1994 and $573,000 and $584,000 for the six months ended June
30, 1994 and 1995 respectively. The approximate rental commitments required
under existing noncancellable leases as of December 31, 1994, are as follows:
<TABLE>
<S> <C>
1995........................................................... $ 812,100
1996........................................................... 167,000
1997........................................................... 150,900
1998........................................................... 147,200
1999 and thereafter............................................ 248,800
----------
$1,526,000
==========
</TABLE>
The Company has an employment agreement with the Chief Executive Officer
which expires on July 5, 1999. In addition to a base salary, the agreement
provides for a bonus to be determined by the Compensation Committee of the
Board of Directors. No maximum compensation limit exists. The compensation
expensed in the year ended December 31, 1992, 1993 and 1994 was $178,000,
$165,000, $151,000 and in the six months ended June 30, 1994 and 1995 was
$77,890 and $84,135, respectively.
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to, employment-related actions and workers'
compensation claims.
F-12
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
Currently the Company is involved in one action filed by a current employee
in the Superior Court of the State of California, County of Orange. The
employee and his wife filed suit in December 1994 alleging that he contracted
chronic beryllium disease during the course and scope of his employment.
Defense of the case has been tendered to the Company's insurance carriers.
While the Company is unable to predict the outcome of current proceedings,
based upon the facts currently known to it, the Company, after consultation
with legal counsel, does not believe that resolution of these proceedings will
have a material adverse effect on the financial condition or operations of the
Company.
During the fourth quarter of 1994 the following actions were concluded: two
former employees each filed suit during 1992 alleging that they had contracted
chronic beryllium disease during the course and scope of their employment at
the Company. Both suits were settled during 1994 and final releases were
executed in January 1995. The impact of these settlements on the Company's
financial statements is included in the 1994 results of operations.
During the second quarter of 1994, the following proceedings where
concluded: an employee of a customer and his wife filed suit in the United
States District Court, Eastern District of Tennessee, on September 22, 1992,
alleging he contracted chronic beryllium disease during his employment as a
laboratory technician. Ceradyne was one of at least 18 defendants who
allegedly sold products containing beryllium oxide to his employer. The
complaint did not state the specific dollar amount sought, but requested
compensatory and punitive damages. In May 1994, the customer's employee
voluntarily dismissed Ceradyne from this action. The dismissal is without
prejudice, which allows the customer's employee up to one year to refile the
action.
7. SEGMENT AND CUSTOMER INFORMATION
The Company operates solely in the development, manufacture and sale of
advanced technical ceramics. In the years ended December 31, 1992, 1993, 1994,
export sales, primarily to Europe, were approximately $2,600,000, $2,900,000
and $4,584,000 and for the six months ended June 30, 1994 and 1995 sales were
$1,907,000 and $2,913,000, respectively.
For the year ended December 31, 1992, the Company had one customer that
accounted for 12 percent of sales. For the year ended December 31, 1993, the
Company had one customer that accounted for 14 percent of sales. For the year
ended December 31, 1994, the Company had one customer that accounted for 13
percent of sales. For the six months ended June 30, 1994, the Company had one
customer that accounted for 13 percent of sales. For the six months ended June
30, 1995, the Company did not have any customer that accounted for 10 percent
of sales. No other customer accounted for 10 percent of more of the Company's
net sales for the periods presented.
8. STOCK OPTIONS
At the Annual Meeting held on July 18, 1994, the stockholders of the Company
approved the Company's 1994 Stock Incentive Plan. At June 30, 1995, the
Company has reserved 250,000 shares of its common stock for issuance. Under
the Plan, the Company can issue both incentive and nonqualified stock options.
Options are granted at or above the fair market value at the date of grant and
generally become exercisable over a five-year period.
F-13
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
At December 31, 1993, the Company has reserved 600,000 shares of its common
stock for issuance under the 1983 Stock Plan (as amended). Under the Plan, the
Company can issue both incentive and nonqualified stock options. Options are
granted at or above the fair market value at the date of grant and generally
become exercisable over a five-year period. No option shares were available
for grant since the plan terminated on December 31, 1993.
The following is a summary of the transactions relating to the Plans for the
periods 1992 through the six months ended June 30, 1995:
<TABLE>
<CAPTION>
STOCK OPTIONS
-----------------------
SHARES PRICE
------- --------------
<S> <C> <C>
OUTSTANDING, December 31, 1991.................... 395,100 $2.75--$3.625
Granted........................................... 31,500 $3.125--$3.875
Exercised......................................... (9,500) $2.75
Canceled.......................................... (40,800) $2.75
------- --------------
OUTSTANDING, December 31, 1992.................... 376,300 $2.75--$3.875
Granted........................................... 80,500 $2.00--$2.75
Exercised......................................... (74,900) $2.75--$3.875
Canceled.......................................... (18,200) $2.75--$3.875
------- --------------
OUTSTANDING, December 31, 1993.................... 363,700 $2.00--$3.875
Granted........................................... 159,500 $2.00
Exercised......................................... (3,000) $2.75
Canceled.......................................... (48,000) $2.00--$3.875
------- --------------
OUTSTANDING, December 31, 1994.................... 472,200 $2.00--$3.875
Granted........................................... -0-
Exercised......................................... (30,900) $2.00--$3.875
Canceled.......................................... (5,400) $2.00--$3.875
------- --------------
OUTSTANDING, June 30, 1995 (unaudited)............ 435,900 $2.00--$3.875
======= ==============
</TABLE>
At June 30, 1995, options to acquire 314,640 shares were exercisable and
93,500 shares were available for grant.
The Company has also reserved 150,000 shares of its common stock for
issuance under an employee stock purchase plan which became effective during
1985 and was amended in 1994. At June 30, 1995, 51,454 shares were available
for issuance under the Plan. Under the terms of the Plan, employees may
purchase shares at the lower of 85 percent of the quoted market value of the
shares as determined on the first or last day of the Plan year. Effective July
3, 1995, the Plan expired.
Compensation expense has been immaterial under the aforementioned Plans.
9. SUPPLEMENTAL RETIREMENT PLAN
In December 1988 the Board of Directors of the Company approved the adoption
of a supplemental retirement plan (Ceradyne SMART 401(k) Plan) in which
substantially all employees are eligible to participate after completing one
year of employment. Participation in the Plan is voluntary. An employee may
elect to
F-14
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
contribute up to seven percent (7%) of the employee's pretax compensation as a
basic contribution. The Company may contribute any amount which the Board of
Directors annually determines appropriate. For 1995, the Company will
contribute five percent (5%) of consolidated net income. Company contributions
fully vest and are nonforfeitable after the participant has completed five
years of service. The Company made no contributions to the plan during the
years ending December 31, 1992 through 1994 and the six months ended June 30,
1995.
The Company's contribution is in the form of shares of its common stock. The
number of shares to be contributed will be determined by dividing the total
Company match for the Plan year by the higher of the market value per share of
common stock as of the end of that Plan year (December 31), or the audited
book value per share of common stock as of the end of that Plan year. The
member's contributions may be invested, at their discretion, in one or all of
the following: (1) Fixed Income Fund, (2) Bond and Mortgage Fund, (3)
International Stock Fund or (4) Equity Fund. The member can elect to allocate
the accumulated and future contributions to their accounts among these funds
in increments of 10 percent.
The Company has reserved 250,000 shares of its common stock for possible
issuance under the Plan. At June 30, 1995, 210,287 shares were available for
issuance under the Plan.
10. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The results by quarter for 1993 and 1994 and for the six months ended June
30, 1994 and June 30, 1995 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales............... $4,112,000 $4,132,000 $3,812,000 $3,931,000
Net loss................ (488,000) (849,000) (577,000) (683,000)
Net loss per share--
primary................ ($0.08) ($0.14) ($0.09) ($0.11)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales............... $4,500,000 $4,229,000 $4,323,000 $4,944,000
Net loss................ (189,000) (558,000) (493,000) (626,000)
Net loss per share--
primary................ ($0.03) ($0.09) ($0.08) ($0.10)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
MARCH 31, JUNE 30,
1995 1995
---------- ----------
<S> <C> <C>
Net sales................................................ $5,379,000 $5,757,000
Net income............................................... 351,000 453,000
Net income per share--primary............................ $0.06 $0.07
========== ==========
</TABLE>
F-15
<PAGE>
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995
11. JOINT VENTURE AND JOINT DEVELOPMENT AGREEMENT
On March 11, 1986, the Company sold 526,316 shares of its common stock to
Ford Motor Company (Ford) for a gross sales price of $10,000,000. In addition,
Ford and the Company formed a joint venture, Ceradyne Advanced Products, Inc.
(CAPI), in which the Company acquired a 20 percent interest for $200,000. Ford
contributed certain technology in exchange for its 80 percent interest in the
joint venture. The Company granted Ford an option to put Ford's 80 percent
interest in the joint venture to the Company in exchange for 608,020 shares of
the Company's common stock. Ford granted the Company an option to call Ford's
80 percent interest in the joint venture in exchange for 680,983 shares of the
Company's common stock.
On February 13, 1988, the Company exercised its call option and issued
680,983 shares of its common stock to Ford. The value of the shares issued
($2,043,000) was allocated to the technology acquired and is being amortized
over a 20 year period utilizing the purchase method of accounting (see Note
1).
Ford and the Company have also entered into a joint development program to
develop a prototype production facility to produce ceramics with automotive
applications. Under the terms of the joint development agreement, Ford and the
Company share equally in the cost of this project. For the years ended
December 31, 1992, 1993 and 1994, Ford agreed to contribute $495,000, $424,000
and $250,000, respectively, and for the six months ended June 30, 1994 and
1995, Ford agreed to contribute $125,000 and $100,000, respectively. These
amounts have been reflected as a reduction of the expenses incurred or a
reduction in the capitalized value of the fixed assets acquired for this
project in the accompanying consolidated financial statements. Included in
accounts receivable on the accompanying consolidated balance sheets is
approximately $115,000, $-0- and $50,000, respectively, due from Ford related
to this agreement as of December 31, 1993, 1994 and the six months ended June
30, 1995, respectively.
12. SUBSEQUENT EVENTS
In 1995, the Board of Directors adopted and the shareholders approved the
Company's 1995 Employee Stock Purchase Plan, and the amendment to the 1994
Stock Incentive Plan.
1995 Employee Stock Purchase Plan
A total of 100,000 shares of common stock are reserved for issuance under
the 1995 Employee Stock Purchase Plan (the Plan) to eligible employees. Under
the terms of the Plan, employees may purchase shares at the lower of 85
percent of the quoted market value of the shares as determined on the first or
last day of the Plan year.
Amendment to 1994 Stock Incentive Plan
The amendment was to increase the number of shares of Common Stock
authorized for issuance under the Plan from 250,000 to 350,000. All other
provisions of the Plan remain unchanged.
F-16
<PAGE>
Photo depicting Cutting Tool/Lathe
. Ceralloy(R) 147 silicon nitride industrial cutting tool inserts are
effective in milling or turning operations requiring high speed metal
removal. Shown: Typical cutting tool insert/lathe setup.
Photo depicting Glass Tempering Furnace
. Tempering glass furnaces require large rolls and tooling which will support
but not "mark" hot glass. This industrial need is met with Ceradyne's fused
silica ceramic components. Shown: Glass tempering roll being placed in
furnace.
Photo depicting Cathodes for Satellites
. The Company produces microwave cathodes and other parts for microwave power
tubes. These tubes are used in a wide variety of applications including
satellite communications. Shown: Various cathodes.
Photo of Ceramic Engine Parts
. Ceralloy(R) 147 silicon nitride components are candidates for future
substitution of metal parts in diesel and automobile engines. The Company
is in preliminary development of such components as part of its strategic
relationship with the Ford Motor Company. Shown: Diesel and automobile
engine prototype components.
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
The Company............................................................... 5
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Price Range of Common Stock and Dividend Policy........................... 10
Capitalization............................................................ 11
Selected Consolidated Financial Data...................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 17
Management................................................................ 29
Certain Transactions...................................................... 36
Principal Stockholders.................................................... 37
Description of Capital Stock.............................................. 38
Underwriting.............................................................. 40
Legal Matters............................................................. 41
Experts................................................................... 41
Available Information..................................................... 41
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,200,000 SHARES
LOGO(R)
Logo of Ceradyne(R), Inc. appears here
COMMON STOCK
---------------
PROSPECTUS
---------------
VAN KASPER & COMPANY
CRUTTENDEN ROTH
INCORPORATED
, 1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than the
underwriting discount and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered hereunder.
<TABLE>
<CAPTION>
TO BE PAID
BY THE
REGISTRANT
----------
<S> <C>
SEC registration fee........................................... $ 2,588
NASD filing fee................................................ 1,250
Non accountable expense allowance.............................. 93,840
Printing expenses.............................................. 30,000
Legal fees and expenses........................................ 150,000
Accounting fees and expenses................................... 75,000
Blue sky fees and expenses..................................... 15,000
Miscellaneous.................................................. 32,322
--------
Total........................................................ $400,000
========
</TABLE>
--------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation eliminates the liability of directors to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent otherwise required by the Delaware
General Corporation Law.
(b) The Registrant's Bylaws provide that the Registrant will indemnify each
person who was or is made a party to any proceeding by reason of the fact that
such person is or was a director or officer of the Registrant against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith to the fullest extent authorized by the Delaware General
Corporation Law.
(c) The Registrant's Bylaws give the Registrant the ability to enter into
indemnification agreements with any of its directors, officers, employees or
agents. The Registrant has entered into indemnification agreements with each
of its directors and executive officers which provide for the indemnification
of such directors and executive officers against any and all expenses,
judgments, fines, penalties and amounts paid in settlement, to the fullest
extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* --Form of Underwriting Agreement.
3.1 --Certificate of Incorporation of the Registrant. Incorporated herein
by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form 8-B.
3.2 --Bylaws of Registrant. Incorporated herein by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form 8-B.
4.1* --Form of Representatives Warrant Agreement.
5.1* --Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation.
10.1 --Agreement for Purchase and Sale of Stock of the Registrant dated
January 12, 1983. Incorporated herein by reference to Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1 (File No. 2-
90821).
10.2 --Payment Schedule dated January 12, 1983. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Registration Statement
on Form S-1 (File No. 2-90821).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.3 --Ceradyne, Inc. Patent and Know-How License Agreement dated January
12, 1983. Incorporated herein by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (File No. 2-90821).
10.4 --Ceradyne, Inc. 1983 Stock Option Plan as amended and restated.
Incorporated herein by reference to Exhibit 10.13 to the Registrant's
Registration Statement on Form S-1 (File No. 2-99930).
10.5 --Lease between Trico Rents and the Registrant dated March 23, 1984,
covering premises located at 235 Paularino Avenue, Costa Mesa,
California. Incorporated herein by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File No. 2-90821).
10.6 --Lease covering premises located at 3169-A Red Hill Avenue, Costa
Mesa, California dated October 28, 1985. Incorporated herein by
reference to Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1985.
10.7 --Stock Sale Agreement between the Registrant and Ford Motor Company
dated March 11, 1986. Incorporated herein by reference to Exhibit
10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.
10.8 --Agreement between certain shareholders of the Registrant and Ford
Motor Company dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1985.
10.9 --Stock Purchase Agreement between Ceradyne Advanced Products, Inc.,
the Registrant and Ford Motor Company dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.33 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1985.
10.10 --Patent and Technology Transfer Agreement between Ford Motor Company
and Ceradyne Advanced Products, Inc. dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1985.
10.11 --License Agreement between the Registrant and Ceradyne Advanced
Products, Inc. dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985.
10.12 --License Agreement between Ford Motor Company and the Registrant
dated March 11, 1986. Incorporated herein by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.
10.13 --Joint Development Agreement between the Registrant and Ford Motor
Company dated March 11, 1986. Incorporated herein by reference to
Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10.14 --Cathode Purchase Agreement, dated as of October 4, 1986, between the
Registrant and Varian Associates. Incorporated herein by reference to
Exhibit 28.2 to the Company's Current Report on Form 8-K dated
November 17, 1986.
10.15 --Lease dated March 31, 1986 covering premises located at 3163 Red
Hill Avenue, Costa Mesa, California. Incorporated herein by reference
to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.
10.16 --Lease dated August 5, 1986 covering premises located at 225
Paularino Avenue, Costa Mesa, California. Incorporated herein by
reference to Exhibit 10.46 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.
10.17 --Short-form Memorandum of Lease Assignment dated December 15, 1986,
and Lease dated June 23, 1980, covering premises located at 3449
Church Street, Scottdale, Georgia. Incorporated herein by reference
to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.
10.18 --Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option
Plan. Incorporated herein by reference to Exhibit 10.50 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19 --Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.51 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10.20 --Joint Development Agreement dated March 28, 1986 between Unitek
Corporation and the Registrant, and First and Second Amendments
thereto. Incorporated herein by reference to Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10.21 --Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.56 to the
Registrant's Registration Statement on Form 8-B.
10.22 --Loan and Security Agreement dated November 27, 1989 between the
Registrant and Fidelcor Business Credit Corp. Incorporated herein by
reference to Exhibit 28.1 to the Registrant's Current Report on Form
8-K dated December 8, 1989.
10.23 --Promissory Note Agreement dated November 27, 1989 between the
Registrant and Fidelcor Business Credit Corp. Incorporated herein by
reference to Exhibit 28.2 to the Company's Current Report on Form 8-K
dated December 8, 1989.
10.24 --Collateral Assignment of Patents Agreement dated November 27, 1989
between the Registrant and Fidelcor Business Credit Corp.
Incorporated herein by reference to Exhibit 28.3 to the Registrant's
Current Report on Form 8-K dated December 8, 1989.
10.25 --Collateral Assignment of Trademarks Agreement dated November 27,
1989 between the Registrant and Fidelcor Business Credit Corp.
Incorporated herein by reference to Exhibit 28.4 to the Registrant's
Current Report on Form 8-K dated December 8, 1989.
10.26 --Amendment dated September 22, 1993 to Loan and Security Agreement
dated November 27, 1989, and all addenda and supplements thereto
between the Registrant and The CIT Group/Credit Finance, Inc.,
assignee of Fidelcor Business Credit Corporation. Incorporated herein
by reference to Exhibit 10.27 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
10.27 --Amendment dated September 22, 1994 to Loan and Security Agreement
dated November 27, 1989, and all amendments and supplements thereto
between The CIT Group/Credit Finance, Inc. and the Registrant.
Incorporated herein by reference to Exhibit 10.29 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10.28 --Employment Agreement entered into as of July 5, 1994 by and between
Joel P. Moskowitz and the Registrant. Incorporated herein by
reference to Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10.29 --Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by
reference to Exhibit 10.31 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10.30 --Amendment No. 1 to the Ceradyne, Inc., 1994 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-8 (File No. 33-61675).
10.31 --Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated
herein by reference to Exhibit 4.1 to Registrant's Registration
Statement on Form S-8 (File No. 33-61677).
10.32 --Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents
and the Registrant covering premises located at 235 Paularino Avenue,
Costa Mesa, California.
10.33 --Amendment No. 2, dated June 5, 1995, to Lease covering premises
located at 3169-A Red Hill Avenue, Costa Mesa, California.
10.34 --Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986
covering premises located at 3163 Red Hill Avenue, Costa Mesa,
California.
10.35 --Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986
covering premises located at 225 Paularino Avenue, Costa Mesa,
California.
21.1 --Subsidiaries of the Registrant.
23.1* --Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1).
23.2 --Consent of Arthur Andersen LLP.
24.1 --Power of Attorney (see page II-5).
</TABLE>
--------
* To be filed by amendment
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants on Schedule VIII
Schedule VIII--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director September , 1995
____________________________________
Norman A. Gjostein
Director September , 1995
____________________________________
William P. Lanphear IV
/s/ Milton L. Lohr Director September 1, 1995
____________________________________
Milton L. Lohr
/s/ Melvin A. Shader Director September 1, 1995
____________________________________
Melvin A. Shader
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ceradyne, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Ceradyne, Inc. (a Delaware corporation) and
subsidiaries included in this registration statement and have issued our
report thereon dated March 6, 1995. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the index is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
March 6, 1995
S-1
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE
AT TO COATS AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- --------- -------- ---------- -------
FOR THE YEAR ENDED
DECEMBER 31, 1994
------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable.............................. $204 $79 $84 $199
==== === === ====
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1993:
------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable.............................. $164 $82 $42 $204
==== === === ====
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1992:
------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable.............................. $ 99 $84 $19 $164
==== === === ====
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
1.1* --Form of Underwriting Agreement.
3.1 --Certificate of Incorporation of the Registrant.
Incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form 8-B.
3.2 --Bylaws of Registrant. Incorporated herein by reference
to Exhibit 3.2 to the Registrant's Registration
Statement on Form 8-B.
4.1* --Form of Representatives Warrant Agreement.
5.1* --Opinion of Stradling, Yocca, Carlson & Rauth, a
Professional Corporation.
10.1 --Agreement for Purchase and Sale of Stock of the
Registrant dated January 12, 1983. Incorporated herein
by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (File No. 2-90821).
10.2 --Payment Schedule dated January 12, 1983. Incorporated
herein by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 (File No. 2-90821).
10.3 --Ceradyne, Inc. Patent and Know-How License Agreement
dated January 12, 1983. Incorporated herein by
reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1 (File No. 2-90821).
10.4 --Ceradyne, Inc. 1983 Stock Option Plan as amended and
restated. Incorporated herein by reference to Exhibit
10.13 to the Registrant's Registration Statement on
Form S-1 (File No. 2-99930).
10.5 --Lease between Trico Rents and the Registrant dated
March 23, 1984, covering premises located at 235
Paularino Avenue, Costa Mesa, California. Incorporated
herein by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File
No. 2-90821).
10.6 --Lease covering premises located at 3169-A Red Hill
Avenue, Costa Mesa, California dated October 28, 1985.
Incorporated herein by reference to Exhibit 10.30 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10.7 --Stock Sale Agreement between the Registrant and Ford
Motor Company dated March 11, 1986. Incorporated herein
by reference to Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
10.8 --Agreement between certain shareholders of the
Registrant and Ford Motor Company dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.32 to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1985.
10.9 --Stock Purchase Agreement between Ceradyne Advanced
Products, Inc., the Registrant and Ford Motor Company
dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.33 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10.10 --Patent and Technology Transfer Agreement between Ford
Motor Company and Ceradyne Advanced Products, Inc.
dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985.
10.11 --License Agreement between the Registrant and Ceradyne
Advanced Products, Inc. dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.35 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10.12 --License Agreement between Ford Motor Company and the
Registrant dated March 11, 1986. Incorporated herein by
reference to Exhibit 10.36 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1985.
10.13 --Joint Development Agreement between the Registrant and
Ford Motor Company dated March 11, 1986. Incorporated
herein by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
10.14 --Cathode Purchase Agreement, dated as of October 4,
1986, between the Registrant and Varian Associates.
Incorporated herein by reference to Exhibit 28.2 to
the Company's Current Report on Form 8-K dated
November 17, 1986.
10.15 --Lease dated March 31, 1986 covering premises located
at 3163 Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.45 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
10.16 --Lease dated August 5, 1986 covering premises located
at 225 Paularino Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.46 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
10.17 --Short-form Memorandum of Lease Assignment dated
December 15, 1986, and Lease dated June 23, 1980,
covering premises located at 3449 Church Street,
Scottdale, Georgia. Incorporated herein by reference
to Exhibit 10.47 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986.
10.18 --Amendment dated June 3, 1986 to the Ceradyne, Inc.
1983 Stock Option Plan. Incorporated herein by
reference to Exhibit 10.50 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1986.
10.19 --Amendment dated March 16, 1987 to the Ceradyne, Inc.
1983 Stock Option Plan. Incorporated herein by
reference to Exhibit 10.51 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1986.
10.20 --Joint Development Agreement dated March 28, 1986
between Unitek Corporation and the Registrant, and
First and Second Amendments thereto. Incorporated
herein by reference to Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1986.
10.21 --Amendment dated April 30, 1987 to the Ceradyne, Inc.
1983 Stock Option Plan. Incorporated herein by
reference to Exhibit 10.56 to the Registrant's
Registration Statement on Form 8-B.
10.22 --Loan and Security Agreement dated November 27, 1989
between the Registrant and Fidelcor Business Credit
Corp. Incorporated herein by reference to Exhibit 28.1
to the Registrant's Current Report on Form 8-K dated
December 8, 1989.
10.23 --Promissory Note Agreement dated November 27, 1989
between the Registrant and Fidelcor Business Credit
Corp. Incorporated herein by reference to Exhibit 28.2
to the Company's Current Report on Form 8-K dated
December 8, 1989.
10.24 --Collateral Assignment of Patents Agreement dated
November 27, 1989 between the Registrant and Fidelcor
Business Credit Corp. Incorporated herein by reference
to Exhibit 28.3 to the Registrant's Current Report on
Form 8-K dated December 8, 1989.
10.25 --Collateral Assignment of Trademarks Agreement dated
November 27, 1989 between the Registrant and Fidelcor
Business Credit Corp. Incorporated herein by reference
to Exhibit 28.4 to the Registrant's Current Report on
Form 8-K dated December 8, 1989.
10.26 --Amendment dated September 22, 1993 to Loan and
Security Agreement dated November 27, 1989, and all
addenda and supplements thereto between the Registrant
and The CIT Group/Credit Finance, Inc., assignee of
Fidelcor Business Credit Corporation. Incorporated
herein by reference to Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.27 --Amendment dated September 22, 1994 to Loan and
Security Agreement dated November 27, 1989, and all
amendments and supplements thereto between The CIT
Group/Credit Finance, Inc. and the Registrant.
Incorporated herein by reference to Exhibit 10.29 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
10.28 --Employment Agreement entered into as of July 5, 1994
by and between Joel P. Moskowitz and the Registrant.
Incorporated herein by reference to Exhibit 10.30 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<C> <S> <C>
10.29 --Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated
herein by reference to Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
10.30 --Amendment No. 1 to the Ceradyne, Inc., 1994 Stock
Incentive Plan. Incorporated herein by reference to
Exhibit 4.2 to Registrant's Registration Statement on
Form S-8 (File No. 33-61675).
10.31 --Ceradyne, Inc. 1995 Employee Stock Purchase Plan.
Incorporated herein by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-8 (File
No. 33-61677).
10.32 --Amendment No. 2, dated June 5, 1995, to Lease between
Trico Rents and the Registrant covering premises
located at 235 Paularino Avenue, Costa Mesa,
California.
10.33 --Amendment No. 2, dated June 5, 1995, to Lease covering
premises located at 3169-A Red Hill Avenue, Costa Mesa,
California.
10.34 --Amendment No. 2, dated June 5, 1995, to Lease dated
March 31, 1986 covering premises located at 3163 Red
Hill Avenue, Costa Mesa, California.
10.35 --Amendment No. 2, dated June 5, 1995, to Lease dated
August 5, 1986 covering premises located at 225
Paularino Avenue, Costa Mesa, California.
21.1 --Subsidiaries of the Registrant.
23.1* --Consent of Stradling, Yocca, Carlson & Rauth (see
Exhibit 5.1).
23.2 --Consent of Arthur Andersen LLP.
24.1 --Power of Attorney (see page II-5).
</TABLE>
--------
* To be filed by amendment
<PAGE>
EXHIBIT 10.32
Date: June 5, 1995 Extension No. 2
--------------------- ------------------
STANDARD
LEASE RENEWAL FORM
LEASE to be renewed is that certain lease described as follows:
Lessor: TRICO RENTS, a California General Partnership
------------------------------------------------------------
Lessee: CERADYNE, INC., a Delaware Corporation
------------------------------------------------------------
Property Leased: 235 Paularino Avenue
------------------------------------------------------------
Costa Mesa, CA 92626
------------------------------------------------------------
Lease Dated: March 23, 1984
------------------------------------------------------------
The term of the referenced lease is hereby extended from:
November 1, 1995 through October 31, 2000
----------------------------------- ------------------------------------
With the following changes only:
A. Security Deposit decreased from: $7,998.00 to $6,449.00
-------------------- --------------------
B. Rent: Throughout the term of this Lease Extension the following rental
schedule shall prevail:
Rental Period Monthly Amount
------------- --------------
November 1, 1995 - October 31, 1996 $ 5,429.00
November 1, 1996 - October 31, 1997 5,646.00
November 1, 1997 - October 31, 1998 5,872.00
November 1, 1998 - October 31, 1999 6,107.00
November 1, 1999 - October 31, 2000 6,351.00
The above rental figures do not include the estimated monthly Common Area
Maintenance (CAM) charges which are currently $98.00, per month.
Note: A credit of $1,549.00 shall be applied to the November, 1995 rent to
offset the reduction in the security deposit requirement ($7,998.00 -
$6,449.00 = $1,549.00).
C. Option to Renew. Lessor hereby grants to the Lessee an Option to Renew this
Lease for an additional five (5) years under the following terms and
conditions:
A. Lessee must notify Lessor, in writing, on or before May 1, 2000 of
Lessee's intent to exercise its Option to Renew.
B. The renewal period shall commence, if the Option is exercised, on
November 1, 2000 and shall terminate on October 31, 2005.
C. The terms and conditions of this option period shall be the same as the
terms and conditions of the original Lease, including extensions, except
that the following monthly rental schedule shall prevail throughout this
option period:
Rental Period Monthly Amount
------------- --------------
November 1, 2000 - October 31, 2001 $ 6,605.00
November 1, 2001 - October 31, 2002 6,869.00
November 1, 2002 - October 31, 2003 7,144.00
November 1, 2003 - October 31, 2004 7,430.00
November 1, 2004 - October 31, 2005 7,727.00
The above rental figures do not include the estimated monthly CAM
charges.
All other terms and conditions of the Lease dated March 23, 1984
--------------------------
shall remain the same.
APPROVED BY: LESSOR APPROVED BY: LESSEE
TRICO RENTS, a CERADYNE, INC., a Delaware
California General Partnership Corporation
/s/ Clarence J. Turner /s/ James F. Gardner
------------------------------ --------------------------------
Clarence J. Turner James F. Gardner
/s/ David P. Reed
--------------------------------
David P. Reed
DATED: 6/8/95 DATED: 6/8/95
------------------------ --------------------------------
<PAGE>
EXHIBIT 10.33
Date: June 5, 1995 Extension No. 2
--------------------- ------------------
STANDARD
LEASE RENEWAL FORM
LEASE to be renewed is that certain lease described as follows:
Lessor: TRICO RENTS, a California General Partnership
------------------------------------------------------------
Lessee: CERADYNE, INC., a Delaware Corporation
------------------------------------------------------------
Property Leased: 3169-A Redhill Avenue
------------------------------------------------------------
Costa Mesa, CA 92626
------------------------------------------------------------
Lease Dated: October 28, 1985
------------------------------------------------------------
The term of the referenced lease is hereby extended from:
November 1, 1995 through October 31, 2000
----------------------------------- ------------------------------------
With the following changes only:
A. Security Deposit decreased from: $15,519.00 to $10,735.00
-------------------- --------------------
B. Rent: Throughout the term of this Lease Extension the following rental
schedule shall prevail:
Rental Period Monthly Amount
------------- --------------
November 1, 1995 - October 31, 1996 $ 8,981.00
November 1, 1996 - October 31, 1997 9,340.00
November 1, 1997 - October 31, 1998 9,713.00
November 1, 1998 - October 31, 1999 10,102.00
November 1, 1999 - October 31, 2000 10,506.00
The above rental figures do not include the estimated monthly Common Area
Maintenance (CAM) charges which are currently $229.00, per month.
Note: A credit of $4,784.00 shall be applied to the November, 1995 rent to
offset the reduction in the security deposit requirement ($15,519.00 -
$10,735.00 = $4,784.00).
C. Option to Renew. Lessor hereby grants to the Lessee an Option to Renew this
Lease for an additional five (5) years under the following terms and
conditions:
A. Lessee must notify Lessor, in writing, on or before May 1, 2000 of
Lessee's intent to exercise its Option to Renew.
B. The renewal period shall commence, if the Option is exercised, on
November 1, 2000 and shall terminate on October 31, 2005.
C. The terms and conditions of this option period shall be the same as the
terms and conditions of the original Lease, including extensions, except
that the following monthly rental schedule shall prevail throughout this
option period:
Rental Period Monthly Amount
------------- --------------
November 1, 2000 - October 31, 2001 $10,926.00
November 1, 2001 - October 31, 2002 11,363.00
November 1, 2002 - October 31, 2003 11,818.00
November 1, 2003 - October 31, 2004 12,290.00
November 1, 2004 - October 31, 2005 12,782.00
The above rental figures do not include the estimated monthly CAM
charges.
All other terms and conditions of the Lease dated October 28, 1985
--------------------------
shall remain the same.
APPROVED BY: LESSOR APPROVED BY: LESSEE
TRICO RENTS, a CERADYNE, INC., a Delaware
California General Partnership Corporation
/s/ Clarence J. Turner /s/ James F. Gardner
------------------------------ --------------------------------
Clarence J. Turner James F. Gardner
/s/ David P. Reed
--------------------------------
David P. Reed
DATED: 6/8/95 DATED: 6/8/95
------------------------ --------------------------------
<PAGE>
EXHIBIT 10.34
Date: June 8, 1995 Extension No. 2
--------------------- ------------------
STANDARD
LEASE RENEWAL FORM
LEASE to be renewed is that certain lease described as follows:
Lessor: TRICO RENTS, a California General Partnership
------------------------------------------------------------
Lessee: CERADYNE, INC., a Delaware Corporation
------------------------------------------------------------
Property Leased: 3163 Redhill Avenue
------------------------------------------------------------
Costa Mesa, CA 92626
------------------------------------------------------------
Lease Dated: March 31, 1986
------------------------------------------------------------
The term of the referenced lease is hereby extended from:
November 1, 1995 through October 31, 2000
----------------------------------- ------------------------------------
With the following changes only:
A. Security Deposit decreased from: $13,120.00 to $9,350.00
-------------------- --------------------
B. Rent: Throughout the term of this Lease Extension the following rental
schedule shall prevail:
Rental Period Monthly Amount
------------- --------------
November 1, 1995 - October 31, 1996 $ 7,833.00
November 1, 1996 - October 31, 1997 8,146.00
November 1, 1997 - October 31, 1998 8,472.00
November 1, 1998 - October 31, 1999 8,811.00
November 1, 1999 - October 31, 2000 9,163.00
The above rental figures do not include the estimated monthly Common Area
Maintenance (CAM) charges which are currently $187.00, per month.
Note: A credit of $3,770.00 shall be applied to the November, 1995 rent to
offset the reduction in the security deposit requirement ($13,120.00 -
$9,350.00 = $3,770.00).
C. Option to Renew. Lessor hereby grants to the Lessee an Option to Renew this
Lease for an additional five (5) years under the following terms and
conditions:
A. Lessee must notify Lessor, in writing, on or before May 1, 2000 of
Lessee's intent to exercise its Option to Renew.
B. The renewal period shall commence, if the Option is exercised, on
November 1, 2000 and shall terminate on October 31, 2005.
C. The terms and conditions of this option period shall be the same as the
terms and conditions of the original Lease, including extensions, except
that the following monthly rental schedule shall prevail throughout this
option period:
Rental Period Monthly Amount
------------- --------------
November 1, 2000 - October 31, 2001 $ 9,530.00
November 1, 2001 - October 31, 2002 9,911.00
November 1, 2002 - October 31, 2003 10,307.00
November 1, 2003 - October 31, 2004 10,719.00
November 1, 2004 - October 31, 2005 11,148.00
The above rental figures do not include the estimated monthly CAM
charges.
All other terms and conditions of the Lease dated March 31, 1986
--------------------------
shall remain the same.
APPROVED BY: LESSOR APPROVED BY: LESSEE
TRICO RENTS, a CERADYNE, INC., a Delaware
California General Partnership Corporation
/s/ Clarence J. Turner /s/ James F. Gardner
------------------------------ --------------------------------
Clarence J. Turner James F. Gardner
/s/ David P. Reed
--------------------------------
David P. Reed
DATED: 6/8/95 DATED: 6/8/95
------------------------ --------------------------------
<PAGE>
EXHIBIT 10.35
Date: June 5, 1995 Extension No. 2
--------------------- ------------------
STANDARD
LEASE RENEWAL FORM
LEASE to be renewed is that certain lease described as follows:
Lessor: TRICO RENTS, a California General Partnership
------------------------------------------------------------
Lessee: CERADYNE, INC., a Delaware Corporation
------------------------------------------------------------
Property Leased: 225 Paularino Avenue
------------------------------------------------------------
Costa Mesa, CA 92626
------------------------------------------------------------
Lease Dated: August 5, 1986
------------------------------------------------------------
The term of the referenced lease is hereby extended from:
November 1, 1995 through October 31, 2000
----------------------------------- ------------------------------------
With the following changes only:
A. Security Deposit decreased from: $10,226.00 to $7,203.00
-------------------- --------------------
B. Rent: Throughout the term of this Lease Extension the following rental
schedule shall prevail:
Rental Period Monthly Amount
------------- --------------
November 1, 1995 - October 31, 1996 $ 6,074.00
November 1, 1996 - October 31, 1997 6,317.00
November 1, 1997 - October 31, 1998 6,569.00
November 1, 1998 - October 31, 1999 6,832.00
November 1, 1999 - October 31, 2000 7,105.00
The above rental figures do not include the estimated monthly Common Area
Maintenance (CAM) charges which are currently $98.00, per month.
Note: A credit of $3,023.00 shall be applied to the November, 1995 rent to
offset the reduction in the security deposit requirement ($10,226.00 -
$7,203.00 = $3,023.00).
C. Option to Renew. Lessor hereby grants to the Lessee an Option to Renew this
Lease for an additional five (5) years under the following terms and
conditions:
A. Lessee must notify Lessor, in writing, on or before May 1, 2000 of
Lessee's intent to exercise its Option to Renew.
B. The renewal period shall commence, if the Option is exercised, on
November 1, 2000 and shall terminate on October 31, 2005.
C. The terms and conditions of this option period shall be the same as the
terms and conditions of the original Lease, including extensions, except
that the following monthly rental schedule shall prevail throughout this
option period:
Rental Period Monthly Amount
------------- --------------
November 1, 2000 - October 31, 2001 $ 7,389.00
November 1, 2001 - October 31, 2002 7,685.00
November 1, 2002 - October 31, 2003 7,992.00
November 1, 2003 - October 31, 2004 8,312.00
November 1, 2004 - October 31, 2005 8,645.00
The above rental figures do not include the estimated monthly CAM
charges.
All other terms and conditions of the Lease dated August 5, 1986
--------------------------
shall remain the same.
APPROVED BY: LESSOR APPROVED BY: LESSEE
TRICO RENTS, a CERADYNE, INC., a Delaware
California General Partnership Corporation
/s/ Clarence J. Turner /s/ James F. Gardner
------------------------------ --------------------------------
Clarence J. Turner James F. Gardner
/s/ David P. Reed
--------------------------------
David P. Reed
DATED: 6/8/95 DATED: 6/8/95
------------------------ --------------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Electron Sources, Inc.
Ceradyne Export, Inc.
Ceradyne Advanced Products, Inc.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated March 6, 1995 included in or made a part of this registration on
Form S-1.
ARTHUR ANDERSEN LLP
Orange County, California
August 31, 1995
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Costa Mesa, State of
California, on the 1st day of September, 1995.
Ceradyne, Inc.
/s/ Joel P. Moskowitz
By: _________________________________
Joel P. Moskowitz
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
We, the undersigned directors and officers of Ceradyne, Inc., do hereby
constitute and appoint Joel P. Moskowitz and James F. Gardner, or either of
them, our true and lawful attorneys and agents, to do any and all acts and
things in our name and behalf in our capacities as directors and officers and
to execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the
Securities Act of 1933, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission, in connection with
this Registration Statement, including specifically, but without limitation,
power and authority to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any related registration
statement that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, as amended; and we do hereby ratify and confirm
all that the said attorneys and agents, or either of them, shall do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joel P. Moskowitz Chairman, Chief Executive September 1, 1995
____________________________________ Officer, President and
Joel P. Moskowitz Director (Principal
executive officer)
/s/ James F. Gardner Vice President, Finance and September 1, 1995
____________________________________ Chief Financial Officer
James F. Gardner (Principal financial and
accounting officer)
/s/ Leonard M. Allenstein Director September 1, 1995
____________________________________
Leonard M. Allenstein
/s/ Richard A. Alliegro Director September 1, 1995
____________________________________
Richard A. Alliegro
Director September , 1995
____________________________________
Frank Edelstein
</TABLE>
II-5
