15
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended November 27, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-10843
CSP Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2441294
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
40 Linnell Circle, Billerica, Massachusetts
(Address of principal executive offices)
Registrant's telephone number, including area code:(978)663-7598
NONE
(Former name, former address, former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding November 27, 1998
Common stock, $.01 par value 3,267,370 shares
INDEX
PAGE
NUMBER
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets...........................3
Consolidated Statements of Operations.................4
Consolidated Statements of Cash Flows.................5
Notes to Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................7
PART II. OTHER INFORMATION:
Item 6. Exhibits & Reports on Form 8-
K.........................11
CSP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
November 27, August 28,
1998 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $2,832 $3,913
Marketable securities 10,636 9,635
Accounts receivable, net 7,781 7,698
Inventories 5,791 6,308
Deferred income taxes 1,345 1,068
Prepaid expenses 1,423 1,248
Total current assets 29,808 29,870
Property, equipment and improvements, net 3,214 3,367
Other assets:
Land held for future development 163 163
Deferred income taxes 935 1,168
Goodwill, net 1,172 1,142
Other assets 1,862 1,818
Total other assets 4,132 4,291
Total assets $37,154 $37,528
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $5,342 $6,399
Income taxes payable 1,217 1,375
Total current liabilities 6,559 7,774
3,565 3,363
Deferred compensation and retirement
plans
Shareholders' equity:
Common stock, $.01 par, authorized
7,500 shares; issued 3,627
and 3,624 shares 36 36
Additional paid in capital 10,720 10,631
Retained earnings 18,507 18,032
Equity adj. from foreign currency trans (173) (248)
29,090 28,451
Less treasury stock, at cost, 370
shares 2,060 2,060
Total shareholders' equity 27,030 26,391
Total liabilities and shareholders' equity $37,154 $37,528
See notes to consolidated financial statements
CSP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
/-For the three months ended--/
November November
27, 28,
1998 1997
Sales
Systems 4,866 3,269
Software 802 1,148
Service and system
integration 5,847 12,389
Total sales 11,515 16,806
Costs and expenses, net:
Cost of sales
Systems 1,924 1,333
Software 237 494
Service and system
integration 3,916 10,708
Total cost of sales 6,077 12,535
Engineering and development 1,129 1,054
Sales, general and admin. 3,348 3,106
Total costs and expenses,net 10,554
16,695
Operating income 961
111
Other income 86
215
Income before income taxes 1,047
326
Income tax expense 572
166
Net income $475
$160
Earnings per share
Basic $0.15 $0.05
Diluted $0.14 $0.05
Weighted average shares
Basic 3,264 3,244
Diluted 3,311
3,267
See accompanying notes to consolidated financial statements.
CSP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
/---For the three-----/
months ended
November November
27, 28,
1998 1997
Cash flows from operating
activities:
Net income $475 $160
Adjustments to reconcile net income
to
net cash provided by (used in
operating activities:
Unreal. Gain on mark. sec. (20) (3)
Depreciation and amortization 456 333
Deferred compensation and 202 66
retirement
plans
Deferred income taxes (44) (64)
Changes in current assets and
liab.:
Increase in accounts receivable (84) (4,001)
Decrease in inventories 518 273
(Increase)decrease in prepaid (175) 94
expenses
Increase(decrease) in accounts (1,057) 4,499
payable
and accrued expenses
Increase(decrease) in income taxes (158) 370
payable
Other assets (146) (165)
Net cash provided by (used in) (33) 1,562
operating activities
Cash flows from investing activities:
Purchase of marketable securities (6,427) (6,573)
Sale of marketable securities 5,446 3,773
Property, equipment and (231) 58
improvements
Net cash used in investing (1,212) (2,742)
activities
Cash flows from financing activity:
Proceeds from stock options and
employee stock purchase 90 -
---- ----
Net cash provided by financing
activity 90 -
Effect of exchange rate change on 74 56
cash
Net decrease in cash (1,081) (1,124)
Cash and cash equivalents, beg. of 3,913 4,344
period
Cash and cash equivalents, end of $2,832 $3,220
period
See accompanying notes to consolidated financial statements.
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the
Company, without audit, and reflect all adjustments which in the
opinion of management, are necessary for a fair statement of the
results of the interim periods presented. All adjustments were
of a normal recurring nature. Certain information and footnote
disclosures normally included in the annual financial statements
which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
Accordingly, the Company believes that although the disclosures
are adequate to make the information presented not misleading,
the financial statements should be read in conjunction with the
footnotes contained in the Company's Annual Report on Form 10-K
for the fiscal year ended August 28, 1998.
1. Reclassification:
Certain reclassifications were made to the Fiscal 1998 financial
statements to conform to the Fiscal 1999 presentation.
2. Inventories:
Inventories consist of the following (in thousands):
November 27, August 28,
1998 1998
Raw materials $2,761 $1,502
Work in process 587 1,138
Finished goods 2,443 3,668
Total $5,791 $6,308
3. Stock Repurchase:
On October 9, 1986 the Board of Directors authorized the Company
to repurchase up to 313,538 shares of the outstanding stock at
market prices. On September 28, 1995, the Board of Directors
authorized the Company to repurchase up to an additional 181,500
shares of the outstanding stock at market prices. The timing of
stock purchases are made at the discretion of management.
Through November 27, 1998 the Company has repurchased 351,477, or
71% of the total authorized.
4.New Accounting Standards
Effective August 29, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("SFAS 130") which establishes standards
for reporting and display of comprehensive income and its
components in a full set of financial statements. For the
Company, comprehensive income includes net income and unrealized
gains and losses from foreign currency translation.
In June 1997, the Financial Accounting Standards Board issued
Statement 131, "Disclosures about Segments of an Enterprise and
Related Information" SFAS 131"), which establishes standards for
the way that public business enterprises report selected
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. This Statement becomes effective for the
Company in its fiscal year ending August 27, 1999. The Company
is in the process of determining the impact of SFAS 131 on its
footnote disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which requires that all
derivatives be recorded on the balance sheet at there fair
value. Changes in the fair value of derivatives for each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company
currently expects to adopt SFAS No. 133 for the year ending
August 27, 1999. Management has determined there will be no
impact on its results of operations or financial position
resulting from the adoption of SFAS No. 133 because the Company
currently does not hold derivative instruments.
5. EPS Reconciliation
The reconciliation of the numerators and denominators of the
basic and diluted income per common share computations for the
Company's reported net income is as follows (in thousands, except
per share amounts):
Three months ended
November 27
November 28
1998
1997
Basic net income $475
$160
Weighted Average shares outstanding, basic 3,264
3,244
Net additional common shares upon exercise
of common stock options 47
23
Weighted average shares outstanding-diluted 3,311
3,267
Net income per share-basic $0.15
$0.05
Net income per share-diluted $0.14
$0.05
6. Comprehensive Income
The Company's total of comprehensive income is as follows:
For the three month period ended
November 27 November 28
1998 1997
(in thousands)
Net income $475 $160
Other comprehensive income:
Foreign translation adjustment 75 -
Total comprehensive income $550 $160
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
A summary of the period to period changes in principal items
included in the Statements of Operations is shown in Schedules I
and II (pages 13 and 14).
The discussion below contains certain forward-looking statements
related to, among others but not limited to, among other things,
statements concerning future revenues and future business plans.
Actual results may vary from those contained in such forward-
looking statements.
Results of Operations -1999 Compared to 1998:
Revenue:
The Company's sales were $11,515,000 for the three months ended
November 27, 1998, compared to $16,806,000 for the same period
in fiscal 1998. The decrease in revenue was due to a reduction in
integration services sales by MODCOMP which was offset by a 92%
increase in sales by the CSP MultiComputer Division (CSPI).
MODCOMP accounted for 59% of total revenue. CSP MultiComputer
Division (CSPI) products accounted for 37% of total revenue and
Scanalytics revenue was 4% of the total revenue for the first
quarter of fiscal 1999. Sales for systems integration and
services represented 51% of sales for the quarter compared to 74%
for the same period of the prior fiscal year. In the prior year,
MODCOMP delivered a large integration system which was sold by
its German subsidiary. The sales of these large integration
systems are individual orders.
Systems sales, which include software and hardware products
designed and developed by CSPI and MODCOMP, represented 42% of
total revenue for the first quarter compared to 19% in the same
period of the prior fiscal year. During the quarter, CSPI
delivered a large system to an international defense customer for
an approximately 400 computer node system of its 2640
MultiComputer product for more than $2.6 million which
represented 53% of the systems sales. These systems will be used
by military ships and aircraft using Towed Array Sonar Systems
and sonobuoys simultaneously to locate submarines. The 2000
systems are either based on the Power PC from IBM/Motorola or
Analog Devices SHARC processor and Myrinet networking technology
from Myricom Inc. CSPI`s newest product, the 2000 high-
performance series, will provide the future source of revenue
growth in the MultiComputer division. Sales of this product
represented 27% of total revenue, while the older SuperCard
family of products accounted for approximately 6% of total sales
for the quarter. Sale of machine code readers primarily for
United Parcel Service (UPS), represented 6% of CSP sales for the
quarter. MODCOMP continues to ship its real-time process control
classic product line to its existing customers, which represented
12% of MODCOMP revenue.
Software sales represented 7% of total quarterly sales compared
to 7% in the prior year. Scanalytics accounts for 57% of the
total sales. Scanalytics sales decreased by 17% from the prior
year. The decreased sales were due to the discontinued sales of
certain proprietary hardware products, primarily CellScan, while
the Company is transitioning to a software solutions provider
rather than hardware provider. The MODCOMP internet product,
ViewMax, accounted for 22% of the total software sales for the
year. ViewMax is a legacy-to-web internet software bridge that
allows organizations to connect their legacy mainframe data bases
to their new intranet, extranet, or internet applications.
European sales accounted for 42% of the total revenue for the
quarter. Sales were primarily from MODCOMP's subsidiaries in
Germany, France and United Kingdom. North American sales
represent 35% of total sales. Sales to Asia were 22% of total
revenue. Other International sales represented 1% of total sales.
COST OF SALES:
Cost of sales as a percentage of sales decreased to 53% compared
to 75% for the same period of the prior fiscal year. The
decreased cost of sales was due to a shift in product mix with
the increased sales volume of CSP and MODCOMP service sales,
which have higher product margins than the integration systems
business, which has a large component of third party product
sales. The integration and third-party products are sold at lower
gross profit margins than the proprietary products sold by
MODCOMP, CSPI and Scanalytics. The Company will continue to take
steps to lower the manufacturing overhead and gain the operating
efficiencies to improve the overall efficiency to lower the cost
of goods sold. The future cost of sales as a percent of sales
will fluctuate based on the mix of business, but most probably
will increase from the levels we have historically experienced if
MODCOMP integration systems sales remain as a large percentage of
the total revenue.
Operating Expenses:
Engineering and development expenditures were higher, about 7%
over the same period of the prior fiscal year. The increased
engineering and development expenses were for MODCOMP. The cost
represents labor and outside service expenses, and cost of the
purchase of a one-time universal license for Accessware for
development of the recently announced VIEWTERM and Scadabase
products. The ViewTERM product is similar to View Max in that it
is a bridge between a company's legacy mainframe and its network.
ViewTerm is a lower-cost version for customers that do not need
the customized, application specific reengineering that ViewMax
offers. The ViewTerm product primary development was completed in
the first quarter of fiscal 1999. The Scadabase product was
formerly called AccessPoint for supervisory controls of process
control systems. MODCOMP's engineering and development expenses
represented 34% of the total expense. Scanalytics expenses were
down by approximately 19% and represented 10% of the total cost.
The reduction in expense was due primarily to consolidation of
the two groups (Signal Analytics and CSPI Scanalytics Division)
which included staff reductions. CSP represented 56% of the
total and was approximately at the same level as the prior fiscal
year.
Sales, general and administrative expense increased by 8% in the
first quarter compared to the same period of the previous fiscal
year. The increase in expense was attributable to CSP. CSPI's
expense increased 19% over the prior fiscal year. The increase
in expense was for addition of three individuals in sales and
support, which represented 22% (of the increase), sales
commission for the increased sales volume represented 41% (of the
increase), shareholders services represented 6% (of the increase)
and bonus expense due to the increased profitability 12%(of the
increase). Bonuses for the executives are based on company
revenue and profitability, coupled with individual goals based on
the duties and responsibilities of the individual. Scanalytics
and MODCOMP expenses decreased by 2% and 3% as compared to the
prior year.
Other income expenses and taxes:
Other income expense was down by approximately $129,000 as
compared to the same as the same period in the prior year. This
was due in part to the reduction in investment income which
represented 36% of the reduction. A decrease in other income
from our MODCOMP operation represented 43% of the total
reduction.
The Company showed a high effective tax rate of 54%, which is
above the normal US statutory rate. This was due to the large
portion of foreign-based revenue and profits from France and
Germany which have high statutory tax rates. The Company will
continue to review with advisors the most effective tax strategy
to reduce our lower effective rate.
Financial Position, Capital Resources and Liquidity:
The Company still has a solid financial position with working
capital increasing to $23. 2 million at November 27, 1998. The
Company's inventory decreased to $5.8 million from $6.3 million.
This was due to the large number of shipments in the
MultiComputer Division.
Management believes that all the Company's current and
foreseeable needs can be met through working capital generated by
operations and investments.
Inflation and Changing Prices:
Management does not believe that inflation and changing prices
had significant impact on sales, revenues or income from
continued operations during the three month period ended
November 27, 1998. There is no assurance, however, that the
Company's business will not be materially and adversely affected
by inflation and changing prices in the future .
Factors That May Affect future Performance:
This document contains forward-looking statements based on
current expectations that involve a number of risks and
uncertainties. The factors that could cause actual results to
differ materially include the following: general economic
conditions and growth rates in the peripherals and computer
products, biological imaging software and instruments and machine
code readers industries; competitive factors and pricing
pressures; changes in product mix; the timely development and
acceptance of new products; inventory risks due to shifts in
market demand; and component constraints and shortages. In
response to competitive pressures or new product introductions,
the Company may take certain pricing or marketing actions that
could adversely effect the Company's operating results. In
addition, changes in the mix of old products may cause
fluctuations in the Company's gross margin. Due to the potential
quarterly fluctuations in operating results, the Company believes
that quarter to quarter comparisons, if its results of operations
are not necessarily an indicator of future performance.
The markets for the Company's products are characterized by
rapidly changing technology, new products introduction and short
product life cycles. These changes can adversely affect the
business and operating results. The Company's success will depend
upon its ability to enhance its existing products and to develop
and introduce, on a timely and cost effective basis, new products
that keep pace with technological developments and address
increasing customer requirements. The inability to meet these
demands could adversely effect the Company's business and
operating results.
Year 2000
Historically, certain computer programs have been written using
two digits rather than four digits to define year. This could
result in computer recognizing a date using "00" as the year 1900
rather than the year 2000, resulting in potential major system
failures or miscalculations. This problem will be referred to as
the "Year 2000."
The Company has reviewed both its internal computer systems and
its products that could be affected by the "Year 2000" issue and
has identified some systems and a few products that will be
affected. The Company presently believes with modification to
existing software and conversion to new software, the "Year 2000"
issues related to internal computer system and products will not
cause significant operational or computer problems. Furthermore,
the cost of implementing these solutions is anticipated to be
immaterial to the financial position or results of operations.
The cost of such conversions and updates are based on
management's best estimates, which were based on numerous
assumptions of future activities such as, but not limited to,
availability and cost of personnel needed to correct and train,
ability to locate and correct relevant computer code. The Company
has not identified alternative remediation plans if upgrade or
replacement is not feasible. The Company will consider the need
for such remediation plans as it continues to asset the Year 2000
risk.
The Company has initiated and will continue formal communication
with all of its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to those
third parties failure to correct their own "Year 2000" issues.
There can be no guarantee that the systems of other companies on
which significant supplies and large customers rely upon will be
timely converted or failure to convert by another, will not have
a material impact on the Company.
CSP, INC. AND SUBSIDIARIES SCHEDULE I
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE OF SALES
(Dollars in thousands)
(Unaudited)
/--For the three months---/
ended
Nov. Nov.
27, 28,
1998 % 1997 %
Sales 11,515 100% 16,806 100%
Costs and expenses:
Cost of sales 6,077 53% 12,535 75%
Engineering and 1,129 10% 1,054 6%
development
Selling, general 3,348 29% 3,106 18%
and admin.
Total costs and 10,554 92% 16,695 99%
expenses
Operating income 961 8% 111 1%
Other income 86 1% 215 1%
Income before taxes 1,047 9% 326 2%
Income tax expense 572 5% 166 1%
Net income 475 4% 160 1%
CSP, INC. AND SUBSIDIARIES SCHEDULE II
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD TO PERIOD DOLLAR AND PERCENTAGE CHANGE
(Dollars in thousands)
(Unaudited)
/-For the three months-/
ended
November 27, 1998 vs November 28, 1997
$ %
Change Change
Sales (5,291) (31%)
Costs and expenses:
Cost of sales (6,458) (52%)
Engineering and development 75 7%
Selling, general & admin. 242 8%
Total costs and expenses (6,141) (37%)
Operating income (loss) 850 766%
Other income (129) (60%)
Income before income taxes 721 221%
Income tax expense (benefit) 406 245%
Net income $315 297%
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a vote of Security
Holders
None
Item 6. Exhibit and Reports on Form 8-K
a) Reports on Form 8-K
b) Exhibits
27.0 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CSP Inc.
(Registrant)
Date: January 11, 1999 By: /s/Alexander R. Lupinetti
Chief Executive Officer
and President
Date: January 11, 1999 By: /s/Gary W. Levine
Vice President of Finance
and Chief Financial Officer
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial informtion extracted from Form-10Q
and is qualified in its entirety by reference to such financial statements.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] AUG-27-1999
[PERIOD-END] NOV-27-1998
[CASH] 2,832
[SECURITIES] 10,636
[RECEIVABLES] 8,143
[ALLOWANCES] 362
[INVENTORY] 5,791
[CURRENT-ASSETS] 29,806
[PP&E] 13,959
[DEPRECIATION] 10,746
[TOTAL-ASSETS] 37,154
[CURRENT-LIABILITIES] 6,559
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 36
[OTHER-SE] 26,994
[TOTAL-LIABILITY-AND-EQUITY] 37,154
[SALES] 11,515
[TOTAL-REVENUES] 11,515
[CGS] 6,077
[TOTAL-COSTS] 10,554
[OTHER-EXPENSES] (86)
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 1,047
[INCOME-TAX] 572
[INCOME-CONTINUING] 475
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 475
[EPS-PRIMARY] .15
[EPS-DILUTED] .14
</TABLE>
