-----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, REArwah41b86ePSNj9cJQ8EX3RpNDHTvFgL999pnzobjF3NHJaxMLVIfMmfPPQQo WEaH58L67NT2qeOKF6iaUA== 0000950135-98-006128.txt : 19981217 0000950135-98-006128.hdr.sgml : 19981217 ACCESSION NUMBER: 0000950135-98-006128 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERION TECHNOLOGIES INC CENTRAL INDEX KEY: 0001011067 STANDARD INDUSTRIAL CLASSIFICATION: 3572 IRS NUMBER: 020485458 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-28062 FILM NUMBER: 98763414 BUSINESS ADDRESS: STREET 1: 1401 INTERSTATE DR CITY: CHAMPAIGN STATE: IL ZIP: 61821 BUSINESS PHONE: 2173593700 MAIL ADDRESS: STREET 1: 1401 INTERSTATE DRIVE CITY: CHAMPAIGN STATE: IL ZIP: 61821 10-K405/A 1 CERION TECHNOLOGIES, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number: 1-5492-1 CERION TECHNOLOGIES INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) DELAWARE 02-0485458 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1401 INTERSTATE DRIVE, CHAMPAIGN, IL 61822-1065 ----------------------------------------------------- (Address of Principal Executive Offices and Zip Code) (217) 359-3700 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On November 23, 1998, the aggregate market value of the voting stock held by nonaffiliates totaled approximately $1,244,425 based on the closing stock price as reported by The Nasdaq Stock Market. On November 23, 1998, there were 7,054,593 shares of common stock, $.01 par value, of the registrant issued and outstanding. Cerion Technologies Inc. (the "Company") is amending Exhibit 99.1, "Financial Section of the 1997 Annual Report to Shareholders, pages 12 through 23", to its Form 10-K for the fiscal year ended December 31, 1997. The modification includes two new "Subsequent Event" footnotes. The first, "Subsequent Event - Liquidation", references the previously announced decision of the Company's Board of Directors on September 14, 1998 to cease operations on November 15, 1998 and seek shareholder approval for an orderly liquidation of the Company's assets. The second, "Subsequent Event-Accounts Receivable and Fixed Asset Write-Down During Fiscal 1998 (Unaudited)" describes charges taken by the Company during the second and third quarters of 1998 related to the Impairment Loss on Long-Lived Assets and Bad Debt Charges. (See Exhibit 99.1, page 23 for each of these added disclosures.) Furthermore, the "Report of Independent Accountants" included previously on page 23 of Exhibit 99.1 has been modified to include an additional paragraph that refers the reader of the report to the "Subsequent Event - Liquidation" footnote. (See Exhibit 99.1, pages 24-25 for the updated "Report of Independent Accountants".) 2 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. List of Exhibits. EXHIBIT NUMBER DESCRIPTION 99.1 Financial Section of the 1997 Annual Report to Shareholders, pages 12 through 25, including financial statements modified for significant post balance sheet events (Exhibit 99.1 originally filed as Exhibit 99.1 of Form 10-K filed for the year ended December 31, 1997, File Number 1-5492-1). 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CERION TECHNOLOGIES INC. (Registrant) Date: December 3, 1998 By: /s/ RICHARD A. CLARK --------------------------------------------- Richard A. Clark Vice President-Finance, Chief Financial Officer and Treasurer (principal financial and duly authorized officer) EX-99.1 2 FINANCIALS FROM 1997 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 99.1 FINANCIAL SECTION OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS, PAGES 12 THROUGH 25, INCLUDING FINANCIAL STATEMENTS MODIFIED FOR SIGNIFICANT POST BALANCE SHEET EVENTS (EXHIBIT 99.1 ORIGINALLY FILED AS EXHIBIT 99.1 OF FORM 10-K FILED FOR THE YEAR ENDED DECEMBER 31, 1997, FILE NUMBER 1-5492-1). Cerion Technologies Inc. Statements of Operations
Years ended December 31 -------------------------------- (In thousands, except per share data) 1997 1996 1995 - - -------------------------------------------------------------------------------- Net sales $ 31,810 $ 36,540 $ 28,175 Cost of sales 26,606 26,729 19,668 -------------------------------- Gross profit 5,204 9,811 8,507 Selling, general and administrative expenses 4,405 5,561 2,537 -------------------------------- Operating income 799 4,250 5,970 Interest income (expense) 366 169 (316) -------------------------------- Income before provision for income taxes 1,165 4,419 5,654 Provision for income taxes 338 1,914 2,210 -------------------------------- Net income $ 827 $ 2,505 $ 3,444 -------------------------------- Net income per share, basic and diluted $ .12 $ .39 $ .64 Average shares outstanding 7,024 6,379 5,400 --------------------------------
The notes are an integral part of the financial statements. 12 2 Cerion Technologies Inc. Balance Sheets
December 31, ------------------ (In thousands, except share and per share data) 1997 1996 - - ---------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 4,588 $ 9,300 Accounts receivable, net of allowances for doubtful accounts and customer returns of $385 and $234, respectively 10,271 2,928 Inventories 726 1,046 Prepaid expenses and other assets 208 395 Deferred income taxes 637 273 ------------------ Total current assets 16,430 13,942 Property, plant and equipment, net 8,769 9,391 Other assets 66 -- ------------------ $25,265 $23,333 ================== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $ 4,666 $ 3,694 ------------------ Total current liabilities 4,666 3,694 Deferred income taxes 366 273 Commitments and contingencies Stockholders' Equity: Preferred Stock, par value $.01 per share, 100,000 shares authorized, none issued -- -- Common Stock, par value $.01 per share, 20,000,000 shares authorized; 7,028,337 and 7,016,184 shares issued and outstanding, respectively 70 70 Additional paid-in capital 18,679 18,639 Retained earnings 1,484 657 ------------------ Total stockholders' equity 20,233 19,366 ------------------ $25,265 $23,333 ==================
The notes are an integral part of the financial statements. 13 3 Cerion Technologies Inc. Statements of Cash Flows
Years ended December 31, ----------------------------------------- (In thousands) 1997 1996 1995 - - ------------------------------------------------------------------------------------------------------- Cash flows provided by (used in) operating activities: Net income $ 827 $ 2,505 $ 3,444 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 2,466 2,099 1,035 Loss on disposal of property, plant and equipment 201 - - Deferred income taxes (271) (249) 158 Changes in operating assets and liabilities: Accounts receivable (7,343) 3,002 (2,956) Inventories 320 (734) 109 Accounts payable and accrued expenses 972 621 2,152 Prepaid expenses and other assets 187 (413) 31 ----------------------------------------- Net cash provided by (used in) operating activities (2,641) 6,831 3,973 ----------------------------------------- Cash flows provided by (used in) investing activities: Additions to property, plant and equipment (2,164) (6,107) (2,564) Proceeds from sale of property, plant and equipment 153 - 114 Purchase of short-term investments (6,750) (4,496) - Proceeds from redemption of short-term investments 6,750 4,496 - ----------------------------------------- Cash flows used in investing activities (2,011) (6,107) (2,450) ----------------------------------------- Cash flows provided by (used in) financing activities: Payments to parent company - - (1,107) Debt issuance costs (100) - - Repayment of borrowings - (11,142) (342) Proceeds from shares issued 40 19,545 - ----------------------------------------- Cash flows provided by (used in) financing activities (60) 8,403 (1,449) ----------------------------------------- Increase (decrease) in cash (4,712) 9,127 74 Cash at beginning of year 9,300 173 99 ----------------------------------------- Cash at end of year $ 4,588 $ 9,300 $ 173 ----------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ - $ 14 $ 316 Income taxes paid 236 226 - -----------------------------------------
The notes are an integral part of the financial statements. 14 4 Cerion Technologies Inc. Notes to the Financial Statements Description of Business Business Definition: Until its initial public offering in May 1996, the business of Cerion Technologies Inc. (the "Company") had been operated by Nashua Corporation ("Nashua" or the "Parent") since its acquisition in 1986 by Nashua. As of December 31, 1995, Nashua converted the Company into a wholly owned subsidiary of Nashua and contributed to it the business of the Nashua Precision Technologies division in return for the Company's stock and its assumption of the liabilities of the business. The Company was renamed Cerion Technologies Inc. on March 4, 1996. The Company develops, manufactures and markets precision-machined aluminum disk substrates that are used in the production of magnetic thin-film disks for hard disk drives of portable and desktop computers, network servers, add-on storage devices and storage upgrades. The Company operates in one business segment. All sales are denominated in U.S. dollars. Basis of Presentation: The accompanying financial statements for the year ended December 31, 1995 and the period January 1, 1996 through May 24, 1996, have been prepared as if the Company had operated as an independent, stand-alone entity. Such financial statements have been prepared using the historical basis of accounting and include all of the assets, liabilities, revenues and expenses of the Company previously included in Nashua's consolidated financial statements; however, certain adjustments have been made to reflect the operations of the Company on a stand-alone basis. Consequently, these statements include balances for other assets and liabilities related to the Company that were previously included in Nashua's consolidated financial statements except that there is no allocation to the Company of Nashua's borrowings. However, an allocation of Nashua's interest expense has been recorded as determined based upon the Company's net assets as a proportion of Nashua's consolidated net assets. Management believes that the basis for such allocations is reasonable. The Company's results of operations were included in Nashua's federal, state and local income tax returns through May 24, 1996. See "Parent Company Investment" in the following notes. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 55 ("SAB 55"), these statements have been adjusted to include certain corporate expenses incurred by the Parent on the Company's behalf. The financial statements may not necessarily present the Company's financial position and results of operations as if the Company were a stand-alone entity. Beginning on May 24, 1996, the Company's financial statements have been presented on a stand-alone basis. Summary of Significant Accounting Policies Inventories: The Company values all of its inventories at the lower of cost or market on a first-in, first-out basis (FIFO). Property, Plant and Equipment, Net: Property, plant and equipment is recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated and related gains or losses reflected in the statement of operations. The estimated useful lives of the assets are as follows: Buildings and improvements 10 to 40 years Machinery and equipment 4 to 10 years Furniture and fixtures 3 to 10 years Shipping containers 2 years
Revenue Recognition: Sales of products are recorded based on product shipment to customers. 15 5 Cerion Technologies Inc. Research, Development and Engineering: Included in selling, general and administrative expenses are research, development and engineering expenditures of $567,000, $1,071,000 and $648,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Research, development and engineering expenditures are charged to operations as incurred. Income Taxes: The results of the Company's operations have been included in the federal and state consolidated income tax returns of the Parent for the year ended December 31, 1995 and the provision for income taxes has been calculated as if the Company was a stand-alone taxpayer. Prepaid or deferred income taxes result principally from the use of different methods of depreciation for income tax and financial reporting purposes, the recognition of expenses for financial reporting purposes in years different from those in which the expenses are deductible for income tax purposes and the recognition of the tax benefit of net operating losses. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at December 31, 1997 and 1996 and the reported amounts of net sales and expenses during the three years in the period ended December 31, 1997. Actual results could differ from those estimates. Cash Equivalents: The Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1997 and 1996, the Company held $4.6 million and $7.4 million, respectively, of various commercial paper instruments carried at cost, which approximated market. Accounting for Stock-Based Compensation: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company adopted SFAS 123 through disclosure only. Impairment of Long-Lived Assets: In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The initial adoption of SFAS 121 had no impact on the Company's financial statements. Net Income Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The adoption of SFAS 128 had no impact on the calculation of net income per share for the periods presented. Net income per share for the periods presented is determined by dividing the applicable net income by the weighted average number of common shares outstanding during the period. For periods prior to the initial public offering, the weighted average number of common shares outstanding was assumed to be the number of shares issued to Nashua on December 31, 1995. Options to purchase shares were outstanding during the years ended December 31, 1997 and 1996 but were not included in the diluted earnings per share computation because the exercise price exceeded the average market price for the period. Reclassifications: Certain amounts within the footnotes related to the classification of Research, Development and Engineering Expenses and Accounts Payable and Accrued Expenses in the prior years' consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on previously reported net income. Related Party Transactions and Allocations Cash: The Company utilized Nashua's centralized cash management services until May 30, 1996. Under arrangements with Nashua, excess cash generated by the Company was retained by Nashua until May 24, 1996. 16 6 Cerion Technologies Inc. Product Sales: During the years ended December 31, 1997, 1996 and 1995, the Company had sales of approximately $0, $208,000 and $645,000, respectively, to divisions of Nashua. There were no amounts due from these divisions at December 31, 1997 and 1996. The Company believes that the product prices for such sales were at market prices. Corporate Services: In accordance with SAB 55, Nashua has allocated a portion of its domestic corporate expenses and charges to its divisions, including the Company through May 24, 1996. These expenses included management and corporate overhead; benefit administration; risk management/insurance administration; tax and treasury/cash management services; environmental services; litigation administration services; and other support and executive functions. Allocations and charges for services were based on either a direct cost pass-through or a percentage allocation based on factors such as net sales, management time or headcount. Such allocations and corporate charges totaled $147,000 and $227,000 for the years ended December 31, 1996 and 1995, respectively. The allocation and charges ceased on May 24, 1996. Certain research and development expenses of the Parent related to the Company's business were allocated to the Company in accordance with SAB 55. These amounts totaled $70,000 and $69,000 for the years ended December 31, 1996 and 1995, respectively, and are included in selling, general and administrative expenses. Management believes that the basis used for allocating corporate services was reasonable. However, the terms of these transactions may have differed from those that would have resulted from transactions among unrelated parties. Management believes that related expenses that would have been incurred during the year ended December 31, 1995 had the Company operated on a stand-alone basis would have approximated $784,000 (unaudited). Employee fringe benefit expenses were allocated to the Company based on Nashua's total benefits costs and the proportion of Nashua's total salaries and wages represented by the Company's salaries and wages. Fringe benefit costs, which are reflected in cost of sales and selling, general and administrative expenses, include employer FICA and unemployment taxes, medical insurance and annual accruals or contributions made for the Nashua Corporation Retirement Plan for Salaried Employees, the Nashua Corporation Hourly Employees Retirement Plan and the Nashua Corporation Employees' Savings Plan. See "Employee Retirement Plans" in the following notes. The Company was allocated $168,000 and $290,000 for the years ended December 31, 1996 and 1995, respectively, for these expenses. Management believes the allocation method for fringe benefit costs was reasonable. Such allocation ceased on May 24, 1996. Inventories Inventories consisted of the following:
December 31, --------------------------- 1997 1996 - - -------------------------------------------------------------------------------- Raw materials $ 454,000 $ 442,000 Work in progress 24,000 19,000 Finished goods 248,000 585,000 --------------------------- $ 726,000 $1,046,000 ---------------------------
17 7 Cerion Technologies Inc. Property, Plant and Equipment Property, plant and equipment consisted of the following:
December 31, ---------------------------- 1997 1996 - - -------------------------------------------------------------------------------- Land $ 260,000 $ 260,000 Buildings and improvements 3,908,000 3,908,000 Machinery and equipment 8,594,000 7,571,000 Furniture and fixtures 310,000 302,000 Construction in progress 253,000 4,000 Containers 1,950,000 1,882,000 ---------------------------- 15,275,000 13,927,000 Less: accumulated depreciation (6,506,000) (4,536,000) ---------------------------- $ 8,769,000 $ 9,391,000 ----------------------------
Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following:
December 31, ------------------------ 1997 1996 - - -------------------------------------------------------------------------------- Accounts payable -- trade $ 2,839,000 $ 1,802,000 Container deposits 18,000 585,000 Accrued payroll and benefits 925,000 727,000 Income taxes payable 304,000 58,000 Other 580,000 522,000 ------------------------ $ 4,666,000 $ 3,694,000 ------------------------
Employee Retirement Plans The Company adopted a defined contribution plan, the Cerion Technologies Inc. Employees Savings Plan ("Savings Plan") as of May 24, 1996. The Savings Plan allows full-time employees to become eligible in the month following employment to make certain tax-deferred voluntary contributions that the Company generally matches with a 50 percent contribution, limited to three percent of an employee's base pay. The Company's expense for the defined contribution plan totaled $145,000 in 1997 and $79,000 from May 24, 1996 through December 31, 1996. Retirement benefits were provided to the Company's employees through the Nashua Corporation Employees' Savings Plan ("Nashua Savings Plan"), the Nashua Corporation Hourly Employees' Retirement Plan and the Nashua Corporation Retirement Plan for Salaried Employees ("Retirement Plans") until May 24, 1996. The Retirement Plans were defined benefit plans. Guaranteed retirement income levels were determined based on years of service and salary levels as integrated with Social Security benefits. Employees were eligible under the Retirement Plans after one year of continuous service and were 100 percent vested after five years of service. Nashua's Retirement Plans are subject to Internal Revenue Service and ERISA funding limitations. Assets of the plans were invested in interest-bearing cash equivalents, fixed income securities and common stocks. Total expense under the Nashua Savings and Retirement Plans for the years presented through May 24, 1996 is included in the Company's financial statements through the fringe benefit allocations discussed in a prior note: "Related Party Transactions and Allocations." The Company's employees were terminated from future participation in the plan as of May 24, 1996. Nashua's Savings Plan had similar terms and limitations as Cerion's Savings Plan. 18 8 Cerion Technologies Inc. Leases Lease agreements cover warehouse space and office equipment under operating lease arrangements. These leases have expiration dates through January 1, 2000. Rental expense was approximately $70,000 in 1997, $92,000 in 1996 and $78,000 in 1995. Future minimum rents payable under noncancelable leases with initial terms exceeding one year are as follows: $57,000 in 1998 and $54,000 in 1999. Income Taxes
Years ended December 31, ----------------------------------------- 1997 1996 1995 ----------------------------------------- Current: Federal $ 493,000 $ 1,783,000 $ 1,736,000 State 116,000 380,000 316,000 ----------------------------------------- Total current 609,000 2,163,000 2,052,000 Deferred: Federal (244,000) (171,000) 134,000 State (27,000) (78,000) 24,000 ----------------------------------------- Total deferred (271,000) (249,000) 158,000 ----------------------------------------- Provision for income taxes $ 338,000 $ 1,914,000 $ 2,210,000 =========================================
Deferred tax liabilities and assets are comprised of the following:
December 31, ------------------------ 1997 1996 - - -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 366,000 $ 273,000 ------------------------ Deferred tax assets: Accrued vacation $ 49,000 $ 63,000 Inventory reserve 90,000 187,000 Bad debt reserve 154,000 54,000 Accrued bonus 135,000 80,000 Accrued fees 160,000 25,000 Other 49,000 11,000 ------------------------ 637,000 420,000 Deferred tax asset valuation allowance - (147,000) ------------------------ $ 637,000 $ 273,000 ========================
Reconciliation between income taxes computed using the Federal statutory income tax rate and the Company's effective tax rate are as follows:
Years ended December 31, ------------------------- 1997 1996 1995 - - -------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of Federal tax benefit 5.0% 4.7% 3.9% Tax asset valuation reserve (12.6)% 3.3% - Other, net 1.6% 0.3% 0.2% ------------------------- Effective tax rate 29.0% 43.3% 39.1% =========================
19 9 Cerion Technologies Inc. Stockholders' Equity The Company, on December 31, 1995, initially issued 5,400,000 shares of Common Stock, $.01 par value per share, to Nashua. In exchange, Nashua contributed to the Company the business of the Nashua Precision Technologies Division, including the liabilities of the business.
Parent Company Common Paid-in Retained Investment Stock Capital Earnings - - --------------------------------------------------------------------------------------------------------- Balances, December 31, 1995 $ 8,458,000 $ - $ - $ - Issuance of Common Stock (8,458,000) 54,000 8,404,000 - Nashua Notes - - (9,294,000) (1,848,000) Proceeds from initial public offering and selling of 1,615,000 shares - 16,000 19,509,000 - Issuance of Common Stock in lieu of cash payment of directors' fees - - 20,000 - Net income - - - 2,505,000 --------------------------------------------------------------- Balances, December 31, 1996 - 70,000 18,639,000 657,000 Issuance of Common Stock in lieu of cash payment of directors' fees - - 40,000 - Net income - - - 827,000 --------------------------------------------------------------- Balances, December 31, 1997 $ - $ 70,000 $ 18,679,000 $ 1,484,000 ===============================================================
Issuance of Notes Payable to the Parent: As of March 1, 1996, Cerion distributed a dividend to Nashua in the form of a Promissory Note (the "First Nashua Note") payable to Nashua in the principal sum of $10,000,000. The First Nashua Note had an annual interest rate of 7.32 percent from March 1, 1996 to September 30, 1996. As of March 29, 1996, the Company distributed a second dividend to Nashua in the form of a Promissory Note (the "Second Nashua Note") payable to Nashua in the principal amount of $1,142,000. The Second Nashua Note had an annual interest rate of 7.32 percent. On May 31, 1996, the Company repaid the two outstanding Promissory Notes having a combined principal sum of $11,142,000. Stock Split: During March 1996, the Company effected a 1,800-for-one stock split. All share data in the accompanying financial statements have been retroactively restated to reflect the stock split. On May 30, 1996, the Company closed its initial public offering of its stock with the sale of 4,416,000 shares of its Common Stock. Of the 4,416,000 shares of Common Stock sold, 1,615,000 shares were sold by the Company and 2,801,000 were sold by Nashua. Nashua continues to own approximately 37 percent of the Company's outstanding Common Stock. The shares were sold to the public at $13.00 per share. The net proceeds to the Company after the Underwriting Discount was $19,525,350. Parent Company Investment Because the Company operated at various times as a division and as part of a wholly owned subsidiary of Nashua, its equity accounts have been combined and presented as Parent Company Investment as of December 31, 1995. Parent Company Investment also includes balances related to intercompany transactions and other charges and credits as more fully described in a prior note: "Summary of Significant Accounting Policies." No interest has been charged on Parent Company Investment. A summary of changes in Parent Company Investment is as follows:
Years ended December 31, ------------------------------- 1996 1995 ------------------------------- Beginning balance $ 8,458,000 $ 6,121,000 Net income - 3,444,000 Issuance of Common Stock (8,458,000) - Payments to Parent, net - (1,107,000) ------------------------------- Ending balance $ - $ 8,458,000 -------------------------------
20 10 Cerion Technologies Inc. Concentration of Business Activities Customer Concentration: During the years ended December 31, 1997 and 1996, the Company shipped the majority of its aluminum disk substrates to three customers. These three customers represented approximately 29 percent, 10 percent and 44 percent, in the year ended December 31, 1996 and approximately 41 percent, 43 percent and two percent in the year ended December 31, 1997, respectively, of net sales. Concentration of Credit Risk: The Company sells in excess of 50 percent of its production to customers in the U.S., with approximately 43 percent of 1997 and 11 percent of 1996 sales being made to companies located in the Pacific Rim. The Company performs periodic credit evaluations of its customers. The Company does not require collateral for its receivables and maintains an allowance for potential credit losses. Dependence on Supplier: The Company relies solely on one supplier for aluminum blanks used in the manufacture of aluminum disk substrates. Aluminum blank purchases were approximately $7,642,000, $8,536,000 and $5,729,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 1996 Stock Incentive Plan In February 1996, the Board of Directors adopted the 1996 Stock Incentive Plan (the "Plan") and reserved 701,500 shares of Common Stock. The Plan provides for grants of incentive stock options to employees and directors of the Company and grants of stock to non-employee directors of the Company. The options are separated into two categories with different vesting provisions. The first category, one-year vesting options, will become exercisable on the first anniversary date of the option grant if the optionee remains an employee or director of the Company on such date. The second category, performance-accelerated options, will become exercisable in tranches of 25 percent each based upon the Common Stock trading, for a period of 20 consecutive trading days, at an average premium of 25 percent, 50 percent, 75 percent and 100 percent, respectively, above the exercise price, if the optionee remains an employee of the Company on such date. However, if any such performance goals are met prior to the first anniversary of the grant date, the shares that would otherwise become exercisable thereby only become exercisable on the first anniversary date of the grant date, if the optionee remains an employee of the Company on such date. On the eighth anniversary of the grant date, any remaining shares subject to a "performance-accelerated" option will become exercisable, if the optionee remains an employee of the Company on such date. In the event of a merger, consolidation, reverse merger or reorganization, or certain other events constituting a "Change in Corporate Control" as defined in the Plan, options outstanding under the Plan automatically will become fully vested and will terminate if not exercised prior to such event. No option granted under the Plan may be exercised after the expiration of ten years from the date it was granted. The exercise price of options under the Plan will equal the fair market value of the Common Stock on the date prior to the grant. The Plan will terminate in January 2006, unless earlier terminated by the Board of Directors. Had compensation cost been determined on the basis of fair value pursuant to SFAS 123, net income and net income per share for 1997 would have been $73,000 and $.01, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: dividend yield of zero percent for all years, expected volatility of 77 percent, risk-free interest rate of 6.3 percent and expected life of 5.9 years. 21 11 Cerion Technologies Inc. A summary of the status of the Company's stock options under the incentive plan follows:
Outstanding Options Price Exercisable Options per Share Options - - --------------------------------------------------------------------------------------------- December 31, 1995 0 - - Options granted 422,680 $ 13.00 None Options forfeited 52,500 13.00 None -------------------------------------------- December 31, 1996 370,180 13.00 None Options granted 389,090 2.25-4.13 None Options forfeited 374,180 4.13-13.00 None -------------------------------------------- December 31, 1997 385,090 $ 2.25-4.13 None ============================================
Revolving Credit Facility The Company secured on March 7, 1997 a $7.5 million revolving credit facility ("facility") that matures March 7, 2000. The facility is collateralized by all the Company's assets and the Company may borrow against the facility based upon prescribed advance rates applied to certain of the Company's accounts receivable and inventories. Availability under the facility as of December 31, 1997 totaled $3.2 million. The facility bears interest at the bank's prime rate plus 1/4 percent. The facility's terms include a fee for the unused portion of the credit facility equal to 3/8 percent per annum, payable monthly. The facility contains certain covenants including the maintenance of certain financial ratios. In connection with obtaining the facility, the Company paid a commitment fee equal to 100 basis points of the total facility and other costs totaling approximately $90,000 in 1997. These costs are being amortized over the term of the facility. Legal Proceedings In August and September 1996, two individual plaintiffs initiated lawsuits against the Company, Nashua, certain directors and officers of the Company, and the Company's underwriter, on behalf of classes consisting of all persons who purchased the Common Stock of the Company between May 24, 1996 and July 9, 1996. In March 1997, the two individual plaintiffs, joined by a third plaintiff, initiated a consolidated complaint with substantially the same allegations. In October 1997, the court dismissed the complaint and provided for the plaintiffs to file an amended complaint. The plaintiffs filed an amended complaint in December 1997. The amended complaint alleges that, in connection with the Company's initial public offering, the defendants issued certain materially false and misleading statements and omitted the disclosure of material facts, in particular, certain matters concerning significant customer relationships. The complaints seek damages and injunctive relief. The Company believes this lawsuit is without merit and it has substantial defenses and intends to vigorously defend against this action. Liquidity Matters During the second half of 1996 and throughout 1997, industry market supply exceeded demand, resulting in significant pricing and volume reductions and net losses for each of the last two quarters of 1996 and close to break-even performance for the first three quarters of 1997. No assurance can be given that further backwards integration by thin-film media manufacturers or other industry factors will not result in canceled orders or further volume reductions beyond levels experienced in the second half of 1996 and 1997. Additionally, the Company does not believe current market conditions will support substantial price increases in the foreseeable future. Unless the Company achieves substantial cost improvements, increased demand and no further price reductions that exceed cost reductions beyond year-end levels, the Company could incur net operating losses and negative cash flows from operating activities. Without such cost improvements and increased demand, at present cost levels and planned capital expenditures of approximately $3.0 million annually, the Company over an extended period of time may exhaust all or substantially all of its cash resources and borrowing availability under its credit facility (See the "Revolving Credit 22 12 Cerion Technologies Inc. Facility" note for a description of the borrowing limitations under the Company's credit facility). In such event, the Company would be required to pursue other alternatives to improve liquidity, including further cost reductions, sales of assets, the deferral of certain capital expenditures and obtaining additional sources of funds. Furthermore, any significant default by customers on the payment of outstanding amounts due to the Company could cause a significant reduction in liquidity and may exhaust the Company's cash resources sooner than would otherwise happen. No assurances can be given that the Company will be able to pursue such alternatives successfully. During the first quarter of 1998, one of the Company's significant customers became delinquent in the payment of outstanding accounts receivable totaling $4.1 million. This delinquency occurred because of the customer experiencing significant operating losses and negative cash flow from operations that strained the customer's liquidity. This customer's outstanding balance due to the Company exceeds on average of approximately 110 days compared to normal trade terms provided to this customer of 60 days. Future payment of this amount by the customer is expected to be structured payments over a time frame not to exceed one year. This anticipated structuring of future payments will reduce the Company's liquidity and financial flexibility. Furthermore, in the event that this customer's financial position worsens during the payment period, the risk of default increases. Subsequent Event - Liquidation On September 14, 1998, the Company's Board of Directors voted to cease operations on or about November 15, 1998 and seek approval from its shareholders for an orderly liquidation of the Company's assets. Subsequent Event - Accounts Receivable and Fixed Asset Write-Down During Fiscal 1998 (Unaudited) In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company recorded a non-cash accounting charge in the second quarter of 1998 related to the impairment of certain long-lived assets. The Company considered continuing operating losses, continuing negative cash flows, a likelihood of future reductions in market pricing for the Company's product and significant reductions in potential future orders from the Company's existing customer base, in the second quarter to be its primary indicators of potential impairment. Accordingly, the Company recognized a charge of $3.5 million, net of tax, to write down the carrying amounts of its long-lived assets to fair value. The loss is calculated as the difference between the carrying value of property, plant and equipment and the fair value of these assets based on the estimated sales value between willing buyers and sellers. As a result of the Board of Director's decision to sell the Company and subsequent decision to cease operations on or about November 15, 1998, the Company revised the estimated remaining useful lives of its long-lived assets during the third quarter of 1998. The composite remaining useful lives of the Company's long-lived assets approximated 5 years prior to the Company's decision to cease operations. The Company's decision to cease operations reduced the useful lives of the assets to approximately 19 weeks as of the beginning of the third quarter and as such the Company will depreciate the assets to the estimated salvage value of the assets over this period. Prior to the Board's decision, the Company intended to utilize the assets to consume 100% of the assets carrying value, and as such did not utilize a salvage value when determining the depreciation. During the first quarter of 1998, one of the Company's then significant customers became delinquent in the payment of outstanding accounts receivable totaling $4.1 million. This delinquency occurred because of the customer experiencing significant operating losses and negative cash flow from operations that strained the customer's liquidity. The customer made payments of $0.7 million against its obligations since the customer became delinquent, leaving a balance of $3.4 million. Due to the lack of adherence in the second quarter to the payment plan established in the first quarter and the resulting heightened risk of uncollectibility of the receivable, the Company took a charge in the second quarter of 1998 of $2.85 million, net of tax, in order to reduce the receivable to the expected recoverable value in the second quarter of 1998. The customer filed for Chapter 11 23 13 Cerion Technologies Inc. bankruptcy protection on October 11, 1998. Accordingly, the Company took an additional charge of $654,000 in the third quarter to reduce the carrying value of the receivable to zero and to record a liability for amounts received from this customer during the customary preference period which is 90 days prior to filing bankruptcy. Quarterly Operating Results and Common Stock Information (Unaudited)
1st 2nd 3rd 4th (In thousands, except per share data) Quarter Quarter Quarter Quarter Year - - ----------------------------------------------------------------------------------------------------- 1997 Net sales $ 8,266 $ 7,104 $ 6,701 $ 9,739 $ 31,810 Gross profit 1,004 947 839 2,414 5,204 Operating income (loss) 22 (87) (261) 1,125 799 Net income 66 9 45 707 827 Net income per common share .01 -- .01 .10 .12 Market bid price: High 6.88 4.38 3.00 3.44 6.88 Low 3.63 2.63 1.94 1.97 1.94 1996 Net sales $ 11,774 $ 13,440 $ 5,521 $ 5,805 $ 36,540 Gross profit (loss) 4,676 4,984 560 (409) 9,811 Operating income (loss) 3,200 3,592 (879) (1,663) 4,250 Net income (loss) 1,848 2,204 (467) (1,080) 2,505 Net income (loss) per common share (1) .34 .36 (.07) (.15) .39 Market bid price: High N/A 19.50 11.25 9.19 19.50 Low N/A 8.00 2.25 2.75 2.25 1995 Net sales $ 5,028 $ 5,890 $ 7,232 $ 10,025 $ 28,175 Gross profit 1,148 1,607 2,131 3,621 8,507 Operating income 640 1,123 1,478 2,729 5,970 Net income 338 636 854 1,616 3,444 Net income per common share (1) .06 .12 .16 .30 .64
N/A information not applicable as the Company's stock began trading on NASDAQ on May 24, 1996. The Company's stock is traded on the Nasdaq National Market. At March 9, 1998, there were approximately 2,500 record holders of Cerion's Common Stock. (1) Earnings per share data prior to May 30, 1996 assumes shares issued to Nashua on December 31, 1995 were outstanding. Report of Independent Accountants To the Board of Directors and Stockholders of Cerion Technologies Inc. In our opinion, the accompanying balance sheets and the related statements of operations and of cash flows present fairly, in all material respects, the financial position of Cerion Technologies Inc. at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the 24 14 Cerion Technologies Inc. overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the "Subsequent Event - Liquidation" note to the financial statements, the Company's Board of Directors on September 14, 1998 voted to cease operations on or about November 15, 1998 and to seek approval from its shareholders for an orderly liquidation of the Company's assets. No amounts in the accompanying financial statements have been adjusted as a result of the Board of Directors' decision. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois February 2, 1998, except as to the "Subsequent Event - Liquidation" note, which is as of September 14, 1998 25 -----END PRIVACY-ENHANCED MESSAGE-----