3
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 February 26, 1999 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 April 5, 1999
Common stock, $.01 par value 3,267,370 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............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................8
PART II. OTHER INFORMATION:
Item 6. Exhibits & Reports on Form 8-K.........................15
CSP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
February 26, August 28,
1999 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,280 $3,913
Marketable securities 9,836 9,635
Accounts receivable, net 11,758 7,698
Inventories 5,492 6,308
Deferred income taxes 1,333 1,068
Prepaid expenses 1,467 1,248
Total current assets 33,166 29,870
Property, equipment and improvements, net 3,250 3,261
Other assets:
Land held for future development 163 163
Deferred income taxes 1,041 1,168
Goodwill, net 1,341 1,257
Other assets 1,605 1,809
Total other assets 4,150 4,397
Total assets $40,566 $37,528
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $9,201 $6,399
Income taxes payable 490 1,375
Total current liabilities 9,691 7,774
Deferred compensation and retirement
Plans 3,565 3,363
Shareholders' equity:
Common stock, $.01 par, authorized
7,500 shares; issued 3,627
and 3,624 shares 36 36
Additional paid in capital 10,748 10,631
Retained earnings 18,943 18,032
Equity adj. from foreign currency trans (357) (248)
29,370 28,451
Less treasury stock, at cost, 370
shares 2,060 2,060
Total shareholders' equity 27,310 26,391
Total liabilities and shareholders' equity $40,566 $37,528
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 ended-//For the
Six Months Ended-/
February February February February
26, 27, 26, 27,
1999 1998 1999 1998
Sales
Systems $4,194 $4,823 $9,060 $8,092
Software 1,244 967 2,046 2,115
Service and system
integration 10,147 13,937 15,994 26,326
Total sales 15,585 19,727 27,100 36,533
Cost of sales
Systems 1,916 2,475 3,840 3,808
Software 392 257 629 751
Service and system 8,095
integration 10,657 12,011 21,365
Total cost of sales 10,403 13,389 16,480 25,924
Engineering and development 976 994 2,105 1,975
Sales, general and admin. 3,498 4,244 6,846 7,423
Total costs and expenses 14,877 25,431 35,322
18,627
Operating income 708 1,669 1,211
1,100
Other income 143 74 229 289
Income before income taxes 851 1,898 1,500
1,174
Income tax expense 416 987 898
732
Net income $435 $911 $602
$442
Earnings per share
Basic $0.13 $0.14 $0.28 $0.19
Diluted $0.13 $0.13 $0.27 $0.18
Weighted average shares
Basic 3,270 3,248 3,263 3,248
Diluted 3,331 3,314 3,278
3,279
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 Six-
- -/
Months ended Months ended
February February February February
26, 27, 26, 27,
1999 1998 1999 1998
Cash flows from operating
activities:
Net income $435 $442 $911 $602
Adjustments to reconcile net income
to
Net cash provided by (used in
operating activities:
Unrealized Gain on marketable (11) --- (31) (3)
securities
Depreciation and amortization 154 312 609 761
Deferred compensation and --- 1,094 202 1,160
retirement
plans
Deferred income taxes (94) (9) (138) (73)
Changes in current assets and
liab.:
(Increase)decrease in accounts (3,976) 4,243 (4,060) 242
receivable
(Increase)decrease in inventories 298 (72) 816 201
Increase in prepaid expenses (44) (101) (219) (7)
Increase(decrease) in accounts 3,859 (7,102) 2,802 (2,603)
payable
and accrued expenses
Increase(decrease) in income taxes (727) 474 (885) 844
payable
Other assets 180 138 34 (27)
Net cash provided by (used in) 74 (581) 41 1,097
operating activities
Cash flows from investing activities:
Purchase of marketable securities (6,648) (6,147) (13,075) (12,720)
Sale of marketable securities 7,459 6,850 12,905 10,623
Property, equipment and (281) (93) (512) (151)
improvements
Net cash used in investing 530 610 (682) (2,248)
activities
Cash flows from financing activity:
Proceeds from stock options and 27 15 117 15
employee stock purchases
Net cash provided by financing 27 15 117 15
activity
Effect of exchange rate change on (183) (166) (109) (110)
cash
Net increase (decrease) in 448 (122) (633) (1,246)
cash
Cash and cash equivalents, beg. of 2,832 3,220 3,913 4,344
period
Cash and cash equivalents, end of $3,280 $3,098 $3,280 $3,098
period
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
28, 1998.
1. Reclassification:
Certain reclassifications were made to the Fiscal 1998 financial
statements to conform to the Fiscal 1999 presentation.
2. Inventories:
Inventories consist of the following (in thousands):
February 26, August 28,
1999 1998
Raw materials $2,223 $1,502
Work in process 711 1,138
Finished goods 2,558 3,668
Total $5,492 $6,308
3. Stock Repurchase:
On October 9, 1986 the Board of Directors authorized the Company to
repurchase up to 313,538 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 181,500 shares of the
outstanding stock at market prices. The timing of stock purchases are
made at the discretion of management. Through February 26,1999 the
Company has repurchased 351,477, or 71% of the total authorized.
4. New Accounting Standards
Effective August 29, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130") which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. For the Company, comprehensive income includes net income
and unrealized gains and losses from foreign currency translation.
In June 1997, the Financial Accounting Standards Board issued Statement
131, "Disclosures about Segments of an Enterprise and Related
Information" SFAS 131"), which establishes standards for the way that
public business enterprises report selected information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. This Statement becomes effective for the Company in its
fiscal year ending August 27, 1999. The Company is in the process of
determining the impact of SFAS 131 on its footnote disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities," which requires that all derivatives be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded for each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
The Company currently expects to adopt SFAS No. 133 for the year ending
August 27, 1999. Management has determined there will be no impact on
its results of operations or financial position resulting from the
adoption of SFAS No. 133 because the Company currently does not hold
derivative instruments.
5. EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and
diluted income per common share computations for the Company's reported
net income is as follows (in thousands, except per share amounts):
Three months ended Six months ended
Feb. 26 Feb. 27 Feb. 26 Feb.27
1999 1998 1999 1998
Basic net income $435 $442 $911 $602
Weighted Average shares outstanding, basic 3,270 3,248 3,263
3,248
Net additional common shares upon exercise
of common stock options 61 31 51
30
Weighted average shares outstanding-diluted 3,331 3,279 3,314
3,278
Net income per share-basic $0.13 $0.14 $0.28
$0.19
Net income per share-diluted $0.13 $0.13 $0.27
$0.18
6. Comprehensive Income
The Company's comprehensive income is as follows:
Three months ended Six months ended
Feb. 26 Feb. 27 Feb. 26 Feb. 27
1999 1998 1999 1998
(C)
Net income $435 $442 $911 $602
Other comprehensive income:
Foreign translation adjustment (184) (166) (109)(110)
Total comprehensive income $251 $276 $802 $492
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 13 and
14).
The discussion below contains certain forward-looking statements related
to, among others but not limited to, among other things, statements
concerning future revenues and future business plans. Actual results may
vary from those contained in such forward-looking statements.
Results of Operation -1999 Compared to 1998:
Revenue:
The Company's sales were $15,585,000 and $27,101,000 for the three month
and six month periods ended February 26, 1999 compared to $19,727,000 and
$36,533,000 for the same periods in fiscal 1998. The decrease in revenue
was due to a reduction in integration services sales by MODCOMP. In the
second quarter of fiscal 1998, MODCOMP's German subsidiary had a $5.8
million outsourcing shipment from ARCOR, a German telecommunication
supplier. The sales of large integration systems are individual orders.
MODCOMP accounted for 74% and 68% of the total revenue for the three and
six month periods compared to 82% and 83% in the same periods of the
prior fiscal year. CSP MultiComputer Division (CSPI) products accounted
for 21% and 28% for the three and six month periods compared to 15% and
14% for the prior fiscal year and Scanalytics revenues were 5% and 4% for
the three and six month periods compared to 3% and 4% for the prior
fiscal year.
Sales for systems integration and services represented 65% and 59% of
sales for the quarter and six month period compared to 71% and 72% for
the same period of the prior fiscal year. Systems sales, which includes
software and hardware products designed and developed by CSPI and
MODCOMP, represented 27% and 33% of total revenue for the second quarter
and six month period compared to 24% and 22% in the same periods of the
prior fiscal year. CSPI's newest product offering, series 2000 systems
products, are either based on the Power PC from IBM/Motorola or Analog
Devices SHARC processor and Myrinet networking technology from Myricom
Inc. Sales of the 2000 series products have increased by approximately
300% for the six months ended February 26, 1999 over the same period of
the prior fiscal year and accounted for 29% of the total system sales for
the six month period. SuperCard family of products accounted for
approximately 41% of total sales for the system sales for the six month
period ended February 26, 1999. CSPI's 2000 series high-performance
products will provide the future source of revenue growth in the
division. MODCOMP continues to ship its real-time process control
classic product line to it's existing customers which represented 21% of
systems revenue for the six month period ended February 26, 1999.
Software sales represented 8% of sales for both the three and six months
periods of 1999 compared to 5% and 6% of sales for the same periods of
the prior fiscal year. Scanalytics accounts for 59% of the total
software sales for both the three and six month periods during fiscal
1999. Scanalytics sales increased by 9% for the first six months of the
current fiscal year compared to the prior year. The increased sales was
due to the increased demand for the IP software product which is an
imaging software product used by biotechnology organizations. The
MODCOMP internet product, ViewMax, accounted for approximately 26% of the total
software sales for the year. ViewMax allows companies to easily integrate
their IT systems with Internet technology without modification to the
underlying legacy application code. Acting as a bridge between a
company's legacy mainframe and its network - includes extranets and the
Internet-ViewMax reconfigures information from green screen and allows
users to view the data on their PC's in a graphic-friendly format. As
e-commerce continues to expand, the ViewMax product will play an
important role in the growth and success of the Company.
European sales accounted for 63% and 55% of the total revenue for the
quarter and six month periods. The rest of geographic revenue breakdown
was 35% and 34% for the Americas, and 2% and 11%( 10% for Asia) for the
rest of the world for the three and six month periods ended February 26,
1999.
Cost of Sales:
Cost of sales as a percentage of sales was 67% and 61% for the three and
six month periods ended February 26, 1999. This compared to 68% and 71%
for the same periods of the prior fiscal year. The reduction in the
cost of sales was due to the change in product mix with increased sales
of high margin system and software products. The Company will continue
to take steps to lower the manufacturing overhead and make operations
more efficient to improve the overall efficiency of the manufacturing
process, thus reducing the cost of goods sold. The future cost of sales
as a percent of sales will fluctuate based on the mix of business, but
most probably will increase from the levels we have historically
experienced if MODCOMP integration systems sales remain as a large
percentage of the total revenue.
Operating Expense:
Engineering and development expenditures were down by about 2% over the
same period of the prior fiscal year for the three month period. The
decreased engineering and development expenses resulted from decreased
expenses of about 16% at MODCOMP which was partially offset by an
increase of 54% at Scanalytics. The reduction in expenses at MODCOMP was
due to a decrease in staff and expenses associated with the older MODCOMP
legacy products. The Company is currently shifting its focus and
resources to the ViewMAX Internet software products. This shift will take
a number of months to redeploy resources. Scanalytics expenses have
increased by 54% from that of the prior year. This is due to an increase
of three individuals on the engineering and development staff. CSP
represented 57% and 58% of the total expense for the three and six month
periods and was approximately at the same level as the prior fiscal year.
Sales, general and administrative expenses decreased by 18% and 8% for
the quarter and six months of 1999 from the same period of the previous
fiscal year. The decrease in expenses was primarily at MODCOMP due to
reductions in sales commissions, staff and certain sales operating
expenses. MODCOMP's operation has decreased its staff by 10, reduced
associated operating expenses, and experienced lower sales commissions
due to the reduction in revenue. This accounted for entire reduction in
the expenses for the six month period and approximately 80% in the three
month period . CSPI's expenses decreased by 9% for the 1999 quarter
related to staff reductions in the administration departments and legal
expenses over the prior fiscal year and thus represented about 15% of the
total reduction for the period. CSPI sales, general and administration
expenses for the six month period increased by approximately 8% over the
prior year. This was due to the increased sales commissions from
increased revenue and sales department operating expenses. Scanalytics
sales, general and administrative expenses were down by 16% due to the
attrition in the sales and marketing staff and reduction in the
administration expenses since last year.
Other Income Expenses and Taxes:
Other income increased by $69,000 for the quarter. The increase was due
primarily to investment income which represented 84% of the increase.
The year to date other income was approximately $60,000 lower than the
prior year. The reduction was due primarily to the reduction in
investment revenue for MODCOMP's European subsidiaries.
The Company had an effective tax rate of 49% and 52% for three and six
months period of 1999 which is above the normal US statutory rate. This
was due to the large portion of foreign-based revenue and profits from
France and Germany which have high statutory tax rates. The Company will
continue to review with advisors the most effect tax strategy to reduce
our lower effective rate.
Financial Positions, Capital Resources and Liquidity:
The Company has a solid financial position with working capital
increased to $23.5 million at February 26, 1999. Accounts receivable
increased to $11.7 million at the end of the second quarter on February
26, 1999 compared to $7.7 million at the end of Fiscal 1998. The increase
in accounts receivable was due to the timing of shipments and not
collection issues. As of April 5, 1999, 52% of the outstanding balance
in the accounts receivable as of February 26, 1999 has been paid.
Accounts payable and accrued expenses increased to $9.2 million at
February 26, 1999 from $6.4 million on August 28, 1998. The increase was
in accounts payable and was primarily for the purchase of computer
equipment and software for MODCOMP's German subsidiary for a number of
integration service customers which were installed in February, 1999.
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 operating income during fiscal
1999 or 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 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 effect 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.
The market for Company's products are characterized by rapidly changing
technology, new products introduction 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 effect the Company's business and
operating results.
Year 2000
Historically, certain computer programs have been written using two
digits rather than four digits to define the year. This could result in a
computer recognizing a date using "00" as the year 1900 rather than the
year 2000, resulting in potential major system failures or
miscalculations. This problem will be referred to as the "Year 2000."
The Company has completed a reviewed of both its internal computer
systems and its products that could be affected by the "Year 2000"
issues. Generally, on a stand alone basis, CSPI and Scanalytics software
products are not date dependent and therefore are not susceptible to the
"Year 2000"issue like other general purpose computer companies. However,
it should be understood that the majority of the CSPI and Scanalytics
products performance is dependent upon third party host computer
environment. MODCOMP has provided their legacy systems customers with a
software upgrade which is "Year 2000" compliant. The Company believes
that all of the current versions of its products are "Year
2000"compliant. The Company will continue its assessment of all current
versions of its products.
The Company developed a plan and has implemented the necessary remedial
efforts to correct the internal computer systems problems of its
business systems with certain upgrades in these systems that are
"Year 2000" compliant. The Company has been testing the various
systems to assure their compliance with test data. The testing of the
various systems will be completed by the end of July, 1999. The Company
has initiated and will continue a formal communication with all of its
significant suppliers and large customers to determine the extent to
which the Company is vulnerable to those third parties failure to correct
their own "Year 2000" issues. There can be no guarantee that the systems
of other companies on which significant suppliers and large customers
rely upon will be timely converted or failure to convert by another, will
not have a material impact on the Company.
The cost of implementing of all these solutions is anticipated not to be
material to the financial position or results of operations. It estimates
that the cost related to Year 2000 will fall between $100,000-$150,000.
The costs of such conversions and updates are based on the management's
best estimates, which were based on numerous assumptions of future
activities such as, but not limited to, availability and cost of
personnel needed to correct and train, ability to locate and correct
relevant computer code.
Contingency plans are being developed in critical areas, to ensure that
any potential material business interruptions caused by Year 2000 issue
are mitigated. The contingency plan is being developed and should be
completed by June, 1999. However, the foregoing statements are based on
management's best estimate at the present time which were derived
utilizing numerous assumptions of future events, which include third
party modification plans, certain resources and other factors. The
Company has taken and will continue to take the necessary corrective
action to mitigate any significant Year 2000 problems. There can be no
guarantee that the Company will not experience some disruption or loss of
business due to the Year 2000 issue.
CSP, INC. AND SUBSIDIARIES SCHEDULE I
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE OF SALES
(Dollars in thousands)
(Unaudited)
/--For the three months---/ /--For the six months--/
Ended Ended
Feb. Feb. Feb. Feb.
26, 27, 26, 27,
1999 % 1998 % 1999 % 1998 %
Sales 15,585 100% 19,727 100% 27,100 100% 36,533 100%
Costs and expenses:
Cost of sales 10,403 67% 13,389 68% 16,480 61% 25,924 71%
Engineering and 976 6% 994 5% 2,105 8% 1,975 5%
development
Selling, general 3,498 22% 4,244 22% 6,846 25% 7,423 20%
and admin.
Total costs and 14,877 95% 18,627 94% 25,431 94% 35,322 97%
expenses
Operating income 708 5% 1,100 6% 1,669 6% 1,211 3%
Other income 143 1% 74 0% 229 1% 289 1%
Income before taxes 851 5% 1,174 6% 1,898 7% 1,500 4%
Income tax expense 416 3% 732 4% 987 4% 898 2%
Net income 435 3% 442 2% 911 3% 602 2%
CSP, INC. AND SUBSIDIARIES SCHEDULE II
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD TO PERIOD DOLLAR AND PERCENTAGE CHANGE
(Dollars in thousands)
(Unaudited)
/-For the three months-/ /-For the six months-/
ended ended
February 26,1999 vs February 27, 1998
$ % $ $
Change Change Change Change
Sales ($4,142) (21%) ($9,433 (26%)
)
Costs and expenses:
Cost of sales (2,986) (22%) ($9,444 (36%)
)
Engineering and development (18) (2%) 130 7%
Selling, general & admin. (746) (18%) (577) (8%)
Total costs and expenses (3,750) (20%) (9,891) (28%)
Operating income (392) (36%) 458 38%
Other income 69 93% (60) (21%)
Income before income taxes (323) (28%) 398 27%
Income tax expense (316) (43%) 89 10%
Net income ($7) (2%) 309 51%
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
b) Exhibits
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: April 8, 1999 By: /s/Alexander R. Lupinetti
Chief Executive Officer
and President
Date: April 8, 1999 By: /s/Gary W. Levine
Vice President of Finance
and Chief Financial Officer