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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended August 28, 1998 or
/ / Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the transition period
from _____ to____
Commission file number 0-10843
CSP Inc.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2441294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Linnell Circle, Billerica, Massachusetts 01821
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978)663-7598
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing selling price as reported on NASDAQ on
November 16, 1998, was $26,057,616.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was 3,257,202 at November 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5, 6, 7 and 8 is incorporated by
reference to the Registrant's 1998 Annual Report to Stockholders. The
information required by Part III, Items 10,11,12 and 13 is incorporated by
reference to the Registrant's Proxy Statement dated November 30, 1998 filed
with respect to the Annual Meeting of Stockholders of the Registrant to be
held on January 12, 1999.
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CSP Inc.
Form 10-K
Year Ended August 28, 1998
<TABLE>
<CAPTION>
Item Number
in Form 10-K Table of Contents Page
- ------------ ----------------- ----
Part I
<S> <C> <C>
1 Business........................................ 3
2 Properties...................................... 15
3 Legal Proceedings............................... 16
4 Submission of Matters to a Vote
of Security Holders............................ 16
4A Executive Officers of the Registrant............. 16
Part II
5 Market for Registrant's Common Equity
and Related Stockholder Matters................ 17
6 Selected Financial Data......................... 17
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 17
8 Financial Statements and Supplementary Data..... 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 17
Part III
10 Directors and Executive Officers of the
Registrant...................................... 18
11 Executive Compensation........................... 18
12 Security Ownership of Certain Beneficial Owners
and Management.................................. 18
13 Certain Relationships and Related Transactions... 18
Part IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 18
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Part I
Item 1. Business
General
CSP Inc. (the "Company" or "CSPI") was founded in 1968 and is located in
Billerica, Massachusetts, just off Route 128 in the Boston computer corridor.
CSPI develops, manufactures, markets, installs and supports a range of standard
high performance multi- computer products and systems with specific strengths in
digital signal processing for real time applications in defense and commercial
markets. The Company also commercializes technology developed by United Parcel
Service (UPS) to automate parcel sortation capabilities. In 1994 a separate
product group was established, Vision Systems product group, and in March 1997,
it was consolidated with the computer product group. The Company, in
1988, established Scanalytics product group to develop and market imaging
systems for molecular and cell biology. In June 1997, this product group was
consolidated with the assets acquired from Signal Analytics Corp. and was setup
as a wholly-owned subsidiary called Scanalytics Inc.(Scanalytics). Scanalytics
which specializes in the development and marketing of highly sophisticated image
analysis software products used by bio-technology scientists. By integrating
these software products with a diverse group of image-capture devices,
Scanalytics is able to solve application-specific problems for bio-technology
research. Applications include forensics, fluorescence microscopy,
pharmaceutical assays and 3D imaging and visualization. On June 27, 1997, CSPI
acquired the assets of MODCOMP/Cerplex L.P. MODCOMP is the premier provider of
systems integration and outsourcing network services, Internet solutions and
real-time process control systems. This multi-national subsidiary provides
network integration services including consulting, systems integration and
outsourcing. ViewMax, MODCOMP's newest product, is an Internet software tool
that allows organizations to connect their legacy mainframe databases to their
new Intranet, Extranet or Internet applications. CSPI and MODCOMP sell all
products through its own direct sales force in the U.S. and MODCOMP sell
directly in Germany, France and United Kingdom. The two companies sell via a
world-wide organization of distributors in the rest of the world. Scanalytics
sells both direct and through a network of distributors and resellers.
Product Line Acquisitions:
Effective June 27, 1997, the Company acquired Modcomp/Cerplex L.P. (MODCOMP),
a wholly-owned subsidiary of The Cerplex Group Inc. MODCOMP sells
legacy-to-web integration solutions and real-time computer systems software
and service. CSPI purchased MODCOMP for $8,709,000 in cash. This transaction
was accounted for as a purchase.
In June 1997, the Company acquired Signal Analytics Corp., (Signal) a software
company that provides products for scientific imaging to the life science field.
CSPI purchased Signal for $2,159,000 in cash. This transaction was accounted for
as a purchase.
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Current Products
CSPI MultiComputer Division Products
With decades of application experience, CSPI understands the needs of
high-performance computing and real-time I/O applications. Applications
expertise, product innovation, technical support, and dedication to customer
support makes CSPI one of the industry's leading providers of high-performance
computing systems.
CSPI's MultiComputer Group's business is helping its customers solve
high-performance computing problems by supplying multiprocessing systems with
powerful real-time I/O capabilities that require minimum physical space or
power. CSPI's unique commitment to open system designs, seamless upgradability
of software, and superior scaleable multiprocessing architectures provides the
unparalleled price performance products that are needed to solve complex
real-time problems.
The Company's products consist of both hardware and software, each optimized for
the other. A typical OEM/volume end user will employ one or more units in an
embedded system for defense, medical imaging, advanced vision and seismic
applications.
2000 SERIES MultiComputer Products
In fiscal year 1998, the MultiComputer Division introduced several new product
additions to the 2000 SERIES MultiComputer Systems, its latest generation of
products designed specifically for high-performance computing applications.
2000 SERIES MultiComputer Systems offer application developers the most
comprehensive high-performance system in the industry. The Company
differentiates itself from its major competitors by its use of standard
interfaces and the interoperability this affords its OEM customers.
The 2000 Series High-performance MultiComputer Systems use the best of open
systems technologies. They are implemented using Myrinet networking technology,
Message Passing Interface (MPI) software for interprocessor communications, and
the VxWorks real-time operating system. Computational nodes based on PowerPCs,
from Motorola/IBM and SHARCs, from Analog Devices, provide a heterogeneous
processor architecture. The incorporation of open, proven, and established
technologies in the 2000 Series MultiComputer Systems ensures that customers
receive systems using the latest technology while reducing the risks associated
with proprietary technology. 2000 Series products have been shipped in a variety
of configurations, including multiple-chassis systems. These systems are being
used for several different applications including radar, sonar, and surveillance
signal processing.
The entry level price for a 2000 Series High-Performance MultiComputer System is
approximately $70,300. Volume discounts are offered.
MAP-1310/11 Products
The MultiComputer group continues to market and sell the MAP-1300 series of VME
board level products. The MAP-1310 and the MAP-1311 boards, are designed using
Analog Devices' 21060 DSP chip and the PowerPC RISC processor from Motorola/IBM.
The 1310 and the 1311 delivers 1 and 2 Gigaflops of DSP computational power,
respectively, using either 4 or 8 21060's on a daughterboard and a PowerPC 603
RISC processor. The 1310/1311 incorporate the VxWorks real-time operating system
(from Wind
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River Systems), C Compilers and CSPI's Standard Signal Processing Library for
the 21060 DSP chip's operation. The 1310/11 also support third party PMC(PCI)
modules offering a large set of standard I/O options. The MAP-1310 and
MAP-1311 are priced from $6,000 to $30,000, depending upon the model and
quantity purchased.
SuperCard Products
SuperCards are VME-based boards which are incorporated into customized signal
processing systems by OEM customers. Now in its fourth generation, the SuperCard
family is a complete product line of embedded signal processors employing
multiple Intel i860 RISC microprocessors. The most recent version, the
SuperCard-4SLX, employs eight 40MHz i860's and provides 640 MFLOPS of
computational power, incorporates 64MB of high speed memory and a high bandwidth
interboard connection scheme based upon National Semiconductor's QuickRing
components.
SuperCard-3 utilizes one or two of the 50MHz version of the i860 and is
available for the VME bus, the S-Bus and Turbochannel markets. The earlier
SuperCard-2 and 1 are still supplied to a limited number of existing customers.
SuperCard products are priced from $5,000 to $45,000 (depending upon model and
quantity).
Sortation Reader Products
CSPI MultiComputer Division's Vision Systems product group has been integrated
with the MultiComputer Group. The Lightning family of over-the-belt industrial
barcode readers commercialize technology developed by United Parcel Service
(UPS) to automate UPS's parcel sortation capabilities. The next generation of
readers is currently in production and includes upgraded technology to address
more applications.
CSPI's MultiComputer Group's business is helping its customers solve
high-performance computing problems by supplying multiprocessing systems with
powerful real-time I/O capabilities that require minimum physical space or
power. CSPI's unique commitment to open system designs, seamless
upgradibility of software, and superior scaleable multiprocessing
architectures provides the unparalleled price performance products that are
needed to solve complex real-time problems.
Scanalytics, Incorporated
Scanalytics specializes in the development and marketing of highly sophisticated
image analysis software products used in the scientific research community. By
integrating these software products with a diverse group of image capture
devices, Scanalytics is able to solve application-specific problems in a
variety of scientific disciplines. Applications range from astronomy
to microscopy, and include specialized modules for the analysis of images in
fluorescence, emission and electron microscopy, bio-medical and 3D imaging,
laser beam analysis, and remote sensing.
In the biotechnology and bio-medical research markets, Scanalytics offers a
complete line of gel analysis software packages used primarily in quantifying
DNA, RNA, and protein. Investigators involved in DNA fingerprinting, forensic
analysis, paternity testing, genetic linkage analysis, and identification of
pathogenic and environmental micro-organisms utilize Scanalytics analytical
systems in their laboratories. Scanalytics software modules are used by hundreds
of university,
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pharmaceutical and government labs, worldwide. In the field of cell biology,
Scanalytics' 3D, high resolution, fluorescence microscopy software is being used
to image and analyze microscopic cellular structures, in living cells, that were
previously impossible to visualize by any other technique.
Scanalytics software products are available for both the Macintosh and PC, and
are compatible with a wide variety of image capture devices, including
wide-field fluorescence microscopes, confocal microscopes, CCD cameras, storage
phosphor imaging devices, scanners and densitometers.
EPR and 3D Deconvolution
Based upon technology developed by the University of Massachusetts Medical
Center in over ten years of research, EPR (Exhaustive Photon Reassignment) is a
software product designed to allow extremely high-resolution imaging of cellular
and subcellular structures with minimal damage to the specimen. The Company
offers this deconvolution software, for use with desktop Pentium computers, or
with a multi-use server with SuperCards for higher-speed processing option. The
software alone is priced at $5,000, with server hardware prices starting at
$46,600 with additional SuperCard pricing available. The Company also sells
complete image acquisition and analysis systems ($6,000 to $100,000 exclusive of
microscope) to individual researchers in government, academia and industry.
These systems use third-party, off-the-shelf hardware components such as
cameras, z-axis positioners, light shutters and filter wheels.
Electrophoresis products
Electrophoresis is the most widely used technique for the separation
of proteins and nucleic acids in the life sciences. Active components are
separated by charge and molecular weight in thin gels and capillaries and then
detected using inherent properties or reporter molecules. These reporter
molecules can be chemiluminescent, radioactive labels, colored stains or
fluorescent dyes. Images derived by the scanning these gels and capillaries are
then analyzed for pertinent data using gel analysis software. Significant
methodologies using this data include large-scale DNA sequencing, DNA fragment
analysis for microbial identification, genotyping, population genetics,
forensics, and routine QC/QA of protein and nucleic acids in the
biopharmaceutical industry.
The Scanalytics product group markets several software products for
electrophoresis analysis priced from $1,000 to $6,500. These packages were
developed in cooperation with various university and research institute
collaborators. GELLAB II+, a product for the analysis of 2-D electrophoresis was
developed as a direct result of a Cooperative Research and Development agreement
with the National Cancer Institute. These packages are sold directly to
individual researchers and via a number of distributors and OEM suppliers of
scanner and capillary electrophoresis instruments.
IPLab Products
IPLab is a more general purpose image processing package used in microscopy,
astronomy, laser beam analysis, and material science. The software is offered in
modules with upgrades available for multi-probe fluorescence microscopy,
calcium-ratio imaging, 3-D microscopy, time-lapse studies, and microscope
automation. There is also a separate package used in microscopy, astronomy,
available for gel analysis. IPLab scripts allow end-users to write customized
functions
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for their individual applications. The IPlab foundation product was introduced
in 1988 on the Macintosh and is now available on Windows. The base product is
priced at $2,000, and modules range in price from $500 to $3,000. The software
is sold directly and through a network of international and domestics dealers,
OEMs and VARs.
MODCOMP, Inc.
Integration Services
In recent years, MODCOMP's product offering has shifted away from
the sales of MODCOMP produced (proprietary and open architecture) hardware
toward integration solutions including hardware, software, special engineering,
and third party hardware and software. MODCOMP's value proposition is
integrating these components together into a complete computer system and
installing that system at the customer site. These services are offered by all
MODCOMP locations. In particular, the German subsidiary has had significant
successes in the telecommunication market with the recent deregulation of the
industry.
MODCOMP continues to sell MODCOMP produced systems and components, especially as
it relates to servicing current customers with replacement and/or upgraded
systems. MODCOMP's computer systems generally can be expanded without major
redesign as customer
requirements change.
The purchase prices of MODCOMP's computers and computer systems vary in
accordance with the requirements of the customer. Typically their computer
systems are priced from $6,000 to $250,000, depending on configuration and
peripheral equipment.
MODCOMP's computer systems are generally utilized in industrial plants, research
laboratories and data processing applications and operate in real-time.
Computer Hardware
In 1988, MODCOMP began selling RealStar family of computers, based on open
systems VME and Motorola 68 and 88k processor technology. This was a direct
result of faster processing technology and customer demand. MODCOMP provides
migration paths for CLASSIC proprietary customers with these systems. Prices
range from $15,000 to $100,000.
In July 1997, MODCOMP began the launch of its RealStar II line of computer
systems. This is a line of third party hardware based on Pentium processor
technology. This hardware is specially configured for optimum performance with
MODCOMP's REAL/IX PX operating system. MODCOMP adds additional components and
software to these systems such as RAID subsystems, interface cards, disks, video
displays, to optimize them for real-time, process control market place. During
the year MODCOMP purchased a license for AccessPoint from Access Ware in order
to complement the capabilities of the REAL/IX operating system. Prices for these
systems range from $6,000 to $25,000.
MODCOMP also continues to offer its proprietary CLASSIC and MODACS systems,
parts and services, which it manufactures in its Fort Lauderdale headquarters.
The CLASSIC systems are mini and supermini computers designed specifically to
support real-time applications. The MODACS and MODACSX products are data
acquisition and control systems. Prices range from $15,000 to $250,000.
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Computer Software and Computer Programming
MODCOMP's computers are supported by high-level operating software, referred to
as MAX, REAL/IX, REAL/IX PX and Access Point. This software is designed
specifically for optimum real-time performance. MODCOMP's software enables
customers to write their own real-time application software. These applications,
when combined with MODCOMP computers or third party computers, create systems
which simultaneously perform different control functions, program tests and a
batch processing operation with response and interrupt times that are
competitive in the marketplace. Prices range from $3,000 to $35,000 and up.
The Company also offers specialized programming and software engineering
services to supply customers with customized solutions.
Legacy-Web Internet Integration Solutions
In fiscal year 1997, MODCOMP launched ViewMax in the United States. ViewMax
software is a development environment that allows companies to re-engineer and
integrate legacy systems such as mainframe, midrange, and other diverse host
systems with Internet technology. ViewMax can be used to extend corporate data
to a much wider audience via a corporate intranet, extranet, or the Internet.
ViewMax can also, integrate Electronic Commerce transactions with existing
legacy systems. Although the product has a broad potential, the early adopters
of this technology have used it primarily for facilitating Electronic Commerce
and creating extranets, current customers are in the following markets
insurance, financial, health services, governmental, and manufacturing/
distribution. Prices for ViewMax range from $40,000 to $250,000.
MODCOMP's Internet Products Division will be releasing, in early 1999,
ViewTerm-a software product that provides instant access to legacy systems via
the web using only HTML. Since ViewTerm does not use Java or JavaScript, it is
an ideal tool for quickly deploying an extranet that can be secured using the
standard web secure socket layer (SSL). ViewTerm is a low cost product designed
to facilitate immediate access via the web without providing the re-engineering
capabilities found in ViewMax. Prices for ViewTerm will range from $5,000 to
$50,000.
MODCOMP markets ViewMax both directly to end-users and through indirect
channels. The direct market is cross industry, to companies of substantial size,
and it is not dependent on the fluctuations of any particular industry segments.
ViewMax is positioned primarily as an integration tool, with a strong focus on
Electronic Commerce, Intranet and Extranet implementations. In the US and UK, a
wide range of companies from a broad spectrum of industry have signed up,
including insurance, system integrators, automotive and consumer electronics.
Markets, Marketing and Dependence on Certain Customers
CSPI MultiComputer Division
Applications for Multicomputing products include primarily sonar and radar
systems and simulators. It also services other areas such as medical imaging,
package sortation, speech recognition, and image processing. The Company
addresses these widely diverse markets as an OEM supplier to system integrators
primarily in the military and defense area and other high volume end-users. In
the case of Scanalytics, MODCOMP and over-the- belt products, the Company offers
complete application solutions to end-users. The following table sets forth the
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amount (in thousands of dollars) and percentage of sales revenues attributable
to OEM-volume and individual end-users during fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended August
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1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
OEM-volume sales $ 8,320 13% $ 8,662 44% $13,338 81%
End-user sales 55,148 87% 10,878 56% 3,182 19%
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$63,468 100% $19,540 100% $16,520 100%
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The shift in business from OEM volume sales to end-user was due primarily to the
business from MODCOMP in 1998 which was all end-user sales and presented 78% of
total sales and approximately 90% of end-user sales.
While military markets are generally shrinking overall, military signal and
image processing systems continue to be strong as they are considered very
important for maintaining military readiness. CSPI works with prime contractors
that are being encouraged to seek commercial-off-the-shelf (COTS) design
solutions rather than build in-house, custom products. The COTS effort is in
response to government pressure to reduce defense expenditures, from the various
procurement agencies around the world. These agencies have embraced the concept
of Commercial-Off-The-Shelf based systems as a method to reduce costs. Prime
contractors are being directed to employ relatively inexpensive commercial
components whenever possible, replacing custom, fully militarized designs. This
also adds another benefit in that commercial products are estimated to be
several years ahead of militarized equivalents. The Company continues to ship
products for several COTS based programs. The new MultiComputer series 2000
product has been shipped to a number of customers developing COTS based systems
or evaluating its use in future COTS programs. Such systems are mainly for
radar, sonar and night vision applications. The evaluation periods vary based on
the program, but it takes six to eighteen months for many of the programs to
complete their evaluation and begin deployment.
Several currently deployed programs utilize SuperCards incorporated into the
U.S. Navy's sonar computers, which are used to co-ordinate information from
hydraphone sensor arrays in both ship-based and shore-based installations. These
programs have continued, but their deployment is nearing completion.
Currently SuperCards are sold to medical imaging equipment suppliers on an OEM
basis. The market demand for medical imaging and the variety of non-invasive
technologies (e.g. MRI, PET, Ultrasound, Biomagnetics) is holding steady. The
Multicomputing 2000 series system is more powerful than required for these
products.
Barcodes are familiar to anyone shopping at the local supermarket. Designed
simply for product identification or zip code encryption, these one-dimensional
codes have limited information storage capacity. The trend is towards optical
character recognition and high-density, two-dimensional, machine codes capable
of carrying sufficient information for decisions to be made locally. Typical of
these modern machine codes is MaxiCode, which is designed specifically for high
speed sortation tasks. However, until recently, the widespread use of
two-dimensional machine codes has been limited by the lack of an accurate
over-the-belt
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reader, an essential element in any automation scheme. The machine-code reader
developed by UPS, and manufactured and marketed by the Company, addresses the
need for an accurate, affordable unit capable of unattended operation which can
read bar codes and the latest two-dimensional codes and do optical character
recognition as well.
CSPI has had limited success in its sales efforts of this product to other
companies besides UPS, but it continues to market the product through the CSPI
distribution channel. UPS is the primary customer for the product.
Sales to individual customers constituting 10% or more of total sales consisted
of sales to VIAG of $10,105,000 (16%)in 1998. The other significant customer was
ARCOR with sales of $9,294,000 (15%). Both customers are German
Telecommunication companies. MODCOMP, a German subsidiary, installed system
hardware and software for a large mobile communication antenna planning system
and IP backbone network systems. The Company anticipates that, for the
foreseeable future, a significant percentage of its sales will be dependent upon
a relatively small number of customers.
The Company markets its products through sales offices in Billerica,
Massachusetts, Laurel, Maryland, and Los Angeles, California. Elsewhere in the
U.S. and throughout the remainder of the world, these offices coordinate the
activities of independent distributors and manufacturers representatives who
represent other company's product lines not competitive with CSPI and are either
paid a commission on units sold or are permitted to buy units at a discount for
subsequent resale.
MODCOMP supplies and integrates network solutions and designs, manufactures,
services and markets worldwide, high-speed mini-computers and mini-computer
systems principally for use in demanding real-time applications. These 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. MODCOMP has been expanding its product line by including third-party
equipment to their sales and servicing efforts. Their new focus is as a total
solutions company that can meet the needs of customers with a variety of
products including internally produced and those of third-party manufacturers.
Geographically, Europe accounts for approximately 64% of total sales. The
significant increase in European sales was due to MODCOMP business.
Historically, approximately 50% of MODCOMP's revenue is generated
internationally. During the year, MODCOMP had significant sales from system
integration customers in Germany. Accordingly, changes in market conditions in
these countries may significantly affect MODCOMP's performance.
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The following table sets forth the amounts (in thousands of dollars) and
percentage of sales by geographical area during fiscal years 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Year Ended August
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1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
North America $21,245 33% $13,324 68% $14,474 88%
Far East 1,515 3% 1,034 5% 1,407 8%
Europe 40,594 64% 5,090 26% 574 3%
Other 144 % 87 1% 65 1%
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$63,468 100% $19,540 100% $16,520 100%
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</TABLE>
Competition
CSPI MultiComputer Division
The MultiComputer, bar-code reader and bio-instrumentation markets are very
competitive. The Company believes its products to be among the leaders in
performance and price. All the markets are characterized by rapid technological
change, and the introduction of new products with superior capabilities or lower
pricing could adversely affect the Company's business.
The Company's principal direct competitors in CSPI's MultiComputer Division
market are Mercury Computer Inc. and Sky Computers, Inc. In the specialized DSP
market direct competitors include DY4 Inc., Pentek, Ariel, and Alacron. New
companies enter the field periodically, and larger companies with greater
technical resources and marketing organizations could decide to compete in the
future.
The future growth of the MultiComputer systems market depends upon providing
high density and scalability, in a compact, low power, and inexpensive package
that can be easily integrated into an OEM customer's design for high performance
computation for a specific range of signal processing and computer server
systems. Other companies may offer computer systems designed for particular
applications not addressed by the Company or for attachment to computers
incompatible with the Company's products. Since the majority of sales are to OEM
volume users, the principal barrier to competition is the reluctance of
established users to redesign their product once it is in production and the
strength of the Company's relationship with its customers.
Direct competitors to the Company's machine code reader are AccuSort Systems,
Inc., which has also licensed the relevant technology from UPS, and Intermec,
and has developed their own CCD based reader. Machine code readers of
conventional laser design, which have some of the same performance
characteristics, are available from Computer Identics, PSC Automation, and
Datalogic. The Company's competitive advantage stems from the use of its
SuperCards in the reader, its superior signal processing expertise and its
proven capability as a quality supplier.
In the microscopy market, Scanalytics' major competitors are Media Cybernetics,
Universal Imaging and ImproVision. Other competitors include Applied Precision
Instruments, Noran, Innovision, Compix, Carl Zeiss and Intelligent Imaging. In
the gel analysis market, major competitors include Genetic Solutions (formerly
Biolmage), Media Cybernetics, and BioRad. These competitors range from small,
single product companies to large multinational instrument and microscope
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companies. Scanalytics maintains its competitive advantage through the internal
development of sophisticated software applications to offer low-cost solutions
in the 3D microscopy market.
MODCOMP's competition in its Process Control and Data Acquisition business
crosses product line boundaries. Competition in its proprietary product line is
with third party companies that have developed technical expertise with the
CLASSIC computer system family. Direct competitors include Accurate Computers,
Queue Systems, Protostar, and Electronic Visions.
Competitors for both MODCOMP's proprietary and open systems product lines also
include systems integrators with process control skills in markets such as
primary metals, oil and gas, power, rubber and plastics, pharmaceuticals,
chemicals, pulp and paper, and food and beverages. These competitors offer
alternate open systems hardware platforms and industry-specific tailored
application software packages.
MODCOMP's direct competition with its real-time UNIX operating system include
VxWorks, HP-UX, PowerMAX, WindowsNT, Lynx, QNX, and Linux. As performance in
microprocessor technology rapidly advances, real-time capabilities of competing
operating systems narrows. Competing products are differentiated by hardware
platform support and operating system robustness.
The Legacy Extension market space is very competitive, but ViewMax technology
has been reviewed by independent industry analysts and positioned as Visionary
within our market segment. The Company believes it products to be among the
leaders in terms of performance and price. This market space is characterized by
rapid technological change, but our commitment to PERL as the development
language will allow us to rapidly respond to any technical advances made by
competitors that may adversely affect our business.
The Company's principal direct competitors in the Legacy Extension market space
are Clientsoft, Sterling Software, Mozart, CST, Simware, Intelligent
Environments, and Enterprise Link. New companies with backgrounds in emulation
have begun to enter the market space. These companies such as WallData,
Attachmate, and IBM have greater technical resources and marketing
organizations, but are currently behind in technology. Substantial development
efforts on their part could adversely affect our position.
In the system integration service business MODCOMP competitors are extensive and
are difference in each of the geographical markets but they include such
competitors as EDS, IBM , Sun Microsystems, and Compaq.
Manufacturing, Assembly and Testing
All of the CSPI Multicomputing Division's manufacturing is performed at its
plant in Billerica, Massachusetts. The primary manufacturing process is the
assembly and test of printed circuit boards and systems, designed by the Company
and fabricated by other vendors. The Company endeavors to build for inventory
and offers products in a variety of standard formats. A small percentage of
sales reflect products customized to a particular customer's specification, and
even these products are easily reconfigurable should the customer cancel the
order for any reason.
12
<PAGE>
Upon receipt of material by the Company from outside suppliers, products and
components are inspected by the Company's QC/QA technicians. During manufacture
and assembly, both subassemblies and completed systems are subjected to
extensive testing, including burn-in and vibration procedures designed to
minimize equipment failure. The Company also uses diagnostic programs to detect
and isolate potential component failures. A comprehensive log is maintained of
all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Myricom Inc., Arcadia, CA for the
networking technology integrated circuit devices used in 2000 SERIES
MultiComputer products. The Company has sufficient quantities of these
components on hand to satisfy anticipated demand. The Company has been assured
by Myricom that supplies will continue to be available for reasonable quantities
required.
SuperCard products were designed using the Intel i860 RISC microprocessor. CSPI
was recently informed that Intel would be discontinuing production of the i860
at the end of the 1998 calendar year. CSPI has made provisions to accommodate
the future needs of all its SuperCard customers for this product. No new
application development programs will be initiated incorporating SuperCard
products, however, SuperCard products will continue to be shipped into existing
programs that have completed the SuperCard end-of-life plan.
The CSPI MultiComputer Division does not consider the risk of interruption of
supply to be significant to meet its projected revenue requirements for the
immediate future.
The CSPI MultiComputer Division provides a warranty covering defects arising
from products sold and service performed, which varies from 90 days to one year
depending upon the particular unit. However, warranties of substantially greater
scope have been extended to certain major customers for financial and other
considerations. The CSPI MultiComputer Division maintains a reserve for warranty
repairs equal approximately to 2% of product sales for the last 90 days.
The CSPI MultiComputer Division is approved for registration to ANSI/ASQC-Q9001
under RAB and RvC accreditation. The ISO9001 category is the most comprehensive,
and incorporates every aspect of business from design, through sales, to
manufacturing and customer support. Scanalytics ships all of its software
products and manuals form the Fairfax Virginia facility. They perform system
integration of computers equipment with various image capture devices such as a
microscopes or digital camera at their facilities in Virginia before
installation at the customer site.
MODCOMP's computer system production starts with the procurement of raw
materials, components, pcb's, cables, and prefabricated sheet metal. System
configurations can include a wide selection of peripheral subsystems built or
purchased under the original equipment manufacturer agreements. MODCOMP's
manufacturing facility is located in Fort Lauderdale, Florida. The process is
controlled by various quality steps throughout the manufacturing phases. The
production cycle of an individual system generally takes between 30 and 45
days, depending on its complexity.
MODCOMP's manufacturing operations requires a wide variety of mechanical and
electronic components, raw materials and other
13
<PAGE>
supplies. MODCOMP has more than one commercial source of supply for most of the
components and raw materials which it uses, but is dependent on certain
single-source suppliers for a certain number of items. The supply situation is
cyclical and shortages or extended lead times for delivery have developed from
time to time. Although to date the Company has had no significant problems in
procuring its material requirements as needed, MODCOMP's operations could be
seriously affected should shortages become acute.
Customer Support
The CSPI MultiComputer Division and Scanalytics support its customers in a
number of ways: telephone assistance, on-site service, installation of systems,
training and education. Customers are able to call a support unit and report
problems which are reviewed by an analyst. The analyst will research the problem
and will assist the customer, most commonly via telephone, in an effort to
correct the problem. Service of this kind is available during the warranty
period, and is also available to report "bugs" in the software. Customers may
purchase software and hardware maintenance and on-site service contracts after
the warranty period.
The CSPI MultiComputer Division offers training courses at either corporate
headquarters or the customer site, should the customer request it. Field and
customer service support is provided through Billerica, Massachusetts, Los
Angeles, California, Laurel, Maryland and Scanalytics through its Fairfax,
Virginia site.
MODCOMP supports its customers in a number of ways; telephone assistance,
on-site service, installation of systems, training and education. Service and
parts warranty, generally of 90 days duration, is provided on all products. In
addition, MODCOMP sells maintenance service contracts to customers. MODCOMP also
conducts customer training classes of one to three weeks duration on a fee basis
either at their site or the customer's location.
MODCOMP offers training courses at corporate headquarters. Field and customer
service support is provided through offices strategically located throughout the
world.
Engineering and Development
During fiscal 1998, CSPI MultiComputer Division's expenses (including
depreciation) for engineering and development were approximately $4,072,000 (6%
of sales) compared to approximately $3,360,000 (17% of sales) and $3,325,000
(20% of sales) in fiscal years 1997 and 1996, respectively. Expenditures for
engineering and development are expensed as they are incurred. The CSPI
MultiComputer Division expects to continue substantial expenditures, both in
additional applications software development and development of hardware and
software for multicomputers. Scanalytics Inc. will continue to expand its
product offering in software with its various products in gel and cell analysis
for life sciences and complete new releases of the PC version of the IP Lab
software product. CSPI MultiComputer Division's products and development
currently in process are intended to extend the usefulness and marketability of
existing products and introduce new products into existing market segments.
MODCOMP will continue development of the View Max product, Real/IXPR and
AccessPoint for SCADA solutions.
Of CSPI MultiComputer Division's and Scanalytics have 74 employees, 20
14
<PAGE>
professional and staff employees were engaged in software and hardware
engineering and development activities as of August 28, 1998.
The CSPI MultiComputer Division does not have any patents that are material to
its business.
The Company does not have any patents that are material to its business.
MODCOMP's Engineering and Development staff has developed various computers,
computer peripherals and software since 1970, which it continues to maintain and
enhance.
MODCOMP's principal products are the CLASSIC hardware and software line, REAL/IX
PX and special one-of-a-kind products requested by customers.
The CLASSIC hardware and software line is a proprietary line of computers and
related software especially designed for the hard real-time market and has
been in existence since 1970.
REAL/IX PX is a modified version of the AT&T System V UNIX. It has been
modified to add determinism, fast interrupt handling, and fast context
switching required by the hard real-time market. REAL/IX PX runs on he Intel
486 and Pentium line of computers.
Engineering works directly with customers to develop special one- of-a-kind
products such as the MODCOMP-VME-II, which moves the design of one of the early
CLASSIC systems onto a VME board to go into a VME chassis.
MODCOMP's 171 employees, 13 professional and staff employees are engaged in
software and hardware engineering and development.
Backlog
The Company's backlog of customer orders and contracts was approximately
$9,781,000 at August 28, 1998 as compared to $9,550,000 at August 29, 1997. The
backlog of the Company can fluctuate greatly. These fluctuation can be due to
the timing of receiving large orders for integration services and OEM purchases.
Employees
On August 28, 1998, the Company had 245 full time employees. None of the
Company's employees is represented by a labor union and the Company had no work
stoppages. The Company considers relations with its employees to be good.
Item 2. Properties
The Company owns the land and building at 40 Linnell Circle, Billerica,
Massachusetts.
The Company owns approximately 2.8 acres of land adjacent to the Company's
current facility. The Company believes space at its current location, combined
with space that will be available if the Company proceeds to build on the
adjacent land, will be sufficient for future growth.
15
<PAGE>
MODCOMP's corporate headquarters, manufacturing operations and training facility
in Fort Lauderdale, Florida are located in a leased building, totaling
approximately 77,483 square feet. In addition, they lease the following office
spaces in the United States, Canada and foreign countries; Cincinnati - 1,958
sq. feet, Atlanta - 787 sq. feet, Houston - 1,450 sq. feet, Ontario, France -
11,066 sq. feet, Hamburg, Germany - 29 sq. feet, Hannover, Germany - 748 sq.
feet, Cologne, Germany - 6,048 sq. feet and Karlsruhe, Germany - 1,782 sq. feet.
Item 3. Legal Proceedings
MODCOMP is currently defendant in certain lawsuits which arose in the ordinary
course of business. Based in part on the opinion of legal counsel representing
the Company in these lawsuits, management is of the opinion that the outcome of
such litigation will not have a material adverse effect on the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders.
Item 4A. Executive Officers
Information about the executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
Name and Age Business Affiliations
- -------------------------- ------------------------------------------
<S> <C>
Alexander R. Lupinetti(53) Chairman, Chief Executive Officer and
President of CSPI since October 1996;
President and Chief Executive Officer of
each of the TCAM Systems Inc., Shared
Systems Corporation and SoftCom Systems,
Inc. subsidiaries of Stratus Computer Inc.
from November 1987 to September 1996;
Northeastern General Manager for the
Engineering and Scientific Division of
International Business Machines, Inc. from
1984 to 1987.
Michael M. Stern(61) Director of CSPI from 1968 to January 1984;
Vice President of Operations and Treasurer
of CSPI since 1968.
Gary W. Levine(50) Vice President of Finance and Chief
Financial Officer of CSPI since September
1983; Controller of CSPI from May 1983 to
September 1983.
James A. Waggett(61) Director of CSPI from 1968 to January 1984;
Vice President of Advanced Development from
1974 to the present; Business Element
Manager of the Embedded Computing Product
Group from August 1995 to October 1996;
Clerk from 1971 to March 1983; Assistant
Clerk from March 1983 to the present.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Bradley E. Stamp (46) Vice President of Sales and Support for
MultiComputer Group from October 1996 to
present; General Manager of Vision System
Product Group May 1994 to September 1996;
Director of Customer Support September 1988
to May 1994.
Michael Mort(47) President of Scanalytics June, 1997;
President and owner of Signal Analytics
Corp. June, 1997-1987,
John P. Clary(61) President of MODCOMP Inc. and Vice
President of CSPI from August 1997 to
present, Modcomp/Cerplex L.P. President
and Chief Executive Officer December
1994 to August 1997, Vice President of
Customer Support, Manufacturing and
Facilities, Modular Computer Systems
Inc., January 1991 to December 1994
</TABLE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information required by this Item is incorporated by reference from
"Common Stock Data" on page XX of the Company's 1998 Annual Report to
Stockholders. American Stock Transfer Company is the Transfer Agent and
Registrar for the Company's Common Stock. There were approximately 152
Stockholders of record as of November 16, 1998. The Company believes the
number beneficial owners of shares (including shares held in street name) at
that date were approximately 1,000.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference from
"Selected Financial Data" on page 17 of the Company's 1998 Annual Report to
Stockholders.
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
The information required by this Item is incorporated by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18-24 of the Company's 1998
Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference from pages 25
to 42 and from "Independent Auditor's Report" on page 43 of the Company's 1998
Annual Report to Stockholders.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
NONE
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information for Directors required by this Item is incorporated by reference
from the Company's Proxy Statement dated November 30,
1998 filed with respect to the Annual Meeting of Stockholders of the Company on
January 12, 1999.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8K
A) The following are filed as part of this report:
1) Financial Statements (See item 8):
The following financial statements of the Company are included in Part II of
this report through incorporation by reference from the Company's 1998 Annual
Report to Stockholders.
<TABLE>
<CAPTION>
Annual Report
Page
-------------
<S> <C>
Independent Auditors' Report..............................................43
Consolidated Balance Sheets at August 28, 1998 and
August 29, 1997...........................................................25
Consolidated Statements of Operations for years ended August 28, 1998,
August 29, 1997 and August 30, 1996.......................................26
Consolidated Statements of Shareholders' Equity for years
ended August 28, 1998, August 29, 1997 and August 30, 1996................27
Consolidated Statements of Cash Flows for years ended August 28, 1998,
August 29, 1997 and August 30, 1996.......................................28
Notes to Consolidated Financial Statements.............................29-42
</TABLE>
18
<PAGE>
2) Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts
3) Exhibits
Certain of the Exhibits listed hereunder have previously been filed with the
Commission and are hereby incorporated by reference pursuant to Rule 12b-32
under the Securities Exchange Act of 1934 and Rule 24 of the Commission's Rules
of Practice. The location of each document so incorporated by reference is noted
parenthetically.
<TABLE>
<S> <C>
3.1 Articles of Organization and amendments thereto, of the Company as of the
end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended August
31, 1990)
3.2 By-Laws of the Company, as amended through March 21, 1995
10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to
the Form S-8, File No. 2-79414, 1987 Registration Statement)
10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated
January 5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414,
1987 Registration Statement)
10.3 Form of Invention Agreement between the Company and certain
of its employees
10.4 CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8
amendment 2 to Form 10-K for year ended August 31, 1986, dated
February 23, 1987)
10.5 Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5,
1987 as amended (Exhibit 10.11 to Form 10-K for year ended August 31,
1990)
10.6 Amendment to Mr. Ochlis' Employment and Deferred Compensation Agreement
dated March 20, 1989 (Exhibit 10.9 to Form 10-K for year ended August 31,
1991)
10.7 1991 Incentive Stock Option Plan (the Plan is included in the Company's
Proxy Statement dated November 10, 1991 with respect to the Annual Meeting
of Stockholders of the Company on December 10, 1991)
10.8 Retirement Agreement for Edmund U. Cohler (Exhibit 10.9 to Form 10-K for
the year ended August 26, 1994)
10.9 Symbology Reader License Agreement between UPS and CSPI (Exhibit 10.9 to
Form 10-K for the year ended August 26, 1994)
10.10 Software License Agreement between UPS and CSPI (Exhibit 10.12 to Form
10-K for the year ended August 26, 1994)
10.11 Patent Agreement between UPS and CSPI (Exhibit 10.13 to Form 10-K for the
year ended August 26, 1994)
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
10.12 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement dated
February 6, 1995
10.13 Employment Agreement between CSP Inc. and Mr. Lupinetti
dated September 12, 1996
10.14 Signal Analytics Purchase Agreement
10.15 Modcomp/Cerplex L.P. Purchase Agreement
11.0 Computation of Earnings (loss) Per Share for the years ended August 28,
1998, August 29, 1997, and August 30, 1996
13.1 1998 Annual Report to Stockholders
22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year
ended August 29, 1997)
23.0 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
</TABLE>
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of CSP Inc. and Subsidiaries
Under date of October 5, 1998, except as to Note 13, which is dated as of
October 14, 1998, we reported on the consolidated balance sheet of CSP Inc. and
Subsidiaries as of August 28, 1998 and August 29, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended August 28, 1998, as contained
in the 1998 Annual Report to Shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the financial
statement schedule on page 22 of this report. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 5, 1998
21
<PAGE>
CSP INC. AND SUBSIDIARIES
Schedule VIII-Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance
For
Warranty Doubtful
Description Reserve Accounts
- ----------- -------- ----------
<S> <C> <C>
Balance August 25, 1995 $92 $103
Additions Charged to Costs and
Expenses 92 --
Additions Charged to Other
Accounts 23 --
Deductions:
Write off of assets -- --
-------------------------------
Balance August 30, 1996 69 103
Additions Charged to Costs and
Expenses -- --
Additions for MODCOMP 144 154
-------------------------------
Balance August 29, 1997 213 257
Additions Charged to Costs and
Expenses -- --
Additions Charged to Other
Accounts -- l02
Deductions -- --
-------------------------------
Balance August 28, 1998 $213 $359
-------------------------------
-------------------------------
</TABLE>
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CSP INC.
(Registrant)
Alexander R. Lupinetti November 23, 1998
- ---------------------- -------------------
Alexander R. Lupinetti Date
Chief Executive Officer,
President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
Alexander R. Lupinetti Chief Executive Officer, November 23, 1998
- ---------------------- President and Chairman
Alexander R. Lupinetti
Gary W. Levine Vice President of Finance, November 23, 1998
- ---------------------- Chief Financial Offcier
Gary W. Levine
J. David Lyons Director November 23, 1998
- ----------------------
J. David Lyons
Shelton James Director November 23, 1998
- ----------------------
Shelton James
Sandford Smith Director November 23, 1998
- ----------------------
Sandford Smith
Robert Williams Director November 23, 1998
- ----------------------
Robert Williams
</TABLE>
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Form 10-K
Number Exhibit Page
- ------- ------- ---------
<S> <C> <C>
11.0 Computation of Earnings (loss) Per Share for the years ended
August 28, 1998, August 29, 1997, and August 30, 1996
13.1 1998 Annual Report to Stockholders
23.0 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
</TABLE>
24
<PAGE>
Exhibit 11.0
CSP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
For the years ended August 28, 1998,
August 29, 1997, and August 30, 1996
(in thousands except for
per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income (Loss) Per Common Share--(Basic)
Net Income (Loss) $1,362 $ (721) $ 108
--------------- -------------- ---------------
Weighted average common shares outstanding 3,265 3,246 3,226
--------------- -------------- ---------------
Net income per common share--(Basic) $ 0.42 $(0.22) $ 0.03
--------------- -------------- ---------------
--------------- -------------- ---------------
Net Income (Loss) Per Common Share--(Diluted)
Net Income (Loss) $1,362 $ (721) $ 108
--------------- -------------- ---------------
--------------- -------------- ---------------
Weighted average common shares outstanding 3,265 3,246 3,226
Add: Net additional common shares upon
exercise of stock options 75 -- 41
--------------- -------------- ---------------
Weighted average common shares outstanding 3,340 3,246 3,267
--------------- -------------- ---------------
--------------- -------------- ---------------
$ 0.41 $(0.22) $ 0.03
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
<PAGE>
Exhibit 13.1
CSP INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Sales $ 63,468 $ 19,540 $ 16,520 $ 18,526 $ 19,460
Costs and expenses 61,262 21,590 17,169 18,725 17,425
Operating income (loss) 2,206 (2,050) (649) (199) 2,035
Other income 470 885 886 821 478
Income (loss) before income taxes 2,676 (1,165) 237 622 2,513
Provision (benefit) for income taxes 1,314 (444) 129 237 794
Net income (loss) $ 1,362 ($ 721) $ 108 $ 385 $ 1,719
-------- -------- -------- -------- --------
Net income (loss) per share - basic $ 0.42 ($ 0.22) $ 0.03 $ 0.12 $ 0.52
-------- -------- -------- -------- --------
Weighted average number of shares - basic 3,265 3,246 3,226 3,223 3,323
-------- -------- -------- -------- --------
Net income (loss) per share - diluted $ 0.41 ($ 0.22) $ 0.03 $ 0.12 $ 0.50
-------- -------- -------- -------- --------
Weighted average number of shares - diluted 3,340 3,246 3,267 3,276 3,406
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and marketable securities $ 13,548 $ 9,925 $ 17,055 $ 17,651 $ 15,611
Working capital 22,096 19,882 22,800 22,862 23,085
Total assets 37,528 34,999 29,536 29,279 29,936
Long term obligations 3,363 3,282 2,093 1,943 1,804
Total liabilities 11,137 9,978 3,732 3,554 3,695
Retained earnings 18,032 16,670 17,397 17,224 16,839
Shareholders' equity 26,391 25,021 25,804 25,725 26,241
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The following table sets forth certain information which is based on
Operations Statements Data:
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
DOLLAR CHANGES
(AMOUNTS IN THOUSANDS)
PERCENTAGE OF SALES -----------------------------
FISCAL YEAR ENDED AUGUST 1998 1997
------------------------------------------- COMPARED TO COMPARED TO
1998 1997 1996 1997 1996
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SALES: 100.0 %100.0% 100.0% $43,928 $3,020
COSTS AND EXPENSES:
Cost of sales 67.5% 54.0% 40.3% 32,305 3,887
Engineering and development 6.4% 17.2% 20.1% 712 35
In process research and development -- 2.8% -- (550) 550
Selling, general & administrative 22.3% 35.5% 43.5% 7,230 (244)
Restructuring 0.3% 1.0% -- (25) 193
------- ------- ------ ------ ------
Total costs and expenses 96.5% 110.5% 103.9% 39,672 4,421
------- ------- ------ ------ ------
Operating income (loss) 3.5% (10.5)% (3.9)% 4,256 (1,401)
Other income 0.7% 4.5% 5.4% (415) (1)
------- ------- ------ ------ ------
Income (loss) before taxes 4.2% (6.0)% 1.5% 3,841 (1,402)
Provision (benefit) for income taxes 2.1% (2.3)% 0.8% 1,758 (573)
------- ------- ------ ------ ------
Net income (loss) 2.1% (3.7)% 0.7% $2,083 ($829)
------- ------- ------ ------ ------
------- ------- ------ ------ ------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements related to,
among others, but not limited to, statements concerning future revenues and
future business plans. Actual results may vary from those contained in such
forward-looking statements.
ACQUISITIONS
During fiscal 1997, the Company added new businesses and product lines to
accelerate growth by acquiring the assets of MODCOMP/Cerplex, L.P. (MODCOMP),
which sells integrated services, Internet software products (legacy-to-Web
integration solutions), real-time computer systems/software and services, as
well as Signal Analytics Corp. (Signal) a software company that provides
products for scientific imaging to the life science fields. Signal was
consolidated with CSP 's Scanalytics product group (biotechnology products) and
set up as a wholly-owned subsidiary, Scanalytics, Inc.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
REVENUE
In fiscal 1998, the Company's sales increased to $63,468,000 due primarily
to a full year of operations of MODCOMP, compared to $19,540,000, which
included two months of revenue from MODCOMP in 1997. This was the highest
sales level achieved in the history of the Company. MODCOMP accounted for 78%
of total revenue and CSP MultiComputer Division (CSPI) products accounted for
18% of total revenues during fiscal 1998. Scanalytics revenues were 4% of the
total. Sales for systems integration and services represented 66% of product
sales for the fiscal year. MODCOMP secured several outsourcing orders
primarily through its German subsidiary, which had two large systems
integration orders that were installed during the year. The systems were sold
in the German telecommunications market. The two customers were newly
organized companies in January, 1998, created as a result of deregulation of
the telecommunications industry in Germany. MODCOMP installed and integrated
20 Sun 3000 and 4000 servers in ten locations around Germany to build an IP
backbone network for ARCOR. The order and other services represented 22% of
the total integration service revenue for fiscal 1998. MODCOMP also completed
the installation of a Mobile Communications Antenna Planning System to
another telecommunication company, VIAG, for their mobile network. This
represented 24% of the total revenue. These two large integration service
sales included installation of third-party computer equipment and software
systems as well as training of personnel. The sales of large integration
systems are individual orders. MODCOMP has secured other market opportunities
both internationally and domestically to utilize their expertise and know-how
in the systems integration field.
Systems sales represents 27% of total revenue, which include software and
hardware products designed and developed by CSPI and MODCOMP. The CSPI SuperCard
family of products continues to represent the major source of revenue,
accounting for approximately 60% of total sales for the MultiComputing products,
an increase of 12%
<PAGE>
over the prior fiscal year. The increase in systems sales was due to continued
procurement of SuperCards by the various COTS (commercial-off-the-shelf)
programs and shipments to existing customers. The changes in current technology,
coupled with the recent announcement of the discontinued manufacturing of
certain Intel 860 processors, which are used by CSPI in SuperCard 4 products,
will decrease future revenues. CSPI 's newest products, the 2000 SERIES, will
provide the future source of revenue growth. The 2000 SERIEShad numerous
successes during the fiscal year. Sales of new products represented 28% of total
revenue for CSPI for the fiscal year. These systems are either based on the
Power PC from IBM/Motorola or Analog Devices SHARC processor and Myrinet
networking technology from Myricom Inc. These systems have been purchased for
use in applications used to upgrade military aircraft and vessels for radar,
sonar, voice recognition and surveillance capabilities. During the year, CSPI
received an order for more than $2.5 million from a large international defense
customer for a 400 computer node 2640 MultiComputer systems. These systems will
be used by military ships and aircraft using Towed Array Sonar Systems and sonar
buoys simultaneously to locate submarines. The order began shipping in July,
1998 but most of the order will be shipped in October, 1998. The 2641
MultiComputer System, our most powerful system to date, shipped first to
Raytheon in May, 1998 with a second shipment in August to Computing Devices
Canada, a General Dynamics Co., for a sonar system for the Swedish Navy. Sales
of machine code readers primarily for United Parcel Service (UPS), represented
1% of total sales for the year. UPS continues use of machine code readers in
their distribution centers, but the quantities and deployment of units are still
under review by UPS. MODCOMP continues to ship its real-time process control
classic product line to its existing customers, which represent 31% of systems
sales. MODCOMP has increased its product offering with the addition of the
AccessPoint supervisory control system, licensed in August from AccessWare. This
product will be coupled with MODCOMP's current REAL/IX real-time operating
system so we can capitalize on opportunities such as the deregulation of the US
power utility industry. Sales of systems software represent 2% of revenue.
Software sales represented 7% of sales. Scanalytics account for 53% of the
total sales for this product, which decreased by 20% from the prior year. The
decreased sales were due, in part, to the discontinued sales of certain
proprietary hardware products, primarily CellScan, as the Company transitions to
a complete software solutions provider. This was done to meet the changing
demands of the scientific research market. The MODCOMP Internet product,
ViewMAX, accounts for 24% of the total software sales for the year. ViewMAX is a
legacy-to-Web internet software bridge that allows organizations to connect
their legacy mainframe data bases to their new intranet, extranet, or Internet
applications.
European sales account for 64% of the total revenue. Sales were primarily
from MODCOMP's subsidiaries in Germany, France and the United Kingdom. The
significant outsourcing orders in Germany contributed greatly to the increased
volume, representing 62% of European sales. Historically, 50% of MODCOMP's
revenues have come from the international market. North American sales represent
33% of total sales. Other International sales represent 3% of total sales. The
other geographic areas for CSPI products have been decreasing during the past
few years due to the decline in military procurements and slow economic
conditions in the foreign market segments where our products are sold.
<PAGE>
COST OF SALES
Cost of sales as a percentage of sales increased to 68% from 54% in the prior
year. The increased cost of sales was due to the increased sales volume of
integration services sales in Germany, which had significant third-party
products. This included the resale of computer and peripheral products from Sun
Microsystems, Hewlett-Packard, Cisco Systems and Cabletron Systems. These
products are sold at lower gross profit margins than the proprietary products
sold by MODCOMP, CSPI and Scanalytics. In addition, the continuing pressure from
our direct competitors has required larger discounts to secure business with
both new and existing customers. The Company will continue to take steps to
lower the manufacturing overhead and improve the overall efficiency to lower the
cost of goods sold. The future cost of sales as a percentage of sales will
fluctuate based on the mix of the business, but most probably will increase from
the levels we have historically experienced if MODCOMP integration systems sales
remain a large percentage of total revenue.
OPERATING EXPENSES
Engineering and development expenditures were slightly higher, about 21% over
the prior fiscal year. The major portion of the engineering and development
expenses were for CSPI, representing 57% of the total expense. This was a
reduction of approximately 20% from the prior fiscal year for CSPI. The
reduction was due to decreases in outside service and consulting expenses that
were needed to complete software and hardware for the 2000 SERIES product. There
was also a reduction in staff due to attrition. MODCOMP's engineering and
development expenses represented 35% of total engineering and development
expenses. The major portion of the expenses was for continued development of the
ViewMAX Internet software product in both the US and United Kingdom, which
represented approximately 40%. The remaining expenses were for costs to complete
work on the modifications to the REAL/IX operating system and Year 2000 solution
for software on the proprietary products. Scanalytics expenses were down by
approximately 18% and represented 8% of the total cost. The reduction in
expenses was due primarily to consolidation of the two groups (Signal Analytics
and CSPI Scanalytics Division), which resulted in staff reductions compared to
the prior year.
Sales, general and administrative expenses doubled from the previous fiscal
year. The primary reason for the increase was the full year of expenses for
MODCOMP, which accounted for 90% of the total increase. CSPI's expenses
accounted for the remaining 10%, increasing 19% over the prior fiscal year. The
Company had increased bonus expense for the entire group, which represented 39%
of the entire increase over the prior year. Bonuses for the executives are based
on Company revenue and profitability, coupled with individual goals based on the
duties and responsibilities of the individual. Professional fees related to
legal, audit and shareholder services increased by 96% and represented 23% of
the total increase. Another large increase was due to the addition of staff -
three individuals in sales and one in finance - plus added sales commissions for
the increased business, which increased by 41%. Scanalytics sales and marketing
expenses decreased by approximately 40% due to the reduction in staff from the
consolidation of the two organizations.
In March, 1998, MODCOMP had a corporate reorganization to reduce costs in the
US operation. The primary areas included were manufacturing, operations and a
senior financial manager. The restructure
<PAGE>
eliminated twenty positions at a cost of approximately $168,000 for severance
benefits. This restructure will save approximately $1.0 million in expenses in
fiscal 1999.
OTHER - INCOME EXPENSES
Other income - expenses decreased by approximately $415,000 as compared to
the prior year. There was lower investment income for the Company due to the
reduction in cash utilized for the purchase of MODCOMP and Signal and lower
investment income rates for the fiscal year. This represented 90% of the reduced
amount. In addition, there was a full year of other expenses for MODCOMP, which
represented the balance of the total decrease. The Company continued to invest a
larger percentage of its cash in taxable instruments, which have a higher rate
of return on a pre-tax basis than our investments in prior years.
The Company had a high effective tax rate of 49%, which is above the normal
US statutory rate. This was due to the large portion of foreign-based revenue
and profits from France and Germany, which have high statutory tax rates. The
Company will continue to review strategies with its advisors to reduce our
effective rate.
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
The Company's sales increased by approximately 18% to $19,540,000 from
$16,520,000 in fiscal 1996. This was primarily due to the inclusion of two
months of revenue from the acquisition of MODCOMP, which represented
approximately 34% of the total revenue, and Signal which accounted for
approximately 2% of sales for the fiscal year. CSPI products accounted for 51%
of total revenue during fiscal 1997. SuperCard products continued to represent
the major source of revenue, accounting for approximately 62% of total sales.
That was a decrease of 48% over the prior fiscal year. The decrease in sales was
due, in part, to reduced procurement to the various COTS
(commercial-off-the-shelf) programs. The CSP MultiComputing group had initial
shipments of its newest product, the 2000 SERIES high-performance Multicomputer
system. Sales represented about 3.5% of total sales for the year. Sales of
machine code readers to United Parcel Service (UPS) represented 11% of total
sales for the year. This was a significant increase of 240% in shipments from
the prior year. Sales of the older products, such as SuperCards SC-1, RTS-860,
MAP-4000 and MiniMAP, represented approximately 5% of total sales.
Scanalytics represented approximately 15% of total revenues, with a 10%
increase over the prior fiscal year. The increased sales volume was due to the
shipment of software products and CellSCAN shipments in the first half of the
fiscal year.
North American sales represented 68% of total sales. This was a 8% decrease
compared to the prior year. The decrease was due, in part, to the decline in CSP
MultiComputing product procurements from the US military and OEM customers.
International sales increased by $4.2 million due to the sales of products by
MODCOMP's European subsidiaries. The increased sales were primarily in Germany
and France. The sales of both CSP MultiComputer products and Scanalytics
products to Japan (the largest international markets for their products)
decreased by 47% over the prior fiscal year.
Cost of sales as a percentage of sales increased to 54%. The increased cost
of sales was due to the system and service sales of MODCOMP, which sells at
lower gross profit margins than the CSP MultiComputing and Scanalytics software
products.
<PAGE>
Engineering and development expenditures were slightly higher, about 1% compared
to the prior fiscal year. The major engineering and development expenses
resulted from the completion of the new 2000 SERIES MultiComputer systems.
Expenses for the improvement of the machine code reader product doubled and were
approximately 13% of the total engineering and development expenses. Scanalytics
expenses were down by 18% compared to the prior year due to staff reductions.
Sales, general and administrative expenses were approximately the same as the
prior year. CSPI and Scanalytics expenses dropped by approximately 33% and 40%
respectively, with reductions in staff. The large declines in expenses by CSP
and Scanalytics were offset by the expenses related to MODCOMP activity, which
represented 21% of the total expenses for the year. In March, 1997, CSP had a
corporate reorganization to reduce costs. The primary focus was a restructuring
of manufacturing operations and the consolidation of the Vision Systems product
group and MultiComputing group. This restructure eliminated 13 positions at a
cost of approximately $125,000 in severance benefits. The restructure will save
approximately $1.0 million in expenses. In fiscal 1998, MODCOMP had a
restructuring charge of $68,000 for the elimination of two positions. Other
income was consistent with the the prior year. The Company realized a tax
benefit for both federal and state taxes due to the net loss for the year.
FINANCIAL POSITIONS, CAPITAL RESOURCES AND LIQUIDITY
The Company still has a solid financial position as working capital increased
to $22.1 million in fiscal 1998. Cash and marketable securities increased by
$3.6 million. The Company's accounts receivable decreased by $886,000 to
$7,698,000. The Company's inventory increased to $6.3 million from $6.2 million.
The Company's purchase of the two subsidiaries for net of $8.5 million in fiscal
year 1997 reduced working capital to $19.9 million at August 29, 1997 from $22.8
million at August 30, 1996.
The Company spent $698,000, $1,111,000 and $1,144,000, on capital
improvements during fiscal 1998, 1997 and 1996, respectively.
Management believes that all of the Company's current and foreseeable needs
can be met through working capital generated by operations and investments.
INFLATION AND CHANGING PRICES
Management does not believe that inflation and changing prices had
significant impact on sales, revenues or income from continued operations during
fiscal 1998, 1997 or 1996. There is no assurance, however, that the Company's
business will not be materially and adversely affected by inflation and changing
prices in the future.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This document contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The factors that
could cause actual results to differ materially include the following: general
economic conditions and growth rates in the peripheral and computer products,
biological imaging software, and the instruments and machine code readers
industries; competitive factors and pricing pressures; changes in product mix;
the timely development and acceptance of new products; inventory risks due to
shifts in market demand; and component constraints and shortages. In response to
competitive pressures or new product introductions, the Company may
<PAGE>
take certain pricing or marketing actions that could adversely affect the
Company's operating results. In addition, changes in the mix of old products may
cause fluctuations in the Company's gross margin. Due to the potential quarterly
fluctuations in operating results, the Company believes that quarter-to-quarter
comparisons of its results of operations are not necessarily an indicator of
future performance.
Markets for the Company's products are characterized by rapidly changing
technology, new product introductions and short product life cycles.These
changes can adversely affect the business and operating results. The Company's
success will depend upon its ability to enhance its existing products and to
develop and introduce, on a timely and cost effective basis, new products that
keep pace with technological developments and address increasing customer
requirements. The inability to meet these demands could adversely affect the
Company's business and operating results.
YEAR 2000
Historically, certain computer programs have been written using two digits
rather than four digits to define year. This could result in computers
recognizing a date of "00" as the year 1900 rather than the year 2000, resulting
in potential major system failures or miscalculations. This problem will be
referred to as "Year 2000."
The Company has reviewed both its internal computer systems and its products
that could be affected by the "Year 2000" issue and has identified some systems
and a few products that will be affected. The Company presently believes with
modification to existing software and conversion to new software, the "Year
2000" issues related to internal computer systems and products will not cause
significant operational or computer problems. Furthermore, the cost of
implementing these solutions is not anticipated to be material to the financial
position or results of operations. The costs of such conversions and updates are
based on management's best estimates, which were based on numerous assumptions
of future activities such as, but not limited to, availability and cost of
personnel needed to correct and train, as well as the ability to locate and
correct relevant computer codes.
The Company has not identified alternative remediation if upgrade or
replacement does not correct the "Year 2000" issue. The Company will consider
the need for such plans as it continues to assess the "Year 2000" risk.
The Company has initiated and will continue a formal communication with all
of its significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third-parties failure to correct their
own "Year 2000" issues. Where practicable, the Company will attempt to mitigate
its risks with respect to the failure of suppliers to be "Year 2000" ready. In
the event that suppliers are not "Year 2000" compliant, the Company will seek
alternative sources of supply. There can be no guarantee that the systems of
other companies upon which significant supplies and large customers rely will be
converted in a timely fashion nor can there be any guarantee that failure to
convert by another, will not have a material impact on the Company.
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 28, 1998 and August 29,1997
(Amounts in thousands, except for par value)
<TABLE>
<CAPTION>
August 28, August 29,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,913 $ 4,344
Marketable securities 9,635 5,581
Accounts receivable, net 7,698 8,584
Income tax receivable -- 37
Inventories 6,308 6,227
Deferred income taxes 1,068 504
Prepaid expenses 1,248 1,301
---------- ----------
Total current assets 29,870 26,578
---------- ----------
Property, equipment and improvements, net 3,367 3,856
---------- ----------
Other assets:
Land held for future development 163 163
Deferred income taxes 1,168 880
Goodwill, net 1,142 1,562
Other assets 1,818 1,960
---------- ----------
Total other assets 4,291 4,565
---------- ----------
Total assets $37,528 $34,999
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 6,399 6,696
Income taxes payable 1,375 --
---------- ----------
Total current liabilities 7,774 6,696
---------- ----------
Deferred compensation and retirement plans 3,363 3,282
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par; authorized, 7,500 shares issued
3,624 and 3,613 shares (including 328 shares related
to the October 14, 1998 stock dividend) 36 36
Additional paid-in capital 10,631 10,593
Retained earnings 18,032 16,670
Equity adjustment from foreign currency translation (248) (211)
---------- ----------
28,451 27,088
Less treasury stock, at cost 351 and 352 shares 2,060 2,067
---------- ----------
Total shareholders' equity 26,391 25,021
---------- ----------
Total liabilities and shareholders' equity $37,528 $34,999
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 28, 1998, August 29, 1997 and August 30, 1996
(Amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
SALES:
Systems $17,266 $12,448 $15,207
Software 4,220 1,050 618
Service and system integration 41,982 6,042 695
------- ------- -------
Total Sales 63,468 19,540 16,520
------- ------- -------
COST OF SALES:
Systems 8,075 6,111 6,613
Software 1,555 210 41
Service and system integration 33,217 4,221 1
------- ------- -------
Total Cost of sales 42,847 10,542 6,655
------- ------- -------
Gross profit 20,621 8,998 9,865
------- ------- -------
OPERATING EXPENSES:
Engineering and development 4,072 3,360 3,325
In process research and development -- 550 --
Selling, general & administrative 14,175 6,945 7,189
Restructuring 168 193 --
------- ------- -------
Total operating expenses 18,415 11,048 10,514
------- ------- -------
OPERATING INCOME (LOSS): 2,206 (2,050) (649)
------- ------- -------
Other income (expense):
Dividend income 24 94 23
Interest income 549 783 869
Interest expense (30) (89) (24)
Other (73) 97 18
------- ------- -------
Total other income, net 470 885 886
------- ------- -------
Income (loss) before income taxes 2,676 (1,165) 237
------- ------- -------
Provision (benefit) for income taxes 1,314 (444) 129
------- ------- -------
Net income (loss) $1,362 ($721) $108
------- ------- -------
Net income (loss) per share - basic $0.42 ($0.22) $0.03
------- ------- -------
Weighted average shares outstanding - basic 3,265 3,246 3,226
------- ------- -------
Net income (loss) per share - diluted $0.41 ($0.22) $0.03
------- ------- -------
Weighted average shares outstanding - diluted 3,340 3,246 3,267
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CSP INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended August 28, 1998, August 29, 1997
and August 30, 1996 (Amounts in thousands)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
COMMON STOCK ADDITIONAL $ FROM FOREIGN TOTAL
-------------------- PAID-IN RETAINED CURRENCY TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS TRANSLATION STOCK EQUITY
-------- -------- ------------ ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 25, 1995 3,536 $35 $10,187 $ 17,283 -- $(1,780) $25,725
Net income -- -- -- 108 -- 108
Exercise of stock options 42 -- 224 -- -- -- 224
Purchase of treasury stock -- -- -- -- -- (253) (253)
-------- -------- ------------ ---------- -------------- ---------- -------------
Balance, August 30, 1996 3,578 35 10,411 17,391 -- (2,033) 25,804
Net loss -- -- -- (721) -- -- (721)
Exercise of stock options 35 1 182 -- -- -- 183
Foreign currency translation
adjustment (211) (211)
Purchase of treasury stock -- -- -- -- -- (34) (34)
-------- -------- ------------ ---------- -------------- ---------- -------------
Balance, August 29, 1997 3,613 36 10,593 16,670 (211) (2,067) 25,021
Net income 1,362 1,362
Exercise of stock options 11 -- 38 -- -- -- 38
Foreign currency translation
adjustment (37) (37)
Issuance of treasury stock -- -- -- -- -- 7 7
-------- -------- ------------ ---------- -------------- ---------- -------------
Balance, August 28, 1998 3,624 $36 $10,631 $18,032 $(248) $(2,060) $26,391
-------- -------- ------------ ---------- -------------- ---------- -------------
-------- -------- ------------ ---------- -------------- ---------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 28, 1998, August 29, 1997 and August 30, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,362 $ (721) $ 108
Adjustments to reconcile net income (loss) to Net cash provided by
operating activities:
Depreciation and amortization 1,512 1,680 983
In process research and development -- 550 --
Deferred compensation and retirement plans 81 147 150
Deferred income taxes (852) (625) (167)
Acquisition costs -- 150 --
Other 237 (564) 24
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable, net 923 2,007 (214)
Increase in inventories (81) (192) (255)
Decrease in prepaid expenses 53 187 120
Decrease in accounts payable and accrued expenses (297) (549) (36)
Increase (decrease) in income taxes payable 1,375 (120) 64
---------- ----------- -----------
Net cash provided by operating activities 4,313 1,950 777
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (52,309) (198,789) (188,892)
Sales of marketable securities 48,255 199,335 189,247
Businesses acquired -- (8,011) --
Property, equipment and improvements (698) (1,111) (1,144)
Other -- -- (100)
---------- ----------- -----------
Net cash used in investing activities (4,752) (8,576) (889)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options 38 183 224
Issuance (purchase) of treasury stock 7 (34) (253)
---------- ----------- -----------
Net cash provided by (used in) financing activities 45 149 (29)
---------- ----------- -----------
Effects of exchange rate change on cash (37) (107) --
Net decrease in cash (431) (6,584) (141)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR: 4,344 10,928 11,069
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR: $ 3,913 $ 4,344 $ 10,928
---------- ----------- -----------
Supplementary cash flow information:
Cash paid for income taxes, net $ 386 $ 75 $ 183
---------- ----------- -----------
Cash paid for interest $ 60 $ 89 $ 24
---------- ----------- -----------
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
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years ended August 28, 1998, August 29, 1997 and August 30, 1996
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 that enhance a system's ability to perform high-speed
arithmetic. The Company also sells Internet software solutions, real-time
process control systems, systems integration and services as well as develops
and markets hardware and software for scientific imaging and over-the-belt
industrial bar-code readers.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year end is the last Friday in August.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated
into US dollars at the exchange rate in effect on the balance sheet date.
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 by 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 Standard No. 121 ("SFAS
No. 121"), the Company assesses the need to record impairment losses on
long-lived assets when indicators of impairment are present. On an ongoing
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
value of long-lived assets based upon events or circumstances that have occurred
since acquisition.
<PAGE>
GOODWILL
The excess of fair value over net assets acquired (goodwill) is principally
amortized over 15 years. Management assesses impairments of goodwill on a
periodic basis by comparing discounted future cash flows to the carrying value
of goodwill.
INVENTORIES
Inventories are stated at the lower of cost or market; with cost determined
principally by 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. Revenue
from service contracts are recognized ratably over the period the service is
performed. In the case of installation, consulting and support services,
revenues are recognized upon completion of such products and services.
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
On March 16, 1998 the Company announced an eleven-for-ten stock split in the
form of a common stock dividend distributed on April 24, 1998 to stockholders of
record on March 24, 1998. All per share data and number of common stock shares
contained in the annual report reflect the stock dividends of March and
October 14, 1998 (see note 13).
The Company adopted Statement of Financial Accounting Standard No. 128
("SFAS No. 128") "Earnings per Share" in its fiscal quarter ending
February 27, 1998, and all historical net income per share data has been
restated to conform to the provisions of SFAS No. 128.
Under SFAS No. 128, basic net income (loss) per common share is computed by
dividing net income (loss) available to common stockholders
<PAGE>
by the weighted average number of common shares outstanding for the period.
Diluted net income (loss) per common share reflects the maximum dilution that
would have resulted from the assumed exercise and share repurchase related to
dilutive stock options and is computed by dividing net income (loss) by the
weighted average number of common stock outstanding.
The reconciliation of the denominators of the basic and diluted net income
(loss) per share computations for the Company's reported net income (loss) is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Weighted average number of shares outstanding - basic 3,265 3,246 3,226
Incremental shares from the assumed exercise of stock options 75 -- 41
------- ------- -------
Weighted average number of shares outstanding - diluted 3,340 3,246 3,267
------- ------- -------
------- ------- -------
(Amounts in thousands)
</TABLE>
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 PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard No. 130 ("SFAS No.130"),
"Reporting Comprehensive Income," which requires the reporting of additional
financial information in a complete set of financial statements. SFAS No. 130
is effective for fiscal years begining after December 15, 1997 and the
Company will adopt this statement in fiscal 1999. Reclassification for
earlier periods is required for comparative purposes. The Company believes
that the adoption of SFAS No.130 will not have a material effect on the
consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and
Related Information," specific disclosures require segment reporting of
information about products and services, major customers, and the material
countries in which the entity holds assets and reports revenues. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and the Company
will adopt this provision in fiscal 1999. The Company believes that the adoption
of SFAS No.131 will not have a material effect on the disclosures in the
company's consolidated
<PAGE>
financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 97-2 "Software Revenue Recognition,"
which supersedes SOP No. 91-1. SOP No. 97-2, is effective for the Company's
fiscal year beginning in August 29, 1998 and provides guidance on applying
generally accepted accounting principles for software revenue recognition
transactions. The Company does not anticipate any material impact on revenues,
results of operations or financial condition as a result of adopting
SOP No. 97-2.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132("SFAS No.132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which standardizes the disclosure requirements for
pensions and other postretirement benefits, requires additional information on
changes in benefit obligations and fair values of plan assets to facilitate
financial analysis and eliminates certain disclosures that are no longer as
useful as they were under preceding pronouncements. The Statement is effective
for fiscal years beginning after December 15, 1997. Management plans to adopt
SFAS 132 in fiscal year 1999 and does not anticipate any material impact on the
disclosures in the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," which requires that all derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company currently expects to adopt SFAS No.133 for the
year ending August 27, 1999. Management has determined there will be no impact
on its results of operations or financial position resulting from the adoption
of SFAS No.133 because the Company currently does not hold derivative
instruments.
RECLASSIFICATIONS
Certain reclassifications were made to the 1996 and 1997 financial statements
to conform to the 1998 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 company developing imaging software products targeted for the
biological science field. The total purchase price was $2,159,000, which was
paid for in cash, included a charge of $550,000 for in-process research and
development and resulted in $1,200,000 in goodwill.
On August 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
transaction was effective as of June 27, 1997. 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.
The following unaudited pro forma financial information is not necessarily
indicative of results of operations that would have occurred had the
transactions taken place at the beginning of periods presented or of the future
results of the combined companies.
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED AUGUST
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Total revenues $47,311 $59,860
--------- ---------
Operating income (loss) $ (493) $ 6,108
--------- ---------
Net income (loss) $ (233) $ 3,062
--------- ---------
Income (loss) per share (diluted) $ (.07) $ .94
--------- ---------
(Amounts in thousands, except per share data)
</TABLE>
3. MARKETABLE SECURITIES
At August 28, 1998 and August 29, 1997, marketable securities consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Marketable equity securities, at cost $ 332 $274
Less: valuation allowance 50 7
--------- ---------
Marketable equity securities, at market 282 267
Bonds and municipal revenue notes, at cost 6,420 5,000
Money market funds and commercial paper 2,661 42
U.S. treasury bills 272 272
--------- ---------
Total $9,635 $5,581
--------- ---------
--------- ---------
(Amounts in thousands)
</TABLE>
Assets of $733,000 and $660,000 at August 28, 1998 and August 29, 1997,
respectively, which are held in a rabbi trust and generally are available only
to pay certain retirement benefits of a former employee, are included in the
above schedule.
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials $1,502 $3,922
Work-in-process 1,138 918
Finished goods 3,668 1,387
------ ------
Total $6,308 $6,227
------ ------
------ ------
(Amounts in thousands)
</TABLE>
5. INCOME TAXES
Reconciliations of expected income tax expense (benefit) to actual income tax
expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense (benefit) $ 910 34.0% $(396) (34.0%) $ 81 34.0%
Increases (reductions) in taxes resulting from:
Dividend exclusion (6) (0.2) (22) (1.8) (6) (2.5)
Tax exempt interest (52) (1.9) (72) (6.2) (64) (27.0)
State income taxes, net of
federal tax benefit (10) (0.4) (107) (9.2) (7) ( 2.9)
Amortization of goodwill 45 1.7 -- --
Foreign operations 264 9.9 123 10.6 72 30.4
Nondeductible life insurance 63 2.3
Change in valuation allowance (17) (0.6) 35 3.0 25 10.6
Other items 117 4.3 (5) (0.5) 28 11.8
------- ------- -------- -------- ------ -------
Income tax expense (benefit) $1,314 49.1% $(444) (38.1%) $129 54.4%
------- ------- -------- -------- ------ -------
------- ------- -------- -------- ------ -------
(Amounts in thousands)
</TABLE>
<PAGE>
For the years ended August 28, 1998 and August 29, 1997, temporary differences
which give rise to deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $1,048 $ 962
Other accruals 158 77
Bad debt reserves 91 41
In process research and development 203 --
Inventory capitalization and reserves 819 451
Research and development credits 340 69
Unrealized loss on securities 20 --
Accumulated depreciation and reserves -- 156
Other -- 5
--------- ---------
Gross deferred tax assets 2,679 1,761
Less: valuation allowance (360) (377)
--------- ---------
Deferred tax asset less valuation allowance 2,319 1,384
DEFERRED TAX LIABILITY:
Accumulated depreciation and amortization (83) --
--------- ---------
Net deferred tax asset $2,236 $1,384
--------- ---------
--------- ---------
(Amounts in thousands)
</TABLE>
<PAGE>
The valuation allowance was $360,000 and $377,000 at August 28, 1998 and
August 29, 1997, respectively. 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 period 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 28, 1998.
The provisions for income taxes are comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CURRENT:
Federal $ 372 $ (45) $ 267
State 462 (28) 28
Foreign 1,333 123 --
-------- -------- --------
2,167 50 295
DEFERRED:
Federal (378) (360) (128)
State (475) (134) (38)
-------- -------- --------
(853) (494) (166)
-------- -------- --------
$1,314 $(444) $ 129
-------- -------- --------
-------- -------- --------
(Amounts in thousands)
</TABLE>
<PAGE>
6. PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements, net consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land $ 587 $ 587
Building and improvements 1,356 1,356
Equipment 12,201 11,503
Automotive equipment 48 48
--------- ---------
14,192 13,494
Less accumulated depreciation and amortization 10,825 9,638
--------- ---------
Property, equipment and improvements, net $3,367 $3,856
--------- ---------
--------- ---------
(Amounts in thousands)
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Accounts payable $1,846 $2,325
Commissions 256 367
Compensation and fringe benefits 2,704 1,587
Customer advances 86 534
Professional fees and shareholders' reporting costs 348 546
Taxes, other than income 757 869
Other, individually less than 5% of current liabilities 402 468
--------- --------
$6,399 $6,696
--------- --------
--------- --------
(Amounts in thousands)
</TABLE>
<PAGE>
8. SHAREHOLDERS' EQUITY
In 1997, the Company adopted the 1997 Stock Option Plan covering 181,500
shares, which was ratified by the shareholders in January 1998. In 1991, the
Company adopted the 1991 Stock Option Plan covering 302,500 shares of common
stock. Under the Plans, 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 plans provide for issuance of options
at their fair market value on the date of grant. These options vest over a
period of five years, do not vest in the first year, and expire ten years
from the date of grant. In the 1991 plan, up to 24,200 shares are allocated for
annual non-discretionary grants of 1,210 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 28, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------------------------------
WEIGHTED AVERAGE
EXERCISE PRICE OF 1997 1991 1981 TOTAL
SHARES UNDER PLANS PLAN PLAN PLAN PLAN
------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Outstanding August 25, 1995 $5.84 -- 167,041 125,991 293,032
Granted $6.92 -- 7,260 -- 7,260
Exercised $5.27 -- -- (42,653) (42,653)
Expired & terminated $6.00 -- (71,572) (756) (72,328)
Outstanding August 30, 1996 $5.99 -- 102,729 82,582 185,311
Granted $6.01 -- 140,663 -- 140,663
Exercised $4.66 -- -- (36,784) (36,784)
Expired & terminated $6.34 -- (36,119) (28,163) (64,282)
Outstanding August 29, 1997 $6.20 -- 207,273 17,635 224,908
Granted $6.66 -- 56,870 -- 56,870
Exercised $6.50 -- (4,949) (4,084) (9,033)
Expired & terminated $5.32 -- (33,953) (1,210) (35,163)
Outstanding August 28, 1998 $5.72 -- 225,241 12,341 237,582
Available for future grants -- 181,500 72,309 -- 253,809
Exercisable $6.33 -- 86,815 12,341 99,156
</TABLE>
<PAGE>
The grant date fair value of each stock option is estimated using the
following assumptions: an expected life of 5 years, expected volatility and
dividend yields of 0% and a weighted average risk-free interest rate of 5.75% in
1998 and 6.19% in 1997. The weighted average grant date fair values of options
granted in 1998 and 1997 were $6.46 and $5.23, respectively.
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 expenses have been
recognized in the consolidated financial statements for such plans. The
following assumptions were used in the calculation of these values for fiscal
1997 and 1998, respectively: risk free interest rate of 6.19% and expected life
of 5 years. Had compensation costs for the Company's 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 No.123, "Accounting
for Stock based Compensation," the Company's net income (loss) would have been
adjusted to the pro forma amounts indicated below:
The effects of applying SFAS No.123 as shown in the above pro forma
disclosure is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation
expenses related to grants made prior to fiscal 1996.
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net income (loss) as reported $1,362 $(721)
Pro forma $1,304 $(723)
Income (loss) per share diluted as reported $ .41 $(.22)
Pro forma $ .39 $(.22)
(Amounts in thousands, except per share data)
</TABLE>
STOCK PURCHASE PLAN
In October, 1997 the Company adopted an Employee Stock Purchase Plan (the
1997 Purchase Plan), which was ratified by the shareholders. The 1997 Purchase
Plan reserved 302,500 shares of Common Stock for issuance thereunder. Under the
stock purchase plan, the Company's employees may purchase shares of Common Stock
at a price per share that is 85% of the lesser of the fair market value as of
the beginning or end of the semi-annual option period. No shares have been
issued under the plan at August 28, 1998.
<PAGE>
9. DEFERRED COMPENSATION AND RETIREMENT PLANS
The Company has a 401(k) Retirement Plan under which the Company matches a
portion of the employee's salary reduction contributions and may make
discretionary contributions to the plan. All full-time employees with 90 days of
continuous service are eligible for the plan. All Company contributions are
fully vested. Contributions by the Company were $136,000, $94,000 and $145,000
for 1998, 1997, and 1996, 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 former 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 1998, 1997 and 1996 amounted to $336,000,
$302,000 and $277,000, respectively.
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 28, 1998, the Company was obligated under noncancelable operating
leases as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AUGUST OPERATING LEASES:
------------------------- ----------------------
(Amounts in thousands)
<S> <C>
1999 $1,157
2000 1,023
2001 929
2002 483
2003 474
thereafter 728
</TABLE>
Occupancy costs under the operating leases approximated $1,221,000 in 1998,
$221,000 in 1997 and $52,000 in 1996.
<PAGE>
STOCK REPURCHASES:
On October 9, 1986 the Board of Directors authorized the Company to
repurchase up to 313,538 of the outstanding stock at market price. On September
28, 1995, the Board of Directors authorized the Company to repurchase up to
181,500 additional shares of the outstanding stock at market price. The timing
of stock purchases are made at the discretion of management. On August 28, 1998,
the Company repurchased 351,477 or 71% of the total shares authorized to be
purchased.
11. SALES BY MAJOR CUSTOMERS AND GEOGRAPHIC AREAS:
Sales to individual customers constituting 10% or more of total sales were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Customer A -- $2,370 12% $3,394 21%
Customer B -- $2,114 11% --
Customer C $10,105 16% -- --
Customer D $ 9,294 15% -- --
(Amounts in thousands)
</TABLE>
The Company anticipates that, for the foreseeable future, a significant
percentage of its sales will be dependent upon a relatively small number of
customers.
<PAGE>
The Company's sales by geographic area are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
North America $21,245 $13,324 $14,474
Far East 1,515 1,039 1,407
Europe 40,594 5,090 574
Other 114 87 65
------- ------- -------
Totals $63,468 $19,540 $16,520
------- ------- -------
------- ------- -------
(Amounts in thousands)
</TABLE>
12. RESTRUCTURING EXPENSES:
In March 1998, MODCOMP had a reduction of 20 individuals in its domestic
workforce. The expenses related to the action were approximately $168,000 for
severance costs. In March 1997, CSP Inc. had a reduction in its workforce of
thirteen positions primarily in manufacturing operations and Vision Systems. The
expenses related to this action were approximately $125,000 for severance costs.
The entire amounts have been disbursed by the Company.
13. SUBSEQUENT EVENTS:
On October 14, 1998, the Company announced an eleven-for-ten stock split in
the form of a Common Stock dividend distribution on November 16, 1998 to
stockholders of record on October 26, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CSP Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CSP Inc. and
subsidiaries as of August 28, 1998 and August 29, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended August 28, 1998. 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 financial statements referred to above
present fairly, in all material respects, the financial position of CSP Inc. and
subsidiaries as of August 28, 1998 and August 29, 1997 and the results of their
operations and their cash flows for each of the years in the three year period
ended August 28, 1998, in conformity with generally accepted accounting
principles.
October 5, 1998, except as to note 13,
which is dated as of October 14, 1998
Boston, Massachusetts
<PAGE>
INTERNATIONAL OFFICES
<TABLE>
<CAPTION>
CANADA FRANCE GERMANY NORTHERN EUROPE
AND INTERNATIONAL
<S> <C> <C> <C>
MODCOMP Canada, Ltd MODCOMP France, S.A. Modular Computer System, GmbH Modular Computer Services, Inc.
1415 Lawrence Avenue West Centrale Parc-B/ootiment 7 Oskar-JSger-Strasse 125-143 Centennial Court
Suite 102 Avenue Sully Prud'homme D-50825 Ksln Easthampstead Road
North York, Ontario 92298 Chatenay Malabry Cedex Germany Bracknell, Bershire RG12 1YQ
Canada M61 1A9 France Tel: 49-221-954466-0 England
Tel: (416) 240-7906 Tel: (33)-1 41 87 30 00 Fax: 49-221-954466-1 Tel: 44-1344-484-400
Fax: (416) 240-9065 Fax: (33)-1 46 61 96 81 www.modcomp.de Fax: 44-1344-484-333
www.modcomp.com www.modcomp.com www.modcomp.co.uk
</TABLE>
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
DIRECTORS OFFICERS CORPORATE OFFICES GENERAL INFORMATION
GENERAL INFORMATION
<S> <C> <C> <C>
Alexander R. Lupinetti Alexander R. Lupinetti CSP Inc. General Counsel
Chairman of the Board, Chairman of the Board, 40 Linnell Circle Foley, Hoag & Eliot
President and Chief Executive President and Chief Executive Billerica, MA 01821-3901 Boston, MA
Officer Officer Tel: (978) 663-7598
CSP Inc. CSP Inc. Fax: (978) 663-0150 Transfer Agent
www.cspi.com American Stock Transfer Company
C. Shelton James John P. Clary New York, NY
President President Staranalytics, Inc.
Fundamental Management Corp. MODCOMP, Inc. 8550 Lee Highway, Suite 400 Auditors
Fairfax, VA 22031-1515 KPMG Peat Marwick LLP
J. David Lyons Gary W. Levine Tel: (703) 206-2230 Boston, MA
President Vice President of Finance, Fax: (703) 208-1960
Autin International Inc. Chief Financial Officer and www.staranalytics.com Stock Information
Clerk Stock Traded Over the Counter
Sanford Smith CSP Inc. MODCOMP, Inc. Headquarters NASDAQ symbol: CSPI
President, Therapeutics 1650 West McNali Road
Incorporated Michael Most, PhD. Ft. Lauderdale, FL 33309
Genzyme Corp. President Tel: (954) 974-1830
Staranalytics, Inc. Fax: (954) 977-1900
Robert M. Williams www.modcomp.com
Vice President Bradley E. Stamp
International Executive Vice President of Sales and
Service Corp. Support
MultiComputer Division
CSP Inc. Form 10-K
A copy of the Company's Annual Report on Form 10-K
Michael M. Stern for the fiscal year 1993 as filed with the Securities
Vice President of Operations, and Exchange Commission will be furnished without
MultiComputer Division and charge to any stock-holder upon written request to
Treasurer the Vice President of Finance, CSP Inc., 40 Linnell
CSP Inc. Circle, Billerica, MA 01821.
James A. Waggett
Vice President of Business
Development
MultiComputer Division
CSP Inc.
</TABLE>
<PAGE>
Exhibit 23.0
Consent of Independent Certified Public Accountants
The Board of Directors
CSP Inc.
We consent to incorporation by reference in the registration statements
(Nos. 2-79414 and 33-11815) on Form S-8 of CSP Inc. of our report dated
October 5, 1998, except as to Note 13, which is dated as of October 14, 1998,
relating to the consolidated balance sheets of CSP Inc. and Subsidiaries as
of August 28, 1998 and August 29, 1997, and the related consolidated statements
of operations, shareholder's equity and cash flows and related schedule for
each of the years in the three-year period ended August 28, 1998, which reports
appear or are incorporated by reference in the August 28, 1998 report on
Form 10-K of CSP Inc.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
November 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000356037
<NAME> CSP INC
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> AUG-29-1997 AUG-28-1998
<PERIOD-START> AUG-31-1996 AUG-30-1997
<PERIOD-END> AUG-29-1997 AUG-28-1998
<CASH> 4,344 3,913
<SECURITIES> 5,581 9,635
<RECEIVABLES> 8,878 8,057
<ALLOWANCES> 257 (359)
<INVENTORY> 6,227 6,308
<CURRENT-ASSETS> 26,578 29,870
<PP&E> 13,494 14,192
<DEPRECIATION> (9,638) (10,825)
<TOTAL-ASSETS> 34,999 37,528
<CURRENT-LIABILITIES> 7,738 7,774
<BONDS> 0 0
0 0
0 0
<COMMON> 30 36
<OTHER-SE> 24,991 26,355
<TOTAL-LIABILITY-AND-EQUITY> 34,999 37,528
<SALES> 19,540 63,468
<TOTAL-REVENUES> 19,540 63,468
<CGS> 10,542 42,841
<TOTAL-COSTS> 11,048 18,415
<OTHER-EXPENSES> 974 500
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 89 30
<INCOME-PRETAX> (1,165) 2,676
<INCOME-TAX> 444 1,314
<INCOME-CONTINUING> (721) 1,362
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (721) 1,362
<EPS-PRIMARY> (.22) .42
<EPS-DILUTED> (.22) .41
</TABLE>
