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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 30, 2002
Commission File Number 0-10843
CSP Inc.
(Exact name of registrant as specified in its charter)
| Massachusetts |
|
04-2441294 |
| (State of Incorporation) |
|
(IRS Employer Identification Number) |
43 Manning Road, Billerica, Massachusetts 01821-3901 (978) 663-7598
(Address and telephone number of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act
Common Stock (par value $0.01 per share)
Indicate by check mark whether Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
As
of December 10, 2002, there were 3,531,975 shares of Common Stock outstanding. The aggregate market value of shares of such Common Stock (based upon the last sale price of $2.70 of a share as reported for December 9, 2002 on the NASDAQ National
Market System) held by non-affiliates was approximately $9,536,333.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant’s Proxy Statement to be dated December 20, 2002 in connection with
Registrant’s 2002 Annual Meeting of Stockholders scheduled to be held on January 27, 2003 are incorporated by reference in Part III hereof.
PART I
Item 1. Business
(a) General
Development of Business
CSP Inc. (“CSPI” or the “Company”) was founded in 1968 and is
based in Billerica, Massachusetts, just off Route 128 in the Boston computer corridor. To meet the diverse requirements of its industrial, commercial, scientific and defense customers worldwide, CSPI and its subsidiaries develop and market software
for E-business solutions and image processing, network management, security and storage systems integration services and high-performance cluster computer systems.
CSPI operates in four segments. The four segments are: systems, which include manufactured hardware products, systems integration and services, which includes maintenance
and integration and sale of third-party hardware products and services, E-business software and “other software” products that are developed by the Company.
MODCOMP, Inc. is a multinational business operation that develops and markets e-business solutions and provides network management, storage systems and security integration
services including consulting, system integration and outsourcing. MODCOMP’s newest software product is Xport, a messaging server that handles high throughput messages between host systems and client devices like fax, email and telex. In
addition, MODCOMP develops and markets ViewMax, which is a development software that allows companies to rapidly re-engineer and integrate their legacy application with Internet technologies and AIM66, which is a multichannel transaction server
software that supports WAP, GPRS, I-mode and UMTS which are critical for the 3G wireless deployment in Europe. The company sells all of its products through its own direct sales force in the U.S., Germany and U. K. It also sells their products and
services through distributors in the rest of the world.
The Company has another business operation, Scanalytics,
which develops and markets imaging systems for molecular and cell biology. Its revenues are reported in the other software segment. 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 directly and through a network of distributors and resellers.
The CSPI MultiComputer Division is another business operation that reports its activity in the systems segment. The 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 distributors in the rest of the
world.
(b) Financial Information about Industry Segments
The Company operates in four segments, Systems, Service and system integration, E-business Software, and Other Software. The following
table presents sales by each segment:
| |
|
2002
|
|
%
|
|
|
2001
|
|
%
|
|
|
2000
|
|
%
|
|
| |
|
(Dollars in thousands) |
|
| Systems |
|
$ |
7,531 |
|
27 |
% |
|
$ |
8,430 |
|
20 |
% |
|
$ |
12,772 |
|
21 |
% |
| Service and system integration |
|
|
17,226 |
|
62 |
|
|
|
29,693 |
|
71 |
|
|
|
45,597 |
|
73 |
|
| E-business software |
|
|
1,811 |
|
6 |
|
|
|
1,906 |
|
5 |
|
|
|
1,810 |
|
3 |
|
| Other Software |
|
|
1,543 |
|
5 |
|
|
|
1,887 |
|
4 |
|
|
|
1,842 |
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Sales |
|
$ |
28,111 |
|
100 |
% |
|
$ |
41,916 |
|
100 |
% |
|
$ |
62,021 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
(c) Narrative Description of Business
The Company and its subsidiaries develop and market Internet software for E-business solutions, image-processing software, network
management integration services and high-performance cluster computer systems.
Products and Services
CSPI Systems
CSPI Systems 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 Company 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 of the Company’s current products are easily scalable to a 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 and FastCluster are the newest products. Product improvements, as well as new complementary products beneficial to both of these product line are continuously under development.
FastCluster Products
In April 2000, CSPI 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 G4 processors from Motorola™ incorporating AltiVec™ technology, high-speed memory and
Myrinet™ 2000. FastCluster products use the industry-standard Linux operating system for
PowerPC™ 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 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 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
3
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™ RISC processors, Myrinet™ networking technology, Message Passing
Interface (MPI) software for interprocessor communications and the VxWorks® 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
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.
Computer Hardware
In 1988, MODCOMP, Inc. systems began selling RealStar family of
computers, based on open systems VME and Motorola 68k 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, the Company introduced 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, the Company 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.
The Company also continues to offer refurbished CLASSIC(legacy
computer systems) and MODACS proprietary systems as well as parts and services from 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.
Service and
System Integration
Integration Services
In recent years, the Company’s product offering has shifted away from the sales of systems produced (proprietary and open architecture) hardware toward
integration solutions including hardware, software, special engineering, and third-party hardware and software. The Company’s value proposition is integrating these components together into a complete solution and installing the system at the
customer site. These services are
4
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.
The Company continues to sell refurbished legacy systems and components, especially as it relates to servicing current
customers with replacement and/or upgraded systems. The old legacy computer systems generally can be expanded without major redesign as customer requirement’s change.
The legacy computer systems are generally utilized in industrial plants, research laboratories and data processing applications and operate in real-time.
The purchase prices of legacy computer systems are typically priced from $6,000 to $150,000, depending upon customer
requirements.
Computer Software and Computer Programming
Legacy 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. The Company’s software enables customers to write their own real-time application software. These applications, when combined with legacy 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.
Internet Integration and Security Solutions
The Company also offers its own and third-party software products as well as specialized programming and engineering services to supply customers with customized
legacy-to-web, E-business solutions, virtual private networks and Internet security solutions.
E-Business
Software
In fiscal year 1997, the Company launched ViewMax® in the United States. ViewMax® 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. Using ViewMax® technology, the Company creates solutions that extend corporate data to a much wider audience via a corporate
Intranet, Extranet, or the Internet. Using ViewMax®, the Company creates solutions that can also
integrate Electronic Commerce transactions with existing legacy Systems. Although the product has broad potential, the initial user of this technology have used it primarily for facilitating Electronic Commerce and creating Extranets. Current
ViewMax® customers are in the travel, insurance, financial, health services education, government,
manufacturing and distribution markets. Prices for ViewMax® range from $40,000 to $250,000.
The Company 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® is positioned primarily as an integration solution, with a strong focus on Electronic Commerce, Intranet and Extranet implementations. In the US, UK and Germany, a wide range of companies from a broad spectrum of industry
have adopted it, including travel, insurance, automotive, consumer electronics, and financial services.
Additionally, the Company provides Internet security consulting and implementation services for enterprise intrusion prevention and protection. Using third-party products from Checkpoint, MODCOMP ensures data security and integrity
through the establishment of virtual private networks and firewalls.
In particular, the German subsidiary has had
significant successes in the Internet security market in the telecommunications and financial services industries. Offering 7x24 service level agreements are a critical success factor in this market.
5
Wireless Portal Server Software
In fiscal 2002, MODCOMP Germany extended the WAP66 universal wireless transaction server software to be a multichannel transaction server
software, now supporting all existing technologies from WAP, GPRS, I-mode and UMTS. Now offering true Advanced Internet Mobility support software, WAP66 has been renamed AIM66. This offering will enable MODCOMP to participate in the upcoming mobile
services delivery market, which is a critical success factor for the telecommunication industry to succeed with 3G technology in Europe.
Messaging Software
In June 2002, MODCOMP Ltd. acquired the communications
business of Sipher Software Ltd.—Sipher is a UK company specializing in Message Oriented Middleware solutions for companies like Barclays Bank, JP Morgan, Hong Kong Telecom and the BBC.
The Sipher acquisition included the relevant expertise in enterprise level messaging solutions and the Intellectual Property for the core-messaging server called Xport.
This product has advanced gateway functionality for handling high throughput messages between host business systems such as IBM mainframes and client devices—fax, email, telex, EDI. The in-line processing engine can be configured to sort, map,
filter and transcribe messages before being delivered to client devices, systems, databases or other applications.
Competitors include Topcall and Progress Software as well as EDS, IBM Global Services and Ernst & Young, who provide custom message integration solutions for the banking industry using products like IBM MQ Series and TIBCO.
Other Software
In this segment, 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 2002, the other software segment focused its
efforts in three applications areas of biotechnology and life science research: Digital Microscopy, Genomics, and High Throughput Screening. Products are sold through two channels: directly to researchers via our 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 our staff . The Company 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 $3,495 and extensions range in price from $600 to $3,000.
Genomics
GeneProfiler is the backbone of the other 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.
6
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 $5,000. 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.
Markets, Marketing and Dependence on Certain Customers
Systems
The Company markets its FastCluster computer
systems into the high-end scientific/technical/commercial high-performance computing (HPC) segments 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 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 American 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 Company 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.
7
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 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 completed. SuperCards are also sold
to medical imaging equipment suppliers on an OEM basis. No new SuperCard based programs are anticipated.
The
Company sells all products through its own direct sales force in the U.S. and via distributors in the rest of the world.
Service and System Integration
MODCOMP supplies and integrates network and storage
solutions and designs, 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 $5,642,000 (20%) in 2002. This
customer is a “wireless” telecommunication company in Germany. The Company anticipates that, for the foreseeable future, a significant percentage of its sales will be dependent upon a relatively small number of customers.
The Company markets its products through various sales offices in the U.S., Canada, Germany and England (for a detailed list
see Item 2 of Form 10-K contained herein). Throughout the remainder of the world, these offices coordinate the activities of independent distributors and manufacturers representatives who represent other company’s product lines not competitive
with CSPI and are either paid a commission on units sold or are permitted to buy units at a discount for subsequent resale.
Geographically, Europe accounts for approximately 59% of total sales. Historically, approximately 70% of the Company’s revenue were generated internationally. During the current year, the Company had significant sales from
system integration customers in Germany. Accordingly, changes in market conditions in European countries in which we operate may significantly affect the Company performance.
Competition
CSPI Systems
The MultiComputer systems market is very competitive. The Company believes its products to be among the leaders in the use of open and
standard technologies, elegance in packaging and price/performance. The markets addressed by CSPI’s MultiComputer systems product are characterized by rapid technological change, and the introduction of new products with superior capabilities
or lower pricing could adversely affect the Company’s business.
8
The future growth of the MultiComputer systems market depends upon providing high
density and scalability in a compact low-power and inexpensive package that can be easily integrated into original equipment manufacturers (OEM) designed for high performance computation. Since the majority of sales are to OEMs, the principal
barrier to competition is the reluctance of established users to redesign their product once it is in production.
2000 SERIES Competition
The Company’s direct competitors for the MultiComputer
systems in the defense market are Mercury Computer Inc. and Sky Computers, Inc. DSP board manufacturers including DY4, Synergy, Thales Computers and DNA Computing, that specialize in the DSP segment of this market are indirect competitors. In the
low performance segment of the market general-purpose computer and single board computer, manufacturers such as Motorola, Force, Hewlett Packard and Dell may compete. New companies enter the field periodically, and larger companies with greater
technical resources and marketing organizations could decide to compete in the future.
FastCluster
Competition
Companies manufacturing general-purpose computer systems incorporating multiple processors
will be the principal competitors for the FastCluster products. FastCluster products are distinguished by their elegant packaging providing the highest density and lowest power consumption, high-speed node-to-node communications—providing true
scalability and optimum performance and a completely integrated architecture—combining Linux, MPI, Myrinet and fault tolerance features. CSPI believes that its FastCluster products offer the best value in combined performance, features and
price. FastCluster is a newly introduced product line and these distinguishing characteristics may not overcome the capabilities of much larger companies competing in this segment of the high-performance computer market.
Systems- MODCOMP Legacy
MODCOMP’s systems competition in its Process Control and Data Acquisition business crosses product line boundaries. Competition in its proprietary product line is with third-party companies that
have developed technical expertise with the CLASSIC computer system family. Direct competitors include Accurate Computers, Queue Systems, Protostar, and Electronic Visions.
Competitors for both Company proprietary and open systems product lines also include systems integrators with process control skills in markets such as primary metals, oil
and gas, power, rubber and plastics, pharmaceuticals, chemicals, pulp and paper, and food and beverages. These competitors offer alternative open systems hardware platforms and industry-specific tailored application software packages.
Direct competition with its real-time UNIX operating system used in legacy systems includes VxWorks, HP-UX, PowerMAX, Windows
NT, Lynx, QNX, and Linux. As performance in microprocessor technology rapidly advances, real-time capabilities of competing operating systems narrows. Competing products are differentiated by hardware platform support and operating system
robustness.
Service and System Integration
In the network management and storage systems integration services business, MODCOMP competitors are extensive and are different in each of the geographical markets but
they include such competitors as EDS, IBM, and Sun Microsystems.
E-business software
The Company’s principal, direct competitors to ViewMax in the Legacy Extension market space are IBM, Jacada, Attachmate,
Clientsoft, Intelligent Environments, and Micro Focus, International. Companies such as
9
Jacada, Attachmate and IBM have greater technical and marketing resources, and could adversely affect our position. Additionally, in the Internet Security Services area, the principal direct
competitors are ISS, Enterasys, VeriSign, Computer Associates, IBM, HP and TruSecure. Again, these companies have greater financial, technical and marketing resources, and could adversely affect our position.
Competitors for the Company’s AIM66 transaction server software, in this new wireless market segment, range from small, single
product companies to large multinational companies with much greater resources like Oracle, IBM, and Microsoft.
Other Software
In the Digital Microscopy market, the Company’s major competitors are
Media Cybernetics, Universal Imaging, and ImproVision. Other competitors include Compact, Carl Zeiss, Intelligent Imaging, and QED Imaging. In the Genomics market, major competitors include Genomic Solutions, Media Cybernetics, BioRad, and Alpha
Innotech. In the High Throughput Screening market, the only other software company that competes directly with the Company is BioDiscovery. Competitors in all of these markets range from small, single product companies to large, multinational
instrument companies. The Company maintains its competitive advantage by offering high-value solutions.
Manufacturing, Assembly and
Testing
All of the Company’s MultiComputer systems manufacturing is performed at its plant in Billerica,
Massachusetts. The primary manufacturing process is the assembly and test of printed circuit boards and systems, designed by the Company and fabricated by other vendors. The Company endeavors to build for inventory and offers products in a variety
of standard formats. A small percentage of sales reflect products customized to a particular customer’s specification, and even these products are easily reconfigurable should the customer cancel the order for any reason.
Upon receipt of material by the Company from outside suppliers, products and components are inspected by the Company’s
QC/QA technicians. During manufacture and assembly, both subassemblies and completed systems are subjected to extensive testing, including burn-in and vibration procedures designed to minimize equipment failure. The Company also uses diagnostic
programs to detect and isolate potential component failures. A comprehensive log is maintained of all past failures to monitor quality procedures and improve design standards.
The Company is solely dependent upon Myricom Inc., Arcadia, CA, for the networking technology integrated circuit devices used in 2000 SERIES MultiComputer products. The
Company has sufficient quantities of these components on hand to satisfy anticipated demand. Myricom has assured the Company that supplies will continue to be available for reasonable quantities required.
SuperCard products were designed using the Intel i860 RISC microprocessor. Intel discontinued production of the i860 at the end of the
1998 calendar year. CSPI has made provisions to accommodate the future needs of all its SuperCard customers for this product. No new application development programs will be initiated incorporating SuperCard products. However, SuperCard products
will continue to be shipped into existing programs that have committed to the SuperCard end-of-life plan.
The
MultiComputer Division does not consider the risk of interruption of supply to be significant to meet its projected revenue requirements for the immediate future.
The Company provides a warranty covering defects arising from products sold and service performed, which varies from 90 days to one year, depending upon the particular
unit. However, warranties of substantially greater scope have been extended to certain major customers for financial and other considerations.
10
All “other software” products and manuals are shipped from the Fairfax,
Virginia facility. The Company performs system integration of computer equipment with various image capture devices, such as microscopes or digital cameras, at their facilities in Virginia before installation at the customer site.
MODCOMP’s refurbished system configurations can include a wide selection of peripheral subsystems built or purchased under
the original equipment manufacturer agreements. The Legacy system manufacturing facility is located in Fort Lauderdale, Florida. The process is controlled by various quality steps throughout the process. The assembly cycle of an individual system
generally takes between 30 and 45 days, depending on its complexity.
Customer Support
The MultiComputer systems division and Scanalytics (other software) support its customers with telephone assistance, on-site service,
system installation, and training and education. Product support service is provided by the Company during the warranty period. Customers may purchase extended software and hardware maintenance and on-site service contracts for support beyond the
warranty period. Each problem reported by a customer is reviewed by an analyst who researches the issue and assists the customer to resolve the problem.
The Company offers training courses at either corporate headquarters or the customer site. Field and customer service support is provided through its headquarters in Billerica, Massachusetts for
systems customers. Scanalytics (other software) provides support service through its Fairfax, Virginia headquarters.
Support for “legacy systems” is delivered in a number of ways including telephone assistance, on-site service, installation of systems, training and education. Service and parts warranty, generally of 90 days duration is
provided on all products. In addition, the Company sells maintenance service contracts to customers. The Company also conducts customer training courses of one to three weeks’ duration on a fee basis either at their or the customer’s
location.
Field and customer service support is provided through offices strategically located throughout the
world.
Research and Development
During fiscal 2002, CSPI’s expenses (including depreciation) for engineering and development were approximately $3,737,000 (13% of sales) compared to approximately $3,823,000 (9% of sales) and
$4,031,000 (6% of sales) in fiscal years 2001 and 2000, respectively. Expenditures for engineering and development are expensed as they are incurred. CSPI MultiComputer systems Division expects to continue substantial expenditures, both in
additional applications software development and development of hardware and software. “Other software” will continue to expand its product offering in software with its various products in gel and cell analysis for life sciences and
complete new releases of the PC version of the IP Lab software product. The MultiComputer systems products and development currently in process are intended to extend the usefulness and marketability of existing products and introduce new products
into existing market segments. “E-business” will continue development of the ViewMax, Sipher and AIM66 products, as well as Linux and ScadaBase for SCADA solutions.
During 2002, Scanalytics finalized its IPLab software to work under the Windows operating systems, bringing it to parity with the Macintosh product. Scanalytics also worked
on three other major projects: improvements to the MicroArray Suite product line for Macintosh; updates to the Macintosh products to maintain their competitiveness; and development of the Elispot Imager.
CSPI “systems and other software” has 41 employees, of which 16 professional and staff employees were engaged in software and
hardware engineering and development activities as of September 30, 2002.
11
The” legacy system and service and system integration” engineering and
development staff has developed various computers, computer peripherals and software since 1970, which it continues to maintain and enhance.
The Company’s principal products are the CLASSIC hardware and software system line, Linux and ScadaBase application software and special one-of-a-kind products requested by customers.
The CLASSIC hardware and software line is a proprietary line of mini-computers and related software especially
designed for the hard real-time market and has been in existence since 1970.
“Legacy, service and systems
integration” and “E-business” groups have 103 employees, of which 5 professional and staff employees are engaged in software and hardware engineering and development.
The Company does not have any patents that are material to its business.
Backlog
The Company’s backlog of customer orders and contracts was approximately
$3,343,000 at September 30, 2002 as compared to $4,628,000 at August 31, 2001. The backlog of the Company can fluctuate greatly. These fluctuations can be due to the timing of receiving large orders for integration services and OEM purchases.
Employees
On September 30, 2002, the Company had 144 employees. None of the Company’s employees is represented by a labor union and the Company had no work stoppages. The Company considers relations with its employees to be good.
(c) Financial Information about Foreign and Domestic Operations and Export Sales
The Company’s sales and percentage of sales by geographic area based on the location of the customers are as follows:
| |
|
For year ended
|
|
| |
|
September 30,
2002
|
|
|
August 31
|
|
| |
|
|
2001
|
|
|
2000
|
|
| Europe |
|
$ |
16,478 |
|
59 |
% |
|
$ |
27,981 |
|
67 |
% |
|
$ |
43,882 |
|
71 |
% |
| North America |
|
|
10,225 |
|
36 |
|
|
|
13,411 |
|
32 |
|
|
|
16,234 |
|
26 |
|
| Asia |
|
|
1,408 |
|
5 |
|
|
|
524 |
|
1 |
|
|
|
1,690 |
|
3 |
|
| Other |
|
|
— |
|
— |
|
|
|
— |
|
— |
|
|
|
215 |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
28,111 |
|
100 |
% |
|
$ |
41,916 |
|
100 |
% |
|
$ |
62,021 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Factors
This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to
predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. 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 products and services mix 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.
12
Markets for the Company’s products and services 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
services and to develop and introduce, on a timely and cost effect 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.
Dependence on Key Customers
The Company is dependent on a small number of customers for a large portion of its revenues. E-Plus, a wireless telecommunications company
in Germany, accounted for 20%, 40% and 36% of sales in fiscal years ended September 30, 2002, August 31, 2001 and 2000. A significant diminution in the sales to or loss of any of the Company’s major customers would have a material adverse
effect on the Company’s business, financial condition and results of operations. In addition, the Company’s revenues are largely dependent upon the ability of its customers to continue growth or need for services or to develop and sell
products that incorporate the Company’s products. No assurance can be given that the Company’s customers will not experience financial or other difficulties that could adversely affect their operations and, in turn, the results of
operations of the Company.
Competition
The markets for the Company’s products are highly competitive and are characterized by rapidly changing technology, frequent product performance improvements and
evolving industry standards. Due to the rapidly changing nature of technology, new competitors may emerge of which the Company has no current awareness. Such competitors could have a negative impact on the Company’s ability to win future
business opportunities. There can be no assurance that or a new competitor will not attempt to penetrate the various markets for our products and services. Their entry into markets historically targeted by CSPI may have a material adverse effect on
the Company’s business, financial condition and results of operations.
Slowdown in the Economy
The Company’s business has been negatively impacted by the slowdown in the economies of the United
States, Europe and elsewhere that began during fiscal 2001. The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital investment and may cause further reduction of such investments. These reductions
have been particularly severe in the electronics and technology industry. The Company cannot predict if or when the growth rate of worldwide economies will rebound, whether the growth rate of its business will rebound when the worldwide economies
begin to grow, or if or when the Company’s growth rate will return to historical numbers.
Change in
Operating Results
The Company has experienced fluctuations in its results of operations in large part due to
the sale by the Company of its systems and services integration and servers, E-business software and other software in relatively large dollar amounts to a relatively small number of customers. Operating results also have fluctuated due to the
competitive pricing programs and volume discounts, the loss of customers, market acceptance of the Company’s products, product obsolescence and general economic conditions. The Company’s gross margins from third-party products are
typically lower than the Company’s gross margins from standard product revenues. The Company expects research and development expenses to continue as the Company continues to develop products and services to serve its markets, all of which are
subject to rapidly changing technology, frequent product performance improvements and evolving industry standards. The ability to deliver peak performance on a timely and cost-effective basis is a critical factor in wins for future generations of
defense business. Significant research and development spending by the Company does not ensure its systems will be designed into a customer’s
13
system. Because future production orders are usually contingent upon securing a design win, the Company’s operating results may fluctuate due to either obtaining or failing to obtain design
wins for significant customer systems.
The Company’s quarterly results may be subject to fluctuations
resulting from the foregoing factors as well as from a number of other factors, including the timing of significant orders, delays in completion of internal product development projects, delays in shipping the Company’s computer systems and
software programs, delays in acceptance testing by customers, a change in the mix of products sold to the defense and other markets, production delays due to quality programs with outsourced components, shortages of components, the timing of product
line transitions and declines in quarterly revenues from previous generations of products following announcement of replacement products containing more advanced technology. Another factor contributing to fluctuations in quarterly results is the
fixed nature of the Company’s expenditures on personnel, facilities and marketing programs. The Company’s expense levels for personnel, facilities and marketing programs are based, in significant part, on the Company’s expectations of
future revenues. If actual quarterly revenues are below management’s expectations, results of operations likely will be adversely affected. As a result of the foregoing factors, the Company’s operating results, from time to time, may be
below the expectations of public market analysts and investors, which could have a material adverse effect on the price of the Company’s Common Stock.
Dependence on Suppliers
Several components used in the
Company’s products are currently obtained from sole-source suppliers. CSPI is dependent on key vendors like Myricom as well as Motorola for many of its PowerPC line of processors. Generally, suppliers may terminate their contract with the
Company without cause upon 30-days notice and may cease offering products to the Company upon 180-days notice. If Motorola was to limit or reduce the sale of such components to the Company, or if these or other component suppliers to the Company,
some of which are small companies, were to experience financial difficulties or other problems which prevented them from supplying the Company with the necessary components, such events could have a material adverse effect on the Company’s
business, financial condition and results of operations. These sole source and other suppliers are each subject to quality and performance issues, materials shortages, excess demand, reduction in capacity and other factors that may disrupt the flow
of goods to the Company or its customers; thereby adversely affect the Company’s business and customer relationships. The Company has no guaranteed supply arrangements with its suppliers and there can be no assurance that its suppliers will
continue to meet the Company’s requirements. If the Company’s supply arrangements are interrupted, there can be no assurance that the Company would be able to find another supplier on a timely or satisfactory basis. Any shortage or
interruption in the supply of any of the components used in the Company’s products, or the inability of the Company to procure these components from alternate sources on acceptable terms could have a material adverse effect on the
Company’s business, financial condition and results of operations. There can be no assurance that severe shortages of components will not occur in the future. Such shortages could increase the cost or delay the shipment of the Company’s
products, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Significant increases in the prices of these components would also materially adversely affect the Company’s
financial performance since the Company may not be able to adjust product pricing to reflect the increase in component costs. The Company could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due
to work stoppages, shipping delays, financial difficulties or other factors and, under certain circumstances, these costs and delays could have a material adverse effect on the Company’s business, financial condition and results of operations.
Dependence on Defense Business
Sales of the Company’s systems to the defense market accounted for approximately 16%, 17% and 16% of the Company’s revenues in fiscal year ended September 30,
2002, August 31, 2001 and 2000, respectively. Reductions in government spending on programs that incorporate the Company’s products could have a material adverse effect on the Company’s business, financial condition and results of
operations. Moreover, the
14
Company’s subcontracts are subject to special risks, such as: delays in funding; ability of the government agency to unilaterally terminate the prime contract; reduction or modification in
the event of changes in government policies or as the result of budgetary constraints or political changes; increased or unexpected costs under fixed price contracts; and other factors that are not under the control of the Company. In addition,
consolidation among defense industry contractors has resulted in fewer contractors with increased bargaining power relative to the Company. No assurance can be given that such increased bargaining power will not adversely affect the Company’s
business, financial condition or results of operations in the future.
Changes in government administration, as
well as changes in the geo-political environment such as the current “War on Terrorism,” can have significant impact on defense spending priorities and the efficient handling of routine contractual matters. Such changes could have a
negative impact on the Company’s business, financial condition, or results of operations in the future.
Dependence Upon Key Personnel and Skilled Employees
The Company is largely dependent upon
the skills and efforts of its senior management, managerial, sales and technical employees. None of the senior management or other key employees of the Company are subject to any employment contract which require services for a person of time. The
loss of services of any of its executives or other key personnel could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s future success will depend to a significant
extent on its ability to attract, train, motivate and retain highly skilled technical professionals. The Company’s ability to maintain and renew existing engagements and obtain new business depends, in large part, on its ability to hire and
retain technical personnel with the skills that keep pace with continuing changes in industry standards and technologies. The inability to hire additional qualified personnel could impair the Company’s ability to satisfy its growing client
base, requiring an increase in the level of responsibility for both existing and new personnel. There can be no assurance that the Company will be successful in retaining current or future employees.
Risk of International Operations
The Company markets and sells its products in certain international markets, and the Company has established subsidiaries in the United Kingdom, and Germany. Foreign-based revenue is determined based
on the country in which the legal subsidiary is domiciled, and represented 59%, 67% and 71% of the Company’s total revenue for the fiscal years ended September 30, 2002, August 31, 2001 and 2000, respectively. If revenues generated by foreign
activities are not adequate to offset the expense of establishing and maintaining these foreign subsidiaries and activities, the Company’s business, financial condition and results of operations could be materially adversely affected. In
addition, there are certain risks inherent in transacting business internationally, such as changes in applicable laws and regulatory requirement, export and import restrictions, export controls relating to technology, tariffs and other trade
barriers, less favorable operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, expatriation controls and potential adverse tax consequences, any of which could
adversely impact the success of the Company’s international activities. In the recent past, the financial markets in Asia have experienced significant turmoil. A portion of the Company’s revenues from sales to foreign entities, including
foreign governments, is in the form of foreign currencies. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company’s future international activities and, consequently, on the
Company’s business, financial condition or results of operations.
Technological Changes
The Company’s future success will depend in part on its ability to enhance its current products and to develop new
products on a timely and cost-effective basis in order to respond to technological developments and changing customer needs. The defense market, in particular, demands constant technological improvements as a means of gaining military advantage.
Military planners historically have funded significantly more design
15
projects than actual deployments of new equipment, and those systems that are deployed tend to contain the components of the subcontractors selected to participate in the design process. In order
to participate in the design of new defense electronics systems, the Company must be able to demonstrate its ability to deliver superior technological performance on a timely and cost-effective basis. There can be no assurance that the Company will
be able to secure an adequate number of defense electronics design wins in the future, that the equipment in which the Company’s products are intended to function eventually will be deployed in the field, or that the Company’s products
will be included in such equipment if it eventually is deployed.
The design-in process is typically lengthy and
expensive, and there can be no assurance that the Company will be able to continue to meet the product specifications of its OEM customers in a timely and adequate manner. In addition, any failure by the Company to anticipate or respond adequately
to changes in technology and customer preferences, or any significant delay in product developments or introductions, could have a material adverse effect on the Company’s business, financial condition and results of operations, including the
risk of inventory obsolescence. Because of the complexity of its products, the Company has experienced delays from time to time in completing products on a timely basis. If the Company is unable to design, develop or introduce competitive new
products on a timely basis, its future operating results would be adversely affected. There can be no assurance that the Company will be successful in developing new products or enhancing its existing products on a timely or cost-effective basis, or
that such new products or product enhancements will achieve market acceptance.
Research and Development
The Company’s industry is characterized by the need for continued investment in research and
development. If the Company failed to invest sufficiently in research and development, the Company’s products could become less attractive to potential customers, and its business and financial condition could be materially adversely affected.
As a result of the Company’s need to maintain or increase its spending levels in this area the difficulty in reducing costs associated with research and development, the Company’s operating results could be materially harmed if its
revenues fall below expectations. In addition, as a result of CSPI’s commitment to invest in research and development, spending as a percent of revenues may fluctuate in the future.
16
Item 2. Properties
Listed below are CSPI’s principal facilities as of September 30, 2002. 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.
| Location
|
|
Principal Use
|
|
Owned or Leased
|
|
Approximate Floor Area
|
| CSP Inc.
43 Manning Road
Billerica, MA |
|
Corporate Headquarters Manufacturing, Sales, Marketing, and Administration |
|
Leased |
|
21,500 S.F. |
| |
| Scanalytics, Inc.
8550 Lee Highway, Suite 400
Fairfax, VA |
|
Corporate Headquarters Sales, Marketing, and Administration |
|
Leased |
|
3,518 S.F. |
| |
| MODCOMP, Inc.
1650 West McNab Road
Ft. Lauderdale, FL |
|
Corporate Headquarters Sales, Marketing, and Administration |
|
Leased |
|
77,429 S.F. |
| |
| MODCOMP Canada, Ltd.
530 Otto Road
Unit 11A
Mississaugu, Ontario Canada |
|
Sales, Marketing, and Administration |
|
Leased |
|
730 S.F. |
| |
| Modular Computer System, GmbH
Oskar-Jager-Strasse 125-143
D-50825
Koln Germany |
|
Sales, Marketing, and Administration |
|
Leased |
|
1,837 S.F. |
| |
| MODCOMP, Ltd.
Acorn House
61 Peach Street
Wokingham RG40 1XP
United Kingdom |
|
Sales, Marketing, and Administration |
|
Leased |
|
5,173 S.F. |
| |
| MODCOMP Systemhaus, GmbH
Gartenstr. 23-27
61352 Bad Homburg |
|
Sales, Marketing and Service |
|
Leased |
|
945 S.F. |
In addition to the facilities listed above, CSPI also leases space
in various domestic and international industrial centers for use as sales and service offices.
Item
3. Legal Proceedings
The Company is currently not a party to any
material proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders.
Additional Available Information
Our principal Internet address is www.cspi.com. We make our annual, quarterly and current reports, and amendments to those reports, available, free of charge on www.cspi.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
17
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded in the over-the-counter market and is quoted on the NASDAQ System under the symbol “CSPI”. The following table sets forth the range of closing high
and low selling prices for the Common Stock as reported by NASDAQ.
| |
|
2002
|
|
2001
|
| Fiscal Year:
|
|
High
|
|
Low
|
|
High
|
|
Low
|
| 1st Quarter |
|
$ |
3.79 |
|
$ |
3.31 |
|
$ |
6.44 |
|
$ |
3.69 |
| 2nd Quarter |
|
|
4.10 |
|
|
3.35 |
|
|
4.25 |
|
|
2.63 |
| 3rd Quarter |
|
|
4.14 |
|
|
2.85 |
|
|
4.25 |
|
|
3.28 |
| 4th Quarter |
|
|
3.31 |
|
|
2.35 |
|
|
4.00 |
|
|
3.51 |
As of December 5, 2002, there were 3,531,975 shares of Common Stock
outstanding, held of record by approximately 123 stockholders. The Company believes the number of beneficial owners of shares (including shares held in street name) at that date were approximately 1,700.
The Company has never paid any cash dividends on its Common Stock. The Company’s present policy is to retain earnings to finance
expansion and growth, and no change in the policy is anticipated.
Item 6. Selected Financial
Data
This information is set forth in the Selected Financial Data section of Item 8 (page 63).
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of
Operations
This information is set forth in the Management’s Discussion and Analysis of
Financial Conditions and Results of Operations section of Item 8.
Item 7A. Quantitative and
Qualitative Disclosure about Market Risk
The Company, in the normal course of doing business, is
exposed to the risks associated with foreign currency exchange rates. The Company does not hold any market risk sensitive instruments, and minimizes its exposure through judicious management of its international assets and liabilities.
The Company minimizes its foreign inventory levels, and enters into foreign currency transactions only in those countries where
it has foreign operations, and is therefore able to offset resultant assets with local liabilities.
18
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements for CSP Inc. are included herein.
| |
|
Page
|
| Independent Auditors’ Report |
|
29 |
| |
| Consolidated Balance Sheets as of September 30, 2002 and August 31, 2001 |
|
30 |
| |
| Consolidated Statements of Operations for the years ended September 30, 2002, August 31, 2001 and 2000
|
|
31 |
| |
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended September 30, 2002,
August 31, 2001 and 2000 |
|
32 |
| |
| Consolidated Statements of Cash Flows for the years ended September 30, 2002, August 31, 2001 and 2000
|
|
33 |
| |
| Notes to Consolidated Financial Statements |
|
34-51 |
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosures
None
19
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Registrant hereby incorporates by reference in
this Form 10-K certain information contained under the caption “Election of Directors” in Registrant’s Proxy Statement to be dated December 18, 2002 in connection with its Special meeting in lieu of Annual Meeting of Stockholders to
be held on January 27, 2003 (“Registrant’s 2002 Proxy Statement”).
(b) Identification of Executive Officers
Information about the executive
officers of the Company is set forth below.
| Name and Age
|
|
Business Affiliations
|
| Alexander R. Lupinetti (57) |
|
Chairman, Chief Executive Officer and President of CSPI since October 1996; President and Chief Executive Officer of each of the TCAM Systems Inc., Shared
Systems Corporation and SoftCom Systems, Inc. subsidiaries of Stratus Computer Inc. from 1987 to 1996. |
| |
| Gary W. Levine (54) |
|
Vice President of Finance and Chief Financial Officer of CSPI since September 1983; Controller of CSPI from May 1983 to September 1983. |
| |
| Scott M. Mitchell (46) |
|
Vice President of Corporate Business Development of CSPI since August 2001; Chief Operating Officer of Dataware Solutions, Inc. from 2000 to 2001; Business
Unit Manager—Engineering Staffing Service of Adept, Inc. from 1998 to 2000; Director of Marketing Programs of Stratus Computer, Inc. from 1995 to 1998; UNIX Business Development Manager of Stratus Computer, Inc. from 1991 to 1995.
|
| |
| William E. Bent, Jr. (46) |
|
Vice President of CSPI and General Manager of MultiComputer Division since July 2000; Vice President of Engineering for MultiComputer Division from October
1999 to July 2000; Director of Engineering for MultiComputer Group from March 1996 to October 1999; Sr. Technical Manager of Optronics, An Intergraph Division, from 1989 to March 1996. |
| |
| Fernando Delaville (45) |
|
President and Chief Executive Officer of Scanalytics since April 2000; Biomedical Products Manager at Atto Instruments, LLC from May 1998 to April 2000;
Manager of Microscopy Applications at Scanalytics from September 1992 to April 1998; Biomedical Equipment Specialist at Thomas Jefferson University from November 1989 to August 1992; Research Scientist at University of Massachusetts Medical Center
from February 1987 to October 1989. |
(c) Identification of Certain Significant Employees
None
(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 2002 Proxy Statement with respect to the business experience of
20
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
2002 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 2002 Proxy Statement.
Item
11. Executive Compensation
The Registrant hereby incorporates by
reference in this Form 10-K certain information contained under the caption “Executive Compensation” in Registrant’s 2002 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The Registrant hereby incorporates by reference in this Form 10-K certain information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in Registrant’s 2002 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 2002 Proxy Statement.
(c) Changes in Control
The Registrant knows of no contractual arrangements, including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.
Item
13. Certain Relationships and Related Transactions
The Registrant
hereby incorporates by reference in this Form 10-K certain information contained under the captions “Security Ownership of Certain Beneficial Owners and Management,” “Election of Directors” and “Executive Compensation”
in Registrant’s 2002 Proxy Statement.
Item 14. Control and Procedures
(a) Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and
procedures,” which are defined under SEC rules as controls and other
21
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Based upon that evaluation, the Company’s Chairman and Chief Executive Officer and its Chief Financial Officers concluded that the Company’s disclosure controls and procedures were effective.
(b) Change in internal controls
There were no significant changes in the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date of their
most recent evaluation.
22
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statement filed as part of this report:
| Independent Auditors’ Report |
|
|
| |
| Consolidated Balance Sheets as of September 30, 2002 and August 31, 2001 |
|
|
| |
| Consolidated Statements of Operations for the years ended September 30, 2002, August 31, 2001 and 2000 |
|
|
| |
| Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2002, August 31, 2001 and 2000 |
|
|
| |
| Consolidated Statements of Cash Flows for the years ended September 30, 2002, August 31, 2001 and 2000 |
|
|
| |
| Notes to Consolidated Financial Statements |
|
|
(2) Financial Statement Schedules
All other financial statements and schedules not listed have been omitted since the required information is included in the
Consolidated Financial Statements or the Notes thereto of the Registrant included in Item 8, or is not applicable, material or required.
(3) Exhibits
Certain of the Exhibits listed hereunder have previously
been filed with the Commission and are hereby incorporated by reference pursuant to Rule 12b-32 under the Securities Exchange Act of 1934 and Rule 24 of the Commissions Rules of Practice. The location of each document so incorporated by reference is
noted parenthetically.
| |
| 3.1 |
|
Articles of Organization and amendments thereto, of the Company as of the end of Fiscal 1986 (Exhibit 3.1 to the Form 10-K for the
year ended August 31, 1990) |
| |
| 3.2 |
|
By-Laws of the Company, as amended through March 21, 1995 (Exhibit 3.2 to the Form 10-K for the year ended August 31,
1996) |
| |
| 10.1 |
|
Form of Invention Agreement between the Company and certain of its employees |
| |
| 10.2 |
|
CSPI Supplemental Retirement Income Plan (Exhibit 10.13 to Form 8 amendment 2 to Form 10-K for year ended August 31, 1986, dated
February 23, 1987) |
| |
| 10.3 |
|
Trust Agreement (between CSP Inc. and Bank of Boston) dated January 5, 1987 as amended (Exhibit 10.11 to Form 10-K for year ended
August 31, 1990) |
| |
| 10.4 |
|
1991 Incentive Stock Option Plan (the Plan is included in the Company’s Proxy Statement dated November 10, 1991 with respect to
the Annual Meeting of Stockholders of the Company on December 10, 1991) |
| |
| 10.5 |
|
Employment Agreement between CSP Inc. and Mr. Lupinetti dated September 12, 1996 (Exhibit 10.14 to Form 10-K for the year ended August
30, 1996) |
| |
| 10.6 |
|
ModComp/Cerplex L.P. Purchase Agreement (Exhibit 10.15 to Form 10-K for the year ended August 29, 1997) |
| |
| 10.7 |
|
1997 Incentive Stock Option Plan as amended ( Included in the Notice of Special Meeting in Lieu of Annual Meeting of Stockholders
dated January 8, 1998) |
23
| |
| 10.8 |
|
1997 Employees Stock Purchase Plan( Included in the Notice of Special Meeting in Lieu of Annual Meeting of Stockholders dated January
8, 1998) |
| |
| 10.9 |
|
Lease Agreement for property located at 43 Manning Road, Billerica, MA between CSP Inc. and New Boston (Exhibit 10.16 to form 10-K for
the year ended August 31, 2001) |
| |
| 11.0 |
|
Basic and Diluted Earnings Per Share Computation for the years ended August 31, 2001, August 31, 2000, and August 27,
1999 |
| |
| 22.1 |
|
Subsidiaries of the Registrant (Exhibit 22.1 to Form 10-K for the year ended September 30, 2002) |
| |
| 23.0 |
|
Consent of Independent Certified Public Accountant |
| |
| 99.0 |
|
Certification Pursuant Section 606 of the Sarbanres-Oxley Act of 2002 |
24
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. |
|
|
| |
| By: |
|
/s/ ALEXANDER R. LUPINETTI
|
| |
|
Alexander R. Lupinetti |
| |
|
Chief Executive Officer, President and Chairman |
Date: December 20, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Registrant and in the capacities
and on the date indicated.
| Name
|
|
Title
|
|
Date
|
| /s/ ALEXANDER R.
LUPINETTI
Alexander R. Lupinetti |
|
Chief Executive Officer,
President and Chairman |
|
December 20, 2002 |
| |
| /s/ GARY W.
LEVINE
Gary W. Levine |
|
Vice President of Finance,
Chief Financial Officer |
|
December 20, 2002 |
| |
| /s/ J. DAVID
LYONS
J. David Lyons |
|
Director |
|
December 20, 2002 |
| |
| /s/ C. SHELTON
JAMES
C. Shelton James |
|
Director |
|
December 20, 2002 |
| |
| /s/ SANDFORD
SMITH
Sandford Smith |
|
Director |
|
December 20, 2002 |
| |
| /s/ ROBERT
WILLIAMS
Robert Williams |
|
Director |
|
December 20, 2002 |
| |
| /s/ CHRISTOPHER
HALL
Christopher Hall |
|
Director |
|
December 20, 2002 |
25
CERTIFICATE
I, Alexander Lupinetti certify that:
| |
1. |
|
I have reviewed this annual report on Form 10-K of CSP Inc (“the registrant”); |
| |
2. |
|
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| |
4. |
|
The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a.) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| |
b.) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and |
| |
c.) |
|
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date; |
| |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the
registrant’s board of directors: |
| |
a.) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and |
| |
b.) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
| |
6. |
|
The Company’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| By: |
|
/s/ ALEXANDER R.
LUPINETTI
|
| |
|
Alexander R. Lupinetti |
| |
|
Chief Executive Officer |
December 20, 2002
26
CERTIFICATE
I, Gary W. Levine certify that:
| |
1. |
|
I have reviewed this annual report on Form 10-K of CSP Inc (“the registrant”); |
| |
2. |
|
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| |
4. |
|
The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a.) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| |
b.) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and |
| |
c.) |
|
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date; |
| |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the
registrant’s board of directors: |
| |
a.) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and |
| |
b.) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
| |
6. |
|
The Company’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| By: |
|
/s/ GARY W.
LEVINE
|
| |
|
Gary W. Levine |
| |
|
Chief Financial Officer |
December 20, 2002
27
CSP INC.
ANNUAL REPORT ON FORM 10-K
Item 8
Financial Statements and Supplementary Data
Year Ended September 30, 2002
28
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 September 30, 2002 and August 31, 2001 and the related statements of operations, shareholders’ equity and comprehensive income and cash flows for each of the years
ended September 30, 2002, and August 31, 2001 and 2000. 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 September 30, 2002 and August 31, 2001 and the results of their operations and their cash flows
for each of the years ended September 30, 2002 and August 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
November 15, 2002
Boston, Massachusetts
29
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
| |
|
September 30,
2002
|
|
|
August 31, 2001
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
3,835 |
|
|
$ |
1,835 |
|
| Short-term investments |
|
|
11,991 |
|
|
|
11,893 |
|
| Accounts receivable, net of allowance for doubtful accounts of $394 in 2002 and $261 in 2001 |
|
|
2,500 |
|
|
|
5,731 |
|
| Inventories |
|
|
2,834 |
|
|
|
5,312 |
|
| Deferred income taxes |
|
|
264 |
|
|
|
942 |
|
| Other current assets |
|
|
869 |
|
|
|
921 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
22,293 |
|
|
|
26,634 |
|
| |
|
|
|
|
|
|
|
|
| Property, equipment and improvements, net |
|
|
1,182 |
|
|
|
1,417 |
|
| |
|
|
|
|
|
|
|
|
| Other assets: |
|
|
|
|
|
|
|
|
| Long-term investments |
|
|
125 |
|
|
|
350 |
|
| Deferred income taxes |
|
|
— |
|
|
|
1,602 |
|
| Goodwill, net of accumulated amortization of $937 and $765 in 2002 and 2001 |
|
|
582 |
|
|
|
754 |
|
| Other assets |
|
|
1,580 |
|
|
|
1,592 |
|
| |
|
|
|
|
|
|
|
|
| Total other assets |
|
|
2,287 |
|
|
|
4,298 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
25,762 |
|
|
$ |
32,349 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable and accrued expenses |
|
$ |
3,344 |
|
|
$ |
4,014 |
|
| Deferred compensation and retirement plans |
|
|
341 |
|
|
|
207 |
|
| Income taxes payable |
|
|
396 |
|
|
|
485 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
4,081 |
|
|
|
4,706 |
|
| Deferred compensation and retirement plans |
|
|
7,353 |
|
|
|
5,329 |
|
| Other long-term liabilities |
|
|
20 |
|
|
|
12 |
|
| |
|
|
|
|
|
|
|
|
| Total Liabilities |
|
|
11,454 |
|
|
|
10,047 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and contingencies Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Common stock, $.01 par; authorized, 7,500 shares; issued 4,095 and 4,085 shares |
|
|
41 |
|
|
|
41 |
|
| Additional paid-in capital |
|
|
11,275 |
|
|
|
11,235 |
|
| Retained earnings |
|
|
10,038 |
|
|
|
16,359 |
|
| Accumulated other comprehensive income |
|
|
(4,189 |
) |
|
|
(2,472 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
|
17,165 |
|
|
|
25,163 |
|
| Less treasury stock, at cost, 571 and 570 shares |
|
|
(2,857 |
) |
|
|
(2,861 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
14,308 |
|
|
|
22,302 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
25,762 |
|
|
$ |
32,349 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
30
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)
| |
|
Year ended September 30, 2002
|
|
|
Years ended August 31,
|
|
| |
|
|
2001
|
|
|
2000
|
|
| Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
7,531 |
|
|
$ |
8,430 |
|
|
$ |
12,772 |
|
| Service and system integration |
|
|
17,226 |
|
|
|
29,693 |
|
|
|
45,597 |
|
| E-business software |
|
|
1,811 |
|
|
|
1,906 |
|
|
|
1,810 |
|
| Other software |
|
|
1,543 |
|
|
|
1,887 |
|
|
|
1,842 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total sales |
|
|
28,111 |
|
|
|
41,916 |
|
|
|
62,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
|
4,988 |
|
|
|
5,286 |
|
|
|
4,907 |
|
| Service and system integration |
|
|
13,450 |
|
|
|
25,426 |
|
|
|
38,304 |
|
| E-business software |
|
|
915 |
|
|
|
764 |
|
|
|
781 |
|
| Other software |
|
|
425 |
|
|
|
539 |
|
|
|
507 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total cost of sales |
|
|
19,778 |
|
|
|
32,015 |
|
|
|
44,499 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
8,333 |
|
|
|
9,901 |
|
|
|
17,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| Engineering development |
|
|
3,737 |
|
|
|
3,823 |
|
|
|
4,031 |
|
| Selling, general and administrative |
|
|
7,922 |
|
|
|
8,905 |
|
|
|
12,320 |
|
| Restructuring |
|
|
394 |
|
|
|
85 |
|
|
|
64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
12,053 |
|
|
|
12,813 |
|
|
|
16,415 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
|
(3,720 |
) |
|
|
(2,912 |
) |
|
|
1,107 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other income(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
| Dividend income |
|
|
8 |
|
|
|
24 |
|
|
|
11 |
|
| Interest income |
|
|
476 |
|
|
|
554 |
|
|
|
548 |
|
| Interest expense |
|
|
(37 |
) |
|
|
(98 |
) |
|
|
(89 |
) |
| Loss on disposal of French operation |
|
|
— |
|
|
|
(423 |
) |
|
|
(240 |
) |
| Gain on sale of property |
|
|
— |
|
|
|
1,545 |
|
|
|
— |
|
| Impairment charge on investments |
|
|
— |
|
|
|
(1,205 |
) |
|
|
— |
|
| Other |
|
|
(99 |
) |
|
|
(207 |
) |
|
|
331 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total other income, net |
|
|
348 |
|
|
|
190 |
|
|
|
561 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income taxes |
|
|
(3,372 |
) |
|
|
(2,722 |
) |
|
|
1,668 |
|
| Provision for income taxes |
|
|
2,291 |
|
|
|
163 |
|
|
|
993 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
|
$ |
675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share-basic |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding-basic |
|
|
3,524 |
|
|
|
3,527 |
|
|
|
3,572 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share-diluted |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares outstanding-diluted |
|
|
3,524 |
|
|
|
3,527 |
|
|
|
3,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
31
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Years ended September 30, 2002, August 31, 2001 and 2000
(Amounts in thousands)
| |
|
Shares
|
|
Amount
|
|
Additional
paid-in
Capital
|
|
Retained earnings
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Treasury
stock
|
|
|
Total
Shareholders
Equity
|
|
|
Comprehensive income (loss)
|
|
| Balance, August 27, 1999 |
|
4,020 |
|
$ |
40 |
|
$ |
10,812 |
|
$ |
19,287 |
|
|
$ |
(456 |
) |
|
$ |
(2,318 |
) |
|
$ |
27,365 |
|
|
|
|
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
— |
|
|
— |
|
|
— |
|
|
675 |
|
|
|
— |
|
|
|
— |
|
|
|
675 |
|
|
$ |
675 |
|
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized loss on available-for-sale securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(33 |
) |
|
|
— |
|
|
|
(33 |
) |
|
|
(33 |
) |
| Effect of foreign currency translation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(590 |
) |
|
|
— |
|
|
|
(590 |
) |
|
|
(590 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of stock options |
|
35 |
|
|
1 |
|
|
196 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
197 |
|
|
|
|
|
| Issuance of shares under employee stock purchase plan |
|
14 |
|
|
— |
|
|
62 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62 |
|
|
|
|
|
| Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
(230 |
) |
|
|
(230 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, August 31, 2000 |
|
4,069 |
|
|
41 |
|
|
11,070 |
|
|
19,962 |
|
|
|
(1,079 |
) |
|
|
(2,548 |
) |
|
|
27,446 |
|
|
|
|
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(2,885 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,885 |
) |
|
|
(2,885 |
) |
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized loss on available-for-Sale securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(68 |
) |
|
|
— |
|
|
|
(68 |
) |
|
|
(68 |
) |
| Effect of foreign currency translation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
147 |
|
|
|
— |
|
|
|
147 |
|
|
|
147 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional Minimum pension liability |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(1,472 |
) |
|
|
— |
|
|
|
(1,472 |
) |
|
|
(1,472 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(4,278 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercise of stock options |
|
2 |
|
|
— |
|
|
7 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
|
|
| Issuance of shares under employee stock purchase plan |
|
14 |
|
|
— |
|
|
56 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56 |
|
|
|
|
|
| Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
(313 |
) |
|
|
(313 |
) |
|
|
|
|
| Dividend distribution of shares of Vertical Buyer |
|
— |
|
|
— |
|
|
— |
|
|
(718 |
) |
|
|
— |
|
|
|
— |
|
|
|
(718 |
) |
|
|
|
|
| Income tax benefit related to exercise of stock options |
|
— |
|
|
— |
|
|
102 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
102 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance August 31, 2001 |
|
4,085 |
|
|
41 |
|
|
11,235 |
|
|
16,359 |
|
|
|
(2,472 |
) |
|
|
(2,861 |
) |
|
|
22,302 |
|
|
|
|
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(658 |
) |
|
|
— |
|
|
|
— |
|
|
|
(658 |
) |
|
|
(658 |
) |
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized loss on available-for-sale securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(8 |
) |
|
|
(8 |
) |
| Effect of foreign currency translation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
|
|
22 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(644 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30, 2001 |
|
4,085 |
|
|
41 |
|
|
11,235 |
|
|
15,701 |
|
|
|
(2,458 |
) |
|
|
(2,861 |
) |
|
|
21,658 |
|
|
|
|
|
| Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(5,663 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,663 |
) |
|
|
(5,663 |
) |
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized loss on available-for-sale securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(22 |
) |
|
|
— |
|
|
|
(22 |
) |
|
|
(22 |
) |
| Effect of foreign currency translation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
129 |
|
|
|
— |
|
|
|
129 |
|
|
|
129 |
|
| Additional minimum pension liability |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
(1,838 |
) |
|
|
— |
|
|
|
(1,838 |
) |
|
|
(1,838 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,394 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of shares under employee stock purchase plan |
|
10 |
|
|
— |
|
|
40 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
|
|
| Sale of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30, 2002 |
|
4,095 |
|
$ |
41 |
|
$ |
11,275 |
|
$ |
10,038 |
|
|
$ |
(4,189 |
) |
|
$ |
(2,857 |
) |
|
$ |
14,308 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
32
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 2002, August 31, 2001, and 2000
(Amounts in thousands)
| |
|
Years ended
|
|
| |
|
September 30, 2002
|
|
|
August 31,
|
|
| |
|
|
2001
|
|
|
2000
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
|
$ |
675 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
837 |
|
|
|
964 |
|
|
|
1,388 |
|
| Gain (loss) on sale of property, net |
|
|
9 |
|
|
|
(1,318 |
) |
|
|
— |
|
| Non-cash changes in accounts receivable and inventory allowances |
|
|
790 |
|
|
|
523 |
|
|
|
336 |
|
| Impairment charge on investments |
|
|
— |
|
|
|
1,205 |
|
|
|
— |
|
| Deferred compensation and retirement plans |
|
|
859 |
|
|
|
1,721 |
|
|
|
35 |
|
| Deferred income taxes |
|
|
2,671 |
|
|
|
(318 |
) |
|
|
(387 |
) |
| Effects of additional minimum pension liability |
|
|
(1,838 |
) |
|
|
(1,472 |
) |
|
|
— |
|
| Income tax benefit related to exercise of stock options |
|
|
— |
|
|
|
102 |
|
|
|
— |
|
| Other assets |
|
|
(29 |
) |
|
|
(43 |
) |
|
|
(171 |
) |
| Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Decrease in accounts receivable, net |
|
|
1,771 |
|
|
|
1,258 |
|
|
|
540 |
|
| Decrease (increase) in inventories |
|
|
1,862 |
|
|
|
(901 |
) |
|
|
(310 |
) |
| Decrease (increase) in other current assets |
|
|
163 |
|
|
|
(121 |
) |
|
|
745 |
|
| Increase (decrease) in accounts payable and accrued expenses |
|
|
33 |
|
|
|
(968 |
) |
|
|
(939 |
) |
| Increase(decrease) in income taxes payable |
|
|
23 |
|
|
|
(328 |
) |
|
|
766 |
|
| Decrease in other liabilities |
|
|
8 |
|
|
|
12 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) operating activities |
|
|
1,496 |
|
|
|
(2,569 |
) |
|
|
2,678 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Purchases of available-for-sale securities |
|
|
(589 |
) |
|
|
(344 |
) |
|
|
(707 |
) |
| Purchases of held-to-maturity securities |
|
|
(27,949 |
) |
|
|
(47,428 |
) |
|
|
(36,177 |
) |
| Sales of available-for-sale securities |
|
|
595 |
|
|
|
472 |
|
|
|
525 |
|
| Maturities of held-to-maturity securities |
|
|
27,889 |
|
|
|
44,687 |
|
|
|
35,221 |
|
| Proceeds from sale of property, net of expenses |
|
|
— |
|
|
|
3,097 |
|
|
|
— |
|
| Purchases of property, equipment and improvements |
|
|
(488 |
) |
|
|
(611 |
) |
|
|
(805 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(542 |
) |
|
|
(127 |
) |
|
|
(1,943 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Proceeds from stock options |
|
|
— |
|
|
|
7 |
|
|
|
197 |
|
| Proceeds from issuance of shares under employee stock purchase plan |
|
|
40 |
|
|
|
56 |
|
|
|
62 |
|
| (Purchase) sale of treasury stock |
|
|
4 |
|
|
|
(313 |
) |
|
|
(230 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
44 |
|
|
|
(250 |
) |
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Effects of exchange rate on cash |
|
|
1,002 |
|
|
|
858 |
|
|
|
(590 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
|
|
2,000 |
|
|
|
(2,088 |
) |
|
|
174 |
|
| Cash and cash equivalents, beginning of year |
|
|
1,835 |
|
|
|
3,923 |
|
|
|
3,749 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of year |
|
$ |
3,835 |
|
|
$ |
1,835 |
|
|
$ |
3,923 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Supplementary cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes, net |
|
$ |
339 |
|
|
$ |
756 |
|
|
$ |
896 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
20 |
|
|
$ |
108 |
|
|
$ |
105 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Non-cash distribution of dividends |
|
|
— |
|
|
$ |
718 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
33
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 (August 31, 2000). 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 that 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.
34
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
System sales are recognized at the time of shipment when all revenue criteria have been met. 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 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 collectibility is probable. If collectibility is not considered probable, revenue is recognized when cash is collected.
For multi-element arrangements including training, the Company has established vendor specific evidence (VSOE) of
the fair value of its training element. Therefore, revenue for software sales is recognized upon shipment of licenses and delivery of customization and installation services, and when all other revenue criteria has been met. Revenue from training is
recognized when the service has been delivered and all other revenue recognition criteria have been met.
For
software licenses sold separately without modification and training, revenue is recognized upon delivery.
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.
35
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Earnings Per Share of Common Stock
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:
| |
|
2002
|
|
|
2001
|
|
|
2000
|
| |
|
(Amounts in thousands, except
per share) |
| Net income (loss) |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
|
$ |
675 |
| Weighted average number of shares outstanding—basic |
|
|
3,524 |
|
|
|
3,527 |
|
|
|
3,572 |
| Incremental shares from the assumed exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
91 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of shares outstanding—dilutive |
|
|
3,524 |
|
|
|
3,527 |
|
|
|
3,663 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share—basic |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.19 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share—diluted |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.18 |
| |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 403,455 shares of common stock in 2002, 429,728
shares of common stock in 2001 and 11,800 shares in 2000 were outstanding during the years then ended, but were not included in the year calculation of diluted net income (loss) 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
During 2002, the Company implemented SFAS 141, “Business Combinations”. 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 guidance is applicable for
36
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
transactions subsequent to June 30, 2001. There was no impact on the Company’s results of operations and financial position from the adoption of this pronouncement.
In July 2001, SFAS No. 142, “Goodwill and Other Intangible Assets.” 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. 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 October 1,
2002. The Company currently anticipates that there will be no goodwill amortization in post implementation years versus goodwill amortization of $157,000 in the current fiscal year and $185,000 in each of the prior two fiscal years.
In June 2001, SFAS 143, Accounting for Asset Retirement Obligations (“SFAS 143”) was issued. This statement
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 and 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 effect of this pronouncement on the results of operations and financial position of the
Company, but currently believes the effect will not be material.
The FASB issued SFAS No. 145, “Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, “effective for fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement Amends FASB Statement No. 4 and FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or
describe their applicability under changed conditions. The Company is currently examining the effect of this pronouncement on the results of operations and financial position of the Company, but currently believes the effect will not be material.
On July 30, 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”. Statement No. 146 is based on the fundamental principle that a liability for a cost associated with an exit or disposal activity should be recorded when it (1) is incurred, that is, when it meets the definition of a liability in
FASB Concepts Statement No. 6, “Elements of Financial Statements”, and (2) can be measured at fair value. Statement No. 146 is effective for exit and disposal activities initiated after December 31, 2002. The Company is currently examining
the effect of this pronouncement on the results of operations and financial position of the Company, but currently believes the effect will not be material.
Reclassifications
Certain reclassifications were made to
the 2001 and 2000 financial statements to conform to the 2002 presentation.
37
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Change in Fiscal Year
Effective on September 1, 2001 the Company changed its fiscal year end from August 31st to September 30th. This change was effective for the one-month period ended
September 30, 2001. The following table presents the audited Consolidation statement of Cash Flows and Statement of Operation, for the one-month ended September 30, 2001:
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share
data)
| Sales |
|
|
|
|
| Systems |
|
$ |
22 |
|
| Service and system integration |
|
|
1,428 |
|
| E-Commerce software |
|
|
2 |
|
| Other software |
|
|
45 |
|
| |
|
|
|
|
| Total sales |
|
$ |
1,497 |
|
| |
|
|
|
|
| Cost of sales |
|
|
|
|
| Systems |
|
|
178 |
|
| Service and system integration |
|
|
1,186 |
|
| Other software |
|
|
18 |
|
| |
|
|
|
|
| Total cost of sales |
|
|
1,382 |
|
| |
|
|
|
|
| Gross profit |
|
|
115 |
|
| Operating expenses |
|
|
|
|
| Engineering and development |
|
|
291 |
|
| Selling, general and administrative |
|
|
706 |
|
| |
|
|
|
|
| Total operating expenses |
|
|
997 |
|
| |
|
|
|
|
| Operating loss |
|
|
(882 |
) |
| Other expense |
|
|
(142 |
) |
| |
|
|
|
|
| Loss before income taxes |
|
|
(1,024 |
) |
| Income tax benefit |
|
|
366 |
|
| |
|
|
|
|
| Net loss |
|
$ |
(658 |
) |
| |
|
|
|
|
| Net loss per share—basic and diluted |
|
$ |
(0.19 |
) |
| |
|
|
|
|
| Weighted average shares outstanding—basic and diluted |
|
|
3,513 |
|
| |
|
|
|
|
38
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| Cash flows from operating activities: |
|
|
|
|
| Net loss |
|
$ |
(658 |
) |
| Adjustments to reconcile net income loss to net cash provided by (used in) operating activities: |
|
|
|
|
| Depreciation and amortization |
|
|
78 |
|
| Impairment charge on investments |
|
|
77 |
|
| Deferred income taxes |
|
|
(391 |
) |
| Other assets |
|
|
13 |
|
| Changes in current assets and liabilities: |
|
|
|
|
| Decrease in accounts receivable, net |
|
|
1,438 |
|
| Increase in inventories |
|
|
(23 |
) |
| Decrease in other current assets |
|
|
19 |
|
| Decrease in accounts payable and accrued expenses |
|
|
(986 |
) |
| Increase in income taxes payable |
|
|
38 |
|
| |
|
|
|
|
| Net cash provided by (used in) operating activities |
|
|
(393 |
) |
| |
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
| Purchases of held-for-sale securities |
|
|
(20 |
) |
| Purchases of held-to-maturity securities |
|
|
(2,615 |
) |
| Sales of available-for-sale securities |
|
|
36 |
|
| Maturities of held-to-maturity securities |
|
|
2,663 |
|
| Purchases of property, equipment and improvements |
|
|
(29 |
) |
| |
|
|
|
|
| Net cash used in investing activities |
|
|
35 |
|
| |
|
|
|
|
| Net cash provided by(used in) financing activities |
|
|
— |
|
| |
|
|
|
|
| Effects of exchange rate on cash |
|
|
33 |
|
| |
|
|
|
|
| Net decrease in cash |
|
|
(325 |
) |
| Cash and cash equivalents, at August 31, 2001 |
|
|
1,835 |
|
| |
|
|
|
|
| Cash and cash equivalents, at September 30, 2001 |
|
$ |
1,510 |
|
| |
|
|
|
|
39
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Investments
At September 30, 2002 and August 31, 2001, investments consisted of the following:
| |
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Fair Value
|
| |
|
(Amounts in thousands) |
| September 30, 2002 |
|
|
|
|
|
|
|
|
|
| Marketable equity securities |
|
$ |
479 |
|
$ |
37 |
|
$ |
516 |
| Bonds and municipal revenue notes |
|
|
6,171 |
|
|
— |
|
|
6,171 |
| Money market funds and commercial paper |
|
|
5,304 |
|
|
— |
|
|
5,304 |
| U.S. treasury bills |
|
|
125 |
|
|
— |
|
|
125 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
12,079 |
|
$ |
37 |
|
$ |
12,116 |
| |
|
|
|
|
|
|
|
|
|
| August 31, 2001 |
|
|
|
|
|
|
|
|
|
| Marketable equity securities |
|
$ |
530 |
|
$ |
67 |
|
$ |
597 |
| Bonds and municipal revenue notes |
|
|
6,454 |
|
|
— |
|
|
6,454 |
| Money market funds and commercial paper |
|
|
4,941 |
|
|
— |
|
|
4,941 |
| Investment in Vertical Buyer |
|
|
77 |
|
|
— |
|
|
77 |
| U.S. treasury bills |
|
|
173 |
|
|
— |
|
|
173 |
| |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
12,175 |
|
$ |
67 |
|
$ |
12,242 |
| |
|
|
|
|
|
|
|
|
|
| |
| |
|
Short-term
|
|
Long-term
|
|
Total
|
| September 30, 2002 |
|
|
|
|
|
|
|
|
|
| Held-to-maturity |
|
$ |
11,512 |
|
$ |
125 |
|
$ |
11,637 |
| Available-for-sale |
|
|
479 |
|
|
— |
|
|
479 |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
11,991 |
|
$ |
125 |
|
$ |
12,116 |
| |
|
|
|
|
|
|
|
|
|
| |
| |
|
Short-term
|
|
Long-term
|
|
Total
|
| August 31, 2001 |
|
|
|
|
|
|
|
|
|
| Held-to-maturity |
|
$ |
11,363 |
|
$ |
350 |
|
$ |
11,713 |
| Available-for-sale |
|
|
530 |
|
|
— |
|
|
530 |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
11,893 |
|
$ |
350 |
|
$ |
12,243 |
| |
|
|
|
|
|
|
|
|
|
Net unrealized gains on available-for-sale investments are reported
as a separate component of stockholders’ equity until realized. This change in unrealized loss amounted to ($22,000), ($68,000) and ($33,000) for the years ended September 30, 2002, August 31, 2001 and 2000, respectively.
Assets of $705,000 and $828,000 at September 30, 2002 and August 31, 2001, 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. 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 and recorded that distribution as a dividend of $718,000. The Company recorded impairment charges on the Vertical Buyer investment of $1,205,000 and
$77,000 in the period ended August 31, 2001 and September 30, 2001.
40
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Inventories
Inventories consist of the following:
| |
|
September 30, 2002
|
|
August 31, 2001
|
| |
|
(Amounts in thousands) |
| |
| Raw materials |
|
$ |
1,255 |
|
$ |
2,957 |
| Work-in-process |
|
|
130 |
|
|
439 |
| Finished goods |
|
|
1,449 |
|
|
1,916 |
| |
|
|
|
|
|
|
| Total |
|
$ |
2,834 |
|
$ |
5,312 |
| |
|
|
|
|
|
|
4. Accumulated Other Comprehensive Income
The components of Accumulated Other Comprehensive Income are as follows:
| |
|
Unrealized Gain (loss) On Investments
|
|
|
Foreign Translation Adjustment
|
|
|
Accumulated Additional Pension Liability
|
|
|
Accumulated Other Comprehensive Income
|
|
| |
|
(Amounts in thousands) |
|
| Balance August 27, 1999 |
|
$ |
168 |
|
|
$ |
(624 |
) |
|
|
— |
|
|
$ |
(456 |
) |
| Change in period |
|
|
(33 |
) |
|
|
(590 |
) |
|
|
— |
|
|
|
(623 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance August 31, 2000 |
|
|
135 |
|
|
|
(1,214 |
) |
|
|
— |
|
|
|
(1,079 |
) |
| Change in period |
|
|
(68 |
) |
|
|
147 |
|
|
|
(1,472 |
) |
|
|
(1,393 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance August 31, 2001 |
|
|
67 |
|
|
|
(1,067 |
) |
|
|
(1,472 |
) |
|
|
(2,472 |
) |
| Change in period |
|
|
(8 |
) |
|
|
22 |
|
|
|
— |
|
|
|
14 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30, 2001 |
|
|
59 |
|
|
|
(1,045 |
) |
|
|
(1,472 |
) |
|
|
(2,458 |
) |
| Change in period |
|
|
(22 |
) |
|
|
129 |
|
|
|
(1,838 |
) |
|
|
(1,731 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance September 30, 2002 |
|
$ |
37 |
|
|
$ |
(916 |
) |
|
$ |
(3,310 |
) |
|
$ |
(4,189 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Income Taxes:
The provisions for income taxes are comprised of the following:
| |
|
Years ended
|
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
August 31, 2000
|
|
| |
|
(Amounts in thousands) |
|
| Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. |
|
$ |
(3,062 |
) |
|
$ |
(2,048 |
) |
|
$ |
(170 |
) |
| Foreign |
|
|
(310 |
) |
|
|
(674 |
) |
|
|
1,838 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
(3,372 |
) |
|
$ |
(2,722 |
) |
|
$ |
1,668 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Current: |
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
$ |
(370 |
) |
|
$ |
— |
|
|
$ |
239 |
|
| State |
|
|
— |
|
|
|
1 |
|
|
|
93 |
|
| Foreign |
|
|
(10 |
) |
|
|
480 |
|
|
|
1,047 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(380 |
) |
|
|
481 |
|
|
|
1,379 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
|
2,935 |
|
|
|
(1,226 |
) |
|
|
(278 |
) |
| State |
|
|
— |
|
|
|
908 |
|
|
|
(108 |
) |
| Foreign |
|
|
(264 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2,671 |
|
|
|
(318 |
) |
|
|
(386 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,291 |
|
|
$ |
163 |
|
|
$ |
993 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of expected income tax expense (benefit) to actual
income tax expense is as follows:
| |
|
Years ended
|
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
August 31, 2000
|
|
| |
|
(Amounts in thousands) |
|
| Computed expected tax expense (benefit) |
|
$ |
(1,147 |
) |
|
34.0 |
% |
|
$ |
(926 |
) |
|
34.0 |
% |
|
$ |
567 |
|
|
34.0 |
% |
| Increases (reductions) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividend exclusion |
|
|
(1 |
) |
|
0.0 |
|
|
|
(6 |
) |
|
0.2 |
|
|
|
(6 |
) |
|
(0.4 |
) |
| Tax exempt interest |
|
|
(23 |
) |
|
0.7 |
|
|
|
(45 |
) |
|
1.7 |
|
|
|
(43 |
) |
|
(2.6 |
) |
| State income taxes, net of federal tax benefit |
|
|
— |
|
|
— |
|
|
|
600 |
|
|
(22.0 |
) |
|
|
(10 |
) |
|
(.6 |
) |
| Amortization of goodwill |
|
|
27 |
|
|
(0.8 |
) |
|
|
36 |
|
|
(1.3 |
) |
|
|
36 |
|
|
2.2 |
|
| Foreign operations |
|
|
(169 |
) |
|
5.0 |
|
|
|
315 |
|
|
(11.6 |
) |
|
|
413 |
|
|
24.8 |
|
| Dividend grossed-up for Foreign tax |
|
|
— |
|
|
— |
|
|
|
107 |
|
|
(3.9 |
) |
|
|
— |
|
|
— |
|
| Nondeductible life insurance |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
(24 |
) |
|
(1.4 |
) |
| Change in valuation allowance |
|
|
3,327 |
|
|
(98.6 |
) |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
| Other items |
|
|
277 |
|
|
(8.2 |
) |
|
|
82 |
|
|
(3.0 |
) |
|
|
60 |
|
|
3.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense |
|
$ |
2,291 |
|
|
(67.9 |
)% |
|
$ |
163 |
|
|
(5.9 |
)% |
|
$ |
993 |
|
|
59.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the years ended September 30, 2002 and August 31, 2001, temporary
differences, which give rise to deferred tax assets (liabilities), are as follows:
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
| Deferred tax assets: |
|
|
|
|
|
|
|
|
| Deferred compensation |
|
$ |
1,125 |
|
|
$ |
1,155 |
|
| Other accruals |
|
|
595 |
|
|
|
785 |
|
| Bad debt reserves |
|
|
— |
|
|
|
90 |
|
| In process research and development |
|
|
143 |
|
|
|
159 |
|
| Inventory capitalization and reserves |
|
|
1,176 |
|
|
|
961 |
|
| State research and development credits, net of federal benefit |
|
|
466 |
|
|
|
389 |
|
| Net operating losses |
|
|
1,020 |
|
|
|
757 |
|
| Unrealized gain or loss |
|
|
442 |
|
|
|
— |
|
| Depreciation and amortization |
|
|
120 |
|
|
|
— |
|
| Other foreign temporary differences |
|
|
264 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Gross deferred tax assets |
|
|
5,351 |
|
|
|
4,296 |
|
| Less: valuation allowance |
|
|
(5,087 |
) |
|
|
(1,578 |
) |
| |
|
|
|
|
|
|
|
|
| Deferred tax asset less valuation allowance |
|
|
264 |
|
|
|
2,718 |
|
| Deferred tax liability: |
|
|
|
|
|
|
|
|
| Accumulated depreciation and amortization |
|
|
— |
|
|
|
(174 |
) |
| |
|
|
|
|
|
|
|
|
| Net deferred tax asset |
|
$ |
264 |
|
|
$ |
2,544 |
|
| |
|
|
|
|
|
|
|
|
The valuation allowance was $5,087,000 and $1,578,000 at September
30, 2002 and August 31, 2001, respectively. 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 the 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 not realize the benefits of these
deductible differences.
As of September 30, 2002, the Company had operating loss carryforwards for federal and
state tax purposes of approximately $2.5 million, which are available to offset future taxable income, if any, through 2022. As of September 30, 2002, the Company also had research and development and other credits for state tax purposes of
approximately $466,000, which may expire in varying amounts through 2017. Net operating loss carryforwards and other tax attributes may be limited in the event the company incurs an ownership change as defined under Internal Revenue Code Section
382.
6. Property, Equipment and Improvements, Net
Property, equipment and improvements, net consist of the following:
| |
|
2002
|
|
2001
|
| |
|
(Amounts in thousands) |
| Building and improvements |
|
$ |
343 |
|
$ |
343 |
| Equipment |
|
|
4,900 |
|
|
5,920 |
| Automotive equipment |
|
|
36 |
|
|
41 |
| |
|
|
|
|
|
|
| |
|
|
5,279 |
|
|
6,304 |
| Less accumulated depreciation and amortization |
|
|
4,097 |
|
|
4,887 |
| |
|
|
|
|
|
|
| Property, equipment and improvements, net |
|
$ |
1,182 |
|
$ |
1,417 |
| |
|
|
|
|
|
|
43
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
| |
|
2002
|
|
2001
|
| |
|
(Amounts in thousands) |
| Accounts payable |
|
$ |
1,195 |
|
$ |
1,587 |
| Commissions |
|
|
21 |
|
|
55 |
| Compensation and fringe benefits |
|
|
1,195 |
|
|
1,151 |
| Customer advances |
|
|
152 |
|
|
183 |
| Professional fees and shareholders’ reporting costs |
|
|
259 |
|
|
293 |
| Taxes, other than income |
|
|
46 |
|
|
418 |
| Other |
|
|
476 |
|
|
327 |
| |
|
|
|
|
|
|
| |
|
$ |
3,344 |
|
$ |
4,014 |
| |
|
|
|
|
|
|
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 plans provide 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 September 30, 2002:
| |
|
Weighted average Exercise price of shares under plans
|
|
Number of Shares
|
|
| |
|
|
1997 Plan
|
|
|
1991 Plan
|
|
|
1981 Plan
|
|
|
Total
|
|
| Outstanding August 27, 1999 |
|
$ |
5.98 |
|
— |
|
|
319,148 |
|
|
10,038 |
|
|
329,186 |
|
| Granted |
|
$ |
5.29 |
|
110,000 |
|
|
7,400 |
|
|
— |
|
|
117,400 |
|
| Exercised |
|
$ |
5.58 |
|
— |
|
|
(32,723 |
) |
|
(2,763 |
) |
|
(35,486 |
) |
| Expired and terminated |
|
$ |
5.78 |
|
(4,000 |
) |
|
(7,813 |
) |
|
(664 |
) |
|
(12,477 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding August 31, 2000 |
|
$ |
5.80 |
|
106,000 |
|
|
286,012 |
|
|
6,611 |
|
|
398,623 |
|
| Granted |
|
$ |
4.22 |
|
46,500 |
|
|
4,000 |
|
|
— |
|
|
50,500 |
|
| Exercised |
|
$ |
4.60 |
|
— |
|
|
(1,331 |
) |
|
— |
|
|
(1,331 |
) |
| Expired and terminated |
|
$ |
5.67 |
|
(4,000 |
) |
|
(7,453 |
) |
|
— |
|
|
(11,453 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding August 31, 2001 |
|
$ |
5.26 |
|
148,500 |
|
|
281,228 |
|
|
6,611 |
|
|
436,339 |
|
| Granted |
|
$ |
3.68 |
|
4,000 |
|
|
6,000 |
|
|
— |
|
|
10,000 |
|
| Expired and terminated |
|
$ |
5.83 |
|
(6,000 |
) |
|
(30,273 |
) |
|
(6,611 |
) |
|
(42,884 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding Sept. 30, 2002 |
|
$ |
5.53 |
|
146,500 |
|
|
256,955 |
|
|
— |
|
|
403,455 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Available for Future grants |
|
|
|
|
53,150 |
|
|
— |
|
|
— |
|
|
53,150 |
|
| Exercisable |
|
$ |
5.69 |
|
82,001 |
|
|
242,381 |
|
|
— |
|
|
324,482 |
|
44
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about fixed stock options
outstanding at September 30, 2002.
| |
|
Options Outstanding
|
|
Options Exercisable
|
| Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted Average Remaining Years Of Contractual Life
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
| $3.65—$5.64 |
|
171,242 |
|
6.8 |
|
$ |
4.69 |
|
101,494 |
|
$ |
4.75 |
| $5.65—$7.64 |
|
224,813 |
|
4.8 |
|
$ |
6.04 |
|
216,988 |
|
$ |
6.03 |
| $8.50 |
|
4,400 |
|
0.4 |
|
$ |
8.50 |
|
4,400 |
|
$ |
8.50 |
| $11.00—$11.25 |
|
3,000 |
|
7.5 |
|
$ |
11.16 |
|
1,500 |
|
$ |
11.16 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
403,455 |
|
|
|
$ |
5.53 |
|
324,482 |
|
$ |
5.69 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
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:
| |
|
2002
|
|
|
2001
|
|
|
2000
|
| |
|
(Amounts in thousands, except per share data) |
| Net income (loss) as reported |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
|
$ |
675 |
| Pro forma |
|
$ |
(5,770 |
) |
|
$ |
(2,990 |
) |
|
$ |
553 |
| Income (loss) per share diluted as reported |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.18 |
| Pro forma |
|
$ |
(1.64 |
) |
|
$ |
(0.85 |
) |
|
$ |
0.15 |
The grant date fair value of each stock option is estimated using
the following assumptions: an expected life of 5 years, expected volatility of 60.2% in 2002, 56.0% in 2001, and 18.4% in 2000 and dividend yields of 0% and a weighted average risk-free interest rate of 4.62% in 2002, 5.85% in 2001, and 6.30% in
2000. The weighted average grant date fair values of options granted in 2002, 2001, and 2000 were $1.84, $4.22, and $5.90, 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 62,421 shares have been issued under the
plan at September 30, 2002.
10. Deferred Compensation and Retirement Plans
Internationally, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees
worldwide. In the U.S., the Company also provides benefits through supplemental
45
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
retirement plans to certain current and former employees. These supplemental plans provide benefits derived out of cash surrender values relating to current and former employee and officer life
insurance policies, equal to the difference between the amounts that would have been payable under the defined benefit pension plans, in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension
benefits, and the amounts actually payable under the defined benefit pension plans. In addition, in the U.S., the Company provides for officer death benefits through the post-retirement plans to certain officers.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and
local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheet.
The plan assets comprise a diversified mix of assets including corporate equities, government securities and corporate debt securities.
At September 30, 2002, the international pension plans held investments of approximately $2.6 million.
The following table provides the weighted average actuarial assumptions used to develop net periodic benefit cost and the actuarial present value of projected benefit obligations.
| |
|
Pension
|
|
|
Post-Retirement
|
|
| |
|
Years ended
|
|
|
Years ended
|
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
August 31, 2000
|
|
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
August 31, 2000
|
|
| Weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. plans |
|
7.0 |
% |
|
7.0 |
% |
|
7.0 |
% |
|
7.0 |
% |
|
7.0 |
% |
|
7.0 |
% |
| International plans |
|
5.3 |
% |
|
5.3 |
% |
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
| Expected return on plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. plans |
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| International plans |
|
6.9 |
% |
|
8.5 |
% |
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
| Rate of compensation increase: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. plans |
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| International plans |
|
1.6 |
% |
|
2.4 |
% |
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
The periodic benefit cost and the actuarial present value of
projected benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The Company revised these assumptions based on an annual evaluation of long-term trends, as well as market conditions, that may have an impact on
the cost of providing retirement benefits.
The annual cost related to the U.S. and international plans follow:
| |
|
Pension
|
|
|
Post Retirement
|
| |
|
Years ended
|
|
|
Years ended
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
August 31, 2000
|
|
|
September 30, 2002
|
|
August 31, 2001
|
|
August 31, 2000
|
| Service cost |
|
$ |
325 |
|
|
$ |
423 |
|
|
$ |
591 |
|
|
$ |
57 |
|
$ |
24 |
|
$ |
23 |
| Interest cost |
|
|
772 |
|
|
|
600 |
|
|
|
640 |
|
|
|
7 |
|
|
8 |
|
|
8 |
| Expected return on plan assets |
|
|
(349 |
) |
|
|
(475 |
) |
|
|
(559 |
) |
|
|
— |
|
|
— |
|
|
— |
| Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Prior service costs/(gains) |
|
|
150 |
|
|
|
35 |
|
|
|
41 |
|
|
|
— |
|
|
— |
|
|
— |
| Net transition asset |
|
|
(103 |
) |
|
|
(92 |
) |
|
|
(104 |
) |
|
|
— |
|
|
— |
|
|
— |
| ` |
|
$ |
795 |
|
|
$ |
491 |
|
|
$ |
609 |
|
|
$ |
64 |
|
$ |
32 |
|
$ |
31 |
46
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents an analysis of the changes in 2002 and
2001 of the benefit obligation, the plan assets and the funded status of the plans:
| |
|
Pension
|
|
|
Post Retirement
|
|
| |
|
Years ended
|
|
|
Years ended
|
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
September 30, 2002
|
|
|
August 31, 2001
|
|
| Change in projected benefit obligation (PBO) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance beginning of year |
|
$ |
10,100 |
|
|
$ |
9,136 |
|
|
$ |
93 |
|
|
$ |
61 |
|
| Service cost for benefits earned |
|
|
325 |
|
|
|
423 |
|
|
|
57 |
|
|
|
24 |
|
| Interest cost on benefit obligation |
|
|
772 |
|
|
|
600 |
|
|
|
7 |
|
|
|
8 |
|
| Increases in PBO arising primarily from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in actuarial assumptions |
|
|
375 |
|
|
|
324 |
|
|
|
— |
|
|
|
— |
|
| Foreign exchange impact |
|
|
654 |
|
|
|
52 |
|
|
|
— |
|
|
|
— |
|
| Benefits paid |
|
|
(565 |
) |
|
|
(435 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Projected benefit obligation at end of year |
|
|
11,661 |
|
|
|
10,100 |
|
|
|
157 |
|
|
|
93 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value of plan assets at beginning of year |
|
|
4,625 |
|
|
|
5,703 |
|
|
|
|
|
|
|
|
|
| Actual (loss)/gain on plan assets |
|
|
(884 |
) |
|
|
(989 |
) |
|
|
— |
|
|
|
— |
|
| Company contributions |
|
|
100 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Foreign exchange impact |
|
|
308 |
|
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
| Benefits paid from plan assets |
|
|
(63 |
) |
|
|
(55 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value of plan assets at end of year |
|
|
4,086 |
|
|
|
4,625 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Funded status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Plan assets less than projected |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Benefit obligation |
|
|
(7,575 |
) |
|
|
(5,475 |
) |
|
|
(157 |
) |
|
|
(93 |
) |
| Unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net transition liability |
|
|
(378 |
) |
|
|
(453 |
) |
|
|
|
|
|
|
|
|
| Actuarial (gains)/losses |
|
|
(18 |
) |
|
|
60 |
|
|
|
— |
|
|
|
— |
|
| Net (gain)/losses |
|
|
4,776 |
|
|
|
2,931 |
|
|
|
— |
|
|
|
— |
|
| Net (liability)/asset recorded |
|
|
(1,032 |
) |
|
|
(1,035 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| In consolidated balance sheet |
|
$ |
(4,227 |
) |
|
$ |
(3,972 |
) |
|
$ |
(157 |
) |
|
$ |
(93 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the under funded status of the pension plans in
2002 results primarily from the effect on plan assets of adverse capital markets performance.
The components in
the balance sheet consist of:
| |
|
Pension
|
|
|
Post Retirement
|
|
| |
|
September 30, 2002
|
|
|
August 31, 2001
|
|
|
September 30, 2002
|
|
|
August 31, 2001
|
|
| Accrued benefit liability |
|
$ |
(7,537 |
) |
|
$ |
(5,444 |
) |
|
$ |
(157 |
) |
|
$ |
(93 |
) |
| Accumulated other comprehensive income |
|
|
3,310 |
|
|
|
1,472 |
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net liability recorded in consolidated Balance sheet |
|
$ |
(4,227 |
) |
|
$ |
(3,972 |
) |
|
$ |
(157 |
) |
|
$ |
(93 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Information related to both domestic and international plans follows:
| |
|
Pension
|
| |
|
September 30, 2002
|
|
August 31, 2001
|
| Pension plans with an accumulated benefit |
|
|
|
|
|
|
| Obligation in excess of plan assets: |
|
|
|
|
|
|
| Fair value of plan assets |
|
$ |
4,086 |
|
$ |
4,625 |
| Accumulated benefit obligation |
|
|
11,400 |
|
|
10,069 |
| Pension plans with a projected benefit |
|
|
|
|
|
|
| Obligation in excess of plan assets: |
|
|
|
|
|
|
| Fair value of plan assets |
|
|
4,086 |
|
|
4,625 |
| Projected benefit obligation |
|
|
11,611 |
|
|
10,100 |
Plans with accumulated benefit obligations and projected benefit
obligations in excess of plan assets are primarily attributable to U.S. unfunded supplemental retirement plans, as well as German plans which are legally not required to be funded.
The Company has defined contribution plans in the U.S. and in the United Kingdom under which the Company matches the employee’s contribution and may make discretionary
contributions to the plans. The Company’s contributions were $163,000, $148,000 and $163,000 for the years ended September 30, 2002, August 31, 2001 and August 31, 2000.
11. Commitments and Contingencies
Leases
The Company occupies office space under lease
agreements expiring at various dates during the next five years. The leases are classified as operating leases, and provide for the payment of real estate taxes, insurance, utilities and maintenance.
The Company was obligated under non-cancelable operating leases as follows:
| |
|
Operating leases As of September 30, 2002
|
| Fiscal year ending September:
|
|
(Amounts in thousands) |
| 2003 |
|
$ |
1,176 |
| 2004 |
|
|
1,170 |
| 2005 |
|
|
831 |
| 2006 |
|
|
444 |
| 2007 |
|
|
451 |
| Thereafter |
|
|
451 |
| |
|
|
|
| |
|
$ |
4,523 |
| |
|
|
|
Occupancy costs under the operating leases approximated $1,506,000
in 2002, $1,100,000 in 2001, and $1,024,000 in 2000.
48
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. The Company has repurchased 570,875 or 77% of the total shares authorized to be purchased as of September 30, 2002.
12. Segment and Geographical Information
The following table presents certain operating segment information (amounts in thousands).
| |
|
Systems
|
|
|
Service and System Integration
|
|
|
E-Business Software
|
|
|
Other Software
|
|
|
Total
|
|
| 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
7,531 |
|
|
$ |
17,226 |
|
|
$ |
1,811 |
|
|
$ |
1,543 |
|
|
$ |
28,111 |
|
| Profit (loss) from operations |
|
|
(1,692 |
) |
|
|
(857 |
) |
|
|
(803 |
) |
|
|
(368 |
) |
|
|
(3,720 |
) |
| Identifiable assets |
|
|
14,988 |
|
|
|
9,652 |
|
|
|
1,015 |
|
|
|
1,139 |
|
|
|
26,794 |
|
| Capital expenditures |
|
|
328 |
|
|
|
137 |
|
|
|
14 |
|
|
|
9 |
|
|
|
488 |
|
| Depreciation |
|
|
358 |
|
|
|
277 |
|
|
|
29 |
|
|
|
19 |
|
|
|
683 |
|
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
8,430 |
|
|
$ |
29,693 |
|
|
$ |
1,906 |
|
|
$ |
1,887 |
|
|
$ |
41,916 |
|
| Profit (loss) from operations |
|
|
(270 |
) |
|
|
(2,109 |
) |
|
|
(1,123 |
) |
|
|
590 |
|
|
|
(2,912 |
) |
| Identifiable assets |
|
|
19,175 |
|
|
|
10,980 |
|
|
|
691 |
|
|
|
1,503 |
|
|
|
32,349 |
|
| Capital expenditures |
|
|
394 |
|
|
|
193 |
|
|
|
12 |
|
|
|
12 |
|
|
|
611 |
|
| Depreciation |
|
|
372 |
|
|
|
356 |
|
|
|
23 |
|
|
|
28 |
|
|
|
779 |
|
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
12,772 |
|
|
$ |
45,597 |
|
|
$ |
1,810 |
|
|
$ |
1,842 |
|
|
$ |
62,021 |
|
| Profit (loss) from operations |
|
|
3,499 |
|
|
|
(769 |
) |
|
|
(2,211 |
) |
|
|
588 |
|
|
|
1,107 |
|
| Identifiable assets |
|
|
23,209 |
|
|
|
11,477 |
|
|
|
675 |
|
|
|
1,695 |
|
|
|
37,056 |
|
| Capital expenditures |
|
|
289 |
|
|
|
485 |
|
|
|
19 |
|
|
|
12 |
|
|
|
805 |
|
| Depreciation |
|
|
726 |
|
|
|
501 |
|
|
|
20 |
|
|
|
16 |
|
|
|
1,263 |
|
CSP operates in four segments that cross different business
activities. The four segments are: systems, which include manufactured hardware products, systems integration and services, which includes maintenance and integration and sale of third-party hardware products and services, business software and
other software products that are developed by the Company.
Profit from operations 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-business segment based upon employee headcount and the
remaining balance is allocated to the systems and Service and system integration segments based upon sales revenue.
49
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
For the years ended September 30,
2002 and August 31, 2001 and 2000, the Company had sales to one customer which accounted for approximately $5,642,000 (20%), $16,630,000 (40%), $22,363,000 and (36%) of total sales, respectively. No other customers had sales in excess of 10% for the
years ended September 30, 2002, August 31, 2001 and 2000.
The Company’s sales by geographic area based on
the location of the customers are as follows:
| |
|
For Year ended
|
| |
|
September 30, 2002
|
|
August 31, 2001
|
|
August 31, 2000
|
| |
|
(Amounts in thousands) |
| Europe |
|
$ |
16,478 |
|
$ |
27,981 |
|
$ |
43,882 |
| North America |
|
|
10,225 |
|
|
13,411 |
|
|
16,234 |
| Asia |
|
|
1,408 |
|
|
524 |
|
|
1,690 |
| Other |
|
|
— |
|
|
— |
|
|
215 |
| |
|
|
|
|
|
|
|
|
|
| Totals |
|
$ |
28,111 |
|
$ |
41,916 |
|
$ |
62,021 |
| |
|
|
|
|
|
|
|
|
|
Long-lived assets by geographic location at September 30, 2002 and,
August 31, 2001 were as follows:
| |
|
September 30, 2002
|
|
August 31, 2001
|
| United States |
|
$ |
1,383 |
|
$ |
1,628 |
| Europe |
|
|
381 |
|
|
543 |
| |
|
|
|
|
|
|
| Totals |
|
$ |
1,764 |
|
$ |
2,171 |
| |
|
|
|
|
|
|
13. Restructuring Expenses
For the year ended September 30, 2002, the Company reduced its workforce and incurred severance expenses equal to $394,000. For the years
ended August 31, 2001, and 2000, the company reduced its workforce and severance expenses incurred related to the actions of approximately $85,000 and $64,000, respectively.
50
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. Valuation and qualification account
The Company had the following activity for the allowance for doubtful accounts:
| |
|
Year end September 30, 2002
|
|
|
Years ended August 31,
|
|
| |
|
|
2001
|
|
|
2000
|
|
| |
|
(Amount in thousands) |
|
| Balance beginning of year |
|
$ |
261 |
|
|
$ |
409 |
|
|
$ |
395 |
|
| Charged to expense |
|
|
133 |
|
|
|
— |
|
|
|
14 |
|
| Usage |
|
|
— |
|
|
|
(148 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance end of year |
|
$ |
394 |
|
|
$ |
261 |
|
|
$ |
409 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| The company has the following activity for the inventory reserve: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance beginning of year |
|
$ |
(5,577 |
) |
|
$ |
(5,635 |
) |
|
$ |
(6,123 |
) |
| Charged to cost of sales |
|
|
(657 |
) |
|
|
(1,382 |
) |
|
|
(322 |
) |
| Usage |
|
|
464 |
|
|
|
1,343 |
|
|
|
810 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance end of year |
|
$ |
(5,770 |
) |
|
$ |
(5,674 |
) |
|
$ |
(5,635 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
15. Quarterly Results of Operations (Unaudited)
Following is a summary of the quarterly results of operations for the years ended September 30, 2002 and
August 31, 2001:
| |
|
December 31
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
Total
|
|
| |
|
(Amounts in thousands, except per share amounts) |
|
| 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
6,500 |
|
|
$ |
6,190 |
|
|
$ |
7,815 |
|
|
$ |
7,606 |
|
|
$ |
28,111 |
|
| Gross Profit |
|
|
1,871 |
|
|
|
1,525 |
|
|
|
2,699 |
|
|
|
2,238 |
|
|
|
8,333 |
|
| Net loss |
|
|
(943 |
) |
|
|
(907 |
) |
|
|
(84 |
) |
|
|
(3,729 |
) |
|
|
(5,663 |
) |
| Net loss per share—diluted(a) |
|
$ |
(0.27 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.02 |
) |
|
$ |
(1.06 |
) |
|
$ |
(1.61 |
) |
| |
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Sales |
|
$ |
11,422 |
|
|
$ |
9,352 |
|
|
$ |
9,534 |
|
|
$ |
11,608 |
|
|
$ |
41,916 |
|
| Gross Profit |
|
|
3,260 |
|
|
|
2,760 |
|
|
|
814 |
|
|
|
3,067 |
|
|
|
9,901 |
|
| Net income (loss) |
|
|
(212 |
) |
|
|
615 |
|
|
|
(2,706 |
) |
|
|
(582 |
) |
|
|
(2,885 |
) |
| Net income (loss) per share—diluted(a) |
|
$ |
(0.06 |
) |
|
$ |
0.17 |
|
|
$ |
(0.77 |
) |
|
$ |
(0.17 |
) |
|
$ |
(82 |
) |
(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.
|
51
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 E-business solutions, image-processing software, network management, storage
systems and security 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”).
CSPI’s business falls into four segments that cross different
business activities. The four major segments are: systems, which include manufactured hardware products, systems integration and services, which includes maintenance and integration and sale of third-party hardware products and services, E-business
software and “other software” products that are developed by the Company.
MODCOMP, Inc. is a
multinational subsidiary which develops and markets E-business solutions and provides network management, storage systems and security integration services including consulting, systems integration and outsourcing. MODCOMP’s newest software
product is Xport, a messaging server that handles high throughput messages between host systems and client devices like fax, email and telex. In addition, MODCOMP develops and markets ViewMax, which is development software that allows companies to
rapidly re-engineer and integrate their legacy applications with Internet technologies and AIM66, which is a multichannel transaction server software that supports WAP, GPRS, I-mode and UMTS which are critical for the 3G wireless deployment in
Europe.
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.
Critical Accounting Policies
Our discussion and analysis of our financial
condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation,
intangible assets, income taxes, deferred compensation and retirement plans, restructuring costs and contingencies. We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
52
We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts and deferred tax assets valuation allowance; inventory valuation
and goodwill impairment.
Revenue recognition
Our revenues are primarily generated from the sale of e-business solutions and image processing software, network management and storage systems integration services
and high-performance cluster computer systems. In accordance with generally accepted accounting principles in the United States and when all other revenue recognition criteria have been met, CSPI recognizes revenue as follows:
Revenue from the sale of hardware products is recognized at the time of shipment and when all revenue recognition criteria have
been met.
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 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.
For multi-element arrangements including training, the Company has established vendor specific evidence (VSOE) of the fair value of its
training element. Therefore, revenue for software sales is recognized upon shipment of license and delivery of customization and installation services, and when all other revenue criteria has been met. Revenue from training is recognized when the
service has been delivered and all other revenue recognition criteria have been met.
For software licenses sold
separately without modification and training, revenue is recognized upon delivery.
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.
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 collectibility 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.
Valuation Allowances
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
We record a valuation allowance to reduce the balance of deferred tax assets due to the lack of significant orders and US losses over the
last two years. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become
53
deductible. We consider the scheduled reversals of deferred tax liabilities and projected taxable income in making this assessment. Based on the lack of taxable income over the several years and
lack of significant orders, we established a valuation allowance for the entire deferred tax asset. Based upon the level of historical taxable income and projections for the future taxable income over the period in which the deferred taxes will
reverse or NOLs expire, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences.
In assessing the realizability of our deferred tax assets, we consider and rely upon projections of future income. The key assumptions in our projections include sales growth rates, including potential
contract wins, and expected levels of operating expenditures in addition to factors discussed in the section “Factors That May Affect Future Performance”. These assumptions are subject to variation based upon both internal and external
factors, many of which are beyond the control of the Company. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax asset may change. If
the Company is awarded a significant contracts the Company projections will be impacted and the Company may reverse the valuation allowance against the deferred tax asset.
Inventory Valuation
The recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing, competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management,
additional inventory write-down may be required.
Goodwill Impairment
Our long-lived assets include goodwill of $582,000 as of September 30, 2002. We evaluated the recoverability of our goodwill in accordance
with Statement of Financial Accounting Standards No. 121 (“SFAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” which generally required us to assess these assets for
recoverability when events or circumstances indicate a potential impairment by estimating the future discounted cash flows to be generated from the use of these assets. No impairment losses were recorded related to goodwill during the year ended
September 30, 2002. In evaluating the impairment of goodwill, we consider and rely on our discounted cash flow projections. Our key assumptions include sales growth and expected levels of operating expenditures that are subject to variation based on
both internal and external factors. To the extent that actual experience deviates from the projections, our assessment regarding impairment may change. Such a change could have a material adverse affect on the statement of operations. We are
adopting SFAS 142 effective October 1, 2002.
Deferred Compensation and Retirement Plans
In United Kingdom and Germany, the Company provides defined benefit pension plans and defined
contribution plans for the majority of the employees. In the U.S, the Company also provides benefits through supplementary retirement plans to employees. These supplemental plans are funded from cash surrender values from life insurances polices.
The plan assumptions in the US include a discount rate of 7%. In addition, in the U.S., the Company provides for officer death benefits through the post-retirement plans to certain officers. In calculating the deferred compensation and retirement
plans, net liabilities, the Company establishes assumptions regarding discount rates, rates of return on assets and the compensation rates of increase. In calculation the deferred compensation and retirement plans net liabilities, the Company
estimates assumptions regarding expected discount rates, rates of return on assets and compensation increase rates. If activities differ from the assumptions, deferred compensation and retirement plans net liabilities may require significant
adjustments. The Company funds the pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and
54
reported in the consolidated balance sheet. The amount of the deferred retirement compensation and retirement plans was $7,353,000 at September 30, 2002.
Results of Operations—2002 Compared to 2001
For the fiscal year ended September 30, 2002, sales decreased to $28.1 million, compared to $41.9 million for fiscal year ended August 31, 2001. Net loss for the year ended
September 30, 2002 was $5.7 million or $1.61 per share compared with a net loss of $2.9 million or $0.82 per share for fiscal year ended August 31, 2001. Excluding the valuation allowance for deferred federal taxes of $3.3 million and restructure
charges of $394,000, the Company reported a net loss of $2.0 million or $0.58 per share for fiscal year 2002. This compares with a net loss of $1.3 million or $0.37 in 2001 excluding the valuation allowance for deferred state taxes of $1.2 million,
loss on the sale of the French operation of $423,000 and a restructuring charge of $85,000, the Company reported net loss of $1.3 million or $0.37 per diluted share for fiscal 2001.
The following table details the Company’s adjusted loss in fiscal years September 30 2002 and August 31, 2001:
| |
|
Fiscal 2002
|
|
|
Fiscal 2001
|
|
| |
|
(Amounts in thousands) |
|
| Net loss |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
| Valuation allowance for deferred taxes |
|
|
3,327 |
|
|
|
1,218 |
|
| Effect of sale of French operation |
|
|
— |
|
|
|
423 |
|
| Restructuring charge |
|
|
394 |
|
|
|
85 |
|
| Tax effect of exclusion of effect of sale of French operation and exclusion of restructuring charge |
|
|
(89 |
) |
|
|
(67 |
) |
| |
|
|
|
|
|
|
|
|
| Adjusted net loss excluding the effect of the change in the valuation reserve for deferred tax, sale of French operation
and excluding restructuring |
|
$ |
(2,031 |
) |
|
$ |
(1,311 |
) |
| |
|
|
|
|
|
|
|
|
| Adjusted net loss per share—diluted excluding the effect of sale of French operation and excluding, valuation
allowance for deferred taxes and restructuring charge |
|
$ |
(0.58 |
) |
|
$ |
(0.37 |
) |
| |
|
|
|
|
|
|
|
|
| Weighted average shares outstanding—diluted |
|
|
3,524 |
|
|
|
3,527 |
|
| |
|
|
|
|
|
|
|
|
Revenue
CSPI’s business falls into segments, which cross different business activities. CSPI has four major segments: systems, which includes
manufactured hardware products, systems integration and services, which includes maintenance and integration and sale of third-party hardware products and services, E-business software and other software products which are developed by the Company.
The following table details the Company’s sales by operating segment for fiscal years September 30, 2002,
and August 31, 2001
| Sales Revenue:
|
|
2002
|
|
% of Total
|
|
|
2001
|
|
% of Total
|
|
| |
|
(Amounts in thousands) |
|
| Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
7,531 |
|
27 |
% |
|
$ |
8,430 |
|
20 |
% |
| Service and system integration |
|
|
17,226 |
|
61 |
|
|
|
29,693 |
|
71 |
|
| E-business Software |
|
|
1,811 |
|
5 |
|
|
|
1,906 |
|
5 |
|
| Other Software |
|
|
1,543 |
|
5 |
|
|
|
1,887 |
|
4
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
28,111 |
|
100 |
% |
|
$ |
41,916 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
55
The Company reported net sales of $28.1 million for fiscal year 2002 compared to
$41.9 million for fiscal 2001. This represented a decrease of 33% or $13.8 million. The majority of this decrease in revenue was due to the decline in Service and system integration sales, which were $17.2 million for fiscal year 2002 compared to
$29.7 million for fiscal 2001. This represented a decrease of $12.5 million or 90% of the total change between fiscal years. System sales for fiscal 2002 were $7.5 million compared to $8.4 million for fiscal year 2001, representing 7% of the
decrease. Both E-business and other software sales, also declined represented 1% and 2%, respectively of the total decrease in sales.
The System sales decrease was due to the slower than anticipated procurement in defense industry purchases of the Series 2000 and FastCluster products. Company system sales continue to feel the affects of protracted delays
in defense appropriations and the worldwide weakness in technology spending which continues to negatively affect our financial results. The extended defense industry deployment incubation periods have effected our ability to see when revenue will
begin to grow again. During the fiscal year, the Company was part of a team that lost a bid for the procurement of the next generation Destroyer for the US Navy (DD-X Program). The Company would have provided equipment for the radar electronics for
the ship which would have resulted in significant revenue for the Company.
The SuperCard, Series 2000 and
real-time process control classic product lines accounted for 13%, 50% and 37% of system sales, respectively, for fiscal 2002 compared to 13%, 67%, 18% respectively, for the prior fiscal year. In fiscal 2002, the Company discontinued production of
the SuperCard and real-time process control system. This action was taken due to the lack of various component parts and the increased cost to continue manufacturing these products on a limited production basis. The end of life for the real-time
system provided an increase in sales of the systems over the prior year by approximately 150%. The current products offered in the systems segments are the Series 2841 and FastCluster™ which are powered by the newest PowerPC processors, including those incorporating Altivec™ technology from Motorola. Systems may be configured with 16 to 1,000 processor nodes interconnected with high speed Myrinet switches from
Myricom, Inc.
Sales for systems and service integration represented 61% of total sales for fiscal year 2002
compared with 71% in the prior fiscal year. The decrease in revenue of $12.5 million was due to third-party products and integration services sales primarily in Germany and the continued decline in real-time legacy systems service revenue. The
effects of the global telecom and IT spending retrenchment, including several of our key telecom customers that dramatically reduced their technology budgets hindered our sales results. This included a temporary capital-spending freeze by a
significant customer. We believe that these delays can no longer be postponed due to the need to upgrade essential systems for the next generation wireless infrastructure. When this takes place we expect to see a rebound in demand for our
outsourcing services.
E-business software sales decreased 5% and represented 5% of total sales for fiscal year
2002. This segment’s decline was due to the current market conditions and the lack of projects related to the ViewMax® Web-to-Host software and AIM66™ wireless. The AIM66™ wireless product is a multichannel transaction server software for the wireless telecom market access.
“Other software” sales represented 5% of total sales for fiscal year 2002, a decrease from the prior
year of 18%. The other software sales are primarily from products of Scanalytics.
European sales accounted for
59% of total sales for fiscal 2002 compared to 67% for the prior year. European sales were primarily from the Company’s subsidiaries in Germany and the United Kingdom. The decrease from the prior year was primarily due to the decline in orders
from our German telecom customers. Historically, 65% the Company revenues have come from the international market.
Cost of Sales
Cost of sales as a percentage of revenue decreased to 70% compared to
76% for the prior year. The decrease in cost of sales was due to improved gross margin in the system and system integration business. This was due to
56
reductions in staff for the service operations and change in the mix of integration services sales with larger service content from third-party equipment, which has a lower cost of sales
component and reduction in the amount of inventory written off. Inventory writeoffs of Systems products and obsolete parts for end of life during the year was of approximately $.7 million which was a reduction from the prior year which was
approximately $1.1 million . These writeoffs account for the increase in the cost of sales for the Systems segment. The increased cost of sales for the E-business segment was do to low sales volume with fixed resource costs and additional work
needed to complete selected projects.
The following table details the Company’s sales, cost of sales and
gross margin by operating segment for fiscal years ended September 30, 2002, and August 31, 2001 (amounts in thousands):
| |
|
Systems
|
|
|
Service and system integration
|
|
|
E-Business Software
|
|
|
Other Software
|
|
|
Total
|
|
| 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
7,531 |
|
|
$ |
17,226 |
|
|
$ |
1,811 |
|
|
$ |
1,543 |
|
|
$ |
28,111 |
|
| Cost of sales |
|
|
4,988 |
|
|
|
13,450 |
|
|
|
915 |
|
|
|
425 |
|
|
|
19,778 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin $ |
|
|
2,543 |
|
|
|
3,776 |
|
|
|
896 |
|
|
|
1,118 |
|
|
|
8,333 |
|
| Gross margin % |
|
|
34 |
% |
|
|
22 |
% |
|
|
49 |
% |
|
|
72 |
% |
|
|
30 |
% |
| |
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
8,430 |
|
|
$ |
29,693 |
|
|
$ |
1,906 |
|
|
$ |
1,887 |
|
|
$ |
41,916 |
|
| Cost of sales |
|
|
5,286 |
|
|
|
25,426 |
|
|
|
764 |
|
|
|
539 |
|
|
|
32,015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin $ |
|
|
3,144 |
|
|
|
4,267 |
|
|
|
1,142 |
|
|
|
1,348 |
|
|
|
9,901 |
|
| Gross margin % |
|
|
37 |
% |
|
|
14 |
% |
|
|
60 |
% |
|
|
71 |
% |
|
|
24 |
% |
Engineering and Development
Engineering and development expenses decreased 3% from $3.8 million for fiscal year ended August 31, 2001 to $3.7 million for fiscal year
ended September 30, 2002. “System segment” expense accounted for 45% of the total expense for fiscal year 2002 compared to 48% for the prior year. This decrease is mainly attributed to staff reductions, lower expenses for pre-production
materials and outside services, and the reduction in the depreciation expenses for fully depreciated equipment. “Service and system integration segment” accounted for 24% of total engineering and development expense for fiscal 2002
compared to 28% for the prior year. The decrease was due to the reduction in staff and redeployment of staff to support their efforts in E-business. E-business expenses increased by 24% over the prior year due to the shift of personnel from
individual projects or orders fulfillment to working on product enhancements. “Other software” increased by 27% over the prior fiscal year due to the addition of an engineer to complete work on the Windows product features and
enhancements.
The following table details engineering and development expenses by operating segment and
subsidiary for fiscal years 2002, and 2001 (amounts in thousands):
| Engineering & Development Expense:
|
|
2002
|
|
% of Total
|
|
|
2001
|
|
% of Total
|
|
| |
|
(Amounts in thousands) |
|
| By Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
1,687 |
|
45 |
% |
|
$ |
1,821 |
|
48 |
% |
| Service and system integration |
|
|
882 |
|
24 |
|
|
|
1,071 |
|
28 |
|
| E-business Software |
|
|
631 |
|
17 |
|
|
|
509 |
|
13 |
|
| Other Software |
|
|
537 |
|
14 |
|
|
|
422 |
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
3,737 |
|
100 |
% |
|
$ |
3,823 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
57
Sales, General and Administrative
Selling, general and administrative expense decreased $0.6 million or 7% to $8.3 million for fiscal year September 30, 2002 compared to
$8.9 million for fiscal year ended August 31, 2001.
| S,G & A Expense:
|
|
2002
|
|
% of Total
|
|
|
2001
|
|
% of Total
|
|
| |
|
(Amounts in thousands) |
|
| By Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
2,464 |
|
31 |
% |
|
$ |
1,508 |
|
17 |
% |
| Service and system integration |
|
|
3,541 |
|
45 |
|
|
|
5,305 |
|
59 |
|
| E-business Software |
|
|
968 |
|
12 |
|
|
|
1,756 |
|
20 |
|
| Other Software |
|
|
949 |
|
12 |
|
|
|
336 |
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
7,922 |
|
100 |
% |
|
$ |
8,905 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
“Systems” selling, general and administrative expense for
fiscal 2002 increased by 69% from the prior year. This was mainly attributable to increased costs for corporate services, occupancy and outside services to assist after staff reductions. The decrease cost of “Service and system
integration” was 29% over the prior fiscal year. The decrease relates to reduction in staff, sales commission and outside services.
E-business had reductions of 45% and 9% over the prior fiscal year. The reduction was due to staff reductions in 2002 “Other software” increased by 174% over prior fiscal year. The increase in “other
software” was related to corporate services.
Restructuring Expense
In the fiscal years ended September 30, 2002 and August 31, 2001 and 2000 the Company reduced its workforce and as a result incurred severance expenses of
approximately $394,000, $85,000, and $64,000 respectively. These actions will reduce expenses on an annualized basis by approximately $1,520,000.
Other Income/Expenses
Other income/expenses of
$348,000, is primarily from investment income related to its cash and cash equivalents and investments. The decreased investment income of approximately $94,000 or 16 % between fiscal years was due to the changes in the prevailing investment market
with reduced rates on short-term investments.
Income taxes
The Company had a tax expense of $2.3 million which was mainly due to the recording a valuation allowance for the deferred tax asset of approximately $3.3 million. This
valuation allowance was established because the Company sustained significant losses in the US operations over the last two years. In addition, the Company does not currently have any large contracts in the US and management no longer believes that
it is more likely than not that some portion of all of the deferred tax asset will be realized. The Company is currently involved in a number of procurement opportunities that could generate US revenue and could result in the reduction in the
valuation allowance. Management is cautiously optimistic in regards to these opportunities.
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 ended August 31, 2000. Excluding the valuation allowance for deferred state taxes of $1,218,000, 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
$1.3 million or $0.37 per diluted share for fiscal 2001. This compares with net income of $941,000, or
58
$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 year ended August 31, 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:
| |
|
Fiscal 2001
|
|
|
Fiscal 2000
|
|
| |
|
(Amounts in thousands) |
|
| Net income |
|
$ |
(2,885 |
) |
|
$ |
675 |
|
| Valuation allowance for deferred taxes |
|
|
1,218 |
|
|
|
— |
|
| Effect of sale of French operation |
|
|
423 |
|
|
|
240 |
|
| Restructuring charge |
|
|
85 |
|
|
|
64 |
|
| Tax effect of exclusion of effect of sale of French operation and |
|
|
|
|
|
|
|
|
| Exclusion of restructuring charge |
|
|
(67 |
) |
|
|
(38 |
) |
| |
|
|
|
|
|
|
|
|
| Net income excluding the effect of sale of French operation and |
|
|
|
|
|
|
|
|
| Excluding restructuring |
|
$ |
(1,311 |
) |
|
$ |
941 |
|
| |
|
|
|
|
|
|
|
|
| Net income per share—diluted excluding the effect of sale of |
|
|
|
|
|
|
|
|
| French operation and excluding restructuring charge |
|
$ |
(.037 |
) |
|
$ |
0.26 |
|
| |
|
|
|
|
|
|
|
|
| Weighted average shares outstanding—diluted |
|
|
3,527 |
|
|
|
3,663 |
|
| |
|
|
|
|
|
|
|
|
Revenue
The following table details the Company’s sales by operating segment for fiscal years August 31, 2001 and 2000:
| Sales Revenue:
|
|
2001
|
|
% of Total
|
|
|
2000
|
|
% of Total
|
|
| |
|
(Amounts in thousands) |
|
| Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
8,430 |
|
20 |
% |
|
$ |
12,772 |
|
21 |
% |
| Service and system integration |
|
|
29,693 |
|
71 |
|
|
|
45,597 |
|
73 |
|
| E-business Software |
|
|
1,906 |
|
5 |
|
|
|
1,810 |
|
3 |
|
| Other Software |
|
|
1,887 |
|
4 |
|
|
|
1,842 |
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
41,916 |
|
100 |
% |
|
$ |
62,021 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The Company reported net sales of $41.9 million for fiscal year
2001 compared to $62.0 million for fiscal 2000. This represented a decrease of 32% or $20.1 million. The majority of this decrease in revenue was due to the decline in Service and system integration sales, which were $29.7 million for fiscal year
August 31, 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 year ended August 31, 2001 were $8.4 million compared to $12.8
million for fiscal year ended August 31, 2000, representing a decline of $4.3 million.
The systems sales decrease
was due to the slower than anticipated transition of the older MultiComputer products, SuperCards, to the new Series 2000 products. The other negative factor affecting 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.
During the year the MultiComputer Division introduced its newest product, a Linux based FastCluster™
system. The Company continued 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.
59
Sales for “Service and system 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 sale of the French operation and customer
purchase of new technologies and the reduction in foreign currency rates.
E-business software sales increased 5%
and represented 5% of total sales for fiscal year 2001.
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 the Company’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.
The following table details the Company’s sales by geographic region for fiscal years 2001 and 2000:
| |
|
Year Ended August
|
| |
|
2001
|
|
2000
|
| Europe |
|
$ |
27,981 |
|
67% |
|
$ |
43,882 |
|
71% |
| North America |
|
|
13,411 |
|
32% |
|
|
16,234 |
|
26% |
| Asia |
|
|
524 |
|
1% |
|
|
1,690 |
|
3% |
| Other |
|
|
— |
|
% |
|
|
215 |
|
—% |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
41,916 |
|
100% |
|
$ |
62,021 |
|
100% |
| |
|
|
|
|
|
|
|
|
|
|
Cost of Sales
Cost of sales as a percentage of revenue increased to 76% compared to 72% for the prior year. The increase in cost of sales was due to the inventory write off of
approximately $1.1 million for end-of-life systems products and erosion of gross margin in the system segment due to shift in product sales from higher products to lower margin product due in part to product discounting.
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):
| |
|
Systems
|
|
|
Service and System Integration
|
|
|
E-Commerce Software
|
|
|
Other Software
|
|
|
Total
|
|
| 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
8,430 |
|
|
$ |
29,693 |
|
|
$ |
1,906 |
|
|
$ |
1,887 |
|
|
$ |
41,916 |
|
| Cost of sales |
|
|
5,286 |
|
|
|
25,426 |
|
|
|
764 |
|
|
|
539 |
|
|
|
32,015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin $ |
|
|
3,144 |
|
|
|
4,267 |
|
|
|
1,142 |
|
|
|
1,348 |
|
|
|
9,901 |
|
| Gross margin % |
|
|
37 |
% |
|
|
14 |
% |
|
|
60 |
% |
|
|
71 |
% |
|
|
24 |
% |
| |
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
12,772 |
|
|
$ |
45,597 |
|
|
$ |
1,810 |
|
|
$ |
1,842 |
|
|
$ |
62,021 |
|
| Cost of sales |
|
|
4,907 |
|
|
|
38,304 |
|
|
|
781 |
|
|
|
507 |
|
|
|
44,499 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin $ |
|
|
7,865 |
|
|
|
7,293 |
|
|
|
1,029 |
|
|
|
1,335 |
|
|
|
17,522 |
|
| Gross margin % |
|
|
62 |
% |
|
|
16 |
% |
|
|
57 |
% |
|
|
72 |
% |
|
|
28 |
% |
Engineering and Development
Engineering and development expenses decreased 5% from $4.0 million for fiscal 2000 to $3.8 million for fiscal 2001. The engineering and development decrease was due
to staff reductions in primarily the systems
60
segment 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. “Service and system 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-business expenses decreased by 37% over the prior year due to the shift of personnel to
individual order 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):
| Engineering & Development Expense:
|
|
2001
|
|
% of Total
|
|
|
2000
|
|
% of Total
|
|
| |
|
(Amounts in thousands) |
|
| By Operating Segment: |
|
|
|
| Systems |
|
$ |
1,821 |
|
48 |
% |
|
$ |
2,226 |
|
55 |
% |
| Service and system integration |
|
|
1,071 |
|
28 |
|
|
|
547 |
|
14 |
|
| E-business Software |
|
|
509 |
|
13 |
|
|
|
811 |
|
20 |
|
| Other Software |
|
|
422 |
|
11 |
|
|
|
447 |
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
3,823 |
|
100 |
% |
|
$ |
4,031 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
The selling, general and administrative expenses decreased by $3.4 million or 28% between fiscal year ended August 30, 2001 and fiscal
year ended August 31, 2000. This decline was due to staff reductions in all segments, lower sales commissions due to the revenue decline, no executive bonus and lower legal and outside consulting, and decreased depreciation expense for fully
depreciated assets. These decreases were offset by increased occupancy costs for the new corporate headquarters and retirement expenses. The decreases effected all segments with the largest decrease in systems, e-business and systems and service
integration, which declined by 44%, 26% and 18% respectively between the two fiscal years. Systems and systems and service integration reduction of 27% and 29% were due primarily to reduction in staff, and sales commissions related to the revenue
reduction.
The following table sets forth selling, general and administrative expense, net of restructuring
charges, by Company subsidiary:
| S, G, & A Expense:
|
|
2001
|
|
% of Total
|
|
|
2000
|
|
% of Total
|
|
| By Operating Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
| Systems |
|
$ |
1,508 |
|
17 |
% |
|
$ |
2,076 |
|
17 |
% |
| Service and system integration |
|
|
5,305 |
|
59 |
% |
|
|
7,515 |
|
61 |
% |
| E-business Software |
|
|
1.756 |
|
20 |
% |
|
|
2,429 |
|
20 |
% |
| Other Software |
|
|
336 |
|
4 |
% |
|
|
300 |
|
8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
8,905 |
|
100 |
% |
|
$ |
12,320 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Working capital at September 30, 2002 decreased to $18.2 million compared to $21.9 million at August 31, 2001. The reduction is due to the
decrease in inventory, accounts receivables and deferred taxes. The company’s
61
cash and marketable securities position has increased to $15.8 million from $13.7 million in FY 2001. In Fiscal year 2002 the Company’s MODCOMP Ltd subsidiary acquired the communication
business of Sipher Software Ltd for approximately $40,000.
The Company’s consolidated capital expenditures
were $488,000, $611,000, and $805,000 during fiscal years September 30, 2002, August 31, 2001 and 2000, respectively.
The Company continues to invest in short term investments to maximize its return with limited expose of its principal.
The Company has unfunded pension liabilities of $3.3 million related to the plans held by the UK subsidiaries. New legislation relating to UK pensions is currently being contemplated and the of new legislation may result in
changes to the statutory funding requirements. The Company may be required to infuse cash in the UK pension plan once the new legislation has been established.
The following is a schedule of the Company’s contractual obligations outstanding at September 30, 2002:
| |
|
Total
|
|
One year or less
|
|
2-3 Years
|
|
4-5 Years
|
|
Thereafter
|
| Operating leases |
|
$ |
4,523 |
|
$ |
1,176 |
|
$ |
2,001 |
|
$ |
895 |
|
$ |
451 |
| Retirement obligations |
|
|
7,353 |
|
|
540 |
|
|
1,000 |
|
|
1,100 |
|
|
4,713 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
11,876 |
|
$ |
1,716 |
|
$ |
3,001 |
|
$ |
1,995 |
|
$ |
5,164 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2002, 2001 or 2000. There is no assurance that the Company’s business will not be materially and adversely affected
by inflation and changing prices in the future.
62
CSP INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
| |
|
Fiscal Year Ended
|
| |
|
September 2002
|
|
|
August
|
| |
|
|
2001
|
|
|
2000
|
|
1999
|
|
1998
|
| Operating Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
28,111 |
|
|
$ |
41,916 |
|
|
$ |
62,021 |
|
$ |
51,695 |
|
$ |
63,468 |
| Costs and expenses |
|
|
31,831 |
|
|
|
44,828 |
|
|
|
60,914 |
|
|
49,684 |
|
|
61,262 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
|
|
(3,720 |
) |
|
|
(2,912 |
) |
|
|
1,107 |
|
|
2,011 |
|
|
2,206 |
| Other income |
|
|
348 |
|
|
|
190 |
|
|
|
561 |
|
|
612 |
|
|
470 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before taxes |
|
|
(3,372 |
) |
|
|
(2,722 |
) |
|
|
1,668 |
|
|
2,623 |
|
|
2,676 |
| Provision (benefit) for income taxes |
|
|
2,291 |
|
|
|
163 |
|
|
|
993 |
|
|
1,364 |
|
|
1,314 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
(5,663 |
) |
|
$ |
(2,885 |
) |
|
$ |
675 |
|
$ |
1,259 |
|
$ |
1,362 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share—diluted |
|
$ |
(1.61 |
) |
|
$ |
(0.82 |
) |
|
$ |
0.18 |
|
$ |
0.35 |
|
$ |
0.37 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of shares—diluted |
|
|
3,524 |
|
|
|
3,527 |
|
|
|
3,663 |
|
|
3,641 |
|
|
3,674 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and investments |
|
$ |
15,826 |
|
|
$ |
13,728 |
|
|
$ |
15,544 |
|
$ |
14,265 |
|
$ |
13,697 |
| Working capital |
|
|
18,212 |
|
|
|
21,928 |
|
|
|
21,609 |
|
|
23,469 |
|
|
21,622 |
| Total assets |
|
|
25,762 |
|
|
|
32,349 |
|
|
|
37,056 |
|
|
37,113 |
|
|
37,677 |
| Long term obligations |
|
|
7,373 |
|
|
|
5,341 |
|
|
|
3,608 |
|
|
3,573 |
|
|
3,363 |
| Total liabilities |
|
|
11,454 |
|
|
|
10,047 |
|
|
|
9,610 |
|
|
9,748 |
|
|
11,137 |
| Retained earnings |
|
|
10,038 |
|
|
|
16,359 |
|
|
|
19,962 |
|
|
19,287 |
|
|
18,028 |
| Shareholders’ equity |
|
|
14,308 |
|
|
|
22,302 |
|
|
|
27,446 |
|
|
27,365 |
|
|
26,540 |
63
CSP INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(Amounts in thousands, except percentage information)
The following table sets forth certain information which is based on Operations Statement Data:
| |
|
Percentage of sales Fiscal Year ended September
|
|
|
Period to Period Dollar
changes
|
|
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
2002 compared to 2001
|
|
|
2001 compared to 2000
|
|
| Sales |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
$ |
(13,805 |
) |
|
$ |
(20,105 |
) |
| Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of sales |
|
70.4 |
% |
|
76.4 |
% |
|
71.7 |
% |
|
|
(12,237 |
) |
|
|
(12,484 |
) |
| Engineering and development |
|
13.3 |
% |
|
9.1 |
% |
|
6.5 |
% |
|
|
(86 |
) |
|
|
(208 |
) |
| Selling, general and administrative |
|
28.2 |
% |
|
21.2 |
% |
|
19.9 |
% |
|
|
(983 |
) |
|
|
(3,415 |
) |
| Restructuring |
|
1.4 |
% |
|
0.2 |
% |
|
0.1 |
% |
|
|
309 |
|
|
|
21 |
|
| Total costs and expenses |
|
113.2 |
% |
|
106.9 |
% |
|
98.2 |
% |
|
|
(12,997 |
) |
|
|
(16,086 |
) |
| Operating income (loss) |
|
(13.2 |
)% |
|
(6.9 |
)% |
|
1.8 |
% |
|
|
(808 |
) |
|
|
(4,019 |
) |
| Other income |
|
1.2 |
% |
|
0.4 |
% |
|
0.9 |
% |
|
|
158 |
|
|
|
(371 |
) |
| Income before taxes |
|
(12 |
)% |
|
(6.5 |
)% |
|
2.7 |
% |
|
|
(650 |
) |
|
|
(4,390 |
) |
| Provision for income taxes |
|
8.1 |
% |
|
0.4 |
% |
|
1.6 |
% |
|
|
2,128 |
|
|
|
(830 |
) |
| Net income (loss) |
|
(20.1 |
)% |
|
(6.9 |
)% |
|
1.1 |
% |
|
$ |
(2,778 |
) |
|
$ |
(3,560 |
) |
64