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 February 28, 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 April 10, 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 | 19 |
Item 6. | Exhibits & Reports on Form 8-K | 19 |
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
February 28, | August 31, | |
2001 | 2000 | |
(Unaudited) | (Audited) | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $1,912 | $3,923 |
Short-term investments | 13,563 | 9,150 |
Accounts receivable, net | 5,704 | 6,841 |
Inventories | 7,300 | 5,793 |
Deferred income taxes | 1,554 | 1,104 |
Other current assets | 867 | 800 |
Total current assets | 30,900 | 27,611 |
Property, equipment and improvements, net | 1,501 | 3,201 |
Other assets: | ||
Long-term investments | 633 | 2,471 |
Land held for future development | -- | 163 |
Deferred income taxes | 1,122 | 1,122 |
Goodwill, net | 846 | 939 |
Other assets | 1,549 | 1,549 |
Total other assets | 4,150 | 6,244 |
Total assets | $36,551 | $37,056 |
Liabilities and Shareholders' Equity | ||
Current liabilities: | ||
Accounts payable and accrued expenses | $5,379 | $5,189 |
Income taxes payable | 919 | 813 |
Total current liabilities | 6,298 | 6,002 |
Deferred compensation and retirement plans | 3,813 | 3,608 |
Commitments and contingencies | ||
Shareholders' equity: | ||
Common stock, $.01 par; authorized, 7,500 shares; issued 4,078 | ||
and 4,069 shares | 41 | 41 |
Additional paid-in capital | 11,215 | 11,070 |
Retained earnings | 19,647 | 19,962 |
Accumulated other comprehensive income | (1,602) | (1,079) |
29,301 | 29,994 | |
Less treasury stock, at cost, 571 and 491 shares | 2,861 | 2,548 |
Total shareholders' equity | 26,440 | 27,446 |
Total liabilities and shareholders' equity | $36,551 | $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 six months ended--/
February 28, | February 29, | February 28, | February 29, | |
2001 | 2000 | 2001 | 2000 | |
Sales: | ||||
Systems | $2,213 | $3,988 | $4,784 | $6,247 |
Service and system integration | 6,073 | 13,264 | 13,831 | 25,889 |
E-Commerce software | 619 | 480 | 1,236 | 887 |
Other software | 447 | 628 | 923 | 1,071 |
Total sales | 9,352 | 18,360 | 20,774 | 34,094 |
Cost of Sales: | ||||
Systems | 1,066 | 1,522 | 2,267 | 2,627 |
Service and system integration | 5,126 | 10,748 | 11,737 | 21,508 |
E-Commerce software | 294 | 284 | 502 | 445 |
Other software | 106 | 207 | 248 | 370 |
Total cost of sales | 6,592 | 12,761 | 14,754 | 24,950 |
Gross profit | 2,760 | 5,599 | 6,020 | 9,144 |
Operating expenses: | ||||
Engineering and development | 892 | 957 | 1,966 | 2,050 |
Selling, general & administration | 2,371 | 3,492 | 4,691 | 6,681 |
Total operating expenses | 3,263 | 4,449 | 6,657 | 8,731 |
Operating profit (loss) | (503) | 1,150 | (637) | 413 |
Other income(expense): | ||||
Loss on disposal of French operation | (12) | -- | (339) | -- |
Gain on sale of property | 1,545 | -- | 1,545 | -- |
Other income | 78 | 64 | 157 | 142 |
Total other income (expense), net | 1,611 | 64 | 1,363 | 142 |
Income before income taxes | 1,108 | 1,214 | 726 | 555 |
Income tax expense | 493 | 589 | 323 | 260 |
Net income | $615 | $625 | $403 | $295 |
Net income per share - basic | $0.17 | $0.18 | $0.11 | $0.08 |
Weighted average shares outstanding - basic | 3,517 | 3,567 | 3,558 | 3,566 |
Net income per share - diluted | $0.17 | $0.16 | $0.11 | $0.08 |
Weighted average shares outstanding - diluted | 3,518 | 3,825 | 3,560 | 3,809 |
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 six months ended--/
February 28, | February 29, | February 28, | February 29, | ||||||||
2001 | 2000 | 2001 | 2000 | ||||||||
Net income | $615 | $625 | $403 | $295 | |||||||
Other comprehensive income (loss): | |||||||||||
Foreign exchange translation | 307 | (293) | 195 | (391) | |||||||
Unrealized gain (loss) on investments, net | (674) | (21) | (718) | 53 | |||||||
Comprehensive income (loss) | $248 | $311 | ($120) | ($43) | |||||||
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 six months--/
ended ended
February | February | February | February | |
28, 2001 | 29, 2000 | 28, 2001 | 29, 2000 | |
Cash flows from operating activities: | ||||
Net income | $615 | $625 | $403 | $295 |
Adjustments to reconcile net income to net cash | ||||
Used in operating activities: | ||||
Depreciation and amortization | 262 | 334 | 517 | 680 |
Gain on sale of property, net | (1,545) | -- | (1,318) | -- |
Deferred compensation and retirement plans | 66 | 46 | 205 | 30 |
Other | 51 | 42 | -- | (21) |
Changes in current assets and liabilities: | ||||
(Increase) decrease in accounts receivable, net | (237) | (2,244) | 1,137 | (4,628) |
(Increase) in inventories | (1,281) | (245) | (1,507) | (128) |
(Increase) decrease in other current assets | 25 | 235 | (67) | 272 |
Increase (decrease) in accounts payable | ||||
and accrued expenses | 1,397 | (162) | 190 | 2,027 |
Increase in income taxes payable | 300 | 1,033 | 106 | 421 |
Net cash provided by (used) in operating activities | (347) | (336) | (334) | (1,052) |
Cash flows from investing activities: | ||||
Purchases of available-for-sale securities | (82) | (68) | (160) | (147) |
Purchases of held-to-maturity securities | (16,112) | (19,622) | (26,423) | (28,364) |
Sales of available-for-sale securities | 85 | 98 | 217 | 145 |
Maturities of held-to-maturity securities | 14,224 | 18,839 | 21,905 | 27,713 |
Proceeds from sale of property, net of expenses | 3,097 | -- | 3,097 | -- |
Property, equipment and improvements | (51) | (285) | (340) | (396) |
Net cash used in investing activities | 1,161 | (1,038) | (1,704) | (1,049) |
Cash flows from financing activities: | ||||
Proceeds from stock options | -- | 184 | 37 | 184 |
Income tax benefit related to exercise of stock options | -- | -- | 102 | -- |
Proceeds from issuance of shares under employee | ||||
stock purchase plan | -- | -- | 6 | 36 |
Purchase of treasury stock | (127) | (6) | (313) | (179) |
Net cash provided by (used in) financing activities | (127) | 178 | (168) | 41 |
Effects of exchange rate on cash | 307 | (314) | 195 | (338) |
Net increase (decrease) in cash | 994 | (1,510) | (2,011) | (2,398) |
Cash and cash equivalents, beginning of period | 918 | 2,861 | 3,923 | 3,749 |
Cash and cash equivalents, end of period | $1,912 | $1,351 | $1,912 | $1,351 |
Supplementary cash flow information: | ||||
Cash paid for income taxes | $302 | $333 | $494 | $626 |
Cash paid for interest | $97 | $ 63 | $97 | $80 |
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. Scanaltyics 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 February 28, 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 |
February 28, 2001 | |||||
Marketable equity securities | -- | $602 | $89 | -- | $691 |
Bonds and municipal revenue notes | 3/2/01-5/1/02 | 6,554 | -- | -- | 6,554 |
Money market funds and commercial paper | 3/9/01-3/20/01 | 6,618 | -- | -- | 6.618 |
Investment in Vertical Buyer | -- | 1,282 | -- | (1,122) | 160 |
U.S. treasury bills | 8/15/02-2/15/08 | 173 | -- | -- | 173 |
Total | $15,229 | $89 | ($1,122) | $14,196 | |
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 | |||
February 28, 2001 | |||||
Held-to-maturity | $12,872 | $473 | $13,345 | ||
Available-for-sale | 691 | 160 | 851 | ||
$13,563 | $633 | $14,196 | |||
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 increased by $1,124,000 and $1,168,000 for the three and six-month periods ended February 28, 2001.
Assets of $876,000 and $925,000 at February 28, 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. The Company is accounting for this investment under the cost method based on its current ownership percentage.
5. Inventories:
Inventories consist of the following (in thousands):
February 28 | August 31 | |
2001 | 2000 | |
Raw materials | $2,796 | $2,340 |
Work in process | 1,666 | 732 |
Finished goods | 2,838 | 2,721 |
Total | $7,300 | $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 February 28, 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---//---Six Months Ended-----/
February 28, | February 29, | February 28, | February 29, | |
(In thousands, except per share amounts) | 2001 | 2000 | 2001 | 2000 |
Basic net income | $615 | $625 | $403 | $295 |
Weighted average number of shares outstanding | ||||
- basic | 3,517 | 3,567 | 3,558 | 3,566 |
Incremental shares from the assumed exercise | ||||
of stock options | 1 | 258 | 1 | 243 |
Weighted average number of shares outstanding | ||||
- dilutive | 3,518 | 3,825 | 3,560 | 3,809 |
Net income per share - basic | $0.17 | $0.18 | $0.11 | $0.08 |
Net income per share - diluted | $0.17 | $0.16 | $0.11 | $0.08 |
Options to purchase 381,026 shares of common stock were outstanding during the three and six-month periods ended February 28, 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) | |
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) | |
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 2/28/01 | |||||
Net Sales | $2,213 | $6,073 | $619 | $447 | $9,352 |
Profit(loss) from operations | (342) | 81 | (220) | (22) | (503) |
Identifiable assets | 22,115 | 11,310 | 1,111 | 1,565 | 36,101 |
Capital expenditures | 33 | 16 | 2 | -- | 51 |
Depreciation | 95 | 104 | 10 | 7 | 216 |
Quarter Ended 2/29/00 | |||||
Net Sales | $3,988 | $13,264 | $480 | $628 | $18,360 |
Profit(loss) from operations | 486 | 1,183 | (523) | 4 | 1,150 |
Identifiable assets | 21,720 | 15,436 | 556 | 1,877 | 39,589 |
Capital expenditures | 66 | 212 | 7 | -- | 285 |
Depreciation | 180 | 82 | 3 | 7 | 272 |
Six Months Ended 2/28/01 | |||||
Net Sales | $4,784 | $13,831 | $1,236 | $923 | $20,774 |
Profit(loss) from operations | (524) | 315 | (380) | (48) | (637) |
Identifiable assets | 22,115 | 11,310 | 1,111 | 1,565 | 36,101 |
Capital expenditures | 274 | 55 | 5 | 6 | 340 |
Depreciation | 215 | 178 | 16 | 15 | 424 |
Six Months Ended 2/29/00 | |||||
Net Sales | $6,247 | $25,889 | $887 | $1,071 | $34,094 |
Profit(loss) from operations | 19 | 1,731 | (1,117) | (220) | 413 |
Identifiable assets | 21,720 | 15,436 | 556 | 1,877 | 39,589 |
Capital expenditures | 128 | 243 | 8 | 17 | 396 |
Depreciation | 377 | 158 | 5 | 17 | 557 |
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, 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 six months ended February 28, 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 20 and 21).
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 Company and other systems 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 six months ended February 28, 2001 and February 29, 2000.
February 28, | % of | February 29, | % of | |||
Sales Revenue: | 2001 | Total | 2000 | Total | ||
For the three months ended: | ||||||
Operating Segment: | ||||||
Systems | $2,213 | 24% | $3,988 | 22% | ||
System and Service Integration | 6,073 | 65% | 13,264 | 72% | ||
E-Commerce Software | 619 | 6% | 480 | 3% | ||
Other Software | 447 | 5% | 628 | 3% | ||
Total | $9,352 | 100% | $18,360 | 100% | ||
For the six months ended: | ||||||
Operating Segment: | ||||||
Systems | $4,784 | 23% | $6,247 | 18% | ||
System and Service Integration | 13,831 | 67% | 25,889 | 76% | ||
E-Commerce Software | 1,236 | 6% | 887 | 3% | ||
Other Software | 923 | 4% | 1,071 | 3% | ||
Total | $20,774 | 100% | $34,094 | 100% | ||
The Company reported net sales of $9.4 million and $20.8 million for the three and six months ended February 28, 2001 compared to $18.4 million and $34.1 million for the same periods of fiscal 2000. This represented a decrease of 49% or $9.0 million for the three-month period and 39% or $13.3 million for the six-month period. The reduction in revenue was due to the following factors: reduction in system and service integration sales which represents 80% and 90% of the total decline for the three and six month periods compared to the last fiscal year comparative periods, sale of MODCOMP France which represents 24% or $2.2 million of the total decline for the three month period and 30% or $4.0 million of the total decline for the six month period and the decline in foreign currency exchange rates versus the U.S. dollar which represents 7% or $287,000 for the three month period and 11% or $1.4 million for the six month period.
System sales amounted to $2.2 million and $4.8 million (24% and 23% of total sales) for the three and six month periods ended February 28, 2001, representing a decline of 44% and 23%, respectively. The decline in system sales was due primarily to the decline in sales of the older Supercard product line not being offset by the shipment of the newer Series 2000 products. The SuperCard products are sold only to existing customers. The SuperCard and Series 2000 product lines accounted for 9% and 75% of systems sales for the three months ended February 28, 2001 compared to 65% and 9% for the prior comparable quarter, and 11% and 63% of system sales for the six months ended February 28, 2001 compared to 48% and 23%, respectively, for the prior comparable six month period. The CSP MultiComputer Division introduced its newest product; a Linux based FastCluster™ system. 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 continues to ship its real-time process control classic product line to existing customers, which represented 14% and 24% of the three and six month period system sales compared to 22% and 20% for the prior comparable periods.
Sales for System and Service Integration amounted to $6.1 million and $13.8 million (65% and 67% of total sales) for the three and six month periods ended February 28, 2001 a decrease from the prior comparable periods of $7.2 million or 54% for the three months and $12.1 million or 47% for the six months. The decrease was due to three factors: a decline in large system sales by MODCOMP Germany during the first quarter of fiscal 2001, during the period ended November 30, 1999 there was a large non-recurring shipment to a telecommunications company, the change in foreign currency rates which represented 7% of the reduction, and the erosion of the real-time computer service business due to customers switching from our products to newer technologies.
E-commerce software sales increased 29% and 39% for the three and six-month periods ended February 28, 2001 although it represented 6% of total sales for those periods compared to 3% for the prior comparable periods. This segment's growth has centered on s ViewMax® Web-to-Host software and WAP66™ wireless access protocol portal server products. During the six-month period the Company had sales successes at Cornell University which selected ViewMax to provide purchasing department employees with web access to information stored on the university's mainframe system. MdinTouch chose ViewMax to provide physicians and other health professionals with secure and instant web access for time-critical patient information using desktop computers or handheld devices such as a WAP phone or Palm VII PDA.
Other software sales represented 5% and 4% of total sales for the three and six months ended February 28, 2001. Other software sales revenue decreased 29% and 14% from the prior comparable three and six month periods. The other software sales are primarily from Scanalytics.
European sales account for 55% and 61% of total sales for the three and six months ended February 28, 2001 compared to 69% and 73% for the prior comparable periods. European sales were primarily from MODCOMP's subsidiaries in Germany and the United Kingdom. The decrease from the prior year was primarily due to the large outsourcing orders in Germany in fiscal year 2000.
The following table details the Company's sales by geographic region for the three and six months ended February 28, 2001 and February 29, 2000:
/-------For the three months ended--------/ /---------For the six months ended---------/
% of | % of | % of | % of | |||||
2/28/01 | Total | 2/29/00 | Total | 2/28/01 | Total | 2/29/00 | Total | |
Europe | $5,096 | 55% | $12,661 | 69% | $12,736 | 61% | $24,792 | 73% |
North America | 4,214 | 45% | 5,698 | 31% | 7,906 | 38% | 9,152 | 27% |
Far East | 42 | -- | 1 | -- | 132 | 1% | 150 | -- |
Totals | $9,352 | 100% | $18,360 | 100% | $20,774 | 100% | $34,094 | 100% |
Cost of Sales
Cost of sales as a percentage of revenue remained stable at 70% for the three months ended February 28, 2001 compared to the prior year comparable quarter and decreased to 71% for the six months ended February 28, 2001 compared to 73% for the comparable six month period. The decrease in cost 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.
The following table details the Company's sales and gross margin by operating segment for the three and six months ended February 28, 2001 and February 29, 2000 (amounts in thousands):
|
Systems | System and Service Integration | E- Commerce Software | Other Software |
Total |
Qtr Ended 2/28/01 | |||||
Sales | $2,213 | $6,073 | $619 | $447 | $9,352 |
Cost of sales | 1,066 | 5,126 | 294 | 106 | 6,592 |
Gross margin $ | 1,147 | 947 | 325 | 341 | 2,760 |
Gross margin % | 52% | 16% | 52% | 76% | 30% |
Qtr Ended 2/29/00 | |||||
Sales | $3,988 | $13,264 | $480 | $628 | $18,360 |
Cost of sales | 1,522 | 10,748 | 284 | 207 | 12,761 |
Gross margin $ | 2,466 | 2,516 | 196 | 421 | 5,599 |
Gross margin % | 62% | 19% | 41% | 67% | 30% |
YTD Ended 2/28/01 | |||||
Sales | $4,784 | $13,831 | $1,236 | $923 | $20,774 |
Cost of sales | 2,267 | 11,737 | 502 | 248 | 14,754 |
Gross margin $ | 2,517 | 2,094 | 734 | 675 | 6,020 |
Gross margin % | 53% | 15% | 59% | 73% | 29% |
YTD Ended 2/29/00 | |||||
Sales | $6,247 | $25,889 | $887 | $1,071 | $34,094 |
Cost of sales | 2,627 | 21,508 | 445 | 370 | 24,950 |
Gross margin $ | 3,620 | 4,381 | 442 | 701 | 9,144 |
Gross margin % | 58% | 17% | 50% | 65% | 27% |
Engineering and Development
Engineering and development decreased 7% and 4% for the three and six months ended February 28, 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 outside consultants and the addition 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 six month periods ended February 28, 2001 and February 29, 2000 (amounts in thousands):
/----------Three months ended--------/ /----------Six months ended ---------/
Feb 28 | % of | Feb 29 | % of | Feb 28 | % of | Feb 29 | % of | |
Engineering & Development Expense: | 2001 | Total | 2000 | Total | 2001 | Total | 2000 | Total |
By Operating Segment: | ||||||||
Systems | $432 | 49% | $550 | 58% | $994 | 51% | $1,076 | 52% |
System and Service Integration | 192 | 21% | 105 | 11% | 500 | 25% | 302 | 15% |
E-Commerce Software | 166 | 19% | 177 | 18% | 272 | 14% | 409 | 20% |
Other Software | 102 | 11% | 125 | 13% | 200 | 10% | 263 | 13% |
Total | $892 | 100% | $957 | 100% | $1,966 | 100% | $2,050 | 100% |
Selling, General and Administrative
Selling, general and administrative expense decreased $1.1 million or 32% to $2.4 million for the quarter ended February 28, 2001 compared to $3.5 million for the comparable quarter of fiscal 2000. Selling, general and administrative expense decreased $2.0 million or 30% to $4.7 million for the six months ended February 28, 2001 compared to $6.7 million for the comparable period of fiscal 2000.
The following table sets forth selling, general and administrative expense by Company subsidiary for the three and six months ended February 28, 2001 and February 29, 2000:
/---------Three months ended--------/ /----------Six months ended ---------/
Feb 28 | % of | Feb 29 | % of | Feb 28 | % of | Feb 29 | % of | |
S, G & A expense | 2001 | Total | 2000 | Total | 2001 | Total | 2000 | Total |
By Operating Segment: | ||||||||
Systems | $1,057 | 45% | $1,430 | 41% | $2,047 | 44% | $2,525 | 38% |
System and Service Integration | 674 | 28% | 1,228 | 35% | 1,279 | 27% | 2,348 | 35% |
E-Commerce Software | 379 | 16% | 542 | 16% | 842 | 18% | 1,150 | 17% |
Other Software | 261 | 11% | 292 | 8% | 523 | 11% | 658 | 10% |
Total | $2,371 | 100% | $3,492 | 100% | $4,691 | 100% | $6,681 | 100% |
By Subsidiary: | ||||||||
MODCOMP | $1,101 | 46% | $1,850 | 53% | $2,229 | 48% | $3,644 | 54% |
CSP MultiComputer Division | 1,010 | 43% | 1,350 | 39% | 1,941 | 41% | 2,379 | 36% |
Scanalytics | 260 | 11% | 292 | 8% | 521 | 11% | 658 | 10% |
Total | $2,371 | 100% | $3,492 | 100% | $4,691 | 100% | $6,681 | 100% |
MODCOMP's selling, general and administrative expense for the three and six months ended February 28, 2001 decreased $749,000 or 40% and $1.4 million or 39%, respectively, from the comparable periods of the prior year. Approximately $441,000 and $796,000 of the three and six 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 six months ended February 28, 2001 was $0 and $36,000, respectively, compared to $441,000 and $832,000 for the same periods of fiscal year 2000. In addition MODCOMP Germany's selling, general and administrative expenses for the three and six months ended February 28, 2001 declined approximately $214,000 or 31% and $324,000 or 29% from the prior comparable periods. MODCOMP America's expense for the three months ended February 28, 2001 increased $44,000 or 9%. MODCOMP America's expense for the six months ended February 28, 2001 declined approximately $64,000 or 6% which was due to reductions in personnel.
CSP MultiComputer division selling, general and administrative expense for the three and six months ended February 28, 2001 decreased $340,000 or 25% and $438,000 or 18% from the prior comparable periods. Approximately $192,000 of the decline for the three and six month periods relates to a reduction in bonus expense. Approximately $44,000 and $109,000 of this decrease for the three and six month periods ended February 28, 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 $2,000 and $53,000 of the three and six 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 $44,000 and $87,000 of the three and six month decline relates to a reduction in depreciation expense as a result of an increase in fully depreciated assets.
Scanalytics, Inc. selling, general and administrative expense for the three and six months ended February 28, 2001 decreased $32,000 or 11% and $137,000 or 21% from the prior year. This 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 and the gain on sale of property, increased 21% and 11% for the three and six month periods ended February 28, 2001 compared to the prior comparable periods.
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 and netted a pretax gain of approximately $1.5 million.
The Company has an effective tax rate of 45%. The Company's effective tax rate has declined from 47% for last fiscal year, due in part to the reduction in the Germany statutory rate and MODCOMP's reorganization.
Liquidity and Capital Resources
Working capital at February 28, 2001 increased to $24.2 million compared to $21.6 million at August 31, 2000.
The Company's consolidated capital expenditures were $51,000 and $340,000 for the three and six months ended February 28, 2001 compared to $285,000 and $396,000 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 six-month periods ended February 28, 2001 or February 29, 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
(a) Reports on Form -K
Form 8-K Other Events dated February 13, 2001
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: April 10, 2001 By: /s/ Alexander R. Lupinetti
Chief Executive Officer,
President and Chairman
Date: April 10, 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 six months ended------/
Feb 28 | Feb 29 | Feb 28 | Feb 29 | |||||
2001 | % | 2000 | % | 2001 | % | 2000 | % | |
Sales | $9,352 | 100% | $18,360 | 100% | $20,774 | 100% | $34,094 | 100% |
Cost of sales | 6,592 | 70% | 12,761 | 70% | 14,754 | 71% | 24,950 | 73% |
Engineering and | ||||||||
Development | 892 | 9% | 957 | 5% | 1,966 | 9% | 2,050 | 6% |
Selling, general and | ||||||||
Administrative | 2,371 | 25% | 3,492 | 19% | 4,691 | 23% | 6,681 | 20% |
Total costs and | ||||||||
Expenses | 9,855 | 105% | 17,210 | 94% | 21,411 | 103% | 33,681 | 99% |
Operating income (loss) | (503) | (5%) | 1,150 | 6% | (637) | (3%) | 413 | 1% |
Other income (expense) | 1,611 | 17% | 64 | --% | 1,363 | 7% | 142 | --% |
Income before income taxes | 1,108 | 12% | 1,214 | 7% | 726 | 3% | 555 | 2% |
Income tax expense | 493 | 5% | 589 | 3% | 323 | 2% | 260 | 1% |
Net income | $615 | 7% | $625 | 3% | $403 | 2% | $295 | 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 six months ended--/
February 28, 2001 vs. February 29, 2000
$ | % | $ | % | |||
Change | Change | Change | Change | |||
Sales | ($9,008) | (49%) | ($13,320) | (39%) | ||
Cost of sales | (6,169) | (48%) | (10,196) | (41%) | ||
Engineering and | ||||||
development | (65) | (7%) | (84) | (34%) | ||
Selling, general and | ||||||
administrative | (1,121) | (32%) | (1,990) | (30%) | ||
Total costs and | ||||||
expenses | (7,355) | (43%) | (12,270) | (36%) | ||
Operating profit (loss) | (1,653) | (144%) | (1,050) | (254%) | ||
Other income (expense) | 1,547 | 2417% | 1,221 | 860% | ||
Income before | ||||||
income taxes | (106) | (9%) | 171 | 31% | ||
Income tax expense | (96) | (16%) | 63 | 24% | ||
Net income | (10) | (2%) | 108 | 37% | ||