SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT 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 AUGUST 30, 1996 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 0-10843
CSP INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2441294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 LINNELL CIRCLE, BILLERICA, MASSACHUSETTS 01821
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508)663-7598
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 $.01
----------------------------
(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 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-K 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)
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing selling price as reported on NASDAQ on November
15, 1996, was $20,267,021.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was 2,657,970 at November 15, 1996.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5, 6, 7 and 8 is incorporated by
reference to the Registrant's 1996 Annual Report to Stockholders. The
information required by Part III, Items 10,11,12 and 13 is incorporated by
reference to the Registrant's Proxy Statement dated November 11, 1996 filed with
respect to the Annual Meeting of Stockholders of the Registrant to be held on
December 10, 1996.
<PAGE>
CSP Inc.
Form 10-K
Year Ended August 30, 1996
Item Number
in Form 10-K Table of Contents Page
- ------------ ----------------- ----
Part I
1 Business........................................ 4
2 Properties...................................... 14
3 Legal Proceedings............................... 14
4 Submission of Matters to a Vote
of Security Holders............................ 14
Part II
5 Market for Registrant's Common Equity
and Related Stockholder Matters................ 15
6 Selected Financial Data......................... 15
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 15
8 Financial Statements and Supplementary Data..... 15
9 Change in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 15
Part III
10 Directors and Executive Officers of the
Registrant...................................... 16
11 Executive Compensation........................... 16
12 Security Ownership of Certain Beneficial Owners
and Management.................................. 16
13 Certain Relationships and Related Transactions... 16
Part IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 17
<PAGE>
Part I
Item 1. Business
GENERAL
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CSP Inc. (the "Company" or "CSPI") was founded in 1968 and is located in
Billerica, Massachusetts, just off Route 128 in the Boston computer corridor.
CSPI pioneered the concept of embedded computers specifically designed to carry
out scientific calculations at very high speeds. The Company had its initial
public offering in 1982. In 1988, the Company established its Scanalytics
product group to develop and market imaging systems for molecular and cell
biology. In 1994, the Company established its Vision Systems product group to
commercialize technology developed by United Parcel Service (UPS) to automate
parcel sortation capabilities. CSPI sells all products through its own direct
sales force in the U.S., with 14% of total sales outside the U.S. via a
worldwide organization of distributors.
CURRENT PRODUCTS
----------------
EMBEDDED COMPUTERS
Providing additional computation power for specific signal processing
application problems has been CSPI's core technology since its inception. The
Company's products consist of both hardware and software, each optimized for the
other. A typical OEM/volume end user will employ one or more units in an
embedded system for defense, medical imaging, advanced vision and seismic
applications.
Historically, the Company provided embedded computers (Mini- MAP and MAP 4000)
for use with Digital Equipment Corporation's Q-Bus based Micro-VAX
minicomputers. These products are still supplied to a small number of OEM
customers and represent $20,950 of embedded computer sales in 1996.
The majority of products sold are VME-based boards (called SuperCards) which are
incorporated into customized signal processing systems by OEM customers. Now in
its fourth generation, the SuperCard family is a product line of embedded signal
processors that employ multiple Intel i860 RISC microprocessors. The latest
version, the SuperCard-4SLX, employs eight 40MHz i860's and provides 640 MFLOPS
of computational power with 64 MB of high speed memory and a high bandwidth
interconnection scheme based upon National Semiconductor's QuickRing.
SuperCard-3 utilizes one or two of the 50MHz version of the i860 and is
available for VME, S-Bus and Turbochannel. The earlier Supercard-2 and 1 are
still supplied to a limited number of existing customers.
<PAGE>
All SuperCards are supported by a rich software development environment,
real-time software for multiple board installations and an extensive library of
five hundred commonly employed micro-coded mathematical subroutines. New
products currently in development are to be similarly supported. Third party
software support includes VxWorks (Wind River Systems), Unison (Multiprocessor
Toolsmith), FORTRAN (Lahey Computer Systems) and "C" (Metaware Corp) compilers.
The Company has placed great emphasis on its ability to migrate customer
application code to new generations of its hardware.
SuperCard products are priced from $5,000 to $45,000 (depending upon model and
quantity) and represented $11,672,000 of embedded computer sales in 1996.
The development of a new generation of VME board level products ( called MAP
series ) has been on-going. These products are designed around Analog Devices /
21060 DSP chip and the PowerPC RISC processor from Motorola. The first MAP
product, the MAP 1310/11 is starting volume shipment now. The MAP-1310/11
(single VME slot) delivers 1 Gigaflops of DSP power with 8 x 21060's on a
daughterboard and a VME and PowerPC 603 RISC processor. The PowerPC uses VxWorks
( Wind River Systems ) Real Time Kernel while Analog Devices C Compiler and
CSPI's Standard Signal Processing Library is used for the 21060 DSP chip
operation. The MAP-1310/11 supports third party PMC(PCI) modules offering a
large set of standard I/O options. The MAP-1310/11 is priced from $6,000 to
$30,000, depending upon the model and quantity purchased.
New models in the MAP series are currently under development and will
incorporate Myrinet, a high performance multi-gigabytes/sec network technology
by Myricom, Inc. Myrinet technology will be used to implement a high performance
board to board interconnect inside one or multiple VME systems. Multiple
PowerPCs on a single VME slot and optimized sortware for Myrinet are part of the
current development to introduce a high performance scalable network
multicomputing solution for real time applications. The company differentiates
itself from its major competitors by its use of standard interfaces and the
interoperability this affords its OEM customers.
SCANALYTICS
CELLSCAN, 3D FLUORESCENCE MICROSCOPY
Based upon technology developed by the University of Massachusetts Medical
Center in over ten years of research, CELLscan is a system designed to allow the
in vivo analysis of the internal workings and structure of living cells. The
system permits cell biologists to study the cell's reaction to external stimuli
and understand the fundamental processes of cell life and death. Fluorescent
probes are infused into the cell and illuminated under a standard microscope.
<PAGE>
The resulting images are processed by a SuperCard array to compensate for the
distortions introduced by the measurement and then displayed in three dimensions
on a PC. An alternative, incumbent, technology called con-focal microscopy
employs an expensive optical system to produce similar images.
This technology is licensed exclusively to CSPI for a period of ten years which
commenced in April 1991, providing that the Company maintain certain royalty
levels which Management anticipates will be met.
The Company sells complete systems ($60,000 to $100,000 exclusive of the
microscope) to individual researchers in academia and biopharmaceutical
companies.
CELLscan sales were $1,263,000 for 1996.
ELECTROPHORESIS PRODUCTS
Electrophoresis is the most widely used technique for the separation of proteins
and nucleic acids in the life sciences. Active components are separated by
charge and molecular weight in thin gels and capillaries and then detected using
inherent properties or reporter molecules. These reporter molecules can be
radioactive labels, colored stains or chemiluminescent and fluorescent dyes.
Images obtained by the scanning of these gels and capillaries are then analyzed
for pertinent data using PC based software packages. Significant methodologies
using this data include large-scale DNA sequencing, DNA fragment analysis for
microbial identification, population genetics, and forensics, and routine QC/QA
of protein and nucleic acids in the biopharmaceutical industry.
The Scanalytics product group markets several shrink-wrapped software packages
for electrophoresis analysis that sell from $1,500 to $6,500. These packages
were developed in cooperation with various university and research institute
collaborators. GELLAB II+, a product for the analysis of 2-D electrophoresis was
developed as a direct result of a Cooperative Research and Development agreement
with the National Cancer Institute. These packages are sold directly to
individual researchers and via a number of distributors and OEM suppliers of
scanner and capillary electrophoresis instruments.
The Company acquired the assets of AMBIS, a supplier of radioisotopic imagers,
in March 1994 and has integrated the manufacture of these products into its
Billerica facility. AMBIS imagers eliminate the intermediate step of using
photographic film to determine the pattern generated by gel electrophoresis.
Priced from $25,000 to $50,000, AMBIS imagers appeal particularly to researchers
interested in quantitative measurements.
Sales of Electrophoresis products were $1,040,000 in 1996.
<PAGE>
VISION SYSTEMS
This product group was founded in 1994 to commercialize technology developed by
United Parcel Service (UPS) to automate UPS's parcel sortation capabilities. The
Danbury R/D facility of UPS had developed a bar-code reader, incorporating the
Company's SuperCard-2, together with a two-dimensional bar-code for use in its
high-speed sortation facilities. The Company supplied UPS with a limited number
of preproduction readers for evaluation in their Grand Rapids, MI experimental
facility in 1993 and then received an order for production quantities to equip a
newly constructed facility in Chicago. These units were shipped in fiscal
1994/1995 and are currently in daily operation.
The Company negotiated a non-exclusive license to the technology and is
marketing the units to other potential customers. The reader has been exhibited
at trade shows in the US, Europe and Japan. Datalogic, based in Bologna, Italy
has been engaged to distribute the reader outside the US. Further, the Company
is continuing to work with UPS's Danbury R/D facility to improve the reader's
performance and reduce its cost. This engineering effort is expected to result
in a product range with varying price and performance capabilities.
MARKETS, MARKETING AND DEPENDENCE ON CERTAIN CUSTOMERS
------------------------------------------------------
Applications for embedded computers include sonar and radar systems and
simulators, medical imaging, seismic data processing, package sortation, and
mathematical biology. The Company is able to address these widely diverse
markets primarily as an OEM supplier to system integrators and high volume
end-users. The current trend has returned to board-level embedded computer
products which has accelerated the movement to higher unit volume, OEM
customers. In the case of both Scanalytics and Vision Systems, the Company has
decided to offer a complete applications solution to individual end-users. The
following table sets forth the amount (in thousands of dollars) and percentage
of sales revenues attributable to OEM-volume and individual end-users during
fiscal years 1996, 1995 and 1994.
Year Ended August
-----------------
1996 1995 1994
---- ---- ----
OEM-volume sales $13,338 81% $13,344 72% $11,264 58%
End-user sales 3,182 19% 5,182 28% 8,196 42%
------- ---- ------- ---- ------- ----
$16,520 100% $18,526 100% $19,460 100%
======= ==== ======= ==== ======= ====
While military markets may be shrinking overall, CSPI's share has increased as
prime contractors are encouraged to seek commercial
<PAGE>
design solutions rather than build in-house, custom products. In response to
government pressure to reduce defense expenditures, procurement agencies around
the world have embraced the concept of Commercial-Off-The-Shelf (COTS) based
systems. Prime contractors are being directed to employ relatively inexpensive
commercial components whenever possible, replacing custom, fully militarized
designs. A further benefit is that commercial products are estimated to be
several years ahead of militarized equivalents. The Company continues to ship
products for several COTS based systems and has received volume orders as the
systems are deployed. The most productive program has been sales of SuperCards
for use with the U.S. Navy's sonar computers, which are used to co-ordinate
information from sensor arrays in both ship-based and shore-based installations.
However, COTS products are inappropriate for systems designed for truly
hazardous conditions and, to fill this need, the Company has entered into a
license agreement with Hughes Aircraft Company, Fullerton, CA, which has
designed a fully MIL-Spec version of the SuperCard 2XL.
Medical imaging has enjoyed sustained growth and the variety of non-invasive
technologies (e.g. MRI, PET, Ultrasound, Biomagnetics) employed is still
increasing. SuperCards are sold to several medical imaging equipment suppliers
on an OEM basis.
Instrumentation for biotechnology is used for both basic research and the
production of bio-pharmaceuticals. Funding for molecular and cell biology
research is a priority for most industrial nations and is predicted to increase.
Biotechnology techniques are now commonplace in all bio-pharmaceutical companies
and are extensively employed in the manufacturing of bio-engineered drugs.
Scanalytics instruments are used for both basic life sciences research and the
quality control of bio-pharmaceutical production. No single customer represents
a significant percentage of the total Scanalytics sales volume.
Barcodes are familiar to anyone shopping at the local supermarket. Designed
simply for product identification or zipcode encryption, these one-dimensional
codes have limited information storage capacity. The trend is towards
high-density, two-dimensional, machine codes capable of carrying sufficient
information for decisions to be made locally. Typical of these modern codes is
MaxiCode, which is designed specifically for high speed sortation tasks.
However, until recently, the widespread use of two- dimensional machine codes
has been limited by the lack of an accurate over-the-belt reader, an essential
element in any automation scheme. The machine-code reader developed by UPS, and
manufactured and marketed by the Company, addresses the need for an accurate,
affordable unit capable of unattended operation which can read both bar codes
and the latest two-dimensional codes.
<PAGE>
CSPI has been successful in its sales efforts of this product to other companies
besides UPS. In addition to our new customers, there are several companies
involved in material handling interested in this product. This past year ANSI
and the Department of Defense have recommended MaxiCode to be used for sortation
and tracking applications. These are in addition to previous standards groups
who have already recommended MaxiCode.
Sales to individual customers constituting 10% or more of total sales consisted
of sales to Hughes Aircraft of $3,394,000 (21%)in fiscal year 1996. The Company
anticipates that, for the foreseeable future, a significant percentage of its
sales will be dependent upon a relatively small number of customers.
The Company markets its products through sales offices in Billerica, MA, Laurel,
MD, and San Diego, CA. Elsewhere in the U.S. and throughout the remainder of the
world, these offices coordinate the activities of independent distributors and
manufacturers representatives who represent other company's product lines not
competitive with CSPI and are either paid a commission on units sold or are
permitted to buy units at a discount for subsequent resale. On August 31, 1996
CSP, Inc. closed its French subidiary, and is continuing to do business in
France with a local distributor. Geographically, North America accounts for
approximately 88% of total sales due to the dominance of U.S. based
manufacturers in the Company's major markets and the wider acceptance of the VME
standard in the U.S. The following table sets forth the amounts (in thousands of
dollars) and percentage of sales by geographical area during fiscal years 1996,
1995 and 1994.
Year Ended August
-----------------
1996 1995 1994
---- ---- ----
North America $14,474 88% $15,992 86% $16,234 83%
Far East 1,407 8% 953 5% 1,299 7%
Europe 574 3% 1,207 7% 1,392 7%
Other 65 1% 374 2% 535 3%
------- ---- ------- ---- ------- ----
Total $16,520 100% $18,526 100% $19,460 100%
======= ==== ======= ==== ======= ====
COMPETITION
-----------
The embedded computer, bar-code reader and bio-instrumentation markets are very
competitive. The Company believes its products to be among the leaders in
performance and price. All the markets are characterized by rapid technological
change, and the introduction
<PAGE>
of new products with superior capabilities or lower pricing could adversely
affect the Company's business.
The Company's principal direct competitors in the floating-point embedded
computer market are Mercury Computer Inc. and Sky Computers,Inc. In the
specialized DSP market direct competitors are Ixthos, Mizar, Pentek, Ariel, and
Alacron. New companies enter the field periodically, and larger companies with
greater technical resources and marketing organizations could decide to compete
in the future.
The future growth of the embedded computer market depends upon providing high
speed computation for a specific range of signal processing applications in a
compact, low power, and inexpensive package that can be easily integrated into
an OEM customer's design. The markets targeted by CSPI include multiprocessor
system requirements. Certain competitors may offer products with features not
provided by CSPI today. Other companies may offer embedded computers designed
for particular applications not addressed by the Company or for attachment to
computers incompatible with the Company's products. Since the majority of sales
are to OEM-volume users, the principal barrier to competition is the reluctance
of established users to redesign their product once it is in production and the
strength of the Company's relationships with its customers.
Competitors to Scanalytics products include; Applied Precision Instruments,Inc.,
Vaytek Inc., Nikon, Leica, Zeiss, BioRad and NORAN in the fluorescence
microscopy market. The following compete in the gel analysis software markets;
BioImage Corp., Media Cybernetics, Inc., Molecular Dynamics Inc., Phoretix, and
BioRad. These competitors range from small single product companies to large
multi-national instrument and microscope companies. Scanalytics maintains its
competitive advantage by the internal development of sophisticated software
applications and the use of the SuperCard 4 based embedded computers to offer a
low-cost alternative in the 3-D fluorescence microscopy market.
The direct competitors to the Company's machine code reader are Accu-Sort
Systems, Inc., which has also licensed the relevant technology from UPS, and
Intermec, which has developed their own ccd based reader. Machine code readers
of conventional laser design, which have some of the same performance
characteristics, are available from Computer Identics, PSC Automation, and
Datalogic. The Company's competitive advantage stems from the use of its
SuperCards in the reader, its superior signal processing expertise and its
proven capability as a quality supplier.
MANUFACTURING, ASSEMBLY AND TESTING
-----------------------------------
All of the Company's manufacturing is performed at its plant in
<PAGE>
Billerica, MA. The primary manufacturing process is the assembly and test of
printed circuit boards and systems, designed by the Company and fabricated by
other vendors. The Company endeavors to build for inventory and supplies its
products in a variety of standard formats. A small percentage of sales reflects
products customized to a particular customer's specification, and even these
products are easily reconfigurable should the customer cancel the order for any
reason.
Upon receipt of material by the Company from outside suppliers, products and
components are inspected by the Company's QC/QA technicians. During manufacture
and assembly, both subassemblies and completed systems are subjected to
extensive testing, including burn-in and vibration procedures designed to
minimize equipment failure. The Company also uses diagnostic programs to detect
and isolate potential component failures. A comprehensive log is maintained of
all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Intel Corp. for the i860 micro-processor
used in its SuperCard products. The Company has sufficient quantities of these
components on hand to satisfy anticipated demand and has been assured by Intel
that supplies will continue to be available in any quantities reasonably
necessary. The Company does not consider the risk of interruption of supply to
be significant to meet its projected revenue requirements for the immediate
future.
The Company provides a warranty covering defects arising from products sold and
service performed, which varies from 90 days to one year depending upon the
particular unit. However, warranties of substantially greater scope have been
extended to certain major customers for financial and other considerations. The
Company maintains a reserve for warranty repairs equal approximately to 2% of
product sales for the last 90 days.
In October 1995, the Company was approved for registration to ANSI/ASQC-Q9001
under RAB and RvC accreditation. The ISO9001 category is the most comprehensive,
and incorporates every aspect of business from design, through sales, to
manufacturing and customer support.
CUSTOMER SUPPORT
----------------
The Company supports its customers in a number of ways: telephone assistance,
on-site service, installation of systems (primarily in the Scanalytics product
group ), training and education. Customers are able to call a support unit and
report problems which are reviewed by an analyst. The analyst will research the
problem and will assist the customer, most commonly via telephone, in an effort
to correct the problem. Service of this kind is
<PAGE>
available during the warranty period, and is also available to report "bugs" in
the software. Customers may purchase software and hardware maintenance and
on-site service contracts after the warranty period.
The Company offers training courses at either corporate headquarters or the
customer site, should the customer request it. Field and customer service
support is provided through Billerica, Massachusetts, San Diego, California, and
Laurel, Maryland.
ENGINEERING AND DEVELOPMENT
---------------------------
During fiscal 1996, the Company's expenses (including depreciation) for
engineering and development were approximately $3,325,000 (20% of sales)
compared to approximately $3,099,000 (17% of sales) and $2,834,000 (15% of
sales) in fiscal years 1995 and 1994, respectively. Expenditures for engineering
and development are expensed as they are incurred. The Company expects to
continue substantial expenditures, both in additional applications software
development and development of hardware and software for embedded computer and
machine code systems. Additional expenditures may be necessary to complete the
conversion of the embedded computer product line from the I860 processor to
21060/PowerPC processor designs and to integrate Myrinet Network Technology into
the next generation of the MAP series of products. The Company's products and
development currently in process are intended to extend the usefulness and
marketability of existing products and introduce new products into existing
market segments.
Of the Company's 103 employees, 29 professional and staff employees were engaged
in software and hardware engineering and development activities as of August 30,
1996.
The Company does not have any patents that are material to its business.
BACKLOG
-------
The Company's backlog of customer orders and contracts was approximately
$3,190,284 at August 30, 1996 as compared to $3,055,028 at August 25, 1995. The
majority of this backlog is expected to be shipped during the next fiscal year
and primarily in the first quarter. The backlog of the Company has fluctuated
greatly over the last three years at year end. Orders for SuperCard products
(board-level product) have increased recently and the Company is able to ship to
customers in a shorter period of time. Moreover, OEM purchasers are not
committing themselves to orders of the same magnitude as has been the case in
the past.
<PAGE>
EMPLOYEES
---------
On August 30, 1996, the Company had 103 employees, including 7 part-time. There
were 29 employees engaged in engineering; 31 employees in marketing, promotion,
sales and customer support; 27 employees in manufacturing, test and field
service; and 16 employees in general management and administration.
None of the Company's employees is represented by a labor union and the Company
had no work stoppages. The Company considers relations with its employees to be
good.
EXECUTIVE OFFICERS
------------------
Information about the executive officers of the Company is set forth below.
NAME AND AGE BUSINESS AFFILIATIONS
------------ ---------------------
Alexander R. Lupinetti(51).. Director, Chief Executive Officer and President of
CSPI since October 1996; President and Chief
Executive Officer of each of the TCAM Systems Inc.,
Shared Systems Corporation and SoftCom Systems,
Inc. subsidiaries of Stratus Computer Inc. from
November 1987 to September 1996; Northeastern
General Manager for the Engineering and Scientific
Division of International Business Machines, Inc.
from 1984 to 1987.
Michael M. Stern (59)....... Director of CSPI from 1968 to January 1984; Vice
President of Operations and Treasurer of CSPI since
1968.
Gary W. Levine (48)......... Vice President of Finance and Chief Financial
Officer of CSPI since September 1983; Controller of
CSPI from May 1983 to September 1983.
James A. Waggett (59)...... Director of CSPI from 1968 to January 1984; Vice
President of Embedded Computer Product Group
September 1995-Present; Vice President of Advanced
Development from 1974 to September 1995; Business
Element Manager of the Embedded Computing Product
Group from August 1995 to October 1996; Clerk from
1971 to March 1983; Assistant Clerk from March 1983
to the present.
<PAGE>
James E. Storer (69)........ Director of CSPI from 1974 to August 1984; Chief
Scientist and Vice President from 1975 to the
present.
Item 2. PROPERTIES
The Company owns the land and building at 40 Linnell Circle, Billerica, MA.
The Company owns approximately 2.8 acres of land adjacent to the Company's
current facility. The Company believes space at its current location, combined
with space that will be available if the Company proceeds to build on the new
land, will be sufficient for future growth.
Item 3. LEGAL PROCEEDINGS
NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from "Common
Stock Data" on page 3 of the Company's 1996 Annual Report to Stockholders.
American Stock Transfer Company is the Transfer Agent and Registrar for the
Company's Common Stock. There were approximately 167 Stockholders of record as
of November 15, 1996. The Company believes the number of beneficial owners of
shares (including shares held in street name) at that date were approximately
1300.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from
"Selected Financial Data" on page 14 of the Company's 1996 Annual Report to
Stockholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 15-19 of the Company's 1996 Annual Report to Stockholders.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from pages 20
to 30 and from "Independent Auditors' Report" on page 31 of the Company's 1996
Annual Report to Stockholders.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information for Directors required by this Item is incorporated by reference
from the Company's Proxy Statement dated November 11, 1996 filed with respect to
the Annual Meeting of Stockholders of the Company on December 10, 1996.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8K
A) The following are filed as part of this report:
1) Financial Statements (See item 8):
The following financial statements of the Company are included in Part II of
this report through incorporation by reference from the Company's 1996
Annual Report to Stockholders.
Annual Report
Page
----
Independent Auditors' Report...............................31
Consolidated Balance Sheets at August 30, 1996 and
August 25, 1995............................................20
Consolidated Statements of Operations for years ended
August 30, 1996, August 25, 1995 and August 26, 1994......21
Consolidated Statements of Shareholders' Equity for
years ended August 30, 1996, August 25, 1995 and
August 26, 1994............................................22
Consolidated Statements of Cash Flows for years ended
August 30, 1996, August 25, 1995 and August 26, 1994.....23
Notes to Consolidated Financial Statements..............24-30
2) Consolidated Financial Statement Schedules
None
<PAGE>
3) Exhibits
Certain of the Exhibits listed hereunder have previously been filed with the
Commission and are hereby incorporated by reference pursuant to Rule 12b-32
under the Securities Exchange Act of 1934 and Rule 24 of the Commission's Rules
of Practice. The location of each document so incorporated by reference is noted
parenthetically.
3.1 Articles of Organization and amendments thereto, of the Company as of the
end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended August
31, 1990)
3.2 By-Laws of the Company, as amended through March 21,1995
10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to the Form S-8,
File No. 2-79414, 1987 Registration Statement)
10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated January
5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414, 1987 Registration
Statement)
10.3 Form of Invention Agreement between the Company and certain of its
employees
10.4 CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8
amendment 2 to Form 10-K for year ended August 31, 1986, dated February
23, 1987)
10.5 Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5,
1987 as amended (Exhibit 10.11 to Form 10-K for year ended August 31,
1990)
10.6 Amendment to Mr. Ochlis' Employment and Deferred Compensation Agreement
dated March 20, 1989 (Exhibit 10.9 to Form 10-K for year ended August 31,
1991)
10.7 Employment Agreement between CSP Inc. and Mr. Botten dated August 14, 1991
(Exhibit 10.10 to Form 10-K for year ended August 31, 1991)
10.8 1991 Incentive Stock Option Plan (the Plan is included in the Company's
Proxy Statement dated November 10, 1991 with respect to the Annual Meeting
of Stockholders of the Company on December 10, 1991)
10.9 Retirement Agreement for Edmund U. Cohler (Exhibit 10.9 to Form 10-K for
the year ended August 26, 1994)
<PAGE>
10.10 Symbology Reader License Agreement between UPS and CSPI (Exhibit 10.9 to
Form 10-K for the year ended August 26, 1994)
10.11 Software License Agreement between UPS and CSPI (Exhibit 10.12 to Form
10-K for the year ended August 26, 1994)
10.12 Patent Agreement between UPS and CSPI (Exhibit 10.13 to Form 10-K for the
year ended August 26, 1994)
10.13 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement dated
February 6, 1995
10.14 Employment Agreement between CSP Inc. and Mr. Lupinetti dated September
12, 1996
11.0 Computation of Per Share Earnings for the years ended August 30, 1996,
August 25, 1995, and August 26, 1994
13.1 1996 Annual Report to Stockholders
22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year
ended August 26, 1994)
23.1 Consent of Independent Certified Public Accountants
27.0 Financial Data Schedule
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Form 10-K
Number Exhibit Page
- ------ ------- ----
10.14 Employment Agreement between CSP Inc. and Mr. Lupinetti 22-25
dated September 12, 1996
11.0 Computation of Per Share Earnings for the years ended
August 30, 1996, August 25, 1995, and August 26, 1994 26
13.1 1996 Annual Report to Stockholders 27-52
23.1 Consent of Independent Certified Public Accountants 53
27.0 Financial Data Schedule 54
<PAGE>
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.
CSP INC.
- --------
(Registrant)
/s/ Alexander R. Lupinetti November 27, 1996
- -------------------------- -----------------
Alexander R. Lupinetti Date
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ Alexander R. Lupinetti Chief Executive Officer, November 27, 1996
- -------------------------- President
Alexander R. Lupinetti
/s/ Samuel Ochlis Chairman of the Board, November 27, 1996
- -------------------------- Director
Samuel Ochlis
/s/ Gary W.Levine Vice President of Finance, November 27, 1996
- -------------------------- Chief Financial Officer
Gary W. Levine
/s/ Boruch B. Frusztajer Director November 27, 1996
- --------------------------
Boruch B. Frusztajer
/s/ Stanford A. Fingerhood Director November 27, 1996
- --------------------------
Stanford A. Fingerhood
/s/ Shelton James Director November 27, 1996
- --------------------------
Shelton James
/s/ Sandford Smith Director November 27, 1996
- --------------------------
Sandford Smith
/s/ John Ingram Director November 27, 1996
- --------------------------
John Ingram
Exibit 10.14
September 12, 1996
Mr. Alexander R. Lupinetti
36 Russett Hill Road
Sherborn, MA 01770
Dear Alex:
I am very pleased to offer you the position of President and Chief Executive
Officer of CSP Inc. (the "Company"), reporting to the Board of Directors. The
following will be the principal terms and conditions of your employment with the
Company:
1. Your base compensation will be a salary of $200,000 per year, to be reviewed
annually.
2. You will be elected a member of the Board of Directors and will serve as a
director without any additional compensation.
3. You will be eligible to receive the greater of either a cash bonus of
$40,000 based on your achievement of the goals listed below which may be
modified with the approval of the Compensation Committee of the Board of
Directors or an executive bonus of up to 50% of your salary. To meet the
maximum bonus level, the Company must equal or exceed sales of $22M and EPS
of $.50.
Goals for Cash Bonus
--------------------
-Complete one acquisition
-Release of the CSPI Division's products on schedule for FY97
-Meet the Business Plan as approved by the Board of Directors
-Plan for reorganization of sales and marketing functions
The cash bonus will be considered earned if you have met these goals and
objectives at the end of the current fiscal year (1997). The Executive Bonus
Plan will be submitted to the Compensation Committee during the first
quarter of fiscal year 1997 for their approval. Any future bonus to be paid
to you will be based on the Company's Executive Bonus Plan as adopted by the
Compensation Committee of the Board of Directors with respect to the
Company's normal fiscal year-end.
1
4. If your employment is terminated by the Company other than for "cause" (as
used herein "cause" shall mean any material breach by you of any agreement
to which you and the Company are both parties; theft or misappropriation of
Company funds or assets, or intentionally damaging the Company's assets;
falsification of Company records; willful failure or refusal to perform
duties reasonably assigned; conviction (including guilty plea) of a felony
or misdemeanor which creates apprehension or insecurity on the part of the
Board, other officers of the Company; or acting either willfully or with
gross negligence in a disloyal manner or to the detriment of the Company's
best interest) you will be entitled to receive severance pay for twelve
months at your then effective base annual salary per month.
5. So long as you are employed by the Company, you agree to devote your full
time, skill and energy, diligently, loyally, effectively and to the best of
your ability, to the performance of your duties as President.
6. While employed by the Company, you agree not to directly or indirectly
participate as owner, stockholder, manager, consultant, director, officer,
or employee in any business firm or corporation which manufactures and/or
sells products similar to the products sold by the Company. Provided,
however, that you may purchase on a registered securities exchange or in the
"over the counter market" any securities listed on such exchange or trade in
such market. In the event of breach of this provision, the Company shall be
entitled to injunctive relief and damages.
7. You are not being offered employment for a definite term and understand that
either you or the Company may terminate your employment at any time for any
reason and without prior notice.
8. The Company will grant to you options for the purchase of 60,000 shares of
the Company's Common Stock under the Company's 1991 Incentive Stock Option
Plan and this will be reviewed annually. The options will be granted on the
date you commence employment with the Company and the price per share will
be the fair market value of a share of common stock on that date determined
in accordance with the provisions of such Plan. The options will vest at a
rate of 25% a year for 4 years, commencing after one year of service.
However, if the Company is acquired by way of sale of substantially all of
its assets or by merger, your options will fully vest at the time of such
acquisition. Your percentage of total stock options granted will be
maintained so you will not be subject to any dilutions.
9. The Company will provide you with a vehicle at a value not to exceed
$32,000. The vehicle will be purchased in a manner that is mutually
acceptable to you and the Company.
2
10. As a full-time employee of the Company, you shall be eligible to participate
in any and all employee benefit plans which are non-contributory and at your
option to participate in all contributory employee benefit plans. A
description of the Company's benefit plans currently being offered are
described in the brochure which you have been provided with which will
include the 401k. During the fiscal year you will review the non-qualified
retirement plan and recommend any changes or modifications to the
Compensation Committee.
11. You will be entitled to two weeks of vacation during the first year of
service with the Company. After one year, you will be entitled to four weeks
of vacation.
12. You will review the 40lK Plan and recommend to the Board of Directors, any
modifications you feel are necessary.
13. Your medical insurance will be paid by CSPI; either through COBRA or the
current plan to ensure coverage for your daughter.
14. You will be enrolled in the Company Replacement Life Insurance Plan which is
2 (two) times your salary. The Company will pay the same premium amount you
would have received for the Group Life Insurance Plan toward premiums for
the Group Replacement Plan.
15. As a condition to your employment, you will be required to sign the
Company's standard Employee Invention and Non-Disclosure Agreement, a copy
of which is enclosed with this letter.
If you agree with the terms of employment outlined above, would you please
sign and date the enclosed copy of this letter and return it in the enclosed
envelope to the attention of Gary Levine.
On behalf of the Board, I look forward to working together with you to make
CSPI a tremendous success under your stewardship.
Sincerely yours,
Samuel Ochlis
Chairman of the Board
3
I accept the terms of employment as stated on the offer letter dated
September 12, 1996.
/s/ Alexander Lupinetti
- -----------------------
Alexander Lupinetti
9/12/96
- -------
Date
<TABLE>
<CAPTION>
CSP, INC. AND SUBSIDIARIES
EXHIBIT 11.0 - COMPUTATION OF PER SHARE EARNINGSS
For the years ended August 30, 1996, August 25, 1995, and August 26, 1994
( in thousands except for per share amounts )
1996 1995 1994
--------------- --------------- ---------------
Net Income Per Common Share - ( Primary )
- ---------------------------------------------------
<S> <C> <C> <C>
Net Income $108 $385 $1,719
=============== =============== ===============
Average common shares outstanding 2,681 2,747 2,746
Add: Net additional common shares upon
exercise of stock options 41 48 77
--------------- --------------- ---------------
Adjusted average common shares outstanding 2,722 2,795 2,823
=============== =============== ===============
Net income per common share - ( Full Dilution ) $0.04 $0.14 $0.61
=============== =============== ===============
Net Income Per Common Share - ( Full Dilution )
- ---------------------------------------------------
Net Income $108 $385 $1,719
=============== =============== ===============
Average common shares outstanding 2,681 2,747 2,746
Add: Net additional common shares upon
exercise of stock options 41 48 77
--------------- --------------- ---------------
Adjusted average common shares outstanding 2,722 2,795 2,823
=============== =============== ===============
Net income per common share - ( Full Dilution ) $0.04 $0.14 $0.61
=============== =============== ===============
</TABLE>
CSPI
1996 ANNUAL REPORT
Enlightening Technology
( 4-Color Picture)
CSPI
1996 Annual Report
Table of Contents
Introduction 2
Financial Highlights 3
Shareholders Letter 4
Embedded Computing 6
Vision Systems 8
Scanalytics 10
Financials 12
Auditor's Report 31
Corporate Information 32
A NEW LEADER
CSPI welcomed Alexander R. Lupinetti as President and Chief Executive Off icer
on September 30, 1996. Mr. Lupinetti is also a member of the Company `s Board of
Directors. Alex comes to CSPI from Stratus Computer Inc. wher e he was a Sales
Vice President. Alex has over twenty-nine years of diver sified experience in
the high tech field, with a significant concentratio n in the sales and
marketing area. He was with Stratus for nine years and most recently served as
President of three software companies that Strat us had acquired. During that
assignment he implemented a new strategic pl an, merged the companies and hired
his successor. Prior to joining Stratus, Alex worked at IBM Corporation for 20
years. He was promoted to a vari ety of positions of increasing responsibility
such as Northeastern Genera l Manager for the Engineering and Scientific
division that included sales and product management for CAD-CAM and Vector
Processors. We are confide nt that with Alex's experience and background, the
Company has the leader ship necessary for future growth.
ENLIGHTENING TECHNOLOGY
CSPI was founded in 1968 by four engineers determined to build the fastes t
computing engine in the world. Their vision became a reality with the d
evelopment of the first array processor - a dense processing engine that uses
multiple processors to provide hundreds of millions of mathematical calculations
per second. This technology has become the core of CSPI's bu siness. Using this
core technology the company has developed a set of pro ducts and services that
provide people with greatly enhanced ways to see, hear and respond to the world
around them.
Today, CSPI is a global suppl ier of computing systems and instruments for
defense, medical, industrial and research applications requiring maximum
computing power. Although CS PI's core business - fast, highly complex and
powerful computer signal pr ocessing - has been very specialized, today its role
has become fundament al to society.
In medical imaging CSPI delivers sophisticated diagnostic c apabilities for CT,
MRI, PET and SPECT imaging machines. Because of CSPI technology these scans are
faster and less invasive for patients, and les s costly for medical providers.
With the Scanalytics Family of bio-resear ch imaging products, biologists can
now see minute details of the cell ne ver seen before, enabling them to diagnose
genetic disorders and fight ag ainst disease. Sorting packages has become faster
and more accurate with the CSPI Vision Systems one- and two-dimensional machine
readers. And, th ese are a small sample of the company's applications.
As world demands for faster, better and cheaper products and services grow, so
does the need to integrate high performance computing into everyday
applications. Incre asing needs and expectations for reliable, high density
computing power a t low cost have challenged CSPI to create products that fit
these applica tion needs.
With its Vision Systems and Scanalytics product groups, CSPI h opes to further
integrate and strengthen its business based on the core t echnology. The company
also plans to continue to enhance and grow its pro duct lines through
development and strategic acquisition. And CSPI is com mitted to protect its
customers' software investments by continuing to embrace standard technology
platforms.
Computer signal processing has been a n important part of the computer industry
for thirty years. As CSPI ends its 28th year in business it looks to the future
as a supplier of product s and services - based on the speed and power of its
computing processing expertise - that are designed to enhance, enlighten and
protect the peop le who use and apply its products.
Financial Highlights
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended
August 30, August 25,
Operating Statement Data: 1996 1995
<S> <C> <C>
Sales $ 16,520 $ 18,526
Net Income 108 385
Number of primary shares 2,681 2,795
Earnings per share $ 0.04 $ 0.14
Balance Sheet Data:
Working capital $ 22,800 $ 22,862
Total assets 29,536 29,279
Total liabilities 3,732 3,554
Shareholders' equity $ 25,804 $ 25,725
</TABLE>
Common Stock Data
The Common Stock of the Company is traded in the over-the-counter market and is
quoted on NASDAQ System under the symbol "CSPI". The following tab les set forth
the range of closing high and low selling prices for the Common Stock as
reported by NASDAQ.
<TABLE>
<CAPTION>
Fiscal Year: 1996 1995
High Low High Low
<S> <C> <C> <C> <C>
1st quarter $ 9 1/2 $ 8 1/4 $ 9 3/8 $ 8 1/4
2nd quarter 10 1/8 8 3/4 8 3/4 7 1/8
3rd quarter 10 1/4 9 8 3/4 7
4th quarter 9 5/8 7 1/2 9 1/8 7 3/8
</TABLE>
The Company has never paid cash dividends on its Common Stock. It is the policy
of the Company to retain any earnings to finance and expand operat ions and the
Company does not currently anticipate any changes in this policy.
3
Annual Sales
($ in millions)
(FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING ANNUAL SALES)
1992 16.03
1993 18.01
1994 19.46
1995 18.53
1996 16.52
Earning per Share
(Dollars)
(FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING EARNINGS PER SHARE)
1992 .61
1993 .70
1994 .61
1995 .14
1996 .04
Net Income
($ in thousands)
(FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING NET INCOME)
1992 1678
1993 1957
1994 1719
1995 385
1996 108
DEAR FELLOW SHAREHOLDERS
ANNUAL PERFORMANCE
Sales of $16.520 million were down by 11% due to the decline in revenue f or the
machine code reader sold primarily to United Parcel Service (UPS). The Vision
Systems sales were down by approximately $3 million which was offset by
increased revenue from the Embedded Computing and Scanalytics products. Net
income was $108K or earnings per share of $.04. The Company `s decline in
profitability as compared to past performance was due to th e lower revenue;
added expenses for the year including the departure of t he former President and
CEO; termination of our operation in France; and additional R&D expenses in the
embedded computer product group related to products due for release in Fiscal
1997. After losses in both the second and third quarter, we were able to achieve
profitability in the final qu arter and for the year resulting in our 16th
consecutive profitable year.
INVESTMENT IN THE FUTURE
The financial story for the last two years would not be complete without
highlighting the focus on R&D. Our R&D philosophy focuses on changes in c urrent
and new markets. Over the past year, CSPI has made offerings to the marketplaces
of all three product groups. The following are some of the developments
promising market and business growth:
EMBEDDED COMPUTING PRODUCT GROUP
- - Release of the MAP 1310 and 1311 SHARC-based products
- - Release of the VxWorks/SC, Real-Time Operating System
- - Announcement of the MAP 2610, a Power PC based product
- - Announcement of the MAP 2000 series, the next generation of MAP
products based on a collaborative with California-based Myricom
SCANALYTICS PRODUCT GROUP
- - Version 3.0 of the RFLPscan software for DNA fingerprinting
- - Release of GELLAB II+ product for analysis of 2-D gels
- - A new client-server configuration for the CELLscan system
incorporating SuperCard-4XLs
VISION SYSTEMS PRODUCT GROUP
- - Enhancements on current Vision Systems products
- - R&D into new Vision Systems product offerings
1997 will see new software versions from Scanalytics as well as new hardw are
options; Vision Systems continues to refine the design of the Lightni ng family
of readers; and the Embedded Computing product group is embarki ng on a new
generation of products to leapfrog available competitive prod ucts.
OUR STRENGTH IS OUR PEOPLE
We realize that the creative work and dedication of the CSPI team are res
ponsible for our success. In this year of transition, everyone pulled tog ether
to ensure that the quality of our products and services offered to our customers
was always beyond question. We thank every member of the CS PI team for
continuing our long history of quality and profitability.
In summary, I am pleased that Alex Lupinetti has joined us as the new Preside nt
and Chief Executive Officer of CSPI. I am confident that under his lea dership
we will introduce technologically superior products that will gro w our business
in 1997 and the future.
Samuel Ochlis, Chairman of the Board
(4-COLOR PICTURE SHOWING ALEXANDER R. LUPINETTI AND SAMUEL OCHLIS)
(Photo caption Alexander R. Lupinetti, President & CEO and Samuel Ochlis,
Chariman of the Board)
5
EMBEDDED COMPUTING
(4-COLOR PICTURE)
[Large photo caption]
The Japanese Meteorological Agency detected a tornado using a Doppler rad ar
system including a CSPI RTS-860 installed at the Narita airport in Jap an. Red
indicates tornado-force winds.
6
CSP CORE PRODUCTS PROVIDE ENLIGHTENING TECHNOLOGY
CSPI's embedded computing products form the core of the company's product lines.
This core technology uses multiple processors to perform high-spe ed arithmetic
and is recognized throughout the industry for superior quality and performance.
The SuperCard and MAP are the company's flagship pro ducts and are used to
provide the processing for a wide range of real tim e applications, where
maximum computing density is essential. The strength of this core technology has
allowed CSPI to expand its product offering s across multiple markets.
Today, CSPI is a global supplier of computing s ystems and instruments for
defense, medical, industrial and research appl ications requiring maximum
computing power. Although CSPI's core business - real time, highly complex and
powerful computerprocessing - has been v ery specialized, today its role is
fundamental to society.
ANSWERING A NEED
Computing has become part of everyday life with today's personal computer s
providing more computational power than the supercomputers of even five years
ago. This has created a burgeoning need for a network solution tha t will tie
them all together. In the signal processing market this need i s even greater as
the intensity and performance requirements far exceed t hose of general business
applications.
CSPI, in response to this need, wil l introduce a new ultra high performance,
network-based signal computing product line. CSPI selected the Myrinet(TM)
interprocessor network to impl ement the next generation of embedded computing
products. Myrinet, a prod uct of Myricom, Inc., is specially designed for
high-performance multicom puter systems. The new MAP series not only leapfrogs
the current solution s on the market, but offers the growth potential associated
with the Powe rPC architecture and the Myrinet technology.
CSPI is excited by the opport unity to provide our customers with such a
powerful and unrivaled computi ng solution. The company believes this next
generation of products will p rovide growth opportunities across new markets and
its current customer b ase.
CSPI continues to successfully market the SuperCard family of produc ts, and
also has introduced the MAP-1000 series of boards. These products continue to
provide opportunities for CSPI to provide high quality and s uperior
performance-based products to its customers.
7
VISION SYSTEMS
LIGHTING THE WAY WITH CSPI TECHNOLOGY
Tracking packages through today's sortation and distribution centers dema nds
fast, efficient and cost-effective automation. CSPI's Vision Systems product
group answers this need with its Lightning family of readers. The readers are
designed to read bar codes and MaxiCode, a dense 2-dimension al code, at the
high conveyor speeds found in modern distribution centers 2E The readers utilize
CSPI's core processing technology to provide the high-speed computing power
which is necessary for today's belt speeds and sortation devices. It is this
technology that enables packages to be sor ted and tracked reliably.
POISED FOR GROWTH
The superior field performance of the Lightning 500 has led the United Pa rcel
Service to expand the product's implementation into additional distr ibution
facilities around the country. In addition, the use of MaxiCode i s widening, as
evidenced by the acceptance of industry standard groups su ch as ANSI. MaxiCode
is now being written into shipping label specificati ons by domestic and
international standards committees, and has been reco mmended as the preferred
code for high-speed, over-the-belt applications.
CSPI believes that as one of the only suppliers of high-speed, over-the-b elt
products that can read MaxiCode, it is well positioned to take advant age of the
increasing popularity of the code and as a result sees an incr easing demand for
its readers.
Lightning 500 readers have been sold into n ew markets in Europe and planned
product enhancements are expected to inc rease customer satisfaction,
reliability, and value, providing new opport unities in new markets and
applications.
[Shaded caption]
There are now over 200 installations of Vision Systems Lightning 500 rea ders in
UPS facilities.
8
(4-COLOR PICTURE)
VISION SYSTEMS
[Large photo caption]
Today's sortation and distribution centers demand fast, efficient and cos
t-effective automation.
9
SCANALYTICS
[Large photo caption]
CELLscan is used to aid in the study of how burns affect the functions of cells.
These images help determine how cells survive such events. (Image courtesy of
Drs. J. Bogan and H. Lin, Whitehead Institute, Cambridge, MA)
10
Applying Signal Processing at the Microscopic Level
The Scanalytics product group has a highly focused use for CSPI's core
technology - to probe th e microscopic world of the cell. The CELLscan product
applies array proce ssors to the field of high-resolution fluorescence
microscopy, and thus o pens new avenues for the study of living cells.
Through its Scanalytics p roduct group CSPI has given researchers studying the
complex processes of neural signaling a tool that is fast and powerful enough to
answer some of life's most fundamental biological questions. World renowned
research fellows of the Howard Hughes Medical Institute working at Brown
Universit y are using CELLscan to study the cell biology of neurons and hoping
to a nswer questions about Alzheimer's disease and other neurological disorder
s. Scientists throughout the world are discovering the power of Scanalyti cs
Exhaustive Photon Reassignment (EPR) algorithm as it uncovers informat ion in
cells that was previously undetectable.
From Genetics to Forensics
The Human Genome Project has yielded new information on thousands of gene s and
millions of DNA sequences. As a result, the study of genes, gene pr oducts, and
their effects on normal and abnormal cell biology will now be come the focus of
the entire genomic DNA field. Scanalytics has provided several software products
to aid in the study of these data and now compl etes that product offering with
the GELLAB II+ software.
Meanwhile, RFLPscan FE (Forensic Edition) is making inroads in the fast growing
field of D NA typing for forensics. This version of the software enables
forensics l abs around the world to interface with the FBI's DNA fingerprint
database through the CODIS (combined DNA indexing system) software. Filtered and
refined through Scanalytics products, this complex data becomes useful in
formation shedding new light on old problems.
GROWING THE BUSINESS
In the last year Scanalytics has implemented an aggressive schedule of ne w
product releases including new versions of its GELLAB and RFLPscan prod ucts,
and a major upgrade to the CELLscan system that provides customers with
aclient-server solution utilizing the compute powers of CSPI SuperCa
rd-4XLs.
Through strategic partnerships, OEM relationships and an internat ional network
of distributors, Scanalytics will make its software package savailable to
researchers around the world in a variety of disciplines. Scanalytics'
reputation as a supplier of premium solutions for biological imaging is
attracting new opportunities in the research, forensic, and clinical diagnostic
markets.
(4-COLOR PICTURE)
[Small photo caption]
A focused point of light (at center, in white) blurring as a microscope views it
from increasing distances. CELLscan's algorithm restores microscopic details for
a more accurate representation of the cell.
11
(2-COLOR PICTURE)
12
FINANCIAL STATEMENTS
Sales for the 1996 fiscal year were $16.520 million. Net income was $108
thousand or earnings per share of $.04, which extends the string of profitable
years to sixteen.
[Shaded Caption]
Enlightening Technology
13
CSP Inc. and Subsidiaries Selected Financial Data
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended August
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Sales $ 16,520 $ 18,526 $ 19,460 $ 18,015 $ 16,035
Costs and expenses 17,169 18,725 17,425 15,544 14,531
Operating income (loss) (649) (199) 2,035 2,471 1,504
Other income 886 821 478 426 719
Income before income taxes 237 622 2,513 2,897 2,223
Income taxes 129 237 794 940 545
Net income $ 108 $ 385 $ 1,719 $ 1,957 $ 1,678
Earnings per share: $ 0.04 $ 0.14 $ 0.61 $ 0.70 $ 0.61
Weighted average number
of common shares 2,681 2,795 2,823 2,789 2,753
Balance Sheet Data:
Working capital $ 22,800 $ 22,862 $ 23,085 $ 21,873 $ 19,831
Total assets 29,536 29,279 29,936 27,853 24,973
Long term obligations 2,093 1,943 1,804 1,746 1,524
Total liabilities 3,732 3,554 3,695 3,539 2,777
Retained earnings 17,332 17,224 16,839 15,120 13,163
Shareholders' equity 25,804 25,725 26,241 24,314 22,196
</TABLE>
14
Management's Discussion and Analysis of Financial Conditions and Results of
Operations Results of Operations:
The following table sets forth certain information which is based on Operating
Statement Data:
<TABLE>
<CAPTION>
Percentage of sales Period to period
fiscal year ended August dollar changes (in thousands)
------------------------ -----------------------------
1996 1995 1994 1996 1995
Compared to Compared to
1995 1994
<S> <C>
Sales 100.0% 100.0% 100.0% $ (2,006) $ (934)
Costs and expenses:
Costs of sales 40.3% 44.1% 40.0% (1,502) 381
Engineering and development 20.1% 16.7% 14.5% 226 265
Marketing and sales 32.0% 27.0% 24.4% 291 246
General and administrative 11.5% 11.1% 10.6% (155) (8)
Restructuring - 2.2% - (416) 416
Total costs and expenses 103.9% 101.1% 89.5% (1,556) 1,300
Operating income (loss) (3.9)% (1.1)% 10.5% (450) (2,234)
Other income 5.4% 4.5% 2.4% 65 343
Income before taxes 1.5% 3.4% 12.9% (385) (1,891)
Income taxes 0.8% 1.3% 4.1% (108) (557)
Net income 0.7% 2.1% 8.8% $ (277) $ (1,334)
</TABLE>
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Results of Operations -1996 Compared to 1995:
The Company's sales decreased by approximately 11% to $16,520,000 from
$18,526,000. The Embedded computer products accounted for 78% of total revenue
during the fiscal year 1996. The SuperCard family of products continues to
represent the major source of revenue accounting for approximately 71% of total
sales, an increase of 19% over the prior fiscal year. This increase in sales was
due in part to increased procurement of SC-4/4XL, C3/3XL and SC-2 to various
COTS (commercial-off-the-shelf) programs, some of which were delayed from the
Prior fiscal year, plus the award of new programs and increased shipments to OEM
customers. COTS programs were the major source of revenue accounting for
approximately 33% of total sales for the fiscal year.
Sales of the machine code reader for United Parcel S ervice (UPS) represented 6%
of total sales for the year. This was a significant reduction of approximately
$3,000,0000 in shipments from the prior year. In fiscal year 1995 the balance
($3.8 million) of the procurement for $6.2 million of machine code readers was
shipped for the new UPS Chicago Facility.
Scanalytics products (Bio-technology instrument product gro up) sales
represented approximately 16% of total revenues. This was a 22% increase over
the prior fiscal year. The increase in sales was due to th e increase in
shipments of the CELLscan and software package products , w hich represented
approximately 48%, and 24% of total revenue for Scanalyt ics. The sales of
application specific software modules (DNAScan, RFLPSca n, and Gel analysis)
increased by 48% over the prior year. CELLscan produ ct sales were approximately
121% higher than the prior year.
North America n sales represent 88% of total sales, an increase of 2% over the
prior ye ar. This was due to the continued procurement of SuperCard by the US
mili tary and OEM customers, and increased domestic shipments of Scanalytics p
roducts . The sales of both Embedded computer and Scanalytics products to Japan
increased by 48% over the prior fiscal year. Sales to other intern ational
geographic areas decreased due to the decline in military procure ment and slow
economic conditions in the Foreign market segments CSPI pro ducts are sold into.
Cost of sales as a percentage of sales decreased to 40%. This was a decrease of
4% over the prior fiscal year and was due primarily to a change inproduct mix
with increased revenue from Embedded computer and Scanalytics business' which
have lower per unit costs of goods sold compared to the machine code readers.
The Company's improved cost of sales could have been even better but the decline
in sales volume did not allow the efficiency needed to lower our indirect
manufacturing costs. In addition, the continuing competitive pressures in the
Embedded computer business from our direct competitors required larger discounts
to secure the successful award of some business with both new and existing
customers. The Company will continue to take steps to lower the manufacturing
overhead and improve the overall manufacturing efficiency in order to lower the
cost of goods sold. The future cost of sales as a percent of sales will not
increase significantly from the levels we have currently experienced unless
there isa significant change in the mix of products sold.
Engineering and development expenditures increased by approximately 7% fr om the
prior fiscal year. The major portion of the increase was for outsi de services
and the purchase of new equipment and software for the development of the next
generation of Embedded computer products, new MAP
16
produ cts, to be initially shipped during fiscal year 1997. Expenses for the im
provement of the machine code reader product for Vision Systems doubled b ut
only represented 8% of the total engineering and development expenses.
Scanalytics expenses were approximately the same amount as the prior year.
Sales and marketing expenses increased by 6% from the previous fiscal year. The
Scanalytics and Vision Systems products were the primary reason for the
increase. These expenses increas ed 20% and 24% over the prior year. The Vision
Systems increase was for expenses to expand its customer base which included
literature, advertising, trade shows and other direct sales expenses which
resulted in orders from a half dozen customers. The Scana lytics increase in
expenses was due in part to the addition of two employ ees for customer support,
additional sales commission related to increase d sales revenue, and advertising
and promotion programs for the CELLscan and modular software packages. The
Embedded computer products expenses we re reduced by approximately 4% from the
prior year. The reduced expenses were due to cuts in staff in the France and
domestic operations and lower commission due to the reduced sales volume.
General and administrative expense were reduced by 8% compared to the pri or
fiscal year. There were a number of one time expenses this fiscal year related
to the termination of the CEO and President and costs incurred t o hire the new
President and CEO. These expenses represented about 15% of the total general and
administrative expenses.
Other income increased by 8% over the prior year due primarily to an incr ease
in interest income. The Company continued to invest a larger percent age of its
cash in taxable instruments which have a higher rate of return on a pre-tax
basis than in prior years.
The Company's effective tax rate was greater than the statutory rates for both
federal and state taxes since all of our French subsidiary operation loss of
approximately $213,000 could n ot be deducted from either federal or state
taxes. We have closed our Fre nch operation but were not able to benefit from
the losses of the foreign operation. The lower foreign sales did not allow for
any tax benefit fro m our Foreign Sales Corporation (FSC).
Results of Operations -1995 Compared to 1994:
Sales of $18,526,000 was the second highest in the Company's history. The
SuperCard family of products continues to represent the major source of revenue
accounting for 51% of total sales . The decrease in sales from th e prior fiscal
year was due in part to delays in procurement of SC-4/4XL and SC-3/3XL, and to
lower sales of COTS (commercial-off-the-shelf) progr ams to the United States
military. COTS programs continue to be a major source of revenue accounting for
approximately 35% of total sales for the fiscal year.
Sales of the machine code reader for United Parcel Service (UPS) represented 21%
of total sales for the year. These shipments represented the balance of the
overall procurement received from UPS in the prior fiscal year.
Sales of older products such as MAP-4000 and MiniMap represented only 4% of
total sales.
RTS-860 real-time systems represented approximately 7% of sales. This rep
resented an increase of 73% over the prior year.
Scanalytics sales represented approximately 12% of total revenues. This was a
50% increase over the prior fiscal year. The increase in sales was due to the
increased shipments of Ambis, CELLscan, and software package products, which
represented approximately 48%, 26%, and 19% of total revenue for
Scanalytics.
17
North American sales represent 86% of total sales. This was a 3% increase in
percentage of total sales over the prior year. This was due to the shipments to
UPS, continued procurements of SuperCard by the US military, and increased
domestic shipments of Scanalytics products. The other geographic areas had
decreases in sales due to the decline in military procurement and slow economic
recovery in the foreign markets.
Cost of sales as a percentage of sales increased to 44%. This was an increase of
4% over the prior fiscal year and was due primarily to product mix with
increased amount of Vision Systems and Scanalytics business which have higher
per unit costs of goods sold . There were other factors which accounted for some
of the additional expenses for the cost of goods sold such as increased
competition, six months of cost running the San Diego Ambis anufacturing
operation (which was c losed down in February 1995 as part of the restructuring)
and inventory write off of obsolete goods. The Company had inventory write downs
of obso lete materials of approximately $167,000.
Engineering and development expenditures increased by approximately 9% fr om the
prior fiscal year. The major portion of the increase was for outsi de services
and purchase of new equipment and software in the development of our ASIC
(Application Specific Integrated Circuit) for the Embedded c omputer products
and improvement of the machine code reader product for V ision Systems.
Scanalytics expenses were reduced by 8% from the prior year primarily due to
reductions in staff.
Sales and marketing expenses increased by 5% from the previous fiscal yea r.
Scanalytics increased their expenses 40% over the prior year and Visio n
Systems, which was in its initial year of operation, represented 11% of the
overall expenses in the sales and marketing area. The major portion of the
Vision Systems increase was due to the transfer of personnel, star t up expenses
which included literature, advertising, trade shows and oth er normal operating
expenses. The Scanalytics increase in expenses was du e in part to the addition
of four employees for customer support, sales a nd marketing personnel added as
part of the AMBIS purchase, additional sa les commission for the increased
sales, and advertising and promotion pro grams for the CELLscan and modular
software packages. The Embedded comput er expenses were reduced by approximately
19% from the prior year. The re duced expenses were due to reorganizing the
French sales office, staff re ductions in marketing and field operations (both
from attrition and restr ucturing), and decreased advertising and commission due
to the reduced sales volume.
The Company restructured and consolidated operations in November 1994. The
restructure was required due to the change in mix of the Company's business to
lower margin products sold by Vision Systems and Scanalytics. The Company cut
it's work force by seventeen employees, relocated its French subsidiary and
closed the San Diego manufacturing operation. The Company estimated the
restructure to be $409 ,000 and the actual amount was $416,000, of which
$288,000 represented se verance costs and the remaining $128,000 was due to the
closure of the Sa n Diego manufacturing operation. These charges reduced the
overall operat ing expenses of the Company by over $1,000,000.
General and administrative expenses were approximately at the same level as the
prior fiscal year. There were increased expenses related to the De partment of
Commerce (DOC) settlement which was $82,000 expense in this fiscal year (an
additional $50,000 was accrued in the prior year for a tot al of $132,000) and
additional legal, merger and acquisition,
18
other outsi de services, and expenses in the implementation of a new
manufacturing and accounting system which were offset by reduction in bonus
expenses .
Other income increased by 72% over the prior year which was due primarily to the
increase in interest income. The Company invested a larger percen tage of its
cash in taxable investments during the year due to its lower anticipated
operating revenues from our normal non-taxable investment pro curements. The
taxable securities have a higher rate of return on a pre-t ax basis thus the
increase in investment income.
The Company's effective tax rate increased from the statutory rates for b oth
federal and state taxes due to fact that the loss of $202,000 from ou r French
subsidiary operation (a French corporation) could not be deducted from either
federal or state taxes. There were some benefits from our s tatutory rates for
tax-exempt investment income, the Foreign Sales Corporation, and research and
development credits.
Financial Position, Capital Resources and Liquidity:
The Company's solid financial position continued in fiscal year 1996. The
Company's working capital of $22,800,000 at August 30, 1996 decreased by $62,000
from the prior fiscal year. During the fiscal year the Company r epurchased
28,000 shares of its own common stock for $253,000 leading to the reduced
working capital. The Working capital decreased by $223,000 to $22,862,000 at
August 25, 1995, from $23,085,000 on August 26, 1994. The Company accounts
receivable increased by $214,000 to $4,147,000 which is due to the large number
of shipments in the month of August rather than because of slow collection at
August 30, 1996. The Company's inventory in creased to $2,405,000 from
$2,150,000 which was due to materials needed t o complete orders for UPS. The
Company's cash and marketable securities d ecreased by approximately $496,000.
The inventory levels will be maintain ed more in line with industry levels and
we will continue to improve the inventory turn levels.
The Company spent $1,144,000, $988,000, and $771,000, on capital improvem ents
during fiscal years 1996, 1995, and 1994.
Management believes that all the Company's current and foreseeable needs can be
met through working capital generated by operations and investments.
Inflation and Changing Prices:
Management does not believe that inflation and changing prices had a sign
ificant impact on sales, revenues or income from continued operations dur ing
fiscal 1996, 1995 and 1994. There is no assurance, however, that the Company's
business will not be materially and adversely affected by infla tion and
changing prices in the future.
Factors That May Affect Future Performance:
This document contains forward-looking statements based on current expect ations
that involve a number of risks and uncertainties. The factors that could cause
actual results to differ materially include the following: g eneral economic
conditions and growth rates in the peripherals and comput er products,
biological instruments and machine code reader industries; c ompetitive factors
and pricing pressures; changes in product mix; changes in the seasonality of
demand patterns; the timely development and accept ance of new products;
inventory risks due to shifts in market demand; and component constraits and
shortages.
19
CSP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 30, 1996 and August 25, 1995
(Dollars in thousands, except for par value)
August 30, August 25,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,928 $ 11,069
Marketable securities (Note 2) 6,127 6,482
Accounts receivable, net 4,147 3,933
Inventories (Note 3) 2,405 2,150
Deferred income taxes (Note 4) 481 368
Prepaid expenses 351 471
Total current assets 24,439 24,473
Property, equipment and improvements, net (Note 5) 3,607 3,470
Other assets:
Land held for future development 163 163
Deferred income taxes (Note 4) 409 355
Other assets 918 818
Total other assets 1,490 1,336
Total assets $ 29,536 $ 29,279
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 6) 1,425 1,461
Income taxes payable 214 150
Total current liabilities 1,639 1,611
Deferred compensation and retirement plans (Note 8) 2,093 1,943
Commitments and contingencies (Note 9)
Shareholders' equity: (Notes 7 and 9)
Common stock, $.01 par, authorized, 7,500,000
shares: issued 2,957,284 and 2,922,034 shares 29 29
Additional paid-in capital 10,411 10,187
Retained earnings 17,397 17,289
27,837 27,505
Less treasury stock, at cost, 301,314 and 273,314 shares (Note 9) 2,033 1,780
Total shareholders' equity 25,804 25,725
Total liabilities and shareholders' equity $ 29,536 $ 29,279
</TABLE>
See accompanying notes to consolidated financial statements.
20
CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 30, 1996, August 25, 1995 and August 26, 1994
(Amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales (Note 10) $ 16,520 $ 18,526 $ 19,460
Costs and expenses:
Cost of sales 6,655 8,157 7,776
Engineering and development 3,325 3,099 2,834
Marketing and sales 5,284 4,993 4,747
General and administrative 1,905 2,060 2,068
Restructuring (Note 11) - 416 -
Total costs and expenses 17,169 18,725 17,425
Operating income (loss) (649) (199) 2,035
Other income (expense):
Dividend income 23 13 25
Interest income 869 804 475
Interest expense (24) (50) (31)
Other 18 54 9
Total other income 886 821 478
Income before income taxes 237 622 2,513
Income taxes (Note 4) 129 237 794
Net income $ 108 $ 385 $ 1,719
Earnings per share $ 0.04 $ 0.14 $ 0.61
Weighted average shares outstanding 2,681 2,795 2,823
</TABLE>
See accompanying notes to consolidated financial statements.
21
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended August 30, 1996, August 25, 1995 and August 26, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Total
Common stock Paid-in Retained Treasury shareholders'
Shares Amount Capital earnings stock equity
<S> <C> <C> <C> <C> <C> <C>
Balance, August 27, 1993 2,877,609 $ 29 $ 9,928 $ 15,185 $ (828) $ 24,314
Net income - - - 1,719 - 1,719
Exercise of stock options 34,800 - 208 - - 208
Balance, August 26, 1994 2,912,409 29 10,136 16,904 (828) 26,241
Net income - - - 385 - 385
Exercise of stock options 9,625 - 51 - - 51
Purchase of treasury stock - - - - (952) (952)
Balance, August 25, 1995 2,922,034 29 10,187 17,289 (1,780) 25,725
Net income - - - 108 - 108
Exercise of stock options 35,250 - 224 - - 224
Purchase of treasury stock - - - - (253) (253)
Balance, August 30, 1996 2,957,284 $ 29 $ 10,411 $ 17,397 $(2,033) $ 25,804
</TABLE>
See accompanying notes to consolidated financial statements.
22
CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 30, 1996, August 25, 1995 and August 26, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 108 $ 385 $ 1,719
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 983 792 658
Deferred compensation and retirement plans 150 139 58
Deferred income taxes (167) (19) (109)
Other 24 - (13)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable, net (214) 1,151 (2,232)
(Increase) decrease in inventories (255) 1,042 (1,291)
(Increase) decrease in prepaid expenses 120 237 (314)
Decrease in accounts payable and accrued expenses (36) (228) (120)
Increase (decrease) in income taxes payable 64 (52) 70
Net cash provided by (used in) operating activities 777 3,447 (1,574)
Cash flows from investing activities:
Purchase of marketable securities (188,892) (159,099) (130,013)
Sales of marketable securities 189,247 159,674 129,519
Business acquired - - (496)
Property, equipment and improvements (1,144) (988) (771)
Other (100) 380 (738)
Net cash used in investing activities (889) (33) (2,499)
Cash flows from financing activities:
Proceeds from stock options 224 51 208
Purchase of treasury stock (253) (952) -
Net cash provided by (used in) financing activities (29) (901) 208
Net increase (decrease) in cash (141) 2,513 (3,865)
Cash and cash equivalents, beginning of year 11,069 8,556 12,421
Cash and cash equivalents, end of year $ 10,928 $ 11,069 $ 8,556
Supplementary cash flow information:
Cash paid for income taxes, net $ 183 $ 323 $ 893
Cash paid for interest - $ 50 $ 31
Business acquired $ 645
Less liabilities assumed 149
Cash paid $ 496
</TABLE>
See accompanying notes to consolidated financial statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For years ended August 30, 1996, August 25, 1995 and August 26, 1994
ORGANIZATION AND BUSINESS
The Company designs, manufactures and markets embedded processors which a re
small, low power special-purpose computers which enhance a system's ab ility to
perform high-speed arithmetic. The Company also develops and mar kets turnkey
image analysis workstations targeted toward the biological s ciences and
industrial bar-code readers.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year:
The Company's fiscal year end is on the last Friday in August.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transact ions have
been eliminated.
Marketable Securities:
Investments consist of corporate bonds and notes, government agency bonds,
equity securities, and money market funds. Most investments mature within a two
year period. The Compa ny classifies its marketable securities as
held-to-maturity based on its ability and intent to hold these securities until
maturity. Held-to-matur ity securities are recorded at amortized cost, which
approximates market value.
Interest income is accrued as earned. Dividend income is recognized as income on
the date the stock trades "ex-dividend". The cost of marketable securities sold
is determined on the specific identification method and realized gains or losses
are reflected in income.
Inventories:
Inventories are stated at the lower of cost or market; cost being determi ned
principally by use of the average-cost method, which approximates the first-in,
first-out method.
Property, Equipment and Improvements:
The components of property, equipment and improvements are stated at cost. The
Company provides for depreciation by use of the straight-line met hod over the
estimated useful lives of the related assets.
Product Warranty:
The Company ordinarily provides a one year warranty. In addition, certain major
customers are granted extended warranties. The Company accrues est imated
warranty costs at the time of sale.
Revenue Recognition:
Revenues from product sales are recognized at the time of shipment.
Engineering and Development Expenses:
Engineering and development expenditures for company-sponsored projects a re
charged to expenses as incurred.
Income Taxes:
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the f inancial
statement carrying amounts of existing assets and liabilities an d their
respective tax bases and operating loss and tax credit carry forw ards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those tem porary differences are
expected to be recovered or settled.
Earnings Per Share of Common Stock:
Earnings per share are based on the weighted average number of shares out
standing during the period. The effect of outstanding stock options is ex cluded
from the computation because the dilutive effect is not material.
24
Use of Estimates:
The preparation of consolidated financial statements in conformity with g
enerally accepted accounting principles requires management to make estim ates
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 expens es during the
reporting period. Actual results may differ from those esti mates.
New Accounting Pronouncement:
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which established financ ial
accounting and reporting standards for stock-based employee compensat ion plans.
Companies are encouraged, rather than required, to adopt a new method that
accounts for stock compensation awards based on their fair m arket value using
an option pricing model. Companies that do not adopt th is new method will be
required to make pro forma footnote disclosures of net income as if the fair
value-based method of accounting required by SF AS No. 123 had been applied. The
Company is required to adopt SFAS No. 12 3 beginning in fiscal 1997. Adoption of
this pronouncement is not expecte d to have a material impact on the Company's
financial position or result s of operations because the Company intends to make
pro forma footnote diclosures instead of adopting the new accounting method.
Reclassification:
Certain reclassification were made to the 1995 and 1994 financial statements to
conform to the 1996 presentation.
2. MARKETABLE SECURITIES
At August 30,1996 and August 25, 1995, marketable securities consisted of the
following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Marketable equity securities, at cost $ 262 $ 296
Less: valuation allowance 2 9
Marketable equity securities, at market 260 287
Bonds and municipal revenue notes, at cost 5,612 5,787
Money market funds and commercial paper 59 118
U.S. treasury bills 196 290
Total $ 6,127 $ 6,482
</TABLE>
Assets of $635,000 and $686,000 at August 30, 1996 and August 25, 1995, r
espectively, are held in a rabbi trust and generally are available only t o pay
certain retirement benefits of a former employee.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C>
Raw materials $ 1,083 $ 851
Work-in-process 739 822
Finished goods 583 477
Total $ 2,405 $2,150
</TABLE>
25
4. INCOME TAXES
Reconciliations of expected income tax expense to actual income tax expen se are
as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense $ 81 34.0% $ 211 34.0% $ 854 34.0%
Increases (reductions) in taxes resulting from:
Dividend exclusion (6) (2.5) (42) (6.8) - -
Tax exempt interest (64) (27.0) (74) (11.9) (133) (5.3)
Research and experimentation and investment tax credits - - (37) (5.9) ( 89) (3.5)
State income taxes, net of federal tax benefit (7) (2.9) 47 7.6 148 5.9
Non-taxable FSC earnings - - (26) (4.2) (29) (1.2)
French subsidiary loss 72 30.4 165 26.4 - -
Change in valuation allowance 25 10.6 32 5.2 - -
Other items 28 11.9 (39) (6.3) 43 1.7
Income tax expense $ 129 54.5% $ 237 38.1% $ 794 31.6%
</TABLE>
For the years ended August 30, 1996 and August 25, 1995 temporary differences
which give rise to deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 893 $ 834
Other accruals 195 118
Bad debt reserves 41 41
Inventory capitalization and reserves 210 192
Unrealized loss on securities 42 43
Gross deferred tax assets $ 1,381 $ 1,228
Less: valuation allowance (342) (317)
Deferred tax asset less valuation allowance $ 1,039 $ 911
Deferred tax liability:
Accumulated depreciation (149) (188)
Net deferred tax asset $ 890 $ 723
</TABLE>
The valuation allowance was $342,000 and $317,000 at August 30, 1996 and August
25, 1995. The valuation allowance was established due to the long term nature of
certain deferred compensation and retirement obligations for which the tax
benefit will be realized over an extended period of time. In assessing the
realizability of deferred tax assets, management con siders whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Based upon the level of historical taxable income and projections for
future taxable income over the p eriods which the deferred tax assets are
26
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance at August 30, 1996.
The Deferred tax assets account include Massachusetts res earch credits of
$73,000 which if not utilized will begin to expire at the end of August, 2010.
The provisions for income taxes are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 267 $ 232 $ 695
State 28 24 208
$ 295 $ 256 $ 903
Deferred:
Federal (128) (15) (85)
State (38) (4) (24)
(166) (19) (109)
$ 129 $ 237 $ 794
</TABLE>
5. PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements, net consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Land $ 587 $ 587
Building and improvements 1,356 1,334
Equipment 10,499 9,375
Automotive equipment 17 79
12,459 11,375
Less accumulated depreciation
and amortization 8,852 7,905
Property, equipment and
improvements, net $ 3,607 $ 3,470
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
Accounts payable $ 402 $ 606
Commissions 99 113
Compensation and fringe benefits 616 341
Customer advances 134 163
Professional fees and shareholders'
reporting services 93 108
Taxes, other than income 11 36
Other, individually less than
5% of current liabilities 70 94
$ 1,425 $ 1,461
</TABLE>
During 1994 the Company was notified by the Department of Commerce (DOC) about
possible violations of certain export regulations during the period September
15, 1990 to July 6, 1991. The Company has reached an agreement with the DOC
subject to final documentation, pursuant to which the Company will incur a
penalty of $160,000 of which $132,000 was paid during fiscal year 1996, and
$28,000 will be suspended if the Company complies with export regulations for a
period of one year. The Company has accrued the amount to be paid in the agreed
upon settlement at August 25, 1995.
27
7. STOCK OPTIONS
In 1991, the Company adopted the 1991 Stock Option Plan covering 250,000 shares
of common stock. Under the Plan, both incentive stock options and non-qualified
stock options may be granted to officers, key employees and other persons
providing services to the Company. The stock option plan p rovides for issuance
of options at their fair market value on the date of grant. These options vest
over a period of five years and expire ten yea rs from the date of grant. In
addition, up to 20,000 shares are allocated for annual non-discretionary grants
of 1,000 shares each to non-employee directors of the Company who are serving on
the last business day of Jan uary in each year.
The 1991 Plan supersedes three earlier plans, each of which was terminated in
1991.
The following is a summary of common stock option activity for the three years
ended August 30, 1996:
<TABLE>
<CAPTION>
Number of Shares
Option 1991 1987 1981
prices Plan Plan Plan Total
<S> <C> <C> <C> <C> <C>
Outstanding August 27,1993 $ 5.00 - $ 10.75 105,525 6,000 150,425 261,950
Granted $ 9.50 4,000 - - 4,000
Exercised $ 5.00 - $ 9.00 (500) - (34,300) (34,800)
Expired & terminated $ 9.00 - $ 9.125 (2,000) - - (2,000)
Outstanding August 26,1994 $ 5.00 - $ 10.75 107,025 6,000 116,125 229,150
Granted $7.625 - $ 8.50 49,000 - - 49,000
Exercised $ 5.00 - $ 6.625 - - (9,625) (9,625)
Expired & terminated $ 5.00 - $ 10.75 (17,975) (6,000) (2,375) (26,350)
Outstanding August 25,1995 $ 5.00 - $ 10.75 138,050 - 104,125 242,175
Granted $8.875 6,000 - - 6,000
Exercised $ 5.00 - $ 6.63 - - (35,250) (35,250)
Expired and terminated $ 5.00 - $ 10.75 (59,150) - (625) (59,775)
Outstanding August 30,1996 $ 5.00 - $ 9.75 84,900 - 68,250 153,150
Available for future grants - 165,100 - - 165,100
Exercisable $ 5.00 - $ 9.75 49,088 - 68,250 117,338
</TABLE>
28
8. DEFERRED COMPENSATION AND RETIREMENT PLANS
The Company has a 401(k) Retirement Plan under which the Company matches a
portion of the employee's contributions and may make discretionary contributions
to the plan. All e mployees with one year of continuous service are eligible for
the plan. All Company contributions are fully vested. Contributions by the
Company were $145,000, $122,000, and $167,000 for 1996, 1995 and 1994, respectiv
ely.
The Company has a Supplemental Retirement Plan for certain employees that
provides for payments (generally over 15 years) upon retirement, death o r
disability. The annual benefit is based upon a percentage of salary at the
inception of the plan, plus an annual percentage increase, plus inte rest. In
addition, the Company adopted deferred compensation plans for k ey executives
that provide for payments, over a ten-year period, upon ret irement, death or
disability based upon a percentage of salary at that ti me. The charge to
expense for the plans for 1996, 1995 and 1994 amounted to $277,000, $207,000 and
$160,000 respectively.
9. COMMITMENTS AND CONTINGENCIES
Leases:
The Company occupies office space under lease agreements expiring at vari ous
dates during the next five years. The leases are classified as operat ing
leases, and provide for the payment of real estate taxes, insurance, utilities
and maintenance.
At August 30, 1996, the Company was obligated under noncancelable operati ng
leases as follows:
<TABLE>
<CAPTION>
Fiscal year ending August: Operating leases
(In thousands)
<S> <C>
1997 $ 38
1998 $ 23
1999 $ 23
2000 $ 23
2001 $ 11
</TABLE>
Occupancy costs under the operating leases approximated $52,000 in 1996, $76,000
in 1995, and $76,000 in 1994.
Stock Repurchase:
On October 9, 1986 the Board of Directors authorized the Company to repur chase
up to 282,723 of the outstanding stock at market prices. On Septemb er 28, 1995,
the Board of Directors authorized the Company to repurchase up to 150,000
additional shares of the outstanding stock at market prices. The timing of
stock purchases are madeat the discretion of management. At August 30, 1996,
the Company has repurchased 301,314 or 70% of the total authorized to be
repurchased.
29
10. SALES BY MAJOR CUSTOMERS AND GEOGRAPHIC AREAS
Sales to individual customers constituting 10% or more of total sales wer e as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Customer A $ 3,394 21% - - - -
Customer B - - $ 3,948 21% $ 3,348 17%
Customer C - - - - $ 2,639 14%
</TABLE>
The Company anticipates that, for the foreseeable future, a significant p
ercentage of its sales will be dependent upon a relatively small number o f
customers.
The Company's sales by geographic area are as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
<S> <C> <C> <C>
North America $ 14,474 $ 15,992 $ 16,234
Far East 1,407 953 1,299
Europe 574 1,207 1,392
Other 65 374 535
Totals $ 16,520 $ 18,526 $ 19,460
</TABLE>
11. RESTRUCTURING EXPENSES
In November 1994 the Company accrued approximately $409,000 of the estima ted
costs to be incurred in consolidating its manufacturing operations an d reducing
its workforce. Actual costs incurred of approximately $416,000 are comprised of
severance costs of $288,000, and $128,000 for closing t he San Diego
manufacturing operation.
30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CSP Inc.:
We have audited the accompanying consolidated balance sheets of CSP Inc. and
subsidiaries as of August 30, 1996 and August 25, 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended August 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as wel l as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSP Inc. and
subsidiaries as of August 30, 1996 and August 25, 1995, and the results of their
operations and their cash flows for each of the years in the three year period
ended August 30, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
October 1, 1996
Boston, Massachusetts
31
CORPORATE INFORMATION
DIRECTORS
Samuel Ochlis
Chairman of the Board, CSP Inc.
Alexander R. Lupinetti President & CEO, CSP Inc.
Boruch B. Frustajer
President, BBF Corp.
Stanford A. Fingerhood
Senior VP, Laidlaw Holdings, Inc.
John Ingram, PhD
Research Fellow, Schlumberger Ltd.
C. Shelton James
President,
Fundamental Management Corp.
Sandford Smith
President,
Specialty Therapeutics Genzyme, Corp.
Officers
Samuel Ochlis
Chairman of the Board
Michael M. Stern
VP of Operations & Treasurer
Gary W. Levine
VP of Finance & CFO
James A. Waggett
VP of Embedded Computing
PRODUCT GROUP
James E. Storer
Chief Scientist & VP
Dean Hanley
Clerk, Foley, Hoag & Eliot
CORPORATE OFFICE
CSP, Inc.
40 Linnell Circle
Billerica, MA 01821
Tel. (508) 663-7598
Fax (508) 663-0150
GENERAL INFORMATION
General Counsel
Foley, Hoag & Eliot - Boston, MA
Transfer Agent
American Stock Transfer Co. - NY, NY
Auditors
KPMG-Peat Marwick LLP - Boston, MA
Stock Information
Stock Traded Over the Counter
NASDAQ Symbol: CSPI
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for fiscal year 1996 a s
filed with the Securities and Exchange Commission will be furnished wit hout
charge to any stockholder upon written request to the Vice President of Finance,
CSP Inc., 40 Linnell Circle, Billerica, MA 01821.
32
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
The Board of Directors
CSP Inc.
We consent to incorporation by reference in the registration statements (Nos.
2-79414 and 33-11815) on Forms S-8 of CSP Inc. of our report dated October 1,
1996, relating to the consolidated balance sheets of CSP Inc. and subsidiaries
as of August 30, 1996 and August 25, 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended August 30, 1996, which report is
incorporated by reference in the August 30, 1996 annual report on Form 10-K of
CSP Inc.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K DATED AUGUST 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1996
<PERIOD-END> AUG-30-1996
<CASH> 10,928
<SECURITIES> 6,127
<RECEIVABLES> 4,250
<ALLOWANCES> 103
<INVENTORY> 2,405
<CURRENT-ASSETS> 24,439
<PP&E> 12,459
<DEPRECIATION> 8,852
<TOTAL-ASSETS> 29,536
<CURRENT-LIABILITIES> 1,639
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 25,775
<TOTAL-LIABILITY-AND-EQUITY> 29,536
<SALES> 16,520
<TOTAL-REVENUES> 16,520
<CGS> 6,655
<TOTAL-COSTS> 17,169
<OTHER-EXPENSES> (886)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 237
<INCOME-TAX> 129
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
