-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SCDQulLYnHLy3PTJJ3e8kqu8YtUsbTypVyeS0rtSpJttvj2x/TMNUd41B8rAXCcH 143UVotzLnDfjdvAoaVOTA== 0000903893-96-001029.txt : 19961202 0000903893-96-001029.hdr.sgml : 19961202 ACCESSION NUMBER: 0000903893-96-001029 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960830 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSP INC /MA/ CENTRAL INDEX KEY: 0000356037 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042441294 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10843 FILM NUMBER: 96673866 BUSINESS ADDRESS: STREET 1: 40 LINNELL CIRCLE CITY: BILLERICA STATE: MA ZIP: 01821 BUSINESS PHONE: 5086637598 MAIL ADDRESS: STREET 2: 40 LINNELL CIRCLE CITY: BILLERICA STATE: MA ZIP: 01821 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended AUGUST 30, 1996 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to ____ Commission file number 0-10843 CSP INC. -------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2441294 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 LINNELL CIRCLE, BILLERICA, MASSACHUSETTS 01821 - ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508)663-7598 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.01 ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing selling price as reported on NASDAQ on November 15, 1996, was $20,267,021. The number of shares outstanding of the registrant's Common Stock, $.01 par value, was 2,657,970 at November 15, 1996. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part II, Items 5, 6, 7 and 8 is incorporated by reference to the Registrant's 1996 Annual Report to Stockholders. The information required by Part III, Items 10,11,12 and 13 is incorporated by reference to the Registrant's Proxy Statement dated November 11, 1996 filed with respect to the Annual Meeting of Stockholders of the Registrant to be held on December 10, 1996. CSP Inc. Form 10-K Year Ended August 30, 1996 Item Number in Form 10-K Table of Contents Page - ------------ ----------------- ---- Part I 1 Business........................................ 4 2 Properties...................................... 14 3 Legal Proceedings............................... 14 4 Submission of Matters to a Vote of Security Holders............................ 14 Part II 5 Market for Registrant's Common Equity and Related Stockholder Matters................ 15 6 Selected Financial Data......................... 15 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15 8 Financial Statements and Supplementary Data..... 15 9 Change in and Disagreements with Accountants on Accounting and Financial Disclosure......... 15 Part III 10 Directors and Executive Officers of the Registrant...................................... 16 11 Executive Compensation........................... 16 12 Security Ownership of Certain Beneficial Owners and Management.................................. 16 13 Certain Relationships and Related Transactions... 16 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 17 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 pioneered the concept of embedded computers specifically designed to carry out scientific calculations at very high speeds. The Company had its initial public offering in 1982. In 1988, the Company established its Scanalytics product group to develop and market imaging systems for molecular and cell biology. In 1994, the Company established its Vision Systems product group to commercialize technology developed by United Parcel Service (UPS) to automate parcel sortation capabilities. CSPI sells all products through its own direct sales force in the U.S., with 14% of total sales outside the U.S. via a worldwide organization of distributors. CURRENT PRODUCTS ---------------- EMBEDDED COMPUTERS Providing additional computation power for specific signal processing application problems has been CSPI's core technology since its inception. The Company's products consist of both hardware and software, each optimized for the other. A typical OEM/volume end user will employ one or more units in an embedded system for defense, medical imaging, advanced vision and seismic applications. Historically, the Company provided embedded computers (Mini- MAP and MAP 4000) for use with Digital Equipment Corporation's Q-Bus based Micro-VAX minicomputers. These products are still supplied to a small number of OEM customers and represent $20,950 of embedded computer sales in 1996. The majority of products sold are VME-based boards (called SuperCards) which are incorporated into customized signal processing systems by OEM customers. Now in its fourth generation, the SuperCard family is a product line of embedded signal processors that employ multiple Intel i860 RISC microprocessors. The latest version, the SuperCard-4SLX, employs eight 40MHz i860's and provides 640 MFLOPS of computational power with 64 MB of high speed memory and a high bandwidth interconnection scheme based upon National Semiconductor's QuickRing. SuperCard-3 utilizes one or two of the 50MHz version of the i860 and is available for VME, S-Bus and Turbochannel. The earlier Supercard-2 and 1 are still supplied to a limited number of existing customers. All SuperCards are supported by a rich software development environment, real-time software for multiple board installations and an extensive library of five hundred commonly employed micro-coded mathematical subroutines. New products currently in development are to be similarly supported. Third party software support includes VxWorks (Wind River Systems), Unison (Multiprocessor Toolsmith), FORTRAN (Lahey Computer Systems) and "C" (Metaware Corp) compilers. The Company has placed great emphasis on its ability to migrate customer application code to new generations of its hardware. SuperCard products are priced from $5,000 to $45,000 (depending upon model and quantity) and represented $11,672,000 of embedded computer sales in 1996. The development of a new generation of VME board level products ( called MAP series ) has been on-going. These products are designed around Analog Devices / 21060 DSP chip and the PowerPC RISC processor from Motorola. The first MAP product, the MAP 1310/11 is starting volume shipment now. The MAP-1310/11 (single VME slot) delivers 1 Gigaflops of DSP power with 8 x 21060's on a daughterboard and a VME and PowerPC 603 RISC processor. The PowerPC uses VxWorks ( Wind River Systems ) Real Time Kernel while Analog Devices C Compiler and CSPI's Standard Signal Processing Library is used for the 21060 DSP chip operation. The MAP-1310/11 supports third party PMC(PCI) modules offering a large set of standard I/O options. The MAP-1310/11 is priced from $6,000 to $30,000, depending upon the model and quantity purchased. New models in the MAP series are currently under development and will incorporate Myrinet, a high performance multi-gigabytes/sec network technology by Myricom, Inc. Myrinet technology will be used to implement a high performance board to board interconnect inside one or multiple VME systems. Multiple PowerPCs on a single VME slot and optimized sortware for Myrinet are part of the current development to introduce a high performance scalable network multicomputing solution for real time applications. The company differentiates itself from its major competitors by its use of standard interfaces and the interoperability this affords its OEM customers. SCANALYTICS CELLSCAN, 3D FLUORESCENCE MICROSCOPY Based upon technology developed by the University of Massachusetts Medical Center in over ten years of research, CELLscan is a system designed to allow the in vivo analysis of the internal workings and structure of living cells. The system permits cell biologists to study the cell's reaction to external stimuli and understand the fundamental processes of cell life and death. Fluorescent probes are infused into the cell and illuminated under a standard microscope. The resulting images are processed by a SuperCard array to compensate for the distortions introduced by the measurement and then displayed in three dimensions on a PC. An alternative, incumbent, technology called con-focal microscopy employs an expensive optical system to produce similar images. This technology is licensed exclusively to CSPI for a period of ten years which commenced in April 1991, providing that the Company maintain certain royalty levels which Management anticipates will be met. The Company sells complete systems ($60,000 to $100,000 exclusive of the microscope) to individual researchers in academia and biopharmaceutical companies. CELLscan sales were $1,263,000 for 1996. ELECTROPHORESIS PRODUCTS Electrophoresis is the most widely used technique for the separation of proteins and nucleic acids in the life sciences. Active components are separated by charge and molecular weight in thin gels and capillaries and then detected using inherent properties or reporter molecules. These reporter molecules can be radioactive labels, colored stains or chemiluminescent and fluorescent dyes. Images obtained by the scanning of these gels and capillaries are then analyzed for pertinent data using PC based software packages. Significant methodologies using this data include large-scale DNA sequencing, DNA fragment analysis for microbial identification, population genetics, and forensics, and routine QC/QA of protein and nucleic acids in the biopharmaceutical industry. The Scanalytics product group markets several shrink-wrapped software packages for electrophoresis analysis that sell from $1,500 to $6,500. These packages were developed in cooperation with various university and research institute collaborators. GELLAB II+, a product for the analysis of 2-D electrophoresis was developed as a direct result of a Cooperative Research and Development agreement with the National Cancer Institute. These packages are sold directly to individual researchers and via a number of distributors and OEM suppliers of scanner and capillary electrophoresis instruments. The Company acquired the assets of AMBIS, a supplier of radioisotopic imagers, in March 1994 and has integrated the manufacture of these products into its Billerica facility. AMBIS imagers eliminate the intermediate step of using photographic film to determine the pattern generated by gel electrophoresis. Priced from $25,000 to $50,000, AMBIS imagers appeal particularly to researchers interested in quantitative measurements. Sales of Electrophoresis products were $1,040,000 in 1996. VISION SYSTEMS This product group was founded in 1994 to commercialize technology developed by United Parcel Service (UPS) to automate UPS's parcel sortation capabilities. The Danbury R/D facility of UPS had developed a bar-code reader, incorporating the Company's SuperCard-2, together with a two-dimensional bar-code for use in its high-speed sortation facilities. The Company supplied UPS with a limited number of preproduction readers for evaluation in their Grand Rapids, MI experimental facility in 1993 and then received an order for production quantities to equip a newly constructed facility in Chicago. These units were shipped in fiscal 1994/1995 and are currently in daily operation. The Company negotiated a non-exclusive license to the technology and is marketing the units to other potential customers. The reader has been exhibited at trade shows in the US, Europe and Japan. Datalogic, based in Bologna, Italy has been engaged to distribute the reader outside the US. Further, the Company is continuing to work with UPS's Danbury R/D facility to improve the reader's performance and reduce its cost. This engineering effort is expected to result in a product range with varying price and performance capabilities. MARKETS, MARKETING AND DEPENDENCE ON CERTAIN CUSTOMERS ------------------------------------------------------ Applications for embedded computers include sonar and radar systems and simulators, medical imaging, seismic data processing, package sortation, and mathematical biology. The Company is able to address these widely diverse markets primarily as an OEM supplier to system integrators and high volume end-users. The current trend has returned to board-level embedded computer products which has accelerated the movement to higher unit volume, OEM customers. In the case of both Scanalytics and Vision Systems, the Company has decided to offer a complete applications solution to individual end-users. The following table sets forth the amount (in thousands of dollars) and percentage of sales revenues attributable to OEM-volume and individual end-users during fiscal years 1996, 1995 and 1994. Year Ended August ----------------- 1996 1995 1994 ---- ---- ---- OEM-volume sales $13,338 81% $13,344 72% $11,264 58% End-user sales 3,182 19% 5,182 28% 8,196 42% ------- ---- ------- ---- ------- ---- $16,520 100% $18,526 100% $19,460 100% ======= ==== ======= ==== ======= ==== While military markets may be shrinking overall, CSPI's share has increased as prime contractors are encouraged to seek commercial design solutions rather than build in-house, custom products. In response to government pressure to reduce defense expenditures, procurement agencies around the world have embraced the concept of Commercial-Off-The-Shelf (COTS) based systems. Prime contractors are being directed to employ relatively inexpensive commercial components whenever possible, replacing custom, fully militarized designs. A further benefit is that commercial products are estimated to be several years ahead of militarized equivalents. The Company continues to ship products for several COTS based systems and has received volume orders as the systems are deployed. The most productive program has been sales of SuperCards for use with the U.S. Navy's sonar computers, which are used to co-ordinate information from sensor arrays in both ship-based and shore-based installations. However, COTS products are inappropriate for systems designed for truly hazardous conditions and, to fill this need, the Company has entered into a license agreement with Hughes Aircraft Company, Fullerton, CA, which has designed a fully MIL-Spec version of the SuperCard 2XL. Medical imaging has enjoyed sustained growth and the variety of non-invasive technologies (e.g. MRI, PET, Ultrasound, Biomagnetics) employed is still increasing. SuperCards are sold to several medical imaging equipment suppliers on an OEM basis. Instrumentation for biotechnology is used for both basic research and the production of bio-pharmaceuticals. Funding for molecular and cell biology research is a priority for most industrial nations and is predicted to increase. Biotechnology techniques are now commonplace in all bio-pharmaceutical companies and are extensively employed in the manufacturing of bio-engineered drugs. Scanalytics instruments are used for both basic life sciences research and the quality control of bio-pharmaceutical production. No single customer represents a significant percentage of the total Scanalytics sales volume. Barcodes are familiar to anyone shopping at the local supermarket. Designed simply for product identification or zipcode encryption, these one-dimensional codes have limited information storage capacity. The trend is towards high-density, two-dimensional, machine codes capable of carrying sufficient information for decisions to be made locally. Typical of these modern codes is MaxiCode, which is designed specifically for high speed sortation tasks. However, until recently, the widespread use of two- dimensional machine codes has been limited by the lack of an accurate over-the-belt reader, an essential element in any automation scheme. The machine-code reader developed by UPS, and manufactured and marketed by the Company, addresses the need for an accurate, affordable unit capable of unattended operation which can read both bar codes and the latest two-dimensional codes. CSPI has been successful in its sales efforts of this product to other companies besides UPS. In addition to our new customers, there are several companies involved in material handling interested in this product. This past year ANSI and the Department of Defense have recommended MaxiCode to be used for sortation and tracking applications. These are in addition to previous standards groups who have already recommended MaxiCode. Sales to individual customers constituting 10% or more of total sales consisted of sales to Hughes Aircraft of $3,394,000 (21%)in fiscal year 1996. The Company anticipates that, for the foreseeable future, a significant percentage of its sales will be dependent upon a relatively small number of customers. The Company markets its products through sales offices in Billerica, MA, Laurel, MD, and San Diego, CA. Elsewhere in the U.S. and throughout the remainder of the world, these offices coordinate the activities of independent distributors and manufacturers representatives who represent other company's product lines not competitive with CSPI and are either paid a commission on units sold or are permitted to buy units at a discount for subsequent resale. On August 31, 1996 CSP, Inc. closed its French subidiary, and is continuing to do business in France with a local distributor. Geographically, North America accounts for approximately 88% of total sales due to the dominance of U.S. based manufacturers in the Company's major markets and the wider acceptance of the VME standard in the U.S. The following table sets forth the amounts (in thousands of dollars) and percentage of sales by geographical area during fiscal years 1996, 1995 and 1994. Year Ended August ----------------- 1996 1995 1994 ---- ---- ---- North America $14,474 88% $15,992 86% $16,234 83% Far East 1,407 8% 953 5% 1,299 7% Europe 574 3% 1,207 7% 1,392 7% Other 65 1% 374 2% 535 3% ------- ---- ------- ---- ------- ---- Total $16,520 100% $18,526 100% $19,460 100% ======= ==== ======= ==== ======= ==== COMPETITION ----------- The embedded computer, bar-code reader and bio-instrumentation markets are very competitive. The Company believes its products to be among the leaders in performance and price. All the markets are characterized by rapid technological change, and the introduction of new products with superior capabilities or lower pricing could adversely affect the Company's business. The Company's principal direct competitors in the floating-point embedded computer market are Mercury Computer Inc. and Sky Computers,Inc. In the specialized DSP market direct competitors are Ixthos, Mizar, Pentek, Ariel, and Alacron. New companies enter the field periodically, and larger companies with greater technical resources and marketing organizations could decide to compete in the future. The future growth of the embedded computer market depends upon providing high speed computation for a specific range of signal processing applications in a compact, low power, and inexpensive package that can be easily integrated into an OEM customer's design. The markets targeted by CSPI include multiprocessor system requirements. Certain competitors may offer products with features not provided by CSPI today. Other companies may offer embedded computers designed for particular applications not addressed by the Company or for attachment to computers incompatible with the Company's products. Since the majority of sales are to OEM-volume users, the principal barrier to competition is the reluctance of established users to redesign their product once it is in production and the strength of the Company's relationships with its customers. Competitors to Scanalytics products include; Applied Precision Instruments,Inc., Vaytek Inc., Nikon, Leica, Zeiss, BioRad and NORAN in the fluorescence microscopy market. The following compete in the gel analysis software markets; BioImage Corp., Media Cybernetics, Inc., Molecular Dynamics Inc., Phoretix, and BioRad. These competitors range from small single product companies to large multi-national instrument and microscope companies. Scanalytics maintains its competitive advantage by the internal development of sophisticated software applications and the use of the SuperCard 4 based embedded computers to offer a low-cost alternative in the 3-D fluorescence microscopy market. The direct competitors to the Company's machine code reader are Accu-Sort Systems, Inc., which has also licensed the relevant technology from UPS, and Intermec, which has developed their own ccd based reader. Machine code readers of conventional laser design, which have some of the same performance characteristics, are available from Computer Identics, PSC Automation, and Datalogic. The Company's competitive advantage stems from the use of its SuperCards in the reader, its superior signal processing expertise and its proven capability as a quality supplier. MANUFACTURING, ASSEMBLY AND TESTING ----------------------------------- All of the Company's manufacturing is performed at its plant in Billerica, MA. The primary manufacturing process is the assembly and test of printed circuit boards and systems, designed by the Company and fabricated by other vendors. The Company endeavors to build for inventory and supplies its products in a variety of standard formats. A small percentage of sales reflects products customized to a particular customer's specification, and even these products are easily reconfigurable should the customer cancel the order for any reason. Upon receipt of material by the Company from outside suppliers, products and components are inspected by the Company's QC/QA technicians. During manufacture and assembly, both subassemblies and completed systems are subjected to extensive testing, including burn-in and vibration procedures designed to minimize equipment failure. The Company also uses diagnostic programs to detect and isolate potential component failures. A comprehensive log is maintained of all past failures to monitor quality procedures and improve design standards. The Company is solely dependent upon Intel Corp. for the i860 micro-processor used in its SuperCard products. The Company has sufficient quantities of these components on hand to satisfy anticipated demand and has been assured by Intel that supplies will continue to be available in any quantities reasonably necessary. The Company does not consider the risk of interruption of supply to be significant to meet its projected revenue requirements for the immediate future. The Company provides a warranty covering defects arising from products sold and service performed, which varies from 90 days to one year depending upon the particular unit. However, warranties of substantially greater scope have been extended to certain major customers for financial and other considerations. The Company maintains a reserve for warranty repairs equal approximately to 2% of product sales for the last 90 days. In October 1995, the Company was approved for registration to ANSI/ASQC-Q9001 under RAB and RvC accreditation. The ISO9001 category is the most comprehensive, and incorporates every aspect of business from design, through sales, to manufacturing and customer support. CUSTOMER SUPPORT ---------------- The Company supports its customers in a number of ways: telephone assistance, on-site service, installation of systems (primarily in the Scanalytics product group ), training and education. Customers are able to call a support unit and report problems which are reviewed by an analyst. The analyst will research the problem and will assist the customer, most commonly via telephone, in an effort to correct the problem. Service of this kind is available during the warranty period, and is also available to report "bugs" in the software. Customers may purchase software and hardware maintenance and on-site service contracts after the warranty period. The Company offers training courses at either corporate headquarters or the customer site, should the customer request it. Field and customer service support is provided through Billerica, Massachusetts, San Diego, California, and Laurel, Maryland. ENGINEERING AND DEVELOPMENT --------------------------- During fiscal 1996, the Company's expenses (including depreciation) for engineering and development were approximately $3,325,000 (20% of sales) compared to approximately $3,099,000 (17% of sales) and $2,834,000 (15% of sales) in fiscal years 1995 and 1994, respectively. Expenditures for engineering and development are expensed as they are incurred. The Company expects to continue substantial expenditures, both in additional applications software development and development of hardware and software for embedded computer and machine code systems. Additional expenditures may be necessary to complete the conversion of the embedded computer product line from the I860 processor to 21060/PowerPC processor designs and to integrate Myrinet Network Technology into the next generation of the MAP series of products. The Company's products and development currently in process are intended to extend the usefulness and marketability of existing products and introduce new products into existing market segments. Of the Company's 103 employees, 29 professional and staff employees were engaged in software and hardware engineering and development activities as of August 30, 1996. The Company does not have any patents that are material to its business. BACKLOG ------- The Company's backlog of customer orders and contracts was approximately $3,190,284 at August 30, 1996 as compared to $3,055,028 at August 25, 1995. The majority of this backlog is expected to be shipped during the next fiscal year and primarily in the first quarter. The backlog of the Company has fluctuated greatly over the last three years at year end. Orders for SuperCard products (board-level product) have increased recently and the Company is able to ship to customers in a shorter period of time. Moreover, OEM purchasers are not committing themselves to orders of the same magnitude as has been the case in the past. EMPLOYEES --------- On August 30, 1996, the Company had 103 employees, including 7 part-time. There were 29 employees engaged in engineering; 31 employees in marketing, promotion, sales and customer support; 27 employees in manufacturing, test and field service; and 16 employees in general management and administration. None of the Company's employees is represented by a labor union and the Company had no work stoppages. The Company considers relations with its employees to be good. EXECUTIVE OFFICERS ------------------ Information about the executive officers of the Company is set forth below. NAME AND AGE BUSINESS AFFILIATIONS ------------ --------------------- Alexander R. Lupinetti(51).. Director, Chief Executive Officer and President of CSPI since October 1996; President and Chief Executive Officer of each of the TCAM Systems Inc., Shared Systems Corporation and SoftCom Systems, Inc. subsidiaries of Stratus Computer Inc. from November 1987 to September 1996; Northeastern General Manager for the Engineering and Scientific Division of International Business Machines, Inc. from 1984 to 1987. Michael M. Stern (59)....... Director of CSPI from 1968 to January 1984; Vice President of Operations and Treasurer of CSPI since 1968. Gary W. Levine (48)......... Vice President of Finance and Chief Financial Officer of CSPI since September 1983; Controller of CSPI from May 1983 to September 1983. James A. Waggett (59)...... Director of CSPI from 1968 to January 1984; Vice President of Embedded Computer Product Group September 1995-Present; Vice President of Advanced Development from 1974 to September 1995; Business Element Manager of the Embedded Computing Product Group from August 1995 to October 1996; Clerk from 1971 to March 1983; Assistant Clerk from March 1983 to the present. James E. Storer (69)........ Director of CSPI from 1974 to August 1984; Chief Scientist and Vice President from 1975 to the present. Item 2. PROPERTIES The Company owns the land and building at 40 Linnell Circle, Billerica, MA. The Company owns approximately 2.8 acres of land adjacent to the Company's current facility. The Company believes space at its current location, combined with space that will be available if the Company proceeds to build on the new land, will be sufficient for future growth. Item 3. LEGAL PROCEEDINGS NONE Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference from "Common Stock Data" on page 3 of the Company's 1996 Annual Report to Stockholders. American Stock Transfer Company is the Transfer Agent and Registrar for the Company's Common Stock. There were approximately 167 Stockholders of record as of November 15, 1996. The Company believes the number of beneficial owners of shares (including shares held in street name) at that date were approximately 1300. Item 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference from "Selected Financial Data" on page 14 of the Company's 1996 Annual Report to Stockholders. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference from "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 15-19 of the Company's 1996 Annual Report to Stockholders. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference from pages 20 to 30 and from "Independent Auditors' Report" on page 31 of the Company's 1996 Annual Report to Stockholders. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information for Directors required by this Item is incorporated by reference from the Company's Proxy Statement dated November 11, 1996 filed with respect to the Annual Meeting of Stockholders of the Company on December 10, 1996. Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K A) The following are filed as part of this report: 1) Financial Statements (See item 8): The following financial statements of the Company are included in Part II of this report through incorporation by reference from the Company's 1996 Annual Report to Stockholders. Annual Report Page ---- Independent Auditors' Report...............................31 Consolidated Balance Sheets at August 30, 1996 and August 25, 1995............................................20 Consolidated Statements of Operations for years ended August 30, 1996, August 25, 1995 and August 26, 1994......21 Consolidated Statements of Shareholders' Equity for years ended August 30, 1996, August 25, 1995 and August 26, 1994............................................22 Consolidated Statements of Cash Flows for years ended August 30, 1996, August 25, 1995 and August 26, 1994.....23 Notes to Consolidated Financial Statements..............24-30 2) Consolidated Financial Statement Schedules None 3) Exhibits Certain of the Exhibits listed hereunder have previously been filed with the Commission and are hereby incorporated by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and Rule 24 of the Commission's Rules of Practice. The location of each document so incorporated by reference is noted parenthetically. 3.1 Articles of Organization and amendments thereto, of the Company as of the end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended August 31, 1990) 3.2 By-Laws of the Company, as amended through March 21,1995 10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to the Form S-8, File No. 2-79414, 1987 Registration Statement) 10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated January 5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414, 1987 Registration Statement) 10.3 Form of Invention Agreement between the Company and certain of its employees 10.4 CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8 amendment 2 to Form 10-K for year ended August 31, 1986, dated February 23, 1987) 10.5 Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5, 1987 as amended (Exhibit 10.11 to Form 10-K for year ended August 31, 1990) 10.6 Amendment to Mr. Ochlis' Employment and Deferred Compensation Agreement dated March 20, 1989 (Exhibit 10.9 to Form 10-K for year ended August 31, 1991) 10.7 Employment Agreement between CSP Inc. and Mr. Botten dated August 14, 1991 (Exhibit 10.10 to Form 10-K for year ended August 31, 1991) 10.8 1991 Incentive Stock Option Plan (the Plan is included in the Company's Proxy Statement dated November 10, 1991 with respect to the Annual Meeting of Stockholders of the Company on December 10, 1991) 10.9 Retirement Agreement for Edmund U. Cohler (Exhibit 10.9 to Form 10-K for the year ended August 26, 1994) 10.10 Symbology Reader License Agreement between UPS and CSPI (Exhibit 10.9 to Form 10-K for the year ended August 26, 1994) 10.11 Software License Agreement between UPS and CSPI (Exhibit 10.12 to Form 10-K for the year ended August 26, 1994) 10.12 Patent Agreement between UPS and CSPI (Exhibit 10.13 to Form 10-K for the year ended August 26, 1994) 10.13 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement dated February 6, 1995 10.14 Employment Agreement between CSP Inc. and Mr. Lupinetti dated September 12, 1996 11.0 Computation of Per Share Earnings for the years ended August 30, 1996, August 25, 1995, and August 26, 1994 13.1 1996 Annual Report to Stockholders 22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year ended August 26, 1994) 23.1 Consent of Independent Certified Public Accountants 27.0 Financial Data Schedule EXHIBIT INDEX ------------- Exhibit Form 10-K Number Exhibit Page - ------ ------- ---- 10.14 Employment Agreement between CSP Inc. and Mr. Lupinetti 22-25 dated September 12, 1996 11.0 Computation of Per Share Earnings for the years ended August 30, 1996, August 25, 1995, and August 26, 1994 26 13.1 1996 Annual Report to Stockholders 27-52 23.1 Consent of Independent Certified Public Accountants 53 27.0 Financial Data Schedule 54 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSP INC. - -------- (Registrant) /s/ Alexander R. Lupinetti November 27, 1996 - -------------------------- ----------------- Alexander R. Lupinetti Date Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. NAME TITLE DATE - ---- ----- ---- /s/ Alexander R. Lupinetti Chief Executive Officer, November 27, 1996 - -------------------------- President Alexander R. Lupinetti /s/ Samuel Ochlis Chairman of the Board, November 27, 1996 - -------------------------- Director Samuel Ochlis /s/ Gary W.Levine Vice President of Finance, November 27, 1996 - -------------------------- Chief Financial Officer Gary W. Levine /s/ Boruch B. Frusztajer Director November 27, 1996 - -------------------------- Boruch B. Frusztajer /s/ Stanford A. Fingerhood Director November 27, 1996 - -------------------------- Stanford A. Fingerhood /s/ Shelton James Director November 27, 1996 - -------------------------- Shelton James /s/ Sandford Smith Director November 27, 1996 - -------------------------- Sandford Smith /s/ John Ingram Director November 27, 1996 - -------------------------- John Ingram EX-10.14 2 EMPLOYMENT AGREEMENT Exibit 10.14 September 12, 1996 Mr. Alexander R. Lupinetti 36 Russett Hill Road Sherborn, MA 01770 Dear Alex: I am very pleased to offer you the position of President and Chief Executive Officer of CSP Inc. (the "Company"), reporting to the Board of Directors. The following will be the principal terms and conditions of your employment with the Company: 1. Your base compensation will be a salary of $200,000 per year, to be reviewed annually. 2. You will be elected a member of the Board of Directors and will serve as a director without any additional compensation. 3. You will be eligible to receive the greater of either a cash bonus of $40,000 based on your achievement of the goals listed below which may be modified with the approval of the Compensation Committee of the Board of Directors or an executive bonus of up to 50% of your salary. To meet the maximum bonus level, the Company must equal or exceed sales of $22M and EPS of $.50. Goals for Cash Bonus -------------------- -Complete one acquisition -Release of the CSPI Division's products on schedule for FY97 -Meet the Business Plan as approved by the Board of Directors -Plan for reorganization of sales and marketing functions The cash bonus will be considered earned if you have met these goals and objectives at the end of the current fiscal year (1997). The Executive Bonus Plan will be submitted to the Compensation Committee during the first quarter of fiscal year 1997 for their approval. Any future bonus to be paid to you will be based on the Company's Executive Bonus Plan as adopted by the Compensation Committee of the Board of Directors with respect to the Company's normal fiscal year-end. 1 4. If your employment is terminated by the Company other than for "cause" (as used herein "cause" shall mean any material breach by you of any agreement to which you and the Company are both parties; theft or misappropriation of Company funds or assets, or intentionally damaging the Company's assets; falsification of Company records; willful failure or refusal to perform duties reasonably assigned; conviction (including guilty plea) of a felony or misdemeanor which creates apprehension or insecurity on the part of the Board, other officers of the Company; or acting either willfully or with gross negligence in a disloyal manner or to the detriment of the Company's best interest) you will be entitled to receive severance pay for twelve months at your then effective base annual salary per month. 5. So long as you are employed by the Company, you agree to devote your full time, skill and energy, diligently, loyally, effectively and to the best of your ability, to the performance of your duties as President. 6. While employed by the Company, you agree not to directly or indirectly participate as owner, stockholder, manager, consultant, director, officer, or employee in any business firm or corporation which manufactures and/or sells products similar to the products sold by the Company. Provided, however, that you may purchase on a registered securities exchange or in the "over the counter market" any securities listed on such exchange or trade in such market. In the event of breach of this provision, the Company shall be entitled to injunctive relief and damages. 7. You are not being offered employment for a definite term and understand that either you or the Company may terminate your employment at any time for any reason and without prior notice. 8. The Company will grant to you options for the purchase of 60,000 shares of the Company's Common Stock under the Company's 1991 Incentive Stock Option Plan and this will be reviewed annually. The options will be granted on the date you commence employment with the Company and the price per share will be the fair market value of a share of common stock on that date determined in accordance with the provisions of such Plan. The options will vest at a rate of 25% a year for 4 years, commencing after one year of service. However, if the Company is acquired by way of sale of substantially all of its assets or by merger, your options will fully vest at the time of such acquisition. Your percentage of total stock options granted will be maintained so you will not be subject to any dilutions. 9. The Company will provide you with a vehicle at a value not to exceed $32,000. The vehicle will be purchased in a manner that is mutually acceptable to you and the Company. 2 10. As a full-time employee of the Company, you shall be eligible to participate in any and all employee benefit plans which are non-contributory and at your option to participate in all contributory employee benefit plans. A description of the Company's benefit plans currently being offered are described in the brochure which you have been provided with which will include the 401k. During the fiscal year you will review the non-qualified retirement plan and recommend any changes or modifications to the Compensation Committee. 11. You will be entitled to two weeks of vacation during the first year of service with the Company. After one year, you will be entitled to four weeks of vacation. 12. You will review the 40lK Plan and recommend to the Board of Directors, any modifications you feel are necessary. 13. Your medical insurance will be paid by CSPI; either through COBRA or the current plan to ensure coverage for your daughter. 14. You will be enrolled in the Company Replacement Life Insurance Plan which is 2 (two) times your salary. The Company will pay the same premium amount you would have received for the Group Life Insurance Plan toward premiums for the Group Replacement Plan. 15. As a condition to your employment, you will be required to sign the Company's standard Employee Invention and Non-Disclosure Agreement, a copy of which is enclosed with this letter. If you agree with the terms of employment outlined above, would you please sign and date the enclosed copy of this letter and return it in the enclosed envelope to the attention of Gary Levine. On behalf of the Board, I look forward to working together with you to make CSPI a tremendous success under your stewardship. Sincerely yours, Samuel Ochlis Chairman of the Board 3 I accept the terms of employment as stated on the offer letter dated September 12, 1996. /s/ Alexander Lupinetti - ----------------------- Alexander Lupinetti 9/12/96 - ------- Date EX-11 3 COMPUTATION OF PER SHARE EARNINGS
CSP, INC. AND SUBSIDIARIES EXHIBIT 11.0 - COMPUTATION OF PER SHARE EARNINGSS For the years ended August 30, 1996, August 25, 1995, and August 26, 1994 ( in thousands except for per share amounts ) 1996 1995 1994 --------------- --------------- --------------- Net Income Per Common Share - ( Primary ) - --------------------------------------------------- Net Income $108 $385 $1,719 =============== =============== =============== Average common shares outstanding 2,681 2,747 2,746 Add: Net additional common shares upon exercise of stock options 41 48 77 --------------- --------------- --------------- Adjusted average common shares outstanding 2,722 2,795 2,823 =============== =============== =============== Net income per common share - ( Full Dilution ) $0.04 $0.14 $0.61 =============== =============== =============== Net Income Per Common Share - ( Full Dilution ) - --------------------------------------------------- Net Income $108 $385 $1,719 =============== =============== =============== Average common shares outstanding 2,681 2,747 2,746 Add: Net additional common shares upon exercise of stock options 41 48 77 --------------- --------------- --------------- Adjusted average common shares outstanding 2,722 2,795 2,823 =============== =============== =============== Net income per common share - ( Full Dilution ) $0.04 $0.14 $0.61 =============== =============== ===============
EX-13.1 4 ANNUAL REPORT CSPI 1996 ANNUAL REPORT Enlightening Technology ( 4-Color Picture) CSPI 1996 Annual Report Table of Contents Introduction 2 Financial Highlights 3 Shareholders Letter 4 Embedded Computing 6 Vision Systems 8 Scanalytics 10 Financials 12 Auditor's Report 31 Corporate Information 32 A NEW LEADER CSPI welcomed Alexander R. Lupinetti as President and Chief Executive Off icer on September 30, 1996. Mr. Lupinetti is also a member of the Company `s Board of Directors. Alex comes to CSPI from Stratus Computer Inc. wher e he was a Sales Vice President. Alex has over twenty-nine years of diver sified experience in the high tech field, with a significant concentratio n in the sales and marketing area. He was with Stratus for nine years and most recently served as President of three software companies that Strat us had acquired. During that assignment he implemented a new strategic pl an, merged the companies and hired his successor. Prior to joining Stratus, Alex worked at IBM Corporation for 20 years. He was promoted to a vari ety of positions of increasing responsibility such as Northeastern Genera l Manager for the Engineering and Scientific division that included sales and product management for CAD-CAM and Vector Processors. We are confide nt that with Alex's experience and background, the Company has the leader ship necessary for future growth. ENLIGHTENING TECHNOLOGY CSPI was founded in 1968 by four engineers determined to build the fastes t computing engine in the world. Their vision became a reality with the d evelopment of the first array processor - a dense processing engine that uses multiple processors to provide hundreds of millions of mathematical calculations per second. This technology has become the core of CSPI's bu siness. Using this core technology the company has developed a set of pro ducts and services that provide people with greatly enhanced ways to see, hear and respond to the world around them. Today, CSPI is a global suppl ier of computing systems and instruments for defense, medical, industrial and research applications requiring maximum computing power. Although CS PI's core business - fast, highly complex and powerful computer signal pr ocessing - has been very specialized, today its role has become fundament al to society. In medical imaging CSPI delivers sophisticated diagnostic c apabilities for CT, MRI, PET and SPECT imaging machines. Because of CSPI technology these scans are faster and less invasive for patients, and les s costly for medical providers. With the Scanalytics Family of bio-resear ch imaging products, biologists can now see minute details of the cell ne ver seen before, enabling them to diagnose genetic disorders and fight ag ainst disease. Sorting packages has become faster and more accurate with the CSPI Vision Systems one- and two-dimensional machine readers. And, th ese are a small sample of the company's applications. As world demands for faster, better and cheaper products and services grow, so does the need to integrate high performance computing into everyday applications. Incre asing needs and expectations for reliable, high density computing power a t low cost have challenged CSPI to create products that fit these applica tion needs. With its Vision Systems and Scanalytics product groups, CSPI h opes to further integrate and strengthen its business based on the core t echnology. The company also plans to continue to enhance and grow its pro duct lines through development and strategic acquisition. And CSPI is com mitted to protect its customers' software investments by continuing to embrace standard technology platforms. Computer signal processing has been a n important part of the computer industry for thirty years. As CSPI ends its 28th year in business it looks to the future as a supplier of product s and services - based on the speed and power of its computing processing expertise - that are designed to enhance, enlighten and protect the peop le who use and apply its products. Financial Highlights (Amounts in thousands, except per share data)
Fiscal year ended August 30, August 25, Operating Statement Data: 1996 1995 Sales $ 16,520 $ 18,526 Net Income 108 385 Number of primary shares 2,681 2,795 Earnings per share $ 0.04 $ 0.14 Balance Sheet Data: Working capital $ 22,800 $ 22,862 Total assets 29,536 29,279 Total liabilities 3,732 3,554 Shareholders' equity $ 25,804 $ 25,725
Common Stock Data The Common Stock of the Company is traded in the over-the-counter market and is quoted on NASDAQ System under the symbol "CSPI". The following tab les set forth the range of closing high and low selling prices for the Common Stock as reported by NASDAQ.
Fiscal Year: 1996 1995 High Low High Low 1st quarter $ 9 1/2 $ 8 1/4 $ 9 3/8 $ 8 1/4 2nd quarter 10 1/8 8 3/4 8 3/4 7 1/8 3rd quarter 10 1/4 9 8 3/4 7 4th quarter 9 5/8 7 1/2 9 1/8 7 3/8
The Company has never paid cash dividends on its Common Stock. It is the policy of the Company to retain any earnings to finance and expand operat ions and the Company does not currently anticipate any changes in this policy. 3 Annual Sales ($ in millions) (FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING ANNUAL SALES) 1992 16.03 1993 18.01 1994 19.46 1995 18.53 1996 16.52 Earning per Share (Dollars) (FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING EARNINGS PER SHARE) 1992 .61 1993 .70 1994 .61 1995 .14 1996 .04 Net Income ($ in thousands) (FIGURES BELOW ARE USED IN A LINE GRAPH SHOWING NET INCOME) 1992 1678 1993 1957 1994 1719 1995 385 1996 108 DEAR FELLOW SHAREHOLDERS ANNUAL PERFORMANCE Sales of $16.520 million were down by 11% due to the decline in revenue f or the machine code reader sold primarily to United Parcel Service (UPS). The Vision Systems sales were down by approximately $3 million which was offset by increased revenue from the Embedded Computing and Scanalytics products. Net income was $108K or earnings per share of $.04. The Company `s decline in profitability as compared to past performance was due to th e lower revenue; added expenses for the year including the departure of t he former President and CEO; termination of our operation in France; and additional R&D expenses in the embedded computer product group related to products due for release in Fiscal 1997. After losses in both the second and third quarter, we were able to achieve profitability in the final qu arter and for the year resulting in our 16th consecutive profitable year. INVESTMENT IN THE FUTURE The financial story for the last two years would not be complete without highlighting the focus on R&D. Our R&D philosophy focuses on changes in c urrent and new markets. Over the past year, CSPI has made offerings to the marketplaces of all three product groups. The following are some of the developments promising market and business growth: EMBEDDED COMPUTING PRODUCT GROUP - - Release of the MAP 1310 and 1311 SHARC-based products - - Release of the VxWorks/SC, Real-Time Operating System - - Announcement of the MAP 2610, a Power PC based product - - Announcement of the MAP 2000 series, the next generation of MAP products based on a collaborative with California-based Myricom SCANALYTICS PRODUCT GROUP - - Version 3.0 of the RFLPscan software for DNA fingerprinting - - Release of GELLAB II+ product for analysis of 2-D gels - - A new client-server configuration for the CELLscan system incorporating SuperCard-4XLs VISION SYSTEMS PRODUCT GROUP - - Enhancements on current Vision Systems products - - R&D into new Vision Systems product offerings 1997 will see new software versions from Scanalytics as well as new hardw are options; Vision Systems continues to refine the design of the Lightni ng family of readers; and the Embedded Computing product group is embarki ng on a new generation of products to leapfrog available competitive prod ucts. OUR STRENGTH IS OUR PEOPLE We realize that the creative work and dedication of the CSPI team are res ponsible for our success. In this year of transition, everyone pulled tog ether to ensure that the quality of our products and services offered to our customers was always beyond question. We thank every member of the CS PI team for continuing our long history of quality and profitability. In summary, I am pleased that Alex Lupinetti has joined us as the new Preside nt and Chief Executive Officer of CSPI. I am confident that under his lea dership we will introduce technologically superior products that will gro w our business in 1997 and the future. Samuel Ochlis, Chairman of the Board (4-COLOR PICTURE SHOWING ALEXANDER R. LUPINETTI AND SAMUEL OCHLIS) (Photo caption Alexander R. Lupinetti, President & CEO and Samuel Ochlis, Chariman of the Board) 5 EMBEDDED COMPUTING (4-COLOR PICTURE) [Large photo caption] The Japanese Meteorological Agency detected a tornado using a Doppler rad ar system including a CSPI RTS-860 installed at the Narita airport in Jap an. Red indicates tornado-force winds. 6 CSP CORE PRODUCTS PROVIDE ENLIGHTENING TECHNOLOGY CSPI's embedded computing products form the core of the company's product lines. This core technology uses multiple processors to perform high-spe ed arithmetic and is recognized throughout the industry for superior quality and performance. The SuperCard and MAP are the company's flagship pro ducts and are used to provide the processing for a wide range of real tim e applications, where maximum computing density is essential. The strength of this core technology has allowed CSPI to expand its product offering s across multiple markets. Today, CSPI is a global supplier of computing s ystems and instruments for defense, medical, industrial and research appl ications requiring maximum computing power. Although CSPI's core business - real time, highly complex and powerful computerprocessing - has been v ery specialized, today its role is fundamental to society. ANSWERING A NEED Computing has become part of everyday life with today's personal computer s providing more computational power than the supercomputers of even five years ago. This has created a burgeoning need for a network solution tha t will tie them all together. In the signal processing market this need i s even greater as the intensity and performance requirements far exceed t hose of general business applications. CSPI, in response to this need, wil l introduce a new ultra high performance, network-based signal computing product line. CSPI selected the Myrinet(TM) interprocessor network to impl ement the next generation of embedded computing products. Myrinet, a prod uct of Myricom, Inc., is specially designed for high-performance multicom puter systems. The new MAP series not only leapfrogs the current solution s on the market, but offers the growth potential associated with the Powe rPC architecture and the Myrinet technology. CSPI is excited by the opport unity to provide our customers with such a powerful and unrivaled computi ng solution. The company believes this next generation of products will p rovide growth opportunities across new markets and its current customer b ase. CSPI continues to successfully market the SuperCard family of produc ts, and also has introduced the MAP-1000 series of boards. These products continue to provide opportunities for CSPI to provide high quality and s uperior performance-based products to its customers. 7 VISION SYSTEMS LIGHTING THE WAY WITH CSPI TECHNOLOGY Tracking packages through today's sortation and distribution centers dema nds fast, efficient and cost-effective automation. CSPI's Vision Systems product group answers this need with its Lightning family of readers. The readers are designed to read bar codes and MaxiCode, a dense 2-dimension al code, at the high conveyor speeds found in modern distribution centers 2E The readers utilize CSPI's core processing technology to provide the high-speed computing power which is necessary for today's belt speeds and sortation devices. It is this technology that enables packages to be sor ted and tracked reliably. POISED FOR GROWTH The superior field performance of the Lightning 500 has led the United Pa rcel Service to expand the product's implementation into additional distr ibution facilities around the country. In addition, the use of MaxiCode i s widening, as evidenced by the acceptance of industry standard groups su ch as ANSI. MaxiCode is now being written into shipping label specificati ons by domestic and international standards committees, and has been reco mmended as the preferred code for high-speed, over-the-belt applications. CSPI believes that as one of the only suppliers of high-speed, over-the-b elt products that can read MaxiCode, it is well positioned to take advant age of the increasing popularity of the code and as a result sees an incr easing demand for its readers. Lightning 500 readers have been sold into n ew markets in Europe and planned product enhancements are expected to inc rease customer satisfaction, reliability, and value, providing new opport unities in new markets and applications. [Shaded caption] There are now over 200 installations of Vision Systems Lightning 500 rea ders in UPS facilities. 8 (4-COLOR PICTURE) VISION SYSTEMS [Large photo caption] Today's sortation and distribution centers demand fast, efficient and cos t-effective automation. 9 SCANALYTICS [Large photo caption] CELLscan is used to aid in the study of how burns affect the functions of cells. These images help determine how cells survive such events. (Image courtesy of Drs. J. Bogan and H. Lin, Whitehead Institute, Cambridge, MA) 10 Applying Signal Processing at the Microscopic Level The Scanalytics product group has a highly focused use for CSPI's core technology - to probe th e microscopic world of the cell. The CELLscan product applies array proce ssors to the field of high-resolution fluorescence microscopy, and thus o pens new avenues for the study of living cells. Through its Scanalytics p roduct group CSPI has given researchers studying the complex processes of neural signaling a tool that is fast and powerful enough to answer some of life's most fundamental biological questions. World renowned research fellows of the Howard Hughes Medical Institute working at Brown Universit y are using CELLscan to study the cell biology of neurons and hoping to a nswer questions about Alzheimer's disease and other neurological disorder s. Scientists throughout the world are discovering the power of Scanalyti cs Exhaustive Photon Reassignment (EPR) algorithm as it uncovers informat ion in cells that was previously undetectable. From Genetics to Forensics The Human Genome Project has yielded new information on thousands of gene s and millions of DNA sequences. As a result, the study of genes, gene pr oducts, and their effects on normal and abnormal cell biology will now be come the focus of the entire genomic DNA field. Scanalytics has provided several software products to aid in the study of these data and now compl etes that product offering with the GELLAB II+ software. Meanwhile, RFLPscan FE (Forensic Edition) is making inroads in the fast growing field of D NA typing for forensics. This version of the software enables forensics l abs around the world to interface with the FBI's DNA fingerprint database through the CODIS (combined DNA indexing system) software. Filtered and refined through Scanalytics products, this complex data becomes useful in formation shedding new light on old problems. GROWING THE BUSINESS In the last year Scanalytics has implemented an aggressive schedule of ne w product releases including new versions of its GELLAB and RFLPscan prod ucts, and a major upgrade to the CELLscan system that provides customers with aclient-server solution utilizing the compute powers of CSPI SuperCa rd-4XLs. Through strategic partnerships, OEM relationships and an internat ional network of distributors, Scanalytics will make its software package savailable to researchers around the world in a variety of disciplines. Scanalytics' reputation as a supplier of premium solutions for biological imaging is attracting new opportunities in the research, forensic, and clinical diagnostic markets. (4-COLOR PICTURE) [Small photo caption] A focused point of light (at center, in white) blurring as a microscope views it from increasing distances. CELLscan's algorithm restores microscopic details for a more accurate representation of the cell. 11 (2-COLOR PICTURE) 12 FINANCIAL STATEMENTS Sales for the 1996 fiscal year were $16.520 million. Net income was $108 thousand or earnings per share of $.04, which extends the string of profitable years to sixteen. [Shaded Caption] Enlightening Technology 13 CSP Inc. and Subsidiaries Selected Financial Data (Amounts in thousands, except per share data)
Fiscal year ended August 1996 1995 1994 1993 1992 Sales $ 16,520 $ 18,526 $ 19,460 $ 18,015 $ 16,035 Costs and expenses 17,169 18,725 17,425 15,544 14,531 Operating income (loss) (649) (199) 2,035 2,471 1,504 Other income 886 821 478 426 719 Income before income taxes 237 622 2,513 2,897 2,223 Income taxes 129 237 794 940 545 Net income $ 108 $ 385 $ 1,719 $ 1,957 $ 1,678 Earnings per share: $ 0.04 $ 0.14 $ 0.61 $ 0.70 $ 0.61 Weighted average number of common shares 2,681 2,795 2,823 2,789 2,753 Balance Sheet Data: Working capital $ 22,800 $ 22,862 $ 23,085 $ 21,873 $ 19,831 Total assets 29,536 29,279 29,936 27,853 24,973 Long term obligations 2,093 1,943 1,804 1,746 1,524 Total liabilities 3,732 3,554 3,695 3,539 2,777 Retained earnings 17,332 17,224 16,839 15,120 13,163 Shareholders' equity 25,804 25,725 26,241 24,314 22,196
14 Management's Discussion and Analysis of Financial Conditions and Results of Operations Results of Operations: The following table sets forth certain information which is based on Operating Statement Data:
Percentage of sales Period to period fiscal year ended August dollar changes (in thousands) ------------------------ ----------------------------- 1996 1995 1994 1996 1995 Compared to Compared to 1995 1994 Sales 100.0% 100.0% 100.0% $ (2,006) $ (934) Costs and expenses: Costs of sales 40.3% 44.1% 40.0% (1,502) 381 Engineering and development 20.1% 16.7% 14.5% 226 265 Marketing and sales 32.0% 27.0% 24.4% 291 246 General and administrative 11.5% 11.1% 10.6% (155) (8) Restructuring - 2.2% - (416) 416 Total costs and expenses 103.9% 101.1% 89.5% (1,556) 1,300 Operating income (loss) (3.9)% (1.1)% 10.5% (450) (2,234) Other income 5.4% 4.5% 2.4% 65 343 Income before taxes 1.5% 3.4% 12.9% (385) (1,891) Income taxes 0.8% 1.3% 4.1% (108) (557) Net income 0.7% 2.1% 8.8% $ (277) $ (1,334)
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations -1996 Compared to 1995: The Company's sales decreased by approximately 11% to $16,520,000 from $18,526,000. The Embedded computer products accounted for 78% of total revenue during the fiscal year 1996. The SuperCard family of products continues to represent the major source of revenue accounting for approximately 71% of total sales, an increase of 19% over the prior fiscal year. This increase in sales was due in part to increased procurement of SC-4/4XL, C3/3XL and SC-2 to various COTS (commercial-off-the-shelf) programs, some of which were delayed from the Prior fiscal year, plus the award of new programs and increased shipments to OEM customers. COTS programs were the major source of revenue accounting for approximately 33% of total sales for the fiscal year. Sales of the machine code reader for United Parcel S ervice (UPS) represented 6% of total sales for the year. This was a significant reduction of approximately $3,000,0000 in shipments from the prior year. In fiscal year 1995 the balance ($3.8 million) of the procurement for $6.2 million of machine code readers was shipped for the new UPS Chicago Facility. Scanalytics products (Bio-technology instrument product gro up) sales represented approximately 16% of total revenues. This was a 22% increase over the prior fiscal year. The increase in sales was due to th e increase in shipments of the CELLscan and software package products , w hich represented approximately 48%, and 24% of total revenue for Scanalyt ics. The sales of application specific software modules (DNAScan, RFLPSca n, and Gel analysis) increased by 48% over the prior year. CELLscan produ ct sales were approximately 121% higher than the prior year. North America n sales represent 88% of total sales, an increase of 2% over the prior ye ar. This was due to the continued procurement of SuperCard by the US mili tary and OEM customers, and increased domestic shipments of Scanalytics p roducts . The sales of both Embedded computer and Scanalytics products to Japan increased by 48% over the prior fiscal year. Sales to other intern ational geographic areas decreased due to the decline in military procure ment and slow economic conditions in the Foreign market segments CSPI pro ducts are sold into. Cost of sales as a percentage of sales decreased to 40%. This was a decrease of 4% over the prior fiscal year and was due primarily to a change inproduct mix with increased revenue from Embedded computer and Scanalytics business' which have lower per unit costs of goods sold compared to the machine code readers. The Company's improved cost of sales could have been even better but the decline in sales volume did not allow the efficiency needed to lower our indirect manufacturing costs. In addition, the continuing competitive pressures in the Embedded computer business from our direct competitors required larger discounts to secure the successful award of some business with both new and existing customers. The Company will continue to take steps to lower the manufacturing overhead and improve the overall manufacturing efficiency in order to lower the cost of goods sold. The future cost of sales as a percent of sales will not increase significantly from the levels we have currently experienced unless there isa significant change in the mix of products sold. Engineering and development expenditures increased by approximately 7% fr om the prior fiscal year. The major portion of the increase was for outsi de services and the purchase of new equipment and software for the development of the next generation of Embedded computer products, new MAP 16 produ cts, to be initially shipped during fiscal year 1997. Expenses for the im provement of the machine code reader product for Vision Systems doubled b ut only represented 8% of the total engineering and development expenses. Scanalytics expenses were approximately the same amount as the prior year. Sales and marketing expenses increased by 6% from the previous fiscal year. The Scanalytics and Vision Systems products were the primary reason for the increase. These expenses increas ed 20% and 24% over the prior year. The Vision Systems increase was for expenses to expand its customer base which included literature, advertising, trade shows and other direct sales expenses which resulted in orders from a half dozen customers. The Scana lytics increase in expenses was due in part to the addition of two employ ees for customer support, additional sales commission related to increase d sales revenue, and advertising and promotion programs for the CELLscan and modular software packages. The Embedded computer products expenses we re reduced by approximately 4% from the prior year. The reduced expenses were due to cuts in staff in the France and domestic operations and lower commission due to the reduced sales volume. General and administrative expense were reduced by 8% compared to the pri or fiscal year. There were a number of one time expenses this fiscal year related to the termination of the CEO and President and costs incurred t o hire the new President and CEO. These expenses represented about 15% of the total general and administrative expenses. Other income increased by 8% over the prior year due primarily to an incr ease in interest income. The Company continued to invest a larger percent age of its cash in taxable instruments which have a higher rate of return on a pre-tax basis than in prior years. The Company's effective tax rate was greater than the statutory rates for both federal and state taxes since all of our French subsidiary operation loss of approximately $213,000 could n ot be deducted from either federal or state taxes. We have closed our Fre nch operation but were not able to benefit from the losses of the foreign operation. The lower foreign sales did not allow for any tax benefit fro m our Foreign Sales Corporation (FSC). Results of Operations -1995 Compared to 1994: Sales of $18,526,000 was the second highest in the Company's history. The SuperCard family of products continues to represent the major source of revenue accounting for 51% of total sales . The decrease in sales from th e prior fiscal year was due in part to delays in procurement of SC-4/4XL and SC-3/3XL, and to lower sales of COTS (commercial-off-the-shelf) progr ams to the United States military. COTS programs continue to be a major source of revenue accounting for approximately 35% of total sales for the fiscal year. Sales of the machine code reader for United Parcel Service (UPS) represented 21% of total sales for the year. These shipments represented the balance of the overall procurement received from UPS in the prior fiscal year. Sales of older products such as MAP-4000 and MiniMap represented only 4% of total sales. RTS-860 real-time systems represented approximately 7% of sales. This rep resented an increase of 73% over the prior year. Scanalytics sales represented approximately 12% of total revenues. This was a 50% increase over the prior fiscal year. The increase in sales was due to the increased shipments of Ambis, CELLscan, and software package products, which represented approximately 48%, 26%, and 19% of total revenue for Scanalytics. 17 North American sales represent 86% of total sales. This was a 3% increase in percentage of total sales over the prior year. This was due to the shipments to UPS, continued procurements of SuperCard by the US military, and increased domestic shipments of Scanalytics products. The other geographic areas had decreases in sales due to the decline in military procurement and slow economic recovery in the foreign markets. Cost of sales as a percentage of sales increased to 44%. This was an increase of 4% over the prior fiscal year and was due primarily to product mix with increased amount of Vision Systems and Scanalytics business which have higher per unit costs of goods sold . There were other factors which accounted for some of the additional expenses for the cost of goods sold such as increased competition, six months of cost running the San Diego Ambis anufacturing operation (which was c losed down in February 1995 as part of the restructuring) and inventory write off of obsolete goods. The Company had inventory write downs of obso lete materials of approximately $167,000. Engineering and development expenditures increased by approximately 9% fr om the prior fiscal year. The major portion of the increase was for outsi de services and purchase of new equipment and software in the development of our ASIC (Application Specific Integrated Circuit) for the Embedded c omputer products and improvement of the machine code reader product for V ision Systems. Scanalytics expenses were reduced by 8% from the prior year primarily due to reductions in staff. Sales and marketing expenses increased by 5% from the previous fiscal yea r. Scanalytics increased their expenses 40% over the prior year and Visio n Systems, which was in its initial year of operation, represented 11% of the overall expenses in the sales and marketing area. The major portion of the Vision Systems increase was due to the transfer of personnel, star t up expenses which included literature, advertising, trade shows and oth er normal operating expenses. The Scanalytics increase in expenses was du e in part to the addition of four employees for customer support, sales a nd marketing personnel added as part of the AMBIS purchase, additional sa les commission for the increased sales, and advertising and promotion pro grams for the CELLscan and modular software packages. The Embedded comput er expenses were reduced by approximately 19% from the prior year. The re duced expenses were due to reorganizing the French sales office, staff re ductions in marketing and field operations (both from attrition and restr ucturing), and decreased advertising and commission due to the reduced sales volume. The Company restructured and consolidated operations in November 1994. The restructure was required due to the change in mix of the Company's business to lower margin products sold by Vision Systems and Scanalytics. The Company cut it's work force by seventeen employees, relocated its French subsidiary and closed the San Diego manufacturing operation. The Company estimated the restructure to be $409 ,000 and the actual amount was $416,000, of which $288,000 represented se verance costs and the remaining $128,000 was due to the closure of the Sa n Diego manufacturing operation. These charges reduced the overall operat ing expenses of the Company by over $1,000,000. General and administrative expenses were approximately at the same level as the prior fiscal year. There were increased expenses related to the De partment of Commerce (DOC) settlement which was $82,000 expense in this fiscal year (an additional $50,000 was accrued in the prior year for a tot al of $132,000) and additional legal, merger and acquisition, 18 other outsi de services, and expenses in the implementation of a new manufacturing and accounting system which were offset by reduction in bonus expenses . Other income increased by 72% over the prior year which was due primarily to the increase in interest income. The Company invested a larger percen tage of its cash in taxable investments during the year due to its lower anticipated operating revenues from our normal non-taxable investment pro curements. The taxable securities have a higher rate of return on a pre-t ax basis thus the increase in investment income. The Company's effective tax rate increased from the statutory rates for b oth federal and state taxes due to fact that the loss of $202,000 from ou r French subsidiary operation (a French corporation) could not be deducted from either federal or state taxes. There were some benefits from our s tatutory rates for tax-exempt investment income, the Foreign Sales Corporation, and research and development credits. Financial Position, Capital Resources and Liquidity: The Company's solid financial position continued in fiscal year 1996. The Company's working capital of $22,800,000 at August 30, 1996 decreased by $62,000 from the prior fiscal year. During the fiscal year the Company r epurchased 28,000 shares of its own common stock for $253,000 leading to the reduced working capital. The Working capital decreased by $223,000 to $22,862,000 at August 25, 1995, from $23,085,000 on August 26, 1994. The Company accounts receivable increased by $214,000 to $4,147,000 which is due to the large number of shipments in the month of August rather than because of slow collection at August 30, 1996. The Company's inventory in creased to $2,405,000 from $2,150,000 which was due to materials needed t o complete orders for UPS. The Company's cash and marketable securities d ecreased by approximately $496,000. The inventory levels will be maintain ed more in line with industry levels and we will continue to improve the inventory turn levels. The Company spent $1,144,000, $988,000, and $771,000, on capital improvem ents during fiscal years 1996, 1995, and 1994. Management believes that all the Company's current and foreseeable needs can be met through working capital generated by operations and investments. Inflation and Changing Prices: Management does not believe that inflation and changing prices had a sign ificant impact on sales, revenues or income from continued operations dur ing fiscal 1996, 1995 and 1994. There is no assurance, however, that the Company's business will not be materially and adversely affected by infla tion and changing prices in the future. Factors That May Affect Future Performance: This document contains forward-looking statements based on current expect ations that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include the following: g eneral economic conditions and growth rates in the peripherals and comput er products, biological instruments and machine code reader industries; c ompetitive factors and pricing pressures; changes in product mix; changes in the seasonality of demand patterns; the timely development and accept ance of new products; inventory risks due to shifts in market demand; and component constraits and shortages. 19 CSP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 30, 1996 and August 25, 1995 (Dollars in thousands, except for par value) August 30, August 25, 1996 1995 ASSETS Current assets: Cash and cash equivalents $ 10,928 $ 11,069 Marketable securities (Note 2) 6,127 6,482 Accounts receivable, net 4,147 3,933 Inventories (Note 3) 2,405 2,150 Deferred income taxes (Note 4) 481 368 Prepaid expenses 351 471 Total current assets 24,439 24,473 Property, equipment and improvements, net (Note 5) 3,607 3,470 Other assets: Land held for future development 163 163 Deferred income taxes (Note 4) 409 355 Other assets 918 818 Total other assets 1,490 1,336 Total assets $ 29,536 $ 29,279 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses (Note 6) 1,425 1,461 Income taxes payable 214 150 Total current liabilities 1,639 1,611 Deferred compensation and retirement plans (Note 8) 2,093 1,943 Commitments and contingencies (Note 9) Shareholders' equity: (Notes 7 and 9) Common stock, $.01 par, authorized, 7,500,000 shares: issued 2,957,284 and 2,922,034 shares 29 29 Additional paid-in capital 10,411 10,187 Retained earnings 17,397 17,289 27,837 27,505 Less treasury stock, at cost, 301,314 and 273,314 shares (Note 9) 2,033 1,780 Total shareholders' equity 25,804 25,725 Total liabilities and shareholders' equity $ 29,536 $ 29,279
See accompanying notes to consolidated financial statements. 20 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended August 30, 1996, August 25, 1995 and August 26, 1994 (Amounts in thousands, except for per share data)
1996 1995 1994 Sales (Note 10) $ 16,520 $ 18,526 $ 19,460 Costs and expenses: Cost of sales 6,655 8,157 7,776 Engineering and development 3,325 3,099 2,834 Marketing and sales 5,284 4,993 4,747 General and administrative 1,905 2,060 2,068 Restructuring (Note 11) - 416 - Total costs and expenses 17,169 18,725 17,425 Operating income (loss) (649) (199) 2,035 Other income (expense): Dividend income 23 13 25 Interest income 869 804 475 Interest expense (24) (50) (31) Other 18 54 9 Total other income 886 821 478 Income before income taxes 237 622 2,513 Income taxes (Note 4) 129 237 794 Net income $ 108 $ 385 $ 1,719 Earnings per share $ 0.04 $ 0.14 $ 0.61 Weighted average shares outstanding 2,681 2,795 2,823
See accompanying notes to consolidated financial statements. 21 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended August 30, 1996, August 25, 1995 and August 26, 1994 (Dollars in thousands)
Total Common stock Paid-in Retained Treasury shareholders' Shares Amount Capital earnings stock equity Balance, August 27, 1993 2,877,609 $ 29 $ 9,928 $ 15,185 $ (828) $ 24,314 Net income - - - 1,719 - 1,719 Exercise of stock options 34,800 - 208 - - 208 Balance, August 26, 1994 2,912,409 29 10,136 16,904 (828) 26,241 Net income - - - 385 - 385 Exercise of stock options 9,625 - 51 - - 51 Purchase of treasury stock - - - - (952) (952) Balance, August 25, 1995 2,922,034 29 10,187 17,289 (1,780) 25,725 Net income - - - 108 - 108 Exercise of stock options 35,250 - 224 - - 224 Purchase of treasury stock - - - - (253) (253) Balance, August 30, 1996 2,957,284 $ 29 $ 10,411 $ 17,397 $(2,033) $ 25,804
See accompanying notes to consolidated financial statements. 22 CSP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended August 30, 1996, August 25, 1995 and August 26, 1994 (Dollars in thousands)
1996 1995 1994 Cash flows from operating activities: Net Income $ 108 $ 385 $ 1,719 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 983 792 658 Deferred compensation and retirement plans 150 139 58 Deferred income taxes (167) (19) (109) Other 24 - (13) Changes in current assets and liabilities: (Increase) decrease in accounts receivable, net (214) 1,151 (2,232) (Increase) decrease in inventories (255) 1,042 (1,291) (Increase) decrease in prepaid expenses 120 237 (314) Decrease in accounts payable and accrued expenses (36) (228) (120) Increase (decrease) in income taxes payable 64 (52) 70 Net cash provided by (used in) operating activities 777 3,447 (1,574) Cash flows from investing activities: Purchase of marketable securities (188,892) (159,099) (130,013) Sales of marketable securities 189,247 159,674 129,519 Business acquired - - (496) Property, equipment and improvements (1,144) (988) (771) Other (100) 380 (738) Net cash used in investing activities (889) (33) (2,499) Cash flows from financing activities: Proceeds from stock options 224 51 208 Purchase of treasury stock (253) (952) - Net cash provided by (used in) financing activities (29) (901) 208 Net increase (decrease) in cash (141) 2,513 (3,865) Cash and cash equivalents, beginning of year 11,069 8,556 12,421 Cash and cash equivalents, end of year $ 10,928 $ 11,069 $ 8,556 Supplementary cash flow information: Cash paid for income taxes, net $ 183 $ 323 $ 893 Cash paid for interest - $ 50 $ 31 Business acquired $ 645 Less liabilities assumed 149 Cash paid $ 496
See accompanying notes to consolidated financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For years ended August 30, 1996, August 25, 1995 and August 26, 1994 ORGANIZATION AND BUSINESS The Company designs, manufactures and markets embedded processors which a re small, low power special-purpose computers which enhance a system's ab ility to perform high-speed arithmetic. The Company also develops and mar kets turnkey image analysis workstations targeted toward the biological s ciences and industrial bar-code readers. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year: The Company's fiscal year end is on the last Friday in August. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transact ions have been eliminated. Marketable Securities: Investments consist of corporate bonds and notes, government agency bonds, equity securities, and money market funds. Most investments mature within a two year period. The Compa ny classifies its marketable securities as held-to-maturity based on its ability and intent to hold these securities until maturity. Held-to-matur ity securities are recorded at amortized cost, which approximates market value. Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades "ex-dividend". The cost of marketable securities sold is determined on the specific identification method and realized gains or losses are reflected in income. Inventories: Inventories are stated at the lower of cost or market; cost being determi ned principally by use of the average-cost method, which approximates the first-in, first-out method. Property, Equipment and Improvements: The components of property, equipment and improvements are stated at cost. The Company provides for depreciation by use of the straight-line met hod over the estimated useful lives of the related assets. Product Warranty: The Company ordinarily provides a one year warranty. In addition, certain major customers are granted extended warranties. The Company accrues est imated warranty costs at the time of sale. Revenue Recognition: Revenues from product sales are recognized at the time of shipment. Engineering and Development Expenses: Engineering and development expenditures for company-sponsored projects a re charged to expenses as incurred. Income Taxes: The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the f inancial statement carrying amounts of existing assets and liabilities an d their respective tax bases and operating loss and tax credit carry forw ards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those tem porary differences are expected to be recovered or settled. Earnings Per Share of Common Stock: Earnings per share are based on the weighted average number of shares out standing during the period. The effect of outstanding stock options is ex cluded from the computation because the dilutive effect is not material. 24 Use of Estimates: The preparation of consolidated financial statements in conformity with g enerally accepted accounting principles requires management to make estim ates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expens es during the reporting period. Actual results may differ from those esti mates. New Accounting Pronouncement: In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which established financ ial accounting and reporting standards for stock-based employee compensat ion plans. Companies are encouraged, rather than required, to adopt a new method that accounts for stock compensation awards based on their fair m arket value using an option pricing model. Companies that do not adopt th is new method will be required to make pro forma footnote disclosures of net income as if the fair value-based method of accounting required by SF AS No. 123 had been applied. The Company is required to adopt SFAS No. 12 3 beginning in fiscal 1997. Adoption of this pronouncement is not expecte d to have a material impact on the Company's financial position or result s of operations because the Company intends to make pro forma footnote diclosures instead of adopting the new accounting method. Reclassification: Certain reclassification were made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 2. MARKETABLE SECURITIES At August 30,1996 and August 25, 1995, marketable securities consisted of the following:
(In thousands) 1996 1995 Marketable equity securities, at cost $ 262 $ 296 Less: valuation allowance 2 9 Marketable equity securities, at market 260 287 Bonds and municipal revenue notes, at cost 5,612 5,787 Money market funds and commercial paper 59 118 U.S. treasury bills 196 290 Total $ 6,127 $ 6,482
Assets of $635,000 and $686,000 at August 30, 1996 and August 25, 1995, r espectively, are held in a rabbi trust and generally are available only t o pay certain retirement benefits of a former employee. 3. INVENTORIES Inventories consist of the following:
(In thousands) 1996 1995 Raw materials $ 1,083 $ 851 Work-in-process 739 822 Finished goods 583 477 Total $ 2,405 $2,150
25 4. INCOME TAXES Reconciliations of expected income tax expense to actual income tax expen se are as follows:
(In thousands) 1996 1995 1994 Computed expected tax expense $ 81 34.0% $ 211 34.0% $ 854 34.0% Increases (reductions) in taxes resulting from: Dividend exclusion (6) (2.5) (42) (6.8) - - Tax exempt interest (64) (27.0) (74) (11.9) (133) (5.3) Research and experimentation and investment tax credits - - (37) (5.9) ( 89) (3.5) State income taxes, net of federal tax benefit (7) (2.9) 47 7.6 148 5.9 Non-taxable FSC earnings - - (26) (4.2) (29) (1.2) French subsidiary loss 72 30.4 165 26.4 - - Change in valuation allowance 25 10.6 32 5.2 - - Other items 28 11.9 (39) (6.3) 43 1.7 Income tax expense $ 129 54.5% $ 237 38.1% $ 794 31.6%
For the years ended August 30, 1996 and August 25, 1995 temporary differences which give rise to deferred tax assets (liabilities) are as follows:
1996 1995 Deferred tax assets: Deferred compensation $ 893 $ 834 Other accruals 195 118 Bad debt reserves 41 41 Inventory capitalization and reserves 210 192 Unrealized loss on securities 42 43 Gross deferred tax assets $ 1,381 $ 1,228 Less: valuation allowance (342) (317) Deferred tax asset less valuation allowance $ 1,039 $ 911 Deferred tax liability: Accumulated depreciation (149) (188) Net deferred tax asset $ 890 $ 723
The valuation allowance was $342,000 and $317,000 at August 30, 1996 and August 25, 1995. The valuation allowance was established due to the long term nature of certain deferred compensation and retirement obligations for which the tax benefit will be realized over an extended period of time. In assessing the realizability of deferred tax assets, management con siders whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over the p eriods which the deferred tax assets are 26 deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at August 30, 1996. The Deferred tax assets account include Massachusetts res earch credits of $73,000 which if not utilized will begin to expire at the end of August, 2010. The provisions for income taxes are comprised of the following:
(In thousands) 1996 1995 1994 Current: Federal $ 267 $ 232 $ 695 State 28 24 208 $ 295 $ 256 $ 903 Deferred: Federal (128) (15) (85) State (38) (4) (24) (166) (19) (109) $ 129 $ 237 $ 794
5. PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET Property, equipment and improvements, net consist of the following:
(In thousands) 1996 1995 Land $ 587 $ 587 Building and improvements 1,356 1,334 Equipment 10,499 9,375 Automotive equipment 17 79 12,459 11,375 Less accumulated depreciation and amortization 8,852 7,905 Property, equipment and improvements, net $ 3,607 $ 3,470
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
(In thousands) 1996 1995 Accounts payable $ 402 $ 606 Commissions 99 113 Compensation and fringe benefits 616 341 Customer advances 134 163 Professional fees and shareholders' reporting services 93 108 Taxes, other than income 11 36 Other, individually less than 5% of current liabilities 70 94 $ 1,425 $ 1,461
During 1994 the Company was notified by the Department of Commerce (DOC) about possible violations of certain export regulations during the period September 15, 1990 to July 6, 1991. The Company has reached an agreement with the DOC subject to final documentation, pursuant to which the Company will incur a penalty of $160,000 of which $132,000 was paid during fiscal year 1996, and $28,000 will be suspended if the Company complies with export regulations for a period of one year. The Company has accrued the amount to be paid in the agreed upon settlement at August 25, 1995. 27 7. STOCK OPTIONS In 1991, the Company adopted the 1991 Stock Option Plan covering 250,000 shares of common stock. Under the Plan, both incentive stock options and non-qualified stock options may be granted to officers, key employees and other persons providing services to the Company. The stock option plan p rovides for issuance of options at their fair market value on the date of grant. These options vest over a period of five years and expire ten yea rs from the date of grant. In addition, up to 20,000 shares are allocated for annual non-discretionary grants of 1,000 shares each to non-employee directors of the Company who are serving on the last business day of Jan uary in each year. The 1991 Plan supersedes three earlier plans, each of which was terminated in 1991. The following is a summary of common stock option activity for the three years ended August 30, 1996:
Number of Shares Option 1991 1987 1981 prices Plan Plan Plan Total Outstanding August 27,1993 $ 5.00 - $ 10.75 105,525 6,000 150,425 261,950 Granted $ 9.50 4,000 - - 4,000 Exercised $ 5.00 - $ 9.00 (500) - (34,300) (34,800) Expired & terminated $ 9.00 - $ 9.125 (2,000) - - (2,000) Outstanding August 26,1994 $ 5.00 - $ 10.75 107,025 6,000 116,125 229,150 Granted $7.625 - $ 8.50 49,000 - - 49,000 Exercised $ 5.00 - $ 6.625 - - (9,625) (9,625) Expired & terminated $ 5.00 - $ 10.75 (17,975) (6,000) (2,375) (26,350) Outstanding August 25,1995 $ 5.00 - $ 10.75 138,050 - 104,125 242,175 Granted $8.875 6,000 - - 6,000 Exercised $ 5.00 - $ 6.63 - - (35,250) (35,250) Expired and terminated $ 5.00 - $ 10.75 (59,150) - (625) (59,775) Outstanding August 30,1996 $ 5.00 - $ 9.75 84,900 - 68,250 153,150 Available for future grants - 165,100 - - 165,100 Exercisable $ 5.00 - $ 9.75 49,088 - 68,250 117,338
28 8. DEFERRED COMPENSATION AND RETIREMENT PLANS The Company has a 401(k) Retirement Plan under which the Company matches a portion of the employee's contributions and may make discretionary contributions to the plan. All e mployees with one year of continuous service are eligible for the plan. All Company contributions are fully vested. Contributions by the Company were $145,000, $122,000, and $167,000 for 1996, 1995 and 1994, respectiv ely. The Company has a Supplemental Retirement Plan for certain employees that provides for payments (generally over 15 years) upon retirement, death o r disability. The annual benefit is based upon a percentage of salary at the inception of the plan, plus an annual percentage increase, plus inte rest. In addition, the Company adopted deferred compensation plans for k ey executives that provide for payments, over a ten-year period, upon ret irement, death or disability based upon a percentage of salary at that ti me. The charge to expense for the plans for 1996, 1995 and 1994 amounted to $277,000, $207,000 and $160,000 respectively. 9. COMMITMENTS AND CONTINGENCIES Leases: The Company occupies office space under lease agreements expiring at vari ous dates during the next five years. The leases are classified as operat ing leases, and provide for the payment of real estate taxes, insurance, utilities and maintenance. At August 30, 1996, the Company was obligated under noncancelable operati ng leases as follows:
Fiscal year ending August: Operating leases (In thousands) 1997 $ 38 1998 $ 23 1999 $ 23 2000 $ 23 2001 $ 11
Occupancy costs under the operating leases approximated $52,000 in 1996, $76,000 in 1995, and $76,000 in 1994. Stock Repurchase: On October 9, 1986 the Board of Directors authorized the Company to repur chase up to 282,723 of the outstanding stock at market prices. On Septemb er 28, 1995, the Board of Directors authorized the Company to repurchase up to 150,000 additional shares of the outstanding stock at market prices. The timing of stock purchases are madeat the discretion of management. At August 30, 1996, the Company has repurchased 301,314 or 70% of the total authorized to be repurchased. 29 10. SALES BY MAJOR CUSTOMERS AND GEOGRAPHIC AREAS Sales to individual customers constituting 10% or more of total sales wer e as follows:
(In thousands) 1996 1995 1994 Customer A $ 3,394 21% - - - - Customer B - - $ 3,948 21% $ 3,348 17% Customer C - - - - $ 2,639 14%
The Company anticipates that, for the foreseeable future, a significant p ercentage of its sales will be dependent upon a relatively small number o f customers. The Company's sales by geographic area are as follows:
(In thousands) 1996 1995 1994 North America $ 14,474 $ 15,992 $ 16,234 Far East 1,407 953 1,299 Europe 574 1,207 1,392 Other 65 374 535 Totals $ 16,520 $ 18,526 $ 19,460
11. RESTRUCTURING EXPENSES In November 1994 the Company accrued approximately $409,000 of the estima ted costs to be incurred in consolidating its manufacturing operations an d reducing its workforce. Actual costs incurred of approximately $416,000 are comprised of severance costs of $288,000, and $128,000 for closing t he San Diego manufacturing operation. 30 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of CSP Inc.: We have audited the accompanying consolidated balance sheets of CSP Inc. and subsidiaries as of August 30, 1996 and August 25, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended August 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as wel l as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSP Inc. and subsidiaries as of August 30, 1996 and August 25, 1995, and the results of their operations and their cash flows for each of the years in the three year period ended August 30, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP October 1, 1996 Boston, Massachusetts 31 CORPORATE INFORMATION DIRECTORS Samuel Ochlis Chairman of the Board, CSP Inc. Alexander R. Lupinetti President & CEO, CSP Inc. Boruch B. Frustajer President, BBF Corp. Stanford A. Fingerhood Senior VP, Laidlaw Holdings, Inc. John Ingram, PhD Research Fellow, Schlumberger Ltd. C. Shelton James President, Fundamental Management Corp. Sandford Smith President, Specialty Therapeutics Genzyme, Corp. Officers Samuel Ochlis Chairman of the Board Michael M. Stern VP of Operations & Treasurer Gary W. Levine VP of Finance & CFO James A. Waggett VP of Embedded Computing PRODUCT GROUP James E. Storer Chief Scientist & VP Dean Hanley Clerk, Foley, Hoag & Eliot CORPORATE OFFICE CSP, Inc. 40 Linnell Circle Billerica, MA 01821 Tel. (508) 663-7598 Fax (508) 663-0150 GENERAL INFORMATION General Counsel Foley, Hoag & Eliot - Boston, MA Transfer Agent American Stock Transfer Co. - NY, NY Auditors KPMG-Peat Marwick LLP - Boston, MA Stock Information Stock Traded Over the Counter NASDAQ Symbol: CSPI FORM 10-K A copy of the Company's Annual Report on Form 10-K for fiscal year 1996 a s filed with the Securities and Exchange Commission will be furnished wit hout charge to any stockholder upon written request to the Vice President of Finance, CSP Inc., 40 Linnell Circle, Billerica, MA 01821. 32 EX-23.1 5 AUDITORS' CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- The Board of Directors CSP Inc. We consent to incorporation by reference in the registration statements (Nos. 2-79414 and 33-11815) on Forms S-8 of CSP Inc. of our report dated October 1, 1996, relating to the consolidated balance sheets of CSP Inc. and subsidiaries as of August 30, 1996 and August 25, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended August 30, 1996, which report is incorporated by reference in the August 30, 1996 annual report on Form 10-K of CSP Inc. KPMG PEAT MARWICK LLP Boston, Massachusetts November 27, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K DATED AUGUST 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS AUG-30-1996 AUG-30-1996 10,928 6,127 4,250 103 2,405 24,439 12,459 8,852 29,536 1,639 0 0 0 29 25,775 29,536 16,520 16,520 6,655 17,169 (886) 0 24 237 129 108 0 0 0 108 .04 .04
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