CSP INC /MA/ - Quarter Report: 2001 February (Form 10-Q)

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended            February 28, 2001      

or

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                        to                      

                             Massachusetts                                                            04-2441294
                  (State or other jurisdiction of                                               (I.R.S. Employer
                  incorporation or organization)                                              Identification No.)

                 43 Manning Road, Billerica, Massachusetts                               01821-3901
                (Address of principal executive offices)                                         (Zip Code)

                                                                 (978) 663-7598 
                                      (Registrant's telephone number, including area code)

                                                                         None                                                                        
                      (Former name, former address, former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 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.        [X]  Yes            [  ]  No

                                    APPLICABLE ONLY TO CORPORATE ISSUERS:
     Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

                                Class                                                               Outstanding April 10, 2001
           Common Stock, $.01 par value                                                 3, 512,906 shares

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

The accompanying financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements, which are prepared in accordance with generally accepted accounting principles, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the financial statements should be read in conjunction with the footnotes contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2000.

The Company's financial statements include of the accounts of its wholly owned subsidiaries which consist of CSP MultiComputer Division, MODCOMP Inc. and Scanalytics, Inc. CSP MultiComputer Division operations are included in the Systems segment. Scanaltyics Inc. operations are included in the Other Software segment. MODCOMP Inc. operations are included in each of the segments based on the nature of the activity performed by MODCOMP.

Certain reclassifications were made to the 2000 financial statements to conform to the 2001 presentation.

CSPI sells its software offerings and recognizes its revenue as follow:

The Company recognizes revenue from the sale of software products in accordance with the AICPA Statement of Position ("SOP") 97-2, as amended by SOP 98-9. The Company recognizes revenue from software license sales when all services, including customization and training, are delivered.

For software licenses sold separately without modification and training, revenue is recognized upon delivery.

The Company generally recognizes revenue from software licenses when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant Company obligations with regard to customization or implementation remain, the fee is fixed or determinable, and collectiblity is probable. If collectibility is not considered probable, revenue is recognized when the fee becomes due and payable by the customer.

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.

At February 28, 2001 and August 31, 2000, investments consisted of the following:

Net unrealized gains (losses) on available-for-sale investments are reported as a separate component of stockholders' equity until realized. Gross unrealized losses increased by $1,124,000 and $1,168,000 for the three and six-month periods ended February 28, 2001.

Assets of $876,000 and $925,000 at February 28, 2001 and August 31, 2000, respectively, which are held in a rabbi trust and generally are available only to pay certain retirement benefits of a former employee, are included in the above table.

During fiscal year 2000, the Company invested $2 million in Vertical Buyer Inc., which is a holding company for a network of internet sites formed to capitalize on business to business e-commerce opportunities initially in the global commercial lighting and electrical markets. On October 11, 2000, 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. A total of 717,657 shares valued at $717,657 were distributed. The Company is accounting for this investment under the cost method based on its current ownership percentage.

Inventories consist of the following (in thousands):

On October 9, 1986, the Board of Directors authorized the Company to repurchase up to 344,892 additional shares of the outstanding stock at market price. On September 28, 1995, the Board of Directors authorized the Company to repurchase up to 199,650 additional shares of the outstanding stock at market price. The timing of stock purchases are made at the discretion of management. On October 19, 1999, the Board of Directors authorized the Company to repurchase up to 200,000 additional shares of the outstanding stock at market price. At February 28, 2001, the Company has repurchased 570,875 or 77% of the total shares authorized to be purchased.

The reconciliation of the numerators and denominators of the basic and diluted net income per common share computations for the Company's reported net income is as follows:

                                                                          /--Three Months Ended---//---Six Months Ended-----/

Options to purchase 381,026 shares of common stock were outstanding during the three and six-month periods ended February 28, 2001, respectively, but were not included in the calculation of diluted net income per share because the option exercise price was greater than the average market price of the common shares during those periods.

The components of Accumulated Other Comprehensive Income are as follows:

                                                                                                 (Amounts in thousands)

Each segment is broken down by related business activities, which crosses different business operations. These segments are based on the different customer activity of the Company. CSPI has four major segments: systems which includes company manufactured hardware products, systems integration and services which includes maintenance of the Company and other systems sold and integration and sale of third party hardware products and services, E-Commerce software, and other software products which are developed by the Company.

Profit from 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 operation, gain on sale of property, investment income and interest expense.

In calculating profit from operations for individual operating segments, sales and administration expenses incurred at the operating level for CSP and Scanalytics are allocated to the Systems and Other Software segments, respectively. Sales and administrative expenses incurred at the operating level for MODCOMP are allocated to the E-Commerce segment based upon employee headcount and the remaining balance is allocated to the Systems and System and Service Integration segments based upon sales revenue.

All intercompany transactions have been eliminated.

Identifiable assets include deferred income tax assets and other financial instruments managed by the Company. Capital expenditures common to more than one segment are allocated on a sales basis.

In November 2000, the Company sold the remaining assets of MODCOMP's France subsidiary to Eurilogic and incurred additional expenses for the disposal of assets, primarily leasehold improvements and severance costs totaling a net loss on disposal of $339,000 for the six months ended February 28, 2001. The Company has sublet the French facility but remains contingently liable for the remaining lease obligations which amount to approximately $1.1 million and extend through March 10, 2005.

         A summary of the period to period changes in principal items included in the Statements of Operations is shown in Schedules I and II (pages 20 and 21).

        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.

        CSPI considers its products to be in four segment classifications. Each segment is broken down by related business activities, which crosses different business operations. These segments are based on the different customer activity of the Company. CSPI has four major segments: Systems which includes company manufactured hardware products, System and Service Integration which includes maintenance of the Company and other systems sold and integration and sale of third party hardware products and services, E-Commerce software which includes WAP66™ and ViewMax®, and Other Software products which are developed by the Company primarily in the Scanalytics operation.

        The following table details the Company's sales by operating segment for the three and six months ended February 28, 2001 and February 29, 2000.

        The Company reported net sales of $9.4 million and $20.8 million for the three and six months ended February 28, 2001 compared to $18.4 million and $34.1 million for the same periods of fiscal 2000. This represented a decrease of 49% or $9.0 million for the three-month period and 39% or $13.3 million for the six-month period. The reduction in revenue was due to the following factors: reduction in system and service integration sales which represents 80% and 90% of the total decline for the three and six month periods compared to the last fiscal year comparative periods, sale of MODCOMP France which represents 24% or $2.2 million of the total decline for the three month period and 30% or $4.0 million of the total decline for the six month period and the decline in foreign currency exchange rates versus the U.S. dollar which represents 7% or $287,000 for the three month period and 11% or $1.4 million for the six month period.         

        System sales amounted to $2.2 million and $4.8 million (24% and 23% of total sales) for the three and six month periods ended February 28, 2001, representing a decline of 44% and 23%, respectively. The decline in system sales was due primarily to the decline in sales of the older Supercard product line not being offset by the shipment of the newer Series 2000 products. The SuperCard products are sold only to existing customers. The SuperCard and Series 2000 product lines accounted for 9% and 75% of systems sales for the three months ended February 28, 2001 compared to 65% and 9% for the prior comparable quarter, and 11% and 63% of system sales for the six months ended February 28, 2001 compared to 48% and 23%, respectively, for the prior comparable six month period. The CSP MultiComputer Division introduced its newest product; a Linux based FastCluster™ system. The system was designed to meet the high performance computing requirements of mission critical military application and highly scalable data mining applications. FastCluster™ is 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. The Company continues to ship its real-time process control classic product line to existing customers, which represented 14% and 24% of the three and six month period system sales compared to 22% and 20% for the prior comparable periods.

        Sales for System and Service Integration amounted to $6.1 million and $13.8 million (65% and 67% of total sales) for the three and six month periods ended February 28, 2001 a decrease from the prior comparable periods of $7.2 million or 54% for the three months and $12.1 million or 47% for the six months. The decrease was due to three factors: a decline in large system sales by MODCOMP Germany during the first quarter of fiscal 2001, during the period ended November 30, 1999 there was a large non-recurring shipment to a telecommunications company, the change in foreign currency rates which represented 7% of the reduction, and the erosion of the real-time computer service business due to customers switching from our products to newer technologies.

        E-commerce software sales increased 29% and 39% for the three and six-month periods ended February 28, 2001 although it represented 6% of total sales for those periods compared to 3% for the prior comparable periods. This segment's growth has centered on s ViewMax® Web-to-Host software and WAP66™ wireless access protocol portal server products. During the six-month period the Company had sales successes at Cornell University which selected ViewMax to provide purchasing department employees with web access to information stored on the university's mainframe system. MdinTouch chose ViewMax to provide physicians and other health professionals with secure and instant web access for time-critical patient information using desktop computers or handheld devices such as a WAP phone or Palm VII PDA.

        Other software sales represented 5% and 4% of total sales for the three and six months ended February 28, 2001. Other software sales revenue decreased 29% and 14% from the prior comparable three and six month periods. The other software sales are primarily from Scanalytics.

        European sales account for 55% and 61% of total sales for the three and six months ended February 28, 2001 compared to 69% and 73% for the prior comparable periods. European sales were primarily from MODCOMP's subsidiaries in Germany and the United Kingdom. The decrease from the prior year was primarily due to the large outsourcing orders in Germany in fiscal year 2000.

        The following table details the Company's sales by geographic region for the three and six months ended February 28, 2001 and February 29, 2000:

                            /-------For the three months ended--------/  /---------For the six months ended---------/

        Cost of sales as a percentage of revenue remained stable at 70% for the three months ended February 28, 2001 compared to the prior year comparable quarter and decreased to 71% for the six months ended February 28, 2001 compared to 73% for the comparable six month period. The decrease in cost of sales resulted primarily from the significant revenue decline in the system and service integration segment that has higher costs due to the large component of third party products.

        The following table details the Company's sales and gross margin by operating segment for the three and six months ended February 28, 2001 and February 29, 2000 (amounts in thousands):

        Engineering and development decreased 7% and 4% for the three and six months ended February 28, 2001 compared to the same periods of fiscal 2000. The engineering and development decrease was primarily due to staff reductions both in the systems and other software segments. The increases in the system and service integration expense related to outside consultants and the addition of staff to assist in software development and bug fixes.

The following table details engineering and development expenses by operating segment and subsidiary for the three and six month periods ended February 28, 2001 and February 29, 2000 (amounts in thousands):

        Selling, general and administrative expense decreased $1.1 million or 32% to $2.4 million for the quarter ended February 28, 2001 compared to $3.5 million for the comparable quarter of fiscal 2000. Selling, general and administrative expense decreased $2.0 million or 30% to $4.7 million for the six months ended February 28, 2001 compared to $6.7 million for the comparable period of fiscal 2000.

        The following table sets forth selling, general and administrative expense by Company subsidiary for the three and six months ended February 28, 2001 and February 29, 2000: