-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+COb/6Of6Moezv27h+n70PmdWZY9AV7av4OrO4g3GW3wjsXW+jnh7Jq/RclJbw1 n/l/y6nnV16r6enZ0SY/QQ== 0000814676-00-000002.txt : 20000403 0000814676-00-000002.hdr.sgml : 20000403 ACCESSION NUMBER: 0000814676-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERAMICS PROCESS SYSTEMS CORP/DE/ CENTRAL INDEX KEY: 0000814676 STANDARD INDUSTRIAL CLASSIFICATION: POTTERY & RELATED PRODUCTS [3260] IRS NUMBER: 042832509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16088 FILM NUMBER: 591142 BUSINESS ADDRESS: STREET 1: 111 SOUTH WORCESTER STREET STREET 2: PO BOX 338 CITY: CHARTLEY STATE: MA ZIP: 02712 BUSINESS PHONE: 508-222-0614 MAIL ADDRESS: STREET 1: 111 SOUTH WORCESTER STREET STREET 2: PO BOX 338 CITY: CHARTLEY STATE: MA ZIP: 02712 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 1, 2000 - ------------------------------------------- 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 no., including area code: 508-222-0614 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value, $0.01 per share - ---------------------------------------- (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant`s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] The aggregate market value of the voting Common Stock held by non- affiliates of the Registrant was $31,842,836 based on the average of the reported closing bid and asked prices for the Common Stock on March 1, 1999 as reported on the OTC Bulletin Board. Number of shares of Common Stock outstanding as of January 1, 2000: 12,285,969 shares. Documents incorporated by reference. Part I - ----------------------------------------------------------------------- Item 1. Business. Ceramics Process Systems Corporation (the `Company` or `CPS`) serves the wireless communications infrastructure market, high- performance microprocessor market, motor controller market, and other microelectronic markets by developing, manufacturing, and marketing advanced metal-matrix composite 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`). Although the Company`s focus is manufacturing components, the Company has sold licenses to portions of its technology to strategic partners such as Hitachi Metals Ltd. In fiscal 1999, 100% of the Company`s total revenue was derived from manufactured products; in fiscal 1998 86.7% of the Company`s total revenue was derived from manufactured products and 13.3% from licensing fees; and in fiscal 1997, 91.5% of the Company`s total revenue was derived from manufactured products and 8.5% from licensing fees. The Company was incorporated in Massachusetts in 1984. The Company reincorporated in Delaware in April 1987, through merger into its wholly-owned Delaware subsidiary organized for purposes of the reincorporation. In July 1987, the Company completed its initial public offering of 1.5 million shares of its Common Stock. Overview of Markets and Products - -------------------------------- Consumer demand continues to motivate the electronics industry to produce products which: - - operate at higher speeds; - - are smaller in size; and - - operate with higher reliability. While these three requirements result in products of ever-increasing performance, these requirements also create a fundamental challenge for the designer to manage the heat generated by the system moving at higher speeds. Smaller assemblies further concentrate the heat and increase the difficulty of removing it. This challenge is found at each level in an electronic assembly: at the integrated circuit level speeds are increasing and line widths are decreasing; at the circuit board level higher density devices are placed closer together on circuit boards; and at the system level higher density circuit boards are being assembled closer together. The designer must resolve the thermal management issues or the system will fail. For every 10 degree Celsius rise in temperature, the reliability of a circuit is decreased by approximately half. In addition, heat usually causes changes in parameters which degrade the performance of both active and passive electronic components. To resolve thermal management issues the designer is primarily concerned with two properties of the materials which comprise the system: 1) thermal conductivity, which is the rate at which heat moves through materials, and 2) thermal expansion rate (Coefficient of Thermal Expansion or CTE) which is the rate at which materials expand or contract as temperature changes. The designer must ensure that the temperature of an electronic assembly stays within a range in which the differences in the expansion rates of the materials in the assembly do not cause a failure from breaking, delaminating, etc. CPS combines at the microstructural level a ceramic with a metal to produce a composite material which has the thermal conductivity needed to remove heat, and a thermal expansion rate which is sufficiently close to other components in the assembly to ensure the assembly is reliable. The ceramic is silicon carbide (SiC), the metal is aluminum (Al), and the composite is aluminum silicon carbide (AlSiC), a metal-matrix composite. CPS can adjust the thermal expansion rate of AlSiC components to match the specific application by modifying the amount of SiC compared to the amount of Al in the component. CPS produces products made of AlSiC in the shapes and configurations required for each application - i.e., in the form of lids, substrates, housing etc. Every product is made to a customer`s blueprint. The CPS process technology allows most products to be made to net shape, requiring no or little final machining. Although the Company`s focus today is on AlSiC components, the Company believes its proprietary Quickset- Quickcast process technology can be used to produce other metal-matrix composites which may meet future market needs. Today, the problem of thermal management is most acute in high- performance, high-density applications such as cellular basestations, high-performance microprocessors, motor controllers and components for satellite communications. However, as the trends towards faster speeds, reduced size and increased reliability continue, and as high-density circuitry is used in a larger number of applications, the Company believes that the Company`s products will be used in additional market segments. Specific Markets and Products - ----------------------------- Wireless Communications Infrastructure Market - --------------------------------------------- The demand for wireless telecommunications services such as cellular and Personal Communications Systems (`PCS`) has grown significantly during the past decade, driven by reduced costs for wireless handsets, a more favorable regulatory environment, increasing competition among service providers and a greater availability of services and microwave spectrum. In developing countries wireless telephone networks are being installed as an alternative to installing or upgrading traditional wireline networks. The growth in wireless communications has required, and will continue to require, substantial investment by service providers in infrastructure equipment such as basestations. The Company manufactures substrates and heat sinks on which high- performance circuits such as power amplifiers are mounted in wireless basestations. Use of the company`s products allows the basestation manufacturer to reduce overall basestation size, increase the number of calls a basestation can handle, and to improve reliability. Lids for High-Performance Microprocessors and Other Integrated Circuits - ----------------------------------------------------------------------- Increases in speed, circuit density, and the number of connections in microprocessor chips (MPUs) and application specific integrated circuits (ASICs) are accelerating a transition in the way in which these ICs are packaged. Packages provide mechanical protection to the integrated circuit (IC), enable the IC to be connected to other circuits via pins, solder bumps or other connectors, and allow attachment of a heat sink or fan to ensure the IC does not overheat. In the past most high-performance ICs were electrically connected to the package by fine wires in a process known as wire bonding. Increasingly high-performance semiconductors are connected to the package by placing metal bumps on the connection points of the die, turning the die upside down in the package, and directly connecting the bumps on the die with corresponding bumps on the package base by reflowing the bumps. This is referred to as a "flip-chip package". Flip chip packages allow for connection of a larger number of leads in a smaller space, and can provide other electrical performance advantages compared to wire bonded packages. In many flip chip configurations a lid or cap is placed over the die to protect the die from mechanical damage and to facilitate the removal of heat from the die. Often a heat sink or fan is then attached to the lid. For a high-density die the package designer must ensure that the lid has sufficient thermal conductivity to remove heat from the die, and that all components of the package assembly - the die itself, the package base, and the package lid - are made from materials with sufficiently similar thermal expansion rates to ensure the assembly will not break itself apart over time as it thermally cycles. The Company`s composite material, AlSiC, has been developed to meet these two needs: it is engineered to have sufficient thermal conductivity to allow the heat generated by the die to be removed through the lid, and it is engineered to expand upon heating at a rate similar to other materials used in the package assembly in order to ensure reliability of the package over time as it thermally cycles. The Company produces lids made of AlSiC for high performance microprocessors used in servers and other applications. Most participants in the semiconductor industry believe the densities of ICs will continue to increase following the well-known "Moore`s Law". As IC densities increase, generally so does the IC size, and the amount of heat generated by the IC. The company believes the need for thermal management will continue to grow rapidly. For example, the Semiconductor Industry Association (SIA) 1997 Roadmap anticipates the use of 1.5 GHz, 40 million transistor, 385mm2 microprocessor chips dissipating as much as 110 Watts in workstations and servers to be offered in 2001, and a further substantial increase to 3.5 GHz, 200 million transistor, 520 mm2 chips dissipating 160 watts for use in workstations and servers to be offered in 2006. Motor Controller Market - ----------------------- The use of power modules to control electric motors of all sizes is growing. This growth is the result of several factors including emerging high-power applications which demand power controllers such as trains, subways and certain industrial equipment, and cost declines in power modules which increasingly make variable speed drives cost effective. Power semiconductors are a very significant portion of the cost of variable speed drives, and the cost of the module housing and thermal management system are also significant; declines in the costs of all these components is driving increased use of variable speed drives. For example, worldwide approximately 50 million AC induction motors greater than one-half horsepower are installed every year. Today only a small percentage of these motors use variable speed drives because of costs; as costs decline industry observers predict increased use of variable speed drives. The Company provides substrates, baseplates and heatsinks on which power semiconductors are mounted to produce modules for motor control. The Company`s AlSiC baseplates have sufficient thermal conductivity to allow for removal of heat through the baseplate, and have a thermal expansion rate sufficiently similar to the other components in the assembly to ensure reliability over time as the assembly thermally cycles. The Company believes this market will continue to grow as the use of power modules penetrates additional motor applications, and as electric motors themselves penetrate new applications such as the hybrid electric vehicle. Satellite Communications Market - ------------------------------- Satellites provide several advantages over earth-based facilities for many telecommunications applications. Satellites enable high-speed communications service where there is no earth-based alternative available which is often the case for military operations and for communications services in developing countries. Another advantage is that the cost to provide services via satellite does not increase with the distance between sending and receiving stations. The cost of providing services via satellite can be less than the cost of installing copper or fiber optic networks. Demand for satellite telecommunications services for both military and commercial applications is increasing. Some satellite applications have both military and commercial applications such as the Global Positioning System. Commercial applications include satellite based mobile telephone services, direct-to-home television services, and direct-to-home internet services. Military and commercial entities have announced plans to deploy over 1,000 satellites during the next decade. The Company produces housings, substrates, baseplates, and heatsinks on which circuitry is mounted for use in satellites. In addition to the thermal conductivity and the tailored thermal expansion rate, AlSiC is a very lightweight material which is an important attribute for applications which are air-borne, spaced-based or transportation related. Customers - --------- The Company sells to major United States microelectronics systems houses. The Company`s customers typically purchase prototype and evaluation quantities of the Company`s products over a one to three year period before entering into recurring production. In fiscal 1999, the Company`s three largest customers accounted for 67%, 8%, and 6% of total revenues, respectively. In fiscal 1998, the Company`s three largest customers accounted for 72%, 13%, and 6% of total revenues. In fiscal 1997, the Company`s three largest customers accounted for 56%, 9% and 9% of total revenues. In fiscal 1999, 89% of the Company`s revenues were derived from commercial applications and 11% were derived from defense related applications. In fiscal 1998, 94% of the Company`s revenues were derived from commercial applications and 6% were derived from defense related applications. In fiscal 1997, 76% of the Company`s total revenues were derived from commercial applications and 24% were derived from defense related applications. Research and Development - ------------------------ The Company continues to perform product development under prototype manufacturing agreements with customers. The Company had no externally funded collaborative research and development agreements in fiscal years 1999, 1998, or 1997. Availability of Raw Materials - ----------------------------- The Company uses a variety of raw materials from numerous domestic and foreign suppliers. These materials are primarily aluminum ingots, ceramic powders and chemicals. The raw materials used by the Company are available from domestic and foreign sources and none is believed to be scarce or restricted for national security reasons. Patents and Trade Secrets - ------------------------- As of January 1, 2000, the Company had 10 United States patents. The Company also has several international patents covering the same subject matter as the U.S. patents. The Company`s licensees have rights to use certain patents as defined in their respective license agreements. The Company has granted co-ownership of five of its patents and licensing rights to a joint venture company, Metals Process Systems (MPS) in exchange for its equity ownership in MPS. Under terms of the agreement, MPS has the exclusive right to use such patents in the area of metal powders and the Company has the exclusive right to use such patents in all other areas, provided, however, that MPS has granted to the Company a non-exclusive license to use the patents in the area of metal powders. The Company intends to continue to apply for domestic and foreign patent protection in appropriate cases. In other cases, the Company believes it may be better served by reliance on trade secret protection. In all cases, the Company intends to seek protection for its technological developments to preserve its competitive position. Backlog and Contracts - --------------------- As of January 1, 2000, the Company had a product backlog of $1.45 million compared with a product backlog of $1.27 million at December 26, 1998. The Company shipped 100% of the year-end 1998 product backlog in fiscal 1999. Competition - ----------- The Company has developed and expects to continue to develop products for a number of different markets and will encounter competition from different producers of metal-matrix composites and other competing materials. The Company believes that the principal competitive factors in its markets include technical competence, product performance, quality, reliability, price, corporate reputation, and strength of sales and marketing resources. The Company believes its proprietary processes, reputation, and the price at which it can offer products for sale will enable it to compete successfully in the advanced microelectronics markets. However, many of the American and foreign companies now producing or developing metal-matrix composites have far greater financial and sales and marketing resources than the Company, which may enable them to develop and market products which would compete against those developed by the Company. Government Regulation - --------------------- The Company produces non-nuclear, non-medical hazardous waste in its development and manufacturing operations. The disposal of such waste is governed by state and federal regulations. Various customers, vendors, and collaborative development agreement partners of the Company may reside abroad, thereby possibly involving export and import of raw materials, intermediate products, and finished products, as well as potential technology transfer abroad under collaborative development agreements. These types of activities are regulated by the Bureau of Export Administration of the United States Department of Commerce. Employees - --------- As of January 1, 2000, the Company had 50 full-time employees, of whom 45 were engaged in manufacturing and engineering and 5 in sales and administration. The Company also employs temporary employees as needed to support production and program requirements. None of the Company`s employees is covered by a collective bargaining agreement. The Company considers its relations with its employees to be excellent. Item 2. Properties. All of the Company`s operations including corporate headquarters, manufacturing operations and engineering activities are located in a leased facility in Chartley, Massachusetts. The Company is operating at the Chartley facility as a tenant-at-will. The Company`s rental expense for operating leases was $82 thousand, $82 thousand and $68 thousand in fiscal 1999, 1998 and 1997, respectively. Item 3. Legal Proceedings. The Company is not a party to any litigation which could have a material adverse effect on the Company or its business and is not aware of any pending or threatened material litigation against the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of the year ended January 1, 2000. Part II - ------------------------------------------------------------------ Item 5. Market for Registrant`s Common Stock and Related Stockholder Matters On January 1, 2000, the Company had 876 shareholders. The high and low closing bid prices of the Company`s common stock for each quarter during the years ended January 1, 2000 and December 26, 1998 are shown below. 1999 1998 --------------- -------------- High Low High Low ---- ---- ---- ---- 1st Quarter $1.69 $1.19 $2.71 $2.00 2nd Quarter $2.00 $1.38 $2.62 $1.38 3rd Quarter $1.63 $1.00 $1.96 $1.25 4th Quarter $1.19 $0.63 $1.53 $1.25 The Company has never paid cash dividends on its Common Stock. The Company currently plans to reinvest its earnings, if any, for use in the business and does not intend to pay cash dividends in the foreseeable future. Future dividend policy will depend, among other factors, upon the Company`s earnings and financial condition. The Company`s Common Stock is traded on NASD`s Over-the-Counter Bulletin Board (OTCBB) under the symbol CPSX. Item 6. Selected Consolidated Financial Data The following selected financial data of the Company should be read in conjunction with the consolidated financial statements and related notes filed as part of this Annual Report on Form 10-K. SELECTED CONSOLIDATED FINANCIAL DATA For the Fiscal Year: 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------- Summary of Operations - --------------------- Product Revenue $4,806 $4,788 $4,198 $1,922 $1,385 License Revenue 0 737 391 85 2 Operating Expenses 4,723 3,722 2,993 2,201 2,221 ------ ------ ------ ------ ------ Operating Income (Loss) 83 1,803 1,596 (194) (834) Net Other Income (Expense) 155 (131) (219) (217) (274) ------ ------ ------ ------ ------ Net Income (Loss) $ 238 $ 1,672 $ 1,377 $( 411) $(1,108) ====== ====== ====== ====== ====== Net Income (Loss) Per Basic Common Share $ 0.02 $ 0.16 $ 0.18 $ (0.05) $(0.14) ====== ====== ====== ====== ====== Weighted Average Basic Number of Common Shares Outstanding 12,286 10,566 7,799 7,781 7,675 ====== ===== ===== ===== ====== Net Income (Loss) Per Diluted Common Share $ 0.02 $ 0.14 $ 0.13 $ (0.05) $(0.14) ====== ====== ====== ====== ====== Weighted Average Diluted Number of Common Shares Outstanding 12,483 12,547 12,280 7,781 7,675 ====== ====== ====== ====== ====== - -------------------------------------------------------------------------- Year-end Position - ----------------- Working Capital (Deficit) $1,812 $ 1,782 $(1,788) $(3,200) $(2,736) Total Assets 3,186 2,984 1,905 795 526 Long-term Obligations 197 125 310 88 - Stockholders` Equity (Deficit) $2,627 $ 2,389 $(1,520) $(2,905) $(2,493) Item 7. Management`s Discussion and Analysis of Financial Condition and Results of Operations This Annual Report on Form 10-K 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 - --------------------- Revenue - ------- Revenue from sales of products in fiscal 1999 was $4.81 million, up slightly from sales of products in fiscal 1998 of $4.78 million. No revenue was received from licensing agreements in fiscal 1999 compared to $0.74 million received from licensing agreements in fiscal 1998. Because no licensing revenue was received in fiscal 1999, total revenue decreased $720 thousand or 13% to $4.81 million in fiscal 1999 from $5.52 million in fiscal 1998. Although product revenue increased only slightly in fiscal 1999 compared to fiscal 1998, the sources of product revenue changed significantly. Demand from the Company`s largest customer declined in fiscal 1999 by $0.75 million, or 19%, compared to fiscal 1998, while revenue from other customers increased by $0.77 million, or 94%. Total revenue of $5.52 million in fiscal 1998 reflects an increase of $936 thousand or 20% over total revenue of $4.59 million in fiscal 1997. The increase in revenue from fiscal 1997 to fiscal 1998 was due to increased product shipments of $590 thousand, and increased revenues from licensing activities of $347 thousand. Operating Costs - --------------- Total operating costs were $4.7 million, $3.7 million, and $3.0 million for years fiscal 1999, fiscal 1998, and fiscal 1997, respectively. Operating costs increased in fiscal 1999 compared to fiscal 1998 by $1 million as a result of two factors, 1) actions taken, primarily the hiring of additional personnel, to strengthen and improve the quality, engineering, manufacturing and sales functions within the Company to prepare for future growth, and 2) changes in the product mix. In fiscal 1999 the Company hired managers for new business development and quality assurance, and technicians for product development, quality assurance and maintenance, in addition to operators for production positions. The Company purchased additional capital equipment for the quality department and manufacturing operations. The Company also conducted a year-long program to revise and upgrade its quality system with the objective of achieving registration to the ISO 9001 standard in early 2000. Management believes these actions will enable the company to better meet the rigorous quality requirements of its current and future customer base. Changes in product mix resulted in increases in tooling and raw material expenses. Operating costs increased in fiscal 1998 compared to fiscal 1997 by $0.7 million primarily as a result of increased sales volume. Cost of sales for fiscal years 1999, 1998, and 1997 were $3.8 million $3.0 million, and $2.5 million, respectively. Selling, general and administrative costs were $0.9 million, $0.7 million, and $0.5 million for these same years, respectively. The $0.8 million increase in cost of sales in fiscal 1999 versus fiscal 1998 is attributable to increased overhead expenses described above, as well as increased raw material and labor expenses associated with changes in product mix. The $0.5 million increase in cost of sales in fiscal 1998 versus fiscal 1997 is due to higher average sales volume in fiscal 1998. Gross margins on product revenue for fiscal years 1999, 1998 and 1997 were 21%, 37% and 41% respectively. As the Company has transitioned from a research and development focus to a manufacturing focus, the Company has incurred expenses to build the manufacturing infrastructure needed to support future growth. In 1999, the Company added engineering and preventative maintenance personnel, for example. The Company does not anticipate continuing to add fixed costs at a greater rate than revenue growth in the near future. In addition, fiscal 1999 gross margins were negatively affected by reduced shipments in the second half of fiscal 1999 to the Company`s largest customer, resulting in the fixed costs being spread over a smaller base. Selling, general and administrative expenses for fiscal years 1999, 1998 and 1997 were $0.9 million, $0.7 million, and $0.5 million respectively. The increase of $0.2 million from fiscal 1998 to fiscal 1999, and the increase of $0.2 million from fiscal 1997 to fiscal 1998 primarily resulted from hiring additional sales personnel in fiscal 1999 and fiscal 1998, and incurring additional travel and sales promotion expenses. The Company began to sell product actively in Europe in fiscal 1999. The Company continues to perform product development under prototype manufacturing agreements with customers. The Company had no externally funded collaborative research and development agreements in fiscal 1999, 1998 or 1997. Net Other Income and Expense - ------------------ The Company had net other income (expense) of $149 thousand, $0 thousand and ($219) thousand for the fiscal years 1999, 1998 and 1997 respectively. The increase in net other income in fiscal 1999 compared to fiscal 1998 is primarily due to the gain on sale of obsolete equipment. Additionally, interest income increased due to average higher cash balances in fiscal 1999. Net other expenses were similar in amount in 1999 and 1998, and were primarily interest expense. Income Taxes - ------------ The Company`s Federal income tax expenses were ($6), $36, and $21 thousand for 1999, 1998 and 1997 respectively. The Company paid no income tax in 1999 due to its tax loss carryforwards and changes in the tax code relating to small business and the alternative minimum tax. The ($6) expense for 1999 is an adjustment for over accrual of taxes in 1998. Certain provisions of the Internal Revenue Code limit the annual utilization of net operating loss carryforwards if, over a three-year period, a greater than 50% change in ownership occurs. The Company believes that they did not exceed the 50% ownership change in the three- year period ending January 1, 2000; therefore, at January 1, 2000 all net operating loss carryforwards are available to offset future taxable income. Liquidity and Cash Reserves - --------------------------- Cash on hand of $1,034 thousand at fiscal year end 1999 reflects a decrease of $465 thousand or 31% over cash on hand of $1,499 thousand at fiscal year end 1998. Government securities on hand at fiscal year end 1999 were $307 thousand compared to no government securities on hand at fiscal year end 1998. In fiscal 1999, operations generated net cash of $365 thousand, investing activities, primarily the purchase of capital equipment and short term investments in the form of government securities, consumed net cash of $784 thousand, and financing activities, namely principal payments of capital lease obligations, consumed net cash of $47 thousand. Cash on hand of $1,499 thousand at fiscal year end 1998 reflects an increase of $938 thousand or 167% over cash on hand of $561 thousand at fiscal year end 1997. The increase in 1998 from 1997 is primarily the result of receipt of licensing fees, and cash generated by operations. In 1999, 1998, and 1997 the Company financed its operations through funds generated from operations. In 1994 and 1995, the Company issued notes and convertible notes in the amount of $2.4 million to finance its working capital obligations and building renovations cost. In 1997, the Company paid down several notes. In 1998, the Company converted the remaining notes into equity. Specifically, in 1998 the Company issued 3,740,000 shares of common stock upon conversion of note principal in the amount of $1,870,000, the Company issued 723,916 shares of common stock upon conversion of accrued interest in the amount of $361,958, and the Company paid accrued interest in cash in the amount of $160,542. The Company believes it will be able to finance its working capital obligations and capital expenditures through funds generated from operations throughout 2000. The Company continues to sell to a limited number of customers and loss of any one of these customers could cause the Company to require external financing. Newly Issued Accounting Pronouncements and Future Accounting Changes - -------------------------------------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in fiscal 2001. To date the Company has not utilized derivative instruments or engaged in hedging activities, and therefore the adoption of SFAS No. 133 is not expected to have a material impact on the Company`s financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC`s view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required no later than the Company`s second quarter of the fiscal year 2000. The effect of applying the guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company`s evaluation of SAB 101 is not yet complete. Year 2000 Issue - --------------- In 1998 and 1999 the Company 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 Company conducts business. The Company completed an assessment of its exposure in each of these three areas and developed and implemented a plan to address issues identified. The assessment indicated the area of greatest risk was the area of application programs. In the process of addressing the Year 2000 issue, the Company concurrently sought to upgrade certain computer systems to provide greater functionality. In fiscal 1998 and 1999, the Company made capital expenditures of less than $100 thousand to purchase and install new financial, accounting, and selected manufacturing computer systems which are Year 2000 compliant and which provide greater functionality. Regarding the second area, the Company tested all production and analytical equipment to determine where Year 2000 problems existed, and implemented upgrades or other remedies as appropriate. No production or analytical equipment required replacement as a result of Year 2000 problems. Regarding the third area, the Company interviewed vendors and customers to determine their exposure to Year 2000 issues, and developed a contingency plan for sourcing materials and other services in the event of an interruption. As of March 1, 2000 the Company has not experienced any interruptions in its operations from the Year 2000 issue, and does not expect any interruptions in the future; however there can be no assurance this will be the case. Inflation - --------- Inflation had no material effect on the results of operations or financial condition during 1999, 1998 or 1997. There can be no assurance; however, that inflation will not affect the Company`s operations or business in the future. Item 8. Financial Statements and Supplementary Data See Index to the Company`s Financial Statements and the accompanying financial statements and notes which are filed as part of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III - -------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant Directors of the Company are elected annually and hold office until the next annual meeting of stockholders and until their respective successors are duly elected and qualified. The executive officers of the Company are appointed by the Board of Directors and hold office until their respective successors are duly elected and qualified. The directors and executive officers of the Company are as follows: Name Age Position - ---- --- -------- Grant C. Bennett 45 President Chief Executive Officer, Treasurer and Director Michael Bernique 56 Director H. Kent Bowen 58 Director Francis J. Hughes, Jr. 49 Director Mr. Grant C. Bennett has held the positions of President, Chief Executive Officer and Director of the Company since September, 1992. Prior to that time, he served as Vice President-Marketing and Sales of the Company from November, 1985 to September, 1992. Before joining CPS, Mr. Bennett was a consultant at Bain & Company, a Boston-based management consulting firm. Mr. Michael Bernique is currently President and CEO of TelOptica, a network optimization and professional services firm. He served as President, Satellite Data Networks Group of General Instrument Corporation from 1996 to 1998, as Senior Vice President, North American Sales and Vice President and General Manager, Transmission Products Division of DSC Communications from 1989 to 1996, and in a variety of positions with Motorola from 1985 to 1989, including Vice President Domestic Operations, Cellular Infrastructure. Mr. Bernique was elected to the Company`s Board of Directors in 1999. Mr. Bernique is also Chairman of the Board of Directors of RF Monolithics, Inc. Dr. H. Kent Bowen has served as a Professor at Harvard Business School since July, 1992. Prior to that time, he held the position of Ford Professor of Engineering at the Massachusetts Institute of Technology (`MIT`) from 1981 to 1992. Dr. Bowen served as Co-Director of the Leaders for Manufacturing Program at MIT from 1991 through July, 1992. Dr. Bowen has been a Director of the Company since 1984 and served as Chairman of the Board of Directors of the Company from 1984 to August, 1988. Dr. Bowen is also a director of SPX Corporation. Mr. Francis J. Hughes, Jr. has served as President of American Research and Development Corporation (`ARD`), a venture capital firm, since 1992. Mr. Hughes joined ARD`s predecessor organization in 1982, and became Chief Operating Officer in 1990. Mr. Hughes served as General Partner of the following venture capital funds: ARD I, L.P., ARD II, L.P. (since July, 1985), ARD III, L.P. (since April, 1988), Hospitality Technology Fund, L.P.(since June, 1991) and Egan-Managed Capital, L.P. (since February, 1997). Mr. Hughes has served as a Director of the Company since 1993. Mr. Hughes is also a director of RF Monolithics, Inc. There are no family relationships between or among any executive officers or directors of the Company. Item 11. Executive Compensation The following table sets forth certain information with respect to the annual and long-term compensation of the Company`s Chief Executive Officer for the three fiscal years ended January 1, 2000. No other executive officer of the Company serving on the last day of fiscal year 1999 received total annual salary and bonus in excess of $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation Other All Other Compen- Options/ LTIP Compensa- Name & Position Year Salary Bonus sation SAR`s Payouts tion - ---------------------- -------- ----- ------- -------- ------- --------- ($) ($) ($) ($) ($) ($) Grant C. Bennett 1999 $125,000 $0 $0 0 $0 $0 $0 President and 1998 $104,026 $0 $0 0 $0 $0 $0 Chief Executive 1997 $100,163 $0 $0 0 $0 $0 $0 Officer The Company`s President and Chief Executive Officer did not receive option grants during fiscal year 1999. During fiscal year 1999 no options were exercised by him, and at the end of the fiscal year 1999 no options were held by him. Directors` Fees - --------------- The Company adopted the 1992 Director Stock Option Plan ("1992 Director Plan") on February 20, 1992. As of January 1, 2000 options to purchase 35,000 shares of Common Stock were outstanding under the 1992 Director Plan. No grants were made under this plan in fiscal 1999, 1998 or 1997. The 1992 Director Plan expired on April 16, 1998 and no new grants are available under it. The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on January 22, 1999. Under the terms of the 1999 Plan, all of the Company`s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock- based awards. In 1999, options to purchase 24,000 shares of the Company`s Common Stock were granted to directors under the 1999 Plan. All options granted are nonstatutory stock options granted at the fair market value of the stock, are exercisable one year from the date of grant, and expire ten years from the date of grant. The 1999 Plan includes provisions for the acceleration of vesting in the event of a change in control of the Company. Outside directors may receive expense reimbursements for attending board and committee meetings. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information, as of March 1, 2000, with respect to the beneficial ownership of the Company`s Common Stock by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each Director of the Company, (iii) each Executive Officer of the Company named above in the Summary Compensation Table, and (iv) all Directors and Officers as a group: Percentage of Common Stock Shares of Name and Address Beneficially Common Stock of Beneficial Owner Owned (1) Outstanding - ------------------- ------------ ----------- ARD Master, L.P. 30 Federal Street Boston, MA 02110-2508 1,173,214 (2) 9.5% ARD I, L.P. 30 Federal Street Boston, MA 02110-2508 1,021,884 (3) 8.3 Waco Partners c/o Wechsler & Co., Inc. 105 South Bedford Road, Suite 310 Mount Kisco, NY 10549 1,669,980 13.6% Grant C. Bennett (Director & Officer) 1,627,331 13.2% Michael Bernique (Director) 8,000 (4) * H. Kent Bowen (Director) 16,000 (5) * Francis J. Hughes, Jr. (Director) 2,199,598 (6) 18.3% All Directors and Officers as a group (four persons) 3,850,929 (7) 31.6% *Less than 1% of the total number of outstanding shares of Common Stock. 1. The inclusion herein of any shares of Common Stock deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, each stockholder referred to above has sole voting and investment power respect to the shares listed. 2. Total of 1,173,214 shares consists of 1,170,494 shares owned by ARD Master L.P., and options to purchase 2,720 shares of common stock exercisable within 60 days after March 1, 2000. Excludes options to purchase 4,500 shares of common stock held by Mr. Hughes which are exercisable within 60 days after March 1, 2000. 3. Total of 1,021,884 shares consists of 1,019,604 shares owned by ARD I, L.P., and options to purchase 2,280 shares of common stock exercisable within 60 days after March 1, 2000. Excludes options to purchase 4,500 shares of common stock held by Mr. Hughes which are exercisable within 60 days after March 1, 2000. 4. Consists of options to purchase 8,000 shares of common stock exercisable within 60 days after March 1, 2000 5. Consists of options to purchase 16,000 shares of common stock exercisable within 60 days after March 1, 2000. 6. Consists of shares and options to purchase shares described in Footnotes 2 and 3 above owned by ARD Master, L.P., and ARD I, L.P., and options to purchase 4,500 shares of common stock held by Mr. Hughes which are exercisable within 60 days after March 1, 2000. 7. Consists of all shares and options to purchase shares described in Footnotes 4,5 and 6 above, and shares owned by Grant C. Bennett listed in above table. Item 13. Certain Relationships and Related Transactions In 1994, the Company issued convertible subordinated notes to affiliates of Directors and other persons known by the Company to beneficially own more than 5% of the outstanding shares of the Company. In 1998 all remaining notes were converted into equity and accrued interest was paid in cash or converted into equity as summarized below. There were no notes outstanding as of year-end 1998 or year-end 1999. Shares Issued Upon Conversion of Principal and Shares Issued or cash Paid for Accrued Interest in 1998 Per --------------------------------- Annum Principal Interest Interest Principal Interest Conversion Conversion Payment Amount Rate Shares Shares Cash Noteholder ($) (%) ---------- ---------- --------- ASMV $660,000 10% 1,320,000 517,810 - Waco Partners $750,000 10% 1,500,000 - $132,260 ARD III $141,440 10% 282,880 112,122 - ARD I $118,560 10% 237,120 93,984 - Affiliates of Directors as a group $260,000 10% 520,000 206,106 - Part IV - ------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this Form 10-K. 1. Financial Statements -------------------- The financial statements filed as part of this Form 10-K are listed on the Index to Consolidated Financial Statements of this Form 10-K. 2.a. Exhibits -------- The exhibits to this Form 10-K are listed on the Exhibit Index of this Form 10-K. 2.b. Reports on Form 8-K ------------------- None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CERAMICS PROCESS SYSTEMS CORPORATION By: /s/ Grant C. Bennett -------------------------- Grant C. Bennett President Date: March 30, 2000 Pursuant to the Requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - -------------------- ------------------------ ------------ /s/ Grant C. Bennett President, Treasurer and Director} - -------------------------- (Principal Executive Officer) } Grant C. Bennett } } } } /s/ Michael Bernique Director } - -------------------------- } Michael Bernique }Mar. 30, }2000 } } /s/ H. Kent Bowen Director } - -------------------------- } H. Kent Bowen } } } } /s/ Francis J. Hughes, Jr. Director } - -------------------------- } Francis J. Hughes, Jr. } } CERAMICS PROCESS SYSTEMS CORPORATION EXHIBIT INDEX Exhibit No. Description Page - ------- ----------- ---- 3.1** Restated Certificate of Incorporation of the Company, as amended, is incorporated herein by reference to Exhibit 3 to the Company`s Registration Statement on Form 8-A (File No. 0-16088) -- 3.2** By-laws of the Company, as amended, are incorporated herein by reference to Exhibit 3.2 to the Company`s Registration Statement on Form S-1 (File No. 33-14616)(the `1987 S-1Registration Statement`) -- 4.1** Specimen certificate for shares of Common Stock of the Company is incorporated herein by reference to Exhibit 4 to the 1987 S-1 Registration Statement -- 4.2** Description of Capital Stock contained in the Restated Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 -- (1)10.1** 1984 Stock Option Plan of the Company, as amended, is incorporated herein by reference to Exhibit 10(b) to the Company`s Annual Report on Form 10-K for the year ended December 31, 1988 -- (1)10.2** 1989 Stock Option Plan of the Company, is incorporated by reference to Exhibit 10.6 to the Company`s 1989 S-1 Registration Statement -- (1)10.3** 1992 Director Stock Option Plan is incorporated by reference to Exhibit 10.5 to the Company`s Annual Report on Form 10-K for the fiscal year ended December 28, 1991 -- 10.4** Participation Agreement, dated February 14, 1991, between the Company and Sopretac, a French societe anonyme, is incorporated by reference to Exhibit 10.10 to the Company`s Annual Report on Form 10-K for the year ended December 28, 1991 -- (1)10.5** Retirement Savings Plan, effective September 1, 1987 is incorporated by reference to Exhibit 10.35 to the Company`s 1989 S-1 Registration Statement -- (1)10.6** Severance Benefit Program, effective June 1, 1989, is incorporated by reference to Exhibit 10.36 to the Company`s S-1 Registration Statement -- 10.7** Research and Development Agreement, dated as of June 26, 1991, between the Company and Carpenter Technology Corporation (`CarTech`) is incorporated by reference to Exhibit 10.17 to the Company`s Annual Report on Form 10-K for the year ended December 28, 1991 -- 10.8** Option and License Agreement, dated as of June 26, 1991, between the Company and CarTech is incorporated by reference to Exhibit 10.19 to the Company`s Annual Report on Form 10-K for the year ended December 28, 1991 -- 10.9** License Agreement, dated as of December 11, 1992, between the Company and CarTech is incorporated by reference to Exhibit 10.19 to the Company`s Annual Report on Form 10-K for the fiscal year ended January 2, 1993 -- 10.10** Amendment to Research and Development Agreement, dated as of December 11, 1992, between the Company and CarTech is incorporated by reference to Exhibit 10.20 to the Company`s Annual Report on Form 10-K for the fiscal year ended January 2, 1993 -- 10.11** Amendment to Option and License Agreement, dated as of December 11, 1992, between the Company and CarTech is incorporated by reference to Exhibit 10.21 to the Company`s Annual Report on Form 10-K for the fiscal year ended January 2, 1993 -- 10.12** BancBoston lease line of credit, dated December 23, 1991, between the Company and The First National Bank of Boston is incorporated by reference to Exhibit 10.20 to the Company`s Annual Report on Form 10-K for the year ended December 28, 1991 -- 10.13** Amendment to BancBoston lease line of credit, dated December 31, 1992, between the Company and the First National Bank of Boston is incorporated by reference to Exhibit 10.21 to the Company`s Annual Report on Form 10-K for the fiscal year ended January 2, 1993 -- 10.14** Form of 10% Convertible Subordinated Note Due June 30, 1995 and related Common Stock Purchase Warrant between the Company and noteholder is incorporated by reference to Exhibit 10.22 to the Company`s Annual Report for the fiscal year ended January 1, 1994 -- 10.15** 10% Convertible Subordinated Note Due April 21, 2001 between the Company and Waco Partners and related Subordinated Convertible Note Purchase Agreement between the Company and Wechsler & Co., Inc. is incorporated by reference to Exhibit 10.21 to the Company`s Annual Report for the fiscal year ended December 31, 1994 -- 10.16** 10% Convertible Subordinated Note Due January 31, 1996 and related Common Stock Purchase Warrant between the Company and Ampersand Specialty Materials Ventures Limited Partnership is incorporated by reference to Exhibit 10.22 to the Company`s Annual Report for the fiscal year ended December 31, 1994 -- 10.17** Form of 10% Convertible Subordinated Note Due April 24, 1996 and related Common Stock Purchase Warrant between the Company and noteholder is incorporated by reference to Exhibit 10.23 to the Company`s Annual Report for the fiscal year ended December 31, 1994 -- 10.18** Senior Secured Promissory Note Due March 30, 1996 and related Security Agreement between the Company and Aavid Thermal Technologies, Inc. is incorporated by reference to Exhibit 10.24 to the Company`s Annual Report for the fiscal year ended December 31, 1994 -- 10.19** Secured Line of Credit Note Due June 30, 1996 and related Security Agreement between the Company and Kilburn Isotronics, Inc. -- 10.20** Amended and Restated Promissory Note dated July 31, 1996 between the Company and Texas Instruments Incorporated 10.21 1999 Stock Incentive Plan adopted by the Company`s Board of Directors on January 22, 1999 21** Subsidiaries of the Registrant are incorporated herein by reference to Exhibit 22 to the Company`s Annual Report on Form 10-K for the year ended December 31, 1988 -- 23.1 Consent of PricewaterhouseCoopers LLP ** Incorporated herein by reference. (1) Management Contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CERAMICS PROCESS SYSTEMS CORPORATION Page - ------------------------------------------------------------ Report of Independent Accountants 22 Consolidated Balance Sheets as of January 1, 2000 and December 26, 1998 23-24 Consolidated Statements of Operations for the years ended January 1,2000, December 26, 1998, and December 27, 1997 25 Consolidated Statements of Stockholders` Equity (Deficit) for the years ended January 1, 2000, December 26, 1998 and December 27, 1997 26 Consolidated Statements of Cash Flows for the years ended January 1, 2000, December 26, 1998, and December 27, 1997 27 Notes to Consolidated Financial Statements 28-37 All schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto. Report of Independent Accountants - ------------------------------------------------------------------------ To the Board of Directors and Stockholders Ceramics Process Systems Corporation: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Ceramics Process Systems Corporation and its subsidiary at January 1, 2000 and December 26, 1998, and the results of their operations and their cash flows for each of the fiscal years ended January 1, 2000, December 26, 1998 and December 27, 1997 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company`s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts March 3, 2000 CONSOLIDATED BALANCE SHEETS Ceramics Process Systems Corporation ASSETS January 1, December 26, 2000 1998 -------- -------- Current assets: Cash & cash equivalents $ 1,033,522 $ 1,498,774 Short-term investments 306,672 -- Accounts receivable-trade 387,569 514,152 Accounts receivable-other 109,065 32,982 Inventories 307,348 204,200 Prepaid expenses 30,193 1,830 ------------ ------------ Total current assets 2,174,369 2,251,938 Property & equipment: Production equipment 2,013,331 1,569,021 Office equipment 202,523 155,232 Accumulated depreciation and amortization (1,204,000) (1,000,637) ------------ ------------ Net property and equipment 1,011,854 723,616 ------------ ------------ Deposits -- 8,772 ------------ ------------ Total assets $ 3,186,223 $ 2,984,326 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED BALANCE SHEETS (continued) Ceramics Process Systems Corporation LIABILITIES & STOCKHOLDERS` EQUITY January 1, December 26, 2000 1998 -------- ------ Current liabilities: Accounts payable $ 142,667 $ 96,753 Accrued expenses 157,300 184,032 Deferred revenue 9,884 10,670 Current portion of capital lease obligations 52,255 46,959 ---------- -------- Total current liabilities 362,107 338,414 Deferred revenue 124,000 131,596 Long-term portion of capital lease obligations 72,900 125,155 ---------- -------- Total liabilities 559,006 595,165 ---------- -------- Stockholders` Equity Common stock, $0.01 par value, authorized 15,000,000 shares; issued 12,308,852 shares at January 1, 2000 and 12,308,852 shares at December 26, 1998 123,089 123,089 Additional paid-in capital 32,656,353 32,656,353 Accumulated deficit (30,091,390) (30,329,446) Less treasury stock, at cost, 22,883 common shares (60,835) (60,835) ---------- -------- Total stockholders`equity 2,627,217 2,389,161 ---------- -------- Total liabilities & stockholders` equity $ 3,186,223 $ 2,984,326 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS Ceramics Process Systems Corporation For the years ended January 1, December 26, December 27, 2000 1998 1997 ------------ ------------ ----------- Revenue: Product sales $4,805,865 $4,787,790 $4,197,912 License revenues -- 737,504 391,001 ---------- ---------- ---------- Total revenue 4,805,865 5,525,294 4,588,913 ---------- ---------- ---------- Operating expenses: Cost of sales 3,812,094 3,037,351 2,475,140 Selling, general, and administrative 910,343 684,658 517,362 ---------- ---------- ---------- Total operating expenses 4,722,437 3,722,009 2,992,502 ---------- ---------- ---------- Operating income 83,428 1,803,285 1,596,411 ---------- ---------- ---------- Other income (expense): Interest income 59,739 41,455 3,581 Interest expense ( 15,957) (132,202) (237,968) Other income 104,917 90,774 15,122 ---------- ---------- ---------- Income before taxes 232,127 1,803,312 1,377,146 Provision for(benefit from) taxes 5,929 (130,877) -- ---------- ---------- ---------- Net income $ 238,056 $1,672,435 $1,377,146 ========== ========== ========== Net income per basic common share $0.02 $0.16 $ 0.18 ========== ========== ========== Weighted average number of basic common shares outstanding 12,285,969 10,565,961 7,799,279 =========== ========== ========== Net income per diluted common share $0.02 $0.14 $ 0.13 ========== ========== ========== Weighted average number of diluted common shares outstanding 12,483,279 12,547,427 12,279,643 =========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS` EQUITY (DEFICIT) For the years ended January 1, 2000, December 26, 1998 and December 27, 1997 Ceramics Process Systems Corporation Common stock Stock- -----------------Additional holders` Number Par Paid-in Accumulated Treasury equity of shares Value capital deficit stock (deficit) ------- ------- ---------- ---------- ------- ----------- Balance at December 28, 1996 7,780,766 $77,808 $30,457,384 $(33,379,027) $(60,835) $(2,904,670) Stock Options Exercised 43,816 438 7,449 -- -- 7,887 Net income -- -- -- 1,377,146 -- 1,377,146 ------- ------- ------- --------- ------ --------- Balance at December 27, 1997 7,824,582 78,246 30,464,833 32,001,881 (60,385) (1,519,637) Common stock issued in debt conversion 4,463,916 44,639 2,187,319 -- -- 2,231,958 Stock Options Exercised 20,354 204 4,201 -- -- 4,405 Net income -- -- -- 1,672,435 -- 1,672,435 ------- ------- ------- ------- ------- -------- Balance at December 26,1998 12,308,852 123,089 32,656,353 (30,329,446) (60,385) 2,389,161 Net income -- -- -- 238,056 -- 238,056 ------- ------- ------- ------- ------- --------- Balance at January 1, 2000 12,308,852$123,089 $32,656,353 $(30,091,390) $(60,835) $2,627,217 ========== ======= =========== ============ ======== ========= The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Ceramics Process Systems Corporation For the years ended Jan. 1, Dec. 26, Dec 27, 2000 1998 1997 ---------- ---------- --------- Cash flows from operating activities: Net income $ 238,056 $1,672,435 $1,377,146 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 167,359 146,234 115,994 Amortization 46,959 36,600 36,500 Gain on disposal of equipment (104,225) (53,800) -- Changes in assets and liabilities: Accounts receivable, trade 126,583 78,987 (485,086) Accounts receivable, other 17,982 Inventories (103,148) (80,875) 33,120 Prepaid expenses (28,364) 13,698 (14,188) Accrued interest on investments (6,672) -- -- Accounts payable 45,914 (57,904) 25,895 Accrued expenses (26,732) (131,120) (112,657) Deferred revenue (8,382) ( 21,164) (192,557) Net cash provided by ----------- ---------- -------- operating activities 365,330 1,603,091 784,167 ----------- ---------- -------- Cash flows from investing activities: Additions to property and equipment (502,555) (332,954) (212,827) Proceeds on disposal of property and equipment 10,160 53,800 -- Deposits 8,772 (3,700) (2,735) Purchase of marketable securities (300,000) Net cash used in investing ----------- ----------- --------- activities (783,623) (282,854) (215,562) ----------- ----------- --------- Cash flows from financing activities: Principal payment of capital lease (46,959) (42,204) (23,487) obligations Principal payments of notes payable -- (344,830) (105,170) Proceeds from issuance of common stock -- 4,405 7,887 Net cash used in ----------- ----------- --------- financing activities (46,959) (382,629) (120,770) ----------- ----------- -------- Net increase (decrease) in cash (465,252) 937,608 447,835 Cash and cash equivalents at beginning of period 1,498,774 561,166 113,331 Cash and cash equivalents at ----------- --------- ------- end of period $1,033,522 $1,498,774 $561,166 =========== =========== ======= The accompanying notes are an integral part of the consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ceramics Process Systems Corporation - ------------------------------------------------------------------------ (1) Nature of Business ------------------ The Company serves the wireless communications infrastructure market, high-performance microprocessor market, motor controller market, and other microelectronic markets by developing, manufacturing, and marketing advanced metal-matrix composite components to house, interconnect and thermally manage microelectronic devices. (2) Summary of Significant Accounting Policies ------------------------------------------ (2)(a) Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Ceramics Process Systems Corporation (the "Company") and its wholly- owned subsidiary, CPS Superconductor Corporation(`CPSS`). All intercompany balances and transactions have been eliminated in consolidation. (2)(b) Basis of Presentation ---------------------- Certain amounts in the financial statements and notes thereto have been reclassified to conform to fiscal year 1999 classifications. (2)(c) Cash, Cash Equivalents, and Investments --------------------------------------- The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date. As of January 1, 2000, in addition to cash and cash equivalents, the Company held investments in government securities with an original maturity of greater than three months in the amount of $306,672. These government securities are classified as held-to- maturity and carried at amortized cost. As of January 1, 2000, the estimated fair value of each investment approximated its amortized cost and therefore there were no significant unrealized gains or losses. No investments were held as of December 26, 1998. Short-term investments of $306,672 held at January 1, 2000 had maturities of less than one year. (2)(d) Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Year-end inventory balances consisted of the following: January 1, December 26, 2000 1998 --------- --------- Raw materials $ 71,134 $107,259 Work-in-process 236,214 96,941 --------- --------- $ 307,348 $204,200 ========= ========= (2)(e) Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation of equipment is calculated on a straight-line basis over the estimated useful life, generally five years. Amortization under capital leases is calculated on a straight-line basis over the life of the lease. Depreciation of leasehold improvements is calculated using the straight- line method over the lease term or the estimated useful lives, whichever is shorter. Maintenance and repairs are charged to expenses as incurred and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation or amortization are removed from their respective accounts. Any gains or losses are included in the results of operations in the period in which they occur. (2)(f) Revenue Recognition ------------------- The Company recognizes product revenue generally upon shipment. Revenue related to license agreements is recognized upon receipt of the license payment or over the license period, if the Company has continuing obligations under the agreement. Advance payments in excess of revenue recognized are recorded as deferred revenue. (2)(g) Research and Development Costs ------------------------------ The Company continues to perform product development under prototype manufacturing agreements with customers. In fiscal 1999 and fiscal 1998, the Company did not incur any costs for research and development and did not perform any externally funded research and development programs. In prior periods research and development costs were charged to expense as incurred. (2)(h) Income Taxes ------------ The Company accounts for income taxes utilizing the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax and financial statement basis of assets and liabilities, measured using enacted tax rates expected to be in effect in the period which the temporary differences reverse. (2)(i) Net Income Per Common Share --------------------------- Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the sum of the weighted average number of common shares plus additional common shares that would have been outstanding if potential dilutive common shares had been issued for granted stock option and stock purchase rights. (2)(j) Comprehensive Income -------------------- The Company has no items of comprehensive income, and therefore net income is equal to comprehensive income. (2)(k) Recent Accounting Pronouncements -------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Company will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133", in fiscal 2001. To date the Company has not utilized derivative instruments or engaged in hedging activities, and therefore the adoption of SFAS No. 133 is not expected to have a material impact on the Company`s financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC`s view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required no later than the Company`s second quarter of the fiscal year 2000. The effect of applying the guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company`s evaluation of SAB 101 is not yet complete. (2)(l) Use of Estimates in the Preparation of Financial Statements ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2)(m) Risks and Uncertainties ----------------------- The Company manufactures its products to customer specifications and a significant portion of the Company`s revenues have historically been generated from three customers. Financial instruments which potentially subject the Company to concentrations of credit risk consist of trade and other accounts receivable. The Company has not incurred significant losses on its accounts receivable in the past. (2)(n) Fiscal Year-End --------------- The Company`s fiscal year end is the last Saturday in December or the first Saturday in January, which results in a 52- or 53-week year. Fiscal year 1999 consisted of 53 weeks and fiscal years 1998, and 1997, consisted of 52 weeks. (2)(o) Stock-based Compensation Plans ------------------------------- The Company has adopted the disclosure requirements of Statements of Financial Accounting Standards (SFAS) No.123, `Accounting for Stock- Based Compensation`. The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, `Accounting for Stock Issued to Employees`. No stock-based compensation costs were recognized in 1999, 1998, and 1997. (3) Supplemental Cash Flow Information ---------------------------------- No equipment was acquired through capital lease obligations in 1999 or 1998. The Company acquired equipment through capital lease obligations in 1997 in the amount of $135,160. The Company paid interest on these capital leases amounting to $15,957, $20,710, and $15,196 in fiscal years 1999, 1998, and 1997, respectively. In fiscal 1998 the Company issued 4,463,916 shares of common stock upon conversion of note principal and accrued interest in the amount of $2,231,959, and paid $160,542 in cash for accrued interest. The Company paid federal income taxes of $36,066 and $21,060 in 1998 and 1997 respectively. In 1999 the Company recognized a gain of $104,225 on the sale of equipment. At January 1, 2000 a receivable of $94,065 was outstanding on the transaction. (4) Leases ------ At January 1, 2000 the Company had production equipment with a cost of $262,108 and accumulated amortization of $125,349 under capital leases. At December 26, 1998 the Company had production equipment with a cost of $262,108 and accumulated amortization of $78,390 under capital leases. Future payments required under capital lease obligations are as follows at January 1, 2000: 2000 62,916 2001 56,940 2002 21,497 -------- Total future minimum lease payments 141,353 -------- Less amount representing interest 16,198 -------- Present value of net future lease payments 125,155 Less current portion 52,255 -------- Long-term obligation under capital leases $ 72,900 ======== The Company is operating at its Chartley facility as a tenant-at- will. Total rental expense for operating leases was $82,000 for 1999, $82,000 for 1998 and $67,500 for 1997. (5) Stock-Based Compensation Plans ------------------------------ In 1999 no options were exercised by Company employees. In 1998 Company employees exercised options for 20,354 shares of common stock at market prices between $0.18 and $.0625. In 1997 Company employees exercised options for 43,816 shares of common stock at market prices between $0.625 and $2.375. In 1999 the Company granted 311,500 options at fair market values of $1.00 to $1.53 under the 1989 Stock Option Plan and the 1999 Stock Incentive Plan. In 1998 the Company granted 51,000 options at fair market values of $1.44 to $2.375 under the 1989 Stock Option Plan. In 1997, under the 1989 Stock Option Plan, the Company granted 109,000 options at fair market value of $0.18 with similar terms and conditions to existing option holders in exchange for the previously issued options. As of January 1, 2000, the total number of options outstanding under all option plans was 632,853. The Company adopted the 1999 Stock Incentive Plan ("1999 Plan") on January 22, 1999. Under the terms of the 1999 Plan all of the Company`s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards. In 1999, options to purchase 273,500 shares of the Company`s Common Stock were granted to employees and directors under the 1999 Plan. All options were nonstatutory stock options granted at the fair market value of the stock, and expire ten years from the date of grant. The options granted to employees vest in equal annual installments over a five-year period. The options granted to directors vest one year from date of grant. The 1999 Plan includes provisions for the acceleration of vesting in the event of a change in control of the Company. Under the 1999 Plan a total of 1,250,000 shares of common stock is available for issuance. In 1999, options to purchase 273,500 shares of the Company`s Common Stock were granted to employees and directors, leaving 976,500 shares available for grant as of January 1, 2000. As of January 1, 2000 the 1999 Plan is the only stock option plan from which awards can be made, all other options plans have expired. The 1984 Stock Option Plan expired on August 24, 1994 and no additional grants can be made from this plan. The 1989 Stock Option Plan expired on February 22, 1999 and no additional grants can be made from this plan. The 1992 Director Stock Option Plan expired on April 16, 1998 and no additional grants can be made from this plan. A total of 359,353 options granted under the 1984, 1989 and 1992 Plans prior to their expiration dates were outstanding as of January 1, 2000. The following is a summary of stock option activity for all of the above plans for the fiscal years 1999, 1998 and 1997. 1999 1998 1997 -------- -------- -------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------ ------------------ ------------------ Outstanding at beginning of year 338,698 $ 0.81 374,386 $ 0.93 430,961 $ 0.68 Granted at fair market value 311,500 $ 1.09 51,000 $ 2.04 109,000 $ 1.00 Exercised (20,354) $ 0.22 (43,816) $ 0.18 Cancelled (17,345) $ 1.58 (66,334) $ 2.57 (121,759) $ 0.41 --------- -------- --------- ------ -------- ------ Outstanding at end of year 632,853 $ .92 338,698 $ 0.81 374,386 $ 0.93 ========= ======= ========= ===== ======== ====== Options exercisable at year-end 273,053 $ .56 176,734 $ 0.60 165,461 $ 1.44 The following table summarizes information about stock options outstanding at January 1, 2000: Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Range Remaining Weighted Weighted Of Contractual Average Average Exercise Number Life Exercise Number Exercise Price Outstanding (in years) Price Exercisable Price - -------- ----------- ----------- -------- ----------- -------- $0.18 203,353 6.2 $0.18 203,353 $0.18 0.75-0.875 12,000 2.3 0.80 12,000 0.80 $1.00 243,000 9.6 1.00 0 0 1.3 - 1.53 115,000 8.48 1.35 32,666 1.35 2.188 - 2.88 59,500 6.89 2.36 25,034 2.56 ------- ------ $0.18 - $2.88 632,853 7.9 $0.93 273,053 $0.56 ======== ======= The fair value of each option grant under SFAS 123 is estimated on the date of grant using the Black-Scholes option-pricing model. The following table presents the annualized weighted average values of the significant assumptions used to estimate the fair values of the options: 1999 1998 1997 ---- ---- ---- Options issued 311,500 51,000 59,000 Risk-free interest rate 5.30% 5.52% 6.27% Expected life in years 7 7 7 Expected volatility 95% 88% 80% Expected dividends 0 0 0 All options are granted at the fair market value on the date of grant. Had compensation cost for the Company`s two employee stock option plans been recorded based on the fair value of awards at grant date consistent with the alternative method prescribed by SFAS 123, the Company`s pro forma net income for 1999, 1998, and 1997 would have been $181,810, $1,632,788, and $1,362,316 respectively. Diluted income per share for 1999, 1998 and 1997 would have been $.01, $0.14, and $0.13, respectively. The pro forma amounts include amortized fair values attributable to options granted after December 15, 1994 only and therefore, are not likely to be representative of the effects on reported net income for future years. (6) Accrued Expenses ------------ Accrued expenses consist of the following: January 1, December 26, 2000 1998 -------- -------- Accrued legal and accounting $ 37,000 $ 47,500 Accrued payroll 87,814 107,383 Accrued other 32,486 29,149 -------- -------- $ 157,300 $184,032 ======== ======== (7) Income Taxes ------------ Deferred tax assets and liabilities are as follows: January 1, December 26, 2000 1998 ------------ ------------ Net operating losses $10,683,000 $10,851,000 Vacation and other accrued expenses 88,000 79,000 Depreciation (107,000) (99,000) ------------ ------------ Total 10,664,000 10,831,000 Valuation allowance (10,664,000) (10,831,000) ----------- ----------- -- -- ============ ============ Due to the uncertainty related to the realization of the net deferred tax asset, a full valuation allowance has been provided. At January 1, 2000, the Company had net operating loss carryforwards of approximately $30,900,000 available to offset future income for U.S. Federal income tax purposes, and $2,800,000 for state income tax purposes. These operating loss carryforwards expire at various dates from the years 2000 through 2011 for federal income tax purposes and the years 1999 through 2001 for state income tax purposes. Certain provisions of the Internal Revenue Code limit the annual utilization of net operating loss carryforwards if, over a three-year period, a greater than 50% change in ownership occurs. The Company believes that it did not exceed the 50% ownership change in the three- year period ending at year-end 1999 therefore as of year-end 1999 all net operating loss carryforwards are available to offset future taxable income. (10) Retirement Savings Plan ----------------------- Effective September 1, 1987, the Company established the Retirement Savings Plan (the `Plan`) under the provisions of Section 401 of the Internal Revenue Code. Employees, as defined in the Plan, are eligible to participate in the Plan after 30 days of employment. Under the terms of the Plan, the Company may match employee contributions under such method as described in the Plan and as determined each year by the Board of Directors. Through January 1, 2000, no employer matching contributions had been made to the Plan since inception. (11) Significant Customers and Segment Information --------------------------------------------- Significant customers in 1999, 1998, and 1997 were as follows: Significant Significant Customer Customer Year ended January 1, 2000 A 67% B 8% C 6% D 4% Year ended December 26, 1998 A 72% B 13% C 6% D 1% Year ended December 28, 1997 A 56% B 9% C 9% D 10% All of the Company`s long-lived assets and operations are located in the United States. Revenue generated from overseas customers accounted for 0%, 13% and 1% for 1999, 1998, and 1997 respectively. (12) Earnings Per Share ------------------ SFAS 128 requires the following reconciliation of the basic and diluted EPS calculations. For the years ended Jan. 1, 2000 Dec. 26, 1998 Dec. 27, 1997 ------------- ------------- ------------- Basic EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Basic EPS $ 0.02 $ 0.16 $ 0.18 Diluted EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Interest on convertible debt -- 87,290 186,489 ----------- ----------- ---------- Total net income $ 238,056 $ 1,759,725 $1,563,635 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Stock options 197,310 204,749 191,040 Interest converted 359,292 -- Convertible debt -- 1,417,425 4,289,324 ----------- ----------- ---------- Total Shares 12,483,279 12,547,427 12,279,643 Diluted EPS $ 0.02 $ 0.14 $ 0.13 EX-10.21 2 Ceramics Process Systems 2000 Stock Incentive Plan Adopted by the Board of Directors January 22, 1999 1. Purpose The purpose of this 1999 Stock Incentive Plan (the "Plan") of Ceramics Process Systems Corporation, a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any of the Company's present or future subsidiary corporations of as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code") and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Board of Directors of the Company (the "Board"). 2. Eligibility All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options, restricted stock awards, or other stock-based awards (each, an "Award") under the Plan. Each person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration, Delegation (1) Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. (2) Delegation to Executive Officers. To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. (3) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards (1) Number of Shares. Subject to adjustment under Section 8, Awards may be made under the Plan for up to 1,250,000 shares of common stock, $0.01 par value per share, of the Company (the "Common Stock"). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (2) Per-Participant Limit. Subject to adjustment under Section 8, the maximum number of shares of Common Stock with respect to which an Award may be granted to any Participant under the Plan shall be 250,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. 5. Stock Options (1) General. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (2) Incentive Stock Options. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (3) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement; provided, however, that the exercise price shall be not less than 100% of the fair market value of the Common Stock, as determined by the Board, at the time the Option is granted. (4) Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement; provided, however, that no Option will be granted for a term in excess of 10 years. (5) Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (6) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (3) when the Common Stock is registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith ("Fair Market Value"), provided (i) such method of payment is then permitted under applicable law and (ii) such Common Stock was owned by the Participant at least six months prior to such delivery; (4) to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or (5) by any combination of the above permitted forms of payment. 6. Restricted Stock (1) Grants. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a "Restricted Stock Award"). (2) Terms and Conditions. The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Other Stock-Based Awards The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 8. Adjustments for Changes in Common Stock and Certain Other Events (1) Changes in Capitalization. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limit set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, (iv) the repurchase price per share subject to each outstanding Restricted Stock Award, and (v) the terms of each other outstanding Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 8(a) applies and Section 8(c) also applies to any event, Section 8(c) shall be applicable to such event, and this Section 8(a) shall not be applicable. (2) Liquidation or Dissolution. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date. The Board may specify the effect of a liquidation or dissolution on any Restricted Stock Award or other Award granted under the Plan at the time of the grant of such Award. (3) Acquisition and Change in Control Events (1) Definitions (1) An "Acquisition Event" shall mean: (1) any merger or consolidation of the Company with or into another entity as a result of which the Common Stock is converted into or exchanged for the right to receive cash, securities or other property; or (2) any exchange of shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction. (2) A "Change in Control Event" shall mean: (1) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) thirty percent (30%) or more of either (x) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then- outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (C) any acquisition by any corporation pursuant to a Business Combination (as defined below) which complies with clauses (x) and (y) of subsection (iii) of this definition or (D) any acquisition by (i) American Research and Development I, L.P.; (ii) American Research and Development III, L.P.; (iii) Ampersand Specialty Material Ventures Limited Partnership; (iv) Grant C. Bennett or (v) Waco Partners (each such party is referred to herein as an "Exempt Person") of any shares of Common Stock; provided that, after such acquisition, such Exempt Person does not beneficially own more than forty- five percent (45%) of either (i) the Outstanding Company Common Stock or (ii) the Outstanding Company Voting Securities; or (2) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (x) who was a member of the Board on the date of the initial adoption of this Plan by the Board or (y) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (y) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or (3) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (x) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination and (y) no Person (excluding the Acquiring Corporation, any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation or any Exempt Person) beneficially owns, directly or indirectly, 30% or more of the then- outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination). (2) Effect on Options (1) Acquisition Event. Upon the occurrence of an Acquisition Event (regardless of whether such event also constitutes a Change in Control Event), or the execution by the Company of any agreement with respect to an Acquisition Event (regardless of whether such event will result in a Change in Control Event), the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof); provided that if such Acquisition Event also constitutes a Change in Control Event, except to the extent specifically provided to the contrary in the instrument evidencing any Option or any other agreement between a Participant and the Company, such assumed or substituted options shall be immediately exercisable in full upon the occurrence of such Acquisition Event. For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Acquisition Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Acquisition Event, the consideration (whether cash, securities or other property) received as a result of the Acquisition Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Acquisition Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Acquisition Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Acquisition Event. Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants before the consummation of such Acquisition Event; provided, however, in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. (2) Change in Control Event that is not an Acquisition Event. Upon the occurrence of a Change in Control Event that does not also constitute an Acquisition Event, except to the extent specifically provided to the contrary in the instrument evidencing any Option or any other agreement between a Participant and the Company, all Options then-outstanding shall automatically become immediately exercisable in full. (3) Effect on Restricted Stock Awards (1) Acquisition Event that is not a Change in Control Event. Upon the occurrence of an Acquisition Event that is not a Change in Control Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company's successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Acquisition Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award. (2) Change in Control Event. Upon the occurrence of a Change in Control Event (regardless of whether such event also constitutes an Acquisition Event), except to the extent specifically provided to the contrary in the instrument evidencing any Restricted Stock Award or any other agreement between a Participant and the Company, all restrictions and conditions on all Restricted Stock Awards then-outstanding shall automatically be deemed terminated or satisfied. (4) Effect on Other Awards (1) Acquisition Event that is not a Change in Control Event. The Board shall specify the effect of an Acquisition Event that is not a Change in Control Event on any other Award granted under the Plan at the time of the grant of such Award. (2) Change in Control Event. Upon the occurrence of a Change in Control Event (regardless of whether such event also constitutes an Acquisition Event), except to the extent specifically provided to the contrary in the instrument evidencing any other Award or any other agreement between a Participant and the Company, all other Awards shall become exercisable, realizable or vested in full, or shall be free of all conditions or restrictions, as applicable to each such Award. 9. General Provisions Applicable to Awards (1) Transferability of Awards. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (2) Documentation. Each Award shall be evidenced by a written instrument in such form as the Board shall determine. Such written instrument may be in the form of an agreement signed by the Company and the Participant or a written confirming memorandum to the Participant from the Company. Each Award may contain terms and conditions in addition to those set forth in the Plan. (3) Board Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly. (4) Termination of Status. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. (5) Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, when the Common Stock is registered under the Exchange Act, Participants may, to the extent then permitted under applicable law, satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (6) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (7) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (8) Acceleration. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of restrictions in full or in part or that any other Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 10. Miscellaneous (1) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (2) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. (3) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board but no Award granted to a Participant designated by the Board as subject to Section 162(m) of the Code by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders to the extent stockholder approval is required by Section 162(m) in the manner required under Section 162(m) (including the vote required under Section 162(m)). No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (4) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time provided that to the extent required by Section 162(m) of the Code, no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders as required by Section 162(m) (including the vote required under Section 162(m)). (5) Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. EX-11 3 SFAS 128 requires the following reconciliation of the basic and diluted EPS calculations. For the years ended Jan. 1, 2000 Dec. 26, 1998 Dec. 27, 1997 ------------- ------------- ------------- Basic EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Basic EPS $ 0.02 $ 0.16 $ 0.18 Diluted EPS Computation: Numerator: Net income $ 238,056 $ 1,672,435 $1,377,146 Interest on convertible debt -- 87,290 186,489 ----------- ----------- ---------- Total net income $ 238,056 $ 1,759,725 $1,563,635 Denominator: Weighted average common shares outstanding 12,285,969 10,565,961 7,799,279 Stock options 197,310 204,749 191,040 Interest converted 359,292 -- Convertible debt -- 1,417,425 4,289,324 ----------- ----------- ---------- Total Shares 12,483,279 12,547,427 12,279,643 Diluted EPS $ 0.02 $ 0.14 $ 0.13 EX-23 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.33-25690, 33-18398, 33-42556, 33-47587) of Ceramics Process Systems Corporation of our report dated March 3, 2000 relating to the consolidated financial statements which appear in this 10-K. PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts March 29, 2000 EX-27 5
5 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 10K for Period ending January 1, 2000. U.S. DOLLARS YEAR JAN-01-2000 JAN-01-2000 1 1,033,522 306,672 496,634 0 307,348 2,174,370 2,215,853 1,204,000 3,186,223 362,107 0 0 0 12,285,969 0 3,186,223 4,805,865 4,805,865 3,812,094 3,722,437 0 0 15,957 232,127 (5,929) 238,056 0 0 0 238,056 0.02 0.02
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