<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 27, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-16088
CERAMICS PROCESS SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-2832509
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 South Worcester Street, P.O. Box 338,
Chartley, Massachusetts 02712
(Address of Principal Executive Offices) (Zip Code)
Registrant`s Telephone Number, including Area Code:
(508) 222-0614
Former Name, Former Address and Former Fiscal Year if Changed
since Last Report:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period than the registrant was required
to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer`s classes of common stock, as of the latest practicable
date. Number of shares of common stock outstanding as of June 27, 1998:
12,284,303.
<PAGE> 2
CERAMICS PROCESS SYSTEMS CORPORATION
Form 10-Q
For The Fiscal Quarter Ended June 27, 1998
Index
PART I: FINANCIAL INFORMATION Page
Item 1: Consolidated Financial Statements 3
Consolidated Balance Sheets as of
June 27, 1998 and December 27, 1997 3
Consolidated Statements of Operations
for the fiscal quarters and six month
periods ended June 27, 1998 and
June 28, 1997 5
Consolidated Statements of Cash Flows
for the six month periods ended
June 27, 1998 and June 28, 1997 6
Notes to Consolidated Financial
Statements 7
Item 2: Management`s Discussion and Analysis
of Financial Condition and Results of
Operations 10
PART II: OTHER INFORMATION
Items 1-6 12
Signatures 12
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Balance Sheets
(continued on next page)
June 27, December 27,
1998 1997
ASSETS ---------- ----------
Current assets:
Cash and cash equivalents $1,073,532 $ 561,166
Trade receivables 236,587 626,121
Inventories 541,479 123,325
Prepaid expenses 13,067 15,528
---------- ----------
Total current assets 1,864,665 1,326,140
---------- ----------
Property and equipment:
Production equipment 1,713,191 1,470,253
Furniture and office equipment 80,001 70,404
---------- ----------
1,793,192 1,540,657
Less accumulated depreciation (1,054,941) (967,161)
---------- ----------
Net property and equipment 738,251 573,496
---------- ----------
Deposits 8,572 5,072
---------- ----------
Total assets $2,611,488 $1,904,708
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE> 4
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS` EQUITY (DEFICIT)
June 27, December 27,
1998 1997
--------- -----------
Current liabilities:
Accounts payable $ 104,828 $ 154,657
Accrued expenses 272,869 677,109
Deferred revenue 155,003 163,430
Notes payable - 206,962
Convertible notes payable:
Related parties - 260,000
Other - 1,610,000
Current portion of obligations
under capital leases 44,518 42,205
------------ ------------
Total current liabilities 577,218 3,114,363
Obligations under capital
leases less current portion 149,262 172,114
Notes payable less current portion - 137,868
------------ ------------
Total liabilities 726,480 3,424,345
------------ ------------
Stockholders` Equity (Deficit)
Common stock, $0.01 par value.
Authorized 15,000,000 shares;
issued 12,307,186 shares at June
27, 1998 and 7,824,582 at
December 27, 1997 123,072 78,246
Additional paid-in capital 32,655,329 30,464,833
Accumulated deficit (30,832,558) (32,001,881)
------------ ------------
1,945,843 (1,458,802)
Less treasury stock, at cost,
22,883 common shares at June
27,1998 and December 27, 1997 (60,835) (60,835)
------------ ------------
Total stockholders` equity
(deficit) 1,885,008 (1,519,637)
------------ ------------
Total liabilities and
stockholders` equity (deficit) $ 2,611,488 $ 1,904,708
============ ============
See accompanying notes to consolidated financial statements.
<PAGE> 5
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Statements of Operations
Fiscal Six month
Quarters Ended Periods Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
Revenue: ---------- ---------- ---------- ----------
Product sales $1,085,936 $ 829,477 $2,419,149 $1,767,085
License revenue 740,750 155,333 740,750 155,333
---------- ---------- ---------- ----------
Total revenue 1,826,686 984,810 3,159,899 1,922,418
========== ========== ========== ==========
Operating expenses:
Cost of product sales 733,261 466,435 1,461,068 1,100,699
Selling, general, and
administrative 169,488 136,649 327,445 266,582
---------- ---------- ---------- ----------
Total operating expenses 902,749 603,084 1,788,513 1,367,281
---------- ---------- ---------- ----------
Operating income 923,937 381,726 1,371,386 555,137
Other income (expense), net (49,677) (58,829) (104,310) (123,797)
Income before taxes 874,260 322,897 1,267,076 431,340
---------- ---------- ---------- ----------
Income taxes 89,897 - 97,753 -
Net income $ 784,363 $ 322,897 $1,169,323 $ 431,340
========== ========== ========== ==========
Net income per
basic common share $ 0.08 $ 0.04 $ 0.13 $ 0.06
---------- ---------- ---------- ----------
Weighted average number of
basic common shares
outstanding 9,496,117 7,782,582 8,721,231 7,781,844
========== ========== ========= =========
Net income per
diluted common share $ 0.07 $ 0.03 $ 0.10 $ 0.04
---------- ---------- ----------- ---------
Weighted average number of
diluted common shares
outstanding 12,310,768 12,550,713 12,503,427 12,442,785
========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
<PAGE> 6
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
Six month period ended
June 27, June 28,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $1,169,323 $ 431,340
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation 69,480 52,800
Amortization 18,300 12,695
Loss (gain) on disposal of equipment - (1,550)
Changes in assets and liabilities:
Trade receivables 389,534 (87,663)
Inventories (418,154) (11,212)
Prepaid expenses 2,461 (6,586)
Accounts payable (49,829) 37,654
Accrued expenses (42,282) (2,003)
Deferred revenue (8,427) (138,320)
--------- ----------
Net cash provided by
operating activities 1,130,406 287,155
--------- ----------
Cash flows from investing activities:
Additions to property and equipment (252,533) (75,447)
Proceeds from sales of
property and equipment - 1,550
Deposits (3,500) 100
--------- ----------
Net cash used in
investing activities (256,033) (73,797)
--------- ---------
Cash flows from financing activities:
Principal payments of capital lease
obligations (20,541) ( 9,893)
Proceeds from issuance of common stock 3,364 327
Principal payments of notes payable (344,830) -
--------- ---------
Net cash used in
financing activities (362,007) ( 9,566)
--------- ---------
Net increase in cash and
cash equivalents 512,366 203,792
Cash and cash equivalents at
beginning of period 561,166 113,331
--------- ----------
Cash and cash equivalents at
end of period $1,073,532 $ 317,123
========= ==========
See accompanying notes to consolidated financial statements.
<PAGE> 7
CERAMICS PROCESS SYSTEMS CORPORATION
Notes to Consolidated Financial Statement
(Unaudited)
(1) Nature of Business
- ------------------
Ceramics Process Systems Corporation (the `Company` or `CPS`) serves
the wireless communications, satellite communications, motor controller and
other microelectronic markets by developing, manufacturing, and marketing
advanced metal-matrix composite and ceramic components to house, interconnect
and thermally manage microelectronic devices. The Company`s products are
typically in the form of housings, packages, lids, substrates, thermal
planes, or heat sinks, and are used in applications where thermal management
and or weight are important considerations.
The Company`s products are manufactured by proprietary processes the
Company has developed including the QuicksetTM Injection Molding Process
(`Quickset Process`) and the QuickCastTM Pressure Infiltration Process
(`QuickCast Process`).
The Company was incorporated on June 19, 1984.
(2) Interim Consolidated Financial Statements
-----------------------------------------
As permitted by the rules of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, these notes are condensed and
do not contain all disclosures required by generally accepted accounting
principles.
The accompanying financial statements for the fiscal quarters and six
month periods ended June 27, 1998 and June 28, 1997 are unaudited. In the
opinion of management, the unaudited consolidated financial statements of CPS
reflect all adjustments necessary to present fairly the financial position
and results of operations for such periods.
The consolidated financial statements include the accounts of CPS and
its wholly-owned subsidiary, CPS Superconductor Corporation. All significant
intercompany balances and transactions have been eliminated. The results of
operations for interim periods are not necessarily indicative of the results
to be expected for the full year.
(3) Net Income/Loss Per Common and Common Equivalent Share
- ------------------------------------------------------
Basic EPS excludes the effect of any dilutive options, warrants or
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed by
dividing income available to common stockholders by the sum of the weighted
average number of common shares and common share equivalents computed using
the average market price for the period under the treasury stock method.
Fiscal Six month
Quarters Ended Periods ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
----------- ---------- ---------- ----------
Basic EPS Computation:
Numerator:
Net income $784,363 $322,897 $1,169,323 $431,340
Denominator:
Weighted average
common shares
outstanding 9,496,117 7,782,582 8,721,231 7,781,844
Basic EPS $0.08 $0.04 $0.13 $0.06
Diluted EPS Computation:
Numerator:
Net income $784,363 $322,897 $1,169,323 $431,340
Interest on
convertible debt 42,027 46,750 87,290 93,500
--------- -------- --------- ---------
Total net income $826,390 $369,647 $1,256,613 $524,840
Denominator:
Weighted average
common shares
outstanding 9,496,117 7,782,582 8,721,231 7,781,844
Stock options 216,475 174,925 219,001 161,235
Convertible debt 2,598,176 4,593,206 3,563,195 4,499,706
---------- --------- ---------- ----------
Total Shares 12,310,768 12,550,713 12,503,427 12,442,785
Diluted EPS $0.07 $0.03 $0.10 $0.04
As of June 27, 1998 and June 28, 1997, the Company had 121,000 and 92,500
securities that were antidilutive, respectively.
(4) Newly Issued Accounting Changes
- -------------------------------
The Company has adopted Financial Accounting Standards Board Statement
No. 130 (`FAS 130`) `Reporting Comprehensive Income` effective for fiscal
years beginning after December 15, 1997. FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. FAS 130 requires that all
components of comprehensive income shall be reported in the financial
statements in the period in which they are recognized. Furthermore, a total
amount for comprehensive income shall be displayed in the financial statement
where the components of other comprehensive income are reported. The Company
has no items of comprehensive income therefore net income is equal to
comprehensive income.
Financial Accounting Standards Board Statement No. 131 (`FAS 131`)
`Disclosure about Segment of an Enterprise and Related Information` is
effective for financial statements issued for periods beginning after
December 15, 1997. FAS 131 requires disclosures about segments of an
enterprise and related information regarding the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates.
The Company does not believe that the implementation of FAS 131 will
have a material impact on its financial statements.
(5) Inventory
---------
Inventories consist of the following:
June 27, December 27,
1998 1997
--------- ----------
Raw materials $ 155,435 $ 11,097
Work in process 386,044 112,228
Finished goods - -
--------- ----------
$ 541,479 $ 123,325
========= ==========
(6) Accrued Expenses
----------------
Accrued expenses consist of the following:
June 27, December 27,
1998 1997
--------- ----------
Accrued legal and
accounting $ 18,000 $ 33,190
Accrued interest - 526,294
Accrued payroll 155,148 108,242
Accrued rent and utilities 9,676 11,077
Accrued other 90,045 ( 1,694)
--------- ----------
$ 272,869 $ 677,109
========= ==========
(7) Supplemental Cash Flow Information
- ----------------------------------
In the second fiscal quarter of 1998, the Company paid interest in cash
on notes payable in the amount of $70,951 and interest on leases for
production equipment in the amount of $5,322. In the second fiscal quarter
of 1998, the Company issued 2,840,000 shares of common stock upon the
conversion of the principal of convertible notes payable in the amount of
$1,420,000 and 723,916 shares of common stock upon the conversion of accrued
interest on convertible notes payable in the amount of $361,958.
ITEM 2 MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve a number of risks and uncertainties. There are a number of
factors that could cause the Company`s actual results to differ materially
from those forecasted or projected in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these forward-
looking statements which may be made to reflect events or changed
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Results of Operations
- ---------------------
Net income increased to $784 thousand from $323 thousand, a 143%
increase, in the second fiscal quarter of 1998 from the second fiscal quarter
of 1997. Revenues increased to $1,827 thousand from $985 thousand, a 85%
increase over the same time period. Revenue from product shipments in the
second fiscal quarter of 1998 was $1,086 thousand, a 31% increase over
revenue from product shipments in the second fiscal quarter of 1997 of $829
thousand.
Revenue from licensing agreements was $741 thousand in the second
fiscal quarter of 1998 compared to $155 thousand in the second fiscal quarter
of 1997, a 378% increase. The increase in licensing revenue was a result of
receipt of licensing fees from a licensing agreement the Company entered into
during the second fiscal quarter of 1998 with Hitachi Metals, Ltd. of Tokyo,
Japan. The key terms of the licensing agreement are: 1) the Company licensed
Hitachi Metals to use the Company`s proprietary technology to produce metal
matrix composites in Japan, and to sell metal matrix composites world-wide
except in the United States of America, 2) the Company and Hitachi Metals
will share with each other future improvements they develop in the Company`s
proprietary technology and in related manufacturing technology, and 3) the
Company will receive royalties based on the sales of metal matrix products by
Hitachi Metals. Management believes this agreement will benefit the Company
by accelerating the further development of the Company`s proprietary
technology and related manufacturing technology for metal matrix composites.
Although the Company believes it will receive royalty payments from
certain existing licensees in the future, the Company`s primary focus is in
manufacturing and selling metal matrix composites; selling of additional
licenses is not a focus of management.
Total operating expenses in the second fiscal quarter of 1998 were $903
thousand, a 50% increase over operating expenses in the second fiscal quarter
of 1997 of $603 thousand. Cost of sales increased 57% while selling, general
and administrative expenses increased 24% over the same period. Unit
shipments increased 56% over the same period, reflecting an ongoing change in
product mix from small prototyping runs to recurring production.
Gross margins on product sales in the second fiscal quarter of 1998
averaged 32% compared to 44% in the second fiscal quarter of 1997. Gross
margins for the second fiscal quarter of 1998 were negatively affected by the
decision in late May of a major customer to reduce inventories. This
decision resulted in reduced shipments of the Company`s products to that
customer in June, which reduced gross margins for the quarter as overhead
expenses were spread over a smaller production base. Management believes
this customer`s decision to reduce inventory will continue to negatively
affect shipments by the Company to this customer throughout at least the
first half of the third quarter. During the second fiscal quarter of 1998 the
Company hired personnel in both manufacturing and sales functions; management
believes the additional personnel are needed to continue growth.
Income taxes in the second fiscal quarter of 1998 were $90 thousand
compared to $0 in the second fiscal quarter of 1997. The increase is
primarily attributable to Japanese withholding taxes paid in connection with
the licensing agreement described above.
The cumulative effect of these revenues and costs resulted in net
income of $784 thousand, or $0.08 per basic common share, in the second
fiscal quarter of 1998, versus net income of $323 thousand, or $0.04 per
basic common share, in the second fiscal quarter of 1997.
Liquidity
- ---------
The Company`s liquidity in the second fiscal quarter of 1998 was
primarily affected by three developments: 1) elimination of debt as note
holders converted the Company`s subordinated convertible notes into common
stock and the Company retired all nonconvertible debt by making payment of
principal and accrued interest in full, 2) receipt of certain licensing
revenues, and 3) increased shipments of the Company`s metal matrix
composites. The Company`s cash balance at June 27, 1998 was $1,074 thousand
compared to $561 thousand at December 27, 1997. The Company`s current ratio
(current assets divided by current liabilities) was 3.23 at June 27, 1998,
compared to 0.43 at December 27, 1997.
In 1994 the Company issued subordinated notes convertible into the
Company`s common stock at the note holders` option at a conversion rate of
$0.50 of note principal and accrued interest per common share. A total of
4,463,916 shares of common stock were issued to noteholders upon conversion
of the notes in the first two fiscal quarters of 1998. The total number of
shares of common stock outstanding after conversion of all convertible debt
is 12,284,303, excluding 22,883 treasury shares. In addition, the Company
retired $620,100 of debt principal and accrued interest during the first two
fiscal quarters of 1998 using funds generated from operations. Although to
the Company`s knowledge the former noteholders do not have immediate plans to
sell stock issued upon conversion, pursuant to terms of the original note
purchase agreement the Company will shortly file a registration statement
with the Securities and Exchange Commission to register these shares.
Inventories increased to $541 thousand at June 27, 1998 from $123
thousand at December 27, 1997. Raw material inventory increased to $155
thousand from $11 thousand, and work in process inventory increased to $386
thousand from $112 thousand over the same period. Management believes the
increase in raw material inventory is appropriate to support the increased
production volume. Work in process inventory increased primarily as a result
of a major customer`s decision to reduce their inventory.
Accounts Receivable decreased to $237 thousand at June 27, 1998 from
$626 thousand at December 27, 1997. This change resulted from fluctuations
in timing of specific customer requirements, and, in the opinion of
management, does not reflect any inherent seasonality in the business.
The Company financed its working capital requirements during the second
fiscal quarter of 1998 with funds generated by operations. The Company
expects it will continue to be able to fund its working capital requirements
for the remainder of 1998 through operations.
PART II OTHER INFORMATION
Item 1 through Item 5: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ceramics Process Systems Corporation
(Registrant)
Date: August 7, 1998 /s/Grant C. Bennett
Grant C. Bennett
President and Treasurer
(Principal Executive
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
consolidated financial statements of Ceramics Process Systems Corporation
and is qualified in its entirety by reference to such Form 10-Q for period
ending June 27, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> JUN-27-1998
<CASH> 1,073,532
<SECURITIES> 0
<RECEIVABLES> 236,587
<ALLOWANCES> 0
<INVENTORY> 541,479
<CURRENT-ASSETS> 1,864,665
<PP&E> 738,251
<DEPRECIATION> 1,054,941
<TOTAL-ASSETS> 2,611,488
<CURRENT-LIABILITIES> 577,218
<BONDS> 0
0
0
<COMMON> 12,284,303
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,611,488
<SALES> 1,085,936
<TOTAL-REVENUES> 1,826,686
<CGS> 733,261
<TOTAL-COSTS> 902,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,273
<INCOME-PRETAX> 874,260
<INCOME-TAX> 89,897
<INCOME-CONTINUING> 784,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 784,363
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.07
</TABLE>
