CPS TECHNOLOGIES CORP/DE/ - Quarter Report: 2002 September (Form 10-Q)

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended September 28, 2002
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

(Exact Name of Registrant as Specified in its Charter)

(508) 222-0614
Registrants Telephone Number, including Area Code:

Not Applicable
Former Name, Former Address and Former Fiscal Year if Changed since Last Report:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. [X] Yes [ ] No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. Number of shares of common stock outstanding as of September 28, 2002: 12,316,092.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

(1) Nature of Business

Ceramics Process Systems Corporation (the Company or CPS) serves the microprocessor, wireless communications, satellite communications, motor controller and other microelectronic markets by developing, manufacturing, and marketing advanced metal-matrix composite and ceramic components to house, interconnect and thermally manage microelectronic devices. The Company`s products are typically in the form of housings, packages, lids, substrates, thermal planes or heat sinks, and are used in applications where thermal management and or weight are important considerations.

The Company`s products are manufactured by proprietary processes the Company has developed including the QuicksetTM Injection Molding Process (Quickset Process) and the QuickCastTM Pressure Infiltration Process (QuickCast Process).

The Company was incorporated on June 19, 1984.

The Company has an accumulated deficit of $31,093,003 at September 28, 2002 and a net loss for the year to date totaling $328,192. Management believes that cash flows from operations and existing cash balances will be sufficient to fund the Company`s cash requirements for the foreseeable future. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company`s ability to continue as a going concern and achieve its business objective.

(2) Interim Consolidated Financial Statements

As permitted by the rules of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles.

The accompanying financial statements for the fiscal quarters and nine month periods ended September 28, 2002 and September 29, 2001 are unaudited. In the opinion of management, the unaudited consolidated financial statements of CPS reflect all adjustments necessary to present fairly the financial position and results of operations for such periods.

The consolidated financial statements include the accounts of CPS and its wholly-owned subsidiary, CPS Superconductor Corporation. All significant intercompany balances and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

(3) Net Income/Loss Per Common and Common Equivalent Share

Basic EPS excludes the effect of any dilutive options, warrants or convertible securities and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed by dividing net income by the sum of the weighted average number of common shares and common share equivalents computed using the average market price for the period under the treasury stock method.

Options to purchase 956,713 shares of common stock at a weighted-average price of $0.77 were outstanding as of September 28, 2002. Options to purchase 748,234 shares of common stock at a weighted-average price of $0.97 were outstanding as of September 29, 2001.

For the three month period ended September 28, 2002 and the nine month periods ended September 28, 2002 and September 29, 2001, the Company was in a net loss position therefore stock options were not used to compute diluted loss per share since the effect would have been antidulitive.

For the three month period ended September 29, 2001, the diluted share base includes 97,245 potential shares related to options whose exercise price was greater than the average market price of the common shares during this period.

4. Inventory

5. Accrued Expenses

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company`s actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or changed circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Total revenue was $482 thousand in Q3 2002, a 64% decrease from total revenue of $1,324 thousand in Q3 2001. This very sharp decline in revenue was most pronounced at the beginning of Q3; revenue dropped very significantly in the first month of Q3 and then grew sequentially in the second and third months of Q3. Revenue declined as a result of reduced customer demand. The current marketplace for electronic components is characterized by significant uncertainty regarding future demand. At the beginning of Q3 several customers stopped or reduced shipments from the Company in order to assess their own levels of inventory and reassess future demand. In some cases customers concluded that they had purchased in excess of their underlying demand in Q2, and would consume their inventory of the Company`s products before releasing additional shipments. No orders were cancelled by customers during Q3, however, shipment releases were delayed, and in some cases follow-on orders were delayed or not placed.

Throughout Q3 management took steps to control costs, as well as steps to seek to better understand future demand. We have controlled discretionary spending, reduced employment levels and deferred certain capital expenditures. We have visited with key customers to better understand how they forecast demand. Generally we have moved from a "build-to-order" to a "build-to-release" model. We believe we have preserved the ability of the Company to increase production if demand increases, and we believe we have improved the ability of the Company to operate in an environment of increased volatility of demand.

Total operating expenses of $867 thousand in Q3 2002 decreased by 21% from total operating expenses of $1,102 thousand in Q3 2001. Cost of product sales of $623 thousand in Q3 2002 decreased by 30% from total cost of product sales of $890 thousand in Q3 2001.

Gross profit on product sales in Q3 2002 was (29%) compared to gross margins in Q3 2001 of 33%. This decline in gross profit is primarily the result of spreading fixed costs over a much lower production volume.

Selling, general and administrative expenses increased by 16% in Q3 2002 to $244 thousand compared to $211 thousand in Q3 2001. This increase is primarily a result of increased headcount in the sales area.

Total revenue increased to $3,702 thousand in the first nine months of 2002 from $3,135 thousand in the first nine months of 2001, an 18% increase. Increased demand resulted in increased revenue; the increased demand occurred entirely in Q1 and Q2 2002, and demand declined significantly in Q3 2002. The current marketplace for electronic components is characterized by significant uncertainty regarding future demand, and we expect that volatility in demand from quarter to quarter will continue as customers reassess their inventory and their own demand frequently.

Total operating expenses of $4,050 thousand in the first nine months of 2002 increased by 17% from total operating expenses of $3,464 thousand in the first nine months of 2001. Cost of product sales of $3,034 thousand in the first nine months of 2002 increased by 13% from total cost of product sales of $2,687 thousand in the first nine months of 2001. Selling, general and administrative expenses increased by 31% or to $1,016 thousand in the first nine months of 2002 from $777 thousand in the first nine months of 2001.

Gross profit on product sales in the first nine months of 2002 was 18% compared to gross profit in the first nine months of 2001 of 14%. This increase in gross profit is primarily the result of spreading fixed costs over a larger sales volume.

The Company`s cash and cash equivalents balance as of September 28, 2002 was $185 thousand compared to the cash and cash equivalents balance as of December 29, 2001 of $300 thousand, a 38% decline. In the first nine months of 2002 operations generated cash of $71 thousand, additions to property and equipment consumed cash of $142, and net cash consumed by financing activities was $45 thousand.

Trade Accounts Receivable declined to $417 thousand at September 28, 2002 from $785 thousand at December 29, 2001 due to lower shipments in August and September 2002 compared to November and December 2001.

Inventories decreased to $559 thousand at September 28, 2002 from $628 thousand at December 29, 2002. The Company does not build inventory in advance of customer demand; all work in process and finished goods inventory represent production for which the Company has purchase orders from customers.

The Company financed its working capital requirements during Q3 2002 and the first nine months of 2002 with funds from existing cash balances and funds provided by product sales. The Company has an accumulated deficit of $31,093,003 at September 28, 2002 and a net loss for the year to date totaling $328,192. Management believes that cash flows from operations and existing cash balances will be sufficient to fund the Company`s cash requirements for the foreseeable future. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company`s ability to continue as a going concern and achieve its business objective. 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.

Evaluation of Disclosure Controls and Procedures

Within 90 days of the filing of this report, the principal executive officer and principal financial officer of the Company, under the supervision and with the participation of the Company`s management, have evaluated the disclosure controls and procedures of the Company as defined in Exchange Act Rule 13(a)-14(c) and have determined that such controls and procedures are effective.

Changes in Internal Controls

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company`s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to in the paragraph above.

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.

EXHIBIT A

In connection with the quarterly report on Form 10Q of Ceramics Process Systems Corporation (the "Company") for the period ended September 28, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Grant C. Bennett, Chief Executive Officer and Controller of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Acto of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

EXHIBIT B

I, Grant C. Bennett, certify that:

1. I have reviewed this quarterly report on Form 10Q of Ceramics Process Systems Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, an dother financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant`s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectivenss of the disclosure controls and procedures based on our evaluation as of the Evaluation Date:
5. The registrant`s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant`s auditors and the audit committee of registrant`s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant`s ability to record, process, summarize and report financial data and have identified for the registrant`s auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal controls; and
6. The registrant`s over certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.