FORM 8-K
AMENDMENT 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities
Act of 1934
Date of Report September 11,1997
CSP Incorporated
------------------
(Exact name of the registrant as specified in its charter)
Commission file number 0-10843
Massachusetts 04-2441294
- ----------------------- ------------
(State or jurisdiction of (IRS Employer Identification
incorporation or organization) number)
40 Linnell Circle Billerica Massachusetts 01821
- --------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, includes area code: 978-663-7598
CSP INC.
FORM 8-K
SEPTEMBER 11, 1997
AMENDMENT 1
TABLE OF CONTENTS PAGE
- --------------------------------------------------------------------------------
1. Item 2 ............................................................
2. Item 7A ...........................................................
3. Balance sheet August 29, 1997 .....................................
4. Proforma Statement of Operations for year ended
August 29, 1997 ..................................................
5. Independent Auditor's Report for 1997 Financial
Statements .......................................................
6. Consolidated Financial Statements for CSP, Inc. for
year ended August 29, 1997 .......................................
7. Consolidated Financial Statements for Modcomp/
Cerplex, L.P. and Subsidiaries for period ended
June 27, 1997 ....................................................
8. Consolidated Financial Statements for Modcomp/
Cerplex, L.P. and Subsidiaries for period ended
December 29, 1996 and December 31, 1995 ..........................
Form 8-K
Amendment 1
CURRENT REPORT dated September 11, 1997
CSP Inc.
ITEM 2: Acquisition or Disposal of Assets
On August 27, 1997 the Registrant acquired all the assets and subsidiaries of
Modcomp/Cerplex L.P (MODCOMP) of Fort Lauderdale Florida from the Cerplex Group
Inc. of Tussin California for $ 8.5 million in cash. The effective date of the
transaction is June 27, 1997. The assets purchased included the five wholly
owned foreign subsidiaries, equipment, inventory, and all other assets necessary
to continue running the business. The Registrant will continue the operation of
MODCOMP and it will continue to sell high performance, real time computer
systems, applications software and service for mission critical applications
providing installation, maintenance, training, project management, application
software and network integration services. The purchase price of MODCOMP was
based on projected revenues and income multipliers that was supported by
historical information. We reviewed other recent purchases to see that our
purchase price was reasonable and consistant with the current market.
ITEM 7(a): Financial Statements of Business acquired
Included are the audited financials for MODCOMP for the six months ended June
27, 1997 and years ended December 29, 1996 and December 31, 1995, and Proforma
statement of Operations of the Registrant and MODCOMP for the year ended August
29, 1997 assuming the acquisition occurred on August 30, 1996.
Also included are the financial statements for CSP Inc. for the year ended
August 29, 1997 which includes the operating results of MODCOMP for the period
June 28, 1997-August 29, 1997 as well as the balance sheet of MODCOMP
(consolidated with CSP Inc. balance sheet) at August 29, 1997.
CSP INC.
CURRENT REPORT dated September 11, 1997
Amendment 1
SIGNATURE
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 hereunto duly authorized.
CSP INC.
November 10, 1997
/s/ Gary W. Levine
----------------------------------
Gary W. Levine, Vice President-
Finance and Principal Accounting
Officer
<TABLE>
<CAPTION>
CSP INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
August 29, 1997
(Dollars in thousands, except for par value)
August 29,
Assets 1997
----------------
<S> <C>
Current assets:
Cash and cash equivalents $4,344
Marketable securities 5,581
Accounts receivable, net 8,584
Income tax receivable 37
Inventories 6,227
Deferred income taxes 504
Prepaid expenses 1,301
--------------
Total current assets 26,578
--------------
Property, equipment and improvements, net 3,856
--------------
Other assets:
Land held for future development 163
Deferred income taxes 880
Goodwill 1,562
Other assets 1,960
--------------
Total other assets 4,565
--------------
Total Assets $34,999
==============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses 7,738
--------------
Total current liabilities 7,738
--------------
Deferred compensation and retirement plans 2,240
--------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par; authorized, 7,500,000
shares; issued 2,987,264 shares 30
Additional paid-in capital 10,593
Retained earnings 16,676
Equity adjustment from foreign currency translation (211)
--------------
27,088
Less treasury stock, at cost, 306,314 shares 2,067
--------------
Total shareholders' equity 25,021
--------------
Total liabilities and shareholders' equity 34,999
==============
</TABLE>
<TABLE>
<CAPTION>
CSP INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Proforma CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per share data)
CSP Inc. MODCOMP
Registrant ten months Proforma
Year ended ended June 27, Proforma year ended
August 29, 1997(1) 1997 Adjustments August 29, 1997
----------------- ----------------- --------------- ----------------
Sales $19,540 $27,771 $47,311
----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Costs and expenses:
Cost of sales 10,542 19,483 30,025
Engineering and development 3,360 909 4,269
Marketing and sales 4,983 4,343 9,326
General and administrative 1,962 1,323 A 26 3,311
In process reseach and development 550 --- 550
Restructuring 193 130 323
----------------- ----------------- ----------------
Total costs and expenses 21,590 26,188 47,804
----------------- ----------------- ----------------
Operating income (loss) (2,050) 1,583 (493)
----------------- ----------------- ----------------
Other income (expense), net 885 (857) B (327) (299)
----------------- ----------------- ----------------
Income before income taxes (1,165) 726 (439)
Provision(benefit) for income taxes (444) 379 C (141) (206)
----------------- ----------------- ----------------
Net income (loss) ($721) $347 ($233)
============ ============ ============
Earnings(loss) per share ($0.27) ($0.09)
============ ============
Weighted average shares outstanding 2,680 2,680
============ ============
</TABLE>
(1) Includes results of operations for MODCOMP for the two month period ended
August 29, 1997.
Proforma adjustments:
The following Proforma adjustments assume that the acquisition took place on
August 31, 1996.
A. Reflects the amortization of Goodwill, being amortized over a 15 year
period, for the ten month period from September, 1996-June 1997.
B. Reduction in investment income for cash purchase price $8,709,000 over the
ten month period at an estimated interest rate of 5%
C. Adjustment in the income taxes for proforma adjustments at an estimated
effective rate of 40%.
CSP INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1997
(With Independent Auditor's Report Thereon)
TABLE OF CONTENTS
Page
----
Independent Auditor's Report ....................................
Consolidated Balance Sheet ......................................
Consolidated Statements of Operations ...........................
Consolidated Statements of Shareholders' Equity .................
Consolidated Statements of Cash Flows ...........................
Notes to Consolidated Financial Statements ......................
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 29, 1997 and August 30, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended August 29, 1997. 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 well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the financial position of CSP, Inc. and subsidiaries as
of August 29, 1997 and August 30, 1996, and the results of their operations and
their cash flows for each of the years in the three year period ended August 29,
1997, in conformity with generally accepted accounting principles.
KPMG - Peat, Marwick LLP
October 9, 1997
Boston, Massachusetts
CSP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
August 29,1997 and August 30,1996
(Dollars in thousands, except for par value)
August 29, August 30,
1997 1996
------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,344 $ 10,928
Marketable securities 5,581 6,127
Accounts receivable, net 8,584 4,147
Income tax receivable 37 --
Inventories 6,227 2,405
Deferred income taxes 504 481
Prepaid expenses 1,301 351
------------------------
Total current assets 26,578 24,439
------------------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET 3,856 3,607
------------------------
OTHER ASSETS:
Land held for future development 163 163
Deferred income taxes 880 409
Goodwill 1,562 --
Other assets 1,960 918
------------------------
Total other assets 4,565 1,490
------------------------
Total assets $ 34,999 $ 29,536
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 7,738 1,425
Income taxes payable -- 214
------------------------
Total current liabilities 7,738 1,639
Deferred compensation and retirement plans 2,240 2,093
Commitments and contingencies
Shareholders equity:
Common stock, $.01 par, authorized
7,500,000 shares: issued 2,987,684
and 2,957,284 shares 30 29
Additional paid-in capital 10,593 10,411
Retained earnings 16,676 17,397
Equity adjustment from foreign
currency translation (211) --
-------------------------
27,088 27,837
Less treasury stock, at cost, 306,314 and
301,314 shares 2,067 2,033
-------------------------
Total shareholders equity 25,021 25,804
-------------------------
Total liabilities and shareholders'
equity $ 34,999 $ 29,536
=========================
See accompanying notes to consolidated financial statements.
-2-
CSP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 29, 1997, August 30, 1996 and August 25,1995
(Amounts in thousands, except per share data)
1997 1996 1995
------------------------------
Sales
Systems $12,448 $15,207 $17,284
Software 1,050 618 418
Service 6,042 695 824
------------------------------
Total Sales 19,540 16,520 18,526
------------------------------
Cost of sales:
Systems 6,111 6,613 7,956
Software 210 41 26
Service 4,221 1 175
------------------------------
Total Cost of sales 10,542 6,655 8,157
------------------------------
Gross Profit 8,998 9,865 10,369
------------------------------
Operating expenses:
Engineering and development 3,360 3,325 3,099
In process research and development 550 - -
Marketing and sales 4,983 5,284 4,993
General and administrative 1,962 1,905 2,060
Restructuring 193 - 416
------------------------------
Total operating expenses 11,048 10,514 10,568
------------------------------
Operating loss (2,050) (649) (199)
------------------------------
Other income (expense):
Dividend income 94 23 13
Interest income 783 869 804
Interest expense (89) (24) (50)
Other 97 18 54
------------------------------
Total other income 885 886 821
------------------------------
Income (loss) before income taxes (1,165) 237 622
------------------------------
Provision (benefit) for income taxes (444) 129 237
------------------------------
Net income (loss) ($ 721) $ 108 $ 385
==============================
Earnings (loss) per share ($ 0.27) $ 0.04 $ 0.14
==============================
Weighted average shares outstanding 2,680 2,681 2,795
==============================
See accompanying notes to consolidated financial statements.
-3-
<TABLE>
<CAPTION>
CSP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended August 29, 1997, August 30, 1996and August 25, 1995.
(Dollars in thousands)
Adjustment
from foreign Total
Common Stock Paid-in Retained currency Treasury shareholders'
Shares Amount Capital earnings translation stock equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net loss - - - (721) - - (721)
Exercise of stock options 30,400 1 182 - - - 183
Foreign currency translation adjustment - - - - (211) - (211)
Purchase of treasury stock - - - - - (34) (34)
----------------------------------------------------------------------------------
Balance, August 29, 1997 2,987,684 $ 30 $ 10,593 $ 16,676 $ (211) $ (2,067) $ 25,021
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<TABLE>
<CAPTION>
CSP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 29, 1997, August 30, 1996 and August 25, 1995.
(Dollars in thousands)
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (721) $ 108 $ 385
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 1,680 983 792
In process research and development 550 -- --
Deferred compensation and retirement plans 147 150 139
Deferred income taxes (494) (167) (19)
Other (414) -- --
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable, net 2,007 (214) 1,151
Increase in income tax receivable (37) -- --
(Increase) decrease in inventories (192) (255) 1,042
Decrease in prepaid expenses 187 120 237
Decrease in accounts payable and accrued expenses (549) (36) (228)
Increase (decrease) in income taxes payable (214) 64 (52)
-------------------------------------------------
Net cash provided by operating activities 1,950 777 3,447
-------------------------------------------------
Cash flows from investing activities:
Purchase of marketable securities (198,789) (188,892) (159,099)
Sales of marketable securities 199,335 189,247 159,674
Acquistion of businesses less cash acquired (8,011) -- --
Property, equipment and improvements (1,111) (1,144) (988)
Other -- (100) 380
-------------------------------------------------
Net cash used in investing activities (8,576) (889) (33)
-------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options 183 224 51
Purchase of treasury stock (34) (253) (952)
-------------------------------------------------
Net cash provided by (used in)
financing activities 149 (29) (901)
-------------------------------------------------
Effects of exchange rate changes on cash (107) -- --
Net increase (decrease) in cash (6,584) (141) 2,513
Cash and cash equivalents, beginning of year 10,928 11,069 8,556
-------------------------------------------------
Cash and cash equivalents, end of year $ 4,344 $ 10,928 $ 11,069
=================================================
Supplemantary cash flow information:
Cash paid for income taxes, net $ 75 $ 183 $ 323
=================================================
Cash paid for interest $ 89 $ 24 $ 50
=================================================
Fair value of assets acquired $ 17,913 -- --
Less liabilities assumed (7,045) -- --
-------------------------------------------------
Cash paid $ 10,868 -- --
Less; Cash acquired (2,857) -- --
-------------------------------------------------
Net Cash paid $ 8,011 -- --
=================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For years ended August 29, 1997, August 30, 1996 and August 25, 1995.
ORGANIZATION AND BUSINESS
The Company designs, manufactures and markets high performance multiprocessing
systems for real-time applications, which are small, low-power special-purpose
computers to enhance a systems ability to perform high-speed arithmetic. The
Company also sells legacy-to-web integration solutions and real-time computer
systems, software and services. The Company also develops and markets turnkey
image analysis workstations and software which is targeted toward the biological
sciences and industrial bar-code readers.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
The Companys 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 transactions have
been eliminated.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of the Companys foreign operations are translated into US
dollars at the exchange rate in effect at the balance sheet date and revenue and
expenses are translated at average rates in effect during the period. The
resultant translation adjustment is reflected as a separate component of
shareholders equity on the consolidated balance sheets.
MARKETABLE SECURITIES:
Investments consist of corporate bonds and notes, government agency bonds, and
money market funds. Most investments mature within a two year period. The
Company classifies its marketable securities as held-to-maturity based on its
ability and intent to hold these securities until maturity. Held-to-maturity
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.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
the Company assesses the need to record impairment losses on long-lived assets
when indicators of impairment are present. On an on-going basis, management
reviews the value and period of amortization or depreciation of long-lived
assets. During this review, the Company reevaluates the significant assumptions
used in determining the original cost of long-lived assets, including costs in
excess of net assets of businesses acquired. Although the assumptions may vary
from transaction to transaction, they generally include revenue growth,
operating results, cash flows and other indicators of value. Management then
determines whether there has been a permanent impairment of the
-6-
- --------------------------------------------------------------------------------
value of long-lived assets based upon events or circumstances which have
occurred since acquisition.
The costs in excess of net assets of subsidiaries acquired (goodwill) are
principally being amortized over fifteen years.
INVENTORIES:
Inventories are stated at the lower of cost or market; cost being determined
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 method 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 estimated
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 are
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 financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary 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
outstanding during the period. The effect of outstanding stock options is
excluded from the computation because the dilutive effect is not material.
In February 1997 the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards(SFAS) No. 128 Earnings per Share. SFAS 128
establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS 128, the Company will be required to present both basic net
income per share and diluted net income per share. The impact on diluted net
income per share is not expected to be material.
The Company plans to adopt SFAS 128 in its fiscal quarter ending February 27,
1998 and at that time all historical net income per share data will be restated
to conform to the provisions of SFAS No. 128.
-7-
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT:
The Company has adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS 123). As permitted by SFAS 123,
the Company measures compensation cost in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. The adoption of
SFAS 123 was not material to the Companys financial condition or results of
operations; however, the proforma impact on net income and earnings per share
has been disclosed in the Notes to Consolidated Financial Statements as required
by SFAS 123.
RECLASSIFICATIONS:
Certain reclassifications were made to the 1996 and 1995 financial statements to
conform to the 1997 presentation.
2. BUSINESS COMBINATION:
For acquisitions accounted for as purchases, CSP, Inc. consolidated results of
operations include the operating results of the acquired companies from the
acquisition dates. The acquired assets were recorded at their estimated fair
market value at the acquisition date and the aggregate purchase price plus costs
directly attributable to the completion of the acquisitions have been allocated
to the assets acquired.
On June 13, 1997 the Company acquired the assets of Signal Analytics Corp., a
privately held software developer of imaging software targeted for the
biological science field. The total purchase price was $2,159,000 which was paid
for in cash and included a charge of $550,000 for in process research and
development. The transaction resulted in $1,200,000 in goodwill.
Effective June 27, 1997 the Company completed the acquisition of
MODCOMP/Cerplex, L.P., a wholly owned subsidiary of The Cerplex Group Inc.,
which sells legacy-to-web integration solutions for real-time computer systems.
The total purchase price for the assets of MODCOMP was $8,709,000 which was paid
in cash and resulted in goodwill of $473,000.
-8-
- --------------------------------------------------------------------------------
The following unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had the transaction
taken place at the beginning of periods presented or of the future results of
the combined companies.
UNAUDITED
YEAR ENDED AUGUST
--------------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
Total Revenue: $ 33,493 $ 59,860
======================================
Operating income(loss): ($ 493) $ 6,108
======================================
Net income (loss): ($ 233) $ 3,062
======================================
Earnings (loss) per share ($ .09) $ 1.14
======================================
3. MARKETABLE SECURITIES
At August 29,1997 and August 30, 1996, marketable securities consisted of the
following:
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
Marketable equity securities, at cost $ 274 $262
Less: valuation allowance 7 2
-------------------------------
Marketable equity securities, at market 267 260
Bonds and municipal revenue notes, at cost 5,000 5,612
Money market funds and commercial paper 42 59
U.S. treasury bills 272 196
-------------------------------
TOTAL $5,581 $6,127
===============================
Assets of $660,000 and $635,000 at August 29, 1997 and August 30, 1996,
respectively, are held in a rabbi trust and generally are available only to pay
certain retirement benefits of a key employee.
-9-
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
4. INVENTORIES
Inventories consist of the following:
(in thousands) 1997 1996
- -----------------------------------------------------------------------------
Raw materials $3,922 $1,083
Work-in-process 918 739
Finished goods 1,387 583
---------------------------------
Total $6,227 $2,405
=================================
5. INCOME TAXES:
Reconciliations of expected income tax expense (benefit) to actual income tax
expense (benefit) are as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense(benefit) ($396) (34.0) $ 81 34.0% $ 81 34.0%
Increases(reductions) in
taxes resulting from:
Dividend exclusion (22) (1.9) (6) ( 2.5) (42) ( 6.8)
Tax exempt interest (72) (6.2) (64) (27.0) (74) (11.9)
Research and experimentation
and investment tax credits - - - - (37) ( 5.9)
State income taxes, net of
federal tax benefit (107) (9.2) (7) ( 2.9) 47 7.6
Non-taxable FSC earnings - - - - (26) (4.2)
Foreign tax provision 123 10.6 72 30.4 165 26.4
Change in valuation allowance 35 3.0 25 10.6 32 5.2
Other items (5) (0.4) 28 11.9 (39) (6.3)
---------------------------------------------
Income tax expense(benefit) ($444) (38.1%) $129 54.5% $237 38.1%
=============================================
</TABLE>
-10-
- --------------------------------------------------------------------------------
For the years ended August 29, 1997 and August 30, 1996, temporary differences
which give rise to deferred tax assets(liabilities) are as follows:
1997 1996
- ----------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 962 $ 893
Other accruals 77 195
Bad debt reserves 41 41
Inventory capitalization and reserves 451 210
Research and development credits 69 -
Unrealized loss on securities - 42
Accumulated depreciation and amortization 156 (149)
Other 5 -
---------------------------
Gross deferred tax assets $1,761 $1,232
Less: valuation allowance (377) (342)
---------------------------
Net deferred tax asset $1,384 $ 890
===========================
The valuation allowance was $377,000 and $342,000 at August 29, 1997 and August
30, 1996. 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 considers 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 periods which the deferred tax assets are
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 29, 1997.
The provisions for income taxes expense(benfit) are comprised of the following:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------
Current:
Federal ($45) $267 $232
State (28) 28 24
Foreign 123 - -
----------------------------------
$50 $295 $256
Deferred:
Federal (360) (128) (15)
State (134) (38) (4)
----------------------------------
(474) (166) (19)
----------------------------------
($444) $129 $237
==================================
-11-
- --------------------------------------------------------------------------------
6. PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements, net consist of the following:
(in thousands) 1997 1996
- --------------------------------------------------------------------------
Land $ 587 $ 587
Building and improvements 1,356 1,356
Equipment 11,503 10,499
Automotive equipment 48 17
-------- --------
13,494 12,459
Less accumulated depreciation and
amortization 9,638 8,852
-------------------------
Property, equipment and improvements, net $ 3,856 $ 3,607
=========================
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
Accounts payable $ 2,325 $ 402
Commissions 367 99
Compensation and fringe benefits 2,629 616
Customer advances 534 134
Professional fees and shareholders reporting services 546 93
Taxes, other than income 869 11
Other, individually less than 5% of current liabilities 468 70
-------------------------
$ 7,738 $ 1,425
=========================
-12-
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
8. 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 provides for issuance
of options at their fair market value on the date of grant. These options vest
over a period of five years with no vesting in the first year and expire ten
years 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 January 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 29, 1997:
<TABLE>
<CAPTION>
Weighted average Number of Shares
exercise price of 1991 1987 1981 Total
shares under plans Plan Plan Plan
<S> <C> <C> <C> <C> <C>
Outstanding August 26,1994 $7.59 107,025 6,000 116,125 229,150
Granted $8.07 49,000 - - 49,000
Exercised $5.20 - - (9,625) (9,625)
Expired & terminated $7.75 (17,975) (6,000) (2,375) (26,350)
Outstanding August 25,1995 $7.07 138,050 - 104,125 242,175
Granted $8.38 6,000 - - 6,000
Exercised $6.38 - - (35,250) (35,250)
Expired & terminated $7.26 (59,150) - (625) (59,775)
Outstanding August 30,1996 $7.25 84,900 - 68,250 153,150
Granted $7.27 116,250 - - 116,250
Exercised $5.64 - - (30,400) (30,400)
Expired & terminated $7.67 (29,850) - (23,275) (53,125)
Outstanding August 29,1997 $7.50 171,300 - 14,575 185,875
Available for future grants 78,700 - - 78,700
Excerisable $6.05 54,075 - 14,575 68,650
</TABLE>
-13-
- --------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its
stock option plans; accordingly no compensation expense has been recognized in
the consolidated financial statements for such plans(1). Had compensation costs
for Companys stock option plans been determined based on the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS 123, Accounting for Stock based Compensation, the Companys
net income (loss) and earnings(loss) per share would have been adjusted to the
proforma amounts indicated below:
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
Net Income(loss) As reported ($721) $108
Pro forma ($723) $108
Earnings(loss) per share ($.27) $.04
Earnings(loss) per share ($.27) $.04
The following assumptions were used in the calculation of these values for
fiscal years 1997 and 1996: risk free interest rate of 6.19% and expected life
of 5 years.
The effects of applying SFAS 123 as shown in the above proforma disclosure is
not representative of the proforma effect on net income in future years because
it does not take into consideration proforma compensation expense related to
grants made prior to fiscal 1996.
9. DEFERRED COMPENSATION AND RETIREMENT PLANS
The Company has a 401(k) Retirement Plan under which the Company matches a
portion of the employees salary reduction contributions and may make
discretionary contributions to the plan. All employees with one year of
continuous service are eligible for the plan. All Company contributions are
fully vested. Contributions by the Company were $94,000, $145,000 and $122,000
for 1997, 1996 and 1995, respectively.
The Company has a Supplemental Retirement Plan for certain employees that
provides for payments (generally over 15 years) upon retirement, death or
disability. The annual benefit is based upon a percentage of salary at the
inception of the plan, plus an annual percentage increase, plus interest. In
addition, the Company adopted deferred compensation plans for key executives
that provide for payments, over a ten-year period, upon retirement, death or
disability based upon a percentage of salary at that time.
The charge to expense for the plans for 1997, 1996 and 1995 amounted to
$302,000, $277,000 and $207,000 respectively.
-14-
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES:
The Company occupies office space under lease agreements expiring at various
dates during the next five years. The leases are classified as operating leases,
and provide for the payment of real estate taxes, insurance, utilities and
maintenance. At August 29, 1997, the Company was obligated under noncancelable
operating leases as follows:
(IN THOUSANDS) FISCAL YEAR ENDING AUGUST: AMOUNTS
- --------------------------------------------------------------------------------
1998 $ 1,143
1999 $ 1,039
2000 $ 882
2001 $ 841
2002 $ 830
Thereafter $ 1,993
Occupancy costs under the operating leases approximated $221,000 in 1997,
$52,000 in 1996, and $76,000 in 1995.
STOCK REPURCHASE:
On October 9, 1986 the Board of Directors authorized the Company to repurchase
up to 282,723 of the outstanding stock at market prices. On September 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 made at the discretion of management. At August 29, 1997, the
Company has repurchased 306,314 or 71% of the total authorized to be purchased.
-15-
- --------------------------------------------------------------------------------
11. SALES BY MAJOR CUSTOMERS AND GEOGRAPHIC AREAS
Sales to individual customers constituting 10% or more of total sales were as
follows:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Customer A: $2,370 12% $3,394 21% - -
Customer B: $2,114 11% - - $3,948 21%
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 Companys sales by geographic area are as follows:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
North America $13,324 $14,474 $15,992
Far East 1,039 1,407 953
Europe 5,090 574 1,207
Other 87 65 374
------------------------------------------
Totals $19,540 $16,520 $18,526
==========================================
12. RESTRUCTURING EXPENSES
In March, 1997 the Company reduced its workforce by thirteen positions primarily
in manufacturing operations and Vision Systems. The expenses related to this
reduction were approximately $125,000 for severance cost, and the entire amount
was dispursed in 1997. In November, 1994 the Company accrued approximately
$409,000 of the estimated costs to be incurred in consolidating its
manufacturing operations and reducing its workforce. Actual costs incurred of
approximately $416,000 are comprised of severance costs of $288,000, and
$128,000 for closing the San Diego manufacturing operation.
-16-
MODCOMP/CERPLEX, L.P.
AND SUBSIDIARIES
Consolidated Financial Statements
June 27, 1997
(With Independent Auditors' Report Thereon)
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 27, 1997
Table of Contents
Page
----
Independent Auditors' Report .........................................
Consolidated Balance Sheet ........................................... 1
Consolidated Statement of Operations ................................. 2
Consolidated Statement of Partners' Capital .......................... 3
Consolidated Statement of Cash Flows ................................. 4
Notes to Consolidated Financial Statements ........................... 5
INDEPENDENT AUDITORS' REPORT
The Partners
Modcomp/Cerplex, L.P. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Modcomp/Cerplex,
L.P. and subsidiaries (the "Partnership") as of June 27, 1997, and the related
consolidated statements of operations, partners' capital and cash flows for the
six months ended June 27, 1997. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Modcomp/Cerplex,
L.P. and subsidiaries as of June 27, 1997 and the results of their operations
and their cash flows for the six months ended June 27, 1997 in conformity with
generally accepted accounting principles.
KPMG - Peat, Marwick LLP
October 17, 1997
Fort Lauderdale, Florida
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 27, 1997
(Dollars in thousands)
Assets (note 6)
---------------
Current assets:
Cash and cash equivalents $ 2,856
Accounts receivable:
Trade, less allowance for doubtful accounts of $267 6,600
Affiliate (note 5) 19
Inventories, net (note 2) 3,751
Prepaid expenses and other current assets 1,135
-------
Total current assets 14,361
Property and equipment, net (note 3) 730
-------
Total assets $15,091
=======
Liabilities and Partners' Capital
---------------------------------
Current liabilities:
Trade accounts payable $ 1,874
Accrued expenses (note 4) 3,880
Accrued income taxes (note 8) 184
Other current liabilities 1,463
-------
Total current liabilities 7,401
Commitments and contingencies (note 6)
Partners' capital:
Cerplex Subsidiary, Inc. 4,470
Modcomp Joint Venture, Inc. 3,220
-------
Total partners' capital 7,690
-------
Total liabilities and partners' capital $15,091
=======
See accompanying notes to consolidated financial statements.
-1-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six months ended June 27, 1997
(Dollars in thousands)
Sales (note 7):
Systems $ 8,248
Service 8,159
--------
16,407
--------
Cost of sales:
Systems 5,963
Service 5,649
--------
11,612
--------
Gross profit 4,795
--------
Operating expenses:
Selling and marketing 2,671
General and administrative 1,283
Research, development and engineering 489
Restructuring costs 293
Management fees (note 5) 100
Accretion of discount [note 1(b)] (50)
--------
4,786
--------
Income from operations 9
--------
Other income (expense):
Interest income 48
Interest expense (3)
--------
45
--------
Income before income taxes 54
Provision for income taxes (note 8) (283)
--------
Net loss $ (229)
========
See accompanying notes to consolidated financial statements.
-2-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
Six months ended June 27, 1997
(Dollars in thousands)
Cerplex Modcomp
Subsidiary, Joint
Inc. Venture, Inc. Total
---- ------------- -----
Balance at December 29, 1996 $ 4,990 $ 3,761 $ 8,751
Net loss (112) (117) (229)
Earnings distribution (251) (261) (512)
Foreign currency translation adjustment (157) (163) (320)
------- ------- -------
Balance at June 27, 1997 $ 4,470 $ 3,220 $ 7,690
======= ======= =======
See accompanying notes to consolidated financial statements.
-3-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 27, 1997
(Dollars in thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (229)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 196
Discount accretion (50)
Provision for losses on inventory and accounts receivable 199
Increase in accounts receivable, trade (1,764)
Increase in accounts receivable, affiliate (36)
Decrease in inventories 581
Decrease in prepaid expenses and other current assets 500
Increase in accounts payable, trade 365
Increase in accrued expenses and other current liabilities 166
-------
Net cash used in operating activities (72)
-------
Cash flows from investing activities:
Capital expenditures (410)
Proceeds from sale of equipment 52
-------
Net cash used in investing activities (358)
-------
Cash flows from financing activities:
Earnings distribution (512)
-------
Net cash used in financing activities (512)
-------
Effect of exchange rate changes on cash and cash equivalents (324)
-------
Net decrease in cash and cash equivalents (1,266)
Cash and cash equivalents at beginning of year 4,122
-------
Cash and cash equivalents at end of year $ 2,856
=======
Supplemental information of cash flow information:
Cash paid during the year for interest $ (3)
=======
Cash paid during the year for income taxes $ 216
=======
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
June 27, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION, DESCRIPTION OF BUSINESS AND PRINCIPLES OF
CONSOLIDATION
Modcomp/Cerplex, L.P. and subsidiaries (the "Partnership"), a
Delaware limited partnership was formed pursuant to a limited
partnership agreement (the Agreement) dated December 1, 1994
among Modular Computer Systems, Inc. (Modcomp) and Modcomp Joint
Venture, Inc. (JV), wholly-owned subsidiaries of Daimler-Benz
Capital, Inc. and Cerplex Subsidiary, Inc. (Cerplex Sub), a
wholly-owned subsidiary of The Cerplex Group, Inc. (Cerplex).
On April 5, 1996, Modcomp and JV exercised a certain put option
granted them under a Put/Call Option Agreement (Option) with
Cerplex Sub. Prior to this transaction, Modcomp transferred to
Cerplex all of their outstanding capital stock of JV, and
effective April 1, 1996, Modcomp transferred all of their
partnership units of the Partnership to JV. In accordance with
the Option, the interests were transferred for a lump-sum
payment of $2,659 by Cerplex. Distributions for the six months
ended June 27, 1997 to Cerplex amounted to $512 for accumulated
undistributed earnings through the option exercise date.
As a result of this transaction, effective March 31, 1996, the
Partnership is controlled 100 percent by Cerplex, with the
Partnership's percentage of ownership and profits and losses
allocated as follows:
General Limited
partnership partnership
interest interest Total
-------- -------- -----
Modcomp Joint Venture, Inc. 1% 50% 51%
Cerplex Subsidiary, Inc. 1% 48% 49%
--- --- ---
2% 98% 100%
=== === ===
The Partnership designs, manufactures, services and markets
worldwide, high-speed mini-computers and mini-computer systems
principally for use in demanding real-time applications. The
computer systems are used in operations involving process
measurement and control, power production and distribution,
manufacturing test and inspection, scientific data collection
and monitoring, as well as financing and other communications
networks. The Partnership has been expanding their product line
by including third-party equipment to their sales and servicing
efforts. The new focus of the Partnership is to become a total
solutions company that can meet the needs of customers of their
own products and of third-party manufacturers.
(Continued)
-5-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The Partnership's foreign operations are transacted through its
wholly owned subsidiaries located in Canada, England, France and
Germany. Accordingly, these consolidated financial statements
include the accounts of Modcomp/Cerplex, L.P. and its wholly
owned foreign subsidiaries after elimination of all significant
intercompany transactions and balances.
Effective June 30, 1997, Cerplex sold the Partnerships assets
and liabilities to CSP Incorporated (CSP, Inc.) (see transaction
discussed in note 12).
(B) NEGATIVE GOODWILL
The acquisition cost for the 49 percent interest in the
Partnership from Modcomp on April 1, 1996, was lower than the
book value of the assets and liabilities acquired by
approximately $1.8 million. In accordance with APB No. 16,
"Business Combinations," the Partnership reduced property and
equipment by approximately $1.5 million, bringing all
identifiable noncurrent assets to zero and recorded the
remaining amount as negative goodwill to be accreted into income
over a five-year period. Negative goodwill, less accretion
discount, is recorded in other current liabilities.
(C) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the
Partnership considers all highly liquid debt instruments
purchased with maturities of three months or less to be cash
equivalents.
(D) INVENTORIES
Inventories consist of electronic components and parts for the
manufacturing of computer systems and related services.
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Costs
capitalized include material, direct labor and manufacturing and
special engineering overhead.
(E) PROPERTY AND EQUIPMENT
Property and equipment acquired after April 1, 1996 are stated
at cost (property and equipment acquired before April 1, 1996
was reduced to zero [see note 1(b)]). Major renewals and
improvements are capitalized, while maintenance and repairs are
expensed when incurred. Depreciation on property and equipment
is computed on the straight-line method over the estimated
useful lives of the assets (with lives ranging from 2 to 10
years). Leasehold improvements are amortized straight-line over
the shorter of the lease term or the estimated useful life of
the asset.
(Continued)
-6-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(F) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Partnership's foreign
subsidiaries are translated into U.S. dollars, generally using
current exchange rates in effect on reporting dates. Revenue and
expense accounts are translated generally using a weighted
average rate during the period. The unrealized gains and losses
resulting from such translation is charged or credited to
cumulative foreign currency translation adjustment in partners'
capital.
(G) REVENUE RECOGNITION
Sales of products and services are recorded based on shipment of
product and/or performance of services unless otherwise
contractually determined. Revenue from maintenance service
contracts is deferred and recognized as revenue over the period
of the agreement.
(H) WARRANTY
The Partnership generally warrants its products for a period of
ninety days. An accrual for warranty obligations of $60 existed
at June 27, 1997.
(I) USE OF ESTIMATES
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.
(J) INCOME TAXES
Partnerships are not taxable entities for United States federal
and state income tax purposes. As such, no provision has been
made for United States federal and state income taxes since such
taxes, if any, are the liability of the individual partners.
Certain subsidiaries of the Partnership are taxable entities and
calculate income tax expense and file income tax returns in
their respective jurisdictions.
The Partnership's subsidiaries account for income taxes in each
jurisdiction under the asset and liability method of computing
deferred income taxes. Under the asset and liability method,
deferred income taxes are recognized for future consequences
attributable to differences between the consolidated financial
statements carrying amount of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted statutory rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
(Continued)
-7-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(K) IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," on January 1, 1996. This
statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell. The Partnership has no impaired assets at June 27, 1997.
(L) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income," (SFAS No.
130). SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and establishes standards for reporting and
displaying comprehensive income and its components in a full set
of general purpose financial statements. SFAS No 130 requires
all items to be recognized under accounting standards as
components of comprehensive income to be reported in a separate
financial statement. The Partnership does not believe that the
adoption of SFAS No. 130 will have a significant impact on the
Partnership's financial reporting.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS No.
131). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operation segments
in annual financial statements and requires those enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. The adoption of SFAS
No. 131 may have a significant impact on the Partnership's
reporting, especially in light of the Partnership sale of assets
and liabilities to CSP, Inc. subsequent to June 27, 1997 (see
note 12).
(2) INVENTORIES
Inventories at June 27, 1997 consist of the following:
Raw materials $2,729
Work in process 506
Finished goods 417
Customer service inventory 5,914
-----
9,566
Reserves 5,815
-----
Inventories, net $3,751
=====
(Continued)
-8-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(3) PROPERTY AND EQUIPMENT
Property and equipment at June 27, 1997 consist of the following:
Leasehold improvements $473
Furniture and fixtures 378
---
851
Less accumulated depreciation and amortization 121
---
$730
====
The property and equipment at June 27, 1997 represents capital
additions after April 1, 1996. [See note 1(b)].
Depreciation and amortization expense for the six months ended June 27,
1997 amounted to $196.
(4) ACCRUED EXPENSES
Accrued expenses at June 27, 1997 consist of the following:
Employee-related accruals $1,636
Pension costs 1,098
Severance accrual 146
Taxes other than income 290
Professional fees 100
Other 610
------
$3,880
======
(5) RELATED PARTY TRANSACTIONS
In its function as managing partner, Cerplex is entitled to annual
compensation in the amount of $200, payable semi-annually on June 1 and
December 1 of each year. During the six months ended June 27, 1997, the
Partnership recorded charges and made payments to Cerplex for
management fees in the amount of $100. An accrual for management fees
obligations of $17 remains outstanding at June 27, 1997, which is
offset by $36 of receivables due from Cerplex, related to a
reimbursement at June 27, 1997.
(Continued)
-9-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(6) COMMITMENTS AND CONTINGENCIES
Leases
The Partnership has noncancelable operating leases related to office
space. Future minimum rental payments required under operating leases
that have initial or remaining noncancelable lease terms in excess of
one year are as follows:
Year ending June 27,
--------------------
1998 $1,125
1999 1,051
2000 877
2001 819
2002 831
Thereafter 2,122
-----
$6,825
======
The rental expense for the six months ended June 27, 1997 was $794.
Financial Guarantees
The Partnership is the guarantor of certain debt held with Cerplex from
Wells Fargo Bank approximating $48 million at June 27, 1997. Certain
assets of the Partnership are held as collateral for this debt between
Wells Fargo Bank and Cerplex. In accordance with the Sixth amendment to
the Credit agreement between Cerplex and Wells Fargo, the Partnership
is no longer a guarantor of the debt upon payment of sale of the assets
and liabilities of the Partnership to CSP, Inc., which was as of August
27, 1997. The assets transferred to CSP, Inc. effective June 30, 1997
were free of any liens or encumbrances effective with the payment of
the purchase price (see note 12).
Legal Proceedings
The Partnership is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse
effect on the consolidated financial statements of the Partnership.
(Continued)
-10-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(7) FOREIGN OPERATIONS
The following amounts are included in the consolidated financial
statements applicable to foreign consolidated subsidiaries as of and
for the six months ended June 27, 1997:
Germany France Other
------- ------ -----
Statement of operations:
Net sales $ 5,258 3,868 1,994
===== ===== =====
Net income (loss) $ 272 280 (127)
===== ===== =====
Balance sheet:
Total assets $ 4,185 4,429 1,739
===== ===== =====
Total liabilities $ 2,589 1,976 442
===== ===== =====
(8) INCOME TAXES
Total income tax expense for the six months ended June 27, 1997 was
$283. Income taxes are related to the French and Germany subsidiaries
amounting to $188 and $95, respectively. Income taxes attributable to
income from operations at June 27, 1997 differed from the amounts
computed by applying the statutory tax rates in France and Germany to
income before taxes as a result of net operating loss carryforwards
applied to a portion of the income before taxes.
No tax expense was recorded by any other subsidiary for the six months
ended June 27, 1997 because the net operating loss carryforwards were
adequate in all the other jurisdictions to offset taxable income. As a
result of the reduction in net operating loss carryforwards, the
allowance for deferred tax assets was reduced by the tax effect of such
amount. Deferred income taxes relate primarily to temporary differences
on accounts receivable, inventories, accrued vacation and net operating
loss carryforwards. A valuation allowance equal to net deferred tax
assets was provided as of June 27, 1997, since management does not
believe it is more likely than not that the net deferred tax asset will
be realized through future earnings.
At June 27, 1997, the subsidiaries had net operating loss carryforwards
available to reduce future taxable income in their respective
jurisdictions aggregating approximately $6,186, which expire at
different dates according to the statutory laws of the various
countries.
(9) PENSION PLANS
French employment law requires that a nonvested, lump-sum indemnity be
paid to all employees on retirement. This indemnity is calculated based
on the length of service and salary at the date of retirement. However,
no indemnity is payable if an employee resigns from the Partnership
before retirement age and service prior to employment by the current
employer at the time of retirement is not included.
(Continued)
-11-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The Partnership has a defined pension plan covering substantially all
of the employees located in Germany. The benefits are based on an
internal wage and salary agreement dated July 2, 1990. The plan is not
funded.
The following table sets forth the actuarial present value of benefit
obligations and funding status of the plan at June 27, 1997:
Actuarial value of benefit obligations:
Accumulated benefit obligation including vested benefits
of $926 $ 1,067
==== ===========
Projected benefit obligation $ (1,191)
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions (125)
Remaining unrecognized net obligation existing at the
date of initial adoption of SFAS 87 94
----------
Accrued pension cost $ (1,222)
==========
Net pension cost includes the following components:
Service cost - benefits earned during the period $ 65
Interest cost on projected benefit obligation 78
Amortization of net transition liability 6
-----------
Net periodic pension cost $ 149
============
The weighted-average discount rate, rate of increase in future
compensation levels and rate of increase in promotion and seniority
used in determining the actuarial present value of the projected
benefit obligation was 6.5 percent, 4 percent and 1 percent,
respectively.
The Partnership's England subsidiary also has a defined benefit plan
covering substantially all of its employees employed in England.
Employees are vested after two years of service. Benefits are based on
the highest three-year average salary within the last ten years of
employment.
(Continued)
-12-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The following table sets forth the actuarial present value of benefit
obligations and funding status of the plan at June 27, 1997:
Actuarial value of benefit obligations:
Accumulated benefit obligation including vested benefits of
$2,646 $ 2,871
======
Projected benefit obligation $(3,831)
Plan assets at fair value 4,938
-----
Excess value of assets at fair value net of projected
benefit obligations 1,107
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions 652
Unrecognized net transition asset (1,000)
------
Prepaid pension cost and excess earnings $ 759
======
Net pension credit includes the following components:
Return on assets $ (448)
Service cost - benefits earned during the period 159
Interest cost on projected benefit obligation 255
Amortization of net transition liability (110)
----
Net periodic pension credit $ (144)
======
The weighted-average discount rate, rate of increase in future
compensation levels, and long-term rate of return used in determining
the actuarial present value of the projected benefit obligation were
7.5 percent, 5 percent and 10 percent, respectively.
-13-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(10) INVESTMENT AND RETIREMENT PLAN
The Partnership's United States employees are eligible to participate
in a 401(k) Investment and Retirement Plan (the "Plan"). The
Partnership has elected to not make any matching contributions during
the six months ended June 27, 1997. Each participant may contribute up
to 15 percent of his compensation into the Plan. In the event of a plan
termination, all participants are entitled to receive a distribution
equal to their account balance at that date.
(11) BUSINESS AND CREDIT CONCENTRATION
Two customers accounted for 18 percent of the Partnership's sales in
the six months ended June 27, 1997. Accounts receivable at June 27,
1997 related to these customers were $811. The Partnership estimates an
allowance for doubtful accounts based on the credit worthiness of its
customers as well as general economic conditions. Consequently, an
adverse change in those factors could effect the Partnership's estimate
of its bad debts.
The majority of the Partnership's customers are located in the United
States, Germany and France. Accordingly, changes in market conditions
in those countries may significantly affect management's estimates and
the Partnership's performance.
(12) SUBSEQUENT EVENTS
Pursuant to the terms of an Asset Purchase Agreement dated August 6,
1997, among Cerplex, Cerplex Sub, JV, and CSP, Inc., all of the assets
and liabilities of the Partnership were transferred to a newly formed
company, Modcomp, Inc., 100 percent owned by CSP, Inc., a Massachusetts
corporation. The transaction was effective as of June 30, 1997. The
purchase price, $8,445, was transferred to Cerplex on August 27, 1997
at which time, the guarantee by the Partnership on Cerplex's debt was
effectively relieved (see note 6).
The French subsidiary acquired in July 1997 the assets of two unrelated
operations: ISTGH, a sales and engineering business for approximately
$30, and Nemtel Smart Card, a telecommunications business for
approximately $180. These acquisitions were accounted for as a
purchase.
-14-
MODCOMP/CERPLEX, L.P.
AND SUBSIDIARIES
Consolidated Financial Statements
December 29, 1996 and
December 31, 1995
(With Independent Auditors' Report Thereon)
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1996 and December 31, 1995
Table of Contents
Page
----
Independent Auditors' Report .........................................
Consolidated Balance Sheets .......................................... 1
Consolidated Statements of Income .................................... 2
Consolidated Statements of Partners' Capital ......................... 3
Consolidated Statements of Cash Flows ................................ 4
Notes to Consolidated Financial Statements ........................... 5
INDEPENDENT AUDITORS' REPORT
The Partners
Modcomp/Cerplex, L.P. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Modcomp/Cerplex,
L.P. and subsidiaries (the Partnership) as of December 29, 1996 and December 31,
1995, and the related consolidated statements of income, partners' capital and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Partnership'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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well 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 Modcomp/Cerplex,
L.P. and subsidiaries as of December 29, 1996 and December 31, 1995 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG - Peat, Marwick LLP
January 24, 1997
Fort Lauderdale, Florida
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, 1996 and December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Assets (note 6) 1996 1995
--------------- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,122 $ 7,918
Accounts receivable:
Trade, less allowance for doubtful accounts of $194 in 1996 and $322
in 1995
4,909 6,201
Affiliates (note 5) - 1,392
Due from partners (note 5) - 601
Inventories, net (note 2) 4,458 4,971
Prepaid expenses and other current assets
1,635 994
------- -------
Total current assets 15,124 22,077
Property and equipment, net (note 3) 568 1,655
------- -------
$ 15,692 $ 23,732
======= =======
Liabilities and Partners' Capital
Current liabilities:
Accounts payable:
Trade $ 1,509 $ 1,298
Affiliates (note 5) 17 75
Accrued expenses (note 4) 4,073 5,198
Accrued income taxes (note 8) 164 -
Other current liabilities
1,178 1,472
------- -------
Total current liabilities 6,941 8,043
------- -------
Commitments and contingencies (note 6)
Partners' capital:
Cerplex Subsidiary, Inc. 4,990 7,687
Modcomp Joint Venture, Inc. 3,761 286
Modular Computer Systems, Inc.
- 7,716
------- -------
Total partners' capital 8,751 15,689
------- -------
$ 15,692 $ 23,732
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 29, 1996 and December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Sales (notes 5 and 7):
Systems $ 20,804 $ 20,718
Service 15,908 17,505
------- -------
36,712 38,223
------- -------
Cost of sales:
Systems 15,620 11,512
Service 10,794 11,895
------- -------
26,414 23,407
------- -------
Gross profit 10,298 14,816
------- -------
Operating expenses:
Selling, general and administrative 6,520 8,663
Research, development and engineering 1,407 2,163
Restructuring costs (note 4) 108 607
Management fees (note 5) 200 200
Accretion of discount (note 1(b)) (701) (1,878)
------- -------
7,534 9,755
------- -------
Income from operations 2,764 5,061
------- -------
Other income and expense:
Interest income 213 390
Interest expense:
Partner (note 5) (5) (76)
Other (11) (15)
Other, net (280) (410)
------- -------
(83) (111)
------- -------
Income before income taxes 2,681 4,950
Provision for income taxes (note 8) (164) -
------- -------
Net income $ 2,517 $ 4,950
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
Years ended December 29, 1996 and December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Cerplex Modcomp Joint Modular Computer
Subsidiary, Inc. Venture, Inc. Systems, Inc. Total
---------------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $5,190 $ - $ 5,403 $10,593
Transfer of Partnership interest - 184 (184) -
Net income 2,425 99 2,426 4,950
Foreign currency translation adjustment 72 3 71 146
----- ----- ----- ------
Balance at December 31, 1995 7,687 286 7,716 15,689
Transfer of Partnership interest - 2,659 (4,500) (1,841)
Net income 1,234 927 356 2,517
Earnings distribution (3,844) (116) (3,472) (7,432)
Foreign currency translation adjustment (87) 5 (100) (182)
----- ----- ----- -----
Balance at December 29, 1996 $4,990 $ 3,761 $ - $ 8,751
===== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 29, 1996 and December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,517 $ 4,950
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 375 1,221
Discount accretion (701) (1,878)
Provision for losses on inventory and accounts receivable 424 57
Decrease in accounts receivable, trade 2,262 211
Decrease (increase) in accounts receivable, affiliate and due from partner
595 (1,238)
Decrease in inventories 183 1,580
(Increase) decrease in prepaid expenses and other current assets (636) 61
Increase (decrease) in accounts payable, trade 196 (325)
Increase (decrease) in accounts payable affiliates 17 (164)
(Decrease) increase in accrued expenses and other current liabilities
(702) 288
----- -----
Net cash provided by operating activities 4,530 4,763
----- -----
Cash flows from investing activities:
Capital expenditures
(776) (514)
----- -----
Net cash used in investing activities (776) (514)
----- -----
Cash flows from financing activities:
Earnings distribution (7,432) -
Principal payments on notes payable to banks - (2,100)
----- -----
Net cash used in financing activities (7,432) (2,100)
----- -----
Effect of exchange rate changes on cash and cash equivalents (118) (19)
----- -----
Net (decrease) increase in cash and cash equivalents (3,796) 2,130
Cash and cash equivalents at beginning of year 7,918 5,788
----- -----
Cash and cash equivalents at end of year $ 4,122 $ 7,918
===== =====
Supplemental schedule of cash flow information: Cash paid during the year for
interest:
Affiliates and partner $ 5 $ 90
Others
11 15
----- -----
$ 16 $ 105
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
December 29, 1996 and December 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION, DESCRIPTION OF BUSINESS, AND PRINCIPLES OF
CONSOLIDATION
Modcomp/Cerplex, L.P. and subsidiaries (the "Partnership"), a
Delaware limited partnership was formed pursuant to a limited
partnership agreement (the Agreement) dated December 1, 1994
among Modular Computer Systems, Inc. (Modcomp) and Modcomp Joint
Venture, Inc. (JV), wholly-owned subsidiaries of Daimler-Benz
Capital, Inc. and Cerplex Subsidiary, Inc. (Cerplex Sub), a
wholly-owned subsidiary of The Cerplex Group, Inc. (Cerplex).
The Partnership designs, manufactures, services, and markets
worldwide, high-speed mini-computers and mini-computer systems
principally for use in demanding real-time applications. The
computer systems are used in operations involving process
measurement and control, power production and distribution,
manufacturing test and inspection, scientific data collection
and monitoring, as well as financing and other communications
networks. The Company has been expanding their product line by
including third party equipment to their sales and servicing
efforts. The new focus of the Company is to become a total
solutions company that can meet the needs of customers of their
own products and of third party manufacturers.
The Partnership's foreign operations are transacted through its
wholly-owned subsidiaries located in Canada, England, France,
Germany and Venezuela. However, as of June 30, 1996, the
Venezuela subsidiary became inactive as the operations and
assets were transferred to Ft. Lauderdale. Accordingly, these
consolidated financial statements include the accounts of
Modcomp/Cerplex, L.P. and its wholly-owned foreign subsidiaries
after elimination of all significant intercompany transactions
and balances.
From January 1, 1995 through March 31, 1996, the Partnership's
percentage of ownership and profits and losses were allocated as
follows:
<TABLE>
<CAPTION>
General Limited
partnership partnership
interest interest Total
-------- -------- -----
<S> <C> <C> <C>
Modular Computer Systems, Inc. - 49% 49%
Modcomp Joint Venture, Inc. 1% 1% 2%
Cerplex Subsidiary, Inc. 1% 48% 49%
- -- --
2% 98% 100%
= == ===
</TABLE>
(Continued)
-5-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
On April 5, 1996, Modcomp and JV exercised a certain put option
granted them under a Put/Call Option Agreement (Option) with
Cerplex Sub. Prior to this transaction, Modcomp transferred to
Cerplex all of their outstanding capital stock of JV, and
effective April 1, 1996, Modcomp transferred all of their
partnership units of the Partnership to JV. In accordance with
the Option, the interests were transferred for a lump sum
payment of $2,659 by Cerplex. In addition, distributions of
$7,036 were made to the partners as of March 31, 1996 for
accumulated undistributed earnings through the option exercise
date. An additional distribution was made in May 1996 for $396
for second quarter earnings. No subsequent distributions have
been made in 1996.
As a result of this transaction, effective March 31, 1996, the
Partnership is controlled 100% by Cerplex, with the
Partnership's percentage of ownership and profits and losses
allocated as follows:
<TABLE>
<CAPTION>
General Limited
partnership partnership
interest interest Total
-------- -------- -----
<S> <C> <C> <C>
Modular Computer Systems, Inc. - - -
Modcomp Joint Venture, Inc. 1% 50% 51%
Cerplex Subsidiary, Inc. 1% 48% 49%
- -- --
2% 98% 100%
= == ===
</TABLE>
(b) NEGATIVE GOODWILL
The acquisition cost for the 49% interest in the Partnership
from Modcomp was lower than the book value of the assets and
liabilities acquired by approximately $1.8 million. In
accordance with APB No. 16, "Business Combinations," the
Partnership reduced property and equipment by approximately $1.5
million, bringing all identifiable noncurrent assets to zero and
recorded the remaining amount as negative goodwill to be
amortized into income over a five year period.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Partnership
considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
(d) INVENTORIES
Inventories consist of electronic components and parts for the
manufacturing of computer systems and related service.
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Costs
capitalized include material, direct labor, and manufacturing
and special engineering overhead.
(Continued)
-6-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are
expensed when incurred. Depreciation on property and equipment
is computed on the straight-line method over the estimated
useful lives of the assets (with lives ranging from 2 to 10
years). Leasehold improvements are amortized straight-line over
the shorter of the lease term or the estimated useful life of
the asset.
(f) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Partnership's foreign
subsidiaries are translated into U.S. dollars, generally using
current exchange rates in effect on reporting dates. Revenue and
expense accounts are translated generally using a weighted
average rate during the period. The unrealized gains and losses
resulting from such translation are charged or credited to
cumulative foreign currency translation adjustment in partners'
capital. Translation gains and losses of one subsidiary
operating in a hyperinflationary economy were not significant.
(g) REVENUE RECOGNITION
Sales of products and services are recorded based on shipment of
product and/or performance of services unless otherwise
contractually determined. Revenue from maintenance service
contracts is deferred and recognized as revenues over the period
of the agreement.
(h) WARRANTY
The Partnership generally warrants its products for a period of
ninety days. An accrual for warranty obligations of $146 and
$142 existed at December 29, 1996 and December 31, 1995,
respectively.
(i) USE OF ESTIMATES
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(j) INCOME TAXES
Partnerships are not taxable entities for United States Federal
and state income tax purposes. As such, no provision has been
made for United States Federal and state income taxes since such
taxes, if any, are the liability of the individual partners.
Certain subsidiaries of the Partnership are taxable entities and
calculate income tax expense and file income tax returns in
their respective jurisdictions.
(Continued)
-7-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The Partnership's subsidiaries account for income taxes in each
jurisdiction under the asset and liability method of computing
deferred income taxes. Under the asset and liability method,
deferred income taxes are recognized for future consequences
attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted statutory rates expected to apply to
taxable income. In the years in which those temporary
differences are expected to be recovered or settled.
(k) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," on January 1, 1996. This statement
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. The
Company has no impaired assets at December 29, 1996.
(2) INVENTORIES
Inventories at December 29, 1996 and December 31, 1995 consist of the
following:
1996 1995
---- ----
Raw materials $2,907 $3,004
Work in process 385 445
Finished goods 459 246
Customer service inventory 6,337 7,199
------- -------
10,088 10,894
Reserves 5,630 5,923
------- -------
Inventory, net $ 4,458 $ 4,971
======= =======
(Continued)
-8-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 29, 1996 and December 31, 1995
consist of the following:
1996 1995
----- -----
Machinery and equipment $178 $2,442
Leasehold improvements 411 228
Furniture and fixtures 79 301
----- -----
668 2,971
Less accumulated depreciation and amortization (100) (1,316)
----- -----
$568 $1,655
----- -----
The property and equipment at December 29, 1996 represents capital
additions after April 1, 1996.
Depreciation and amortization expense for the year ended December 29,
1996 and December 31, 1995 amounted to $375 and $1,221, respectively.
(4) ACCRUED EXPENSES
Accrued expenses at December 29, 1996 and December 31, 1995 consist of
the following:
1996 1995
---- ----
Employee-related accruals $1,364 $1,794
Pension costs 1,220 1,400
Restructuring costs 322 738
Taxes other than income 472 302
Professional fees 83 183
Other 612 781
--- ---
$4,073 $5,198
====== ======
The composition of the restructuring costs consist of an accrual for
leases on several unused facilities amounting to $322 and $465 in 1996
and 1995, respectively. The remaining balance of the 1995 accrual in
the amount of $273 relates to an estimate for employee severance and
termination agreements. This amount was $-0- at December 29, 1996.
(Continued)
-9-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(5) RELATED PARTY TRANSACTIONS
In its function as managing partner, Cerplex is entitled to annual
compensation in the amount of $200, payable semi-annually on June 1 and
December 1 of each year. During the years ended December 29, 1996 and
December 31, 1995, the Partnership recorded charges and made payments
for management fees in the amount of $200. An accrual for management
fees obligations of $17, payable in the current year, was established
at December 29, 1996.
Included in due from partners in 1995 is approximately $595 of
receivables from Modcomp due under the Partnership Formation and
Contribution Agreement Indemnification clause for which payment was
received during 1996. The remaining balance is related to a
reimbursement which is due from Modcomp at December 29, 1996.
Accounts receivable from affiliates at December 31, 1995 generally
resulted from sale of goods or services to and from nonconsolidated
affiliates of Modcomp. Sales to an affiliate of Modcomp in 1995 were:
systems and parts - $1.7 million, and service - $1.3 million. The
affiliate relationship was effectively terminated in 1996 with the sale
by Modcomp of its interest in the Partnership (see note 1(a)).
In May, 1995 the Partnership paid to Modcomp $2,100 representing the
principal amount of a note payable that originated as part of the
partnership formation agreement. In addition to the principal amount of
the note, the Partnership paid $90 in accumulated interest. The notes
interest expense for the year ended December 31, 1995 amounted to
approximately $76 which represents the balance in accounts payable
affiliate at December 31, 1995.
(6) COMMITMENTS AND CONTINGENCIES
Leases
The Partnership has noncancelable operating leases related to office
space. Future minimum rental payments required under operating leases
that have initial or remaining noncancelable lease terms in excess of
one year are as follows:
Year ending December,
---------------------
1997 $ 1,389
1998 761
1999 648
2000 444
2001 444
Thereafter 1,421
-----
$5,107
======
(Continued)
-10-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Future minimum rental payments above include approximately $438 of
rental cost for facilities that are sublet to unrelated third parties
for the duration of the lease term. A loss of $322 and $383 has been
accrued at December 29, 1996 and December 31, 1995, respectively, which
represents management's best estimate of the total loss to be incurred
by the Partnership relating to sublet and unused facilities (note 4).
The rental expense for the year ended December 29, 1996 and December
31, 1995 was $1,833 and $1,791, respectively.
Financial Guarantees
The Partnership is the guarantor of certain debt held with Cerplex from
Wells Fargo Bank approximating $56 million at December 31, 1996.
Certain assets of the Partnership are held as collateral for this debt
between Wells Fargo Bank and Cerplex. It is reasonably possible that
the Company would be required to make payments under this guarantee if
Cerplex defaults on its debt requirements.
Legal Proceedings
The Partnership is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material adverse
effect on the consolidated financial statements of the Partnership.
(7) FOREIGN OPERATIONS
The following amounts are included in the consolidated financial
statements applicable to foreign consolidated subsidiaries at December
29, 1996 and December 31, 1995:
1996 1995
---- ----
Statement of income:
Net sales $27,121 $23,162
======= =======
Net Income $ 2,094 $ 4,315
======= =======
Balance sheet:
Total assets $ 9,602 $10,596
======= =======
Total liabilities $ 4,409 $ 5,230
======= =======
(8) INCOME TAXES
Total income taxes for the years ended December 29, 1996 and December
31, 1995 was $164 and $-0-, respectively. The entire amount of income
taxes is related to the French subsidiary. Income taxes attributable to
income from operations at December 31, 1996 differed from the amounts
computed by applying the US federal tax rate of 35 percent to pretax
income from operations as a result of net operating loss carryforwards
applied to a portion of the pretax income.
(Continued)
-11-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
No tax expense was recorded by any other subsidiary for 1996 because
the net operating loss carryforwards were adequate in all the other
jurisdictions to offset 1996 taxable income. As a result of the
reduction in net operating loss carryforwards, the allowance for
deferred tax assets was reduced by the tax effect of such amount.
Deferred income taxes relate primarily to temporary differences on
accounts receivable, inventories, accrued vacation and net operating
loss carryforward. A valuation allowance equal to net deferred tax
assets was provided as of December 29, 1996 since management does not
believe it is more likely than not that the net deferred tax asset will
be realized through future earnings.
At December 29, 1996 and December 31, 1995, the subsidiaries had net
operating loss carryforwards available to reduce future taxable income
in their respective jurisdictions aggregating approximately $5,307 and
$14,600, respectively, which expire at different dates according to the
statutory laws of the various countries.
(9) PENSION PLANS
French employment law requires that a nonvested, lump sum indemnity be
paid to all employees on retirement. This indemnity is calculated based
on the length of service and salary at the date of retirement. However,
no indemnity is payable if an employee resigns from the Company before
retirement age and service prior to employment by the current employer
at the time of retirement is not included.
The Partnership has a defined pension plan covering substantially all
of the employees located in Germany. The benefits are based on an
internal wage and salary agreement dated July 2, 1990. The Partnership
did not fund the Plan in 1996 and 1995.
(Continued)
-12-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The following table sets forth the actuarial present value of benefit
obligations and funding status of the plan at December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial value of benefit obligations:
Accumulated benefit obligation including vested benefits of $1,031
and $1,050 at December 29, 1996 and December 31, 1995,
respectively $ 1,160 $ 1,171
========= =========
Projected benefit obligation $ (1,282) $ (1,439)
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions (47) (85)
Remaining unrecognized net obligation existing at the date of initial
adoption of SFAS 87 109 124
-- --------- --------
Accrued pension cost $ (1,220) $ (1,400)
========= ========
Net pension cost included the following components:
Service cost - benefits earned during the period $ 58 $ 67
Interest cost on projected benefit obligation 81 87
Amortization of net transition liability
7 7
------- -------
Net periodic pension cost $ 146 $ 161
======= =======
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation was 6.5% and 4%, respectively, in 1996
and 7% and 4%, respectively, in 1995.
The Partnership's England subsidiary also has a defined benefit plan
covering substantially all of its employees employed in England.
Employees are vested after two years of service. Benefits are based on
the highest three-year average salary within the last ten years of
employment.
(Continued)
-13-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The following table sets forth the actuarial present value of benefit
obligations and funding status of the plan at December 29, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial value of benefit obligations:
Accumulated benefit obligation including vested benefits of $2,218
and $1,574 at December 29, 1996 and December 31, 1995,
respectively
$ 2,362 $ 1,677
=========== ========
Projected benefit obligation $ (3,151) $ (2,237)
Plan assets at fair value 4,691 3,663
----------- --------
Excess value of assets at fair value net of projected benefit
obligations 1,540 1,426
Unrecognized net income (loss) from past experience different from that
assumed and effects of changes in assumptions 257 (22)
Unrecognized net transition asset (1,144) (1,140)
---------- --------
Prepaid pension cost $ 653 $ 264
=========== ========
Net pension credit for 1996 and 1995 include the following components:
Return on assets $(423) $(340)
Service cost - benefits earned during the period 140 87
Interest cost on projected benefit obligation 223 188
Amortization of net transition liability (115) (104)
----------- --------
Net periodic pension credit $ (175) $ (169)
=========== =========
</TABLE>
The weighted average discount rate, rate of increase in future
compensation levels, and long-term rate of return used in determining
the actuarial present value of the projected benefit obligation were
8.5%, 5% and 10%, respectively in 1996 and 9%, 5% and 10%,
respectively, in 1995.
(Continued)
-14-
MODCOMP/CERPLEX, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(10) INVESTMENT AND RETIREMENT PLAN
The Partnership's United States employees are eligible to participate
in a 401(k) Investment and Retirement Plan (the Plan). The Partnership
does not make any matching contributions. Each participant may
contribute up to 15% of his compensation into the Plan. In the event of
a plan termination, all participants are entitled to receive a
distribution equal to their account balance at that date.
(11) BUSINESS AND CREDIT CONCENTRATION
Most of the Partnership's customers are located in the United States,
Germany and France. Accordingly, changes in market conditions in the
above countries may significantly effect management's estimates and the
Partnership's performance. No one customer accounted for 5% of the
Partnership's sales in 1996 or 1995, except one customer in Germany
which accounted for approximately 30% of sales in Germany, and no
accounts receivable from any customer exceeded $865 or 18% of net trade
accounts receivable at December 29, 1996. The Partnership estimates an
allowance for doubtful accounts based on the credit worthiness of its
customers as well as general economic conditions. Consequently, an
adverse change in those factors could effect the Partnership's estimate
of its bad debts.
-15-
