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 September 26, 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
Facsimile Number: 508-222-0220, E-Mail Address: [email protected].
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
October 21, 1998: 12,307,186
<PAGE> 2
CERAMICS PROCESS SYSTEMS CORPORATION
Form 10-Q
For The Fiscal Quarter Ended September 26, 1998
Index
PART I: FINANCIAL INFORMATION Page
Item 1: Consolidated Financial Statements 3-9
Consolidated Balance Sheets as of
September 26, 1998 and December 27, 1997 3-4
Consolidated Statements of Operations
for the fiscal quarters and nine-month
periods ended September 26, 1998 and
September 27, 1997 5
Consolidated Statements of Cash Flows
for the nine-month periods ended September
26, 1998 and September 27, 1997 6
Notes to Consolidated Financial
Statements 7-9
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-11
PART II: OTHER INFORMATION
Items 1-6 13
Signatures 14
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Balance Sheets
September 26, December 27,
1998 1997
------------ -----------
ASSETS
Current Assets:
Cash $1,000,196 $ 561,166
Accounts receivable 789,205 626,121
Inventories 307,553 123,325
Prepaid expenses 7,884 15,528
Prepaid assets 9,772 5,072
---------- ----------
Total current assets $2,114,610 1,331,212
---------- ----------
Property and equipment:
Production equipment 1,540,339 1,470,253
Furniture and office equipment 124,582 70,404
---------- ----------
1,664,921 1,540,657
Less accumulated depreciation
and amortization (952,384) (967,161)
---------- ----------
Net property and equipment $ 712,537 573,496
---------- ----------
Total Assets $2,827,147 $1,904,708
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE> 4
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Balance Sheets (continued)
September 26, December 27,
1998 1997
------------ -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 107,055 $ 154,657
Accrued expenses 138,638 677,109
Deferred revenue 147,347 163,430
Notes payable - 206,962
Current portion of convertible
notes payable:
Related parties - 260,000
Other - 1,610,000
Current portion of obligations
under capital leases 45,722 42,205
------------ ------------
Total current liabilities 438,762 3,114,363
Notes payable, less current portion - 137,868
Obligations under capital
leases less current portion 137,369 172,114
------------ ------------
Total Liabilities 576,131 3,424,345
------------ ------------
Stockholders' Equity (Deficit)
Common stock, $0.01 par value.
Authorized 15,000,000 shares;
issued 12,307,186 shares at September
26, 1998 and 7,824,528 shares
at December 27, 1997 123,072 78,246
Additional paid-in capital 32,655,329 30,464,833
Accumulated deficit (30,466,550) (32,001,881)
------------ ------------
2,311,851 (1,458,802)
Less treasury stock, at cost,
22,883 common shares at September
27, 1997 and December 28, 1996 (60,835) (60,835)
------------ ------------
Total stockholders' equity
(deficit) 2,251,016 (1,519,637)
------------ ------------
Total Liabilities and
Stockholders' Equity
(Deficit) $ 2,827,147 $ 1,904,708
============ ============
See accompanying notes to consolidated financial statements.
<PAGE> 5
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Statements of Operations
Fiscal Quarters Ended Nine-Month Periods Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
Revenue: ---------- ----------- ---------- ---------
Product sales $ 1,260,767 $ 1,084,960 $ 3,679,916 $ 2,852,046
License agreements - 130,333 740,750 285,667
---------- ----------- ---------- ---------
Total revenue 1,260,767 1,215,293 4,420,666 3,137,713
========== =========== ========== ==========
Operating expenses:
Cost of sales 798,503 607,137 2,259,571 1,707,839
Selling, general, and
administrative 162,961 121,287 486,163 387,865
---------- ----------- ---------- ----------
Total operating expenses 961,464 728,424 2,745,734 2,095,704
---------- ----------- ---------- ----------
Operating income 299,303 486,869 1,674,932 1,042,009
Other income (exp.), net 96,978 (52,328) (11,575) (176,125)
Income before taxes 396,281 434,541 1,663,357 865,884
---------- ---------- ---------- ----------
Income taxes 30,274 - 128,027 -
Net income $ 366,007 $ 434,541 $1,535,330 $ 865,884
========== ========== ========== ==========
Net income per
basic common share $ 0.03 $ 0.05 $ 0.15 $ 0.11
---------- ---------- ---------- ----------
Weighted average number
of basic common
shares outstanding 12,307,186 8,079,585 9,916,550 8,084,907
========== ========== ========== ==========
Net income per
diluted common share $ 0.03 $ 0.04 $ 0.13 $ 0.08
---------- ---------- --------- ---------
Weighted average number
of diluted common
shares outstanding 12,506,198 12,938,206 12,729,075 12,820,926
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
<PAGE> 6
CERAMICS PROCESS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
Nine-Month Periods Ended
Sept. 26, Sept. 27,
1998 1997
--------- --------
Cash flows from operating activities:
Net income $1,535,330 $ 865,884
Adjustments to reconcile net income
to cash provided by (used in)
operating activities:
Depreciation and Amortization 134,579 98,242
(gain) on disposal of equipment (53,000) (1,610)
Changes in assets and liabilities:
Accounts receivable, trade (115,084) (215,955)
Inventories (184,228) 9,524
Prepaid expenses 7,644 (6,102)
Other current assets (4,700) -
Accounts payable (47,601) 107,184
Accrued expenses (176,513) (218,430)
Deferred revenue (16,083) (85,654)
--------- --------
Net cash provided by
operating activities 1,080,344 553,083
--------- --------
Cash flows from investing activities:
Additions to property and equipment (273,619) (195,942)
Disposal of property and equipment 5,000 1,610
Deposits - (4,506)
--------- --------
Net cash (used in) investing
activities (268,619) (198,838)
--------- --------
Cash flows from financing activities:
Principal capital lease obligations (31,229) 47,199
Principal payments of Notes Payable (344,830) (54,664)
Proceeds from issuance of common stock 3,364 3,927
--------- --------
Net cash provided by (used in)
financing activities (372,695) (3,538)
--------- --------
Net increase in cash 439,030 350,707
Cash at beginning of period 561,166 113,331
--------- ---------
Cash at end of period $1,000,196 $ 464,038
========= =========
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 and 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 nine
month periods ended September 26, 1998 and September 27, 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 ignificant
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.
<PAGE> 8
(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 Nine month
Quarters Ended Periods ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
----------- ---------- ---------- ----------
Basic EPS Computation:
Numerator:
Net income $366,007 $434,541 $1,535,330 $865,884
Denominator:
Weighted average
common shares
outstanding 12,307,186 8,079,585 9,916,550 8,084,907
Basic EPS $0.03 $0.05 $0.15 $0.11
Diluted EPS Computation:
Numerator:
Net income $366,007 $434,541 $1,535,330 $865,884
Interest on
convertible debt 0 56,293 87,290 103,043
--------- -------- --------- ---------
Total net income $366,007 $490,834 $1,622,620 $968,927
Denominator:
Weighted average
common shares
outstanding 12,307,186 8,079,585 9,916,550 8,084,907
Stock options 199,012 190,739 214,349 161,637
Convertible debt 0 4,667,882 2,598,176 4,574,382
---------- --------- ---------- ----------
Total Shares 12,506,198 12,938,206 12,729,075 12,820,926
Diluted EPS $0.03 $0.04 $0.13 $0.08
<PAGE> 9
(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, and 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:
September 26, December 27,
1998 1997
--------- ----------
Raw materials $ 137,504 $ 11,097
Work in process 170,049 112,228
--------- ----------
$ 307,553 $ 123,325
========= ==========
(6) Accrued Expenses
----------------
Accrued expenses consist of the following:
September 26, December 27,
1998 1997
--------- ----------
Accrued legal and
accounting $ 22,500 $ 33,190
Accrued interest - 526,294
Accrued payroll 79,885 108,242
Accrued rent and utilities 9,451 11,077
Accrued other 26,801 ( 1,694)
--------- ----------
$ 138,637 $ 677,109
========= ==========
<PAGE> 10
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 - Third Fiscal Quarter of 1998 Compared to Third
Fiscal Quarter of 1997
- ----------------------
Total revenue increased 4% in Q3 1998 compared to Q3 1997. Revenue
from product sales increased 16% in Q3 1998 compared to Q3 1997. No revenue
was earned from license agreements in Q3 1998 compared to revenue from
license agreements of $130 thousand earned in Q3 1997.
The growth in product revenue in Q3 1998 compared to Q3 1997 was
primarily due to increased shipments of the Company's metal-matrix
composites for use in wireless telecommunication applications. Unit
shipments in Q3 1998 were 26% higher than unit shipments in Q3 1997, and 15%
higher than unit shipments in Q2 1998.
Total operating expenses in Q3 1998 were $961 thousand, a 32% increase
over operating expenses of $728 thousand in Q3 1997. Of the $233 thousand
increase in operating expenses in Q3 1998 compared to the Q3 1997, $192
thousand related to cost of sales and $41 thousand related to selling,
general and administrative expenses.
Gross margins for Q3 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,
July and part of August, which reduced gross margins for the quarter as
overhead expenses were spread over a smaller production base. In addition,
no revenue from licence agreements was earned in Q3 1998 whereas revenue of
$130 thousand was earned from license agreements in Q3 1997.
Income taxes in Q3 1998 were $30 thousand compared to $0 in Q3 1997.
The cumulative effect of these revenues and costs resulted
in net income of $366 thousand, or $0.03 per basic share, $0.03 per diluted
share, in Q3 1998, compared to net income of $435 thousand, or $0.05 per
basic share, $0.04 per diluted share in the Q3 1997.
<PAGE> 11
Results of Operations - First Nine Months of 1998 Compared to First Nine
Months of 1997
- --------------
Total revenue increased 41% in the first nine months of 1998 compared
to the first nine months of 1997. Revenue from product sales increased 29%
in the first nine months of 1998 compared to the first nine months of 1997.
Revenue from license agreements increased 159% in the first nine months of
1998 compared to the first nine months of 1997.
The growth in product revenue in the first nine months of 1998
compared to the first nine months of 1997 was primarily due to increased
shipments of the Company's metal-matrix composites for use in wireless
telecommunication applications. Unit shipments in the first nine months of
1998 were 65% higher than unit shipments in the first nine months of 1997.
Total operating expenses in the first nine months of 1998 were $2.75
million, a 31% increase over operating expenses of $2.10 million in the
first nine months of 1997. The increase in operating expenses is primarily
attributable to the increased unit shipments, and additional personnel in
sales and marketing. Of the $650 thousand increase in operating expenses
in the first nine months of 1998 compared to the first nine months of 1997,
$552 thousand related to cost of sales and $98 thousand related to selling,
general and administrative expenses.
Gross margins on product sales for the first nine months of 1998 were
39% compared to 40% for the first nine months of 1997. Gross margins on
product sales in Q1 1998 were higher than Q1 1997 as a result of higher unit
volumes, however, gross margins on product sales in Q2 and Q3 1998 were
lower than Q2 and Q3 1997 due to the decision in late May of a major
customer to reduce inventories which resulted in lower than planned
shipments of the Company`s products to that customer in June, July and part
of August, increasing unit costs as as overhead expenses were spread over a
smaller production base.
Income taxes in the first nine months of 1998 were $128 thousand
compared to $0 in the first nine months of 1997.
The cumulative effect of these revenues and costs resulted
in net income of $1,535 thousand, or $0.15 per basic share, $0.13 per
diluted share, in the first nine months of 1998, compared to net income of
$865 thousand, or $0.11 per basic share, $0.08 per diluted share in the
first nine months of 1997.
Financial Condition
- -------------------
The Company`s financial condition and liquidity improved as of the end
of Q3 1998 compared to year-end 1997 as a result 1) operations generating
cash, 2) elimination of debt in Q1 and Q2 1998 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, and 3) receipt of licensing revenues.
<PAGE> 12
The Company`s cash balance at September 26, 1998 was $1,000 thousand
compared to $561 thousand at December 27, 1997.
Inventories increased to $307 thousand at September 26, 1998 from $123
thousand at December 27, 1997. Raw material inventory increased to $138
thousand from $11 thousand, and work in process inventory increased to $170
thousand from $112 thousand over the same period. Management believes the
increase in raw material inventory and work in process inventory is
appropriate to support the increased production volume.
Accounts Receivable increased to $789 thousand at September 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 third
fiscal quarter of 1998 with funds generated by operations. Management
considers cash flow from operations and available cash to be adequate to
meet its working capital requirements for the for the foreseeable future.
Year 2000 Issue
- ---------------
The Company has identified three areas of possible exposure to Year
2000 problems: 1) Application programs (financial, CAD/CAM and management
information programs) used by the company, 2) Embedded programs in
production and analytical equipment used by the Company, and 3) Programs
used by vendors, customers and other third parties with whom the Companies
does business.
The Company has completed an assessment of its exposure in each of
these three areas and has developed a plan and timetable to address issues
identified. The assessment indicated the area of greatest risk is the area
of application programs. In the process of addressing the Year 2000 issue,
the Company has concurrently sought to upgrade certain computer systems to
provide greater functionality. In the first nine months of 1998, the
Company purchased and installed new financial, accounting, and selected
manufacturing computer systems which are Year 2000 compliant and which
provide greater functionality. For the application programs which the
Company does not intend to replace but which are not currently Year 2000
compliant, the Company has identified patches and upgrades which the company
will be implementing through the first half of 1999.
Regarding the second area, the Company is testing production and
analytical equipment one machine at a time to determine where Year 2000
problems exist, and to implement upgrades and or manual workarounds for
problems identified. The Company's timetable calls for completion of this
process by the end of the first half of 1999. If upgrades or manual
workarounds are not possible for certain equipment, the Company believes it
can replace the capital equipment in an orderly manner without disrupting
production. The Company does not currently believe any capital equipment
will need to be replaced, but there is no guarantee this will be the case.
The Company does not believe the cost of upgrades and or manual workarounds
will be material, but there is no guarantee this will be the case.
<PAGE> 13
Regarding the third area, the Company is interviewing vendors and
customers to determine their exposure to Year 2000 issues. The Company has
not yet established a contingency plan in the event of noncompliance by its
customers and vendors.
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: November 10, 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 the period ending September 26, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 1,000,196
<SECURITIES> 0
<RECEIVABLES> 789,205
<ALLOWANCES> 0
<INVENTORY> 307,553
<CURRENT-ASSETS> 2,114,610
<PP&E> 712,537
<DEPRECIATION> 952,384
<TOTAL-ASSETS> 2,827,147
<CURRENT-LIABILITIES> 438,762
<BONDS> 0
0
0
<COMMON> 12,307,186
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,827,147
<SALES> 1,260,767
<TOTAL-REVENUES> 1,260,767
<CGS> 798,503
<TOTAL-COSTS> 961,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,391
<INCOME-PRETAX> 396,281
<INCOME-TAX> 30,274
<INCOME-CONTINUING> 366,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366,007
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
