12
SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 10549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 of 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended May 29, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-10843
CSP Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2441294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.
40 Linnell Circle, Billerica, Massachusetts
(Address of principal executive offices)
Registrant's telephone number, including area code:(978)663-
7598
NONE
(Former name, former address, former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable
date.
Class Outstanding June 29, 1998
Common stock, $.01 par value 2,954,595 shares
INDEX
PAGE
NUMBER
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets...........................3
Consolidated Statements of Operations.................4
Consolidated Statements of Cash Flows.................5
Notes to Consolidated Financial Statements............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................8
PART II. OTHER INFORMATION:
Item 4. Submissions of Matters to a vote of Security
Holders...13
Item 6. Exhibits & Reports on Form 8-K.........................13
CSP INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
May 29, August 29,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $4,679 $4,344
Marketable securities 9,736 5,581
Accounts receivable, net 7,166 8,584
Income tax receivable -- 37
Inventories (Note 1) 5,782 6,227
Deferred income taxes 553 504
Prepaid expenses 1,291 1,301
Total current assets 29,207 26,578
Property, equipment and improvements, net 3,418 3,856
Other assets:
Land held for future development 163 163
Deferred income taxes 932 880
Goodwill, net 1,203 1,562
Other assets 1,949 1,960
Total other assets 4,247 4,565
Total assets $36,872 $34,999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,121 $7,738
Income taxes payable 1,131 --
Total current liabilities 5,252 7,738
Deferred compensation and retirement 5,552 2,240
plans
Shareholders' equity:
Common stock, $.01 par, authorized
7,500,000 shares; issued 2,991,059
and 2,987,684 shares 33 30
Paid in capital 10,617 10,593
Retained earnings 17,728 16,676
Equity adj.from foreign currency trans (243) (211)
28,135 27,088
Less treasury stock, at cost, 305,314& 306,314
shares (Note 2) 2,067 2,067
Total shareholders' equity 26,068 25,021
Total liabilities and shareholders' equity $36,872 $34,999
See notes to consolidated financial statements
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data) (Unaudited)
/-For the three months-/-For the nine months-/
May 29, May 30, May 29, May 30,
1998 1997 1998 1997
Sales
Systems $4,498 $1,944 $12,590 $8,887
Software 1,087 127 3,202 729
Service 9,490 74 35,816 303
Total sales 15,075 2,145 51,608 9,919
Cost of sales
Systems 1,960 790 5,768 3,955
Software 419 67 1,170 169
Service 7,004 (5) 28,369 8
Total cost of sales 9,383 852 35,307 4,132
Gross Profit 5,692 1,293 16,301 5,787
Operating Expenses
Engineering and development 1,183 755 3,158 2,592
Sales,general &
administration 3,779 1,336 11,201 4,406
Total Operating Expenses 4,962 2,091 14,359 6,998
Operating income (loss) 730 (798) 1,942 (1,211)
Other income 124 223 413 637
Income(loss)before income tax
expense (benefit) 854 (575) 2,355 (574)
Income tax expense (benefit) 405 (148) 1,303 (156)
Net income (loss) $449 ($427) $1,052 ($418)
Earnings (loss) per share
Basic $0.15 ($0.16) $0.38 ($0.16)
Diluted $0.15 ($0.16) $0.37 ($0.16)
Weighted average shares
Basic 2,950 2,674 2,755 2,664
Diluted 2,977 2,684 2,819 2,682
See accompanying notes to consolidated financial statements.
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
/---For the three-----//---For the nine--
-/ months ended months ended
May 29, May 30, May 29, May 30,
1998 1997 1998 1997
Cash flows from operating activities:
Net income (loss) $449 ($427) $1,052 ($418)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Unreal. gain on mark. sec. (1) (8) (4) (2)
Depreciation and amortization 336 281 1,096 847
Deferred compensation and
retirement
plans 2,152 11 3,312 117
Deferred income taxes (28) (22) (101) (56)
Changes in current assets and
liab.:
Decrease in accounts receivable 1,193 1,330 1,435 2,302
(Increase)decrease in inventories 244 (60) 445 28
(Increase)decrease in prepaid 17 126 10 (703)
expenses
Decrease in accounts payable
and accrued expenses (994) (233) (3,597) (667)
Increase(decrease) in income taxes
payables 288 (49) 1,132 (214)
Net cash provided by operating
activities 3,656 949 4,780 1,234
Cash flows from investing activities:
Purchase of marketable securities (4,263) (46,736) (16,983)(151,936)
Sale of marketable securities 2,207 45,581 12,830 151,171
Property, equipment and (256) (81) (407) (501)
improvements
Other assets 147 (19) 120 (107)
Net cash used in investing
activities (2,165) (4,440) (1,373) (1,255)
Cash flows from financing activity:
Proceeds from stock options 12 130 27 163
Purchase of treasury stock 0 (34) 0 (34)
Net cash provided by financing
activity 12 96 27 129
Effect of exchange rate changes on cash 78 (32)
Net increase (decrease) in cash 1,581 (210) 335 (10)
Cash and cash equivalents, beg. of
year 3,098 11,128 4,344 10,928
Cash and cash equivalents, end ofyr $4,679 $10,918 $4,679 $10,918
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 29, 1997.
Certain reclassifications were made to the 1997 financial
statements to conform to the 1998 presentation.
All shares adjusted to reflect common stock dividend of 10%
recorded March 24, 1998.
1. Inventories:
Inventories consist of the following:
May 29, August 29,
1998 1997
Raw materials $2,338 $3,922
Work in process 941 918
Finished goods 2,503 1,387
Total $5,782 $6,227
2. Stock Repurchase:
On October 9, 1986 the Board of Directors authorized the
Company to repurchase up to 310,995 shares of the outstanding
stock at market prices. On September 28, 1995, the Board of
Directors authorized the Company to repurchase up to
an additional 165,000 shares of the outstanding stock at market
prices. The timing of stock purchases are made at the
discretion of management. Through May 29, 1998 the Company has
repurchased 336,945, or 71% of the total authorized.
Management's Discussion and Analysis of Financial Condition
and Results of Operations:
A summary of the period to period changes in principal items in
the Statement of Operation is shown on Schedule I (page 10).
Results of Operation - 1998 Compared to 1997:
Company sales increased from $2,145,000 to $15,075,000 in the
third quarter of fiscal 1998 compared to the same period in
fiscal 1997. Sales for the nine month period increased from
$9,919,000 in fiscal 1997 to $51,608,000 in fiscal 1998. The
increased revenue was due primarily to the acquisition (June
27, 1997) of MODCOMP which represented approximately 74% and
80% of the total revenue for the three and nine month periods
ended May 29, 1998. CSP MultiComputer products group which now
includes Vision Systems, or machine bar-code readers, accounted
for 22% and 17% of total revenue for the three and nine months
periods of fiscal year 1998. Scanalytics represented 4% and 3%
of revenue for the three and nine month periods. Services and
systems integration sales continues to represent the major
source of revenue accounting for approximately 63% and 69% of
total sales for the three and nine month periods of the current
fiscal year. Most of this revenue was generated by MODCOMP.
During the third quarter of fiscal 1998 the continuation of
outsourcing shipments were sold by MODCOMP's German subsidiary
to ARCOR Mannesmann and E-Systems. Sales to the German
Telecommunications companies represented 34% of revenue for the
quarter. The system sale included completion of the sale of
equipment, software and integration services to assist in
completing the building of their IP(Internet protocol) backbone
network to provide intranet and internet services in Germany.
During the quarter, CSP MultiComputer Group revenues increased
by 91% and 10% for the three and nine month periods compared to
the prior fiscal year. The increase in sales was due in part to
increased shipments of the new 2000 series products which
represented 44% and 27% of the group's total sales for the
quarter and nine month period. SuperCards continue to be a
major source of revenue and represented 54% and 66% of the
group's total revenue for the three and nine month periods.
The increase in sales was due in part to continued procurement
of SuperCards by various COTS (commercial-off-the-shelf)
programs and shipments to existing commercial customers.
European sales represented 59% and 64% of sales for the three
and nine month periods. The increased revenue from Europe is
due to MODCOMP's wholly-owned subsidiaries in Germany, France
and United Kingdom. North American sales represented 36% and
34% of total sales for the three and nine month periods of
fiscal 1998. Sales to the other geographic areas, primarily
Japan, were 5% and 2% of total sales for the three and nine
month periods.
Cost of sales as a percentage of sales increased to 62% and 68%
respectively for the three and nine month periods as compared
to the prior fiscal year. The increased cost of sales was due
to the change in the mix of business. The cost of sales by
sales category for the three and nine month periods was 74% and
79% for service and systems integration, 44% and 46% for
systems and 39% and 37% for software. MODCOMP systems
integration and service products are sold at a lower gross
profit margins than the CSP MultiComputer systems and
Scanalytics software products. This is due to the purchase of
third party hardware and software products which are a large
part of the integration services sales. The Company attempts to
purchase hardware and software at the best pricing. Purchasing
is done primarily on an order by order basis. The Company also
will continue to take steps to lower the manufacturing overhead
and make the operating efficient to improve the overall
efficiency to lower the cost of goods sold. The future cost of
sales as a percent of sales will fluctuate based on the mix of
products sold.
Engineering and development expenditures increased by 57% and
22% over the prior fiscal year for the three and nine month
period. The reason for the increase was due to the acquisition
of MODCOMP which represented approximately 44% and 36% of the
total expense for the three and nine month period. Actual
engineering and development expenses for CSP MultiComputer
Group decreased by 14% and 22%. This was due to reduction
in outside and consulting services needed to complete the
2640 system. Scanalytics expenses for engineering and
development were also down by 3% and 24% as compared to
the prior year due to staff reductions. Scanalytics
represented 6% and 7% of the total expense for the three and
nine month period ended May 29, 1998.
Sales, marketing and administration expenses increased by
$2,433,000 and $6,795,000 for the three and nine month periods
ended May 29, 1998 compared to the comparable period of the
prior fiscal year. MODCOMP expenses represented 56% and 57% of
the total expenses and represented 86% and 95% of the increased
expenses for the three and nine month periods. CSP
MultiComputer groups expenses increased by 39% and 21% compared
to the prior fiscal year for the three and nine month periods.
The increase in expenses was due to increased sales
commissions, additional staff for sales and marketing, and the
added administrative expenses for the expanded organization
which included additional legal, audit, tax and shareholders
services. Scanalytics sales, marketing & administration
expenses decreased by approximately 11% and 20% for the three
and nine month period due to the reduction in staff and
promotional activity. Scanalytics represented 9% and 10% of the
total expenses for the three and nine month periods in the
current year.
Other income decreased by $99,000 in the quarter and $224,000
for the nine month period due primarily to the reduction in
investment income. Income from investments decreased from the
last year due to the cash purchase of the two subsidiaries in
June 1997.
The Company's effective tax rate for the nine month period was
approximately 55% due to the large amount of foreign source
income. The countries of Germany and France, which had the
largest amount of sales and income for MODCOMP, have high
effective tax rates. The income was all foreign source and had
no United States content to provide any offset at lower tax
rates. The effective tax rate was lower than the prior quarter.
The Company will continue to work with it's tax advisors to
lower the effective rate to a more normal rate. The effective
tax rate should be lower in the fourth quarter based on lower
foreign source revenue and tax benefits for both federal and
state income taxes which should be realized.
Financial Positions, Capital Resources and Liquidity:
The Company's working capital of $23.9 million at May 29, 1998
was increased by $5.1 million from the end of the fiscal year.
The Company's inventory decreased to $5.8 million from $6.2
million at the end of the fiscal year. The increase in
retirement obligations was a reclassification of the German
pension obligation from a current liability to a long term
obligation which represented $2.8 million of the $3.4 million
increase.
The Company spent $407,000 on capital equipment during the nine
month period of fiscal 1998.
Management believes that all the Company's current and
foreseeable needs can be met through working capital generated
by operations and investments.
Inflation and Changing Prices:
Management does not believe that inflation and changing prices
had significant impact on sales, revenues or income from
continued operations during fiscal 1998. There is no
assurance, however, 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 peripherals and computer
products, biological imaging software and instruments and
machine code readers industries; competitive factors and
pricing pressures; changes in products mix; the timely
development and acceptance of new products; inventory risks due
to shifts in market demand; and component constraints and
shortages.
CSP, INC. AND SUBSIDIARIES SCHEDULE I
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE OF SALES
(Dollars in thousands)
(Unaudited)
/--For the three months---/ /--For the nine months--/
ended ended
May May May May
29, 30, 29, 30,
1998 % 1997 % 1998 % 1997 %
Sales 15,075 100% 2,145 100% 51,608 100% 9,919 100%
Costs and expenses:
Cost of sales 9,383 62% 852 40% 35,307 68% 4,132 42%
Engineering and
development 1,183 8% 755 35% 3,158 6% 2,592 26%
Sales,general &
administrative 3,779 25% 1,336 62% 11,201 22% 4,406 44%
Total costs and
expenses 14,345 95% 2,943 137% 49,666 96% 11,130 112%
Operating income
(loss) 730 5% (798) -37% 1,942 4% (1,211) -12%
Other income 124 1% 223 10% 413 1% 637 6%
Income (loss) before
income tax (benefit) 854 6% (575) -27% 2,355 5% (574) -6%
Income tax expense
(benefit) 405 3% (148) -7% 1,303 3% (156) -2%
Net income (loss) $449 3% (427) -20% 1,052 2% (418) -4%
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 8-K
None
b) Exhibits
11.0 Data used in the calculation of net income
per share.
27.0 Financial Data Schedule
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 10, 1998 By: /s/ Alexander R. Lupinetti
Alexander R. Lupinetti
Chief Executive Officer
and President
Date: July 10, 1998 By: /s/ Gary W. Levine
Gary W. Levine
Vice President of Finance
and Chief Financial Officer