cspi_10qa-123110.htm


United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-Q/A
 (Amendment No. 1)
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended December 31, 2010.
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
 
Commission File Number 0-10843
 


CSP Inc.
(Exact name of Registrant as specified in its Charter)
 
 

 
Massachusetts
04-2441294
(State of incorporation)
(I.R.S. Employer Identification No.)
 
43 Manning Road
Billerica, Massachusetts 01821-3901
(978) 663-7598
(Address and telephone number of principal executive offices)
 


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of January 26, 2011, the registrant had 3,491,052 shares of common stock issued and outstanding.
 
 


 
 
 
 
 
INDEX
 
   
Page
PART I. FINANCIAL INFORMATION
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and September 30, 2010
4
     
 
Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2010 and 2009
5
     
 
Consolidated Statement of Shareholders’ Equity (unaudited) for the three months ended December 31, 2010
6
     
 
Consolidated Statements of Cash flows (unaudited) for the three months ended December 31, 2010 and 2009
7
     
 
Notes to Consolidated Financial Statements (unaudited)
8-12
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13-18
     
Item 4.
Controls and Procedures
19
     
PART II. OTHER INFORMATION
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
     
Item 6.
Exhibits
21
 
 
2

 
 
EXPLANATORY NOTE
 
This Amendment No. 1 on Form 10-Q/A to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2010, filed with the Securities and Exchange Commission (SEC) on February 10, 2011 is being filed to restate our consolidated financial statements and other financial information to give effect to adjustments resulting from the identification of sales that are maintenance and support services provided by third parties where the Company is not the primary obligor for the service, which requires presentation of the revenue reported by the Company net of the cost of the services as opposed to recognition as the gross sales value of the services. We have therefore reduced the product revenue and product cost of sales by the amount of the costs associated with these services.  In addition, the Company identified certain other services provided pursuant to third party contracts for which the Company is the primary obligor and reported these services correctly at the gross sales value; however these services were reported as product revenue and should have been reported as service revenue. We have therefore, reclassified both the revenue and cost of sales for these services from product revenue and product cost of sales to service revenue and service cost of sales.  The adjustments made to the restated financial statements referred to above did not affect gross profit, income before taxes, net income, cash flow, total assets, total liabilities, retained earnings or total shareholder equity as of or for the quarters ended December 31, 2010 and 2009.

We have added a disclosure in Note 2 to our Consolidated Financial Statements that explains the restatement and the impact to our Consolidated Financial Statements that were originally filed.  This Form 10-Q/A (Amendment No. 1) amends and restates Part I – Items 1, 2 and 4 of the February 10, 2011 filing, in each case to reflect only the adjustments described herein and the filing of restated financial statements as discussed above, and no other information in our February 10, 2011 filing is amended hereby. Except for the foregoing amended information, this Form 10-Q/A (Amendment No. 1) filing does not reflect events occurring after February 10, 2011.
 
 
3

 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
 
   
December 31,
2010
   
September 30,
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 15,969     $ 15,531  
Accounts receivable, net of allowances of $324 and $288
    11,507       12,190  
Inventories
    6,174       5,862  
Refundable income taxes
    478       721  
Deferred income taxes
    124       124  
Other current assets
    1,834       1,523  
                 
Total current assets
    36,086       35,951  
                 
Property, equipment and improvements, net
    882       873  
                 
                 
Other assets:
               
Intangibles, net
    659       687  
Deferred income taxes
    868       880  
Cash surrender value of life insurance
    2,717       2,689  
Other assets
    297       299  
                 
Total other assets
    4,541       4,555  
                 
Total assets
  $ 41,509     $ 41,379  
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 10,080     $ 10,049  
Deferred revenue
    2,975       3,078  
Pension and retirement plans
    443       441  
Income taxes payable
    372       380  
                 
Total current liabilities
    13,870       13,948  
Pension and retirement plans
    8,879       8,928  
Capital lease obligation
    24       24  
                 
Total liabilities
    22,773       22,900  
                 
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
Common stock, $.01 par; authorized, 7,500 shares; issued and outstanding 3,526 and 3,520 shares, respectively
    35       35  
Additional paid-in capital
    11,209       11,280  
Retained earnings
    12,905       12,516  
Accumulated other comprehensive loss
    (5,413 )     (5,352 )
                 
Total shareholders’ equity
    18,736       18,479  
                 
Total liabilities and shareholders’ equity
  $ 41,509     $ 41,379  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)

   
For the three months ended
 
   
December 31,
2010
   
December 31,
2009
 
Sales:
  (Restated)     (Restated)  
             
Product
  $
15,292
    $
13,498
 
Services
   
5,335
     
4,310
 
                 
Total sales
   
20,627
     
17,808
 
                 
                 
Cost of sales:
               
Product
   
13,415
     
12,042
 
Services
   
2,684
     
3,462
 
                 
Total cost of sales
   
16,099
     
15,504
 
                 
Gross profit
    4,528       2,304  
                 
                 
Operating expenses:
               
Engineering and development
    510       472  
Selling, general and administrative
    3,375       3,057  
                 
Total operating expenses
    3,885       3,529  
                 
                 
Operating income (loss)
    643       (1,225 )
                 
                 
Other income (expense):
               
Foreign exchange gain (loss)
    (4 )     (7 )
Other income (expense), net
    (17 )     (13 )
                 
Total other income (expense), net
    (21 )     (20 )
                 
Income (loss) before income taxes
    622       (1,245 )
Income tax expense (benefit)
    233       (503 )
                 
Net income (loss)
  $ 389     $ (742 )
                 
 Net income (loss) attributable to common stockholders
  $ 385     $ (737 )
                 
Net income (loss) per share – basic
  $ 0.11     $ (0.21 )
                 
Weighted average shares outstanding – basic
    3,485       3,536  
                 
Net income (loss) per share – diluted
  $ 0.11     $ (0.21 )
                 
Weighted average shares outstanding – diluted
    3,521       3,536  

See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended December 31, 2010
(Amounts in thousands)
 
   
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
other
comprehensive
loss
   
Total
Shareholders’
Equity
   
Comprehensive
Income (loss)
 
Balance as of September 30, 2010
    3,520     $ 35     $ 11,280     $ 12,516     $ (5,352 )   $ 18,479        
Comprehensive income (loss):
                                                     
Net income
                      389             389     $ 389  
Other comprehensive loss:
                                                       
Effect of foreign currency translation
                            (61 )     (61 )     (61 )
                                                         
Total comprehensive income
                                                  $ 328  
                                                         
Stock-based compensation
                26                   26          
Issuance of shares under employee stock purchase plan
    25             74                   74          
Restricted stock shares issued
    27             20                   20          
Purchase of common stock
    (46 )           (191 )                 (191 )        
                                                         
Balance as of December 31, 2010
    3,526     $ 35     $ 11,209     $ 12,905     $ (5,413 )   $ 18,736          
 
See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
 
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
   
For the three months ended
 
   
December 31,
2010
   
December 31,
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 389     $ (742 )
Adjustments to reconcile net income to net cash provided (used in) by operating activities:
               
Depreciation and amortization
    92       98  
Amortization of intangibles
    28       28  
Foreign exchange loss (gain)
    4       7  
Non-cash changes in accounts receivable
    36       (22 )
Stock-based compensation expense on stock options and restricted stock awards
    46       54  
Deferred income taxes
    -       (38 )
Increase in cash surrender value of life insurance
    (26 )     (28 )
Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable
    555       (3,417 )
Increase in inventories
    (318 )     (1,235 )
(Increase) decrease in refundable income taxes
    234       (534 )
(Increase) decrease in other current assets
    (335 )     351  
Decrease in other assets
    1       (5 )
Increase in accounts payable and accrued expenses
    107       2,110  
Decrease in deferred revenue
    (72 )     (693 )
Increase in pension and retirement plans liability
    42       57  
Increase (decrease) in income taxes payable
    (7 )     7  
Decrease in other long term liabilities
    -       (14 )
                 
Net cash provided by (used in) operating activities
    776       (4,016 )
                 
                 
Cash flows from investing activities:
               
Life insurance premiums paid
    (3 )     (62 )
Purchases of property, equipment and improvements
    (111 )     (50 )
                 
Net cash used in investing activities
    (114 )     (112 )
                 
                 
Cash flows from financing activities:
               
Proceeds from issuance of shares under employee stock purchase plan
    74       62  
Purchase of common stock
    (191 )     -  
                 
Net cash provided by (used in) financing activities
    (117 )     62  
                 
Effects of exchange rate on cash
    (107 )     (54 )
                 
Net increase (decrease) in cash and cash equivalents
    438       (4,120 )
Cash and cash equivalents, beginning of period
    15,531       18,904  
                 
Cash and cash equivalents, end of period
  $ 15,969     $ 14,784  
                 
                 
Supplementary cash flow information:
               
Cash paid for income taxes
  $ 245     $ 89  
                 
Cash paid for interest
  $ 85     $ 89  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
7

 
 
CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009
 
Organization and Business
 
CSP Inc. was founded in 1968 and is based in Billerica, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “CSPI” or the  “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its Systems segment and its Service and System Integration segment.
 
1.
Basis of Presentation
 
The accompanying consolidated 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 accounting principles generally accepted in the United States, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited 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 September 30, 2010, and Form 8-K/A filed on January 11, 2012.
 
2.
Restatement
 
The Company has restated its Consolidated Statements of Operations for the three months ended December 31, 2010  and 2009 to reflect adjustments and reclassifications of revenue and cost of sales, in connection with the identification of sales that are maintenance and support services provided by third parties where the Company is not the primary obligor of the service, which requires presentation of the revenue reported by the Company net of the cost of the services as opposed to recognition of the gross sales value of the services.  In addition, the Company identified certain other services provided pursuant to third party contracts for which the Company is the primary obligor and reported these services correctly at the gross sales value; however these services were reported as product revenue and should have been included as service revenue. We have therefore, reclassified both the revenue and cost of sales for these services from product revenue and product cost of sales to service revenue and service cost of sales.
 
The adjustments made to the restated financial statements referred to above did not affect gross profit, income before taxes, net income, cash flow, total assets, total liabilities, retained earnings or total shareholder equity as of or for the quarters ended December 31, 2010 and 2009.
 
The tables below show the impact to the statements of operations for the restated periods.
 
   
For the three months ended
 
   
December 31, 2010
   
December 31, 2009
 
   
As reported
   
Restatement
Adjustment
   
 
Restated
   
As reported
   
Restatement
Adjustment
   
 
Restated
 
   
(Amounts in thousands except per share data.)
 
Sales:
                       
Product
  $ 17,424     $ (2,132 )   $ 15,292     $ 15,245     $ (1,747 )   $ 13,498  
Services
    4,686       649       5,335       3,416       894       4,310  
Total sales
    22,110       (1,483 )     20,627       18,661       (853 )     17,808  
                                                 
Cost of sales:
                                               
Product
    15,293       (1,878 )     13,415       13,616       (1,574 )     12,042  
Services
    2,289       395       2,684       2,741       721       3,462  
Total cost of sales
    17,582       (1,483 )     16,099       16,357       (853 )     15,504  
                                                 
Gross profit
    4,528       -       4,528       2,304       -       2,304  
                                                 
Operating expenses 
    3,885       -       3,885       3,529       -       3,529  
                                                 
Operating income (loss)
    643       -       643       (1,225 )     -       (1,225 )
                                                 
Other expense, net
    (21 )     -       (21 )     (20 )     -       (20 )
                                                 
Income (loss) before income taxes
    622       -       622       (1,245 )     -       (1,245 )
Income tax expense (benefit)
    233       -       233       (503 )     -       (503 )
                                                 
Net income
  $ 389       -     $ 389     $ (742 )     -     $ (742 )
                                                 
Net income (loss) per share – basic
  $ 0.11       -     $ 0.11     $ (0.21 )     -     $ (0.21 )
Weighted average shares outstanding – basic
    3,485       -       3,485       3,536       -       3,536  
Net income (loss) per share – diluted
  $ 0.11       -     $ 0.11     $ (0.21 )     -     $ (0.21 )
Weighted average shares outstanding – diluted
    3,521       -       3,521       3,536       -       3,536  
 
 
8

 
 
3.
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 under different assumptions or conditions.
 
4.
Earnings Per Share of Common Stock
 
Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income 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 by the assumed weighted average number of common shares outstanding.
 
We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.
 
Basic and diluted earnings (loss) per share computations for the Company’s reported net income attributable to common stock holders are as follows:
 
   
For the three months ended
 
   
December 31,
2010
   
December 31,
2009
 
             
   
(Amounts in thousands except per share data)
 
Net income (loss)
  $ 389     $ (742 )
Less: Net income (loss) attributable to nonvested common stock
    4       (5 )
                 
Net income (loss) attributable to common stockholders
  $ 385     $ (737 )
                 
Weighted average total shares outstanding – basic
    3,527       3,562  
Less: weighted average non-vested shares outstanding
    42       26  
                 
Weighted average number of common shares outstanding – basic
    3,485       3,536  
Potential common shares from non-vested stock awards and the assumed exercise of stock options
    36       -  
                 
Weighted average common shares outstanding – diluted
    3,521       3,536  
                 
Net income (loss) per share – basic
  $ 0.11     $ (0.21 )
                 
Net income (loss) per share – diluted
  $ 0.11     $ (0.21 )
 
 
9

 
 
For the three months ended December 31, 2010, earnings per share were $0.11 for both basic and diluted. For the three months ended December 31, 2009, the loss per share attributable to unvested shares was $0.21 per share.
 
All anti-dilutive securities, including stock options, are excluded from the diluted income per share computation. For the three months ended December 31, 2010 and 2009, 213,000 and 286,000 options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive.
 
5. 
Inventories
 
Inventories consist of the following:
 
   
December 31,
2010
   
September 30,
2010
 
   
(Amounts in thousands)
 
Raw materials
  $ 1,285     $ 1,029  
Work-in-process
    606       439  
Finished goods
    4,283       4,394  
                 
Total
  $ 6,174     $ 5,862  
 
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met of approximately $2.3 million and $2.4 million as of December 31, 2010 and September 30, 2010, respectively.
 
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.2 million and $4.1 million as of December 31, 2010 and September 30, 2010, respectively.
 
6.
Accumulated Other Comprehensive Loss
 
The components of comprehensive income (loss) are as follows:
 
   
For the Three Months Ended
 
   
December 31,
2010
   
December 31,
2009
 
   
(Amounts in thousands)
 
Net income (loss)
  $ 389     $ (742 )
Effect of foreign currency translation
    (61 )     (59 )
Minimum pension liability
           
                 
Comprehensive income (loss)
  $ 328     $ (801 )
 
The components of Accumulated Other Comprehensive Loss are as follows:
 
   
December 31,
2010
   
September 30,
2010
 
   
(Amounts in thousands)
 
Cumulative effect of foreign currency translation
  $ (2,194 )   $ (2,133 )
Additional minimum pension liability
    (3,219 )     (3,219 )
                 
Accumulated Other Comprehensive Loss
  $ (5,413 )   $ (5,352 )

7. 
Pension and Retirement Plans
 
The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers.  All of the Company’s defined benefit plans are closed to newly hired employees and have been for fiscal years 2009, 2010 and for the three months ended December 31, 2010.
 
 
10

 
 
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 sheets.
 
Our pension plan in the United Kingdom is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.
 
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
 
   
For the Three Months Ended December 31
 
   
2010
   
2009
 
   
Foreign
   
U.S.
   
Total
   
Foreign
   
U.S.
   
Total
 
   
(Amounts in thousands)
 
Pension:
                                   
Service cost
  $ 18     $ 2     $ 20     $ 16     $ 2     $ 18  
Interest cost
    170       25       195       177       29       206  
Expected return on plan assets
    (125 )           (125 )     (116 )           (116 )
Amortization of:
                                               
Prior service gain
                                   
Amortization of net (gain) loss
    17       8       25       11       8       19  
                                                 
Net periodic benefit cost
  $ 80     $ 35     $ 115     $ 88     $ 39     $ 127  
                                                 
                                                 
Post Retirement:
                                               
Service cost
  $     $ 5     $ 5     $     $ 5     $ 5  
Interest cost
          17       17             17       17  
Amortization of net (gain) loss
          12       12             16       16  
                                                 
Net periodic benefit cost
  $     $ 34     $ 34     $     $ 38     $ 38  
 
8.
Segment Information
 
The following table presents certain operating segment information.
 
         
Service and System Integration Segment
       
Three Months Ended December 31,
 
Systems
Segment
   
Germany
   
United Kingdom
   
U.S.
   
Total
   
Consolidated
Total
 
   
(Amounts in thousands)
 
2010
                                   
Sales:
                                   
Product
  $ 309     $
3,467
    $ 11     $
11,505
    $
14,983
    $
15,292
 
Service
    1,516      
2,620
      332      
867
     
3,819
     
5,335
 
                                                 
Total sales
    1,825      
6,087
      343      
12,372
     
18,802
     
20,627
 
                                                 
Profit (loss) from operations
    105       112       (30 )     456       538       643  
Assets
    13,011       11,136       3,675       13,687       28,498       41,509  
Capital expenditures
    55       36       1       19       56       111  
Depreciation and amortization
    21       46       7       46       99       120  
                                                 
2009
                                               
Sales:
                                               
Product
  $ 393     $
3,355
    $ 25     $
9,725
    $
13,105
    $
13,498
 
Service
    61      
3,257
      386      
606
     
4,249
     
4,310
 
                                                 
Total sales
    454      
6,612
      411      
10,331
     
17,354
     
17,808
 
                                                 
Profit (loss) from operations
    (1,294 )     1       (5 )     73       69       (1,225 )
Assets
    13,192       11,355       4,124       12,429       27,908       41,100  
Capital expenditures
    10       32       4       4       40       50  
Depreciation and amortization
    33       35       7       51       93       126  
 
 
11

 
 
Profit (loss) 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 investment income and interest expense.  All intercompany transactions have been eliminated.
 
The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the three  month periods ended December 31, 2010 and 2009.
 
   
For the Three Months Ended
 
   
December 31,
2010
   
December 31,
2009
 
   
Amount
   
% of
Revenues
   
Amount
   
% of
Revenues
 
                         
   
(Dollar amounts in millions)
 
Verio
  $ 2.5       12 %   $ 2.0       11 %
Vodafone
  $ 1.7       8 %   $ 2.6       15 %
 
9.
Fair Value Measures
 
Assets and Liabilities measured at fair value on a recurring basis are as follows:
 
   
Fair Value Measurements Using
   
Quoted Prices in
Active
Markets for Identical
Instruments
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Input
(Level 3)
   
Total
Balance
   
Gain
or
(loss)
   
As of December 31, 2010
   
(Amounts in thousands)
Assets:
                           
Money Market funds
  $ 3,485     $     $     $ 3,485     $
                                       
Total assets measured at fair value
  $ 3,485     $     $     $ 3,485     $
                                       
   
As of September 30, 2010
   
(Amounts in thousands)
Assets:
                                     
Money Market funds
  $ 3,482     $     $     $ 3,482     $
                                       
Total assets measured at fair value
  $ 3,482     $     $     $ 3,482     $
 
These assets are included in cash and cash equivalents in the accompanying consolidated balance sheets.  All other monetary assets and liabilities are short-term in nature and approximate their fair value.
 
The Company had no liabilities measured at fair value as of December 31, 2010. The Company had no assets or liabilities measured at fair value on a non recurring basis as of December 31, 2010.
 
10. 
Common Stock Repurchase
 
On February 3, 2009, the Board of Directors (the “Board”) authorized the Company to purchase up to 350 thousand additional shares of the Company’s outstanding common stock at market price.  Pursuant to this authorization by the Board, the Company repurchased approximately 46 thousand shares of its outstanding common stock during the three months ended December 31, 2010.  As of December 31, 2010, approximately 99 thousand shares remain authorized for repurchase under the Company’s stock repurchase program.
 
 
12

 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
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.
 
Markets for our products and services are characterized by rapidly changing technology, new product introductions and short product life cycles. These changes can adversely affect our business and operating results. Our success will depend on our ability to enhance our existing products and services and to develop and introduce, on a timely and cost effective basis, new products that keep pace with technological developments and address increasing customer requirements. The inability to meet these demands could adversely affect our business and operating results.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are 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, income taxes, deferred compensation and retirement plans, estimated selling prices used for revenue recognition 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. A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Results of Operations
 
Overview of the three months ended December 31, 2010 Results of Operations
 
Highlights include:
 
 
Revenue increased by approximately $2.8 million, or 16%, to $20.6 million for the three months ended December 31, 2010 versus $17.8 million for the three months ended December 31, 2009.
 
 
For the three months ended December 31, 2010, operating income was approximately $0.6 million versus an operating loss of approximately $1.2 million for the three months ended December 31, 2009.
 
 
For the three months ended December 31, 2010, net income was approximately $0.4 million versus a net loss of approximately $0.7 million for the three months ended December 31, 2009.
 
The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2010 and 2009:
 
   
December 31,
2010
   
%
of sales
   
December 31,
2009
   
%
of sales
 
   
(Dollar amounts in thousands)
 
Sales
  $
20,627
      100 %   $
17,808
      100 %
Costs and expenses:
                               
Cost of sales
   
16,099
     
78
%    
15,504
      87 %
Engineering and development
    510       3 %     472       3 %
Selling, general and administrative
    3,375       16 %     3,057       17 %
                                 
Total costs and expenses
   
19,984
      97 %    
19,033
      107 %
                                 
Operating income (loss)
    643       3 %     (1,225 )     (7 )%
Other income (expense)
    (21 )     %     (20 )     %
                                 
Income (loss) before income taxes
    622       3 %     (1,245 )     (7 )%
Income tax expense
    233       1 %     (503 )     (3 )%
                                 
Net income (loss)
  $ 389       2 %   $ (742 )     (4 )%
 
 
13

 

Sales
 
The following table details our sales by operating segment for the three months ended December 31, 2010 and 2009:
 
   
Systems
   
Service and
System
Integration
   
Total
   
% of
Total
 
   
(Dollar amounts in thousands)
 
For the three months ended December 31, 2010:
                       
Product
  $ 309     $
14,983
    $
15,292
      74 %
Services
    1,516      
3,819
     
5,335
      26 %
                                 
Total
  $ 1,825     $
18,802
    $
20,627
      100 %
                                 
% of Total
    9 %     91 %     100 %        
                                 
   
Systems
   
Service and
System
Integration
   
Total
   
% of
Total
 
For the three months ended December 31, 2009:
                               
Product
  $ 393     $
13,105
    $
13,498
     
76
%
Services
    61      
4,249
     
4,310
     
24
%
                                 
Total
  $ 454     $
17,354
    $
17,808
      100 %
                                 
% of Total
    3 %     97 %     100 %        
                                 
   
Systems
   
Service and
System
Integration
   
Total
   
%
increase
 
Increase (Decrease)
                               
Product
  $ (84 )   $
1,878
    $
1,794
      13 %
Services
    1,455      
   (430
)    
1,025
      24 %
                                 
Total
  $ 1,371     $
1,448
    $
2,819
      16 %
                                 
% increase
    302 %     8 %     16 %        
 
As shown above, total revenues increased by approximately $2.8 million, or 16%, for the three months ended December 31, 2010 compared to the three months ended December 31, 2009.  Revenue in the Systems segment increased for the current year three month period versus the prior year three month period by approximately $1.4 million, while revenues in the Service and System Integration segment increased by approximately $1.4 million, resulting in the overall increase of approximately $2.8 million.
 
Product revenues increased by approximately $1.8 million, or 13% for the three months ended December 31, 2010 compared to the comparable period of the prior fiscal year. This change in product revenues was made up of an increase in product revenues in the Service and System Integration segment of approximately $1.9 million over the prior year three months, offset by a decrease in product revenues in the Systems segment of approximately $0.1 million versus the prior year three months.
 
The increase in the Service and System Integration segment product sales of approximately $1.9 million was due primarily to increased product sales in the U.S. division of the segment. The increase in the U.S. reflected increases in shipments to a wide spectrum of customers. Sales to our largest customer of fiscal year 2010 and the quarter ended December 31, 2010 increased by $0.5 million compared to the prior year three month period ended December 31. However, it should be noted that sales to this customer for the three months ended December 31, 2010 were approximately $2.5 million compared to the fiscal year 2010 quarterly average sales to this customer of approximately $5.6 million per quarter. The remainder of the increase was derived from more recently acquired customers, and the increase was made up of a larger number of smaller customers compared to the prior year.
 
As shown in the table above, service revenues increased by approximately $1.0 million, or 24%, for the three months ended December 31, 2010 compared to the comparable three month period ended December 31, 2009. Service revenue in the Systems segment increased by approximately $1.4 million, while service revenue in the Service and System Integration segment decreased by approximately $0.4 million, as shown in the table above.
 
 
14

 
 
The $1.4 million increase in Systems segment service revenue was substantially the result of an increase in royalty revenue from Lockheed Martin which was approximately $1.4 million for the three months ended December 31, 2010, versus no royalty revenue for the three months ended December 31, 2009.  This $1.4 million in royalty revenue recognized in the three months ended December 31, 2010, represents approximately 88% of the total royalty income we expect to recognize for all of our fiscal year ending September 30, 2011.

 The decrease in the Service and System Integration segment service revenue as shown in the table above, was driven by lower service revenues from the segment’s German and United Kingdom divisions which decreased by approximately $0.6 million and $0.1 million, respectively. These decreases were offset by an increase in services revenue from the segment’s US division of approximately $0.3 million. The decreases in service revenue from our German and United Kingdom divisions was attributed to the unfavorable economic conditions in Europe, which has resulted in reduced demand for IT project orders and/or delays in the commencement of projects.  The increase from the U.S. division was due substantially to revenue recognized on the final phase of a large IT infrastructure project which was completed during the three month period ended December 31, 2010.
 
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
 
   
For the three Months Ended
             
   
December 31,
2010
   
%
   
December 31,
2009
   
%
   
$ Increase
(Decrease)
   
% Increase
(Decrease)
 
   
(Dollar amounts in thousands)
 
Americas
  $
14,053
      68 %   $
10,331
      58 %   $
3,722
      36 %
Europe
   
6,435
      31 %    
7,083
      40 %    
(648
)     (9 %)
Asia
    139       1 %     394       2 %     (255 )     (65 %)
                                                 
Totals
  $
20,627
      100 %   $
17,808
      100 %   $
2,819
      16 %
 
The increase in Americas revenue for the three months ended December 31, 2010 versus the three months ended December 31, 2009 was primarily the result of the increase in revenues from the U.S. operations of the Service and System Integration segment which accounted for approximately $2.0 million of the increase. Additionally, sales from the Systems segment to U.S. customers increased by approximately $1.6 million comprised primarily of royalty income described above.
 
The decrease in sales in Europe was primarily the result of lower sales from the German and United Kingdom divisions of the Service and System Integration segment.  This change was made up substantially of the impact of the weaker Euro versus the U.S. dollar for the three months ended December 31, 2010 versus the three months ended December 31, 2009. This unfavorable impact on European sales, when comparing to the prior year three months, was approximately $0.5 million.  The decrease in Asia sales was the result of a decrease in sales into our existing program which supplies the Japanese defense market.
 
 
15

 
 
Cost of Sales and Gross Margins
 
The following table details our cost of sales by operating segment for the three months ended December 31, 2010 and 2009:
 
   
Systems
   
Service and
System
Integration
   
Total
   
% of
Total
 
   
(Dollar amounts in thousands)
 
For the three months ended December 31, 2010:
                       
Product
  $ 245     $
13,170
    $
13,415
      83 %
Services
    74      
2,610
     
2,684
      17 %
Total
  $ 319     $
15,780
    $
16,099
      100 %
                                 
% of Total
    2 %     98 %     100 %        
% of Sales
    17 %     84 %     78 %        
Gross Margins:
                               
Product
    21 %     12 %     12 %        
Services
    95 %     32 %     50 %        
Total
    83 %     16 %     22 %        
                                 
   
Systems
   
Service and
System
Integration
   
Total
   
% of
Total
 
For the three months ended December 31, 2009:
                               
Product
  $ 344     $
11,698
    $
12,042
     
78
%
Services
    48      
3,414
     
3,462
     
22
%
Total
  $ 392     $
15,112
    $
15,504
      100 %
                                 
% of Total
    3 %     97 %     100 %        
% of Sales
    86 %     87 %     87 %        
Gross Margins:
                               
Product
    12 %     11 %     11 %        
Services
    21 %     20 %     20 %        
Total
    14 %     13 %     13 %        
                                 
Increase (decrease)
                               
Product
  $ (99 )   $
1,472
    $
1,373
      11 %
Services
    26      
(804
)    
(778
)     (22 )%
Total
  $ (73 )   $
668
    $
595
      4 %
                                 
% Increase (decrease)
    (19 )%     4 %     4 %        
% of Sales
    (69 )%     (3 )%     (9 )%        
Gross Margins:
                               
Product
    9 %     1 %     1 %        
Services
    74 %     12 %     30 %        
Total
    69 %     3 %     9 %        
 
Total cost of sales increased by approximately $0.6 million when comparing the three months ended December 31, 2010 versus the three months ended December 31, 2009.   This increase in cost of sales of 4% overall, compares with an increase in sales of 16%.  The primary reason that cost of sales increased at a lower rate than the rate of increase in sales was due to the fact that $1.4 million of the increase in sales was from royalties in the Systems segment, for which there is zero cost of sales.  In addition, the sales mix in the Service and System Integration segment resulted in a lower increase in cost of sales versus the increase in sales as described below.
 
Cost of sales in the Systems segment decreased slightly; by approximately $0.1 million in the current year three month period versus the prior year three month period despite the fact that sales in the Systems segment increased by approximately $1.4 million.  This is due to the fact that substantially all of the increase in sales was from royalty sales to Lockheed Martin which carries no cost of sales, referred to above.
 
Cost of sales in the Service and System Integration segment increased by approximately $0.7 million, which is a 4% increase when comparing the current year three months versus the prior year three months. While this trend is consistent with an increase in sales over the prior year, the rate of increase of 4% is lower than the rate of increase in sales, which was 8%.  The reason for this is two-fold. First, on the product sales side we experienced smaller deal size with better margins (i.e., higher relative prices per unit).  In the prior year, a higher percentage of our sales were to higher-volume-lower-margin customers, particularly in the US division. And, secondly we had better utilization of service resources in the three months ended December 31, 2010 versus the prior three month period, especially in Germany, which resulted in lower cost as a percent of revenue.
 
 
16

 
 
The overall gross profit margin for the three months ended December 31, 2010 was 22% compared to 13% for the three months ended December 31, 2009.  The gross margin in the Systems segment improved to 83% from 14% which was driven by the royalty revenue which is referred to above.  The gross margin in the Service and System Integration segment increased from 13% for the three months ended December 31, 2009 to 16% for the three months ended December 31, 2010.  This increase in gross profit margin for the Service and System Integration segment was due to the reasons described in the paragraph above.
 
Engineering and Development Expenses
 
The following table details our engineering and development expenses by operating segment for the three months ended December 31, 2010 and 2009:
 
   
For the Three Months Ended
             
   
December 31,
2010
   
% of
Total
   
December 31,
2009
   
% of
Total
   
$ Increase
   
% Increase
 
   
(Dollar amounts in thousands)
 
By Operating Segment:
                                   
Systems
  $ 510       100 %   $ 472       100 %   $ 38       8 %
Service and System Integration
          %           %           %
                                                 
Total
  $ 510       100 %   $ 472       100 %   $ 38       8 %
 
The increase in engineering and development expenses displayed above was due to higher engineering consulting expenditures in connection with the development of the next generation of MultiComputer products in the Systems segment.
 
Selling, General and Administrative
 
The following table details our selling, general and administrative expense by operating segment for the three months ended December 31, 2010 and 2009:
 
   
For the Three Months Ended
             
   
December 31,
2010
   
% of
Total
   
December 31,
2009
   
% of
Total
   
$ Increase (Decrease)
   
% Increase (Decrease)
 
   
(Dollar amounts in thousands)
 
By Operating Segment:
                                   
Systems
  $ 882       26 %   $ 884       29 %   $ (2 )     - %
Service and System Integration
    2,493       74 %     2,173       71 %     320       15 %
                                                 
Total
  $ 3,375       100 %   $ 3,057       100 %   $ 318       10 %
 
The increase in selling, general and administrative (“SG&A”) expenses displayed above was primarily due to higher commission expense resulting from higher revenue and gross profit, and higher bonus expense resulting from the more favorable operating results in the current year three month period versus the prior year.
 
 Other Income/Expenses
 
The following table details our other income/expenses for the three months ended December 31, 2010 and 2009:
 
   
For the Three Months Ended
       
   
December 31,
2010
   
December 31,
2009
   
Increase
(Decrease)
 
   
(Amounts in thousands)
 
Interest expense
  $ (22 )   $ (23 )   $ 1  
Interest income
    7       11       (4 )
Foreign exchange gain (loss)
    (4 )     (7 )     3  
Other income (expense), net
    (2 )     (1 )     (1 )
                         
Total other income (expense), net
  $ (21 )   $ (20 )   $ (1 )

Other income (expense), net, for the three month periods ended December 31, 2010 and 2009 was not significant nor was the change from the prior year three month period to that of the current year.
 
 
17

 
 
Income Taxes
 
Income Tax Provision
 
The Company recorded an income tax provision of approximately $0.2 million for the quarter ended December 31, 2010 reflecting an effective income tax rate of 38% compared to an income tax benefit of $0.5 million for the quarter ended December 31, 2009, which reflected an effective income tax benefit rate of 40%.
 
In assessing the realizability of deferred tax assets, we considered our taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, we have recorded a valuation allowance which reduces the gross deferred tax asset to an amount which we believe will more likely than not be realized. Our inability to project future profitability beyond fiscal year 2011 in the U.S. and cumulative losses incurred in recent years in the United Kingdom represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets. We maintained a substantial valuation allowance against our United Kingdom deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. 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 assets may change.
 
Liquidity and Capital Resources
 
Our primary source of liquidity is our cash and cash equivalents, which increased by approximately $0.4 million to $16.0 million as of December 31, 2010.  This compares to $15.5 million as of September 30, 2010. At December 31, 2010, the Company’s cash equivalents of $3.5 million were held in money market funds.
 
Significant sources of cash for the three months ended December 31, 2010 were net income of approximately $0.4 million and a decrease in accounts receivable of approximately $0.6 million.  The significant uses of cash during the period were an increase in other current assets, which consisted of payments for prepaid items of $0.3 million, capital expenditures of approximately $0.1 million and repurchase of CSPI common stock of $0.2 million.
 
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans or other means. There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition or continue to effectively operate our business.
 
Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, cash generated from operations and availability on our lines of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for the foreseeable future.
 
 
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Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Our chief executive officer, our chief financial officer, and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or  the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2010, the Company’s chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in Internal Controls over Financial Reporting
 
As we have previously reported, management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2011, and identified material weaknesses.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected in a timely basis.
 
The material weaknesses were in connection with our determination that we did not sufficiently assess and apply certain aspects of ASC 605-45-45 Principal Agent Considerations, to the particular facts and circumstances of many of our revenue arrangements.  We therefore determined that this failure to accurately assess an accounting principle amounted to a material weakness in our controls over financial reporting.  As a result, we had concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2011 and 2010.

 During the quarter ended December 31, 2011, in response to the identification of the material weakness referred to above, management assessed various alternatives to modify our existing internal control processes and systems to remediate this material weakness.  Currently, we have devised a method whereby we are able to utilize data-mining techniques to identify the applicable transactions, and then apply the appropriate accounting treatment to them.  We have incorporated this process into our existing internal control structure to insure that we apply the appropriate accounting for these transactions beginning with the quarter ended December 31, 2011.
 
 
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PART II. OTHER INFORMATION
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
Share Repurchase Plans. The following table provides information with respect to shares of our common stock that we repurchased during the three months ended December 31, 2010:
 
   
Issuer Purchases of Equity Securities
 
Period
 
Total Number of
Shares Purchased
   
Average Price
Paid per Share
   
Total Number of Shares
Purchased as
Part of Publicly
Announced Plans (1)
   
Maximum Number of
Shares that May
Yet Be
Purchased Under
the Plans
 
October 1-31, 2010
    7,940     $ 4.53       7,940        
November 1-30, 2010
    9,500     $ 4.52       9,500        
December 1-31, 2010
    28,221     $ 3.98       28,221        
                               
Total
    45,661     $ 4.19       45,661       98,895  

(1)
All shares were purchased under publicly announced plans. For additional information about these publicly announced plans, please refer to Note 12 of our audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
 
 
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Item 6.
Exhibits
 
Number
 
Description
     
3.1
 
Articles of Organization and amendments thereto (incorporated by reference to Exhibit 3.1 to our Form 10-K for the year ended September 30, 2007)
     
3.2
 
By-Laws, as amended (incorporated by reference to Exhibit 3.2 to our Form 10-K for the year ended September 30, 2007)
     
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
CSP INC.
       
Date: March 1, 2012
 
By:
/s/  Alexander R. Lupinetti
     
Alexander R. Lupinetti
     
Chief Executive Officer,
     
President and Chairman
       
Date: March 1, 2012
 
By:
/s/  Gary W. Levine
     
Gary W. Levine
     
Chief Financial Officer
 
 
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Exhibit Index
 
Number
 
Description
     
3.1
 
Articles of Organization and amendments thereto (incorporated by reference to Exhibit 3.1 to our Form 10-K for the year ended September 30, 2007)
     
3.2
 
By-Laws, as amended (incorporated by reference to Exhibit 3.2 to our Form 10-K for the year ended September 30, 2007)
     
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
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