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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended August 31, 2001
Commission File Number 0-10843
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CSP Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2441294
(State of Incorporation) (IRS Employer Identification Number)
43 Manning Road, Billerica, Massachusetts 01821-3901 (978) 663-7598
(Address and telephone number of principal executive offices)
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act
Common Stock (par value $0.01 per share)
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Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of November 21, 2001, there were 3,511,392 shares of Common Stock
outstanding. The aggregate market value of shares of such Common Stock (based
upon the last sale price of $3.54 of a share as reported for November 21, 2001
on the NASDAQ National Market System) held by non-affiliates was approximately
$12,430,327.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Proxy Statement to be dated November 30,
2001 in connection with Registrant's 2001 Annual Meeting of Stockholders
scheduled to be held on January 29, 2002 are incorporated by reference in Part
III hereof.
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PART I
Item 1. Business
(a) General Development of Business
CSP Inc. ("CSPI" or the "Company") was founded in 1968 and is based in
Billerica, Massachusetts, just off Route 128 in the Boston computer corridor.
To meet the diverse requirements of its industrial, commercial, scientific and
defense customers worldwide, CSPI and its subsidiaries develop and market
software for E-business solutions and image-processing, network management and
storage systems integration services and high-performance cluster computer
systems.
On June 27, 1997, CSPI acquired the assets of MODCOMP/Cerplex L.P.
("MODCOMP"), a wholly owned subsidiary of The Cerplex Group Inc. for $8,709,000
in cash. This transaction was accounted for as a purchase. This multi-national
subsidiary provides network integration services including, consulting, system
integration and outsourcing. WAP66(TM), MODCOMP's newest product, makes
existing enterprise data available to mobile business (M-business). In
addition, MODCOMP's ViewMax(R) is an Internet software product that allows
companies to easily integrate their IT systems with Internet technology for E-
commerce applications. MODCOMP sells all products through its own direct sales
force in the U.S., Germany, and the United Kingdom. MODCOMP sells via a
worldwide organization of distributors in the rest of the world.
In 1988, the Company established the Scanalytics product group to develop
and market imaging systems for molecular and cell biology. In June 1997, the
Company acquired the assets of Signal Analytics Corp. ("Signal"), a software
company that provides products for scientific imaging to the life science and
biotechnology fields. CSPI purchased the assets of Signal for $2,159,000 in
cash. This transaction was accounted for as a purchase. In June 1997, the
Scanalytics product group was consolidated with the assets acquired from Signal
and was setup as a wholly-owned subsidiary called Scanalytics, Inc.
("Scanalytics"). Scanalytics specializes in the development and marketing of
highly sophisticated image capture and analysis software products used by
researchers in the biological and physical sciences. By integrating these
software products with a diverse group of image-capture devices, Scanalytics is
able to solve application-specific problems in biotechnology and life science
research including Digital Microscopy, Genomics, and High-Throughput Screening.
Scanalytics sells both direct and through a network of distributors and
resellers.
The CSPI MultiComputer Division ("MultiComputer Division") helps its
customers solve high-performance computing problems in the medical imaging and
defense markets by supplying very dense multiprocessing systems distinguished
by elegant packaging and high-speed node-to-node communications in a completely
integrated architecture. These systems are used in a broad array of
applications, including radar, sonar and surveillance signal processing. The
MultiComputer Division sells all products through its own direct sales force in
the U.S. and via a worldwide organization of distributors in the rest of the
world.
(b) Financial Information about Industry Segments
The Company considers its products to be of four segments: Systems, System
and Service Integration, E-Commerce Software, and Other Software. The following
table presents sales by industry segment:
2001 % 2000 % 1999 %
------- --- ------- --- ------- ---
(Dollars in thousands)
Systems.............................. $ 8,430 20% $12,772 21% $15,555 30%
System and service integration....... $29,693 71% $45,597 73% $32,978 64%
E-Commerce software.................. $ 1,906 5% $ 1,810 3% $ 790 1%
Other Software....................... $ 1,887 4% $ 1,842 3% $ 2,372 5%
------- --- ------- --- ------- ---
Total Sales........................ $41,916 100% $62,021 100% $51,695 100%
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Additional segment information and financial information about the Company's
foreign operations is included in Note 12 to the Consolidated Financial
Statements of the Registrant included in Item 8.
(c) Narrative Description of Business
The Company and its subsidiaries develop and market Internet software for E-
commerce solutions, image-processing software, network management integration
services and high-performance cluster computer systems.
Products and Services
CSPI MultiComputer Division Products
CSPI MultiComputer Division supplies very dense high-performance cluster
computer systems ("HPC") for the high-end scientific/technical/defense
computing markets and high-performance embedded computer systems ("HPEC") for
the signal/image processing market. Applications expertise, product innovation,
strong technical support, and dedicated customer support make CSPI one of the
industry's leading providers of high-performance cluster computer systems.
Applying its three plus decades of experience, the CSPI MultiComputer
Division designs, manufactures, sells and services high-performance cluster
computer systems for compute intensive applications needing tens to hundreds of
processors interconnected with a very high bandwidth network. All the CSPI
MultiComputer Division's current products are easily scalable to very large
size, are specially designed to require minimum space and power and are based
upon open and standard hardware and software components.
The 2000 SERIES MultiComputer and FastCluster are the MultiComputer
Division's newest products. Product improvements as well as new complimentary
products beneficial to both of these product lines are continuously under
development.
FastCluster Products
In April of fiscal year 2000, CSPI MultiComputer Division introduced the
FastCluster line of high-performance cluster computer systems incorporating
hundreds of processors, all interconnected by a very high-bandwidth network.
FastCluster systems are very dense Linux cluster computers designed to meet the
needs of a wide range of computationally intensive applications in the military
computer marketplace. Applications areas include radar and sonar signal
processing, command and control, communications and intelligence.
FastCluster offers customers a very dense open hardware platform including
the most modern processors, memory and networking components, easy upgrades
through continuous insertion of the latest technologies and seamless
application reuse through the use of industry standards, such as Open Source
Software (OSS) including Linux, MPI and VSIPL. The superior architectural
design of FastCluster products is based on 7400 processors from Motorola(TM)
incorporating AltiVec(TM) technology, high-speed memory and Myrinet(TM) 2000.
FastCluster products use the industry-standard Linux operating system for
PowerPC(TM) processors and are compatible with the full range of third party
software packages including FORTRAN compilers, vectorizers, math and image
processing libraries, debuggers, profilers and other cluster development and
run-time tools. CSPI MultiComputer's Linux-based products are offered with many
high-availability features including instant booting from a cold start, error-
correcting memory, a fault tolerant MPI-like library, hot-swappable hardware,
extended environmental specifications and built-in test.
Entry price for a 16 processor FastCluster desktop is under $100,000. Larger
FastCluster systems incorporating over 1000 processors are available and sell
for several million dollars. All FastCluster products are sold with standard
hardware and software warranties. Contract support and service are optionally
available from CSPI MultiComputer's support organization.
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2000 SERIES MultiComputer Products
2000 SERIES products are very dense high-performance cluster computer
systems especially designed to solve applications with demanding analysis of
complex signals and images in real time. Typical computational intense
applications requiring 2000 SERIES products include SONAR, RADAR and
stimulation applications within the defense market segment, CT and MRI
applications in the medical imaging market, stimulation/modeling for real-time
simulation markets and target/image/voice recognition in video and audio
processing markets.
The 2000 SERIES systems use the best of open systems technologies
incorporating the latest PowerPC(TM) RISC processors, Myrinet(TM) networking
technology, Message Passing Interface (MPI) software for interprocessor
communications and the VxWorks(R) real-time operating system. The 2000 SERIES
product offers very high density, low power and a full set of reliability,
maintainability and repairability features. The incorporation of open and
standard technologies in the 2000 SERIES systems ensures that customers receive
systems using the latest technology while reducing the risks associated with
proprietary technology.
The 2000 SERIES product line was first offered in fiscal year 1997. Several
new and improved versions of the 2000 SERIES have been offered since its
introduction. 2000 SERIES products have been shipped in a variety of
configurations, including multiple-chassis systems with over 400 processors.
SuperCard and Other Products
The MultiComputer Division continues to manufacture, sell and support
certain of its older products, principally the SuperCard product line.
SuperCards are VME-based board products that are incorporated into customized
signal processing systems by OEM customers. SuperCard products are no longer
being applied into new designs but are incorporated in systems still being
deployed by our customers. The SuperCard family line of embedded signal
processors employ multiple Intel i860 RISC microprocessors. Intel discontinued
production of the i860 at the end of the 1998 calendar year. CSPI has made
provisions to accommodate the future needs of its SuperCard customers.
Management believes current inventory levels of this product are adequate to
support future customer needs.
CSPI MultiComputers supplies, on an "as available' basis, support for other
older products, some initially released a decade or more ago, still in use by
our customers, mainly on critical applications within the defense industry.
Scanalytics, Inc.
Scanalytics gives "sight" to computers by creating software that captures
images from digital cameras and scanners and extracts information from those
images. The Company integrates those software products with off-the-shelf
hardware components to create high-performance vision systems that support
scientific researchers in the biological and the physical sciences. During
2000, Scanalytics focused its efforts in three applications areas of
biotechnology and life science research: Digital Microscopy, Genomics, and High
Throughput Screening. Scanalytics' products are sold through two channels:
directly to researchers via Scanalytics' own sales force, and through a network
of international and domestic dealers, OEMs, and VARs.
Digital Microscopy
IPLab is a general-purpose image analysis software package. It was
originally available only on Macintosh computers, where IPLab has been called
"the de facto standard in Macintosh image analysis". Since then, IPLab has also
been programmed to work within the Windows operating systems. Add-on modules
for IPLab, called Extensions, provide application-specific functionality,
making IPLab extremely adaptable for a wide variety of customers and
industries. Extensions can easily be written by IPLab customers and third party
developers, as well as by Scanalytics itself. Scanalytics makes and markets
individual Extensions for
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multi-fluorescence microscopy, calcium-ratio imaging, 3-D image visualization,
time lapse studies, and microscope automation. The list price of Basic IPLab is
$2,995 and extensions range in price from $600 to $3,000.
Genomics
GeneProfiler is the backbone of Scanalytics software products oriented
towards Genomics. It is widely recognized as the most sophisticated and easy to
use software of its kind in the industry. Scanalytics makes several other
products within this group: OneDscan for either Macintosh or Windows provides
basic gel documentation and analysis, Gellab II+ is used for 2D gel analysis,
and DNAscan is a package for automatic sequencing of DNA sequencing gels.
Prices for these products range from $995 to $2,995.
High Throughput Screening
High Throughput Screening systems are characterized by a high density of
samples automated analysis and experimental repeatability. MicroArray Suite,
introduced by Scanalytics in 1999, is an extension to IPLab that was developed
by and licensed from the National Center for Human Genome Research at the
National Institutes of Health. This software package assists researchers in
analyzing microarrays, which are devices that let researchers evaluate
potential drug candidates by testing them against thousands of DNA fragments
simultaneously. MicroArray Suite is priced at $6,000. Scanalytics is continuing
development of the Elispot Imager in collaboration with the Navy Medical
Research Center. This system of software and hardware is used for immunological
assays. (Elispot stands for Enzyme Linked Immuno-Spot). ELISpot Imager is
priced at $21,000.
MODCOMP, Inc.
Integration Services
In recent years, MODCOMP's product offering has shifted away from the sales
of MODCOMP produced (proprietary and open architecture) hardware toward
integration solutions including hardware, software, special engineering, and
third party hardware and software. MODCOMP's value proposition is integrating
these components together into a complete solution and installing the system at
the customer site. These services are offered by all MODCOMP locations. In
particular, the German subsidiary has had significant successes in the
telecommunication market with the recent deregulation of that industry.
MODCOMP continues to sell and manufacture legacy systems and components,
especially as it relates to servicing current customers with replacement and/or
upgraded systems. MODCOMP's computer systems generally can be expanded without
major redesign as customer requirements change.
MODCOMP's computer systems are generally utilized in industrial plants,
research laboratories and data processing applications and operate in real-
time.
The purchase prices of MODCOMP's computer systems are typically priced from
$6,000 to $150,000, depending upon customer requirements.
Computer Hardware
In 1988, MODCOMP began selling RealStar family of computers, based on open
systems VME and Motorola 68 and 88k processor technology. This was a direct
result of faster processing technology and customer demand. MODCOMP provides
migration paths for CLASSIC proprietary customers with these systems. Prices
range from $15,000 to $100,000.
In July 1997, MODCOMP began the launch of its RealStar II line of computer
systems. This is a line of third party hardware based on Pentium processor
technology. This hardware is specially configured for
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optimum performance with MODCOMP's REAL/IX PX operating system. MODCOMP adds
additional components and software to these systems such as RAID subsystems,
interface cards, disks, video displays, to optimize them for the real-time,
process control market place. During fiscal year 1999, MODCOMP purchased a
license for ScadaBase from Access Ware in order to complement the capabilities
of the REAL/IX operating system. ScadaBase has also been programmed to work
with the LINUX operating system for applications like the monitoring of
Internet Service Provider's (ISP's) facilities. Prices for these systems range
from $6,000 to $25,000.
MODCOMP also continues to offer its proprietary CLASSIC and MODACS Systems,
parts and services, which it manufactures in its Fort Lauderdale headquarters.
The CLASSIC systems are mini and supermini computers designed specifically to
support real-time applications. The MODACS and MODACSX products are data
acquisition and control systems. Prices range from $15,000 to $150,000.
Computer Software and Computer Programming
MODCOMP's computers are supported by high-level operating software, referred
to as MAX, REAL/IX, REAL/IX PX and ScadaBase. This software is designed
specifically for optimum real-time performance. MODCOMP's software enables
customers to write their own real-time application software. These
applications, when combined with MODCOMP computers or third party computers,
create systems which simultaneously perform different control functions,
program tests and a batch processing operation with response and interrupt
times that are required in this marketplace. Prices range from $3,000 to
$35,000.
Legacy-Web Internet Integration Solutions
The Company also offers specialized programming and software engineering
services to supply customers with customized e-commerce solutions.
In fiscal year 1997, MODCOMP launched ViewMax(R) in the United States.
ViewMax(R) is a development environment that allows MODCOMP to rapidly re-
engineer and integrate legacy systems such as mainframe, midrange, and other
diverse host systems with Internet technology for E-commerce applications.
Using ViewMax(R) technology, MODCOMP creates solutions that can extend
corporate data to a much wider audience via a corporate Intranet, Extranet, or
the Internet. Using ViewMax(R), MODCOMP creates solutions that can also
integrate Electronic Commerce transactions with existing legacy systems.
Although the product has broad potential, the early adopters of this technology
have used it primarily for facilitating Electronic Commerce and creating
Extranets. Current ViewMax(R) customers are in the travel, insurance,
financial, health services, governmental and manufacturing/ distribution
markets. Prices for ViewMax(R) range from $40,000 to $250,000.
MODCOMP markets solutions using ViewMax directly to end-users. The direct
market is cross industry, to companies of substantial size, and is not
dependent on the fluctuations of any particular business segments. ViewMax(R)
is positioned primarily as an integration solution, with a strong focus on
Electronic Commerce, Intranet and Extranet implementations. In the US and UK, a
wide range of companies from a broad spectrum of industry have adopted it,
including travel, insurance, system integrators, automotive and consumer
electronics.
Wireless Portal Server Softwar
In fiscal 2000, MODCOMP launched WAP66 in Germany for the wireless market.
WAP66 is universal wireless transaction server software. Its configuration
toolset allows you to write once and deploy anywhere on any type of mobile
device. WAP66 automatically addresses the technical requirements to implement
the ability to combine dynamic content management with on the fly formatting
for optimal support of various mobile devices. In addition, WAP66 provides a
simple user administration system and strict session control that allows the
user to perform highly complex transactions for complete M-business solutions.
6
Markets, Marketing and Dependence on Certain Customers
MultiComputer Division
The MultiComputer Division markets its FastCluster cluster computer systems
into the high-end scientific/technical/commercial high-performance computing
(HPC) segment and markets its 2000 SERIES high-performance embedded computer
(HPEC) systems into signal/image processing segment with emphasis on analysis
of complex signals. The Company distributes its products in these markets as an
original equipment manufacturer (OEM) supplier to system integrators,
distributors and value added resellers (VARs).
FastCluster Markets
The MultiComputer Division's newly introduced FastCluster line of high-
performance cluster computer systems was designed to meet the needs of a wide
range of computationally intensive applications in the scientific/defense high-
performance computer marketplace. Typical applications in this market include
radar and sonar, signal processing, command and control, communications and
intelligence.
FastCluster brings to the high-performance cluster computing market a family
of products incorporating many important features differentiating it from all
other cluster computing offerings. FastCluster systems are distinguished by
their elegant packaging--providing the highest density and lowest power
consumption, high-speed node-to-node communications--providing optimum
performance with true scalability and a completely integrated architecture--
combining Linux, MPI, Myrinet and fault tolerance features. FastCluster systems
offer the high-performance cluster computing market the best combined
performance, features and price.
2000 SERIES Markets
2000 SERIES systems are sold primarily to prime contractors within the
defense industry for use in sonar and radar systems, simulators, speech
recognition equipment, night vision systems and signal & image analysis
computers.
New programs requiring signal/image processing and analysis equipment as
well as upgrades to existing military systems considered essential for
maintaining our military leadership continues at a steady rate. However, fewer
new programs are now funded into full deployment as the number of platforms
(ships, planes, tanks, etc.) for computer systems reduce in number. Both new
and upgrade programs require a substantial period of development and evaluation
time before products are deployed into field use. Time from development to
deployment varies based on the program, however, many programs are now
stretching out well beyond the historical twelve to twenty-four month time
period.
The MultiComputer division supplies commercial-off-the-shelf (COTS) products
to defense industry prime contractors who are being encouraged to use COTS
solutions rather than build systems in-house using proprietary designs. The
COTS initiative is in response to US Defense Department's efforts to contain
program costs and to improve the time and cost to insert new technology into
existing field equipment. This initiative is now being adopted by other
governmental procurement agencies around the world. 2000 SERIES MultiComputer
systems have been shipped to a number of customers developing COTS-based
systems or evaluating its use for future COTS programs.
SuperCard Products
The MultiComputer Division's SuperCard products are being used in programs
currently in deployment such as the U.S. Navy's sonar computers where they are
used to co-ordinate information from hydraphone sensor arrays in both ship-
based and shore-based installations. These programs typically stretch over many
years. The deployment phases of many programs incorporating SuperCards are now
nearing completion. SuperCards are also sold to medical imaging equipment
suppliers on an OEM basis. No new SuperCard based programs are anticipated.
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The MultiComputer Division sells all products through its own direct sales
force in the U.S. and via a worldwide organization of distributors in the rest
of the world.
MODCOMP
MODCOMP supplies and integrates network and storage solutions and designs,
manufactures, services and markets worldwide, high-speed mini-computers
principally for use in demanding real-time applications. These computer systems
are used in operations involving process measurement and control, power
production and distribution, manufacturing test and inspection, scientific data
collection and monitoring, as well as financing and other communications
networks. MODCOMP has expanded its product line by including third-party
equipment in their sales and servicing offerings. This new focus as a "total
solutions company" allows MODCOMP to meet the needs of their customers with a
variety of products including internally produced as well as those from third-
party manufacturers.
Sales to individual customers constituting 10% or more of total sales
consisted of sales to E-Plus of $16,630,000 (40%) in 2001. This customer is a
"wireless" telecommunication company in Germany. The Company anticipates that,
for the foreseeable future, a significant percentage of its sales will be
dependent upon a relatively small number of customers.
The Company markets its products through various sales offices in the U.S.,
Canada, Germany and England (for a detailed list see Item 2 of Form 10-K
contained herein). Throughout the remainder of the world, these offices
coordinate the activities of independent distributors and manufacturers
representatives who represent other company's product lines not competitive
with CSPI and are either paid a commission on units sold or are permitted to
buy units at a discount for subsequent resale.
Geographically, Europe accounts for approximately 67% of total sales.
Historically, approximately 80% of MODCOMP's revenue was generated
internationally. During the current year, MODCOMP had significant sales from
system integration customers in Germany. Accordingly, changes in market
conditions in European countries in which we operate may significantly affect
MODCOMP's performance.
The following table sets forth the amounts (in thousands of dollars) and
percentage of sales by geographical area during fiscal years 2001, 2000 and
1999.
Year Ended August 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Europe................................ $27,981 67% $43,882 71% $28,692 56%
North America......................... 13,411 32% 16,234 26% 18,632 36%
Asia.................................. 524 1% 1,690 3% 4,347 8%
Other................................. -- -- 215 -- % 24 -- %
------- --- ------- --- ------- ---
$41,916 100% $62,021 100% $51,695 100%
======= === ======= === ======= ===
Competition
CSPI MultiComputer Division
The MultiComputer market is very competitive. The MultiComputer Division
believes its products to be among the leaders in the use of open and standard
technologies, elegance in packaging and price/performance. All the markets are
characterized by rapid technological change, and the introduction of new
products with superior capabilities or lower pricing could adversely affect the
Company's business.
The future growth of the MultiComputer Division's markets depends upon
providing high density and scalability in a compact low power and inexpensive
package that can be easily integrated into original equipment manufacturers
(OEM) design for high performance computation. Since the majority of sales are
to
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OEMs, the principal barrier to competition is the reluctance of established
users to redesign their product once it is in production.
2000 SERIES Competition
The Company's direct competitors for the MultiComputer Division in the
defense market are Mercury Computer Inc. and Sky Computers, Inc. DSP board
manufacturers including DY4, Pentek, SBS, Spectrum Signal and Alacron that
specialize in the DSP segment of this market are indirect competitors. In the
low performance segment of the market general-purpose computer and single board
computer, manufacturers such as Motorola, Force, Hewlett Packard and Dell may
compete. New companies enter the field periodically, and larger companies with
greater technical resources and marketing organizations could decide to compete
in the future.
FastCluster Competition
Companies manufacturing general-purpose computer systems incorporating
multiple processors will be the principal competitors for the MultiComputer
Division's FastCluster products. FastCluster products are distinguished by
their elegant packaging providing the highest density and lowest power
consumption, high-speed node-to-node communications--providing true scalability
and optimum performance and a completely integrated architecture--combining
Linux, MPI, Myrinet and fault tolerance features. CSPI believes that its
FastCluster products offer the best value in combined performance, features and
price. FastCluster is a newly introduced product line and these distinguishing
characteristics may not overcome the capabilities of much larger companies
competing in this segment of the high-performance computer market.
Scanalytics, Inc.
In the Digital Microscopy market, Scanalytics' major competitors are Media
Cybernetics, Universal Imaging, and ImproVision. Other competitors include
Compix, Carl Zeiss, Intelligent Imaging, and QED Imaging. In the Genomics
market, major competitors include Genomic Solutions, Media Cybernetics, BioRad,
and Alpha Innotech. In the High Throughput Screening market, the only other
software company that competes directly with Scanalytics is BioDiscovery.
Competitors in all of these markets range from small, single product companies
to large, multinational instrument companies. Scanalytics maintains its
competitive advantage by offering high-value solutions.
MODCOMP, Inc.
MODCOMP's competition in its Process Control and Data Acquisition business
crosses product line boundaries. Competition in its proprietary product line is
with third party companies that have developed technical expertise with the
CLASSIC computer system family. Direct competitors include Accurate Computers,
Queue Systems, Protostar, and Electronic Visions.
Competitors for both MODCOMP's proprietary and open systems product lines
also include systems integrators with process control skills in markets such as
primary metals, oil and gas, power, rubber and plastics, pharmaceuticals,
chemicals, pulp and paper, and food and beverages. These competitors offer
alternative open systems hardware platforms and industry-specific tailored
application software packages.
MODCOMP's direct competition with its real-time UNIX operating system
include VxWorks, HP-UX, PowerMAX, Windows NT, Lynx, QNX, and Linux. As
performance in microprocessor technology rapidly advances, real-time
capabilities of competing operating systems narrows. Competing products are
differentiated by hardware platform support and operating system robustness.
The Company's principal direct competitors to ViewMax in the Legacy
Extension market space are IBM, Jacada, Attachmate, Clientsoft, Intelligent
Environments, and Enterprise Link. Companies such as Jacada,
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Attachmate and IBM have greater technical resources and marketing
organizations, and could adversely affect our position.
Competitors for MODCOMP's WAP66 transaction server software, in this new
wireless market segment, range from small, single product companies to large
multinational companies with much greater resources like Oracle, IBM, and
Microsoft.
In the network management and storage systems integration services business,
MODCOMP competitors are extensive and are different in each of the geographical
markets but they include such competitors as EDS, IBM, Sun Microsystems, and
Compaq.
Manufacturing, Assembly and Testing
All of the CSPI MultiComputer Division's manufacturing is performed at its
plant in Billerica, Massachusetts. The primary manufacturing process is the
assembly and test of printed circuit boards and systems, designed by the
Company and fabricated by other vendors. The Company endeavors to build for
inventory and offers products in a variety of standard formats. A small
percentage of sales reflect products customized to a particular customer's
specification, and even these products are easily reconfigurable should the
customer cancel the order for any reason.
Upon receipt of material by the Company from outside suppliers, products and
components are inspected by the Company's QC/QA technicians. During manufacture
and assembly, both subassemblies and completed systems are subjected to
extensive testing, including burn-in and vibration procedures designed to
minimize equipment failure. The Company also uses diagnostic programs to detect
and isolate potential component failures. A comprehensive log is maintained of
all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Myricom Inc., Arcadia, CA for the
networking technology integrated circuit devices used in 2000 SERIES
MultiComputer products. The Company has sufficient quantities of these
components on hand to satisfy anticipated demand. Myricom has assured the
Company that supplies will continue to be available for reasonable quantities
required.
SuperCard products were designed using the Intel i860 RISC microprocessor.
Intel discontinued production of the i860 at the end of the 1998 calendar year.
CSPI has made provisions to accommodate the future needs of all its SuperCard
customers for this product. No new application development programs will be
initiated incorporating SuperCard products. However, SuperCard products will
continue to be shipped into existing programs that have committed to the
SuperCard end-of-life plan.
The CSPI MultiComputer Division does not consider the risk of interruption
of supply to be significant to meet its projected revenue requirements for the
immediate future.
The CSPI MultiComputer Division provides a warranty covering defects arising
from products sold and service performed, which varies from 90 days to one year
depending upon the particular unit. However, warranties of substantially
greater scope have been extended to certain major customers for financial and
other considerations. The CSPI MultiComputer Division maintains a reserve for
warranty repairs equal to approximately 2% of product sales for the last 90
days.
The CSPI MultiComputer Division is approved for registration to ANSI/ASQC-
Q9001 under RAB and RvC accreditation. The ISO9001 category is the most
comprehensive, and incorporates every aspect of business from design, through
sales, to manufacturing and customer support.
Scanalytics ships all of its software products and manuals from the Fairfax
Virginia facility. Scanalytics performs system integration of computer
equipment with various image capture devices, such as microscopes or digital
cameras, at their facilities in Virginia before installation at the customer
site.
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MODCOMP's computer system production starts with the procurement of raw
materials, components, pcb's, cables, and prefabricated sheet metal. System
configurations can include a wide selection of peripheral subsystems built or
purchased under the original equipment manufacturer agreements. MODCOMP's
manufacturing facility is located in Fort Lauderdale, Florida. The process is
controlled by various quality steps throughout the manufacturing process. The
production cycle of an individual system generally takes between 30 and 45
days, depending on its complexity.
MODCOMP's manufacturing operations require a wide variety of mechanical and
electronic components, raw materials and other supplies. MODCOMP has more than
one commercial source of supply for most of the components and raw materials
that it uses, but is dependent on certain single-source suppliers for a
certain number of items. The supply situation is cyclical and shortages or
extended lead times for delivery have developed from time to time. Although to
date the Company has had no significant problems in procuring its material
requirements as needed, MODCOMP's operations could be seriously affected
should shortages become acute.
Customer Support
The MultiComputer Division and Scanalytics support its customers with
telephone assistance, on-site service, system installation, and training and
education. Product support service is provided by CSPI during the warranty
period. Customers may purchase extended software and hardware maintenance and
on-site service contracts for support beyond the warranty period. Each problem
reported by a customer is reviewed by an analyst who researches the issue and
assists the customer to resolve the problem.
The MultiComputer Division offers training courses at either corporate
headquarters or the customer site. Field and customer service support is
provided through its headquarters in Billerica, Massachusetts. Scanalytics
provides support service through its Fairfax, Virginia headquarters.
MODCOMP supports its customers in a number of ways including telephone
assistance, on-site service, installation of systems, training and education.
Service and parts warranty, generally of 90 days duration is provided on all
products. In addition, MODCOMP sells maintenance service contracts to
customers. MODCOMP also conducts customer training courses of one to three
weeks' duration on a fee basis either at their or the customer's location.
Field and customer service support is provided through offices
strategically located throughout the world.
Research and Development
During fiscal 2001, CSPI's expenses (including depreciation) for
engineering and development were approximately $3,823,000 (9% of sales)
compared to approximately $4,031,000 (6% of sales) and $4,199,000 (8% of
sales) in fiscal years 2000 and 1999, respectively. Expenditures for
engineering and development are expensed as they are incurred. The CSPI
MultiComputer Division expects to continue substantial expenditures, both in
additional applications software development and development of hardware and
software for multicomputers. Scanalytics Inc. will continue to expand its
product offering in software with its various products in gel and cell
analysis for life sciences and complete new releases of the PC version of the
IP Lab software product. CSPI MultiComputer Division's products and
development currently in process are intended to extend the usefulness and
marketability of existing products and introduce new products into existing
market segments. MODCOMP will continue development of the ViewMax and WAP66
products, Real/IX PX and AccessPoint for SCADA solutions.
During 2000, Scanalytics finalized its IPLab software to work under the
Windows operating systems, bringing it to parity with the Macintosh product.
Scanalytics also worked on three other major projects: improvements to the
MicroArray Suite product line for Macintosh; updates to the Macintosh products
to maintain their competitiveness; and development of the Elispot Imager.
11
Of CSPI MultiComputer's Division and Scanalytics 57 employees, 17
professional and staff employees were engaged in software and hardware
engineering and development activities as of August 31, 2001.
MODCOMP's Engineering and Development staff has developed various computers,
computer peripherals and software since 1970, which it continues to maintain
and enhance.
MODCOMP's principal products are the CLASSIC hardware and software line,
REAL/IX PX and special one-of-a-kind products requested by customers.
The CLASSIC hardware and software line is a proprietary line of mini-
computers and related software especially designed for the hard real-time
market and has been in existence since 1970.
REAL/IX PX is a modified version of the AT&T System V UNIX. It has been
modified to add determinism, fast interrupt handling, and fast contact
switching required by the hard real-time market. REAL/IX PX runs on the Intel
486 and Pentium line of computers.
Of MODCOMP's 117 employees, 5 professional and staff employees are engaged
in software and hardware engineering and development.
The Company does not have any patents that are material to its business.
Backlog
The Company's backlog of customer orders and contracts was approximately $
4,628,000 at August 31, 2001 as compared to $11,770,000 at August 31, 2000. The
backlog of the Company can fluctuate greatly. These fluctuations can be due to
the timing of receiving large orders for integration services and OEM
purchases.
Employees
On August 31, 2001, the Company had 174 employees. None of the Company's
employees is represented by a labor union and the Company had no work
stoppages. The Company considers relations with its employees to be good.
(c) Financial Information about Foreign and Domestic Operations and Export
Sales
A summary of net sales, attributable to CSPI's foreign and domestic
operations for the fiscal years ended August 2001, 2000 and 1999 is presented
at Note 12 to the Consolidated Financial Statements of the Registrant included
in item 8.
12
Item 2. Properties
Listed below are CSPI's principal facilities as of August 31, 2001.
Management considers all facilities listed below to be suitable for the
purpose(s) for which they are used, including manufacturing, research and
development, sales, marketing, service, and administration.
Owned or Approximate
Location Principal Use Leased Floor Area
-------- ----------------------------- -------- -----------
CSP Inc..................... Corporate Headquarters Leased 21,500 S.F.
43 Manning Road Manufacturing, Sales,
Billerica, MA Marketing, and Administration
Scanalytics, Inc............ Corporate Headquarters Leased 3,518 S.F.
8550 Lee Highway, Suite 400 Sales, Marketing, and
Fairfax, VA Administration
MODCOMP, Inc................ Corporate Headquarters Leased 77,429 S.F.
1650 West McNab Road Sales, Marketing, and
Ft. Lauderdale, FL Administration
MODCOMP Canada, Ltd......... Sales, Marketing, and Leased 730 S.F.
530 Otto Road Administration
Unit 11A
Mississaugu, Ontario Canada
Modular Computer System, Sales, Marketing, and Leased 1,837 S.F.
GmbH....................... Administration
Oskar-Jager-Strasse 125-143
D-50825
Koln Germany
MODCOMP, Ltd................ Sales, Marketing, and Leased 5,173 S.F.
Acorn House Administration
61 Peach Street
Wokingham RG40 1XP
United Kingdom
MODCOMP Systemhaus, GmbH.... Sales, Marketing and Service Leased 945 S.F.
Gartenstr. 23-27
61352 Bad Homburg
In addition to the facilities listed above, CSPI also leases space in
various domestic and international industrial centers for use as sales and
service offices.
Item 3. Legal Proceedings
MODCOMP is currently the defendant in a lawsuit, which arose, in the
ordinary course of business. Based in part on the opinion of legal counsel
representing the Company in this lawsuit, management is of the opinion that the
outcome of such litigation will not have a material adverse effect on the
Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded in the over-the-counter market and
is quoted on the NASDAQ System under the symbol "CSPI". The following table
sets forth the range of closing high and low selling prices for the Common
Stock as reported by NASDAQ.
2001 2000
----------- ------------
Fiscal Year High Low High Low
----------- ----- ----- ------ -----
1st Quarter......................................... $6.44 $3.69 $ 6.62 $4.56
2nd Quarter......................................... 4.25 2.63 17.00 4.69
3rd Quarter......................................... 4.25 3.28 17.00 5.37
4th Quarter......................................... 4.00 3.51 8.25 5.00
As of November 23, 2001, there were 3,511,392 shares of Common Stock
outstanding, held of record by approximately 113 stockholders. The Company
believes the number of beneficial owners of shares (including shares held in
street name) at that date were approximately 2,500.
The Company has never paid any cash dividends on its Common Stock. The
Company's present policy is to retain earnings to finance expansion and growth,
and no change in the policy is anticipated.
Item 6. Selected Financial Data
This information is set forth in the Selected Financial Data section of Item
8 (page 51).
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
This information is set forth in the Management's Discussion and Analysis of
Financial Conditions and Results of Operations section of Item 8.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company, in the normal course of doing business, is exposed to the risks
associated with foreign currency exchange rates. The Company does not hold any
market risk sensitive instruments, and minimizes its exposure through judicious
management of its international assets and liabilities.
The Company minimizes its foreign inventory levels, and enters into foreign
currency transactions only in those countries where it has foreign operations,
and is therefore able to offset resultant assets with local liabilities.
14
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements and supplementary data for
CSP Inc. are included herein.
Page
-----
Independent Auditors' Report............................................. 22
Consolidated Balance Sheets as of August 31, 2001 and August 31, 2000.... 23
Consolidated Statements of Operations for the years ended August 31,
2001, August 31, 2000 and August 27, 1999............................... 24
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 2001, August 31, 2000 and August 27, 1999.................... 25
Consolidated Statements of Cash Flows for the years ended August 31,
2001, August 31, 2000 and August 27, 1999............................... 26
Notes to Consolidated Financial Statements............................... 27-39
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None
15
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
Proxy Statement to be dated November 30, 2001 in connection with its Annual
Meeting of Stockholders to be held on January 29, 2002 ("Registrant's 2001
Proxy Statement").
(b) Identification of Executive Officers
Information about the executive officers of the Company is set forth below.
Name and Age Business Affiliations
------------ ---------------------
Alexander R. Lupinetti (56) Chairman, Chief Executive Officer and President of
CSPI since October 1996; President and Chief
Executive Officer of each of the TCAM Systems
Inc., Shared Systems Corporation and SoftCom
Systems, Inc. subsidiaries of Stratus Computer
Inc. from 1987 to 1996.
Gary W. Levine (53) Vice President of Finance and Chief Financial
Officer of CSPI since September 1983; Controller
of CSPI from May 1983 to September 1983.
Scott M. Mitchell (45) Vice President of Corporate Business Development
of CSPI since August 2001; Chief Operating Officer
of Dataware Solutions, Inc. from 2000 to 2001;
Busines Unit Manager--Engineering Staffing Service
of Adept, Inc. from 1998 to 2000 Director of
Marketing Programs of Stratus Computer, Inc. from
1995 to 1998; UNIX Business Development Manager of
Stratus Computer, Inc. from 1991 to 1995.
Amy J. Dexter (35) Treasurer of CSPI since September 1999; Corporate
Controller of CSPI since February 1999 and from
October 1993 to March 1997; Manager of Financial
Reporting of SierraCom from July 1998 to February
1999; Controller of Microwave Radio
Communications, a division of California
Microwave, Inc. (currently known as Adaptive
Broadband) from March 1997 to July 1998; Senior
Accountant at Robert Allen Fabrics from October
1992 to October 1993; Supervising Senior
Accountant at KPMG LLP from July 1988 to October
1992.
William E. Bent, Jr. (45) Vice President of CSPI and General Manager of
MultiComputer Division since July 2000; Vice
President of Engineering for MultiComputer
Division from October 1999 to July 2000; Director
of Engineering for MultiComputer Group from March
1996 to October 1999; Sr. Technical Manager of
Optronics, An Intergraph Division, from 1989 to
March 1996.
Fernando Delaville (44) President and Chief Executive Officer of
Scanalytics since April 2000; Biomedical Products
Manager at Atto Instruments, LLC from May 1998 to
April 2000; Manager of Microscopy Applications at
Scanalytics from September 1992 to April 1998;
Biomedical Equipment Specialist at Thomas
Jefferson University from November 1989 to August
1992; Research Scientist at University of
Massachusetts Medical Center from February 1987 to
October 1989.
(c) Identification of Certain Significant Employees
None
16
(d) Family Relationships
There is no family relationship between any director and executive officer
of the Company.
(e) Business Experience
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in registrant's
2001 Proxy Statement with respect to the business experience of Registrant's
directors. The information called for by this Item 10 with respect to executive
officers of Registrant is included in Part III Item 10 (b) of this Form 10-K.
(f) Involvement in Certain Legal Proceedings
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Election of Directors" in Registrant's
2001 Proxy Statement.
(g) Compliance with Section 16(a) of the Exchange Act
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in Registrant's 2001 Proxy Statement.
Item 11. Executive Compensation
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Executive Compensation" in
Registrant's 2001 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Registrant's 2001 Proxy Statement.
(b) Security Ownership of Management
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Registrant's 2001 Proxy Statement.
(c) Changes in Control
The Registrant knows of no contractual arrangements, including any pledge by
any person of securities of the Registrant, the operation of which may at a
subsequent date result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions
The Registrant hereby incorporates by reference in this Form 10-K certain
information contained under the captions "Security Ownership of Certain
Beneficial Owners and Management," "Election of Directors" and "Executive
Compensation" in Registrant's 2001 Proxy Statement.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statement filed as part of this report:
Independent Auditors' Report.......................................... 22
Consolidated Balance Sheets as of August 31, 2001 and August 31,
2000................................................................. 23
Consolidated Statements of Operations for the years ended August 31,
2001, August 31, 2000 and August 27, 1999............................ 24
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 2001, August 31, 2000, and August 27, 1999................ 25
Consolidated Statements of Cash Flows for the years ended August 31,
2001, August 31, 2000, and August 27, 1999........................... 26
Notes to Consolidated Financial Statements............................ 27-39
(2) Financial Statement Schedules
All other financial statements and schedules not listed have been omitted
since the required information is included in the Consolidated Financial
Statements or the Notes thereto of the Registrant included in Item 8, or is not
applicable, material or required.
(3) Exhibits
Certain of the Exhibits listed hereunder have previously been filed with the
Commission and are hereby incorporated by reference pursuant to Rule 12b-32
under the Securities Exchange Act of 1934 and Rule 24 of the Commissions Rules
of Practice. The location of each document so incorporated by reference is
noted parenthetically.
3.1 Articles of Organization and amendments thereto, of the Company as of
the end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the year ended
August 31, 1990)
3.2 By-Laws of the Company, as amended through March 21, 1995
10.1 1981 Incentive Stock Option Plan as amended (Exhibit 10.3 to the Form S-
8, File No. 2-79414, 1987 Registration Statement)
10.2 Mr. Ochlis' Employment and Deferred Compensation Agreement dated January
5, 1987 (Exhibit 10.5 to the Form S-8, File No. 2-79414, 1987
Registration Statement)
10.3 Form of Invention Agreement between the Company and certain of its
employees
10.4 CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8
amendment 2 to Form 10-K for year ended August 31, 1986, dated February
23, 1987)
10.5 Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5,
1987 as amended (Exhibit 10.11 to Form 10-K for year ended August 31,
1990)
10.6 Amendment to Mr. Ochlis' Employment and Deferred Compensation Agreement
dated March 20, 1989 (Exhibit 10.9 to Form 10-K for year ended August
31, 1991)
10.7 1991 Incentive Stock Option Plan (the Plan is included in the Company's
Proxy Statement dated November 10, 1991 with respect to the Annual
Meeting of Stockholders of the Company on December 10, 1991)
10.8 Retirement Agreement for Edmund U. Cohler (Exhibit 10.9 to Form 10-K for
the year ended August 26, 1994)
18
10.9 Symbology Reader License Agreement between UPS and CSPI (Exhibit 10.9 to
Form 10-K for the year ended August 26, 1994)
10.10 Software License Agreement between UPS and CSPI (Exhibit 10.12 to Form
10-K for the year ended August 26, 1994)
10.11 Patent Agreement between UPS and CSPI (Exhibit 10.13 to Form 10-K for
the year ended August 26, 1994)
10.12 Amendment to Mr. Ochlis' Employment Deferred Compensation Agreement
dated February 6, 1995 (Exhibit 10.13 to Form 10-K for the year ended
August 25, 1995)
10.13 Employment Agreement between CSP Inc. and Mr. Lupinetti dated September
12, 1996 (Exhibit 10.14 to Form 10-K for the year ended August 30, 1996)
10.14 Signal Analytics Purchase Agreement (Exhibit 10.14 to Form 10-K for the
year ended August 29, 1997)
10.15 Modcomp/Cerplex L.P. Purchase Agreement (Exhibit 10.15 to Form 10-K for
the year ended August 29, 1997)
10.16 Lease Agreement for property located at 43 Manning Road, Billerica, MA
between CSP Inc. and New Boston (sold to CalEast in July 2001 )
11.0 Basic and Diluted Earnings Per Share Computation for the years ended
August 31, 2001, August 31, 2000, and August 27, 1999
22.1 Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year
ended August 31, 2001)
23.0 Consent of Independent Certified Public Accountants
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CSP INC.
/s/ Alexander R. Lupinetti
By: _________________________________
Alexander R. Lupinetti
Chief Executive Officer, President
and Chairman
Date: November 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Registrant and in
the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/ Alexander R. Lupinetti Chief Executive Officer, November 27, 2001
______________________________________ President and Chairman
Alexander R. Lupinetti
/s/ Gary W. Levine Vice President of Finance, November 27, 2001
______________________________________ Chief Financial Officer
Gary W. Levine
/s/ J. David Lyons Director November 27, 2001
______________________________________
J. David Lyons
/s/ C. Shelton James Director November 27, 2001
______________________________________
C. Shelton James
/s/ Sandford Smith Director November 27, 2001
______________________________________
Sandford Smith
/s/ Robert Williams Director November 27, 2001
______________________________________
Robert Williams
20
CSP INC.
ANNUAL REPORT ON FORM 10-K
Item 8
Financial Statements and Supplementary Data
Year Ended August 31, 2001
21
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of CSP Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CSP Inc. and
subsidiaries as of August 31, 2001 and 2000 and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended August 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSP Inc.
and subsidiaries as of August 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the years in the three year period
ended August 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
October 2, 2001
Boston, Massachusetts
22
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
August 31, August 31,
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,398 $ 3,923
Short-term investments................................. 12,330 9,150
Accounts receivable, net of allowance for doubtful
accounts of $261 in 2001
and $409 in 2000...................................... 5,731 6,841
Inventories............................................ 5,312 5,793
Deferred income taxes.................................. 942 1,104
Other current assets................................... 921 800
------- -------
Total current assets............................... 26,634 27,611
------- -------
Property, equipment and improvements, net................ 1,417 3,201
------- -------
Other assets:
Long-term investments................................ 350 2,471
Land held for future development..................... -- 163
Deferred income taxes................................ 1,602 1,122
Goodwill, net of accumulated amortization of $765 and
$580 in 2001
and 2000............................................ 754 939
Other assets......................................... 1,592 1,549
------- -------
Total other assets................................. 4,298 6,244
------- -------
Total assets....................................... $32,349 $37,056
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 4,221 $ 5,189
Income taxes payable................................... 485 813
Total current liabilities.......................... 4,706 6,002
------- -------
Deferred compensation and retirement plans............. 3,869 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.................................... 16,359 19,962
Accumulated other comprehensive income............... (1,000) (1,079)
26,635 29,994
Less treasury stock, at cost, 571 and 491 shares....... 2,861 2,548
------- -------
Total shareholders' equity......................... 23,774 27,446
------- -------
Total liabilities and shareholders' equity......... $32,349 $37,056
======= =======
See accompanying notes to consolidated financial statements.
23
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 31, 2001, August 31, 2000 and August 27, 1999
(Amounts in thousands, except for per share data)
2001 2000 1999
------- ------- -------
Sales:
Systems............................................ $ 8,430 $12,772 $15,555
System and service integration..................... 29,693 45,597 32,978
E-Commerce software................................ 1,906 1,810 790
Software........................................... 1,887 1,842 2,372
------- ------- -------
Total sales...................................... 41,916 62,021 51,695
------- ------- -------
Cost of sales:
Systems............................................ 5,286 4,907 6,447
Service and system integration..................... 25,426 38,304 24,725
E-Commerce software................................ 764 781 375
Software........................................... 539 507 528
------- ------- -------
Total cost of sales.............................. 32,015 44,499 32,075
------- ------- -------
Gross profit....................................... 9,901 17,522 19,620
------- ------- -------
Operating expenses:
Engineering development............................ 3,823 4,031 4,199
Selling, general & administrative.................. 8,905 12,320 13,100
Restructuring...................................... 85 64 310
------- ------- -------
Total operating expenses......................... 12,813 16,415 17,609
------- ------- -------
Operating income (loss).............................. (2,912) 1,107 2,011
------- ------- -------
Other income(expense):
Dividend income.................................... 24 11 32
Interest income.................................... 554 548 442
Interest expense................................... (98) (89) (40)
Loss on disposal of French operation............... (423) (240) --
Gain on sale of property........................... 1,545 -- --
Impairment charge on investments................... (1,205) -- --
Other.............................................. (207) 331 178
------- ------- -------
Total other income, net.......................... 190 561 612
------- ------- -------
Income (loss) before income taxes.................. (2,722) 1,668 2,623
Provision for income taxes......................... 163 993 1,364
------- ------- -------
Net income (loss)................................ $(2,885) $ 675 $ 1,259
======= ======= =======
Net income (loss) per share-basic.................. $ (0.82) $ 0.19 $ 0.35
======= ======= =======
Weighted average shares outstanding-basic.......... 3,527 3,572 3,597
======= ======= =======
Net income (loss) per share-diluted................ $ (0.82) $ 0.18 $ 0.35
======= ======= =======
Weighted average shares outstanding-diluted........ 3,527 3,663 3,641
======= ======= =======
See accompanying notes to consolidated financial statements.
24
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended August 31, 2001, August 31, 2000 and August 27, 1999
(Amounts in thousands)
Accumulated
Additional other Total
paid-in Retained comprehensive Treasury Shareholders Comprehensive
Shares Amount Capital earnings income stock Equity income (loss)
------ ------ ---------- -------- ------------- -------- ------------ -------------
Balance, August 28,
1998................... 3,991 $40 $10,631 $18,028 $ (99) $(2,060) $26,540 --
Comprehensive income:
Net income............. -- -- -- 1,259 -- -- 1,259 $ 1,259
Other comprehensive
income (loss):
Unrealized gain(loss)
on available-for--
sale securities -- -- -- -- 19 -- 19 19
Effect of foreign
currency
translation.......... -- -- -- -- (376) -- (376) (376)
-------
Total comprehensive
income.............. 902
=======
Exercise of stock
options................ 7 -- 36 -- -- -- 36
Issuance of shares under
employee stock purchase
plan................... 22 -- 145 -- -- -- 145
Issuance of treasury
stock.................. -- -- -- -- -- 2 2
Purchase of treasury
stock.................. -- -- -- -- -- (260) (260)
----- --- ------- ------- ------- ------- -------
Balance, August 27,
1999................... 4,020 40 10,812 19,287 (456) (2,318) 27,365
Comprehensive income:
Net income............. -- -- -- 675 -- -- 675 675
Other comprehensive
income (loss):
Unrealized gain
(loss) on available-
for-Sale
securities........... -- -- -- -- (33) -- (33) (33)
Effect of foreign
currency
translation.......... -- -- -- -- (590) -- (590) (590)
-------
Total comprehensive
income.............. 52
=======
Exercise of stock
options................ 35 1 196 -- -- -- 197
Issuance of shares under
employee stock purchase
plan................... 14 -- 62 -- -- -- 62
Purchase of treasury
stock.................. -- -- -- -- -- (230) (230)
----- --- ------- ------- ------- ------- -------
Balance August 31,
2000................... 4,069 41 11,070 19,962 (,079) (2,548) 27,446
Comprehensive income:
Net income (loss)...... -- -- -- (2,885) -- -- (2,885) (2,885)
Other comprehensive
income (loss):
Unrealized gain(loss)
on available-for-
sale securities...... -- -- -- -- (68) -- (68) (68)
Effect of foreign
currency
translation.......... -- -- -- -- 147 -- 147 147
-------
Total comprehensive
loss................ $(2,800)
=======
Exercise of stock
options................ 2 -- 7 -- -- -- 7
Issuance of shares under
employee stock purchase
plan................... 14 -- 56 -- -- -- 56
Purchase of treasury
stock.................. -- -- -- -- -- (313) (313)
Dividend distribution of
shares of Vertical
Buyer.................. -- -- -- (718) -- -- (718)
Income tax benefit
related to exercise of
stock options.......... -- -- 102 -- -- -- 102
----- --- ------- ------- ------- ------- -------
Balance August 31,
2001................... 4,085 $41 $11,235 $16,359 $(1,000) $(2,861) $23,774
===== === ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
25
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 31, 2001, August 31, 2000 and August 27, 1999
(Amounts in thousands)
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss)................................ $ (2,885) $ 675 $ 1,259
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:
Depreciation and amortization.................. 964 1,388 1,245
Gain on sale of property, net.................. (1,318) -- --
Impairment charge on investments............... 1,205 -- --
Deferred compensation and retirement plans..... 261 35 210
Deferred income taxes.......................... (318) (387) 397
Income tax benefit related to exercise of stock
options....................................... 102 -- --
Other assets................................... (43) (171) 87
Changes in current assets and liabilities:
Decrease in accounts receivable, net.......... 1,110 554 303
Decrease in inventories....................... 481 12 503
(Increase)decrease in other current assets.... (121) 745 (297)
Decrease in accounts payable and accrued
expenses..................................... (968) (939) (271)
Increase(decrease)in income taxes payable..... (328) 766 (1,328)
-------- -------- --------
Net cash provided by (used in ) operating
activities...................................... (1,858) 2,678 2,108
-------- -------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities..... (344) (707) (458)
Purchases of held-to-maturity securities....... (47,865) (36,177) (18,637)
Sales of available-for-sale securities......... 472 525 289
Maturities of held-to-maturity securities...... 44,687 35,221 18,093
Proceeds from sale of property, net of
expenses...................................... 3,097 -- --
Purchases of property, equipment and
improvements.................................. (611) (805) (1,106)
-------- -------- --------
Net cash used in investing activities............ (564) (1,943) (1,819)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock options.................... 7 197 36
Proceeds from issuance of shares under employee
stock purchase plan........................... 56 62 145
Purchase of treasury stock..................... (313) (230) (258)
-------- -------- --------
Net cash provided by(used in) financing
activities...................................... (250) 29 (77)
-------- -------- --------
Effects of exchange rate on cash................. 147 (590) (376)
-------- -------- --------
Net increase (decrease) in cash.................. (2,525) 174 (164)
Cash and cash equivalents, beginning of year..... 3,923 3,749 3,913
-------- -------- --------
Cash and cash equivalents, end of year........... $ 1,398 $ 3,923 $ 3,749
======== ======== ========
Supplementary cash flow information:
Cash paid for income taxes, net................ $ 756 $ 896 $ 2,750
======== ======== ========
Cash paid for interest......................... $ 108 $ 105 $ 54
======== ======== ========
Non-cash distribution of dividends............. $ 718 -- --
======== ======== ========
See accompanying notes to consolidated financial statements.
26
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Organization and Business
The Company designs, manufactures and markets high-performance
multiprocessing systems for real-time applications, which are small, low-power
special-purpose computers that enhance a system's ability to perform high-speed
arithmetic. The Company also sells Internet software solutions, real-time
process control systems, systems integration and services as well as develops
and markets hardware and software for scientific imaging.
1. Summary of Significant Accounting Policies
Fiscal Year
The Company changed its fiscal year end from the last Friday in August to
the last day in August for Fiscal 2000. In Fiscal 1999 each quarter was 13
weeks in length ending on the last Friday of the quarter. In Fiscal 2000 each
quarter ended on the last day of the last month of the quarter. Fiscal Year
2000 was 53 weeks in length compared to 52 weeks in Fiscal 1999. Effective on
September 1, 2001, the Company changed its fiscal year end from August 31 to
September 30. This change was effective for the one-month period ended
September 30, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated
into US dollars at the exchange rate in effect at the balance sheet date.
Revenue and expenses are translated at average rates in effect during the
period. The resulting translation adjustment is reflected as accumulated other
comprehensive income, a separate component of shareholders' equity on the
consolidated balance sheets.
Investments
The Company classifies its investments at the time of purchase as either
held-to-maturity or available-for-sale. Held-to-maturity securities are those
investments which the Company has the ability and intent to hold until
maturity. Held-to-maturity securities are recorded at cost, adjusted for the
amortization of premiums and discounts which approximates market value.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses net of the related tax effect on available-for-sale securities are
reported in accumulated other comprehensive income, a component of
stockholders' equity, until realized. The estimated fair market values of
investments are based on quoted market prices as of the end of the reporting
period.
Interest income is accrued as earned. Dividend income is recognized as
income on the date the stock trades "ex-dividend". The cost of marketable
securities sold is determined by the specific identification method and
realized gains or losses are reflected in income.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets by measuring
the carrying amount of the assets against the related estimated undiscounted
future cash flows. When an evaluation indicates that the future undiscounted
cash flows are not sufficient to recover the carrying value of the assets, the
asset is adjusted to its estimated fair value.
27
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
The excess of fair value over net assets acquired (goodwill) is principally
amortized over 15 years. Management assesses impairments of goodwill on a
periodic basis by comparing discounted future cash flows to the carrying value
of goodwill.
Inventories
Inventories are stated at the lower of cost or market; with cost determined
principally by the average-cost method, which approximates the first-in, first-
out method.
Property, Equipment and Improvements
The components of property, equipment and improvements are stated at cost.
The Company provides for depreciation by use of the straight-line method over
the estimated useful lives of the related assets.
Product Warranty
The Company ordinarily provides a one-year warranty. In addition, certain
major customers are granted extended warranties. The Company accrues estimated
warranty costs at the time of sale.
Revenue Recognition
CSPI sells its software offerings and recognizes its revenue as follows:
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 cash is collected.
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.
Engineering and Development Expenses
Engineering and development expenditures for company-sponsored projects are
charged to expenses as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
28
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share of Common Stock
On April 12, 1999, the Company announced an eleven-for-ten stock split in
the form of a common stock dividend distributed on May 7, 1999 to stockholders
of record on April 21, 1999. On October 14, 1998, the Company announced an
eleven-for-ten stock split in the form of a common stock dividend distributed
on November 16, 1998 to stockholders of record on October 26, 1998. All per
share data and number of common stock shares contained in the annual report
reflect the stock dividends of April 12, 1999.
Basic net income (loss) per common share is computed by dividing net income
(loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per common
share reflects the maximum dilution that would have resulted from the assumed
exercise and share repurchase related to dilutive stock options and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding.
The reconciliation of the numerators and denominators of the basic and
diluted net income per share computations for the Company's reported net income
is as follows:
2001 2000 1999
------- ------ ------
(Amounts in
thousands, except per
share)
Net income (loss)...................................... $(2,885) $ 675 $1,259
Weighted average number of shares outstanding--basic... 3,527 3,572 3,597
Incremental shares from the assumed exercise of stock
options............................................... -- 91 44
------- ------ ------
Weighted average number of shares outstanding--
dilutive.............................................. 3,527 3,663 3,641
======= ====== ======
Net income (loss) per share--basic..................... $ (0.82) $ 0.19 $ 0.35
======= ====== ======
Net income (loss) per share--diluted................... $ (0.82) $ 0.18 $ 0.35
======= ====== ======
Options to purchase 429,728 shares of common stock in 2001, 11,800 shares of
common stock in 2000 and 27,618 shares in 1999, were outstanding during the
years then ended, but were not included in the year-to-date 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides new
guidance on the accounting for a business combination at the date a business
combination is completed. Specifically, it requires use of the purchase method
of accounting for all business combinations initiated after June 30, 2001,
thereby eliminating use of the pooling-of-interests method. The provisions of
SFAS 141 are effective immediately, except with regard to business combinations
initiated prior to June 30, 2001. SFAS 142 will be effective as of January 1,
2002. Goodwill and other intangible assets determined to have an indefinite
useful life that are acquired in a business combination completed after July 1,
2001, will not be amortized, but will continue to be evaluated for impairment
in accordance with appropriate pre-SFAS 142 accounting literature. Goodwill and
other intangible assets acquired in business combinations completed before July
1, 2001 to the adoption of SFAS 142. The
29
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company does not believe there will be a material effect from the adoption of
these new standards. SFAS No. 142 establishes new guidance on how to account
for goodwill and intangible assets after a business combination is completed.
Among other things, it requires that goodwill and certain other intangible
assets will no longer be amortized and will be tested for impairment at least
annually and written down only when impaired. This statement will apply to
existing goodwill and intangible assets, beginning with fiscal years starting
after December 15, 2001. The Company is currently evaluating these
statements.which the Company anticipates will result in no goodwill
amortization in post implementation years versus goodwill amortization of
$185,000 in each of the last three fiscal years.
FASB recently issued SFAS 143, "Accounting for Asset Retirement Obligations"
("SFAS 143)" which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires an enterprise to record the fair
value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of a tangible long-
lived asset. SFAS 143 also requires the enterprise to record the contra to the
initial obligation as an increase to the carrying amount of the related long-
lived asset and to depreciate that cost over the remaining useful life of the
asset. The liability is changed at the end of each period to reflect the
passage of time changes in the estimated future cash flows underlying the
initial fair value measurement. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently examining the impact on
this pronouncement on the results of operation and financial position of the
Company, but currently believes the impact will not be material.
On October 3, 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes FASB Statement No.121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of
the fundamental provisions of that Statement. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principle Board Opinion 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("ABP 30"), for the disposal of a segment of a
business. However, it retains the requirement in APB 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. SFAS 144 is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company is currently examining the impact on this pronouncement on
the results of operation and financial position of the Company, but currently
believes the impact will not be material.
Reclassifications
Certain reclassifications were made to the 1999 and 2000 financial
statements to conform to the 2001 presentation.
30
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Investments
At August 31, 2001 and August 31, 2000, investments consisted of the
following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -------
(Amounts in thousands)
August 31, 2001
Marketable equity securities......... $ 530 $ 67 -- $ 597
Bonds and municipal revenue notes.... 6,454 -- -- 6,454
Money market funds and commercial
paper............................... 5,379 -- -- 5,379
Investment in Vertical Buyer......... 77 -- -- 77
U.S. treasury bills.................. 173 -- -- 173
------- ------ ------- -------
Total.............................. $12,613 $ 67 -- $12,680
======= ====== ======= =======
August 31, 2000
Marketable equity securities......... $ 659 $ 135 -- $ 794
Bonds and municipal revenue notes.... 4,473 -- -- 4,473
Money market funds and commercial
paper............................... 4,183 -- -- 4,183
Investment in Vertical Buyer......... 2,000 -- -- 2,000
U.S. treasury bills.................. 171 -- -- 171
------- ------ ------- -------
Total.............................. $11,486 $ 135 -- $11,621
======= ====== ======= =======
Short-term Long-term Total
---------- ---------- ----------
August 31, 2001
Held-to-maturity..................... $11,800 $ 350 $12,150
Available-for-sale................... 530 -- 530
------- ------ -------
$12,330 $ 350 $12,680
======= ====== =======
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. This change in
unrealized gains amounted to ($68,000), ($33,000) and $19,000 for the years
ended August 31, 2001, August 31, 2000, and August 27, 1999, respectively.
Assets of $828,000 and $925,000 at August 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. 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. During May 2001, the Company
recorded an impairment charge on the Vertical Buyer investment of $1,205,000.
31
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventories
Inventories consist of the following:
2001 2000
----------- -----------
(Amounts in thousands)
Raw materials........................................... $ 2,957 $ 2,340
Work-in-process......................................... 439 732
Finished goods.......................................... 1,916 2,721
----------- -----------
Total................................................. $ 5,312 $ 5,793
=========== ===========
4. Accumulated Other Comprehensive Income
The components of Accumulated Other Comprehensive Income are as follows:
Unrealized Accumulated
Gain (loss) Foreign Other
On Translation Comprehensive
Investments Adjustment Income
----------- ----------- -------------
(Amounts in thousands)
Balance August 28, 1998................... $149 $ (248) $ (99)
Change in period........................ 19 (376) (357)
---- ------- -------
Balance August 27, 1999................... 168 (624) (456)
Change in period........................ (33) (590) (623)
---- ------- -------
Balance August 31, 2000................... 135 (1,214) (1,079)
Change in period........................ (68) 147 79
---- ------- -------
Balance August 31, 2001................... $ 67 $(1,067) $(1,000)
==== ======= =======
5. Income Taxes:
Reconciliation of expected income tax expense (benefit) to actual income tax
expense (benefit) is as follows:
2001 2000 1999
------------ ---------- ------------
(Amounts in thousands)
Computed expected tax expense
(benefit)............................ $(926) 34.0% $567 34.0% $ 892 34.0%
Increases(reductions) in taxes
resulting from:
Dividend exclusion.................. (6) 0.2 (6) (0.4) (9) (0.3)
Tax exempt interest................. (45) 1.7 (43) (2.6) (56) (2.1)
State income taxes, net of federal
tax benefit........................ 600 (22.0) (10) (0.6) (169) (6.5)
Amortization of goodwill............ 36 (1.3) 36 2.2 36 1.4
Foreign operations.................. 315 (11.6) 413 24.8 642 24.5
Dividend grossed-up for Foreign
tax................................ 107 (3.9) -- -- -- --
Nondeductible life insurance........ -- -- (24) (1.4) (6) (0.2)
Other items......................... 82 (3.0) 60 3.6 34 1.2
----- ----- ---- ---- ------ ----
Income tax expense.................. $ 163 (5.9)% $993 59.6% $1,364 52.0%
===== ===== ==== ==== ====== ====
32
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended August 31, 2001 and August 31, 2000, temporary
differences, which give rise to deferred tax assets (liabilities), are as
follows:
2001 2000
------ ------
Deferred tax assets:
Deferred compensation........................................ $1,155 $1,133
Other accruals............................................... 785 252
Bad debt reserves............................................ 90 141
In process research and development.......................... 159 173
Inventory capitalization and reserves........................ 961 715
State research and development credits, net of federal
benefit..................................................... 389 228
Net operating losses......................................... 757 --
------ ------
Gross deferred tax assets.................................... 4, 296 2,642
Less: valuation allowance.................................... (1,578) (360)
------ ------
Deferred tax asset less valuation allowance.................. 2,718 2,282
Deferred tax liability:
Accumulated depreciation and amortization.................... (174) (56)
------ ------
Net deferred tax asset....................................... $2,544 $2,226
====== ======
The valuation allowance was $1,578,000 and $360,000 at August 31, 2001 and
August 31, 2000, respectively. The valuation allowance was established due to
long-term nature of certain deferred compensation, and retirement, inventory
capitalization reserves and limited loss carry over periods for state net
operating loss which may be realized over an extended period. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Based upon the level of historical taxable income and projections for
future taxable income over the period in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowance at August 31, 2001.
The provisions for income taxes are comprised of the following:
2001 2000 1999
------- ------ ------
(Amounts in
thousands)
Current:
Federal.............................................. $ -- $ 239 $ 238
State................................................ 1 93 (350)
Foreign.............................................. 480 1,047 1,077
------- ------ ------
481 1,379 965
Deferred:
Federal.............................................. (1,226) (278) 206
State................................................ 908 (108) 193
------- ------ ------
(318) (386) 399
------- ------ ------
$ 163 $ 993 $1,364
======= ====== ======
33
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Property, Equipment and Improvements, Net
Property, equipment and improvements, net consist of the following:
2001 2000
----------- -----------
(Amounts in thousands)
Land................................................... $ -- $ 587
Building and improvements.............................. 343 1,776
Equipment.............................................. 5,920 7,335
Automotive equipment................................... 41 41
----------- -----------
6,304 9,739
Less accumulated depreciation and amortization......... 4,887 6,538
----------- -----------
Property, equipment and improvements, net.............. $ 1,417 $ 3,201
=========== ===========
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
2001 2000
----------- -----------
(Amounts in thousands)
Accounts payable...................................... $ 1,587 $ 1,895
Commissions........................................... 55 146
Compensation and fringe benefits...................... 1,358 1,878
Customer advances..................................... 183 296
Professional fees and shareholders' reporting costs... 293 217
Taxes, other than income.............................. 418 423
Other, individually less than 5% of current
liabilities.......................................... 327 334
----------- -----------
$4,221 $ 5,189
=========== ===========
34
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stock Options
In 1997, the Company adopted the 1997 Stock Option Plan covering 199,650
shares, which was ratified by the shareholders in January 1998. In 1991, the
Company adopted the 1991 Stock Option Plan covering 332,750 shares of common
stock. Under the Plans, both incentive stock options and non-qualified stock
options may be granted to officers, key employees and other persons providing
services to the Company. The stock option plan provides for issuance of
options at their fair market value on the date of grant. These options vest
over a period of five years, do not vest in the first year, and expire ten
years from the date of grant. In the 1991 plan, up to 26,624 shares are
allocated for annual non-discretionary grants of 1,100 shares each to non-
employee directors of the Company who are serving on the last business day of
January each year.
The following is a summary of common stock option activity for the three
years ended August 31, 2001:
Number of Shares
---------------------------------
Weighted average
Exercise price
of shares under 1997 1991 1981 Total
plans Plan Plan Plan Plan
---------------- ------- ------- ------ -------
Outstanding August
28,1998.................. $5.20 -- 247,765 13,575 261,340
Granted................. $6.95 -- 100,226 -- 100,226
Exercised............... $5.79 -- (3,642) (2,872) (6,514)
Expired & terminated.... $5.41 -- (25,201) (665) (25,866)
------- ------- ------ -------
Outstanding August
27,1999.................. $5.98 -- 319,148 10,038 329,186
Granted................. $5.29 117,400 -- -- 117,400
Exercised............... $5.58 -- (32,723) (2,763) (35,486)
Expired & terminated.... $5.78 (4,000) (7,813) (664) (12,477)
------- ------- ------ -------
Outstanding August
31,2000.................. $5.80 113,400 278,612 6,611 398,623
Granted................. $4.22 50,500 -- -- 50,500
Exercised............... $4.60 -- (1,331) -- (1,331)
Expired & terminated.... $5.67 (3,000) (8,453) -- (11,453)
------- ------- ------ -------
Outstanding August
31,2001.................. $5.26 160,900 268,828 6,611 436,339
======= ======= ====== =======
Available for future
grants................... -- 38,750 17,663 -- 56,413
Exercisable............... 58,238 226,430 6,611 279,003
The following table summarizes information about fixed stock options
outstanding at August 31, 2001.
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Years Of Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------- ----------- ----------- -------- ----------- --------
$3.75-- $5.74...... 270,893 6.4 $ 5.08 143,843 $ 5.37
$5.75-- $7.74...... 158,046 3.1 $ 6.37 130,010 $ 6.34
$8.75-- $8.99...... 4,400 1.4 $ 8.50 4,400 $ 8.50
$9.00--$11.25...... 3,000 8.6 $11.21 750 $11.21
------- -------
436,339 $ 5.61 279,003 $ 5.87
======= ====== ======= ======
35
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Following the guidance of APB No. 25, no
compensation expenses have been recognized in the consolidated financial
statements for such plans. Had compensation costs for the Company's stock
option plans been determined based on the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, "Accounting for Stock based Compensation," the Company's net income
(loss) would have been adjusted to the proforma amounts indicated below:
2001 2000 1999
------- ----- ------
(Amounts in
thousands, except
per share data)
Net income (loss) as reported............................ $(2,885) $ 675 $1,259
Pro forma................................................ $(2,990) $ 553 $1,176
Income (loss) per share diluted as reported.............. $ (0.82) $0.18 $ 0.35
Pro forma................................................ $ (0.85) $0.15 $ 0.32
The grant date fair value of each stock option is estimated using the
following assumptions: an expected life of 5 years, expected volatility of 56%
in 2001, 18.4% in 2000 and 1999 and dividend yields of 0% and a weighted
average risk-free interest rate of 5.85 % in 2001, 6.30% in 2000 and 5.20% in
1999. The weighted average grant date fair values of options granted in 2001,
2000 and 1999 were $4.22, $5.90 and $5.23, respectively.
The effects of applying SFAS No. 123 as shown in the above pro forma
disclosure is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma compensation
expense related to grants made prior to fiscal 1996.
9. Stock Purchase Plan
In October 1997, the Company adopted an Employee Stock Purchase Plan (the
1997 Purchase Plan), which was ratified by the shareholders. The 1997 Purchase
Plan reserved 332,750 shares of Common Stock for issuance thereunder. Under the
stock purchase plan, the Company's employees may purchase shares of Common
Stock at a price per share that is 85% of the lesser of the fair market value
as of the beginning or end of the semi-annual option period. Approximately
35,686 shares have been issued under the plan at August 31, 2001.
10. Deferred Compensation and Retirement Plans
The Company has a 401(k) Retirement Plan under which the Company matches a
portion of the employee's salary reduction contributions and may make
discretionary contributions to the plan. All full-time employees with 90 days
of continuous service are eligible for the plan. All Company contributions are
fully vested. Contributions by the Company were $148,000, $163,000 and $170,000
for 2001, 2000, and 1999, respectively.
The Company has a Supplemental Retirement Plan for certain employees that
provides for payments (generally over 15 years) upon retirement, death or
disability. The annual benefit is based upon a percentage of salary at the
inception of the plan, plus an annual percentage increase, plus interest. In
addition, the Company adopted deferred compensation plans for former key
executives that provide for payments, over a ten-year period, upon retirement,
death or disability based upon a percentage of salary at that time. The charge
to expense for the plans for 2001, 2000 and 1999 amounted to $496,000, $436,000
and $372,000, respectively.
36
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
Leases
The Company occupies office space under lease agreements expiring at various
dates during the next five years. The leases are classified as operating
leases, and provide for the payment of real estate taxes, insurance, utilities
and maintenance.
The Company was obligated under non-cancelable operating leases as follows:
Operating leases
Fiscal year ending August: As of August 31, 2001
-------------------------- ---------------------
2002...................................................... $1,211
2003...................................................... 1,145
2004...................................................... 1,139
2005...................................................... 799
2006...................................................... 412
Thereafter................................................ 418
======
Occupancy costs under the operating leases approximated $1,100,000 in 2001,
$1,024,000 in 2000, and $1,564,000 in 1999.
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 August 31, 2001, the Company has repurchased 570,875 or 77% of the
total shares authorized to be purchased.
12. Segment and Geographical Information
The following table presents certain operating segment information (amounts
in thousands).
System and E-
Service Commerce Other
Systems Integration Software Software Total
------- ----------- -------- -------- -------
2001
Net Sales............... $ 8,430 $29,693 $1,906 $1,887 $41,916
Profit (loss) from
operations............. (270) (2,109) (1,123) 590 (2,912)
Identifiable assets..... 19,175 10,980 691 1,503 32,349
Capital expenditures.... 403 193 12 12 620
Depreciation............ 372 356 23 28 779
2000
Net Sales............... $12,772 $45,597 $1,810 $1,842 $62,021
Profit (loss) from
operations............. 3,499 (769) (2,211) 588 1,107
Identifiable assets..... 23,209 11,477 675 1,695 37,056
Capital expenditures.... 289 485 19 12 805
Depreciation............ 726 501 20 16 1,263
1999
Net Sales............... $15,555 $32,978 $ 790 $2,372 $51,695
Profit (loss) from
operations............. 2,355 (1,258) 220 694 2,011
Identifiable assets..... 22,168 12,806 266 1,873 37,113
Capital expenditures.... 621 435 10 40 1,106
Depreciation............ 653 263 6 40 962
37
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 operation 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 operations,
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 administrative 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.
Sales to individual customers constituting 10% or more of total sales were
as follows:
2001 2000 1999
---------- ---------- ---------
(Amounts in thousands)
Customer A................................... $16,630 40% $22,363 36% $7,804 15%
The Company anticipates that, for the foreseeable future, a significant
percentage of its sales will be dependent upon a relatively small number of
customers.
The Company's sales by geographic area based on the location of the
customers are as follows:
2001 2000 1999
------- ------- -------
(Amounts in thousands)
Europe.................................................. $27,981 $43,882 $28,692
North America........................................... 13,411 16,234 18,632
Asia.................................................... 524 1,690 4,347
Other................................................... -- 215 24
------- ------- -------
Totals................................................ $41,916 $62,021 $51,695
======= ======= =======
Long-lived assets by geographic location at August 31, 2001, August 31, 2000
and August 27, 1999 were as follows:
2001 2000 1999
------ ------ ------
United States.............................................. $1,628 $3,240 $3,952
Europe..................................................... 543 850 771
------ ------ ------
Totals .................................................. $2,171 $4,090 $4,723
====== ====== ======
13. Restructuring Expenses
In May 2001, April 2000 and March 1999, MODCOMP had a reduction of 17, 2 and
15 individuals, respectively, in its domestic workforce. The expenses related
to the actions were approximately $85,000, $64,000 and $310,000 for severance
costs, respectively.
38
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts accrued approximated the amounts paid under the May 2001, April
2000 and March 1999 restructuring programs.
14. Valuation and qualification account
The Company had the following activity for the allowance for doubtful for
doubtful accounts:
2001 2000 1999
----- ---- ----
(Amount in
thousands)
Balance beginning of year..................................... $ 409 $395 $359
Additions..................................................... -- 14 36
Reductions.................................................... (148) -- --
----- ---- ----
Balance August 31, 2001....................................... $ 261 $409 $395
===== ==== ====
15. Quarterly Results of Operations (Unaudited)
Following is a summary of the quarterly results of operations for the years
ended August 31, 2001, August 31, 2000 and August 27, 1999:
First Second Third Fourth Total
------- ------- ------- ------- -------
(Amounts in thousands, except per share
amounts)
2001
Net Sales......................... $11,422 $ 9,352 $ 9,534 $11,608 $41,916
Gross Profit...................... 3,260 2,760 814 3,067 9,901
Net income (loss)................. (212) 615 (2,706) (582) (2,885)
Net income (loss) per share--
diluted(a)....................... (.06) .17 (.77) (.17) (.82)
2000
Net Sales......................... $15,734 $18,360 $16,303 $11,624 $62,021
Gross Profit...................... 3,545 5,599 4,911 3,467 17,522
Net income (loss)................. (330) 625 321 59 675
Net income (loss) per share--
diluted(a)....................... (.09) .16 .09 .02 .18
- --------
(a) Earnings per common share are computed independent for each of the periods
presented and therefore may not add up to the total for the year
39
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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.
Overview
CSP, Inc. ("CSPI" or the "Company") was founded in 1968 and is based in
Billerica, Massachusetts. To meet the diverse requirements of its industrial,
commercial, scientific and defense customers worldwide, CSPI and its
subsidiaries develop and market Internet software for E-commerce solutions,
image-processing software, network management integration services and high-
performance cluster computer systems. The Company's wholly owned subsidiaries
include MODCOMP, Inc. ("MODCOMP"), Scanalytics, Inc. ("Scanalytics"), and CSPI
MultiComputer division ("MultiComputer division").
MODCOMP, Inc. is a multinational subsidiary which develops and markets
Internet software for E-commerce solutions and provides network management
integration services including consulting, systems integration and outsourcing.
MODCOMP's newest product, WAP66(TM), makes existing enterprise data available
to mobile business (M-business) and is available on Palm IV(TM) from Palm, Inc.
In addition, MODCOMP's ViewMax(R) is an Internet software product that allows
companies to easily integrate their IT systems with Internet technology for E-
commerce applications.
Scanalytics specializes in the development and marketing of highly
sophisticated image capture and analysis software products used by researchers
in the biological and physical sciences. By integrating these software products
with a diverse group of image-capture devices, Scanalytics is able to solve
application-specific problems in biotechnology and life science research,
including Digital Microscopy, Genomics, and High Throughput Screening.
The MultiComputer division helps its customers solve high-performance
computing problems in the medical imaging and defense markets by supplying very
dense multiprocessing systems with powerful real-time I/O capabilities that
require minimum physical space or power. These systems are used in a broad
array of applications, including radar, sonar and surveillance signal
processing.
Results of Operations--2001 Compared to 2000
For the fiscal year ended August 31, 2001, sales decreased to $41.9 million,
compared to $62.0 million for fiscal year 2000. Excluding the loss on the sale
of the French operation of $423,000 and a restructuring charge of $85,000, the
Company reported net loss of $2.4 million or ($0.69) per diluted share for
fiscal 2001. This compares with net income of $941,000, or $0.26 per diluted
share, excluding the loss on the sale of the French operation of $240,000 and a
$64,000 restructuring charge, in fiscal 2000. Including the effect of the sale
of the French operation and restructuring charge, the Company reported net loss
for fiscal 2001 of $2.9 million, or ($0.82) diluted share, compared with fiscal
2000 net income of $675,000, or $0.18 per diluted share.
40
The following table details the Company's earnings in fiscal years 2001 and
2000:
Fiscal 2001 Fiscal 2000
----------- -----------
(Amounts in thousands)
Net income (loss).................................. $(2,885) $ 675
Effect of sale of French operation................. 423 240
Restructuring charge............................... 85 64
Tax effect of exclusion of effect of sale of French
operation and Exclusion of restructuring charge... (67) (38)
------- ------
Net income (loss) excluding the effect of sale of
French Operation and excluding restructuring...... $(2,444) $ 941
======= ======
Net income (loss) per share--diluted excluding the
effect of sale of French operation and excluding
restructuring charge.............................. $ (0.69) $ 0.26
======= ======
Weighted average shares outstanding--diluted....... 3,527 3,663
======= ======
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(TM) and ViewMax(R), 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
fiscal years 2001, and 2000
% of % of
Sales Revenue: 2001 Total 2000 Total
-------------- ------- ----- ------- -----
(Amounts in thousands)
Operating Segment:
Systems.......................................... $ 8,430 20% $12,772 21%
System and Service Integration................... 29,693 71% 45,597 73%
E-Commerce Software.............................. 1,906 5% 1,810 3%
Other Software................................... 1,887 4% 1,842 3%
------- --- ------- ---
Total.......................................... $41,916 100% $62,021 100%
======= === ======= ===
The Company reported net sales of $41.9 million for fiscal year 2001
compared to $62.0 million for fiscal 2000. This represented a decrease of 32%
or $20.1 million. The majority of this decrease in revenue was due to the
decline in System and service integation sales which were $29.7 million for
fiscal year 2001 compared to $45.6 million for fiscal 2000. This represented a
decrease of $15.9 million or 79% of the total change between fiscal years.
System sales for the for fiscal 2001 were $8.4 million compared to $12.8
million for fiscal year 2000, representing a decline of $4.3 million. Both E-
Commerce and other software sales increased nominally compared to the prior
fiscal year.
System sales decrease was due to the slower than anticipated transition of
the older MultiComputer products, SuperCards, to the new Series 2000 products.
The other factor affecting the revenue growth has been the extended defense
industry deployment incubation periods that are not anticipated to change in
the near future. The CSPI SuperCard and Series 2000 product lines accounted for
13% and 67% of system sales, respectively, for fiscal 2001 compared to 31% and
44%, respectively, for the prior year. The MultiComputer Division introduced
its newest product, a Linux based FastCluster(TM) system. The system was
designed to
41
meet the high performance computing requirements of mission critical military
application and highly scalable data mining applications. FastCluster(TM) is
powered by the newest PowerPC processors, including those incorporating
Altivec(TM) 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 18% of fiscal
2001 system sales compared to 22% for the prior year.
Sales for System and Service Integration represented 71% of total sales for
fiscal year 2001. The decrease in revenue was due to the decline in sales of
third party products and integration services primarily in Germany, erosion of
the real-time service revenue due to the sales of the French operation and
customer purchase of new technologies and the reduction in foreign currency
rates.
E-commerce software sales increased 5% and represented 5% of total sales for
fiscal year 2001. This segment's growth has centered on the ViewMax(R) Web-to-
Host software and WAP66(TM) wireless access protocol portal server products.
Other software sales represented 4% of total sales for fiscal year 2001, an
increase from the prior year of $45,000 or 2%. The other software sales are
primarily from products of Scanalytics.
European sales account for 67% of total sales for fiscal 2001 compared to
71% for the prior year. 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. Historically, 80% of MODCOMP's revenues have come from the
international market.
The following table details the Company's sales by geographic region for
fiscal years 2001and 2000:
Year Ended August
------------------------
2001 2000
----------- -----------
(amounts in thousands)
Europe............................................. $27,981 67% $43,882 71%
North America...................................... 13,411 32% 16,234 26%
Asia............................................... 524 1% 1,690 3%
Other.............................................. -- -- 215 -- %
------- --- ------- ---
$41,916 100% $62,021 100%
======= === ======= ===
Cost of Sales
Cost of sales as a percentage of revenue increased to 76% compared to 72%
for the prior year. The increase in cost of sales was due to the inventory
write off of approximately $1.1 million for end of life systems products and
erosion of gross margin in the system segment due to shift in product sales
from higher products to lower margin product due in part to product
discounting.
42
The following table details the Company's sales, cost of sales and gross
margin by operating segment for fiscal years 2001 and 2000 (amounts in
thousands):
System and
Service E-Commerce Other
Systems Integration Software Software Total
------- ----------- ---------- -------- -------
2001
Sales...................... $ 8,430 $29,693 $1,906 $1,887 $41,916
Cost of sales.............. 5,286 25,426 764 539 32,015
------- ------- ------ ------ -------
Gross margin $............. 3,144 4,267 1,142 1,348 9,901
Gross margin %............. 37% 14% 60% 71% 24%
2000
Sales...................... $12,772 $45,597 $1,810 $1,842 $62,021
Cost of sales.............. 4,907 38,304 781 507 44,499
------- ------- ------ ------ -------
Gross margin $............. 7,865 7,293 1,029 1,335 17,522
Gross margin %............. 62% 16% 57% 72% 28%
Engineering and Development
Engineering and development expenses decreased 5% from $4.0 million for
fiscal 2000 to $3.8 million for fiscal 2001. Engineering and development
decrease was due to staff reductions at the systems segment primarily at
Systems and other software segments. Systems segment expense accounted for 48%
of the total expense for fiscal year 2001 compared to 55% for the prior year.
This decrease is mainly attributed to a decline in engineering and development
personnel due to attrition. System and service integration segment accounted
for 28% of total engineering and development expense for fiscal 2001 compared
to 14% for the prior year. The large increase was due to the addition and
redeployment of staff from other segments and equipment to support their
efforts for integration and services. E-commerce expenses decreased by 37% over
the prior year due to the shift of personnel to individual orders fulfillment,
assignment of staff to specific programs in other segments, and the reduction
of personnel.
43
The following table details engineering and development expenses by
operating segment and subsidiary for fiscal years 2001 and 2000 (amounts in
thousands):
% of % of
Engineering & Development Expense: 2001 Total 2000 Total
---------------------------------- ------ ----- ------ -----
(Amounts in thousands)
By Operating Segment:
Systems............................................ $1,821 48% $2,226 55%
System and Service Integration..................... 1,071 28% 547 14%
E-Commerce Software................................ 509 13% 811 20%
Other Software..................................... 422 11% 447 11%
------ --- ------ ---
Total............................................ $3,823 100% $4,031 100%
====== === ====== ===
By Subsidiary:
MODCOMP, Inc....................................... $1,766 46% $1,391 35%
CSP MultiComputer Division......................... 1,636 43% 2,193 54%
Scanalytics, Inc................................... 421 11% 447 11%
------ --- ------ ---
Total............................................ $3,823 100% $4,031 100%
====== === ====== ===
Selling, General and Administrative
Selling, general and administrative expense decreased $3.4 million or 28% to
$8.9 million for fiscal year 2001 compared to $12.3 million for fiscal year
2000.
% of % of
S,G & A Expense: 2001 Total 2000 Total
---------------- ------ ----- ------- -----
(Amounts in thousands)
By Operating Segment:
Systems........................................... $1,508 17% $ 2,076 17%
System and Service Integration.................... 5,305 59% 7,515 61%
E-Commerce Software............................... 1,756 20% 2,429 20%
Other Software.................................... 336 4% 300 2%
------ --- ------- ---
Total........................................... $8,905 100% $12,320 100%
====== === ======= ===
By Subsidiary:
MODCOMP, Inc...................................... $4,334 49% $ 7,047 57%
CSP MultiComputer Division........................ 3,583 40% 4,221 34%
Scanalytics, Inc.................................. 988 11% 1,052 9%
------ --- ------- ---
Total........................................... $8,905 100% $12,320 100%
====== === ======= ===
MODCOMP's selling, general and administrative expense for fiscal 2001
decreased $2.7 million or 38% from the prior year. This decline is mainly
attributable to staff reductions in the administration and sales departments,
lower sales commission due to the lower revenue, no executive bonuses and lower
legal and outside consultants costs primarily related to European restructure
in FY 2000.
CSP MultiComputer division selling, general and administrative expense for
fiscal 2001 decreased $638,000 or 15% from the prior year. MultiComputer
division expense decreased approximately $170,000 due to a decline in sales
personnel due to attrition and $175,000 due to a decline in depreciation
expense related to fully depreciated assets. In addition, the expense decreased
approximately $96,000 due to a reduction in sales commissions related to lower
sales revenue, $109,000 due to a decline in bonus expense, and $180,000 due to
a reduction in consulting expenses. These decreases were offset by increases in
retirement plan expense of $74,000 and occupancy expense related to the new
corporate headquarters of approximately $32,000.
44
Scanalytics selling, general and administrative expense for fiscal 2001
decreased $64,000 or 6% from the prior year. This decline is mainly
attributable to a decrease in labor expense of $40,000 due to a reduction in
headcount and a reduction in sales literature and materials expense of $16,000.
Restructuring Expense
In April 2001, 2000 and 1999 the Systems and System and Service Integration
segments had a reduction of 17, 2 and 15 individuals, respectively, in its
domestic workforce. The expenses related to the actions were approximately
$85,000, $64,000 and $310,000 for severance costs, respectively. In May , 2001,
the company reduced staff levels which will reduce expenses on an annualized
basis by approximately $835,000.
Other Income/Expenses
Other income/expenses of $273,000, exclusive of the loss on disposal of
French operation, gain on sale of property, and impairment charge on
investments increased $10,000 from the prior year.
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 $423,000 and $240,000 was
recognized as other expense in fiscal year 2001 and 2000, respectively. 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 recorded 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 had a tax expense %, for the year which was primarily due to the
large portion of foreign-based revenue and profits primarily from Germany,
which has high statutory tax rates as well as the inability to deduct any of
the loss on the disposal of the French operation. The Company also recorded a
valuation allowance for the state portion of deferred taxes that have a shorter
carry over period than the federal taxes do. The Company will continue to
review strategies with its advisors to reduce our effective rate.
45
Results of Operations--2000 Compared to 1999
For the fiscal year ended August 31, 2000, sales increased to $62.0 million,
compared to $51.7 million for fiscal year 1999. Excluding the loss on the sale
of the French operation of $240,000 and a restructuring charge of $64,000, the
Company reported net income of $941,000 or $0.26 per diluted share for fiscal
2000. This compares with net income of $1.4 million, or $0.38 per diluted
share, excluding a $310,000 restructuring charge, in fiscal 1999. Including the
effect of the sale of the French operation and restructuring charge, the
Company reported net income for fiscal 2000 of $675,000, or $0.18 diluted
share, compared with fiscal 1999 net income of $1.3 million, or $0.35 per
diluted share.
The following table details the Company's earnings in fiscal years 2000 and
1999:
Fiscal 2000 Fiscal 1999
----------- -----------
(Amounts in thousands)
Net income.......................................... $ 675 $1,259
Effect of sale of French operation.................. 240 --
Restructuring charge................................ 64 310
Tax effect of exclusion of effect of sale of French
operation and Exclusion of restructuring charge.... (38) (169)
----- ------
Net income excluding the effect of sale of French
operation and Excluding restructuring.............. $ 941 $1,400
===== ======
Net income per share--diluted excluding the effect
of sale of French operation and excluding
restructuring charge............................... $0.26 $ 0.38
===== ======
Weighted average shares outstanding--diluted........ 3,663 3,641
===== ======
Revenue
The following table details the Company's sales by operating segment for
fiscal years 2000, 1999 and 1998:
% of % of
Sales Revenue: 2000 Total 1999 Total
-------------- ------- ----- ------- -----
(Amounts in thousands)
Operating Segment:
Systems.......................................... $12,772 21% $15,555 30%
System and Service Integration................... 45,597 73% 32,978 64%
E-Commerce Software.............................. 1,810 3% 790 1%
Other Software................................... 1,842 3% 2,372 5%
------- --- ------- ---
Total.......................................... $62,021 100% $51,695 100%
======= === ======= ===
The Company reported net sales of $62.0 million for fiscal year 2000
compared to $51.7 million for fiscal 1999. This represented an increase of 20%
or $10.3 million. The majority of this increase in revenue was generated
primarily from MODCOMP's German subsidiary, with the continued growth in the
system and service integration business to the telecom market. The increase in
MODCOMP's sales was offset by declines in revenue reported by systems and other
software.
System sales represented 21% of total sales for fiscal year 2000, a decrease
from the prior year of $2.8 million, or 18%. The decreased revenue was due to
the slower than anticipated transition of the older MultiComputer products,
SuperCards, to the new Series 2000 products. The other factor effecting the
revenue growth has been the extended defense industry deployment incubation
periods that are not anticipated to change in the near future. The CSPI
SuperCard and Series 2000 product lines accounted for 31% and 44% of system
sales, respectively, for fiscal 2000, compared to 28% and 44%, respectively,
for the prior year.
46
MODCOMP continues to ship its real-time process control classic product line to
existing customers, which represented 22% of fiscal 2000 system sales compared
to 22% for the prior year.
Sales for System and Service Integration represented 73% of total sales for
fiscal year 2000, an increase from the prior year of $12.6 million or 38%. This
increase is primarily due to additional systems sales by MODCOMP Germany in the
telecommunications market.
E-commerce software sales increased 129% although it represented 3% of total
sales for fiscal year 2000. This segment's growth has centered on MODCOMP's
ViewMax(R) Web-to-Host software and WAP66(TM) wireless access protocol portal
server products.
Other software sales represented 3% of total sales for fiscal year 2000, a
decrease from the prior year of $530,000 or 22%. The decrease was related to
the decline in the older Gel products and larger imaging systems. The software
sales showed improvement in the fourth quarter of fiscal 2000.
European sales account for 71% of total sales for fiscal 2000 compared to
56% for the prior year. European sales were primarily from MODCOMP's
subsidiaries in Germany and the United Kingdom. The increase 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
fiscal years 2000, 1999 and 1998:
Year Ended August
------------------------
2000 1999
----------- -----------
Europe............................................. $43,882 71% $28,692 56%
North America...................................... 16,234 26% 18,632 36%
Asia............................................... 1,690 3% 4,347 8%
Other.............................................. 215 -- % 24 -- %
------- --- ------- ---
$62,021 100% $51,695 100%
======= === ======= ===
Cost of Sales
Cost of sales as a percentage of revenue increased to 72% compared to 62%
for the prior year. The increase in cost of sales resulted primarily from the
significant revenue growth in the system and service integration segment that
has higher costs due to the large component of third party products. The shift
of revenue from the Systems, E-commerce and Other Software segments, which have
significantly lower costs than the System and Service Integration, results in
the increased cost of sales.
47
The following table details the Company's sales, cost of sales and gross
margin by operating segment for fiscal years 2000 and 1999 (amounts in
thousands):
System and
Service E-Commerce Other
Systems Integration Software Software Total
------- ----------- ---------- -------- -------
2000
Sales......................... $12,772 $45,597 $1,810 $1,842 $62,021
Cost of sales................. 4,907 38,304 781 507 44,499
------- ------- ------ ------ -------
Gross margin $................ 7,865 7,293 1,029 1,335 17,522
Gross margin %................ 62% 16% 57% 72% 28%
1999
Sales......................... $15,555 $32,978 $ 790 $2,372 $51,695
Cost of sales................. 6,447 24,725 375 528 32,075
------- ------- ------ ------ -------
Gross margin $................ 9,108 8,253 415 1,844 19,620
Gross margin %................ 59% 25% 52% 78% 38%
Engineering and Development
Engineering and development expenses decreased 4% from $4.2 million for
fiscal 1999 to $4.0 million for fiscal 2000. Engineering and development
decrease was due to staff reductions at the MultiComputer Division and
Scanalytics. CSP MultiComputer Division expense accounted for 54% of the total
expense for fiscal year 2000 compared to 57% for the prior year. This decrease
is mainly attributed to a decline in engineering and development personnel due
to attrition. MODCOMP and Scanalytics accounted for 35% and 11%, respectively,
of total engineering and development expense for fiscal 2000, compared to 30%
and 13% for the prior year. MODCOMP's increase is mainly due to increased
development efforts of the WAP66(TM) and ViewMax(R) product offerings.
The following table details engineering and development expenses by
operating segment and subsidiary for fiscal years 2000 and 1999 (amounts in
thousands):
(Amounts in thousands)
-------------------------
% of % of
Engineering & Development Expense: 2000 Total 1999 Total
---------------------------------- ------ ----- ------ -----
By Operating Segment:
Systems............................................ $2,226 55% $2,486 59%
System and Service Integration..................... 547 14% 1,131 27%
E-Commerce Software................................ 811 20% 27 1%
Other Software..................................... 447 11% 555 13%
------ --- ------ ---
Total............................................ $4,031 100% $4,199 100%
====== === ====== ===
By Subsidiary:
MODCOMP, Inc....................................... $1,391 35% $1,258 30%
CSP MultiComputer Division......................... 2,193 54% 2,386 57%
Scanalytics, Inc................................... 447 11% 555 13%
------ --- ------ ---
Total............................................ $4,031 100% $4,199 100%
====== === ====== ===
48
Selling, General and Administrative
Selling, general and administrative expense decreased $780,000 or 6% to
$12.3 million for fiscal year 2000 compared to $13.1 million for fiscal year
1999.
The following table sets forth selling, general and administrative expense,
net of restructuring charges, by Company subsidiary:
% of % of
S, G, & A Expense: 2000 Total 1999 Total
------------------ ------- ----- ------- -----
By Operating Segment:
Systems.......................................... $ 2,076 17% $ 3,957 30%
System and Service Integration................... 7,515 61% 8,380 64%
E-Commerce Software.............................. 2,429 20% 168 1%
Other Software................................... 300 2% 595 5%
------- --- ------- ---
Total.......................................... $12,320 100% $13,100 100%
======= === ======= ===
% of % of
S, G & A expense 2000 Total 1999 Total
---------------- ------- ----- ------- -----
MODCOMP.......................................... $ 7,047 57% $ 7,480 57%
CSP MultiComputer Division....................... 4,221 34% 4,200 32%
Scanalytics...................................... 1,052 9% 1,420 11%
------- --- ------- ---
Total.......................................... $12,320 100% $13,100 100%
======= === ======= ===
MODCOMP's selling, general and administrative expense for fiscal 2000
decreased $433,000 or 6% from the prior year. This decline is mainly
attributable to staff reductions in the administration and sales departments.
CSP MultiComputer division selling, general and administrative expense for
fiscal 2000 remained fairly consistent with the prior year. MultiComputer
division expense decreased approximately $100,000 due to a reduction in sales
commissions related to lower sales revenue and approximately $54,000 due to a
decline in retirement plan expense. These decreases were offset by an increase
in outside consulting expense of approximately $180,000 related to the
international tax restructuring..
Scanalytics selling, general and administrative expense for fiscal 2000
decreased $368,000 or 26% from the prior year. This decline is mainly
attributable to a decrease in sales commissions due to lower sales revenue and
a decrease in labor expense due to a reduction in headcount.
Liquidity and Capital Resources
Working capital at August 31, 2001 increased to $21.9 million compared to
$21.6 million at August 31, 2000.
The Company's consolidated capital expenditures were $611,000, $805,000 and
$1,106,000 during fiscal years 2001, 2000 and 1999, respectively.
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 fiscal 2001, 2000 or 1999. There is no assurance that the Company's
business will not be materially and adversely affected by inflation and
changing prices in the future.
49
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.
50
CSP INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
Fiscal Year Ended August
----------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Operating Statement Data:
Sales............................... $41,916 $62,021 $51,695 $63,468 $19,540
Costs and expenses.................. $44,828 60,914 49,684 61,262 21,590
------- ------- ------- ------- -------
Operating income (loss)............. (2,912) 1,107 2,011 2,206 (2,050)
Other income........................ 190 561 612 470 885
------- ------- ------- ------- -------
Income (loss) before taxes.......... (2,722) 1,668 2,623 2,676 (1,165)
Provision (benefit) for income
taxes.............................. 163 993 1,364 1,314 (444)
------- ------- ------- ------- -------
Net income (loss)................... $(2,885) $ 675 $ 1,259 $ 1,362 $ (721)
------- ------- ------- ------- -------
Net income (loss) per share--
diluted............................ $ (0.82) $ 0.18 $ 0.35 $ 0.37 $ (0.20)
------- ------- ------- ------- -------
Weighted average number of shares--
diluted............................ 3,527 3,663 3,641 3,674 3,571
------- ------- ------- ------- -------
Balance Sheet Data:
Cash and investments................ $14,078 $15,544 $14,265 $13,697 $10,150
Working capital..................... 21,928 21,609 23,469 21,622 18,636
Total assets........................ 32,349 37,056 37,113 37,677 35,224
Long term obligations............... 3,869 3,608 3,573 3,363 3,282
Total liabilities................... 8,575 9,610 9,748 11,137 9,978
Retained earnings................... 16,359 19,962 19,287 18,028 16,666
Shareholders' equity................ 23,774 27,446 27,365 26,540 25,246
51
CSP INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(Amounts in thousands, except percentage information)
The following table sets forth certain information which is based on
Operations Statement Data:
Percentage of
sales Fiscal year Period to Period
ended August Dollar changes
-------------------- ------------------
2001 2000
compared compared
2001 2000 1999 to 2000 to 1999
----- ----- ----- -------- --------
Sales................................. 100.0% 100.0% 100.0% $(20,105) $10,326
Costs and expenses:
Cost of sales....................... 76.4% 71.7% 62.1% (12,484) 12,424
Engineering and development......... 9.1% 6.5% 8.1% (208) (168)
Selling, general and
administrative..................... 21.2% 19.9% 25.3% (3,415) (780)
Restructuring....................... 0.2% 0.1% 0.6% 21 (246)
Total costs and expenses.............. 106.9% 98.2% 96.1% (16,086) 11,230
Operating income (loss)............... (6.9)% 1.8% 3.9% (4,019) (904)
Other income.......................... 0.4% 0.9% 1.2% (371) (51)
Income before taxes................... (6.5)% 2.7% 5.1% (4,390) (955)
Provision for income taxes............ 0.4% 1.6% 2.6% (830) (371)
Net income (loss)..................... (6.9)% 1.1% 2.5% $ (3,560) $ (584)
52