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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended August 28, 1998 or
/ / Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the transition period
from _____ to____
Commission file number 0-10843
CSP Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2441294
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Linnell Circle, Billerica, Massachusetts 01821
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978)663-7598
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
-----
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing selling price as reported on NASDAQ on
November 16, 1998, was $26,057,616.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was 3,257,202 at November 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5, 6, 7 and 8 is incorporated by
reference to the Registrant's 1998 Annual Report to Stockholders. The
information required by Part III, Items 10,11,12 and 13 is incorporated by
reference to the Registrant's Proxy Statement dated November 30, 1998 filed
with respect to the Annual Meeting of Stockholders of the Registrant to be
held on January 12, 1999.
CSP Inc.
Form 10-K
Year Ended August 28, 1998
Item Number
in Form 10-K Table of Contents Page
- ------------ ----------------- ----
Part I
1 Business........................................ 3
2 Properties...................................... 15
3 Legal Proceedings............................... 16
4 Submission of Matters to a Vote
of Security Holders............................ 16
4A Executive Officers of the Registrant............. 16
Part II
5 Market for Registrant's Common Equity
and Related Stockholder Matters................ 17
6 Selected Financial Data......................... 17
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 17
8 Financial Statements and Supplementary Data..... 17
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 17
Part III
10 Directors and Executive Officers of the
Registrant...................................... 18
11 Executive Compensation........................... 18
12 Security Ownership of Certain Beneficial Owners
and Management.................................. 18
13 Certain Relationships and Related Transactions... 18
Part IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 18
2
Part I
Item 1. Business
General
CSP Inc. (the "Company" or "CSPI") was founded in 1968 and is located in
Billerica, Massachusetts, just off Route 128 in the Boston computer corridor.
CSPI develops, manufactures, markets, installs and supports a range of standard
high performance multi- computer products and systems with specific strengths in
digital signal processing for real time applications in defense and commercial
markets. The Company also commercializes technology developed by United Parcel
Service (UPS) to automate parcel sortation capabilities. In 1994 a separate
product group was established, Vision Systems product group, and in March 1997,
it was consolidated with the computer product group. The Company, in
1988, established Scanalytics product group to develop and market imaging
systems for molecular and cell biology. In June 1997, this product group was
consolidated with the assets acquired from Signal Analytics Corp. and was setup
as a wholly-owned subsidiary called Scanalytics Inc.(Scanalytics). Scanalytics
which specializes in the development and marketing of highly sophisticated image
analysis software products used by bio-technology scientists. By integrating
these software products with a diverse group of image-capture devices,
Scanalytics is able to solve application-specific problems for bio-technology
research. Applications include forensics, fluorescence microscopy,
pharmaceutical assays and 3D imaging and visualization. On June 27, 1997, CSPI
acquired the assets of MODCOMP/Cerplex L.P. MODCOMP is the premier provider of
systems integration and outsourcing network services, Internet solutions and
real-time process control systems. This multi-national subsidiary provides
network integration services including consulting, systems integration and
outsourcing. ViewMax, MODCOMP's newest product, is an Internet software tool
that allows organizations to connect their legacy mainframe databases to their
new Intranet, Extranet or Internet applications. CSPI and MODCOMP sell all
products through its own direct sales force in the U.S. and MODCOMP sell
directly in Germany, France and United Kingdom. The two companies sell via a
world-wide organization of distributors in the rest of the world. Scanalytics
sells both direct and through a network of distributors and resellers.
Product Line Acquisitions:
Effective June 27, 1997, the Company acquired Modcomp/Cerplex L.P. (MODCOMP),
a wholly-owned subsidiary of The Cerplex Group Inc. MODCOMP sells
legacy-to-web integration solutions and real-time computer systems software
and service. CSPI purchased MODCOMP for $8,709,000 in cash. This transaction
was accounted for as a purchase.
In June 1997, the Company acquired Signal Analytics Corp., (Signal) a software
company that provides products for scientific imaging to the life science field.
CSPI purchased Signal for $2,159,000 in cash. This transaction was accounted for
as a purchase.
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Current Products
CSPI MultiComputer Division Products
With decades of application experience, CSPI understands the needs of
high-performance computing and real-time I/O applications. Applications
expertise, product innovation, technical support, and dedication to customer
support makes CSPI one of the industry's leading providers of high-performance
computing systems.
CSPI's MultiComputer Group's business is helping its customers solve
high-performance computing problems by supplying multiprocessing systems with
powerful real-time I/O capabilities that require minimum physical space or
power. CSPI's unique commitment to open system designs, seamless upgradability
of software, and superior scaleable multiprocessing architectures provides the
unparalleled price performance products that are needed to solve complex
real-time problems.
The Company's products consist of both hardware and software, each optimized for
the other. A typical OEM/volume end user will employ one or more units in an
embedded system for defense, medical imaging, advanced vision and seismic
applications.
2000 SERIES MultiComputer Products
In fiscal year 1998, the MultiComputer Division introduced several new product
additions to the 2000 SERIES MultiComputer Systems, its latest generation of
products designed specifically for high-performance computing applications.
2000 SERIES MultiComputer Systems offer application developers the most
comprehensive high-performance system in the industry. The Company
differentiates itself from its major competitors by its use of standard
interfaces and the interoperability this affords its OEM customers.
The 2000 Series High-performance MultiComputer Systems use the best of open
systems technologies. They are implemented using Myrinet networking technology,
Message Passing Interface (MPI) software for interprocessor communications, and
the VxWorks real-time operating system. Computational nodes based on PowerPCs,
from Motorola/IBM and SHARCs, from Analog Devices, provide a heterogeneous
processor architecture. The incorporation of open, proven, and established
technologies in the 2000 Series MultiComputer Systems ensures that customers
receive systems using the latest technology while reducing the risks associated
with proprietary technology. 2000 Series products have been shipped in a variety
of configurations, including multiple-chassis systems. These systems are being
used for several different applications including radar, sonar, and surveillance
signal processing.
The entry level price for a 2000 Series High-Performance MultiComputer System is
approximately $70,300. Volume discounts are offered.
MAP-1310/11 Products
The MultiComputer group continues to market and sell the MAP-1300 series of VME
board level products. The MAP-1310 and the MAP-1311 boards, are designed using
Analog Devices' 21060 DSP chip and the PowerPC RISC processor from Motorola/IBM.
The 1310 and the 1311 delivers 1 and 2 Gigaflops of DSP computational power,
respectively, using either 4 or 8 21060's on a daughterboard and a PowerPC 603
RISC processor. The 1310/1311 incorporate the VxWorks real-time operating system
(from Wind
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River Systems), C Compilers and CSPI's Standard Signal Processing Library for
the 21060 DSP chip's operation. The 1310/11 also support third party PMC(PCI)
modules offering a large set of standard I/O options. The MAP-1310 and
MAP-1311 are priced from $6,000 to $30,000, depending upon the model and
quantity purchased.
SuperCard Products
SuperCards are VME-based boards which are incorporated into customized signal
processing systems by OEM customers. Now in its fourth generation, the SuperCard
family is a complete product line of embedded signal processors employing
multiple Intel i860 RISC microprocessors. The most recent version, the
SuperCard-4SLX, employs eight 40MHz i860's and provides 640 MFLOPS of
computational power, incorporates 64MB of high speed memory and a high bandwidth
interboard connection scheme based upon National Semiconductor's QuickRing
components.
SuperCard-3 utilizes one or two of the 50MHz version of the i860 and is
available for the VME bus, the S-Bus and Turbochannel markets. The earlier
SuperCard-2 and 1 are still supplied to a limited number of existing customers.
SuperCard products are priced from $5,000 to $45,000 (depending upon model and
quantity).
Sortation Reader Products
CSPI MultiComputer Division's Vision Systems product group has been integrated
with the MultiComputer Group. The Lightning family of over-the-belt industrial
barcode readers commercialize technology developed by United Parcel Service
(UPS) to automate UPS's parcel sortation capabilities. The next generation of
readers is currently in production and includes upgraded technology to address
more applications.
CSPI's MultiComputer Group's business is helping its customers solve
high-performance computing problems by supplying multiprocessing systems with
powerful real-time I/O capabilities that require minimum physical space or
power. CSPI's unique commitment to open system designs, seamless
upgradibility of software, and superior scaleable multiprocessing
architectures provides the unparalleled price performance products that are
needed to solve complex real-time problems.
Scanalytics, Incorporated
Scanalytics specializes in the development and marketing of highly sophisticated
image analysis software products used in the scientific research community. By
integrating these software products with a diverse group of image capture
devices, Scanalytics is able to solve application-specific problems in a
variety of scientific disciplines. Applications range from astronomy
to microscopy, and include specialized modules for the analysis of images in
fluorescence, emission and electron microscopy, bio-medical and 3D imaging,
laser beam analysis, and remote sensing.
In the biotechnology and bio-medical research markets, Scanalytics offers a
complete line of gel analysis software packages used primarily in quantifying
DNA, RNA, and protein. Investigators involved in DNA fingerprinting, forensic
analysis, paternity testing, genetic linkage analysis, and identification of
pathogenic and environmental micro-organisms utilize Scanalytics analytical
systems in their laboratories. Scanalytics software modules are used by hundreds
of university,
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pharmaceutical and government labs, worldwide. In the field of cell biology,
Scanalytics' 3D, high resolution, fluorescence microscopy software is being used
to image and analyze microscopic cellular structures, in living cells, that were
previously impossible to visualize by any other technique.
Scanalytics software products are available for both the Macintosh and PC, and
are compatible with a wide variety of image capture devices, including
wide-field fluorescence microscopes, confocal microscopes, CCD cameras, storage
phosphor imaging devices, scanners and densitometers.
EPR and 3D Deconvolution
Based upon technology developed by the University of Massachusetts Medical
Center in over ten years of research, EPR (Exhaustive Photon Reassignment) is a
software product designed to allow extremely high-resolution imaging of cellular
and subcellular structures with minimal damage to the specimen. The Company
offers this deconvolution software, for use with desktop Pentium computers, or
with a multi-use server with SuperCards for higher-speed processing option. The
software alone is priced at $5,000, with server hardware prices starting at
$46,600 with additional SuperCard pricing available. The Company also sells
complete image acquisition and analysis systems ($6,000 to $100,000 exclusive of
microscope) to individual researchers in government, academia and industry.
These systems use third-party, off-the-shelf hardware components such as
cameras, z-axis positioners, light shutters and filter wheels.
Electrophoresis products
Electrophoresis is the most widely used technique for the separation
of proteins and nucleic acids in the life sciences. Active components are
separated by charge and molecular weight in thin gels and capillaries and then
detected using inherent properties or reporter molecules. These reporter
molecules can be chemiluminescent, radioactive labels, colored stains or
fluorescent dyes. Images derived by the scanning these gels and capillaries are
then analyzed for pertinent data using gel analysis software. Significant
methodologies using this data include large-scale DNA sequencing, DNA fragment
analysis for microbial identification, genotyping, population genetics,
forensics, and routine QC/QA of protein and nucleic acids in the
biopharmaceutical industry.
The Scanalytics product group markets several software products for
electrophoresis analysis priced from $1,000 to $6,500. These packages were
developed in cooperation with various university and research institute
collaborators. GELLAB II+, a product for the analysis of 2-D electrophoresis was
developed as a direct result of a Cooperative Research and Development agreement
with the National Cancer Institute. These packages are sold directly to
individual researchers and via a number of distributors and OEM suppliers of
scanner and capillary electrophoresis instruments.
IPLab Products
IPLab is a more general purpose image processing package used in microscopy,
astronomy, laser beam analysis, and material science. The software is offered in
modules with upgrades available for multi-probe fluorescence microscopy,
calcium-ratio imaging, 3-D microscopy, time-lapse studies, and microscope
automation. There is also a separate package used in microscopy, astronomy,
available for gel analysis. IPLab scripts allow end-users to write customized
functions
6
for their individual applications. The IPlab foundation product was introduced
in 1988 on the Macintosh and is now available on Windows. The base product is
priced at $2,000, and modules range in price from $500 to $3,000. The software
is sold directly and through a network of international and domestics dealers,
OEMs and VARs.
MODCOMP, Inc.
Integration Services
In recent years, MODCOMP's product offering has shifted away from
the sales of MODCOMP produced (proprietary and open architecture) hardware
toward integration solutions including hardware, software, special engineering,
and third party hardware and software. MODCOMP's value proposition is
integrating these components together into a complete computer system and
installing that system at the customer site. These services are offered by all
MODCOMP locations. In particular, the German subsidiary has had significant
successes in the telecommunication market with the recent deregulation of the
industry.
MODCOMP continues to sell MODCOMP produced systems and components, especially as
it relates to servicing current customers with replacement and/or upgraded
systems. MODCOMP's computer systems generally can be expanded without major
redesign as customer
requirements change.
The purchase prices of MODCOMP's computers and computer systems vary in
accordance with the requirements of the customer. Typically their computer
systems are priced from $6,000 to $250,000, depending on configuration and
peripheral equipment.
MODCOMP's computer systems are generally utilized in industrial plants, research
laboratories and data processing applications and operate in real-time.
Computer Hardware
In 1988, MODCOMP began selling RealStar family of computers, based on open
systems VME and Motorola 68 and 88k processor technology. This was a direct
result of faster processing technology and customer demand. MODCOMP provides
migration paths for CLASSIC proprietary customers with these systems. Prices
range from $15,000 to $100,000.
In July 1997, MODCOMP began the launch of its RealStar II line of computer
systems. This is a line of third party hardware based on Pentium processor
technology. This hardware is specially configured for optimum performance with
MODCOMP's REAL/IX PX operating system. MODCOMP adds additional components and
software to these systems such as RAID subsystems, interface cards, disks, video
displays, to optimize them for real-time, process control market place. During
the year MODCOMP purchased a license for AccessPoint from Access Ware in order
to complement the capabilities of the REAL/IX operating system. Prices for these
systems range from $6,000 to $25,000.
MODCOMP also continues to offer its proprietary CLASSIC and MODACS systems,
parts and services, which it manufactures in its Fort Lauderdale headquarters.
The CLASSIC systems are mini and supermini computers designed specifically to
support real-time applications. The MODACS and MODACSX products are data
acquisition and control systems. Prices range from $15,000 to $250,000.
7
Computer Software and Computer Programming
MODCOMP's computers are supported by high-level operating software, referred to
as MAX, REAL/IX, REAL/IX PX and Access Point. This software is designed
specifically for optimum real-time performance. MODCOMP's software enables
customers to write their own real-time application software. These applications,
when combined with MODCOMP computers or third party computers, create systems
which simultaneously perform different control functions, program tests and a
batch processing operation with response and interrupt times that are
competitive in the marketplace. Prices range from $3,000 to $35,000 and up.
The Company also offers specialized programming and software engineering
services to supply customers with customized solutions.
Legacy-Web Internet Integration Solutions
In fiscal year 1997, MODCOMP launched ViewMax in the United States. ViewMax
software is a development environment that allows companies to re-engineer and
integrate legacy systems such as mainframe, midrange, and other diverse host
systems with Internet technology. ViewMax can be used to extend corporate data
to a much wider audience via a corporate intranet, extranet, or the Internet.
ViewMax can also, integrate Electronic Commerce transactions with existing
legacy systems. Although the product has a broad potential, the early adopters
of this technology have used it primarily for facilitating Electronic Commerce
and creating extranets, current customers are in the following markets
insurance, financial, health services, governmental, and manufacturing/
distribution. Prices for ViewMax range from $40,000 to $250,000.
MODCOMP's Internet Products Division will be releasing, in early 1999,
ViewTerm-a software product that provides instant access to legacy systems via
the web using only HTML. Since ViewTerm does not use Java or JavaScript, it is
an ideal tool for quickly deploying an extranet that can be secured using the
standard web secure socket layer (SSL). ViewTerm is a low cost product designed
to facilitate immediate access via the web without providing the re-engineering
capabilities found in ViewMax. Prices for ViewTerm will range from $5,000 to
$50,000.
MODCOMP markets ViewMax both directly to end-users and through indirect
channels. The direct market is cross industry, to companies of substantial size,
and it is not dependent on the fluctuations of any particular industry segments.
ViewMax is positioned primarily as an integration tool, with a strong focus on
Electronic Commerce, Intranet and Extranet implementations. In the US and UK, a
wide range of companies from a broad spectrum of industry have signed up,
including insurance, system integrators, automotive and consumer electronics.
Markets, Marketing and Dependence on Certain Customers
CSPI MultiComputer Division
Applications for Multicomputing products include primarily sonar and radar
systems and simulators. It also services other areas such as medical imaging,
package sortation, speech recognition, and image processing. The Company
addresses these widely diverse markets as an OEM supplier to system integrators
primarily in the military and defense area and other high volume end-users. In
the case of Scanalytics, MODCOMP and over-the- belt products, the Company offers
complete application solutions to end-users. The following table sets forth the
8
amount (in thousands of dollars) and percentage of sales revenues attributable
to OEM-volume and individual end-users during fiscal years 1998, 1997 and 1996.
Year Ended August
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
OEM-volume sales $ 8,320 13% $ 8,662 44% $13,338 81%
End-user sales 55,148 87% 10,878 56% 3,182 19%
------- ---- ------- ---- ------- ----
$63,468 100% $19,540 100% $16,520 100%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
The shift in business from OEM volume sales to end-user was due primarily to the
business from MODCOMP in 1998 which was all end-user sales and presented 78% of
total sales and approximately 90% of end-user sales.
While military markets are generally shrinking overall, military signal and
image processing systems continue to be strong as they are considered very
important for maintaining military readiness. CSPI works with prime contractors
that are being encouraged to seek commercial-off-the-shelf (COTS) design
solutions rather than build in-house, custom products. The COTS effort is in
response to government pressure to reduce defense expenditures, from the various
procurement agencies around the world. These agencies have embraced the concept
of Commercial-Off-The-Shelf based systems as a method to reduce costs. Prime
contractors are being directed to employ relatively inexpensive commercial
components whenever possible, replacing custom, fully militarized designs. This
also adds another benefit in that commercial products are estimated to be
several years ahead of militarized equivalents. The Company continues to ship
products for several COTS based programs. The new MultiComputer series 2000
product has been shipped to a number of customers developing COTS based systems
or evaluating its use in future COTS programs. Such systems are mainly for
radar, sonar and night vision applications. The evaluation periods vary based on
the program, but it takes six to eighteen months for many of the programs to
complete their evaluation and begin deployment.
Several currently deployed programs utilize SuperCards incorporated into the
U.S. Navy's sonar computers, which are used to co-ordinate information from
hydraphone sensor arrays in both ship-based and shore-based installations. These
programs have continued, but their deployment is nearing completion.
Currently SuperCards are sold to medical imaging equipment suppliers on an OEM
basis. The market demand for medical imaging and the variety of non-invasive
technologies (e.g. MRI, PET, Ultrasound, Biomagnetics) is holding steady. The
Multicomputing 2000 series system is more powerful than required for these
products.
Barcodes are familiar to anyone shopping at the local supermarket. Designed
simply for product identification or zip code encryption, these one-dimensional
codes have limited information storage capacity. The trend is towards optical
character recognition and high-density, two-dimensional, machine codes capable
of carrying sufficient information for decisions to be made locally. Typical of
these modern machine codes is MaxiCode, which is designed specifically for high
speed sortation tasks. However, until recently, the widespread use of
two-dimensional machine codes has been limited by the lack of an accurate
over-the-belt
9
reader, an essential element in any automation scheme. The machine-code reader
developed by UPS, and manufactured and marketed by the Company, addresses the
need for an accurate, affordable unit capable of unattended operation which can
read bar codes and the latest two-dimensional codes and do optical character
recognition as well.
CSPI has had limited success in its sales efforts of this product to other
companies besides UPS, but it continues to market the product through the CSPI
distribution channel. UPS is the primary customer for the product.
Sales to individual customers constituting 10% or more of total sales consisted
of sales to VIAG of $10,105,000 (16%)in 1998. The other significant customer was
ARCOR with sales of $9,294,000 (15%). Both customers are German
Telecommunication companies. MODCOMP, a German subsidiary, installed system
hardware and software for a large mobile communication antenna planning system
and IP backbone network systems. The Company anticipates that, for the
foreseeable future, a significant percentage of its sales will be dependent upon
a relatively small number of customers.
The Company markets its products through sales offices in Billerica,
Massachusetts, Laurel, Maryland, and Los Angeles, California. Elsewhere in the
U.S. and throughout the remainder of the world, these offices coordinate the
activities of independent distributors and manufacturers representatives who
represent other company's product lines not competitive with CSPI and are either
paid a commission on units sold or are permitted to buy units at a discount for
subsequent resale.
MODCOMP supplies and integrates network solutions and designs, manufactures,
services and markets worldwide, high-speed mini-computers and mini-computer
systems principally for use in demanding real-time applications. These computer
systems are used in operations involving process measurement and control, power
production and distribution, manufacturing test and inspection, scientific data
collection and monitoring, as well as financing and other communications
networks. MODCOMP has been expanding its product line by including third-party
equipment to their sales and servicing efforts. Their new focus is as a total
solutions company that can meet the needs of customers with a variety of
products including internally produced and those of third-party manufacturers.
Geographically, Europe accounts for approximately 64% of total sales. The
significant increase in European sales was due to MODCOMP business.
Historically, approximately 50% of MODCOMP's revenue is generated
internationally. During the year, MODCOMP had significant sales from system
integration customers in Germany. Accordingly, changes in market conditions in
these countries may significantly affect MODCOMP's performance.
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The following table sets forth the amounts (in thousands of dollars) and
percentage of sales by geographical area during fiscal years 1998, 1997 and
1996.
Year Ended August
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
North America $21,245 33% $13,324 68% $14,474 88%
Far East 1,515 3% 1,034 5% 1,407 8%
Europe 40,594 64% 5,090 26% 574 3%
Other 144 % 87 1% 65 1%
------- ----- ------- ---- ------- ----
$63,468 100% $19,540 100% $16,520 100%
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
Competition
CSPI MultiComputer Division
The MultiComputer, bar-code reader and bio-instrumentation markets are very
competitive. The Company believes its products to be among the leaders in
performance and price. All the markets are characterized by rapid technological
change, and the introduction of new products with superior capabilities or lower
pricing could adversely affect the Company's business.
The Company's principal direct competitors in CSPI's MultiComputer Division
market are Mercury Computer Inc. and Sky Computers, Inc. In the specialized DSP
market direct competitors include DY4 Inc., Pentek, Ariel, and Alacron. New
companies enter the field periodically, and larger companies with greater
technical resources and marketing organizations could decide to compete in the
future.
The future growth of the MultiComputer systems market depends upon providing
high density and scalability, in a compact, low power, and inexpensive package
that can be easily integrated into an OEM customer's design for high performance
computation for a specific range of signal processing and computer server
systems. Other companies may offer computer systems designed for particular
applications not addressed by the Company or for attachment to computers
incompatible with the Company's products. Since the majority of sales are to OEM
volume users, the principal barrier to competition is the reluctance of
established users to redesign their product once it is in production and the
strength of the Company's relationship with its customers.
Direct competitors to the Company's machine code reader are AccuSort Systems,
Inc., which has also licensed the relevant technology from UPS, and Intermec,
and has developed their own CCD based reader. Machine code readers of
conventional laser design, which have some of the same performance
characteristics, are available from Computer Identics, PSC Automation, and
Datalogic. The Company's competitive advantage stems from the use of its
SuperCards in the reader, its superior signal processing expertise and its
proven capability as a quality supplier.
In the microscopy market, Scanalytics' major competitors are Media Cybernetics,
Universal Imaging and ImproVision. Other competitors include Applied Precision
Instruments, Noran, Innovision, Compix, Carl Zeiss and Intelligent Imaging. In
the gel analysis market, major competitors include Genetic Solutions (formerly
Biolmage), Media Cybernetics, and BioRad. These competitors range from small,
single product companies to large multinational instrument and microscope
11
companies. Scanalytics maintains its competitive advantage through the internal
development of sophisticated software applications to offer low-cost solutions
in the 3D microscopy market.
MODCOMP's competition in its Process Control and Data Acquisition business
crosses product line boundaries. Competition in its proprietary product line is
with third party companies that have developed technical expertise with the
CLASSIC computer system family. Direct competitors include Accurate Computers,
Queue Systems, Protostar, and Electronic Visions.
Competitors for both MODCOMP's proprietary and open systems product lines also
include systems integrators with process control skills in markets such as
primary metals, oil and gas, power, rubber and plastics, pharmaceuticals,
chemicals, pulp and paper, and food and beverages. These competitors offer
alternate open systems hardware platforms and industry-specific tailored
application software packages.
MODCOMP's direct competition with its real-time UNIX operating system include
VxWorks, HP-UX, PowerMAX, WindowsNT, Lynx, QNX, and Linux. As performance in
microprocessor technology rapidly advances, real-time capabilities of competing
operating systems narrows. Competing products are differentiated by hardware
platform support and operating system robustness.
The Legacy Extension market space is very competitive, but ViewMax technology
has been reviewed by independent industry analysts and positioned as Visionary
within our market segment. The Company believes it products to be among the
leaders in terms of performance and price. This market space is characterized by
rapid technological change, but our commitment to PERL as the development
language will allow us to rapidly respond to any technical advances made by
competitors that may adversely affect our business.
The Company's principal direct competitors in the Legacy Extension market space
are Clientsoft, Sterling Software, Mozart, CST, Simware, Intelligent
Environments, and Enterprise Link. New companies with backgrounds in emulation
have begun to enter the market space. These companies such as WallData,
Attachmate, and IBM have greater technical resources and marketing
organizations, but are currently behind in technology. Substantial development
efforts on their part could adversely affect our position.
In the system integration service business MODCOMP competitors are extensive and
are difference in each of the geographical markets but they include such
competitors as EDS, IBM , Sun Microsystems, and Compaq.
Manufacturing, Assembly and Testing
All of the CSPI Multicomputing Division's manufacturing is performed at its
plant in Billerica, Massachusetts. The primary manufacturing process is the
assembly and test of printed circuit boards and systems, designed by the Company
and fabricated by other vendors. The Company endeavors to build for inventory
and offers products in a variety of standard formats. A small percentage of
sales reflect products customized to a particular customer's specification, and
even these products are easily reconfigurable should the customer cancel the
order for any reason.
12
Upon receipt of material by the Company from outside suppliers, products and
components are inspected by the Company's QC/QA technicians. During manufacture
and assembly, both subassemblies and completed systems are subjected to
extensive testing, including burn-in and vibration procedures designed to
minimize equipment failure. The Company also uses diagnostic programs to detect
and isolate potential component failures. A comprehensive log is maintained of
all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Myricom Inc., Arcadia, CA for the
networking technology integrated circuit devices used in 2000 SERIES
MultiComputer products. The Company has sufficient quantities of these
components on hand to satisfy anticipated demand. The Company has been assured
by Myricom that supplies will continue to be available for reasonable quantities
required.
SuperCard products were designed using the Intel i860 RISC microprocessor. CSPI
was recently informed that Intel would be discontinuing production of the i860
at the end of the 1998 calendar year. CSPI has made provisions to accommodate
the future needs of all its SuperCard customers for this product. No new
application development programs will be initiated incorporating SuperCard
products, however, SuperCard products will continue to be shipped into existing
programs that have completed the SuperCard end-of-life plan.
The CSPI MultiComputer Division does not consider the risk of interruption of
supply to be significant to meet its projected revenue requirements for the
immediate future.
The CSPI MultiComputer Division provides a warranty covering defects arising
from products sold and service performed, which varies from 90 days to one year
depending upon the particular unit. However, warranties of substantially greater
scope have been extended to certain major customers for financial and other
considerations. The CSPI MultiComputer Division maintains a reserve for warranty
repairs equal approximately to 2% of product sales for the last 90 days.
The CSPI MultiComputer Division is approved for registration to ANSI/ASQC-Q9001
under RAB and RvC accreditation. The ISO9001 category is the most comprehensive,
and incorporates every aspect of business from design, through sales, to
manufacturing and customer support. Scanalytics ships all of its software
products and manuals form the Fairfax Virginia facility. They perform system
integration of computers equipment with various image capture devices such as a
microscopes or digital camera at their facilities in Virginia before
installation at the customer site.
MODCOMP's computer system production starts with the procurement of raw
materials, components, pcb's, cables, and prefabricated sheet metal. System
configurations can include a wide selection of peripheral subsystems built or
purchased under the original equipment manufacturer agreements. MODCOMP's
manufacturing facility is located in Fort Lauderdale, Florida. The process is
controlled by various quality steps throughout the manufacturing phases. The
production cycle of an individual system generally takes between 30 and 45
days, depending on its complexity.
MODCOMP's manufacturing operations requires a wide variety of mechanical and
electronic components, raw materials and other
13
supplies. MODCOMP has more than one commercial source of supply for most of the
components and raw materials which it uses, but is dependent on certain
single-source suppliers for a certain number of items. The supply situation is
cyclical and shortages or extended lead times for delivery have developed from
time to time. Although to date the Company has had no significant problems in
procuring its material requirements as needed, MODCOMP's operations could be
seriously affected should shortages become acute.
Customer Support
The CSPI MultiComputer Division and Scanalytics support its customers in a
number of ways: telephone assistance, on-site service, installation of systems,
training and education. Customers are able to call a support unit and report
problems which are reviewed by an analyst. The analyst will research the problem
and will assist the customer, most commonly via telephone, in an effort to
correct the problem. Service of this kind is available during the warranty
period, and is also available to report "bugs" in the software. Customers may
purchase software and hardware maintenance and on-site service contracts after
the warranty period.
The CSPI MultiComputer Division offers training courses at either corporate
headquarters or the customer site, should the customer request it. Field and
customer service support is provided through Billerica, Massachusetts, Los
Angeles, California, Laurel, Maryland and Scanalytics through its Fairfax,
Virginia site.
MODCOMP supports its customers in a number of ways; telephone assistance,
on-site service, installation of systems, training and education. Service and
parts warranty, generally of 90 days duration, is provided on all products. In
addition, MODCOMP sells maintenance service contracts to customers. MODCOMP also
conducts customer training classes of one to three weeks duration on a fee basis
either at their site or the customer's location.
MODCOMP offers training courses at corporate headquarters. Field and customer
service support is provided through offices strategically located throughout the
world.
Engineering and Development
During fiscal 1998, CSPI MultiComputer Division's expenses (including
depreciation) for engineering and development were approximately $4,072,000 (6%
of sales) compared to approximately $3,360,000 (17% of sales) and $3,325,000
(20% of sales) in fiscal years 1997 and 1996, respectively. Expenditures for
engineering and development are expensed as they are incurred. The CSPI
MultiComputer Division expects to continue substantial expenditures, both in
additional applications software development and development of hardware and
software for multicomputers. Scanalytics Inc. will continue to expand its
product offering in software with its various products in gel and cell analysis
for life sciences and complete new releases of the PC version of the IP Lab
software product. CSPI MultiComputer Division's products and development
currently in process are intended to extend the usefulness and marketability of
existing products and introduce new products into existing market segments.
MODCOMP will continue development of the View Max product, Real/IXPR and
AccessPoint for SCADA solutions.
Of CSPI MultiComputer Division's and Scanalytics have 74 employees, 20
14
professional and staff employees were engaged in software and hardware
engineering and development activities as of August 28, 1998.
The CSPI MultiComputer Division does not have any patents that are material to
its business.
The Company does not have any patents that are material to its business.
MODCOMP's Engineering and Development staff has developed various computers,
computer peripherals and software since 1970, which it continues to maintain and
enhance.
MODCOMP's principal products are the CLASSIC hardware and software line, REAL/IX
PX and special one-of-a-kind products requested by customers.
The CLASSIC hardware and software line is a proprietary line of computers and
related software especially designed for the hard real-time market and has
been in existence since 1970.
REAL/IX PX is a modified version of the AT&T System V UNIX. It has been
modified to add determinism, fast interrupt handling, and fast context
switching required by the hard real-time market. REAL/IX PX runs on he Intel
486 and Pentium line of computers.
Engineering works directly with customers to develop special one- of-a-kind
products such as the MODCOMP-VME-II, which moves the design of one of the early
CLASSIC systems onto a VME board to go into a VME chassis.
MODCOMP's 171 employees, 13 professional and staff employees are engaged in
software and hardware engineering and development.
Backlog
The Company's backlog of customer orders and contracts was approximately
$9,781,000 at August 28, 1998 as compared to $9,550,000 at August 29, 1997. The
backlog of the Company can fluctuate greatly. These fluctuation can be due to
the timing of receiving large orders for integration services and OEM purchases.
Employees
On August 28, 1998, the Company had 245 full time employees. None of the
Company's employees is represented by a labor union and the Company had no work
stoppages. The Company considers relations with its employees to be good.
Item 2. Properties
The Company owns the land and building at 40 Linnell Circle, Billerica,
Massachusetts.
The Company owns approximately 2.8 acres of land adjacent to the Company's
current facility. The Company believes space at its current location, combined
with space that will be available if the Company proceeds to build on the
adjacent land, will be sufficient for future growth.
15
MODCOMP's corporate headquarters, manufacturing operations and training facility
in Fort Lauderdale, Florida are located in a leased building, totaling
approximately 77,483 square feet. In addition, they lease the following office
spaces in the United States, Canada and foreign countries; Cincinnati - 1,958
sq. feet, Atlanta - 787 sq. feet, Houston - 1,450 sq. feet, Ontario, France -
11,066 sq. feet, Hamburg, Germany - 29 sq. feet, Hannover, Germany - 748 sq.
feet, Cologne, Germany - 6,048 sq. feet and Karlsruhe, Germany - 1,782 sq. feet.
Item 3. Legal Proceedings
MODCOMP is currently defendant in certain lawsuits which arose in the ordinary
course of business. Based in part on the opinion of legal counsel representing
the Company in these lawsuits, management is of the opinion that the outcome of
such litigation will not have a material adverse effect on the Company's
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders.
Item 4A. Executive Officers
Information about the executive officers of the Company is set forth below.
Name and Age Business Affiliations
- -------------------------- ------------------------------------------
Alexander R. Lupinetti(53) Chairman, Chief Executive Officer and
President of CSPI since October 1996;
President and Chief Executive Officer of
each of the TCAM Systems Inc., Shared
Systems Corporation and SoftCom Systems,
Inc. subsidiaries of Stratus Computer Inc.
from November 1987 to September 1996;
Northeastern General Manager for the
Engineering and Scientific Division of
International Business Machines, Inc. from
1984 to 1987.
Michael M. Stern(61) Director of CSPI from 1968 to January 1984;
Vice President of Operations and Treasurer
of CSPI since 1968.
Gary W. Levine(50) Vice President of Finance and Chief
Financial Officer of CSPI since September
1983; Controller of CSPI from May 1983 to
September 1983.
James A. Waggett(61) Director of CSPI from 1968 to January 1984;
Vice President of Advanced Development from
1974 to the present; Business Element
Manager of the Embedded Computing Product
Group from August 1995 to October 1996;
Clerk from 1971 to March 1983; Assistant
Clerk from March 1983 to the present.
16
Bradley E. Stamp (46) Vice President of Sales and Support for
MultiComputer Group from October 1996 to
present; General Manager of Vision System
Product Group May 1994 to September 1996;
Director of Customer Support September 1988
to May 1994.
Michael Mort(47) President of Scanalytics June, 1997;
President and owner of Signal Analytics
Corp. June, 1997-1987,
John P. Clary(61) President of MODCOMP Inc. and Vice
President of CSPI from August 1997 to
present, Modcomp/Cerplex L.P. President
and Chief Executive Officer December
1994 to August 1997, Vice President of
Customer Support, Manufacturing and
Facilities, Modular Computer Systems
Inc., January 1991 to December 1994
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information required by this Item is incorporated by reference from
"Common Stock Data" on page XX of the Company's 1998 Annual Report to
Stockholders. American Stock Transfer Company is the Transfer Agent and
Registrar for the Company's Common Stock. There were approximately 152
Stockholders of record as of November 16, 1998. The Company believes the
number beneficial owners of shares (including shares held in street name) at
that date were approximately 1,000.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference from
"Selected Financial Data" on page 17 of the Company's 1998 Annual Report to
Stockholders.
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
The information required by this Item is incorporated by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18-24 of the Company's 1998
Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference from pages 25
to 42 and from "Independent Auditor's Report" on page 43 of the Company's 1998
Annual Report to Stockholders.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
NONE
17
PART III
Item 10. Directors and Executive Officers of the Registrant
The information for Directors required by this Item is incorporated by reference
from the Company's Proxy Statement dated November 30,
1998 filed with respect to the Annual Meeting of Stockholders of the Company on
January 12, 1999.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The information required by this Item is incorporated by reference from the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8K
A) The following are filed as part of this report:
1) Financial Statements (See item 8):
The following financial statements of the Company are included in Part II of
this report through incorporation by reference from the Company's 1998 Annual
Report to Stockholders.
Annual Report
Page
-------------
Independent Auditors' Report..............................................43
Consolidated Balance Sheets at August 28, 1998 and
August 29, 1997...........................................................25
Consolidated Statements of Operations for years ended August 28, 1998,
August 29, 1997 and August 30, 1996.......................................26
Consolidated Statements of Shareholders' Equity for years
ended August 28, 1998, August 29, 1997 and August 30, 1996................27
Consolidated Statements of Cash Flows for years ended August 28, 1998,
August 29, 1997 and August 30, 1996.......................................28
Notes to Consolidated Financial Statements.............................29-42
18
2) Consolidated Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts
3) Exhibits
Certain of the Exhibits listed hereunder have previously been filed with the
Commission and are hereby incorporated by reference pursuant to Rule 12b-32
under the Securities Exchange Act of 1934 and Rule 24 of the Commission's Rules
of Practice. The location of each document so incorporated by reference is noted
parenthetically.
3.1 Articles of Organization and amendments thereto, of the Company as of the
end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended August
31, 1990)
3.2 By-Laws of the Company, as amended through March 21, 1995
10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to
the Form S-8, File No. 2-79414, 1987 Registration Statement)
10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated
January 5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414,
1987 Registration Statement)
10.3 Form of Invention Agreement between the Company and certain
of its employees
10.4 CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8
amendment 2 to Form 10-K for year ended August 31, 1986, dated
February 23, 1987)
10.5 Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5,
1987 as amended (Exhibit 10.11 to Form 10-K for year ended August 31,
1990)
10.6 Amendment to Mr. Ochlis' Employment and Deferred Compensation Agreement
dated March 20, 1989 (Exhibit 10.9 to Form 10-K for year ended August 31,
1991)
10.7 1991 Incentive Stock Option Plan (the Plan is included in the Company's
Proxy Statement dated November 10, 1991 with respect to the Annual Meeting
of Stockholders of the Company on December 10, 1991)
10.8 Retirement Agreement for Edmund U. Cohler (Exhibit 10.9 to Form 10-K for
the year ended August 26, 1994)
10.9 Symbology Reader License Agreement between UPS and CSPI (Exhibit 10.9 to
Form 10-K for the year ended August 26, 1994)
10.10 Software License Agreement between UPS and CSPI (Exhibit 10.12 to Form
10-K for the year ended August 26, 1994)
10.11 Patent Agreement between UPS and CSPI (Exhibit 10.13 to Form 10-K for the
year ended August 26, 1994)
19
10.12 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement dated
February 6, 1995
10.13 Employment Agreement between CSP Inc. and Mr. Lupinetti
dated September 12, 1996
10.14 Signal Analytics Purchase Agreement
10.15 Modcomp/Cerplex L.P. Purchase Agreement
11.0 Computation of Earnings (loss) Per Share for the years ended August 28,
1998, August 29, 1997, and August 30, 1996
13.1 1998 Annual Report to Stockholders
22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year
ended August 29, 1997)
23.0 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of CSP Inc. and Subsidiaries
Under date of October 5, 1998, except as to Note 13, which is dated as of
October 14, 1998, we reported on the consolidated balance sheet of CSP Inc. and
Subsidiaries as of August 28, 1998 and August 29, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended August 28, 1998, as contained
in the 1998 Annual Report to Shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the financial
statement schedule on page 22 of this report. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 5, 1998
21
CSP INC. AND SUBSIDIARIES
Schedule VIII-Valuation and Qualifying Accounts
Allowance
For
Warranty Doubtful
Description Reserve Accounts
- ----------- -------- ----------
Balance August 25, 1995 $92 $103
Additions Charged to Costs and
Expenses 92 --
Additions Charged to Other
Accounts 23 --
Deductions:
Write off of assets -- --
-------------------------------
Balance August 30, 1996 69 103
Additions Charged to Costs and
Expenses -- --
Additions for MODCOMP 144 154
-------------------------------
Balance August 29, 1997 213 257
Additions Charged to Costs and
Expenses -- --
Additions Charged to Other
Accounts -- l02
Deductions -- --
-------------------------------
Balance August 28, 1998 $213 $359
-------------------------------
-------------------------------
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CSP INC.
(Registrant)
Alexander R. Lupinetti November 23, 1998
- ---------------------- -------------------
Alexander R. Lupinetti Date
Chief Executive Officer,
President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- ----
Alexander R. Lupinetti Chief Executive Officer, November 23, 1998
- ---------------------- President and Chairman
Alexander R. Lupinetti
Gary W. Levine Vice President of Finance, November 23, 1998
- ---------------------- Chief Financial Offcier
Gary W. Levine
J. David Lyons Director November 23, 1998
- ----------------------
J. David Lyons
Shelton James Director November 23, 1998
- ----------------------
Shelton James
Sandford Smith Director November 23, 1998
- ----------------------
Sandford Smith
Robert Williams Director November 23, 1998
- ----------------------
Robert Williams
23
EXHIBIT INDEX
Exhibit Form 10-K
Number Exhibit Page
- ------- ------- ---------
11.0 Computation of Earnings (loss) Per Share for the years ended
August 28, 1998, August 29, 1997, and August 30, 1996
13.1 1998 Annual Report to Stockholders
23.0 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
24