10-Q 1 qmay01.htm FORM 10Q QTR ENDED 5/31/01 SECURITIES AND EXCHANGE COMMISSION

                                                UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                                               Washington, D.C. 10549
                                                         ___________________
                                                  FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended            May 31, 2001      

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.)

                 43 Manning Road, Billerica, Massachusetts                               01821-3901
                (Address of principal executive offices)                                         (Zip Code)

                                                                 (978) 663-7598 
                                      (Registrant's telephone number, including area code)

                                                                         None                                                                        
                      (Former name, former address, former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 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.        [X]  Yes            [  ]  No

 

                                    APPLICABLE ONLY TO CORPORATE ISSUERS:
     Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

                                Class                                                               Outstanding July 11, 2001
           Common Stock, $.01 par value                                                 3,512,906 shares

INDEX

PAGE

NUMBER

PART I.

FINANCIAL INFORMATION:

Item 1.

Financial Statements

Consolidated Balance Sheets

3

Consolidated Statements of Operations

4

Consolidated Statements of Comprehensive Income (Loss)

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial

    Condition and Results of Operations

13

PART II.

OTHER INFORMATION:

Item 4.

Submission of Matters to a vote of Security Holders

20

Item 6.

Exhibits & Reports on Form 8-K

20

 

                                                       CSP INC. AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
                                                 (Amounts in thousands, except par value)

May 31,

August 31,

2001

2000

(Unaudited)

(Audited)

                                                                      Assets                                            

Current assets:

   Cash and cash equivalents

$3,233

$3,923

   Short-term investments

12,874

9,150

   Accounts receivable, net

3,494

6,841

   Inventories

7,240

5,793

   Deferred income taxes

1,104

1,104

   Other current assets

     949

     800

        Total current assets

28,894

27,611

Property, equipment and improvements, net

1,435

3,201

Other assets:

   Long-term investments   

350

2,471

   Land held for future development

--

163

   Deferred income taxes

1,793

1,122

   Goodwill, net

800

939

   Other assets

   1,533

   1,549

        Total other assets

   4,476

   6,244

                 Total assets

$34,805

$37,056

                                                 Liabilities and Shareholders' Equity

Current liabilities:

  Accounts payable and accrued expenses

$6,395

$5,189

  Income taxes payable

   562

813

      Total current liabilities

6,957

6,002

Deferred compensation and retirement plans

3,706

3,608

Commitments and contingencies

Shareholders' equity:

   Common stock, $.01 par; authorized, 7,500 shares; issued 4,085

       and 4,069 shares

41

41

   Additional paid-in capital

11,235

11,070

   Retained earnings

16,941

 19,962

   Accumulated other comprehensive income

(1,214)

(1,079)

27,003

29,994

   Less treasury stock, at cost, 571 and 491 shares

  2,861

 2,548

        Total shareholders' equity

24,142

27,446

                 Total liabilities and shareholders' equity

$34,805

$37,056

See accompanying notes to consolidated financial statements.

                                                          CSP INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                            (Amounts in thousands, except for per share data)
                                                                       (Unaudited)

                                                                  /-For the three months ended-//-For the nine months ended--/

May 31,

May 31,

May 31,

May 31,

2001

2000

2001

2000

Sales:

   Systems

$733

$3,231

$5,517

$9,478

   Service and system integration

7,906

12,298

21,737

38,187

   E-Commerce software

375

415

1,611

1,302

   Other software

   520

    359

  1,443

  1,430

        Total sales

9,534

16,303

30,308

50,397

Cost of Sales:

   Systems

1,259

848

3,526

3,475

   Service and system integration

7,100

10,272

18,837

31,780

   E-Commerce software

198

200

700

645

   Other software

  163

      72

    411

    442

        Total cost of sales

8,720

11,392

23,474

36,342

   Gross profit

814

4,911

6,834

14,055

Operating expenses:

   Engineering and development

944

1,057

2,910

3,107

   Selling, general & administration

2,181

3,197

6,872

9,878

   Restructuring

     74

    64

     74

      64

        Total operating expenses

3,199

4,318

9,856

13,049

Operating profit (loss)

(2,385)

593

(3,022)

1,006

Other income(expense):

   Loss on disposal of French operation

--

--

(339)

--

   Gain on sale of property

--

--

1,545

--

   Impairment charge on investments

(1,205)

--

(1,205)

--

   Other income

    161

175

     318

317

          Total other income (expense), net

(1,044)

175

319

317

Income (loss) before income taxes

(3,429)

768

(2,703)

1,323

Income tax expense (benefit)

(723)

447

(400)

707

           Net income (loss)

($2,706)

$321

($2,303)

$616

Net income(loss) per share - basic

($0.77)

$0.09

($0.65)

$0.17

Weighted average shares outstanding - basic

  3,511

3,589

  3,543

3,573

Net income (loss) per share - diluted

($0.77)

$0.09

($0.65)

$0.17

Weighted average shares outstanding - diluted

  3,511

3,738

  3,543

3,676

See accompanying notes to consolidated financial statements.

                                                             CSP INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
                                                                  (Amounts in thousands)
                                                                           (Unaudited)

                                                               /-For the three months ended--/ /-For the nine months ended--/

May 31,

May 31,

May 31,

May 31,

2001

2000

2001

2000

Net income (loss)

($2,706)

$321

($2,303)

$616

Other comprehensive income (loss):

     Foreign exchange translation

(276)

645

(81)

254

     Unrealized gain (loss) on investments, net

  664

  (9)

     (54)

   44

Comprehensive income (loss)

($2,318)

$957

($2,438)

$914

See accompanying notes to consolidated financial statements.

 

                                                                     CSP INC. AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                          (Amounts in thousands)
                                                                                   (Unaudited)

                                                                                  /-For the three months--/  /-For the nine months--/

                                                                                                 ended                                 ended

May 31

May 31

May 31

May 31

2001

2000

2001

2000

Cash flows from operating activities:

Net income (loss)

($2,706)

$321

($2,303)

$616

Adjustments to reconcile net income (loss) to net cash

  used in operating activities:

     Depreciation and amortization

228

353

745

1,033

     Gain on sale of property, net

--

--

(1,318)

--

     Impairment charge on investments

1,205

--

1,205

--

     Deferred compensation and retirement plans

(107)

34

98

64

     (Increase) in deferred income taxes

(671)

--

(671)

--

     Other

16

(15)

16

(36)

     Changes in current assets and liabilities:

        (Increase) decrease in accounts receivable, net

2,210

(555)

3,347

(5,183)

        (Increase) decrease in refundable income taxes

--

83

--

(396)

        (Increase) decrease in inventories

60

(9)

(1,447)

(137)

        (Increase) decrease in other current assets

(82)

203

(149)

475

        Increase in accounts payable and accrued expenses

1,016

633

1,206

3,132

        Decrease in income taxes payable

(357)

(217)

(251)

  211

Net cash provided by (used in) operating activities

  812

  831

  478

(221)

Cash flows from investing activities:

     Purchases of available-for-sale securities

(111)

(209)

(271)

(356)

     Purchases of held-to-maturity securities

(12,434)

(19,443)

(38,857)

(47,754)

     Sales of available-for-sale securities

146

165

363

310

     Maturities of held-to-maturity securities

13,280

19,326

35,185

47,039

     Proceeds from sale of property, net of expenses

--

--

3,097

--

     Property, equipment and improvements

(116)

(154)

(456)

  (550)

Net cash provided by (used in) investing activities

  765

(315)

0

(939)

(1,311)

Cash flows from financing activities:

     Proceeds from stock options

--

13

37

205

     Income tax benefit related to exercise of stock options

--

--

102

--

     Proceeds from issuance of shares under employee

       stock purchase plan

20

26

26

54

     Purchase of treasury stock

    --

   --

(313)

(179)

Net cash provided by (used in) financing activities

20

39

(148)

80

Effects of exchange rate on cash

(276)

645

 (81)

    254

Net increase (decrease) in cash

1,321

1,200

(690)

(1,198)

Cash and cash equivalents, beginning of period

 1,912

 1,351

 3,923

 3,749

Cash and cash equivalents, end of period

$3,233

$2,551

$3,233

$2,551

Supplementary cash flow information:

    Cash paid for income taxes

$138

$227

$632

$853

    Cash paid for interest

$8

$  12

$105

$  92

    Non-cash distribution of dividends

     --

     --

$718

     --

See accompanying notes to consolidated financial statements.

                                                       CSP INC. AND SUBSIDIARIES
                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements, which are prepared in accordance with generally accepted accounting principles, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the financial statements should be read in conjunction with the footnotes contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2000.

1.   Basis of Presentation and Principles of Consolidation:

The Company's financial statements include of the accounts of its wholly owned subsidiaries which consist of CSP MultiComputer Division, MODCOMP Inc. and Scanalytics, Inc. CSP MultiComputer Division operations are included in the Systems segment. Scanalytics Inc. operations are included in the Other Software segment. MODCOMP Inc. operations are included in each of the segments based on the nature of the activity performed by MODCOMP.

2.     Reclassifications:

Certain reclassifications were made to the 2000 financial statements to conform to the 2001 presentation.

3.     Revenue Recognition:

CSPI sells its software offerings and recognizes its revenue as follow:

The Company recognizes revenue from the sale of software products in accordance with the AICPA Statement of Position ("SOP") 97-2, as amended by SOP 98-9. The Company recognizes revenue from software license sales when all services, including customization and training, are delivered.

For software licenses sold separately without modification and training, revenue is recognized upon delivery.

The Company generally recognizes revenue from software licenses when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant Company obligations with regard to customization or implementation remain, the fee is fixed or determinable, and collectiblity is probable. If collectibility is not considered probable, revenue is recognized when the fee becomes due and payable by the customer.

Revenue derived from consulting services rendered in connection with the integration of third party hardware and third party software is generally recognized when the services have been completed.

 

 

 

 

 

 

 

4.     Investments:

At May 31, 2001 and August 31, 2000, investments consisted of the following:

(Amounts in thousands)

Contractual Maturities

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

 

Fair Value

May 31, 2001

Marketable equity securities

--

$567

$81

--

$648

Bonds and municipal revenue notes

6/12/01-5/1/02

7,025

--

--

7,025

Money market funds and commercial paper

6/1/01-6/8/01

5,301

--

--

5,301

Investment in Vertical Buyer

--

77

--

--

77

U.S. treasury bills

8/15/02-2/15/08

      173

--

    --

      173

Total

$13,143

$81

    --

$13,224

August 31, 2000

Marketable equity securities

--

$659

$135

--

$794

Bonds and municipal revenue notes

12/1/00-5/1/02

4,473

--

--

4,473

Money market funds and commercial paper

9/8/00-10/3/00

4,183

--

--

4,183

Investment in Vertical Buyer

--

2,000

--

--

2,000

U.S. treasury bills

8/15/02-2/15/08

      171

      --

        --

        171

Total

$11,486

$135

        --

$11,621

Short-term

Long-term

Total

May 31, 2001

Held-to-maturity

$12,307

$350

$12,657

Available-for-sale

      567

     --

      567

$12,874

$350

$13,224

Short-term

Long-term

Total

August 31, 2000

Held-to-maturity

$8,356

$2,471

$10,827

Available-for-sale

     794

        --

       794

$9,150

$2,471

$11,621

Net unrealized gains (losses) on available-for-sale investments are reported as a separate component of stockholders' equity until realized. Gross unrealized losses decreased by $952,000 for the three-month period ended May 31, 2001 and gross unrealized gains decreased $54,000 for the nine-month period ended May 31, 2001.

Amortized cost at May 31, 2001 includes an impairment charge on the investment in Vertical Buyer of $1,205,000 which was recorded on the income statement in the three and nine months ended May 31, 2001.

Assets of $868,000 and $925,000 at May 31, 2001 and August 31, 2000, respectively, which are held in a rabbi trust and generally are available only to pay certain retirement benefits of a former employee, are included in the above table.

During fiscal year 2000, the Company invested $2 million in Vertical Buyer Inc., which is a holding company for a network of internet sites formed to capitalize on business to business e-commerce opportunities initially in the global commercial lighting and electrical markets. On October 11, 2000, the Company distributed 1 share of Vertical Buyer Inc. common stock for every 5 shares of CSPI stock owned for shareholders of record on July 7, 2000. A total of 717,657 shares valued at $717,657 were distributed. During the quarter the Company recorded an impairment charge on the Vertical Buyer investment of $1,205,000.

5.    Inventories:

Inventories consist of the following (in thousands):

 

May 31

August 31
 

         2001

        2000
     

Raw materials

$3,134

    $2,340

Work in process

1,573

732

Finished goods

2,533

           2,721
     

     Total

$7,240

         $5,793
     
     

6.     Stock Repurchase:

On October 9, 1986, the Board of Directors authorized the Company to repurchase up to 344,892 additional shares of the outstanding stock at market price. On September 28, 1995, the Board of Directors authorized the Company to repurchase up to 199,650 additional shares of the outstanding stock at market price. The timing of stock purchases are made at the discretion of management. On October 19, 1999, the Board of Directors authorized the Company to repurchase up to 200,000 additional shares of the outstanding stock at market price. At May 31, 2001, the Company has repurchased 570,875 or 77% of the total shares authorized to be purchased.

7.     Earnings Per Share Reconciliation:

The reconciliation of the numerators and denominators of the basic and diluted net income per common share computations for the Company's reported net income is as follows:

                                                                          /---Three Months Ended---//---Nine Months Ended-----/
 

May 31,

May 31,

May 31,

May 31,

(In thousands, except per share amounts)

2001

2000

2001

2000
         

Basic net income (loss)

($2,706)

$321

($2,303)

$616
         

Weighted average number of shares outstanding

        

      - basic

3,511

3,589

3,543

3,573

Incremental shares from the assumed exercise

        

      of stock options

     --

  149

     --

  103

Weighted average number of shares outstanding

        

     - dilutive

3,511

3,738

3,543

3,676
         

Net income (loss) per share - basic

($0.77)

$0.09

($0.65)

$0.17

Net income (loss) per share - diluted

($0.77)

$0.09

($0.65)

$0.17

Options to purchase 427,526 shares of common stock were outstanding during the three and nine-month periods ended May 31, 2001, respectively, but were not included in the calculation of diluted net income per share because the option exercise price was greater than the average market price of the common shares during those periods.

8.     Accumulated Other Comprehensive Income:

The components of Accumulated Other Comprehensive Income are as follows:

                                                                                                 (Amounts in thousands)
   

Unrealized

  

Accumulated
   

Gain(loss)

Foreign

Other
   

On

Translation

Comprehensive
   

Investments

Adjustment

Income
         

Balance August 27, 1999

  

$168

($624)

($456)

   Change in period

  

   74

    (98)

   (24)

Balance November 30, 1999

  

242

(722)

(480)

   Change in period

  

 (21)

   (293)

 (314)

Balance February 29, 2000

  

$221

($1,015)

($794)

   Change in period

  

   (9)

    645

    636

Balance May 31, 2000

  

 $212

($370)

($158)
         

Balance August 31, 2000

  

$135

($1,214)

($1,079)

   Change in period

  

  (44)

    (112)

   (156)

Balance November 30, 2000

  

   91

(1,326)

(1,235)

   Change in period

  

 (674)

      307

   (367)

Balance February 28, 2001

  

($583)

($1,019)

($1,602)

   Change in period

  

   664

    (276)

      388

Balance May 31, 2001

  

   $81

($1,295)

($1,214)
         
         
         
         
         

 

9.     Segment Information:

The following table presents certain operating segment information (Amounts in thousands).

   

System and

      
   

Service

E-Commerce

Other

  
 

Systems

Integration

Software

Software

Total
           

Quarter Ended 5/31/01

          

Net Sales

$733

$7,906

$375

$520

$9,534

Profit(loss) from operations

(1,850)

(141)

(403)

9

(2,385)

Identifiable assets

20,713

11,592

919

1,581

34,805

Capital expenditures

56

55

3

2

116

Depreciation

80

92

4

6

182
           

Quarter Ended 5/31/00

          

Net Sales

$3,231

$12,298

$415

$359

$16,303

Profit(loss) from operations

674

405

(479)

(7)

593

Identifiable assets

22,326

16,735

786

1,667

41,514

Capital expenditures

106

41

2

5

154

Depreciation

177

79

4

7

267
           

Nine Months Ended 5/31/01

          

Net Sales

$5,517

$21,737

$1,611

$1,443

$30,308

Profit(loss) from operations

(2,374)

174

(783)

(39)

(3,022)

Identifiable assets

20,713

11,592

919

1,581

34,805

Capital expenditures

330

110

8

8

456

Depreciation

294

271

20

21

606
           

Nine Months Ended 5/31/00

          

Net Sales

$9,478

$38,187

$1,302

$1,430

$50,397

Profit(loss) from operations

693

2,136

(1,596)

(227)

1,006

Identifiable assets

22,326

16,735

786

1,667

41,514

Capital expenditures

234

284

10

22

550

Depreciation

554

253

9

8

824

Each segment is broken down by related business activities, which crosses different business operations. These segments are based on the different customer activity of the Company. CSPI has four major segments: systems which includes company manufactured hardware products, systems integration and services which includes maintenance of the Company and other systems sold and integration and sale of third party hardware products and services, E-Commerce software, and other software products which are developed by the Company.

Profit from operations is sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either non-operating charges/income or by income taxes. Non operating charges/income consists principally of loss on disposal of French operation, gain on sale of property, impairment charge on investments, investment income and interest expense.

In calculating profit from operations for individual operating segments, sales and administration expenses incurred at the operating level for CSP and Scanalytics are allocated to the Systems and Other Software segments, respectively. Sales and administrative expenses incurred at the operating level for MODCOMP are allocated to the E-Commerce segment based upon employee headcount and the remaining balance is allocated to the Systems and System and Service Integration segments based upon sales revenue.

All intercompany transactions have been eliminated.

Identifiable assets include deferred income tax assets and other financial instruments managed by the Company. Capital expenditures common to more than one segment are allocated on a sales basis.

10.     Sale of French Operation:

In November 2000, the Company sold the remaining assets of MODCOMP's France subsidiary to Eurilogic and incurred additional expenses for the disposal of assets, primarily leasehold improvements and severance costs totaling a net loss on disposal of $339,000 for the nine months ended May 31, 2001. The Company has sublet the French facility but remains contingently liable for the remaining lease obligations which amount to approximately $1.1 million and extend through March 10, 2005.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                                        CONDITION AND RESULTS OF OPERATIONS

         A summary of the period to period changes in principal items included in the Statements of Operations is shown in Schedules I and II (pages 21 and 22).

        The discussion below contains certain forward-looking statements related to, among others, but not limited to, statements concerning future revenues and future business plans. Actual results may vary from those contained in such forward-looking statements.

Results of Operations - 2001 Compared to 2000

Revenue

        CSPI considers its products to be in four segment classifications. Each segment is broken down by related business activities, which crosses different business operations. These segments are based on the different customer activity of the Company. CSPI has four major segments: Systems which includes company manufactured hardware products, System and Service Integration which includes maintenance of the products sold and integration and sale of third party hardware products and services, E-Commerce software which includes WAP66™ and ViewMax®, and Other Software products which are developed by the Company primarily in the Scanalytics operation.

        The following table details the Company's sales by operating segment for the three and nine months ended May 31, 2001 and May 31, 2000.
 

May 31,

% of

  

May 31,

% of

  

Sales Revenue:

2001

Total

  

2000

Total

  
             

For the three months ended:

            

Operating Segment:

            

Systems

$733

8%

  

$3,231

20%

  

System and Service Integration

7,906

83%

  

12,298

75%

  

E-Commerce Software

375

4%

  

415

3%

  

Other Software

    520

   5%

  

      359

   2%

  

     Total

$9,534

100%

  

$16,303

100%

  
             

For the nine months ended:

            

Operating Segment:

            

Systems

$5,517

18%

  

$9,478

19%

  

System and Service Integration

21,737

72%

  

38,187

76%

  

E-Commerce Software

1,611

5%

  

1,302

2%

  

Other Software

   1,443

   5%

  

   1,430

   3%

  

     Total

$30,308

100%

  

$50,397

100%

  
             

        The Company reported net sales of $9.5 million and $30.3 million for the three and nine months ended May 31, 2001 compared to $16.3 million and $50.4 million for the same periods of fiscal 2000. This represented a decrease of 41% or $6.8 million for the three-month period and 40% or $20.1 million for the nine-month period. The reduction in revenue was due to the following factors: reduction in system and service integration sales which represents 65% and 82% of the total decline for the three and nine month periods compared to the last fiscal year comparative periods, sale of MODCOMP France which represents 24% or $1.6 million of the total decline for the three month period and 28% or $5.6 million of the total decline for the nine month period and the decline in foreign currency exchange rates versus the U.S. dollar which represents 15% or $1.0 million for the three month period and 12% or $2.4 million for the nine month period.         

        System sales amounted to $733,000 and $5.5 million (8% and 18% of total sales) for the three and nine month periods ended May 31, 2001, representing a decline of 77% and 42%, respectively. The decline in system sales was due in part to the extension of time related to defense procurements schedules in the United States (U.S.) and Japan. The continued extension of the incubation periods for defense spending has effected both bookings and sales during the third quarter for the MultiComputer Division's products. One potential delayed opportunity that the Defense Department announced was the Navy's DD21 Advance Destroyer program. This trend doesn't appear to be reversing in the near term. Sales of SuperCard and Series 2000 products accounted for 44% and 40% of systems sales for the three months ended May 31, 2001 compared to 58% and 26% for the prior comparable quarter, and 16% and 60% of system sales for the nine months ended May 31, 2001 compared to 35% and 41%, respectively, for the prior comparable nine month period. The SuperCard products are sold only to existing customers. The CSP MultiComputer Division introduced its newest product; a Linux based FastCluster™ system which has generated a great deal of interest; however the bookings for the product have been slow due to procurement delays and the current economic climate in the IT spending area. The system was designed to meet the high performance computing requirements of mission critical military application and highly scalable data mining applications. FastCluster™ is powered by the newest PowerPC processors, including those incorporating Altivec™ technology from Motorola. Systems may be configured with 16 to 1,000 processor nodes interconnected with high speed Myrinet switches from Myricom, Inc. The Company announced the end of life for the majority of MODCOMP classic real-time process control products and MultiComputer legacy products including the Vision System, MiniMAP and MAPs. The Company strategy going forward is to offer MODCOMP customers our state of the art ScadaBase software for new and replacement requirements. Sales of the classic products represented 13% and 17% of the three and nine month period system sales compared to 9% and 22% for the prior comparable periods.

        Sales for System and Service Integration amounted to $7.9 million and $21.7 million (83% and 72% of total sales) for the three and nine month periods ended May 31, 2001 a decrease from the prior comparable periods of $4.4 million or 36% for the three months and $16.4 million or 43% for the nine months. The decrease was due to three factors: a decline in large system sales by MODCOMP in Germany during the quarter and nine month periods of fiscal 2001 due to the following factors, a large non-recurring shipment to a telecommunications company occurring in the quarter ending November 30, 1999, a decline in foreign currency rates versus the U.S. dollar which represented 15% of the reduction, economic slow down is being felt in the German market and the erosion of the real-time computer service business resulting from customers switching from the Company's products to newer technologies.

        Although E-commerce represented only 4% and 5% of total sales for the three and nine-month periods ended May 31, 2001 compared to 3% and 2% for the prior comparable periods, e-commerce software sales increased 24% for the nine-month period ended May 31, 2001 with a decrease of 10% for the three-month period ended May 31, 2001. This segment's growth has centered on its ViewMax® Web-to-Host software and WAP66™ wireless access protocol portal server products. During the quarter the Company had successfully completed professional service work relating to Cornell University's implementation of ViewMax which provides purchasing department employees with web access to information stored on the university's mainframe system. The current economic slow down in IT spending has effected sales for the E-commerce software products and services. During the quarter, MODCOMP forged a new partnership with Information Architects (iA) to offer broader IT solutions to its customers that are migrating enterprise applications to the Web and wireless environment.

        Other software sales represented 5% of total sales for the three and nine months ended May 31, 2001. Other software sales revenue increased 45% and 1% from the prior comparable three and nine month periods. The other software sales are primarily from Scanalytics.

        European sales account for 76% and 68% of total sales for the three and nine months ended May 31, 2001 compared to 71% and 74% for the prior comparable periods. European sales were primarily from MODCOMP's subsidiaries in Germany and the United Kingdom. The year to date decrease from the prior year was primarily due to the decline in outsourcing orders in Germany.

 

 

        The following table details the Company's sales by geographic region for the three and nine months ended May 31, 2001 and May 31, 2000:

                            /-------For the three months ended--------/  /--------For the nine months ended---------/

   

% of

  

% of

  

% of

  

% of
 

5/31/01

Total

5/31/00

Total

5/31/01

Total

5/31/00

Total
                 

Europe

$7,269

76%

$11,605

71%

$20,579

68%

$37,023

74%

North America

2,200

23%

4,040

25%

9,298

31%

12,251

24%

Far East

       65

   1%

      658

   4%

      431

   1%

    1,123

   2%

     Totals

$9,534

100%

$16,303

100%

$30,308

100%

$50,397

100%
                 

Cost of Sales

        Cost of sales as a percentage of revenue increased to 92% and 77% for the three and nine months ended May 31, 2001 compared to the prior comparable periods of 70% and 72%. The increase in cost of sales as a percentage of sales resulted primarily from the significant revenue decline in the system and service integration segment that has higher costs due to the large component of third party products and the write off of obsolete inventory for the end of life of the MODCOMP and MultiComputer Division products which was approximately $806,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        The following table details the Company's sales and gross margin by operating segment for the three and nine months ended May 31, 2001 and May 31, 2000 (amounts in thousands):

 

 

 

 

Systems

System and Service Integration

E-

Commerce

Software

Other

Software

 

Total

Qtr Ended 5/31/01

          

Sales

$733

$7,906

$375

$520

$9,534

Cost of sales

1,259

7,100

198

163

8,720

Gross margin $

(526)

806

177

357

814

Gross margin %

(72%)

10%

47%

69%

9%
           

Qtr Ended 5/31/00

          

Sales

$3,231

$12,298

$415

$359

$16,303

Cost of sales

   848

10,272

200

  72

11,392

Gross margin $

2,383

2,026

215

287

4,911

Gross margin %

74%

16%

52%

80%

30%
           

YTD Ended 5/31/01

          

Sales

$5,517

$21,737

$1,611

$1,443

$30,308

Cost of sales

3,526

18,837

   700

  411

23,474

Gross margin $

1,991

2,900

911

1,032

6,834

Gross margin %

36%

13%

57%

72%

23%
           

YTD Ended 5/31/00

          

Sales

$9,478

$38,187

$1,302

$1,430

$50,397

Cost of sales

3,475

31,780

   645

   442

36,342

Gross margin $

6,003

6,407

657

988

14,055

Gross margin %

63%

17%

50%

69%

28%

Engineering and Development

        Engineering and development decreased $113,000 or 11% and $197,000 or 6% for the three and nine months ended May 31, 2001 compared to the same periods of fiscal 2000. The engineering and development decrease was primarily due to staff reductions both in the systems and other software segments. The increases in the system and service integration expense related to the utilization of outside consultants and the redeployment of staff to assist in software development and bug fixes.

 

 

 

 

 

 

 

 

 

 

The following table details engineering and development expenses by operating segment and subsidiary for the three and nine month periods ended May 31, 2001 and May 31, 2000 (amounts in thousands):

                                               /----------Three months ended--------/    /-----Nine months ended ---------/
                 
 

May 31

% of

May 31

% of

May 31

% of

May 31

% of

Engineering & Development Expense:

2001

Total

2000

Total

2001

Total

2000

Total
                 

By Operating Segment:

                

Systems

$430

46%

$585

55%

$1,424

49%

$1,661

53%

System and Service Integration

281

30%

221

21%

781

27%

523

17%

E-Commerce Software

118

12%

155

15%

390

13%

564

18%

Other Software

 115

 12%

      96

   9%

    315

 11%

    359

 12%

Total

$944

100%

$1,057

100%

$2,910

100%

$3,107

100%
                 

Selling, General and Administrative

        Selling, general and administrative expense decreased $1.0 million or 32% to $2.3 million for the quarter ended May 31, 2001 compared to $3.3 million for the comparable quarter of fiscal 2000. Selling, general and administrative expense decreased $3.0 million or 30% to $6.9 million for the nine months ended May 31, 2001 compared to $9.9 million for the comparable period of fiscal 2000. The primary decrease was due to reductions in staff, lower sales commissions, and no management bonus accrual.

        The following table sets forth selling, general and administrative expense by Company subsidiary for the three and nine months ended May 31, 2001 and May 31, 2000:

                                                 /---------Three months ended--------/   /--------Nine months ended ---------/
 

May 31

% of

May 31

% of

May 31

% of

May 31

% of

S, G & A expense

2001

Total

2000

Total

2001

Total

2000

Total
                 

By Operating Segment:

                

Systems

$893

40%

$1,124

35%

$2,940

42%

$3,649

37%

System and Service Integration

667

30%

1,400

43%

1,946

28%

3,748

38%

E-Commerce Software

461

20%

539

16%

1,303

19%

1,689

17%

Other Software

    234

 10%

    198

   6%

    757

  11%

    856

   8%

Total

$2,255

100%

$3,261

100%

$6,946

100%

$9,942

100%
                 

By Subsidiary:

                

MODCOMP

$1,133

50%

$1,992

61%

$3,362

48%

$5,636

57%

CSP MultiComputer Division

889

40%

1,071

33%

2,830

41%

3,451

35%

Scanalytics

    233

 10%

    198

   6%

    754

 11%

    855

   8%

Total

$2,255

100%

$3,261

100%

$6,946

100%

$9,942

100%

        

       MODCOMP's selling, general and administrative expense for the three and nine months ended May 31, 2001 decreased $859,000 or 43% and $2.3 million or 40%, respectively, from the comparable periods of the prior year. Approximately $413,000 and $1,178,000 of the three and nine month period decline, respectively, is attributable to the disposal of the French operation. MODCOMP France's selling, general and administrative expense for the three and nine months ended May 31, 2001 was $0 and $67,000, respectively, compared to $413,000 and $1,245,000 for the same periods of fiscal year 2000. In addition, MODCOMP Germany's selling, general and administrative expenses for the three and nine months ended May 31, 2001 increased approximately $22,000 or 4% and $12,000 or 1% from the prior comparable periods. MODCOMP America's expense for the three and nine months ended May 31, 2001 decreased $196,000 or 27% and $260,000 or 14%. This decline was due to reductions in personnel.

        CSP MultiComputer division selling, general and administrative expense for the three and nine months ended May 31, 2001 decreased $182,000 or 17% and $621,000 or 18% from the prior comparable periods. Approximately $125,000 of the decline for the three and nine month periods relates to a reduction in bonus expense. Approximately $13,000 and $122,000 of this decrease for the three and nine month periods ended May 31, 2001 is due to a reduction in labor expenses related to attrition. During the quarter CSP Inc. moved its operation to a new facility. The cost of the move was approximately $25,000 which was expensed in the current year. Approximately $31,000 and $82,000 of the three and nine month decrease is due to a decline in outside consulting fees related to the restructure of the MODCOMP foreign operation completed in fiscal year 2000. Approximately $46,000 and $133,000 of the three and nine month decline relates to a reduction in depreciation expense as a result of an increase in fully depreciated assets. Approximately $45,000 and $77,000 of the three and nine month decline relates to a reduction in commissions expense related to the decline in revenue.

        Scanalytics, Inc. selling, general and administrative expense for the three and nine months ended May 31, 2001 increased $35,000 or 18% and decreased $101,000 or 12% from the prior year. The year to date decline is mainly attributable to a decrease in labor expense due to a reduction in headcount.

Other Income/Expenses

        Other income/expenses, exclusive of the loss on disposal of French operation, the gain on sale of property and the impairment charge on investments, decreased 8% for the three month period ended May 31, 2001 compared to the prior comparable period and remained consistent for the nine months ended May 31, 2001 compared to the prior comparable period.

        In July 2000, the Company sold substantially all of the assets and transferred the personnel of MODCOMP's French subsidiary to France-based-Eurilogic. A loss on disposal of French operation of $240,000 was recognized as other expense in the fourth quarter of fiscal year 2000. In November 2000, the Company sold the remaining assets of the French operation to Eurilogic and incurred additional expenses for the disposal of assets, primarily leasehold improvements and severance costs of $327,000 for the period ended November 30, 2000. In the three-month period ended February 28, 2001 additional expenses of $12,000 for legal and statutory expenses which exceed the estimated accruals were recorded during the quarter. The decision to sell the assets and transfer its personnel was based on the fact that the French legacy business no longer represented a good strategic fit with CSPI and had incurred a loss. The sale allowed CSPI to exit the business without incurring restructuring costs that could have exceeded $2 million.

        The Company sold its Massachusetts headquarters for $3.3 million during the quarter ended February 28, 2001and netted a pretax gain of approximately $1.5 million.

        In May 2001 the Company recorded an impairment charge on investments of $1.2 million related to the write down of the investment in Vertical Buyer.

        The Company has an effective tax rate of 15%. The Company's effective tax rate has declined from 53% for last fiscal year, due in part to valuation reserves for state taxes, the reduction in the Germany statutory rate and MODCOMP's reorganization.

 

 

Liquidity and Capital Resources

        Working capital at May 31, 2001 increased to $21.9 million compared to $21.6 million at August 31, 2000.

        The Company's consolidated capital expenditures were $116,000 and $456,000 for the three and nine months ended May 31, 2001 compared to $154,000 and $550,000 in the prior comparable periods. The majority of the expenditures for the current year relate to leasehold improvements at the new corporate facility.

        Management believes that the Company's available cash and cash generated from operations and investments will be sufficient to provide for the Company's working capital and capital expenditure requirements for the foreseeable future.

 

Inflation and Changing Prices

        Management does not believe that inflation and changing prices had significant impact on sales, revenues or income from continued operations during the three and nine-month periods ended May 31, 2001 or May 31, 2000. There is no assurance that the Company's business will not be materially and adversely affected by inflation and changing prices in the future.

Factors That May Affect Future Performance

        This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include the following: general economic conditions and growth rates in the peripheral and computer products, biological imaging software, and the instruments and machine code readers industries; competitive factors and pricing pressures; changes in product mix; the timely development and acceptance of new products; inventory risks due to shifts in market demand; and component constraints and shortages. In response to competitive pressures or new product introductions, the Company may take certain pricing or marketing actions that could adversely affect the Company's operating results. In addition, changes in the mix of old products may cause fluctuations in the Company's gross margin. Due to the potential quarterly fluctuations in operating results, the Company believes that quarter-to-quarter comparisons of its results of operations are not necessarily an indicator of future performance.

        Markets for the Company's products are characterized by rapidly changing technology, new product introductions and short product life cycles. These changes can adversely affect the business and operating results. The Company's success will depend upon its ability to enhance its existing products and to develop and introduce, on a timely and cost effective basis, new products that keep pace with technological developments and address increasing customer requirements. The inability to meet these demands could adversely affect the Company's business and operating results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 4. Submissions of Matters to a vote of Security Holders

            None

Item 6. Exhibit and Reports on Form 8-K

None

 

                                                                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)

 

Date: July 12, 2001                                         By: /s/ Alexander R. Lupinetti       
                                                                                    Chief Executive Officer,
                                                                                    President and Chairman

 

Date: July 12, 2001                                         By: /s/ Gary W. Levine                 
                                                                                    Vice President of Finance,
                                                                                    Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                        SCHEDULE I
                                                       CSP INC. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                                           PERCENTAGE OF SALES

                                                               (Dollars in thousands)
                                                                      (Unaudited)

                                      /---------For the three months ended---------/  /-----For the nine months ended------/
 

May 31

  

May 31

  

May 31

  

May 31

  
 

2001

%

2000

%

2001

%

2000

%
                 

Sales

$9,534

100%

$16,303

100%

$30,308

100%

$50,397

100%
                 

Cost of sales

8,720

91%

11,392

70%

23,474

78%

36,342

72%

Engineering and

               

     Development

944

10%

1,057

7%

2,910

10%

3,107

6%

Selling, general and

                

     Administrative

2,255

24%

3,261

20%

6,946

23%

9,942

20%

      Total costs and

                

         Expenses

11,919

125%

15,710

96%

33,330

110%

49,391

98%
                 

Operating income (loss)

(2,385)

(25%)

593

4%

(3,022)

(10%)

1,006

2%
                 

Other income (expense)

(1,044)

(11%)

175

1%

319

1%

317

1%
                 

Income (loss) before income taxes

(3,429)

(36%)

768

5%

(2,703)

(9%)

1,323

3%
                 

Income tax expense (benefit)

(723)

(8%)

447

3%

(400)

(1%)

707

1%
                 

Net income (loss)

($2,706)

(28%)

$321

2%

($2,303)

(8%)

$616

1%
                 
                 
                 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                        SCHEDULE II
                                                       CSP INC. AND SUBSIDIARIES
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                          PERIOD TO PERIOD DOLLAR AND PERCENTAGE CHANGE

                                                               (Dollars in thousands)
                                                                      (Unaudited)

                                              /--For the three months ended--/          /--For the nine months ended--/
                                                                         May 31, 2001 vs. May 31, 2000

 

$

%

  

$

%

  
 

Change

Change

  

Change

Change

  
             

Sales

($6,769)

(42%)

  

($20,089)

(40%)

  
             

Cost of sales

(2,672)

(23%)

  

(12,868)

(35%)

  

Engineering and

           

     development

(113)

(11%)

  

(197)

(6%)

  

Selling, general and

            

     administrative

(1,006)

(31%)

  

(2,996)

(30%)

  

     Total costs and

            

          expenses

(3,791)

(24%)

  

(16,061)

(33%)

  
             

Operating profit (loss)

(2,978)

(502%)

  

(4,028)

(400%)

  
             

Other income (expense)

(1,219)

(697%)

  

         2

    --%

  
             

Income (loss) before

            

     income taxes

(4,197)

(546%)

  

(4,026)

(304%)

  
             

Income tax expense (benefit)

(1,170)

(262%)

  

(1,107)

(157%)

  
             

Net income (loss)

($3,027)

(943%)

  

($2,919)

(474%)