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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 27, 1999
COMMISSION FILE NUMBER 0-10843
CSP INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2441294
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
40 LINNELL CIRCLE, BILLERICA, MASSACHUSETTS 01821-3901 (978)663-7598
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common
Stock (par value $0.01 per share)
Indicate by check mark whether 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]
As of November 3, 1999, there were 3,576,291 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $5.00 of a share as reported for November 3, 1999 on
the NASDAQ National Market System) held by non-affiliates was approximately
$17,881,455.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Proxy Statement to be dated
November 30, 1999 in connection with Registrant's 1999 Annual Meeting of
Stockholders scheduled to be held on January 11, 2000 are incorporated by
reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
CSP, Inc. ("CSPI" or the "Company") was founded in 1968 and is based in
Billerica, Massachusetts, just off Route 128 in the Boston computer corridor. To
meet the diverse requirements of its industrial, commercial, scientific and
defense customers worldwide, CSPI and its subsidiaries develop and market
Internet software for e-commerce solutions, image processing software, network
management integration services and high-performance computer systems.
On June 27, 1997, CSPI acquired the assets of MODCOMP/Cerplex L.P
("MODCOMP"), a wholly owned subsidiary of The Cerplex Group Inc. for $8,709,000
in cash. This transaction was accounted for as a purchase. This multi-national
subsidiary provides network integration services including, consulting, system
integration and outsourcing. ViewMax, MODCOMP's newest product, is an Internet
software product that allows companies to easily integrate their IT systems with
Internet technology for e-commerce applications. MODCOMP sells all products
through its own direct sales force in the U.S., Germany, France and the United
Kingdom. MODCOMP sells via a worldwide organization of distributors in the rest
of the world.
In 1988, the Company established the Scanalytics product group to develop
and market imaging systems for molecular and cell biology. In June 1997, the
Company acquired the assets of Signal Analytics Corp. ("Signal"), a software
company that provides products for scientific imaging to the life science and
biotechnology fields. CSPI purchased the assets of Signal for $2,159,000 in
cash. This transaction was accounted for as a purchase. In June 1997, the
Scanalytics product group was consolidated with the assets acquired from Signal
and was setup as a wholly owned subsidiary called Scanalytics, Inc.
("Scanalytics"). Scanalytics specializes in the development and marketing of
highly sophisticated image capture and analysis software products used by
researchers in the biological and physical sciences. By integrating these
software products with a diverse group of image-capture devices, Scanalytics is
able to solve application-specific problems in biotechnology and life science
research including digital microscopy, genomics, and high-throughput screening.
Scanalytics sells both direct and through a network of distributors and
resellers.
The MultiComputer Division helps its customers solve high-performance
computing problems in the medical imaging and defense markets by supplying
multiprocessing systems with powerful real-time I/O capabilities that require
minimum physical space and power. These systems are used in a broad array of
applications, including radar, sonar and surveillance signal processing. The
MultiComputer Division sells all products through its own direct sales force in
the U.S. and via a worldwide organization of distributors in the rest of the
world.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company considers its products to be of three classes, Systems,
Software, and System Integration and Service. Systems accounted for 30%, 27%,
and 63% of total revenues for fiscal years 1999, 1998, and 1997, respectively.
Software accounted for 6%, 4%, and 3%, of total revenues for fiscal years 1999,
1998, and 1997, respectively. System Integration and Service accounted for 64%,
69%, and 34%, of total revenues for fiscal years 1999, 1998, and 1997,
respectively.
Additional segment information and financial information about the
Company's foreign operations is included in Note 11 to the Consolidated
Financial Statements of the Registrant included in Item 8.
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company and its subsidiaries develop and market Internet software for
e-commerce solutions, image processing software, network management integration
services and high-performance computer systems.
PRODUCTS AND SERVICES
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 Division'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 and
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, and advanced vision
applications.
2000 SERIES Multicomputer Products
The 2000 SERIES MultiComputer Products ("2000 SERIES") 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. In fiscal
year 1999, the MultiComputer Division introduced several new product additions
to the 2000 SERIES, its latest generation of products designed specifically for
high-performance computing applications.
The 2000 SERIES 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
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operating system. Computational nodes based on PowerPCs, from Motorola/IBM, and
SHARCs, from Analog Devices, provide heterogeneous processor architecture. The
incorporation of open, proven, and established technologies in the 2000 SERIES
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, simulation and surveillance signal processing.
The entry-level price for a 2000 SERIES product is approximately $25,000.
Large systems sell for several million dollars. Volume discounts are offered.
Supercard Products
SuperCards are VME-based board level products that are incorporated into
customized signal processing systems by OEM customers. 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. CSPI was
notified 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 of 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. Management believes current
inventory levels of this product are adequate to support future customer needs.
SCANALYTICS, INC.
Scanalytics gives "sight" to computers by creating software that captures
images from digital cameras and scanners and extracts information from those
images. The Company integrates those software products with off-the-shelf
hardware components to create high-performance vision systems that support
scientific researchers in the biological and the physical sciences. During 1999,
Scanalytics focused its efforts in three applications areas of biotechnology and
life science research: digital microscopy, genomics, and high-throughput
screening. Scanalytics products are sold directly to researchers and through a
network of international and domestic dealers, OEMs, and VARs.
Digital Microscopy
IPLab is a general-purpose image analysis software package. It was
originally available only on Macintosh computers, where IPLab has been called
"the de facto standard in Macintosh image analysis". IPLab has now been ported
to work within the Windows operating systems. Add-on modules for IPLab, called
Extensions, provide application-specific functionality. These Extensions can be
written by Scanalytics, customers, or third party developers. Scanalytics makes
specific Extensions for multi-fluorescence microscopy, calcium-ratio imaging,
3-D image visualization, time lapse studies, and microscope automation. The list
price of Basic IPLab is $2,000 and extensions range in price from $500 to
$3,000.
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Genomics
GeneProfiler (formerly called RFLPScan) is the backbone of Scanalytics
software products oriented towards genomics. It is widely recognized as the most
sophisticated and easy to use software of its kind in the industry, which is
evidenced by the fact that GeneProfiler has commanded a premium price relative
to competing products. Scanalytics makes several other products within this
group: IPLab Gel for Macintosh and One D Scan for Windows provide basic gel
documentation and analysis, Gellab II+ is used for 2D gel analysis, and DNAScan
is a package for automatic sequencing of DNA sequencing gels. Prices for these
products range from $1,000 to $6,500.
High Throughput Screening
High-throughput screening systems are characterized by a high density of
samples, automated analysis and experimental repeatability. During 1999,
Scanalytics introduced two new products in this burgeoning field: MicroArray
Suite, and ELISpot Imager. MicroArray Suite is an extension to IPLab which was
developed by and licensed from the National Center for Human Genome Research at
the National Institutes of Health. This software package assists researchers in
analyzing microarrays which are devices that let researchers evaluate potential
drug candidates by testing them against thousands of DNA fragments
simultaneously. MicroArray Suite is priced at $8,500. ELISpot Imager was
developed by Scanalytics in collaboration with the Navy Medical Research Center.
This system of software and hardware is used for immunological assays (ELISpot
stands for Enzyme Linked Immuno-Spot). ELISpot Imager is priced at $29,995.
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.
MODCOMP's computer systems are generally utilized in industrial plants,
research laboratories and data processing applications and operate in real-time.
The purchase prices of MODCOMP's computer systems are typically priced from
$6,000 to $250,000, depending upon customer requirements.
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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 the real-time, process control market place.
During fiscal year 1999 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.
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 required in this marketplace. Prices range from $3,000 to $35,000.
Legacy-web Internet Integration Solutions
The Company also offers specialized programming and software engineering
services to supply customers with customized e-commerce solutions.
In fiscal year 1997, MODCOMP launched ViewMax in the United States. ViewMax
is a development environment that allows MODCOMP to rapidly re-engineer and
integrate legacy systems such as mainframe, midrange, and other diverse host
systems with Internet technology. Using ViewMax technology, MODCOMP creates
solutions that can extend corporate data to a much wider audience via a
corporate Intranet, Extranet, or the Internet. Using ViewMax, MODCOMP creates
solutions that can also integrate Electronic Commerce transactions with existing
legacy systems. Although the product has broad potential, the early adopters of
this technology have used it primarily for facilitating Electronic Commerce and
creating Extranets. Current ViewMax customers are in the insurance, financial,
health services, governmental, and manufacturing/ distribution markets. Prices
for ViewMax range from $40,000 to $250,000.
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MODCOMP markets solutions using ViewMax directly to end-users. The direct
market is cross industry, to companies of substantial size, and is not dependent
on the fluctuations of any particular business segments. ViewMax is positioned
primarily as an integration solution, 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
Applications for MultiComputer products include primarily sonar and radar
systems as well as simulators, 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 arena. In the case of
Scanalytics and MODCOMP, the Company offers complete application solutions to
end-users.
The market for new high-performance signal and image processing military
systems continues to shrink overall with fewer new programs being funded as the
number of existing system platforms (ships, planes, tanks, etc.) is reduced in
number. However, programs to upgrade existing military signal and image
processing systems continues to be steady as they are considered very essential
for maintaining our military leadership.
Both new and upgrade programs require a substantial period of development
and evaluation before products are deployed into field use. With the reduction
in defense spending, time from development to deployment varies based on the
program and may often stretch out beyond the usual twelve to twenty-four months.
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 and has been initiated by 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 for future COTS programs. Such systems are mainly for
radar, sonar and night vision applications.
Several currently deployed programs utilize SuperCards such as 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 been running for years, but their deployment is nearing
completion. SuperCards are also sold to medical imaging equipment suppliers on
an OEM basis. There are no new SuperCard programs anticipated.
Sales to individual customers constituting 10% or more of total sales
consisted of sales to E-Plus of $7,804,000 (15%) in 1999. This customer is a
"wireless" telecommunication company in Germany. The Company anticipates that,
for the foreseeable future, a significant percentage of its sales will be
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dependent upon a relatively small number of customers.
The Company markets its products through various sales offices in the U.S.,
Canada, France, Germany and England (for a detailed list see Item 2 of Form 10-K
contained herein). 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-computer
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 in their sales and servicing efforts. This new focus as a "total
solutions company" allows MODCOMP to meet the needs of their customers with a
variety of products including internally produced as well as those of
third-party manufacturers.
Geographically, Europe accounts for approximately 56% of total sales. The
significant decrease in European sales was due to MODCOMP business.
Historically, approximately 80% of MODCOMP's revenue is generated
internationally. During the prior 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.
The following table sets forth the amounts (in thousands of dollars) and
percentage of sales by geographical area during fiscal years 1999, 1998 and
1997.
<TABLE>
<CAPTION>
Year Ended August
1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
North America $18,632 36% $21,245 33% $13,324 68%
Far East 4,347 8% 1,515 3% 1,039 5%
Europe 28,692 56% 40,594 64% 5,090 26%
Other 24 -% 114 -% 87 1%
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$51,695 100% $63,468 100% $19,540 100%
============================================
</TABLE>
COMPETITION
CSPI MULTICOMPUTER DIVISION
The MultiComputer market is 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 DSP board manufacturers including DY4, Pentek,
SBS, Spectrum Signal and Alacron. In the lower
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performance/higher density segment of the market general-purpose computer and
single board computer manufacturers such as Motorola, Force and Hewlett Packard
may compete. 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.
SCANALYTICS, INC.
In the digital microscopy market, Scanalytics major competitors are Media
Cybernetics, Universal Imaging, and ImproVision. Other competitors include
Compix, Carl Zeiss, Intelligent Imaging, and QED Imaging. In the genomics
market, major competitors include Genomic Solutions, Media Cybernetics, BioRad,
and Alpha Innotech. In the high-throughput screening market, the only other
software company that competes directly with Scanalytics is BioDiscovery. All
these competitors range from small, single product companies to large,
multinational instrument companies. Scanalytics maintains its competitive
advantage by offering high-value solutions.
MODCOMP, INC.
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
alternative open systems hardware platforms and industry-specific tailored
application software packages.
MODCOMP's direct competition with its real-time UNIX operating system
includes 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 this product is
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
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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 this 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 different 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 MultiComputer 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.
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. Myricom has assured the
Company that supplies will continue to be available for reasonable quantities
required.
SuperCard products were designed using the Intel i860 RISC microprocessor.
CSPI was notified 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 committed to 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
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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 to approximately 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 from the Fairfax
Virginia facility. Scanalytics performs system integration of computer equipment
with various image capture devices, such as microscopes or digital cameras, 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 process. The
production cycle of an individual system generally takes between 30 and 45 days,
depending on its complexity.
MODCOMP's manufacturing operations require a wide variety of mechanical and
electronic components, raw materials and other supplies. MODCOMP has more than
one commercial source of supply for most of the components and raw materials
that 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,
and 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, Port St.
Lucie, Florida, Owings Mills, 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
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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 courses of one to three weeks' duration on a fee
basis either at their or the customer's location.
Field and customer service support is provided through offices
strategically located throughout the world.
RESEARCH AND DEVELOPMENT
During fiscal 1999, CSPI's expenses (including depreciation) for
engineering and development were approximately $4,199,000 (8% of sales) compared
to approximately $4,072,000 (6% of sales) and $3,360,000 (17% of sales) in
fiscal years 1998 and 1997, 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 ViewMax product, Real/IX PX and AccessPoint for SCADA
solutions.
During 1999, Scanalytics invested heavily in porting its IPLab software to
work under the Windows operating systems. This project was essentially completed
during fiscal 1999. Scanalytics also worked on three other projects; updating
the Macintosh products to maintain their competitiveness; developing the ELISpot
Imager; and improving GeneProfiler for specific OEM requirements.
Of CSPI MultiComputer's Division and Scanalytics 77 employees, 22
professional and staff employees were engaged in software and hardware
engineering and development activities as of August 27, 1999.
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
mini-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 contact
switching required by the hard real-time market. REAL/IX PX runs on the Intel
486 and Pentium line of computers.
Of MODCOMP's 171 employees, 6 professional and staff employees are
engaged in software and hardware engineering and development.
Page 12
<PAGE>
The Company does not have any patents that are material to its business.
BACKLOG
The Company's backlog of customer orders and contracts was approximately
$6,100,000 at August 27, 1999 as compared to $9,781,000 at August 28, 1998. The
backlog of the Company can fluctuate greatly. These fluctuations can be due to
the timing of receiving large orders for integration services and OEM purchases.
EMPLOYEES
On August 27, 1999, the Company had 248 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.
(C) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
A summary of net sales, attributable to CSPI's foreign and domestic
operations for the fiscal years ended August 1999, 1998 and 1997 is presented at
Note 11 to the Consolidated Financial Statements of the Registrant included in
item 8.
Page 13
<PAGE>
ITEM 2. PROPERTIES
Listed below are CSPI's principal facilities as of August 27, 1999.
Management considers all facilities listed below to be suitable for the
purpose(s) for which they are used, including manufacturing, research and
development, sales, marketing, service, and administration.
<TABLE>
<CAPTION>
Owned Approx.
or Floor
Location Principal Use Leased Area
- ---------------------------- ------------------------- ------- -----------
<S> <C> <C> <C>
CSP, Inc. Corporate Headquarters Owned 40,000 S.F.
40 Linnell Circle Manufacturing
Billerica, MA Sales, Marketing, and
Administration
Scanalytics, Inc. Corporate Headquarters Leased 3,518 S.F.
8550 Lee Highway Sales, Marketing, and
Suite 400 Administration
Fairfax, VA
MODCOMP, Inc. Corporate Headquarters Leased 77,429 S.F.
1650 West McNab Road Sales, Marketing, and
Ft. Lauderdale, FL Administration
MODCOMP Canada, Ltd. Sales, Marketing, and Leased 730 S.F.
530 Otto Road Administration
Unit 11A
Mississaugu, Ontario
Canada
MODCOMP France, S.A. Service and Leased 4,101 S.F.
Centrale Parc-Batiment 7 Administration
Avenue Sully Prud'homme
92298 Chatenay Malabry Cedex
France
Modular Computer System, GmbH Sales, Marketing, and Leased 1,837 S.F.
Oskar-Jager-Strasse 125-143 Administration
D-50825 Koln
Germany
Modular Computer Services, Inc. Sales, Marketing, and Leased 3,200 S.F.
Centennial Court Administration
Easthampstead Road
Bracknell, Berkshire
England
MODCOMP Systemhaus GmbH Sales, Marketing and Leased 945 S.F.
Gartenstr. 23-27 Service
61352 Bad Homburg
</TABLE>
In addition to the facilities listed above, CSPI also leases space in
various domestic and international industrial centers for use as sales and
service offices.
Page 14
<PAGE>
The Company owns approximately 2.8 acres of land adjacent to the Company's
corporate headquarters in Billerica, Massachusetts. 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.
ITEM 3. LEGAL PROCEEDINGS
MODCOMP is currently the 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.
Page 15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded in the over-the-counter market
and is quoted on the NASDAQ System under the symbol "CSPI". The following table
sets forth the range of closing high and low selling prices for the Common Stock
as reported by NASDAQ. This data reflects the effect of the stock dividends of
April 1999, March 1998 and October 1998.
<TABLE>
<CAPTION>
Fiscal Year: 1999 1998
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $7.84 $6.20 $6.10 $5.64
2nd Quarter 8.18 6.59 6.65 5.29
3rd Quarter 8.12 5.17 10.02 6.38
4th Quarter 7.00 4.63 8.57 6.48
</TABLE>
As of November 3, 1999, there were 3,576,291 shares of Common Stock
outstanding, held of record by approximately 135 stockholders. The Company
believes the number of beneficial owners of shares (including shares held in
street name) at that date were approximately 800.
The Company has never paid any cash dividends on its Common Stock. The
Company's present policy is to retain earnings to finance expansion and growth,
and no change in the policy is anticipated.
On April 12,1999 the Company announced an eleven-for-ten stock split in the
form of a common stock dividend distributed to stockholders of record on April
21, 1999.
ITEM 6. SELECTED FINANCIAL DATA
This information is set forth in the Selected Financial Data section of
Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
This information is set forth in the Management's Discussion and Analysis
of Financial Conditions and Results of Operations section of Item 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to the
risks associated with foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments, and minimizes its exposure through
judicious management of its international assets and liabilities.
The Company minimizes its foreign inventory levels, and enters into foreign
currency transactions only in those countries where it has foreign operations,
and is therefore able to offset resultant assets with local liabilities.
Page 16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and supplementary data for
CSP Inc. are included herein.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 25
Consolidated Balance Sheets as of August 27, 1999 and
August 28, 1998 26
Consolidated Statements of Operations for the years ended
August 27, 1999, August 28, 1998 and August 29, 1997 27
Consolidated Statements of Stockholders' Equity for the years
ended August 27, 1999, August 28, 1998 and August 29, 1997 28
Consolidated Statements of Cash Flows for the years ended
August 27, 1999, August 28, 1998 and August 29, 1997 29
Notes to Consolidated Financial Statements 30-42
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
Page 17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS
Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
Proxy Statement to be dated November 30, 1999 in connection with its Annual
Meeting of Stockholders to be held on January 11, 2000 ("Registrant's 1999 Proxy
Statement").
(B) IDENTIFICATION OF 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 (54) 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 1987 to 1996.
Gary W. Levine (51) Vice President of Finance and Chief Financial
Officer of CSPI since September 1983; Controller
of CSPI from May 1983 to September 1983.
Michael M. Stern (62) Mr. Stern resigned his position as Vice
President of Operations and Treasurer
in September 1999. He will continue with
the Company on a part-time basis, working
on special projects in manufacturing and
engineering; Director of CSPI from 1968 to
January 1984; Vice President of Operations of
CSPI from 1968 to September 1999; Treasurer
of CSPI from 1968 to September 1999.
Amy J. Dexter (33) Treasurer of CSPI since September 1999;
Corporate Controller of CSPI since February
1999 and from October 1993 to March 1997;
Manager of Financial Reporting of SierraCom
from July 1998 to February 1999; Controller of
Microwave Radio Communications, a division of
California Microwave, Inc. (currently known as
Adaptive Broadband) from March 1997 to July
1998; Senior Accountant at Robert Allen Fabrics
from October 1992 to October 1993; Supervising
Senior Accountant at KPMG LLP from July 1988 to
October 1992.
</TABLE>
Page 18
<PAGE>
<TABLE>
<S> <C>
Michael Mort, Ph.D. (48) President of Scanalytics from June 1997 to
present; President and owner of Signal Analytics
Corp. from June 1997 to 1987.
William E. Bent, Jr. (43) Vice President of Engineering for MultiComputer
Division from October 1999 to present; Director
Of Engineering for MultiComputer Division from
March 1996 to October 1999; Sr. Technical
Manager of Optronics, An Intergraph Division,
from 1989 to March 1996.
Bradley E. Stamp (46) Vice President of Sales and Support for
MultiComputer Division 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.
James A. Waggett (62) Director of CSPI from 1968 to January 1984;
Vice President of Business Development for
MultiComputer Division from September 1998
to present; Vice President of Advanced
Development from 1974 to September 1998;
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>
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
None
(D) FAMILY RELATIONSHIPS
There is no family relationship between any director and executive officer
of the Company.
(E) BUSINESS EXPERIENCE
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in registrant's
1999 Proxy Statement with respect to the business experience of Registrant's
directors. The information called for by this Item 10 with respect to executive
officers of Registrant is included in Part III Item 10 (b) of this Form 10-K.
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
1999 Proxy Statement.
Page 19
<PAGE>
(G) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in Registrant's 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Executive Compensation" in Registrant's
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Registrant's 1999 Proxy Statement.
(B) SECURITY OWNERSHIP OF MANAGEMENT
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Registrant's 1999 Proxy Statement.
(D) CHANGES IN CONTROL
The Registrant knows of no contractual arrangements, including any pledge by
any person of securities of the Registrant, the operation of which may at a
subsequent date result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the captions "Security Ownership of Certain
Beneficial Owners and Management," "Election of Directors" and "Executive
Compensation" in Registrant's 1999 Proxy Statement.
Page 20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENT FILED AS PART OF THIS REPORT:
Independent Auditors' Report
Consolidated Balance Sheets as of August 27, 1999 and August 28, 1998
Consolidated Statements of Operations for the years ended August 27,
1999, August 28, 1998 and August 29, 1997
Consolidated Statements of Stockholders' Equity for the years ended
August 27, 1999, August 28, 1998, and August 29, 1997
Consolidated Statements of Cash Flows for the years ended August 27,
1999, August 28, 1998, and August 29, 1997
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
Schedule II Valuation and Qualifying Accounts
All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the Notes thereto of the Registrant included in Item 8, or is not
applicable, material or required.
(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 Commissions Rules
of Practice. The location of each document so incorporated by reference is noted
parenthetically.
3.1 Articles of Organization and amendments thereto, of the Company as of the
end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended August
31, 1990)
3.2 By-Laws of the Company, as amended through March 21, 1995
10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to the Form
S-8, File No. 2-79414, 1987 Registration Statement)
10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated
January 5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414, 1987
Registration Statement)
Page 21
<PAGE>
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)
10.12 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement dated
February 6, 1995 (Exhibit 10.13 to Form 10-K for the year ended August 25,
1995)
10.13 Employment Agreement between CSP Inc. and Mr. Lupinetti dated September
12, 1996 (Exhibit 10.14 to Form 10-K for the year ended August 30, 1996)
10.14 Signal Analytics Purchase Agreement (Exhibit 10.14 to Form 10-K for the
year ended August 29, 1997)
10.15 Modcomp/Cerplex L.P. Purchase Agreement (Exhibit 10.15 to Form 10-K for
the year ended August 29, 1997)
11.0 Computation of Earnings (loss) Per Share for the years ended August 27,
1999, August 28, 1998, and August 29, 1997
22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year
ended August 27, 1999)
23.0 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
Page 22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CSP INC.
By: /s/ ALEXANDER R. LUPINETTI
---------------------------
Alexander R. Lupinetti
Chief Executive Officer,
President and Chairman
Date: November 4, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Registrant and in
the capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ Alexander R. Lupinetti Chief Executive Officer, November 4, 1999
- -------------------------
Alexander R. Lupinetti President and Chairman
/s/ Gary W. Levine Vice President of Finance, November 4, 1999
- -------------------------
Gary W. Levine Chief Financial Officer
/s/ J. David Lyons Director November 4, 1999
- -------------------------
J. David Lyons
/s/ Shelton James Director November 4, 1999
- -------------------------
Shelton James
/s/ Sandford Smith Director November 4, 1999
- -------------------------
Sandford Smith
/s/ Robert Williams Director November 4, 1999
- -------------------------
Robert Williams
Page 23
<PAGE>
CSP INC.
ANNUAL REPORT ON FORM 10-K
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED AUGUST 27, 1999
Page 24
<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 27, 1999 and August 28, 1998 and the related
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended August 27, 1999. 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 27, 1999 and August 28, 1998 and the results of their
operations and their cash flows for each of the years in the three year period
ended August 27, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
October 15, 1999
Boston, Massachusetts
Page 25
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
August 27, August 28,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,749 $3,913
Short-term investments 10,046 9,161
Accounts receivable, net of allowance for
doubtful accounts of $395 in 1999 and
$359 in 1998 7,395 7,698
Inventories 5,805 6,308
Deferred income taxes 1,104 1,068
Prepaid expenses 1,545 1,248
------ ------
Total current assets 29,644 29,396
------ ------
Property, equipment and improvements, net 3,497 3,367
------ ------
Other assets:
Long-term investments 470 623
Land held for future development 163 163
Deferred income taxes 735 1,168
Goodwill, net of accumulated amortization
Of $310 and $253 in 1999 and 1998 1,226 1,325
Other assets 1,378 1,635
------ ------
Total other assets 3,972 4,914
------ ------
Total assets $37,113 $37,677
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $6,128 $6,399
Income taxes payable 47 1,375
----- -----
Total current liabilities 6,175 7,774
----- -----
Deferred compensation and retirement plans 3,573 3,363
----- -----
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par; authorized,
7,500 shares; issued 4,020 and 3,991
shares 40 40
Additional paid-in capital 10,812 10,631
Retained earnings 19,287 18,028
Accumulated other comprehensive income (456) (99)
------ ------
29,683 28,600
Less treasury stock, at cost,
449 and 406 shares 2,318 2,060
------ ------
Total shareholders' equity 27,365 26,540
------ ------
Total liabilities and
shareholders' equity $37,113 $37,677
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 26
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 27, 1999, AUGUST 28, 1998 AND AUGUST 29, 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
SALES:
Systems $15,555 $17,199 $12,365
Software 3,162 2,317 512
Service and system integration 32,978 43,952 6,663
------ ------ ------
Total sales 51,695 63,468 19,540
------ ------ ------
COST OF SALES:
Systems 6,447 8,007 5,678
Software 903 624 132
Service and system integration 24,725 34,216 4,732
------ ------ ------
Total cost of sales 32,075 42,847 10,542
------ ------ ------
Gross profit 19,620 20,621 8,998
------ ------ ------
OPERATING EXPENSES:
Engineering development 4,199 4,072 3,360
In process research and development -- -- 550
Selling, general & administrative 13,100 14,175 6,945
Restructuring 310 168 193
------ ------ ------
Total operating expenses 17,609 18,415 11,048
------ ------ ------
OPERATING INCOME(LOSS) 2,011 2,206 (2,050)
------ ------ ------
Other income(expense):
Dividend income 32 24 94
Interest income 442 549 783
Interest expense (40) (30) (89)
Other 178 (73) 97
------ ----- -----
TOTAL OTHER INCOME, NET 612 470 885
------ ----- -----
Income(loss) before income taxes 2,623 2,676 (1,165)
Provision(benefit)for income taxes 1,364 1,314 (444)
----- ----- -----
NET INCOME(LOSS) $1,259 $1,362 $(721)
====== ====== =====
Net income(loss) per share-basic $0.35 $0.38 $(0.20)
===== ===== =====
Weighted average shares outstanding-basic 3,597 3,592 3,571
===== ===== =====
Net income(loss) per share-diluted $0.35 $0.37 $(0.20)
===== ===== =====
Weighted average shares outstanding-diluted 3,641 3,674 3,571
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
Page 27
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 27, 1999, AUGUST 28, 1998 AND AUGUST 29, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Total
Additional other share-
Common Stock paid-in Retained comprehensive Treasury holders'
Shares Amount capital earnings income stock equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 30,1996 3,952 $ 39 $ 10,411 $ 17,387 $ 163 $ (2,033) $ 25,967
Comprehensive income (loss):
Net loss -- -- -- (721) -- -- (721)
Other comprehensive income (loss):
Unrealized gain(loss) on
available-for-sale securities -- -- -- -- 62 -- 62
Effect of foreign currency
translation -- -- -- -- (211) -- (211)
---------
Total comprehensive income (loss) (870)
Exercise of stock options 30 1 182 -- -- -- 183
Purchase of treasury stock -- -- -- -- -- (34) (34)
-----------------------------------------------------------------------------------------
Balance, August 29, 1997 3,982 40 10,593 16,666 14 (2,067) 25,246
Comprehensive income:
Net income -- -- -- 1,362 -- -- 1,362
Other comprehensive income (loss):
Unrealized gain(loss) on
available-for-sale securities -- -- -- -- (76) -- (76)
Effect of foreign currency
translation -- -- -- -- (37) -- (37)
---------
Total comprehensive income 1,249
Exercise of stock options 9 -- 38 -- -- -- 38
Issuance of treasury stock -- -- -- -- -- 7 7
-----------------------------------------------------------------------------------------
Balance, August 28, 1998 3,991 40 10,631 18,028 (99) (2,060) 26,540
Comprehensive income:
Net income -- -- -- 1,259 -- -- 1,259
Other comprehensive income (loss):
Unrealized gain(loss) on
Available-for-sale securities -- -- -- -- 19 -- 19
Effect of foreign currency
Translation -- -- -- -- (376) -- (376)
---------
Total comprehensive income 902
Exercise of stock options 7 -- 36 -- -- -- 36
Issuance of shares under employee
stock purchase plan 22 -- 145 -- -- -- 145
Issuance of treasury stock -- -- -- -- -- 2 2
Purchase of treasury stock -- -- -- -- -- (260) (260)
-----------------------------------------------------------------------------------------
Balance August 27, 1999 4,020 $ 40 $ 10,812 $ 19,287 $ (456) $ (2,318) $ 27,365
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 28
<PAGE>
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 27, 1999, AUGUST 28, 1998 AND AUGUST 29, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $1,259 $1,362 $ (721)
Adjustments to reconcile net income(loss)
to net cash provided by operating activities:
Depreciation and amortization 1,245 1,512 1,680
In process research and development --- --- 550
Deferred compensation and retirement plans 210 81 147
Deferred income taxes 397 (852) (625)
Acquisition costs --- --- 150
Other 87 237 (564)
Changes in current assets and liabilities:
Decrease in accounts receivable, net 303 923 2,007
(Increase)decrease in inventories 503 (81) (192)
(Increase)decrease in prepaid expenses (297) 53 187
Decrease in accounts payable and accrued expenses (271) (297) (549)
Increase(decrease)in income taxes payable (1,328) 1,375 (120)
---------------------------------
Net cash provided by operating activities 2,108 4,313 1,950
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (458) (149) (137)
Purchases of held-to-maturity securities (18,637) (52,160) (198,652)
Sales of available-for-sale securities 289 91 115
Maturities of held-to-maturity securities 18,093 48,164 199,220
Businesses acquired --- --- (8,011)
Property, equipment and improvements (1,106) (698) (1,111)
---------------------------------
Net cash used in investing activities (1,819) (4,752) (8,576)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options 36 38 183
Proceeds from issuance of shares under
employee stock purchase plan 145 -- --
Issuance(purchase) of treasury stock (258) 7 (34)
---------------------------------
Net cash provided by(used in) financing activities (77) 45 149
---------------------------------
Effects of exchange rate on cash (376) (37) (107)
---------------------------------
Net decrease in cash (164) (431) (6,584)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,913 4,344 10,928
---------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,749 $3,913 $4,344
=================================
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid for income taxes, net $2,750 $386 $75
==================================
Cash paid for interest $54 $60 $89
=================================
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 29
<PAGE>
CSP INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 at the balance sheet date. Revenue and
expenses are translated at average rates in effect during the period. The
resultant translation adjustment is reflected as Accumulated other comprehensive
income, a separate component of shareholders' equity on the consolidated balance
sheets.
INVESTMENTS
The Company classifies its investments at the time of purchase as either
held-to-maturity or available-for-sale. Held-to-maturity securities are those
investments which the Company has the ability and intent to hold until maturity.
Held-to-maturity securities are recorded at cost, adjusted for the amortization
of premiums and discounts which approximates market value. Available-for-sale
securities are recorded at fair value. Unrealized gains and losses net of the
related tax effect on available-for-sale securities are reported in accumulated
other comprehensive income, a component of stockholders' equity, until realized.
The estimated fair market values of investments are based on quoted market
prices as of the end of the reporting period.
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.
Page 30
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the related estimated undiscounted future
cash flows. When an evaluation indicates that the future undiscounted cash flows
are not sufficient to recover the carrying value of the assets, the asset is
adjusted to its estimated fair value.
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 is 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.
Page 31
<PAGE>
EARNINGS PER SHARE OF COMMON STOCK
On April 12, 1999 the Company announced an eleven-for-ten stock split in the
form of a common stock dividend distributed on May 7, 1999 to stockholders of
record on April 21, 1999.
On October 14, 1998 the Company announced an eleven-for-ten stock split in the
form of a common stock dividend distributed on November 16, 1998 to stockholders
of record on October 26, 1998.
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 April 12, 1999, March 16, 1998 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 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 shares 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:
1999 1998 1997
Weighted average number of shares
outstanding - basic 3,597 3,592 3,571
Incremental shares from the assumed
exercise of stock options 44 82 -- (1)
----- ----- -----
Weighted average number of shares
outstanding - dilutive 3,641 3,674 3,571
===== ===== =====
(1) No additional shares since the effect would be anti-dilutive.
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.
Page 32
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 130 ("SFAS
No. 130"), "Reporting Comprehensive Income," in fiscal year ended August 27,
1999. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
For the Company, comprehensive income includes net income (loss), unrealized
gains and losses from foreign currency translation and unrealized gains and
losses on available for sales securities.
The Company adopted Statement of Financial Accounting Standard No. 131 ("SFAS
No. 131"), "Disclosures about Segments of an Enterprise and Related
Information," in fiscal year ended August 27, 1999. SFAS No. 131 establishes
standards for reporting selected information about operating segments. SFAS No.
131 requires segment reporting of information about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information as illustrated in Note 11.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position (SOP) No. 97-2 "Software Revenue Recognition," in fiscal
year ended August 27, 1999. SOP No. 97-2 provides guidance on applying generally
accepted accounting principles for software revenue recognition transactions.
The adoption of SOP No. 97-2 did not materially impact the disclosures in the
consolidated financial statements.
The Company adopted Statement of Financial Accounting Standard No. 132 ("SFAS
No. 132"), "Employers' Disclosures about Pensions and Other Postretirement
Benefits," in fiscal year ended August 27, 1999. SFAS No. 132 standardizes
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
adoption of SFAS No. 132 did not materially impact 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 the changes in the fair value of 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 25, 2000. As the Company currently
does not hold derivative instruments, management believes that there will be no
impact on its results of operations or financial position resulting from the
adoption of SFAS No. 133.
RECLASSIFICATIONS
Certain reclassifications were made to the 1997 and 1998 financial statements to
conform to the 1999 presentation.
Page 33
<PAGE>
2. BUSINESS COMBINATION
For acquisitions accounted for as purchases, the 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, including 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.
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST
1997
UNAUDITED ----------
(Amounts in thousands, except per share data)
<S> <C>
Total revenues $47,311
-------
Operating loss $(493)
--------
Net loss $(233)
--------
Loss per share (diluted) $(.06)
--------
</TABLE>
Page 34
<PAGE>
3. INVESTMENTS
At August 27,1999 and August 28, 1998, investments consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
(Amounts in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AUGUST 27, 1999
Marketable equity securities $ 476 $ 168 -- $ 644
Bonds and municipal revenue notes 5,764 -- -- 5,764
Money market funds and commercial paper 3,835 -- -- 3,835
U.S. treasury bills 273 -- -- 273
----------------------------------------
Total $10,348 $ 168 -- $10,516
========================================
AUGUST 28, 1998
Marketable equity securities $ 307 $ 149 -- $ 456
Bonds and municipal revenue notes 6,395 -- -- 6,395
Money market funds and commercial paper 2,661 -- -- 2,661
U.S. treasury bills 272 -- -- 272
----------------------------------------
Total $ 9,635 $ 149 -- $ 9,784
========================================
</TABLE>
<TABLE>
<CAPTION>
Short-term Long-term Total
<S> <C> <C> <C>
AUGUST 27, 1999
Held-to-maturity $ 9,402 $ 470 $ 9,872
Available-for-sale 644 -- 644
----------------------------------
$10,046 $ 470 $10,516
==================================
</TABLE>
<TABLE>
<CAPTION>
Short-term Long-term Total
<S> <C> <C> <C>
AUGUST 28, 1998
Held-to-maturity $8,705 $623 $9,328
Available-for-sale 456 -- 456
----------------------------------
$9,161 $623 $9,784
==================================
</TABLE>
Net unrealized gains(losses) on available-for-sale investments are reported as a
separate component of stockholders' equity until realized. This change in
unrealized gains amounted to $19,000, ($76,000) and $62,000 for the years ended
August 27, 1999, August 28, 1998, and August 29, 1997, respectively.
Assets of $804,000 and $660,000 at August 27, 1999 and August 28, 1998,
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 table.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands)
<S> <C> <C>
Raw materials $1,422 $1,502
Work-in-process 227 1,138
Finished goods 4,156 3,668
------ -----
Total $5,805 $6,308
====== ======
</TABLE>
Page 35
<PAGE>
5. INCOME TAXES:
Reconciliations of expected income tax expense (benefit) to actual income tax
expense (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense(benefit) $ 892 34.0% $ 910 34.0% $ (396) (34.0)%
Increases(reductions) in taxes resulting from:
Dividend exclusion (9) (0.3) (6) (0.2) (22) (1.8)
Tax exempt interest (56) (2.1) (52) (1.9) (72) (6.2)
State income taxes, net of
federal tax benefit (169) (6.5) (10) (0.4) (107) (9.2)
Amortization of goodwill 36 1.4 45 1.7 -- --
Foreign operations 642 24.5 264 9.9 123 10.6
Nondeductible life insurance (6) (0.2) 63 2.3 -- --
Change in valuation allowance -- -- (17) (0.6) 35 3.0
Other items 34 1.2 117 4.3 (5) (0.5)
------- ---- ------- ---- ------- -----
Income tax expense (benefit) $ 1,364 52.0% $ 1,314 49.1% $ (444) (38.1)%
======= ==== ======= ==== ======= =====
</TABLE>
For the years ended August 27, 1999 and August 28, 1998, temporary differences,
which give rise to deferred tax assets (liabilities), are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $1,164 $1,048
Other accruals 88 158
Bad debt reserves 146 91
In process research and development 190 203
Inventory capitalization and reserves 697 819
State research and development credits, net of
federal benefit 209 340
Unrealized loss on securities -- 20
----- -----
Gross deferred tax assets 2,494 2,679
Less: valuation allowance (360) (360)
----- -----
Deferred tax asset less valuation allowance 2,134 2,319
DEFERRED TAX LIABILITY:
Accumulated depreciation and amortization (295) (83)
------ ------
Net deferred tax asset $1,839 $2,236
====== ======
</TABLE>
The valuation allowance was $360,000 at August 27, 1999 and August 28, 1998. The
valuation allowance was established due to the long-term nature of certain
deferred compensation and retirement obligations for which the tax benefit may
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 in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize
Page 36
<PAGE>
the benefits of these deductible differences, net of the existing valuation
allowance at August 27, 1999.
The provisions for income taxes are comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands)
<S> <C> <C> <C>
Current:
Federal $238 $372 $(45)
State (350) 462 (28)
Foreign 1,077 1,333 123
------ ------ -----
965 2,167 50
Deferred:
Federal 206 (378) (360)
State 193 (475) (134)
------ ------ -----
399 (853) (494)
------ ------ -----
$1,364 $1,314 $(444)
====== ====== =====
</TABLE>
6. PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements, net consist of the following:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands)
<S> <C> <C>
Land $ 587 $ 587
Building and improvements 1,226 1,356
Equipment 8,586 12,201
Automotive equipment 34 48
------ -------
10,433 14,192
Less accumulated depreciation and amortization 6,936 10,825
------ -------
Property, equipment and improvements, net $3,497 $ 3,367
====== =======
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
(Amounts in thousands)
<S> <C> <C>
Accounts payable $1,811 $1,846
Commissions 195 256
Compensation and fringe benefits 2,450 2,704
Customer advances 201 86
Professional fees and shareholders' reporting costs 274 348
Taxes, other than income 579 757
Other, individually less than 5% of current liabilities 618 402
------ ------
$6,128 $6,399
====== ======
</TABLE>
Page 37
<PAGE>
8. STOCK OPTIONS
In 1997, the Company adopted the 1997 Stock Option Plan covering
199,650 shares, which was ratified by the shareholders in January 1998. In 1991,
the Company adopted the 1991 Stock Option Plan covering 332,750 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 plan provides for issuance of options
at their fair market value on the date of grant. These options vest over a
period of five years, do not vest in the first year, and expire ten years from
the date of grant. In the 1991 plan, up to 26,624 shares are allocated for
annual non-discretionary grants of 1,100 shares each to non-employee directors
of the Company who are serving on the last business day of January each year.
The following is a summary of common stock option activity for the three years
ended August 27, 1999:
<TABLE>
<CAPTION>
Number of Shares
Weighted average 1997 1991 1981 Total
exercise price of Plan Plan Plan Plan
shares under plans
<S> <C> <C> <C> <C> <C>
Outstanding August 30,1996 $5.44 --- 113,002 90,840 203,842
Granted $5.46 --- 154,729 --- 154,729
Exercised $4.24 --- --- (40,462) (40,462)
Expired & terminated $5.76 --- (39,731) (30,979) (70,710)
-------------------------------------
Outstanding August 29,1997 $5.64 --- 228,000 19,399 247,399
Granted $6.05 --- 62,557 --- 62,557
Exercised $5.91 --- (5,444) (4,492) (9,936)
Expired & terminated $4.84 --- (37,348) (1,332) (38,680)
-------------------------------------
Outstanding August 28,1998 $5.20 --- 247,765 13,575 261,340
Granted $6.95 --- 100,226 --- 100,226
Exercised $5.79 --- (3,642) (2,872) (6,514)
Expired & terminated $5.41 --- (25,201) (665) (25,866)
-------------------------------------
Outstanding August 27,1999 $5.98 --- 319,148 10,038 329,186
=====================================
Available for future grants -- 199,650 2,711 --- 202,361
Exercisable $5.63 --- 153,663 10,038 163,701
</TABLE>
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 5.20% in 1999,
5.75% in 1998 and 6.19% in 1997. The weighted average grant date fair values of
options granted in 1999, 1998 and 1997 were $5.23, $6.46 and $5.35,
respectively.
Page 38
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Following the guidance of APB No. 25, no
compensation expenses have been recognized in the consolidated financial
statements for such plans. 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 proforma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
(Amounts in thousands, except per share data)
Net income (loss) as reported $1,259 $1,362 $(721)
Pro forma $1,176 $1,304 $(723)
Income (loss) per share diluted as reported $.35 $.37 $(.20)
Pro forma $.32 $.35 $(.20)
</TABLE>
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 expense
related to grants made prior to fiscal 1996.
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 332,750 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. Approximately 22,028 shares
have been issued under the plan at August 27, 1999.
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 $170,000, $136,000 and $94,000
for 1999, 1998, and 1997, 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 1999, 1998 and 1997 amounted to $372,000, $336,000
and $302,000, respectively.
Page 39
<PAGE>
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 27, 1999, the Company was obligated under noncancelable operating
leases as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending August: Operating Leases
(Amounts in thousands)
<S> <C>
2000 $868
2001 1,393
2002 1,300
2003 987
2004 994
thereafter 906
------
$6,448
======
</TABLE>
Occupancy costs under the operating leases approximated $1,564,000 in 1999,
$1,221,000 in 1998, and $221,000 in 1997.
STOCK REPURCHASE
On October 9, 1986 the Board of Directors authorized the Company to repurchase
up to 344,892 of the outstanding stock at market price. On September 28, 1995,
the Board of Directors authorized the Company to repurchase up to 199,650
additional shares of the outstanding stock at market price. The timing of stock
purchases are made at the discretion of management. At August 27, 1999, the
Company has repurchased 449,244 or 82% of the total shares authorized to be
purchased.
Page 40
<PAGE>
11. SEGMENT AND GEOGRAPHICAL INFORMATION
The following table presents certain operating segment information.
<TABLE>
<CAPTION>
System
Integration
1999 Systems and Service Software Total
- ---- ------- ------------ -------- -----
<S> <C> <C> <C> <C>
Net Sales $15,555 $32,978 $3,162 $51,695
Profit from operations 1,805 117 89 2,011
Identifiable assets 22,168 12,806 2,139 37,113
Capital expenditures 621 435 50 1,106
Depreciation 653 263 46 962
1998
- ----
Net Sales $17,199 $43,952 $2,317 $63,468
Profit(loss)from operations 780 1,451 (25) 2,206
Identifiable assets 22,161 13,509 2,007 37,677
Capital expenditures 305 363 30 698
Depreciation 979 265 35 1,279
1997
- ----
Net Sales $12,365 $6,663 $512 $19,540
Profit(loss)from operations (1,930) 392 (512) (2,050)
Identifiable assets 17,663 15,360 2,201 35,224
Capital expenditures 1,064 47 -- 1,111
Depreciation 928 21 29 978
</TABLE>
Each segment is broken down by related business activities, which crosses
different business operations. These segments are based on the different
customer activity of the Company. CSPI has three major segments: systems which
includes company manufactured hardware products, systems integration and
services which includes maintenance of the Company and other systems sold and
integration and sale of third party hardware products and services, and software
products which are developed by the Company.
Profit from operation is sales less cost of sales, engineering and development,
selling, general and administrative expenses but is not affected by either
nonoperating charges/income or by income taxes. Non operating charges/ income
consists principally of investment income and interest expense.
In calculating profit from operations for individual operating segments,
substantial administration expenses incurred at the operating level are common
to more than one segment and are allocated on a sales basis.
All intercompany transactions have been eliminated.
Identifiable assets include deferred income tax assets and other financial
instruments managed by the Company. Capital expenditures common to more than one
segment are allocated on a sales basis.
Page 41
<PAGE>
Sales to individual customers constituting 10% or more of total sales were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands)
<S> <C> <C> <C>
Customer A -- -- $2,370 12%
Customer B -- -- $2,114 11%
Customer C -- $10,105 16% --
Customer D -- $9,294 15% --
Customer E $7,804 15% -- --
</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.
The Company's sales by geographic area are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in thousands)
<S> <C> <C> <C>
North America $18,632 $21,245 $13,324
Far East 4,347 1,515 1,039
Europe 28,692 40,594 5,090
Other 24 114 87
------- ------- -------
Totals $51,695 $63,468 $19,540
======= ======= =======
</TABLE>
Long-lived assets at August 27, 1999, August 28, 1998 and August 29, 1997 were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
United States $3,952 $3,938 $4,373
Europe 771 754 775
------ ------ ------
Totals $4,723 $4,692 $5,418
====== ====== ======
</TABLE>
12. RESTRUCTURING EXPENSES
In March 1999 and March 1998, MODCOMP had a reduction of 15 and 20 individuals,
respectively, in its domestic workforce. The expenses related to the action were
approximately $310,000 and $168,000 for severance costs. In March 1997, CSP Inc.
had a reduction in its workforce of 13 positions primarily in manufacturing
operations and Vision Systems. The expenses related to this action were
approximately $125,000 for severance costs.
The actions contemplated by the above described workforce reduction have been
completed as planned. There was a $166,000 accrual remaining at August 27, 1999,
related to the March 1999 restructure program which will be paid in full during
fiscal year 2000. The amounts accrued approximated the amounts paid under the
March 1998 and 1997 restructuring programs.
Page 42
<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 - 1999 COMPARED TO 1998
REVENUE
In fiscal 1999, the Company's sales decreased to $51,695,000 due primarily
to a decline in outsourcing sales by MODCOMP's German subsidiary. MODCOMP
accounted for 71% of total revenue for fiscal 1999 compared to 78% for fiscal
1998. CSP MultiComputer Division (CSPI) products accounted for 24% and 18% and
Scanalytics revenues accounted for 5% and 4% of the total of total revenues for
fiscal 1999 and 1998.
In fiscal 1999, the Company's sales decreased $11,773,000 to $51,695,000
compared to $63,468,000 for the year ended August 28, 1998. This decrease was
due primarily to a decline in sales by MODCOMP. In fiscal 1999, MODCOMP's sales
were $36,675,000 or a 26% decrease as compared to $49,653,000 in fiscal 1998.
This decrease was due to the fact that in Fiscal 1998 MODCOMP's German
subsidiary had two large outsourcing sales for computer systems in the
telecommunication market. These opportunities were created by the deregulation
of the telecommunication industry in Germany in January 1998. These orders were
for approximately $19,399,000 and accounted for a major portion of the decrease.
Sales for systems integration and services represented $32,978,000 or 64% of
product sales for the fiscal year. This represents a 25% decline from the prior
year. This decline is mainly attributable to two large systems integration
orders, mentioned above, shipped by MODCOMP's German subsidiary in fiscal year
1998. Service revenues increased by $774,000 as compared to the prior year. The
increase was mainly in France and Germany where some current year projects
offset the normal erosion of legacy service revenue. During the year MODCOMP
completed the Hampton tunnel project for the Virginia Transit Authority which
represented 2% of the system integration and service revenue.
Systems sales represent 30% of total revenue, which include software and
hardware products designed and developed by CSPI and MODCOMP. The CSPI SuperCard
family of products accounted for approximately 27% of total system sales, a
decrease of 40% from the prior year. This decline is mainly due to changes in
current technology, coupled with the discontinued manufacturing of
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<PAGE>
certain Intel 860 processors, which are used by CSPI in SuperCard 4 products.
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. CSPI's newest products, the 2000 SERIES, will provide the
future source of revenue growth. Sales of the 2000 SERIES represented
approximately 47% of system revenue in fiscal 1999 compared to 19% in fiscal
1998. 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. MODCOMP continues to ship its real-time process
control classic product line to its existing customers, which represent 22% of
system sales.
Software sales represented 6% of total sales for fiscal year 1999, an
increase of approximately 36% from the prior year. Scanalytics accounts for 75%
of software sales. Scanalytics software sales increased 5% from the prior year.
The MODCOMP Internet product, ViewMax, accounted for 25% of software sales, a
decrease of 16% from the prior year. The decline in revenue was due in part to a
reflection of what the Web-to-Host market is experiencing in general, with
implementation cycles that last for six to nine months combined with a lack of
market growth. In addition, ViewMax in the US suffered from the turnover of key
personnel and thus experienced some delay of product release.
European sales account for 56% of total revenue for fiscal year 1999. Sales
were primarily from MODCOMP's subsidiaries in Germany, France and the United
Kingdom. The decline from the prior year, 64% of total sales, was primarily due
to the large outsourcing orders in Germany in fiscal 1998. Historically, 80% of
MODCOMP's revenues have come from the international market. North American sales
accounted for 36% of total sales. Other international sales represent 8% of
total sales. International sales for CSPI products increased during the past
years due to the shipment of the largest computer system ever built by CSPI to
an international defense customer integrator in Asia. This system represented
approximately 5% of sales for the year.
COST OF SALES
Cost of sales as a percentage of sales decreased to 62% compared to 68% for
the prior year. The improvement in cost of sales was due to a shift in business
to more profitable system and software sales. The decrease in systems
integration service sales, which traditionally has a high cost of sales,
combined with increased sales of systems and software, which has lower cost of
sales, contributed to the improved gross margin.
OPERATING EXPENSES
Engineering and development expenditures were $4,199,000 for fiscal 1999
compared to $4,072,000 for fiscal 1998. This represents an approximate 3%
increase over the prior year. The major portion of the engineering and
development expenses was for CSPI, representing 57% of the total expense. This
represents a slight increase of 4% over the prior year. The increase was
primarily due to additional outside service, consulting and labor expenses work
on the SERIES 2000 products which had two new products released during the year.
This increase was offset by a decline in depreciation expense. Labor
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<PAGE>
increased due to the addition of engineering staff. The decrease in depreciation
expense relates to several large assets becoming fully depreciated in fiscal
year 1999. MODCOMP's engineering and development expenses represented 30% of
total engineering and development expenses, which was a decrease of 12% from the
prior year. The major portion of the decrease was from reductions in staff at
MODCOMP's U.S. operation in both fiscal 1999 and 1998. However, the addition of
three individuals to the ViewMax development team offset 4% of the total
reduction. Scanalytics expenses represented 13% of the total expense which is
approximately a 70% increase from the prior year. The majority of this increase
was due to the addition of two technical staff in fiscal 1999. Programmers were
added on both the Macintosh and Windows platforms.
Sales, general and administrative expenses were $13,100,000 for fiscal year
1999 compared to $14,175,000 for the prior year. This represents a decline of
approximately 8% from the prior year. CSPI's expenses accounted for 33% of the
total which was a decrease of 15% from the prior fiscal year. A major portion of
this decrease relates to a reduction of bonus expense for the management team,
which represented 30% of the entire decrease from the prior year. Bonuses for
executives are based on the duties and responsibilities of the individual as
well as Company operating results. Another portion of the decrease relates to
the decline in depreciation expense due to several large assets becoming fully
depreciated in fiscal 1999. This decrease accounts for approximately 19% of the
total decrease. In addition, approximately 15% of the decrease relates to lower
expense for company owned life insurance policies related in part to the
increase in the cash surrender value of the policies. MODCOMP's expenses
accounted for 57% of the total, decreasing 3% from the prior year. This decrease
is mainly in general and administrative expense reductions from the
restructuring in March 1999 which was offset by increased sales and marketing
efforts. MODCOMP sales and marketing increased by approximately 7% from the
prior year. The majority of this increase relates to MODCOMP France's
acquisition of Altis business early in the fiscal year. MODCOMP general and
administrative expenses decreased approximately 40% from the prior year. This
decrease is mainly attributable to staff reductions of 15 and 20 employees in
MODCOMP's U.S. operation in fiscal years 1999 and 1998, respectively.
In March, 1999, MODCOMP had a corporate restructure to reduce costs in the
US operation. The restructure eliminated fifteen positions at a cost of
approximately $310,000 for severance benefits. This restructure will save
approximately $1.0 million in expenses in fiscal 2000.
OTHER INCOME/EXPENSES
Other income/expenses increased by approximately $142,000 from the prior
year. Investment income for the Company decreased by approximately $99,000 or
17% due to the low interest rate on short term investments. The company had an
increase in realized gains on investments sold which represented 21% of the
total and there was also a decline in other expense. In fiscal year 1998, there
was a full year of other expenses for MODCOMP, approximately $270,000. The
Company continued to invest a larger percentage of its cash in short-term
non-taxable and taxable instruments, which have lower rates of return on a
pre-tax basis than our investments in prior years.
The Company had a high effective tax rate of 52%, which is above the normal
US statutory rate. This was primarily due to the large portion of foreign-based
revenue and profits form France and Germany, which have high
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<PAGE>
statutory tax rates. The Company will continue to review strategies with its
advisors to reduce our effective rate.
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 is 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 10 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% 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 SERIES had 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
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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 form 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 accounts 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 discounted 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
revnue 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.
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 Sytems 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
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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 eliminated twenty positions at a
cost of approximately $168,000 for severance benefits. This restructure saved
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.
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<PAGE>
FINANCIAL POSITIONS, CAPITAL RESOURCES AND LIQUIDITY
The Company still has a solid financial position as working capital
increased to $23,469,000 in fiscal 1999. Cash and short-term investments
increased by $721,000. The Company's accounts receivable decreased by $303,000
to $7,395,000 at August 27, 1999. The Company's inventory decreased to
$5,805,000 from $6,308,000.
The Company spent $1,106,000, $698,000 and $1,111,000 on capital
improvements during fiscal year 1999, 1998 and 1997, 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 1999, 1998 or 1997. 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 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,
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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 the 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 has been fully expensed in the current fiscal year
and management believes that any further financial position or results of
operations will not be material.
The Company has identified alternative remediation if any upgrade or
replacement does not correct the "Year 2000" issue.
The Company continues 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 has attempted 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 has found alternative
sources of supply where practical. 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.
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CSP INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended August
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Sales $51,695 $63,468 $19,540 $16,520 $18,526
Costs and expenses 49,684 61,262 21,590 17,169 18,725
-----------------------------------------------
Operating income (loss) 2,011 2,206 (2,050) (649) (199)
Other income 612 470 885 886 821
-----------------------------------------------
Income (loss) before taxes 2,623 2,676 (1,165) 237 622
Provision (benefit) for income taxes 1,364 1,314 (444) 129 237
-----------------------------------------------
Net income (loss) $1,259 $1,362 $(721) $108 $385
===============================================
Net income (loss) per
share - basic $0.35 $0.38 $(0.20) $0.03 $0.11
===============================================
Weighted average number of
shares - basic 3,597 3,592 3,571 3,549 3,545
===============================================
Net income (loss) per
share - diluted $0.35 $0.37 $(0.20) $0.03 $0.11
===============================================
Weighted average number of
shares - diluted 3,641 3,674 3,571 3,594 3,604
===============================================
BALANCE SHEET DATA:
Cash and investments $14,265 $13,697 $10,150 $17,218 $17,745
Working capital 23,469 21,622 18,636 21,216 22,760
Total assets 37,113 37,677 35,224 29,699 29,279
Long term obligations 3,573 3,363 3,282 2,093 1,943
Total liabilities 9,748 11,137 9,978 3,732 3,554
Retained earnings 19,287 18,028 16,666 17,387 17,279
Shareholders' equity 27,365 26,540 25,246 25,967 25,819
</TABLE>
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CSP INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE INFORMATION)
The following table sets forth certain information which is based on Operations
Statement Data:
<TABLE>
<CAPTION>
Period to Period
Dollar changes
1999 1998
Percentage of sales compared compared
fiscal year ended August to to
1999 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% $(11,773) $43,928
Costs and expenses:
Cost of sales 62.1% 67.5% 54.0% (10,772) 32,305
Engineering and development 8.1% 6.4% 17.2% 127 712
In process research and development -- -- 2.8% -- (550)
Selling, general and administrative 25.3% 22.3% 35.5% (1,075) 7,230
Restructuring 0.6% 0.3% 1.0% 142 (25)
Total costs and expenses 96.1% 96.5% 110.5% (11,578) 39,672
Operating income (loss) 3.9% 3.5% (10.5%) (195) 4,256
Other income 1.2% 0.7% 4.5% 142 (415)
Income (loss) before taxes 5.1% 4.2% (6.0%) (53) 3,841
Provision (benefit) for income taxes 2.6% 2.1% (2.3%) 50 1,758
Net income (loss) 2.5% 2.1% (3.7%) $(103) $ 2,083
</TABLE>
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CSP Inc. and Subsidiaries:
Under date of October 15, 1999 we reported on the consolidated balance sheets of
CSP Inc. and subsidiaries as of August 27, 1999 and August 28, 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the the years in the three-year period ended August 27, 1999.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedule as listed in item 14(a)2 of this form 10-K. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
schedule based on our audits.
In our opinion, the consolidated 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 LLP
October 15, 1999
Boston, Massachusetts
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SCHEDULE II
CSP INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED AUGUST 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
Allowance
for
Doubtful
Accounts
Balance August 30, 1996 $103
Additions charged to costs and expenses --
Additions for MODCOMP 154
----
Balance August 29, 1997 257
Additions charged to costs and expenses --
Additions charged to other accounts 102
----
Balance August 28, 1998 359
Additions charged to costs and expenses 36
Additions charged to other accounts --
----
Balance August 27, 1999 $395
====
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EXHIBIT 11
CSP INC. AND SUBSIDIARIES
BASIC AND DILUTED EARNINGS PER SHARE COMPUTATION
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended August
1999 1998 1997
<S> <C> <C> <C>
Net income (loss) per common share - basic:
Net income (loss) $1,259 $1,362 ($721)
Weighted average common shares outstanding 3,597 3,592 3,571
Net income (loss) per common share - basic $ 0.35 $ 0.38 ($0.20)
Net income (loss) per common share - diluted:
Net income (loss) $1,259 $1,362 ($721)
Weighted average common shares outstanding 3,597 3,592 3,571
Add: net additional common shares upon
Exercise of stock options 44 82 --
Weighted average common shares
outstanding - dilutive 3,641 3,674 3,571
Net income (loss) per common share - diluted $ 0.35 $ 0.37 ($0.20)
</TABLE>
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF THE REGISTRANT
Each of the below listed subsidiaries is 100% directly or indirectly owned by
CSP Inc. except as otherwise indicated, and all are included in the consolidated
financial statements.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION/ORGANIZATION
- ------------------------------ --------------------------
<S> <C>
CSP Inc. Massachusetts
40 Linnell Circle
Billerica, MA 01821-3901
CSP Securities Corp. Massachusetts
40 Linnell Circle
Billerica, MA 01821-3901
CSP Foreign Sales Corp., Ltd. U.S. Virgin Islands
40 Linnell Circle
Billerica, MA 01821-3901
Scanalytics, Inc. Delaware
8550 Lee Highway, Suite 400
Fairfax, VA 22031-1515
MODCOMP, Inc. Florida
1650 West McNab Road
Ft. Lauderdale, FL 33309
</TABLE>
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders of CSP Inc. and Subsidiaries:
We consent to incorporation by reference in the registration statements (Nos.
2-79414 and 33-11815) on Form S-8 of CSP Inc. our report dated October 15,
1999, relating to the consolidated balance sheets of CSP Inc. and
Subsidiaries as of August 27, 1999 and August 28, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows
and related schedule for each of the years in the three-year period ended
August 27, 1999, which reports appear or are incorporated by reference in the
August 27, 1999 report on Form 10-K of CSP Inc.
KPMG LLP
November 16, 1999
Boston, Massachusetts
Page 57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF AUGUST 27, 1999 AND AUGUST 28, 1998
AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTH PERIODS ENDED
AUGUST 27, 1999 AND AUGUST 28, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> AUG-27-1999 AUG-28-1998
<PERIOD-START> AUG-29-1998 AUG-29-1997
<PERIOD-END> AUG-27-1999 AUG-28-1998
<CASH> 3,749 3,913
<SECURITIES> 10,516 9,784
<RECEIVABLES> 7,790 8,057
<ALLOWANCES> 395 359
<INVENTORY> 5,805 6,308
<CURRENT-ASSETS> 29,644 29,396
<PP&E> 10,322 14,192
<DEPRECIATION> 6,825 10,825
<TOTAL-ASSETS> 37,113 37,677
<CURRENT-LIABILITIES> 6,175 7,774
<BONDS> 0 0
0 0
0 0
<COMMON> 40 40
<OTHER-SE> 27,325 26,500
<TOTAL-LIABILITY-AND-EQUITY> 37,113 37,677
<SALES> 51,695 63,468
<TOTAL-REVENUES> 51,695 63,468
<CGS> 32,075 42,847
<TOTAL-COSTS> 49,684 61,262
<OTHER-EXPENSES> (612) (470)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 40 30
<INCOME-PRETAX> 2,623 2,676
<INCOME-TAX> 1,364 1,314
<INCOME-CONTINUING> 1,259 1,362
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,259 1,362
<EPS-BASIC> .35 .38
<EPS-DILUTED> .35 .37
</TABLE>
