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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 30, 2002
Commission File Number 0-10843
CSP Inc.
(Exact name of registrant as specified in its charter)
| Massachusetts |
|
04-2441294 |
| (State of Incorporation) |
|
(IRS Employer Identification Number) |
43 Manning Road, Billerica, Massachusetts 01821-3901 (978) 663-7598
(Address and telephone number of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act
Common Stock (par value $0.01 per share)
Indicate by check mark whether Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
As
of December 10, 2002, there were 3,531,975 shares of Common Stock outstanding. The aggregate market value of shares of such Common Stock (based upon the last sale price of $2.70 of a share as reported for December 9, 2002 on the NASDAQ National
Market System) held by non-affiliates was approximately $9,536,333.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant’s Proxy Statement to be dated December 20, 2002 in connection with
Registrant’s 2002 Annual Meeting of Stockholders scheduled to be held on January 27, 2003 are incorporated by reference in Part III hereof.
PART I
Item 1. Business
(a) General
Development of Business
CSP Inc. (“CSPI” or the “Company”) was founded in 1968 and is
based in Billerica, Massachusetts, just off Route 128 in the Boston computer corridor. To meet the diverse requirements of its industrial, commercial, scientific and defense customers worldwide, CSPI and its subsidiaries develop and market software
for E-business solutions and image processing, network management, security and storage systems integration services and high-performance cluster computer systems.
CSPI operates in four segments. The four segments are: systems, which include manufactured hardware products, systems integration and services, which includes maintenance
and integration and sale of third-party hardware products and services, E-business software and “other software” products that are developed by the Company.
MODCOMP, Inc. is a multinational business operation that develops and markets e-business solutions and provides network management, storage systems and security integration
services including consulting, system integration and outsourcing. MODCOMP’s newest software product is Xport, a messaging server that handles high throughput messages between host systems and client devices like fax, email and telex. In
addition, MODCOMP develops and markets ViewMax, which is a development software that allows companies to rapidly re-engineer and integrate their legacy application with Internet technologies and AIM66, which is a multichannel transaction server
software that supports WAP, GPRS, I-mode and UMTS which are critical for the 3G wireless deployment in Europe. The company sells all of its products through its own direct sales force in the U.S., Germany and U. K. It also sells their products and
services through distributors in the rest of the world.
The Company has another business operation, Scanalytics,
which develops and markets imaging systems for molecular and cell biology. Its revenues are reported in the other software segment. Scanalytics specializes in the development and marketing of highly sophisticated image capture and analysis software
products used by researchers in the biological and physical sciences. By integrating these software products with a diverse group of image-capture devices, Scanalytics is able to solve application-specific problems in biotechnology and life science
research, including Digital Microscopy, Genomics, and High-Throughput Screening. Scanalytics sells both directly and through a network of distributors and resellers.
The CSPI MultiComputer Division is another business operation that reports its activity in the systems segment. The MultiComputer Division helps its customers solve
high-performance computing problems in the medical imaging and defense markets by supplying very dense multiprocessing systems distinguished by elegant packaging and high-speed node-to-node communications in a completely integrated architecture.
These systems are used in a broad array of applications, including radar, sonar and surveillance signal processing. The MultiComputer Division sells all products through its own direct sales force in the U.S. and via distributors in the rest of the
world.
(b) Financial Information about Industry Segments
The Company operates in four segments, Systems, Service and system integration, E-business Software, and Other Software. The following
table presents sales by each segment:
| |
|
2002
|
|
%
|
|
|
2001
|
|
%
|
|
|
2000
|
|
%
|
|
| |
|
(Dollars in thousands) |
|
| Systems |
|
$ |
7,531 |
|
27 |
% |
|
$ |
8,430 |
|
20 |
% |
|
$ |
12,772 |
|
21 |
% |
| Service and system integration |
|
|
17,226 |
|
62 |
|
|
|
29,693 |
|
71 |
|
|
|
45,597 |
|
73 |
|
| E-business software |
|
|
1,811 |
|
6 |
|
|
|
1,906 |
|
5 |
|
|
|
1,810 |
|
3 |
|
| Other Software |
|
|
1,543 |
|
5 |
|
|
|
1,887 |
|
4 |
|
|
|
1,842 |
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Sales |
|
$ |
28,111 |
|
100 |
% |
|
$ |
41,916 |
|
100 |
% |
|
$ |
62,021 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
(c) Narrative Description of Business
The Company and its subsidiaries develop and market Internet software for E-business solutions, image-processing software, network
management integration services and high-performance cluster computer systems.
Products and Services
CSPI Systems
CSPI Systems supplies very dense high-performance cluster computer systems (“HPC”) for the high-end scientific/technical/defense computing markets and high-performance embedded computer systems (“HPEC”)
for the signal/image processing market. Applications expertise, product innovation, strong technical support, and dedicated customer support make CSPI one of the industry’s leading providers of high-performance cluster computer systems.
Applying its three plus decades of experience, the Company designs, manufactures, sells and services
high-performance cluster computer systems for compute intensive applications needing tens to hundreds of processors interconnected with a very high bandwidth network. All of the Company’s current products are easily scalable to a very large
size, are specially designed to require minimum space and power and are based upon open and standard hardware and software components.
The 2000 SERIES and FastCluster are the newest products. Product improvements, as well as new complementary products beneficial to both of these product line are continuously under development.
FastCluster Products
In April 2000, CSPI introduced the FastCluster line of high-performance cluster computer systems incorporating hundreds of processors, all interconnected by a very high-bandwidth network. FastCluster
systems are very dense Linux cluster computers designed to meet the needs of a wide range of computationally intensive applications in the military computer marketplace. Applications areas include radar and sonar signal processing, command and
control, communications and intelligence.
FastCluster offers customers a very dense open hardware platform
including the most modern processors, memory and networking components, easy upgrades through continuous insertion of the latest technologies and seamless application reuse through the use of industry standards, such as Open Source Software (OSS)
including Linux, MPI and VSIPL. The superior architectural design of FastCluster products is based on G4 processors from Motorola™ incorporating AltiVec™ technology, high-speed memory and
Myrinet™ 2000. FastCluster products use the industry-standard Linux operating system for
PowerPC™ processors and are compatible with the full range of third-party software packages
including FORTRAN compilers, vectorizers, math and image processing libraries, debuggers, profilers and other cluster development and run-time tools. CSPI Linux-based products are offered with many high-availability features including instant
booting from a cold start, error-correcting memory, a fault tolerant MPI-like library, hot-swappable hardware, extended environmental specifications and built-in test.
Entry price for a 16 processor FastCluster desktop is under $100,000. Larger FastCluster systems incorporating over 1000 processors are available and sell for several
million dollars. All FastCluster products are sold with standard hardware and software warranties. Contract support and service are optionally available from CSPI support organization.
2000 SERIES MultiComputer Products
2000 SERIES products are very dense high-performance cluster computer systems especially designed to solve applications with demanding analysis of complex signals and images in real time. Typical computational
3
intense applications requiring 2000 SERIES products include SONAR, RADAR and stimulation applications within the defense market segment, CT and MRI applications in the medical imaging market,
stimulation/modeling for real-time simulation markets and target/image/voice recognition in video and audio processing markets.
The 2000 SERIES systems use the best of open systems technologies incorporating the latest PowerPC™ RISC processors, Myrinet™ networking technology, Message Passing
Interface (MPI) software for interprocessor communications and the VxWorks® real-time operating
system. The 2000 SERIES product offers very high density, low power and a full set of reliability, maintainability and repairability features. The incorporation of open and standard technologies in the 2000 SERIES systems ensures that customers
receive systems using the latest technology while reducing the risks associated with proprietary technology.
The
2000 SERIES product line was first offered in fiscal year 1997. Several new and improved versions of the 2000 SERIES have been offered since its introduction. 2000 SERIES products have been shipped in a variety of configurations, including
multiple-chassis systems with over 400 processors.
SuperCard and Other Products
CSPI MultiComputers supplies, on an ‘as available’ basis, support for other older products, some initially released a
decade or more ago, still in use by our customers, mainly on critical applications within the defense industry.
Computer Hardware
In 1988, MODCOMP, Inc. systems began selling RealStar family of
computers, based on open systems VME and Motorola 68k and 88k processor technology. This was a direct result of faster processing technology and customer demand. MODCOMP provides migration paths for CLASSIC proprietary customers with these systems.
Prices range from $15,000 to $100,000.
In July 1997, the Company introduced its RealStar II line of computer
systems. This is a line of third-party hardware based on Pentium processor technology. This hardware is specially configured for optimum performance with MODCOMP’s REAL/IX PX operating system. MODCOMP adds additional components and software to
these systems such as RAID subsystems, interface cards, disks, video displays, to optimize them for the real-time, process control market place. During fiscal year 1999, the Company purchased a license for ScadaBase from Access Ware in order to
complement the capabilities of the REAL/IX operating system. ScadaBase has also been programmed to work with the LINUX operating system for applications like the monitoring of Internet Service Provider’s (ISP’s) facilities. Prices for
these systems range from $6,000 to $25,000.
The Company also continues to offer refurbished CLASSIC(legacy
computer systems) and MODACS proprietary systems as well as parts and services from its Fort Lauderdale headquarters. The CLASSIC systems are mini and supermini computers designed specifically to support real-time applications. The MODACS and
MODACSX products are data acquisition and control systems. Prices range from $15,000 to $150,000.
Service and
System Integration
Integration Services
In recent years, the Company’s product offering has shifted away from the sales of systems produced (proprietary and open architecture) hardware toward
integration solutions including hardware, software, special engineering, and third-party hardware and software. The Company’s value proposition is integrating these components together into a complete solution and installing the system at the
customer site. These services are
4
offered by all MODCOMP locations. In particular, the German subsidiary has had significant successes in the telecommunication market with the recent deregulation of that industry.
The Company continues to sell refurbished legacy systems and components, especially as it relates to servicing current
customers with replacement and/or upgraded systems. The old legacy computer systems generally can be expanded without major redesign as customer requirement’s change.
The legacy computer systems are generally utilized in industrial plants, research laboratories and data processing applications and operate in real-time.
The purchase prices of legacy computer systems are typically priced from $6,000 to $150,000, depending upon customer
requirements.
Computer Software and Computer Programming
Legacy computers are supported by high-level operating software, referred to as MAX, REAL/IX, REAL/IX PX and ScadaBase. This software is
designed specifically for optimum real-time performance. The Company’s software enables customers to write their own real-time application software. These applications, when combined with legacy computers or third-party computers, create
systems which simultaneously perform different control functions, program tests and a batch processing operation with response and interrupt times that are required in this marketplace. Prices range from $3,000 to $35,000.
Internet Integration and Security Solutions
The Company also offers its own and third-party software products as well as specialized programming and engineering services to supply customers with customized
legacy-to-web, E-business solutions, virtual private networks and Internet security solutions.
E-Business
Software
In fiscal year 1997, the Company launched ViewMax® in the United States. ViewMax® is a development environment that allows MODCOMP to rapidly re-engineer and integrate legacy systems such as mainframe, midrange, and other diverse host systems with Internet technology. Using ViewMax® technology, the Company creates solutions that extend corporate data to a much wider audience via a corporate
Intranet, Extranet, or the Internet. Using ViewMax®, the Company creates solutions that can also
integrate Electronic Commerce transactions with existing legacy Systems. Although the product has broad potential, the initial user of this technology have used it primarily for facilitating Electronic Commerce and creating Extranets. Current
ViewMax® customers are in the travel, insurance, financial, health services education, government,
manufacturing and distribution markets. Prices for ViewMax® range from $40,000 to $250,000.
The Company markets solutions using ViewMax directly to end-users. The direct market is cross industry, to
companies of substantial size, and is not dependent on the fluctuations of any particular business segments. ViewMax® is positioned primarily as an integration solution, with a strong focus on Electronic Commerce, Intranet and Extranet implementations. In the US, UK and Germany, a wide range of companies from a broad spectrum of industry
have adopted it, including travel, insurance, automotive, consumer electronics, and financial services.
Additionally, the Company provides Internet security consulting and implementation services for enterprise intrusion prevention and protection. Using third-party products from Checkpoint, MODCOMP ensures data security and integrity
through the establishment of virtual private networks and firewalls.
In particular, the German subsidiary has had
significant successes in the Internet security market in the telecommunications and financial services industries. Offering 7x24 service level agreements are a critical success factor in this market.
5
Wireless Portal Server Software
In fiscal 2002, MODCOMP Germany extended the WAP66 universal wireless transaction server software to be a multichannel transaction server
software, now supporting all existing technologies from WAP, GPRS, I-mode and UMTS. Now offering true Advanced Internet Mobility support software, WAP66 has been renamed AIM66. This offering will enable MODCOMP to participate in the upcoming mobile
services delivery market, which is a critical success factor for the telecommunication industry to succeed with 3G technology in Europe.
Messaging Software
In June 2002, MODCOMP Ltd. acquired the communications
business of Sipher Software Ltd.—Sipher is a UK company specializing in Message Oriented Middleware solutions for companies like Barclays Bank, JP Morgan, Hong Kong Telecom and the BBC.
The Sipher acquisition included the relevant expertise in enterprise level messaging solutions and the Intellectual Property for the core-messaging server called Xport.
This product has advanced gateway functionality for handling high throughput messages between host business systems such as IBM mainframes and client devices—fax, email, telex, EDI. The in-line processing engine can be configured to sort, map,
filter and transcribe messages before being delivered to client devices, systems, databases or other applications.
Competitors include Topcall and Progress Software as well as EDS, IBM Global Services and Ernst & Young, who provide custom message integration solutions for the banking industry using products like IBM MQ Series and TIBCO.
Other Software
In this segment, Scanalytics gives “sight” to computers by creating software that captures images from digital cameras and scanners and extracts information from those images. The Company
integrates those software products with off-the-shelf hardware components to create high-performance vision systems that support scientific researchers in the biological and the physical sciences. During 2002, the other software segment focused its
efforts in three applications areas of biotechnology and life science research: Digital Microscopy, Genomics, and High Throughput Screening. Products are sold through two channels: directly to researchers via our own sales force and through a
network of international and domestic dealers, OEMs, and VARs.
Digital Microscopy
IPLab is a general-purpose image analysis software package. It was originally available only on Macintosh computers, where
IPLab has been called “the de facto standard in Macintosh image analysis”. Since then, IPLab has also been programmed to work within the Windows operating systems. Add-on modules for IPLab, called Extensions, provide application-specific
functionality, making IPLab extremely adaptable for a wide variety of customers and industries. Extensions can easily be written by IPLab customers and third-party developers, as well as by our staff . The Company makes and markets individual
Extensions for multi-fluorescence microscopy, calcium-ratio imaging, 3-D image visualization, time lapse studies, and microscope automation. The list price of Basic IPLab is $3,495 and extensions range in price from $600 to $3,000.
Genomics
GeneProfiler is the backbone of the other software products oriented towards Genomics. It is widely recognized as the most sophisticated and easy to use software of its kind in the industry.
Scanalytics makes several other products within this group: OneDscan for either Macintosh or Windows provides basic gel documentation and analysis, Gellab II+ is used for 2D gel analysis, and DNAscan is a package for automatic sequencing of DNA
sequencing gels. Prices for these products range from $995 to $2,995.
6
High Throughput Screening
High Throughput Screening systems are characterized by a high density of samples automated analysis and experimental repeatability.
MicroArray Suite, introduced by Scanalytics in 1999, is an extension to IPLab that was developed by and licensed from the National Center for Human Genome Research at the National Institutes of Health. This software package assists researchers in
analyzing microarrays, which are devices that let researchers evaluate potential drug candidates by testing them against thousands of DNA fragments simultaneously. MicroArray Suite is priced at $5,000. Scanalytics is continuing development of the
Elispot Imager in collaboration with the Navy Medical Research Center. This system of software and hardware is used for immunological assays. (Elispot stands for Enzyme Linked Immuno-Spot). ELISpot Imager is priced at $21,000.
Markets, Marketing and Dependence on Certain Customers
Systems
The Company markets its FastCluster computer
systems into the high-end scientific/technical/commercial high-performance computing (HPC) segments and markets its 2000 SERIES high-performance embedded computer (HPEC) systems into signal/image processing segment with emphasis on analysis of
complex signals. The Company distributes its products in these markets as an original equipment manufacturer (OEM) supplier to system integrators; distributors and value added resellers (VARs).
FastCluster Markets
The newly introduced FastCluster line of high-performance cluster computer systems was designed to meet the needs of a wide range of computationally intensive applications in the scientific/defense high-performance computer
marketplace. Typical applications in this market include radar and sonar, signal processing, command and control, communications and intelligence.
FastCluster brings to the high-performance cluster computing market a family of products incorporating many important features differentiating it from all other cluster computing offerings. FastCluster
systems are distinguished by their elegant packaging—providing the highest density and lowest power consumption, high-speed node-to-node communications—providing optimum performance with true scalability and a completely integrated
architecture—combining Linux, MPI, Myrinet and fault tolerance features. FastCluster systems offer the high-performance cluster computing market the best combined performance, features and price.
2000 SERIES Markets
2000 SERIES systems are sold primarily to prime contractors within the defense industry for use in sonar and radar systems, simulators, speech recognition equipment, night vision systems and signal
& image analysis computers.
New programs requiring signal/image processing and analysis equipment as well as
upgrades to existing military systems considered essential for maintaining American military leadership continues at a steady rate. However, fewer new programs are now funded into full deployment as the number of platforms (ships, planes, tanks,
etc.) for computer systems reduce in number. Both new and upgrade programs require a substantial period of development and evaluation time before products are deployed into field use. Time from development to deployment varies based on the program,
however, many programs are now stretching out well beyond the historical twelve to twenty-four month time period.
The Company supplies commercial-off-the-shelf (COTS) products to defense industry prime contractors who are being encouraged to use COTS solutions rather than build systems in-house using proprietary designs.
7
The COTS initiative is in response to US Defense Department’s efforts to contain program costs and to improve the time and cost to insert new technology into existing field equipment. This
initiative is now being adopted by other governmental procurement agencies around the world. 2000 SERIES MultiComputer systems have been shipped to a number of customers developing COTS-based systems or evaluating its use for future COTS programs.
SuperCard Products
The MultiComputer SuperCard products are being used in programs currently in deployment such as the U.S. Navy’s sonar computers where they are used to co-ordinate
information from hydraphone sensor arrays in both ship-based and shore-based installations. These programs typically stretch over many years. The deployment phases of many programs incorporating SuperCards are now completed. SuperCards are also sold
to medical imaging equipment suppliers on an OEM basis. No new SuperCard based programs are anticipated.
The
Company sells all products through its own direct sales force in the U.S. and via distributors in the rest of the world.
Service and System Integration
MODCOMP supplies and integrates network and storage
solutions and designs, services and markets worldwide, high-speed mini-computers principally for use in demanding real-time applications. These computer systems are used in operations involving process measurement and control, power production and
distribution, manufacturing test and inspection, scientific data collection and monitoring, as well as financing and other communications networks. MODCOMP has expanded its product line by including third-party equipment in their sales and servicing
offerings. This new focus as a “total solutions company” allows MODCOMP to meet the needs of their customers with a variety of products including internally produced as well as those from third-party manufacturers.
Sales to individual customers constituting 10% or more of total sales consisted of sales to E-Plus of $5,642,000 (20%) in 2002. This
customer is a “wireless” telecommunication company in Germany. The Company anticipates that, for the foreseeable future, a significant percentage of its sales will be dependent upon a relatively small number of customers.
The Company markets its products through various sales offices in the U.S., Canada, Germany and England (for a detailed list
see Item 2 of Form 10-K contained herein). Throughout the remainder of the world, these offices coordinate the activities of independent distributors and manufacturers representatives who represent other company’s product lines not competitive
with CSPI and are either paid a commission on units sold or are permitted to buy units at a discount for subsequent resale.
Geographically, Europe accounts for approximately 59% of total sales. Historically, approximately 70% of the Company’s revenue were generated internationally. During the current year, the Company had significant sales from
system integration customers in Germany. Accordingly, changes in market conditions in European countries in which we operate may significantly affect the Company performance.
Competition
CSPI Systems
The MultiComputer systems market is very competitive. The Company believes its products to be among the leaders in the use of open and
standard technologies, elegance in packaging and price/performance. The markets addressed by CSPI’s MultiComputer systems product 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.
8
The future growth of the MultiComputer systems market depends upon providing high
density and scalability in a compact low-power and inexpensive package that can be easily integrated into original equipment manufacturers (OEM) designed for high performance computation. Since the majority of sales are to OEMs, the principal
barrier to competition is the reluctance of established users to redesign their product once it is in production.
2000 SERIES Competition
The Company’s direct competitors for the MultiComputer
systems in the defense market are Mercury Computer Inc. and Sky Computers, Inc. DSP board manufacturers including DY4, Synergy, Thales Computers and DNA Computing, that specialize in the DSP segment of this market are indirect competitors. In the
low performance segment of the market general-purpose computer and single board computer, manufacturers such as Motorola, Force, Hewlett Packard and Dell may compete. New companies enter the field periodically, and larger companies with greater
technical resources and marketing organizations could decide to compete in the future.
FastCluster
Competition
Companies manufacturing general-purpose computer systems incorporating multiple processors
will be the principal competitors for the FastCluster products. FastCluster products are distinguished by their elegant packaging providing the highest density and lowest power consumption, high-speed node-to-node communications—providing true
scalability and optimum performance and a completely integrated architecture—combining Linux, MPI, Myrinet and fault tolerance features. CSPI believes that its FastCluster products offer the best value in combined performance, features and
price. FastCluster is a newly introduced product line and these distinguishing characteristics may not overcome the capabilities of much larger companies competing in this segment of the high-performance computer market.
Systems- MODCOMP Legacy
MODCOMP’s systems competition in its Process Control and Data Acquisition business crosses product line boundaries. Competition in its proprietary product line is with third-party companies that
have developed technical expertise with the CLASSIC computer system family. Direct competitors include Accurate Computers, Queue Systems, Protostar, and Electronic Visions.
Competitors for both Company proprietary and open systems product lines also include systems integrators with process control skills in markets such as primary metals, oil
and gas, power, rubber and plastics, pharmaceuticals, chemicals, pulp and paper, and food and beverages. These competitors offer alternative open systems hardware platforms and industry-specific tailored application software packages.
Direct competition with its real-time UNIX operating system used in legacy systems includes VxWorks, HP-UX, PowerMAX, Windows
NT, Lynx, QNX, and Linux. As performance in microprocessor technology rapidly advances, real-time capabilities of competing operating systems narrows. Competing products are differentiated by hardware platform support and operating system
robustness.
Service and System Integration
In the network management and storage systems integration services business, MODCOMP competitors are extensive and are different in each of the geographical markets but
they include such competitors as EDS, IBM, and Sun Microsystems.
E-business software
The Company’s principal, direct competitors to ViewMax in the Legacy Extension market space are IBM, Jacada, Attachmate,
Clientsoft, Intelligent Environments, and Micro Focus, International. Companies such as
9
Jacada, Attachmate and IBM have greater technical and marketing resources, and could adversely affect our position. Additionally, in the Internet Security Services area, the principal direct
competitors are ISS, Enterasys, VeriSign, Computer Associates, IBM, HP and TruSecure. Again, these companies have greater financial, technical and marketing resources, and could adversely affect our position.
Competitors for the Company’s AIM66 transaction server software, in this new wireless market segment, range from small, single
product companies to large multinational companies with much greater resources like Oracle, IBM, and Microsoft.
Other Software
In the Digital Microscopy market, the Company’s major competitors are
Media Cybernetics, Universal Imaging, and ImproVision. Other competitors include Compact, Carl Zeiss, Intelligent Imaging, and QED Imaging. In the Genomics market, major competitors include Genomic Solutions, Media Cybernetics, BioRad, and Alpha
Innotech. In the High Throughput Screening market, the only other software company that competes directly with the Company is BioDiscovery. Competitors in all of these markets range from small, single product companies to large, multinational
instrument companies. The Company maintains its competitive advantage by offering high-value solutions.
Manufacturing, Assembly and
Testing
All of the Company’s MultiComputer systems manufacturing is performed at its plant in Billerica,
Massachusetts. The primary manufacturing process is the assembly and test of printed circuit boards and systems, designed by the Company and fabricated by other vendors. The Company endeavors to build for inventory and offers products in a variety
of standard formats. A small percentage of sales reflect products customized to a particular customer’s specification, and even these products are easily reconfigurable should the customer cancel the order for any reason.
Upon receipt of material by the Company from outside suppliers, products and components are inspected by the Company’s
QC/QA technicians. During manufacture and assembly, both subassemblies and completed systems are subjected to extensive testing, including burn-in and vibration procedures designed to minimize equipment failure. The Company also uses diagnostic
programs to detect and isolate potential component failures. A comprehensive log is maintained of all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Myricom Inc., Arcadia, CA, for the networking technology integrated circuit devices used in 2000 SERIES MultiComputer products. The
Company has sufficient quantities of these components on hand to satisfy anticipated demand. Myricom has assured the Company that supplies will continue to be available for reasonable quantities required.
SuperCard products were designed using the Intel i860 RISC microprocessor. Intel discontinued production of the i860 at the end of the
1998 calendar year. CSPI has made provisions to accommodate the future needs of all its SuperCard customers for this product. No new application development programs will be initiated incorporating SuperCard products. However, SuperCard products
will continue to be shipped into existing programs that have committed to the SuperCard end-of-life plan.
The
MultiComputer Division does not consider the risk of interruption of supply to be significant to meet its projected revenue requirements for the immediate future.
The 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.
10
All “other software” products and manuals are shipped from the Fairfax,
Virginia facility. The Company performs system integration of computer equipment with various image capture devices, such as microscopes or digital cameras, at their facilities in Virginia before installation at the customer site.
MODCOMP’s refurbished system configurations can include a wide selection of peripheral subsystems built or purchased under
the original equipment manufacturer agreements. The Legacy system manufacturing facility is located in Fort Lauderdale, Florida. The process is controlled by various quality steps throughout the process. The assembly cycle of an individual system
generally takes between 30 and 45 days, depending on its complexity.
Customer Support
The MultiComputer systems division and Scanalytics (other software) support its customers with telephone assistance, on-site service,
system installation, and training and education. Product support service is provided by the Company during the warranty period. Customers may purchase extended software and hardware maintenance and on-site service contracts for support beyond the
warranty period. Each problem reported by a customer is reviewed by an analyst who researches the issue and assists the customer to resolve the problem.
The Company offers training courses at either corporate headquarters or the customer site. Field and customer service support is provided through its headquarters in Billerica, Massachusetts for
systems customers. Scanalytics (other software) provides support service through its Fairfax, Virginia headquarters.
Support for “legacy systems” is delivered in a number of ways including telephone assistance, on-site service, installation of systems, training and education. Service and parts warranty, generally of 90 days duration is
provided on all products. In addition, the Company sells maintenance service contracts to customers. The Company also conducts customer training courses of one to three weeks’ duration on a fee basis either at their or the customer’s
location.
Field and customer service support is provided through offices strategically located throughout the
world.
Research and Development
During fiscal 2002, CSPI’s expenses (including depreciation) for engineering and development were approximately $3,737,000 (13% of sales) compared to approximately $3,823,000 (9% of sales) and
$4,031,000 (6% of sales) in fiscal years 2001 and 2000, respectively. Expenditures for engineering and development are expensed as they are incurred. CSPI MultiComputer systems Division expects to continue substantial expenditures, both in
additional applications software development and development of hardware and software. “Other software” will continue to expand its product offering in software with its various products in gel and cell analysis for life sciences and
complete new releases of the PC version of the IP Lab software product. The MultiComputer systems 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. “E-business” will continue development of the ViewMax, Sipher and AIM66 products, as well as Linux and ScadaBase for SCADA solutions.
During 2002, Scanalytics finalized its IPLab software to work under the Windows operating systems, bringing it to parity with the Macintosh product. Scanalytics also worked
on three other major projects: improvements to the MicroArray Suite product line for Macintosh; updates to the Macintosh products to maintain their competitiveness; and development of the Elispot Imager.
CSPI “systems and other software” has 41 employees, of which 16 professional and staff employees were engaged in software and
hardware engineering and development activities as of September 30, 2002.
11
The” legacy system and service and system integration” engineering and
development staff has developed various computers, computer peripherals and software since 1970, which it continues to maintain and enhance.
The Company’s principal products are the CLASSIC hardware and software system line, Linux and ScadaBase application software and special one-of-a-kind products requested by customers.
The CLASSIC hardware and software line is a proprietary line of mini-computers and related software especially
designed for the hard real-time market and has been in existence since 1970.
“Legacy, service and systems
integration” and “E-business” groups have 103 employees, of which 5 professional and staff employees are engaged in software and hardware engineering and development.
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
$3,343,000 at September 30, 2002 as compared to $4,628,000 at August 31, 2001. The backlog of the Company can fluctuate greatly. These fluctuations can be due to the timing of receiving large orders for integration services and OEM purchases.
Employees
On September 30, 2002, the Company had 144 employees. None of the Company’s employees is represented by a labor union and the Company had no work stoppages. The Company considers relations with its employees to be good.
(c) Financial Information about Foreign and Domestic Operations and Export Sales
The Company’s sales and percentage of sales by geographic area based on the location of the customers are as follows:
| |
|
For year ended
|
|
| |
|
September 30,
2002
|
|
|
August 31
|
|
| |
|
|
2001
|
|
|
2000
|
|
| Europe |
|
$ |
16,478 |
|
59 |
% |
|
$ |
27,981 |
|
67 |
% |
|
$ |
43,882 |
|
71 |
% |
| North America |
|
|
10,225 |
|
36 |
|
|
|
13,411 |
|
32 |
|
|
|
16,234 |
|
26 |
|
| Asia |
|
|
1,408 |
|
5 |
|
|
|
524 |
|
1 |
|
|
|
1,690 |
|
3 |
|
| Other |
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
215 |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
28,111 |
|
100 |
% |
|
$ |
41,916 |
|
100 |
% |
|
$ |
62,021 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Factors
This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to
predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. In response to competitive pressures or new product introductions, the Company may take
certain pricing or marketing actions that could adversely affect the Company’s operating results. In addition, changes in the products and services mix may cause fluctuations in the Company’s gross margin. Due to the potential quarterly
fluctuations in operating results, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily an indicator of future performance.
12
Markets for the Company’s products and services are characterized by rapidly
changing technology, new product introductions and short product life cycles. These changes can adversely affect the business and operating results. The Company’s success will depend upon its ability to enhance its existing products and
services and to develop and introduce, on a timely and cost effect basis, new products that keep pace with technological developments and address increasing customer requirements. The inability to meet these demands could adversely affect the
Company’s business and operating results.
Dependence on Key Customers
The Company is dependent on a small number of customers for a large portion of its revenues. E-Plus, a wireless telecommunications company
in Germany, accounted for 20%, 40% and 36% of sales in fiscal years ended September 30, 2002, August 31, 2001 and 2000. A significant diminution in the sales to or loss of any of the Company’s major customers would have a material adverse
effect on the Company’s business, financial condition and results of operations. In addition, the Company’s revenues are largely dependent upon the ability of its customers to continue growth or need for services or to develop and sell
products that incorporate the Company’s products. No assurance can be given that the Company’s customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, the results of
operations of the Company.
Competition
The markets for the Company’s products are highly competitive and are characterized by rapidly changing technology, frequent product performance improvements and
evolving industry standards. Due to the rapidly changing nature of technology, new competitors may emerge of which the Company has no current awareness. Such competitors could have a negative impact on the Company’s ability to win future
business opportunities. There can be no assurance that or a new competitor will not attempt to penetrate the various markets for our products and services. Their entry into markets historically targeted by CSPI may have a material adverse effect on
the Company’s business, financial condition and results of operations.
Slowdown in the Economy
The Company’s business has been negatively impacted by the slowdown in the economies of the United
States, Europe and elsewhere that began during fiscal 2001. The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital investment and may cause further reduction of such investments. These reductions
have been particularly severe in the electronics and technology industry. The Company cannot predict if or when the growth rate of worldwide economies will rebound, whether the growth rate of its business will rebound when the worldwide economies
begin to grow, or if or when the Company’s growth rate will return to historical numbers.
Change in
Operating Results
The Company has experienced fluctuations in its results of operations in large part due to
the sale by the Company of its systems and services integration and servers, E-business software and other software in relatively large dollar amounts to a relatively small number of customers. Operating results also have fluctuated due to the
competitive pricing programs and volume discounts, the loss of customers, market acceptance of the Company’s products, product obsolescence and general economic conditions. The Company’s gross margins from third-party products are
typically lower than the Company’s gross margins from standard product revenues. The Company expects research and development expenses to continue as the Company continues to develop products and services to serve its markets, all of which are
subject to rapidly changing technology, frequent product performance improvements and evolving industry standards. The ability to deliver peak performance on a timely and cost-effective basis is a critical factor in wins for future generations of
defense business. Significant research and development spending by the Company does not ensure its systems will be designed into a customer’s
13
system. Because future production orders are usually contingent upon securing a design win, the Company’s operating results may fluctuate due to either obtaining or failing to obtain design
wins for significant customer systems.
The Company’s quarterly results may be subject to fluctuations
resulting from the foregoing factors as well as from a number of other factors, including the timing of significant orders, delays in completion of internal product development projects, delays in shipping the Company’s computer systems and
software programs, delays in acceptance testing by customers, a change in the mix of products sold to the defense and other markets, production delays due to quality programs with outsourced components, shortages of components, the timing of product
line transitions and declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology. Another factor contributing to fluctuations in quarterly results is the
fixed nature of the Company’s expenditures on personnel, facilities and marketing programs. The Company’s expense levels for personnel, facilities and marketing programs are based, in significant part, on the Company’s expectations of
future revenues. If actual quarterly revenues are below management’s expectations, results of operations likely will be adversely affected. As a result of the foregoing factors, the Company’s operating results, from time to time, may be
below the expectations of public market analysts and investors, which could have a material adverse effect on the price of the Company’s Common Stock.
Dependence on Suppliers
Several components used in the
Company’s products are currently obtained from sole-source suppliers. CSPI is dependent on key vendors like Myricom as well as Motorola for many of its PowerPC line of processors. Generally, suppliers may terminate their contract with the
Company without cause upon 30-days notice and may cease offering products to the Company upon 180-days notice. If Motorola was to limit or reduce the sale of such components to the Company, or if these or other component suppliers to the Company,
some of which are small companies, were to experience financial difficulties or other problems which prevented them from supplying the Company with the necessary components, such events could have a material adverse effect on the Company’s
business, financial condition and results of operations. These sole source and other suppliers are each subject to quality and performance issues, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow
of goods to the Company or its customers; thereby adversely affect the Company’s business and customer relationships. The Company has no guaranteed supply arrangements with its suppliers and there can be no assurance that its suppliers will
continue to meet the Company’s requirements. If the Company’s supply arrangements are interrupted, there can be no assurance that the Company would be able to find another supplier on a timely or satisfactory basis. Any shortage or
interruption in the supply of any of the components used in the Company’s products, or the inability of the Company to procure these components from alternate sources on acceptable terms could have a material adverse effect on the
Company’s business, financial condition and results of operations. There can be no assurance that severe shortages of components will not occur in the future. Such shortages could increase the cost or delay the shipment of the Company’s
products, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Significant increases in the prices of these components would also materially adversely affect the Company’s
financial performance since the Company may not be able to adjust product pricing to reflect the increase in component costs. The Company could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due
to work stoppages, shipping delays, financial difficulties or other factors and, under certain circumstances, these costs and delays could have a material adverse effect on the Company’s business, financial condition and results of operations.
Dependence on Defense Business
Sales of the Company’s systems to the defense market accounted for approximately 16%, 17% and 16% of the Company’s revenues in fiscal year ended September 30,
2002, August 31, 2001 and 2000, respectively. Reductions in government spending on programs that incorporate the Company’s products could have a material adverse effect on the Company’s business, financial condition and results of
operations. Moreover, the
14
Company’s subcontracts are subject to special risks, such as: delays in funding; ability of the government agency to unilaterally terminate the prime contract; reduction or modification in
the event of changes in government policies or as the result of budgetary constraints or political changes; increased or unexpected costs under fixed price contracts; and other factors that are not under the control of the Company. In addition,
consolidation among defense industry contractors has resulted in fewer contractors with increased bargaining power relative to the Company. No assurance can be given that such increased bargaining power will not adversely affect the Company’s
business, financial condition or results of operations in the future.
Changes in government administration, as
well as changes in the geo-political environment such as the current “War on Terrorism,” can have significant impact on defense spending priorities and the efficient handling of routine contractual matters. Such changes could have a
negative impact on the Company’s business, financial condition, or results of operations in the future.
Dependence Upon Key Personnel and Skilled Employees
The Company is largely dependent upon
the skills and efforts of its senior management, managerial, sales and technical employees. None of the senior management or other key employees of the Company are subject to any employment contract which require services for a person of time. The
loss of services of any of its executives or other key personnel could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s future success will depend to a significant
extent on its ability to attract, train, motivate and retain highly skilled technical professionals. The Company’s ability to maintain and renew existing engagements and obtain new business depends, in large part, on its ability to hire and
retain technical personnel with the skills that keep pace with continuing changes in industry standards and technologies. The inability to hire additional qualified personnel could impair the Company’s ability to satisfy its growing client
base, requiring an increase in the level of responsibility for both existing and new personnel. There can be no assurance that the Company will be successful in retaining current or future employees.
Risk of International Operations
The Company markets and sells its products in certain international markets, and the Company has established subsidiaries in the United Kingdom, and Germany. Foreign-based revenue is determined based
on the country in which the legal subsidiary is domiciled, and represented 59%, 67% and 71% of the Company’s total revenue for the fiscal years ended September 30, 2002, August 31, 2001 and 2000, respectively. If revenues generated by foreign
activities are not adequate to offset the expense of establishing and maintaining these foreign subsidiaries and activities, the Company’s business, financial condition and results of operations could be materially adversely affected. In
addition, there are certain risks inherent in transacting business internationally, such as changes in applicable laws and regulatory requirement, export and import restrictions, export controls relating to technology, tariffs and other trade
barriers, less favorable operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences, any of which could
adversely impact the success of the Company’s international activities. In the recent past, the financial markets in Asia have experienced significant turmoil. A portion of the Company’s revenues from sales to foreign entities, including
foreign governments, is in the form of foreign currencies. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company’s future international activities and, consequently, on the
Company’s business, financial condition or results of operations.
Technological Changes
The Company’s future success will depend in part on its ability to enhance its current products and to develop new
products on a timely and cost-effective basis in order to respond to technological developments and changing customer needs. The defense market, in particular, demands constant technological improvements as a means of gaining military advantage.
Military planners historically have funded significantly more design
15
projects than actual deployments of new equipment, and those systems that are deployed tend to contain the components of the subcontractors selected to participate in the design process. In order
to participate in the design of new defense electronics systems, the Company must be able to demonstrate its ability to deliver superior technological performance on a timely and cost-effective basis. There can be no assurance that the Company will
be able to secure an adequate number of defense electronics design wins in the future, that the equipment in which the Company’s products are intended to function eventually will be deployed in the field, or that the Company’s products
will be included in such equipment if it eventually is deployed.
The design-in process is typically lengthy and
expensive, and there can be no assurance that the Company will be able to continue to meet the product specifications of its OEM customers in a timely and adequate manner. In addition, any failure by the Company to anticipate or respond adequately
to changes in technology and customer preferences, or any significant delay in product developments or introductions, could have a material adverse effect on the Company’s business, financial condition and results of operations, including the
risk of inventory obsolescence. Because of the complexity of its products, the Company has experienced delays from time to time in completing products on a timely basis. If the Company is unable to design, develop or introduce competitive new
products on a timely basis, its future operating results would be adversely affected. There can be no assurance that the Company will be successful in developing new products or enhancing its existing products on a timely or cost-effective basis, or
that such new products or product enhancements will achieve market acceptance.
Research and Development
The Company’s industry is characterized by the need for continued investment in research and
development. If the Company failed to invest sufficiently in research and development, the Company’s products could become less attractive to potential customers, and its business and financial condition could be materially adversely affected.
As a result of the Company’s need to maintain or increase its spending levels in this area the difficulty in reducing costs associated with research and development, the Company’s operating results could be materially harmed if its
revenues fall below expectations. In addition, as a result of CSPI’s commitment to invest in research and development, spending as a percent of revenues may fluctuate in the future.
16
Item 2. Properties
Listed below are CSPI’s principal facilities as of September 30, 2002. Management considers all facilities listed below to be suitable for the purpose(s) for which
they are used, including manufacturing, research and development, sales, marketing, service, and administration.
| Location
|
|
Principal Use
|
|
Owned or Leased
|
|
Approximate Floor Area
|
| CSP Inc.
43 Manning Road
Billerica, MA |
|
Corporate Headquarters Manufacturing, Sales, Marketing, and Administration |
|
Leased |
|
21,500 S.F. |
| |
| Scanalytics, Inc.
8550 Lee Highway, Suite 400
Fairfax, VA |
|
Corporate Headquarters Sales, Marketing, and Administration |
|
Leased |
|
3,518 S.F. |
| |
| MODCOMP, Inc.
1650 West McNab Road
Ft. Lauderdale, FL |
|
Corporate Headquarters Sales, Marketing, and Administration |
|
Leased |
|
77,429 S.F. |
| |
| MODCOMP Canada, Ltd.
530 Otto Road
Unit 11A
Mississaugu, Ontario Canada |
|
Sales, Marketing, and Administration |
|
Leased |
|
730 S.F. |
| |
| Modular Computer System, GmbH
Oskar-Jager-Strasse 125-143
D-50825
Koln Germany |
|
Sales, Marketing, and Administration |
|
Leased |
|
1,837 S.F. |
| |
| MODCOMP, Ltd.
Acorn House
61 Peach Street
Wokingham RG40 1XP
United Kingdom |
|
Sales, Marketing, and Administration |
|
Leased |
|
5,173 S.F. |
| |
| MODCOMP Systemhaus, GmbH
Gartenstr. 23-27
61352 Bad Homburg |
|
Sales, Marketing and Service |
|
Leased |
|
945 S.F. |