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:
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.
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
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
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.
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.
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
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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders.
PART II
Item 5.
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.
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.
Item 6. Selected Financial Data
This information is set forth in the Selected Financial Data section of Item 8 (page 51).
Item 7.
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.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements and supplementary data for CSP Inc. are included herein.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
None
PART III
Item 10.
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.
(c) Identification of Certain Significant Employees
None
(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.
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.
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.
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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statement filed as part of this report:
(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.
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.
CSP INC.
ANNUAL REPORT ON FORM 10-K
Item 8 Financial Statements and Supplementary Data Year Ended August 31, 2001
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
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value)
See accompanying notes to consolidated financial statements.
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)
See accompanying notes to consolidated financial statements.
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended August 31, 2001, August 31, 2000 and August 27, 1999 (Amounts in thousands)
See accompanying notes to consolidated financial statements.
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended August 31, 2001, August 31, 2000 and August 27, 1999 (Amounts in thousands)
See accompanying notes to consolidated financial statements.
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.
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.
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:
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
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.
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:
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.
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventories
Inventories consist of the following:
4. Accumulated Other Comprehensive Income
The components of Accumulated Other Comprehensive Income are as follows:
5. Income Taxes:
Reconciliation of expected income tax expense (benefit) to actual income tax expense (benefit) is as follows:
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:
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:
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:
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
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:
The following table summarizes information about fixed stock options outstanding at August 31, 2001.
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:
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.
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:
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).
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:
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:
Long-lived assets by geographic location at August 31, 2001, August 31, 2000 and August 27, 1999 were as follows:
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.
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:
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:
- -------- (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
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.
The following table details the Company's earnings in fiscal years 2001 and 2000:
Revenue
CSPI considers its products to be in four segment classifications. Each segment is broken down by related business activities, which crosses different business operations. These segments are based on the different customer activity of the Company. CSPI has four major segments: Systems which includes company manufactured hardware products, System and Service Integration which includes maintenance of the Company and other systems sold and integration and sale of third party hardware products and services, E-Commerce software which includes WAP66(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
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
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:
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.
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):
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.
The following table details engineering and development expenses by operating segment and subsidiary for fiscal years 2001 and 2000 (amounts in thousands):
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.
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.
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.
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:
Revenue
The following table details the Company's sales by operating segment for fiscal years 2000, 1999 and 1998:
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.
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:
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.
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):
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):
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:
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.
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.
CSP INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
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: