1、CSP INC/MA/FORM 10-K(Annual Report)Filed 12/22/09 for the Period Ending 09/30/09 Address43 MANNING ROADBILLERICA,MA 01821Telephone9786637598CIK0000356037SymbolCSPISIC Code7373-Computer Integrated Systems DesignIndustryComputer HardwareSectorTechnologyFiscal Year12/19http:/www.edgar- Copyright 2015,E
2、DGAR Online,Inc.All Rights Reserved.Distribution and use of this document restricted under EDGAR Online,Inc.Terms of Use.Table of Contents UNITED STATES 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 19
3、34 For the Fiscal Year Ended September 30,2009.?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 000-10843 CSP Inc.(Exact name of Registrant as specified in its Charter)Massachusetts 04-2441294(State of
4、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)Securities Registered Pursuant to Section 12(b)of the Act:Title of Each Class Name of Exchange of Which Registered Common Stoc
5、k,par value$0.01 per share NASDAQ Global Market Securities registered pursuant to Section 12(g)of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes?No Indicate by check mark if the registrant is not required to file
6、 reports pursuant to Section 13 or Section 15(d)of the Act.Yes?No 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
7、required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes 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 pursua
8、nt to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be
9、contained,to the best of registrants 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.?Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated f
10、iler,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.Large accelerated filer?Accelerated filer?Non-accelerated filer?Smaller Reporting Company Indicate by check mark whether the registra
11、nt is a shell company(as defined in Rule 12b-2 of the Exchange Act.Yes?No As of March 31,2009,the aggregate market value of the registrants common stock held by non-affiliates of the registrant was$7,762,861 based on the closing sale price of$2.85 as reported on the Nasdaq Global Market.As of Decemb
12、er 16,2009,we had outstanding 3,587,925 shares of common stock.DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the information required in Part III of this Form 10-K are incorporated by reference from our definitive proxy statement for our 2010 annual meeting of stockholders to be filed with
13、 the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30,2009.Table of Contents TABLE OF CONTENTS Note:Items 1B,6 and 7A are not required for smaller reporting companies and therefore not furnished.2 Page PART I.3 Item 1.Business 3 Item 1A.Risk Fact
14、ors 9 Item 2.Properties 15 Item 3.Legal Proceedings 15 Item 4.Submission of Matters to a Vote of Security Holders 15 PART II.16 Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities 16 Item 7.Managements Discussion and Analysis of Financial
15、 Condition and Results of Operations 17 Item 8.Financial Statements and Supplementary Data 32 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 Item 9A(T).Controls and Procedures 33 Item 9B.Other Information 34 PART III.35 Item 10.Directors,Executive Offi
16、cers and Corporate Governance 35 Item 11.Executive Compensation 35 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35 Item 13.Certain Relationships,Related Transactions and Director Independence 36 Item 14.Principal Accountant Fees and Services
17、36 PART IV.37 Item 15.Exhibits and Financial Statement Schedules 37 Table of Contents PART I Item 1.Business CSP Inc.(“CSPI”or“the Company”or“we”or“our”)was incorporated in 1968 and is based in Billerica,Massachusetts,just off Route 128 in the Boston computer corridor.To meet the diverse requirement
18、s of our industrial,commercial,and defense customers worldwide,CSPI and its subsidiaries develop and market IT integration solutions and high-performance cluster computer systems.Segments CSPI operates in two segments,the Systems segment and the Service and System Integration segment.The Systems seg
19、ment consists primarily of CSPIs MultiComputer Division(the“MultiComputer Division”)which designs and manufactures specialty,high-performance computer signal processing systems for the aerospace&defense markets.The MultiComputer Divisions products are known as multicomputers or cluster computers,whi
20、ch use multiple microprocessors linked together in a specialized network to achieve very high performance processing capabilities.Our MultiComputer systems utilize“blades”(self-contained,high-density computer boards)to achieve a high level of compute processing per-cubic-foot-per-watt.The blades and
21、 other components that make up the system are housed in a ruggedized chassis,designed to withstand physically demanding environments such as those found on board a ship or airplane.In addition,CSPIs MultiComputer products are designed to operate in environments that have low power,cooling and space
22、requirements.These systems are used on land,and in airborne and shipboard platforms for high-speed digital signal processing(“DSP”)in radar,sonar,and surveillance applications.The MultiComputer Division sells all its products through its own direct sales force in the United States and via distributo
23、rs and authorized resellers in the Asia-Pacific region and Europe.Financial Information about Industry Segments The Service and System Integration Segment consists of the computer maintenance and integration services and third-party computer hardware and software value added reseller(“VAR”)businesse
24、s of our Modcomp subsidiary(“Modcomp”).Modcomp is a wholly owned subsidiary of CSPI which operates in the United States,Germany and the United Kingdom(the“U.K.”).Modcomp markets and sells its products through its own direct sales force.Modcomp provides solutions and services for complex IT environme
25、nts including storage and servers,unified communications solutions,IT security solutions and consulting services.Modcomp also provides managed IT services through its state of the art network operations center(“NOC”).The following table details our sales by operating segment for fiscal years ending
26、September 30,2009 and 2008.Additional segment and geographical information is set forth in Note 15 to our financial statements.3 Segment 2009%2008%(Amounts in thousands)Systems$7,987 10%$4,957 6%Service and System Integration 75,370 90%71,825 94%Total Sales$83,357 100%$76,782 100%Table of Contents S
27、ystems Segment Products and Services The Systems segments MultiComputer systems utilize commodity hardware components that are compliant with industry standards and open source software,and deliver a high-performance,high density,and low power consuming computer solution to our customers.These syste
28、ms incorporate tens to hundreds of processors,all interconnected by a very high-bandwidth network.They are specifically designed for analysis of complex signals and images in real-time or in modeling and simulations.Typical computationally intense applications requiring these products include radar,
29、sonar,command,control,communications,computers,intelligence,surveillance,and reconnaissance(C ISR)within the defense market segment.We utilize the most recent,currently available high performance processor technology,large memory subsystems,and high-bandwidth networking components in the open hardwa
30、re architecture of our MultiComputer systems.These systems are scalable and easy to upgrade,allowing for continuous insertion of the latest technologies.To meet the demands of mission-critical applications,our MultiComputer systems incorporate high-availability features to facilitate continuous oper
31、ation of the system.These features include instant booting from a cold start,error-correcting memory,hot-swappable hardware,extended environmental specifications,and built-in self-test.These systems ship in a variety of configurations ranging from small lab systems with as few as ten processors to m
32、ultiple-chassis systems with over 400 processors.Hardware Products Our MultiComputer Division cluster computer systems are currently marketed under the brand name FastCluster.Introduced in 1997,the first generation of FastCluster products were referred to as the FastCluster 2000 SERIES.Based upon in
33、dustry standards,the 2000 SERIES systems included a VME 6U form factor(the form factor best suited for use in rugged applications),the Motorola G4 PowerPC RISC processors with AltiVec technology,high-speed memory and Myrinet-2000 cluster interconnect.The 2000 SERIES product line is ideally suited fo
34、r use by customers in the aerospace and defense markets seeking Commercial-Off-The-Shelf(“COTS”)solutions to reduce costs and ensure widespread availability.To remain competitive,our COTS solutions incorporate the latest industry standard technologies and minimize the risks associated with proprieta
35、ry solutions.In fiscal year 2004,we introduced the StarGate I/O blade,a 2000 SERIES board-level component designed specifically for high-speed data acquisition.The StarGate bolstered our product offerings in radar,sonar and surveillance DSP by providing the rapid execution times that are necessary f
36、or the complex signal processing demands of these applications.The StarGate I/O blade was the first 2000 SERIES product to benefit from the increased performance provided by the 1GHz Motorola 7457 PowerPC microprocessors and related technologies.Also in 2004,the FastCluster product line was enhanced
37、 with the addition of rugged system capabilities for blades and enclosures with the introduction of the FastCluster 220R to our 2000 SERIES product line.The FastCluster 220R introduced a new rugged chassis,specifically designed to meet military standard(“MIL-STD”)specifications for mission-critical,
38、airborne defense programs.The advanced packaging maintained scalability to hundreds of processors and leveraged the latest Myrinet-2000 fiber clustering technology for multi-chassis configurations.This packaging offered better fault detection,hot-swap capability,plug-in power supply and blower assem
39、bly components for improved serviceability,and addressed MIL-STD requirements for shock,vibration,and EMC/EMI.Building upon the momentum of the 2000 SERIES,we announced the next generation FastCluster product line,the 3000 SERIES,in fiscal 2006.The first prototype of a 3000 SERIES component was ship
40、ped to a customer for evaluation purposes in September 2007.This prototype was successfully evaluated by the customer during fiscal 2008,and we anticipate future orders for 3000 Series systems.The 3000 SERIES product line is being designed to deliver performance that is superior to our predecessor p
41、roducts in bi-section bandwidth and 4 4 Table of Contents processing density while preserving absolute code reuse at the application layer.The 3000 SERIES product line is targeting high performance DSP,signal intelligence(“SIGINT”),radar,and sonar applications in airborne,shipboard and unmanned aeri
42、al vehicle(“UAV”)platforms where space,power and cooling are at a premium.With its built-in 10-Gigabit Ethernet technology,the 3000 SERIES supports the United States(“U.S.”)Government Department of Defense(“DOD”)vision of“systems of systems”in which embedded systems are not designed,deployed,and use
43、d in isolation but rather in a cooperative way.All of the products of the MultiComputer Division offer the user a choice in selecting the system software best suited to their application requirements.For customers wanting a lower cost solution,our cluster computer systems are available with the open
44、-source Linux operating system and toolkit.Customer applications requiring real-time response have the option of purchasing systems with the industry standard VxWorks real-time operating system and Tornado II development tools suite.All MultiComputer cluster computer systems use the best of open sys
45、tems software technologies,such as message passing interface(“MPI”)software for interprocessor communications and the highly optimized industry standard math libraries:Industry Standard Signal Processing Library and Vector Signal and Image Processing Library.These libraries facilitate the developmen
46、t of truly portable code for seamless reuse across applications,while taking advantage of optimized performance on the PowerPC with AltiVec.Markets,Marketing and Dependence on Certain Customers Aerospace&Defense Market We market our MultiComputer systems to the aerospace and defense markets with emp
47、hasis on applications requiring the analysis of complex signals such as sonar and radar.We distribute our products in these markets as an original equipment manufacturer(“OEM”)supplier to system integrators,distributors,and value-added resellers.In these markets,the supplier/customer relationship is
48、 viewed as a long-term strategic partnership.MultiComputer systems are sold primarily to prime contractors(serving as systems integrators)within the defense industry and are used in sonar,radar,C ISR systems,simulators,and signal and image analysis computers.Customers in this market segment have uni
49、que requirements.A prime contractor will typically incorporate our products into their own future product developments and,therefore,will need early access to low-level,detailed technical specifications,prototype units,form,fit and function compatibility with previous products,long term product avai
50、lability and support.As a supplier in this market,we recognize that there may be a significant up-front investment of time and resources in building a business partnership.However,the result of this partnership is a strong potential for long-term revenue streams as products progress from development
51、 phases into deployment.Our cluster computing technologies that support“network centric warfare”and information exchange in real-time are becoming increasingly significant to twenty-first century military operations.There has been steady growth of new programs requiring signal/image processing and a
52、nalysis equipment as well as upgrades to existing military programs.However,the efficiency inherent in these technologies reduces the number of systems required to achieve the same results.Both new and upgraded programs require a substantial investment in development and evaluation before products d
53、eploy into field use.The time from development to deployment varies based on the program;however,it very often extends beyond twenty-four months.Looking forward to fiscal 2010 and beyond,our focus is to build interest in our 3000 SERIES multicomputers among our customers.Competition The Systems segm
54、ents markets are very competitive.Customer requirements coupled with advances in technology drive our efforts to continuously improve existing products and develop new ones.Starting with Intel i860 microprocessors used in the SuperCards of the 1980s to the Motorola PowerPCs with AltiVec processors i
55、ncorporated in the early FastCluster 2000 SERIES and later the addition of Linux open source software,we have 5 4 Table of Contents responded with product offerings that are vital to remaining competitive.Product development efforts in fiscal year 2009 involved completing and launching new enhanceme
56、nts to our 3000 SERIES product line,with a focus on continuing to provide our defense customers with increased processing capabilities based on the latest industry standard technologies:VXS(VITA 41),multi-core processors,FPGAs,and Myricoms Myri-10G high speed interconnect with 10 Gigabit Ethernet su
57、pport.Applications expertise,product innovation,strong technical support,and dedicated customer service allow us to compete favorably as a provider of high-performance cluster computer systems.Aerospace&Defense Market Our direct competitors in the aerospace and defense market are Mercury Computer In
58、c.,Curtis Wright and G.E.Fanuc.Our indirect competitors are the board manufacturers that specialize in the DSP segment of this market.In the past,manufacturers such as Emerson,HP,IBM,and Dell participated in the low performance segment of the general-purpose computer and single board computer market
59、.Today,those companies manufacture general-purpose computer systems incorporating multi-core processors and have the potential to become formidable competitors in compute intensive applications,such as radar and sonar.While our products are designed to offer the best overall value in combined perfor
60、mance,features,and price,we may not overcome the capabilities of larger companies to address the needs of the cost sensitive customer,where price,as opposed to system performance,size,and specialized packaging,is the primary factor in the buying decision.New companies enter the field periodically,an
61、d larger companies with greater technical resources and marketing organizations could decide to compete in the future.The future growth of this market depends upon continued growth in strategic partnerships and providing high density and scalability in a compact,low power,and cost effective package
62、that can easily be integrated into OEM designs for high performance computation.Since the majority of sales are to prime contractors,the principal barrier to gaining market share is the reluctance of established users to redesign their product once it is in production.A key area of opportunity exist
63、s in design wins on new programs.Manufacturing,Assembly and Testing All MultiComputer systems are shipped to our customers directly from our plant in Billerica,Massachusetts.Our manufacturing activities consist mainly of final assembly and testing of printed circuit boards and systems that are desig
64、ned by us and fabricated by outside vendors.Upon receipt of material by us from outside suppliers,our quality assurance technicians inspect products and components.During manufacture and assembly,both subassemblies and completed systems are subjected to extensive testing,including burn-in and enviro
65、nmental stress screening designed to minimize equipment failure at delivery and over its useful service life.We also use 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 stan
66、dards.We provide a warranty covering defects arising from products sold and service performed,which varies from 90 days to one year,depending upon the particular unit.Customer Support Our MultiComputer Division supports our customers with telephone assistance,on-site service,system installation,trai
67、ning,and education.We provide product support service during the warranty period.Customers may purchase extended software and hardware maintenance and on-site service contracts for support beyond the warranty period.6 Table of Contents We offer training courses at our corporate headquarters or the c
68、ustomer site.Field and customer service support is provided by employees located at our headquarters in Billerica,Massachusetts for Systems segment customers.Sources and Availability of Raw Materials Several components used in our Systems products are obtained from sole-source suppliers.We are depen
69、dent on key vendors like Myricom,Inc.for our high-speed interconnect components,Freescale Semiconductor,Inc.for our PowerPC processors and Wind River Systems,Inc.for VxWorks operating system software.Despite our dependence on these sole-source suppliers,we do not consider the risk of interruption of
70、 supply to be significant to meet our projected revenue requirements for the near term.Also,all components used to build our new 3000 SERIES systems are currently available in a timely manner.Research and Development For the year ended September 30,2009,our expenses for research and development were
71、 approximately$2.0 million compared to approximately$2.2 million for fiscal year 2008.Expenditures for research and development are expensed as they are incurred.Our Systems segment expects to continue to have substantial expenditures related to the development of new hardware products and the softw
72、are that enables the hardware to function.Our 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,including the 3000 SERIES product line.We do not have any patents
73、that are material to our business.Backlog The backlog of customer orders and contracts in the Systems segment was approximately$4.1 million at September 30,2009 as compared to$687 thousand at September 30,2008.Our backlog can fluctuate greatly.These fluctuations can be due to the timing of receiving
74、 large orders representing prime contractor purchases.It is expected that all of the customer orders in backlog will ship within the next twelve months.Service and System Integration Segment Products and Services Integration Solutions Over the past several years,the business of our Service and Syste
75、m Integration segment has evolved away from selling our proprietary process control and data acquisition(“PCDA”)computer systems,into becoming a systems integrator and VAR of integrated solutions including third-party hardware,software and technical computer-related consulting services and managed s
76、ervices via a state of the art NOC.Our value proposition is our ability to integrate diverse third-party components together into a complete solution and install the system at the customer site.Third-Party Hardware and Software Modcomp sells third-party hardware and software products in the informat
77、ion technology market,with a strategic focus on industry standard servers,midrange data storage infrastructure products,unified communications and IT security hardware and software solutions,as well as computer networking equipment.Our key offerings include products from HP,Cisco Systems,Sun Microsy
78、stems,IBM,Juniper Networks,Hitachi,QLogic,Dell,Enterasys,Citrix,APC,EMC,Intel,VM Ware,Fortinet,Pillar,Microsoft and Checkpoint.Through our supplier relationships with these vendors,we are able to offer competitively priced best-of-breed 7 Table of Contents products to meet our customers diverse tech
79、nology needs,providing procurement and engineering expertise in server infrastructure,storage,security,unified communications and networking,to the small-to-medium sized businesses(“SMBs”),and large enterprise businesses(“LEBs”)with complex IT environments.We offer our customers a single point of co
80、ntact for complex multi-vendor technology purchases.Many of our SMB customers have unique technology needs,and may lack technical purchasing expertise or have very limited IT engineering resources on staff.We also provide installation,integration,logistical assistance and other value-added services
81、that customers may require.Our current customers are in education,telecommunications,health services,distribution,financial services,professional services,manufacturing and entertainment industries.We target SMB and LEB customers across all industries.Professional Services We provide professional IT
82、 consulting services in the following areas:Maintenance and technical support both for third-party products and proprietary Modcomp legacy PCDA systemshardware and software,operating system and user support Implementation,integration,configuration and installation services.Enterprise security intrus
83、ion prevention,network access control and unified threat managementUsing third-party products from companies like Checkpoint,Juniper Networks and Cisco Systems,our services are designed to ensure data security and integrity through the establishment of virtual private networks,firewalls and other te
84、chnologies.IT security compliance servicesWe provide services for IT security compliance with personal privacy laws such as HIPAA and corporate governance laws such as Sarbanes-Oxley.Unified communications,wireless and routing and switching solutions using Cisco Systems products and services.Custom
85、software applications and solutions development and supportWe develop custom applications to customer specifications using industry standard platforms such as Microsoft.Net,Sharepoint,and Prince2 project management.We are a Microsoft Gold Partner.Markets,Marketing and Dependence on Certain Customers
86、 NOC managed IT services that include monitoring,reporting and management of alerts for the resolution and preventive general IT and IT security support tasks.We are an IT systems integrator and computer hardware and software VAR.We also provide technical services to achieve a value-add to our custo
87、mers.We operate within the VAR sales channels of major computer hardware and software OEMs,primarily within the geographic areas of our sales offices,and across the U.S.We provide innovative IT solutions,including a myriad of infrastructure products with customized integration consulting services an
88、d managed services to meet the unique requirements of our customers.We market the products we sell and services we provide through various sales offices in the U.S.,Germany,and the U.K.through our direct sales force(for a detailed list of our locations,see Item 2 of this Form 10-K).Competition The p
89、rimary competition in the Service and System Integration segment are other VARs,ranging from small companies that number in the thousands,to large enterprises such as CDW,PC Connection,Insight,MoreDirect,Dimension Data,Bechtle AG and Computacenter.In addition,we compete directly with many of the com
90、panies who manufacture the third-party products that we sell including IBM,HP EMC,Hitachi and others.In the network management,security and storage systems integration services business,our competitors are extensive and vary to a certain degree in each of the geographical markets,but they include su
91、ch competitors as HP/EDS,IBM and Cap Gemini.8 Table of Contents Nearly all of our product offerings are available through other channels.Favorable competitive factors for the Service and System Integration segment include procurement capability,product diversity allowing for delivery of complete and
92、 custom solutions to our customers,strength of key partner relationships with the major IT OEMs,ability to supply unique and/or specialized needs of the SMB and LEB markets,strong knowledge of the IT products that we sell,ability to provide managed services through our NOC,and the consulting integra
93、tion services required to design and install the custom solutions that fit our customers IT needs.Unfavorable competitive factors include low name recognition,limited geographic coverage and pricing.Backlog The backlog of customer orders and contracts for the Service and System Integration segment w
94、as approximately$4.8 million at September 30,2009,as compared to$4.6 million at September 30,2008.Our backlog can fluctuate greatly.These fluctuations can be due to the timing of receiving large orders for third-party products and/or IT services.It is expected that all of the customer orders in back
95、log will ship and/or be provided within the next twelve months.Significant Customers See Note 15 for detailed information regarding customers which comprised 10%or more of consolidated revenues for the years ended September 30,2009 and 2008.Employees On September 30,2009,we had approximately 150 ful
96、l time equivalent employees worldwide for our consolidated operations.None of our employees are represented by a labor union and we had no work stoppages.We consider relations with our employees to be good.Financial Information about Geographic Areas Information regarding our sales by geographic are
97、a and percentage of sales based on the location to which the products are shipped or services are rendered are in Note 15 of our consolidated financial statements.Item 1A.Risk Factors Factors that may Affect Future Performance This document contains forward-looking statements based on current expect
98、ations 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 we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is
99、 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,we may take certain pricing or marketing acti
100、ons that could adversely affect our operating results.In addition,changes in the products and services mix may cause fluctuations in our gross margin.Due to the potential quarterly fluctuations in operating results,we believe that quarter-to-quarter comparisons of our results of operations are not n
101、ecessarily an indicator of future performance.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 upon our ability
102、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 operati
103、ng results.9 Table of Contents We Depend on a Small Number of Customers for a Significant Portion of our Revenue and Loss of any Customer Could Significantly Affect the Business We are dependent on a small number of customers for a large portion of our revenues.Both the Systems and Service and Syste
104、m Integration segments are reliant upon a small number of significant customers,the loss of any one of which could have a material adverse effect on our business.A significant diminution in the sales to or loss of any of our major customers would have a material adverse effect on our business,financ
105、ial condition and results of operations.In addition,our revenues are largely dependent upon the ability of our customers to have continued growth or need for services or to develop and sell products that incorporate our products.No assurance can be given that our customers will not experience financ
106、ial or other difficulties that could adversely affect their operations and,in turn,our results of operations.We Depend on Defense Business for a Significant Amount of our Revenue and the Loss or Decline of Existing or Future Defense Business Could Adversely Affect our Financial Results Sales of our
107、products and services to the defense market accounted for approximately 9%and 6%of our consolidated revenues and 99%and 98%of the Systems segment sales for the fiscal years ended September 30,2009 and 2008,respectively.Reductions in government spending on programs that incorporate our products could
108、 have a material adverse effect on our business,financial condition and results of operations.Moreover,our 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 chang
109、es in government policies or as the result of budgetary constraints or political changes;increased or unexpected costs under fixed price contracts;and In addition,consolidation among defense industry contractors has resulted in fewer contractors with increased bargaining power relative to our bargai
110、ning power.No assurance can be given that such increased bargaining power will not adversely affect our 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,”c
111、an have significant impact on defense spending priorities and the efficient handling of routine contractual matters.Such changes could have a negative impact on our business,financial condition,or results of operations in the future.We Face Competition That Could Adversely Affect our Sales and Profi
112、tability other factors that are not under our control.The markets for our 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 ma
113、y emerge of which we have no current awareness.Competitors may be able to offer more attractive pricing or develop products that could offer performance features that are superior to our products,resulting in reduced demand for our products.Such competitors could have a negative impact on our abilit
114、y to win future business opportunities.There can be no assurance that a new competitor will not attempt to penetrate the various markets for our products and services.Their entry into markets historically targeted by us may have a material adverse effect on our business,financial condition and resul
115、ts of operations.Slowdown in the Economy Can Affect our Revenue and Profitability The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital investment and this may cause further reduction of demand for our products and services.These reductions have
116、been particularly severe in the electronics and technology industries.10 Table of Contents Our Operating Results May Fluctuate Significantly Our operating results have fluctuated widely on a quarterly and annual basis during the last several years,and we expect to experience significant fluctuations
117、 in future operating results.Many factors,some of which are beyond our control,have contributed to these fluctuations in the past and may continue to do so.Such factors include:sales in relatively large dollar amounts to a relatively small number of customers;competitive pricing programs and volume
118、discounts;loss of customers;market acceptance of our products;product obsolescence;general economic conditions;change in the mix of products sold;obtaining or failure to obtain design wins for significant customer systems;timing of significant orders;delays in completion of internal product developm
119、ent projects;delays in shipping our products;delays in acceptance testing by customers;production delays due to quality programs with outsourced components;shortages of components;timing of product line transitions;declines of revenues from previous generations of products following announcement of
120、replacement products containing more advance technology;and We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and should not be relied upon as indicative of our future performance.It is also possible that in some periods,our operating result
121、s may be below the expectations of securities analysts and investors.In such circumstances,the price of our common stock may decline.We Rely on Single Sources for Supply of Certain Components and our Business may be Seriously Harmed if our Supply of any of These Components or Other Components is Dis
122、rupted fixed nature of our expenditures on personnel,facilities and marketing programs.Several components used in our Systems products are currently obtained from sole-source suppliers.We are dependent on key vendors like Myricom,Inc.as well as Freescale Semiconductor,Inc.(“Freescale”)for many of ou
123、r PowerPC line of processors.Generally,suppliers may terminate their purchase order with us without cause upon 30-days notice and may cease offering products to us upon 180-days notice.If Myricom of Freescale were to limit or reduce the sale of such components to us,or if these or other component su
124、ppliers to us,some of which are small companies,were to experience financial difficulties or other problems which prevented them from supplying us with the necessary components,such events could have a material adverse effect on our business,financial condition and results of operations.These sole s
125、ource 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 us or our customers,which thereby may adversely affect our business and customer relationships.11 Table of Cont
126、ents We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers will continue to meet our requirements.If our supply arrangements are interrupted,there can be no assurance that we would be able to find another supplier on a timely or satisfactory ba
127、sis.Any shortage or interruption in the supply of any of the components used in our products,or the inability to procure these components from alternate sources on acceptable terms,could have a material adverse effect on our business,financial condition and results of operations.There can be no assu
128、rance that severe shortages of components will not occur in the future.Such shortages could increase the cost or delay the shipment of our products,which could have a material adverse effect on our business,financial condition and results of operations.Significant increases in the prices of these co
129、mponents would also materially adversely affect our financial performance since we may not be able to adjust product pricing to reflect the increase in component costs.We could incur set-up costs and delays in manufacturing should it become necessary to replace any key vendors due to work stoppages,
130、shipping delays,financial difficulties or other factors and,under certain circumstances,these costs and delays could have a material adverse effect on our business,financial condition and results of operations.We Depend on Key Personnel and Skilled Employees and Face Competition in Hiring and Retain
131、ing Qualified Employees We are largely dependent upon the skills and efforts of our senior management,managerial,sales and technical employees.None of our senior management personnel except Alex Lupinetti,our Chief Executive Officer,or other key employees are subject to any employment contracts whic
132、h require services for a period of time.The loss of services of any of our executives or other key personnel could have a material adverse effect on our business,financial condition and results of operations.Our future success will depend to a significant extent on our ability to attract,train,motiv
133、ate and retain highly skilled technical professionals.Our ability to maintain and renew existing engagements and obtain new business depends,in large part,on our ability to hire and retain technical personnel with the skills that keep pace with continuing changes in industry standards and technologi
134、es.The inability to hire additional qualified personnel could impair our ability to satisfy our growing client base,requiring an increase in the level of responsibility for both existing and new personnel.There can be no assurance that we will be successful in retaining current or future employees.O
135、ur International Operations are Subject to a Number of Risks We market and sell our products in certain international markets,and we have established operations in the U.K.and Germany.Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered,a
136、nd represented 36%and 51%of our total revenue for the fiscal years ended September 30,2009 and 2008,respectively.If revenues generated by foreign activities are not adequate to offset the expense of establishing and maintaining these foreign subsidiaries and activities,our business,financial conditi
137、on 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 requirements,export and import restrictions,export controls relating to technology,tariffs and ot
138、her 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 our internationa
139、l activities.A portion of our revenues are from sales to foreign entities,including foreign governments,which are primarily paid 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 our future international activities
140、 and,consequently,on our business,financial condition or results of operations.Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal control over financial reporting.Effective internal control over financial reporting and disclosure co
141、ntrols and procedures are necessary in order for us to provide reliable financial and other reports and effectively prevent fraud.These types of controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the proper 12 Table of Contents preparation of o
142、ur financial statements,as well as regarding the timely reporting of material information.If we cannot maintain effective internal control or disclosure controls and procedures,or provide reliable financial or Securities and Exchange Commission(“SEC”)reports or prevent fraud,investors may lose confi
143、dence in our reported financial information,our common stock could be subject to delisting on the stock exchange where it is traded,our operating results and the trading price of our common stock could suffer,and we might become subject to litigation.While our management will continue to review the
144、effectiveness of our internal control over financial reporting and disclosure controls and procedures,there is no assurance that our disclosure controls and procedures or our internal control over financial reporting will be effective in accomplishing all control objectives,including the prevention
145、and detection of fraud,all of the time.To be Successful,We Must Respond to the Rapid Changes in Technology Our future success will depend in part on our ability to enhance our current products and to develop new products on a timely and cost-effective basis in order to respond to technological devel
146、opments 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 projects than actual deployments of new equipment,and those systems that are
147、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,we must be able to demonstrate our ability to deliver superior technological performance on a timely and cost-effective
148、 basis.There can be no assurance that we will be able to secure an adequate number of defense electronics design wins in the future,that the equipment in which our products are intended to function eventually will be deployed in the field,or that our products will be included in such equipment if it
149、 is eventually deployed.The design-in process is typically lengthy and expensive,and there can be no assurance that we will be able to continue to meet the product specifications of our customers in a timely and adequate manner.In addition,if we fail to anticipate or to respond adequately to changes
150、 in technology and customer preferences,or if there is any significant delay in product developments or introductions,this could have a material adverse effect on our business,financial condition and results of operations,including the risk of inventory obsolescence.Because of the complexity of our
151、products,we have experienced delays from time to time in completing products on a timely basis.If we are unable to design,develop or introduce competitive new products on a timely basis,our future operating results would be adversely affected.There can be no assurance that we will be successful in d
152、eveloping new products or enhancing our existing products on a timely or cost-effective basis,or that such new products or product enhancements will achieve market acceptance.We Need to Continue to Expend Resources on Research and Development Efforts to Meet the Needs of our Customers The industry i
153、n which our Systems segment competes is characterized by the need for continued investment in research and development.If we fail to invest sufficiently in research and development,our products could become less attractive to potential customers,and our business and financial condition could be mate
154、rially adversely affected.As a result of our need to maintain or increase our spending levels in this area and the difficulty in reducing costs associated with research and development,our operating results could be materially harmed if our revenues fall below expectations.In addition,as a result of
155、 CSPIs commitment to invest in research and development,spending as a percent of revenues may fluctuate in the future.13 Table of Contents We May be Unable to Successfully Integrate Acquisitions In order to achieve strategic objectives to maintain and grow our market position,we may have a need to a
156、cquire or make investments in complementary companies,products or technologies.Acquisitions may pose risks to our operations,including:problems and increased costs in connection with the integration of the personnel,operations,technologies or products of the acquired companies;unanticipated costs;di
157、version of managements attention from our core business;adverse effects on business relationships with suppliers and customers and those of the acquired company;acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance by the acquired company;entering
158、 markets in which we have no,or limited,prior experience;and In addition,in connection with any acquisitions or investments we could:potential loss of key employees,particularly those of the acquired organization.issue stock that would dilute existing shareholders percentage of ownership;incur debt
159、and assume liabilities;obtain financing on unfavorable terms;incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs;incur large expenditures related to office closures of the acquired companies,including costs relating to termination of employees an
160、d leasehold improvement charges relating to vacating the acquired companies premises;and The failure to successfully integrate any acquisition or for acquisitions to yield expected results may negatively impact our financial condition and operating results.Any resulting impairment of goodwill would
161、have a negative effect on results of operations.Our Stock Price May Continue to be Volatile reduce the cash that would otherwise be available to fund operations or to use for other purposes.Historically,the market for technology stocks has been extremely volatile.Our common stock has experienced,and
162、 may continue to experience,substantial price volatility.The following factors could cause the market price of our common stock to fluctuate significantly:loss of a major customer;loss of a major supplier;the addition or departure of key personnel;variations in our quarterly operating results;announ
163、cements by us or our competitors of significant contracts,new products or product enhancements;acquisitions,distribution partnerships,joint ventures or capital commitments;14 regulatory changes;Table of Contents sales of our common stock or other securities in the future;changes in market valuations
164、 of technology companies;and In addition,the stock market in general,and the NASDAQ Global Market and technology companies in particular,have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.These broa
165、d market and industry factors may materially adversely affect the market price of our common stock,regardless of our actual operating performance.In the past,following periods of volatility in the market price of a companys securities,securities class action litigation has often been instituted agai
166、nst such companies.fluctuations in stock market prices and volumes.Item 2.Properties Listed below are our principal facilities as of September 30,2009.Management considers all facilities listed below to be suitable for the purpose(s)for which they are used,including manufacturing,research and develo
167、pment,sales,marketing,service,and administration.Location Principal Use Owned or Leased Approximate Floor Area Systems Segment Properties:CSP Inc.Corporate Headquarters Leased 21,500 S.F.43 Manning Road Manufacturing,Sales,Billerica,MA Marketing,and Administration Service and Systems Integration Seg
168、ment Properties:Modcomp,Inc.Division Headquarters Leased 21,450 S.F.1500 N.Powerline Road Sales,Marketing,and Deerfield Beach,FL Administration Modcomp,Inc.Sales,Marketing and Service Leased 3,083 S.F.9155 South Dadeland Blvd,Suite 1400 Miami,FL Modular Computer Systems GmbH Sales,Marketing,Service
169、Leased 12,191 S.F.Oskar-Jager-Strasse 125-143 and Administration D-50825 Koln Germany Modcomp,Ltd.Sales,Marketing,and Leased 2,490 S.F.12a Oaklands Business Park,Fishponds Road Administration Wokingham Berkshire United Kingdom Modcomp Systemhaus GmbH Sales,Marketing and Service Leased 2,819 S.F.Gart
170、enstr.23-27 D-61352 Bad Homburg Germany Item 3.Legal Proceedings We are currently not a party to any material legal proceedings.Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted for a vote of security holders during our fiscal quarter ended September 30,2009.15 Tab
171、le of Contents PART II Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities Market information.Our common stock is traded on the Nasdaq Global Market under the symbol CSPI.The following table provides the high and low sales prices of our c
172、ommon stock as reported on the Nasdaq Global Market for the periods indicated.Stockholders.We had approximately 87 holders of record of our common stock as of December 18,2009.This number does not include stockholders for whom shares were held in a“nominee”or“street”name.We believe the number of ben
173、eficial owners of our shares of common stock(including shares held in street name)at that date was approximately 1,400.Dividends.We have never paid any cash dividends on our common stock.Our present policy is to retain earnings to finance expansion and growth,and no change in the policy is anticipat
174、ed.Share Repurchase Plans.The following table provides information with respect to shares of our common stock that we repurchased during the year ended September 30,2009:16 2009 2008 Fiscal Year:High Low High Low 1st Quarter$5.27$1.51$9.16$6.19 2nd Quarter 3.90 2.50 7.60 5.43 3rd Quarter 3.74 2.55 6
175、.30 5.55 4th Quarter 4.25 3.38 6.33 4.76 Month Ended 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 31,2008 9,805$3.92 9,805 November 30,20
176、08 17,088 3.17 17,088 December 31,2008 45,023 2.77 45,023 January 31,2009 59,608 3.07 59,608 February 28,2009 139,781 3.18 139,781 March 31,2009 15,206 2.75 15,206 April 30,2009 18,300 2.82 18,300 May 31,2009 June 30,2009 July 31,2009 August 31,2009 September 30,2009 Total 304,811$3.08 304,811 240,0
177、46 (1)All shares were purchased under publicly announced plans.For additional information about these publicly announced plans please refer to Note 14 of our audited financial statements.Table of Contents Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The
178、 discussion below contains certain forward-looking statements related to statements concerning future revenues and future business plans.Actual results may vary from those contained in such forward-looking statements.Overview of Fiscal 2009 Results of Operations CSP Inc.operates in two segments:Syst
179、emsthe Systems segment consists of our MultiComputer Division which designs,develops and manufactures signal processing computer platforms that are used primarily in military applications and the process control and data acquisition(“PCDA”)proprietary hardware business of our Modcomp subsidiary.High
180、lights include:Service and System Integrationthe Service and System Integration segment includes the computer systems maintenance and integration services and third-party computer hardware and software products businesses of our Modcomp subsidiary.Revenue increased by approximately$6.6 million,or 9%
181、,to$83.4 million for the year ended September 30,2009 versus$76.8 million for the year ended September 30,2008.Operating loss increased by approximately$3.5 million,or 240%,to an operating loss of approximately$4.9 million for the year ended September 30,2009 versus an operating loss of approximatel
182、y$1.5 million for the year ended September 30,2008.Net loss increased by approximately$3.4 million,or 829%,to a net loss of approximately$3.8 million for the year ended September 30,2009 versus a net loss of approximately$407 thousand for the year ended September 30,2008.A non-cash goodwill impairme
183、nt charge was taken in fiscal 2009 for$3.9 million which was the total value of goodwill on the Companys balance sheet prior to the impairment charge.This goodwill impairment charge was a significant factor in the increase in net loss for fiscal 2009 versus fiscal 2008,however,did not impact cash fl
184、ow.The increase in revenues of$6.6 million was due to increased revenues in our Systems segment where revenues were up by approximately$3.0 million and increased revenues in the Service and System Integration segment where revenues were up by approximately$3.6 million versus the year ended September
185、 30,2008.Also,in fiscal 2009,we were engaged in significant research and development efforts in the Systems segment making significant progress with on-going development of our newest product line,the Fast Cluster Series 3000,which is designed to provide what we believe is the most advanced intercon
186、nect technology available today.The 3000 SERIES is expected to provide our customers with another state-of-the-art,fully ruggedized open source system,which will be essential to our future growth opportunities.We expect Systems segment revenues for fiscal year 2010 to exceed fiscal year 2009 revenue
187、s.We expect to benefit from follow-on orders from existing programs that include high-margin royalties as we continue to advance our Fast Cluster Series 3000 technology.17 Net cash provided by operating activities was approximately$3.4 million for the year ended September 30,2009 compared to net cas
188、h used by operations of$280 thousand for the year ended September 30,2008.Table of Contents Revenues in the Service and System Integration segment for fiscal 2009 were$75.4 million versus fiscal 2008 revenues of$71.8 million.The U.S.operations of this segment experienced strong sales growth in fisca
189、l 2009 of$12.4 million,a 35%increase over fiscal year 2008.This growth was due to(i)revenues from the acquisition of R2 Technology Services,Inc.(“R2”)on September 25,2008,which accounted for approximately$5.4 million of the increase and(ii)increases in sales to a number of the divisions largest cust
190、omers.Offsetting the growth in the U.S.operation,revenues declined in the European operations(Germany and the U.K.)of the segment for fiscal year 2009 versus fiscal 2008 by approximately$8.8 million,or 25%.The decline was due primarily to the economic recession in Europe resulting in an overall decl
191、ine in large orders in fiscal 2009 compared with fiscal 2008 from the divisions largest customers,plus the foreign exchange impact of the stronger U.S.dollar in fiscal 2009 versus fiscal 2008.Sales volume in Europe in constant dollars was down approximately$5.6 million and the foreign exchange impac
192、t accounted for approximately$3.2 million of the decline in sales in Europe.Based on the current economic environment,we plan to manage the Service and System Integration segment assuming relatively weak demand in fiscal 2010.We plan to focus our attention and resources on higher-margin business and
193、 away from low margin business as we move forward.While this may put pressure on sales growth in fiscal 2010,we believe this strategy will accelerate profitable growth for the long term.The following table sets forth certain information which is based on data from our Consolidated Statements of Oper
194、ations:Results of Operations2009 Compared to 2008 Percentage of sales Period to Period Fiscal year ended September Dollar increase(decrease)2009 2008 2009 compared to 2008 (Dollar amounts in thousands)Sales 100.0%100.0%$6,575 Costs and expenses:Cost of sales 82.1%81.8%5,623 Engineering and developme
195、nt 2.3%2.8%(201)Selling,general and administrative 16.8%17.3%690 Impairment on goodwill 4.7%3,941 Total costs and expenses 105.9%101.9%10,053 Operating income(loss)(5.9)%(1.9)%(3,478)Other income%0.8%(610)Income(loss)before income taxes (5.9)%(1.1)%(4,088)Income tax expense(benefit)(1.4)%(0.6)%(712)
196、Net income(loss)(4.5)%(0.5)%$(3,376)For the fiscal year ended September 30,2009 sales increased to$83.4 million,compared to$76.8 million for fiscal year ended September 30,2008.The net loss for the year ended September 30,2009 was$3.8 million,or$1.05 per diluted share compared with a net loss of$407
197、 thousand,or$0.11 per diluted share for fiscal year ended September 30,2008.18 Table of Contents Revenue The following table details the Companys sales by geographical region for fiscal years September 30,2009 and 2008:The increase in Americas revenue for the year ended September 30,2009 versus the
198、year ended September 30,2008 was the result of the increase in Systems segment sales to U.S.customers which increased by approximately$3.1 million plus the increase in revenues of the U.S.division of the Service and System Integration segment to North American customers,which increased by approximat
199、ely$13.3 million.The decrease shown above in sales to Europe was primarily the result of lower sales from the German and U.K.divisions of the Service and System Integration segment,where sales in Europe decreased by approximately$8.1 million and$802 thousand,respectively.The impact of the fluctuatio
200、n of the U.S.Dollar versus the Euro and the Great Britain Pound(“GBP”)accounted for approximately$2.7 million from the German division and$600 thousand from the U.K.division,respectively,of the total decreases in sales to Europe from these divisions,referred to previously.Offsetting the decreases in
201、 sales to Europe from the European divisions,sales to Europe from the U.S.division of the Service and Systems Integration segment increased by approximately$283 thousand.The decreased Asia Pacific sales were primarily the result of a decrease in sales to Asia Pacific from the U.S.division of the Ser
202、vice and Systems Integration segment of approximately$1.2 million.The Companys sales by geographic area are based upon the location of where the products were shipped or services rendered.The following table details the Companys sales for products and services by operating segment for the fiscal yea
203、rs ended September 30,2009 and 2008:19 For the Year Ended$Increase/(Decrease)%Increase (Decrease)September 30,2009%September 30,2008%(Dollar amounts in thousands)Americas$53,748 64%$37,337 49%$16,411 44%Europe 27,387 33%35,992 47%(8,605)(24)%Asia Pacific 2,222 3%3,453 4%(1,231)(36)%Totals$83,357 100
204、%$76,782 100%$6,575 9%Systems Service and System Integration Total%of Total (Dollar amounts in thousands)2009 Product$6,055$61,182$67,237 81%Services 1,932 14,188 16,120 19%Total$7,987$75,370$83,357 100%of Total 10%90%100%2008 Product$4,633$55,670$60,303 79%Services 324 16,155 16,479 21%Total$4,957$
205、71,825$76,782 100%of Total 6%94%100%Table of Contents Total revenues were$83.4 million for the year ended September 30,2009 versus$76.8 million for the year ended September 30,2008 for an increase of approximately$6.6 million,or 9%.Approximately$3.0 million of this increase was in the Systems segmen
206、t and approximately$3.6 million of the increase was from the Service and System Integration segment.A significant factor impacting the fluctuation in total revenues,year over year,was the currency exchange rate fluctuation of the stronger U.S.Dollar versus both the GBP in the U.K.and the Euro in Ger
207、many for the year ended September 30,2009 versus the prior year ended September 30,2008.This currency exchange fluctuation negatively impacted the current fiscal year revenues when comparing to the prior fiscal year by approximately$3.3 million.Product revenues for fiscal 2009 increased by approxima
208、tely$6.9 million,while service revenue decreased by approximately$359 thousand,versus fiscal 2008.Systems segment product revenue increased by approximately$1.4 million while Service and System Integration segment product revenue increased by approximately$5.5 million.The$1.4 million increase in the
209、 Systems segment product revenue was primarily due to increased product sales to Lockheed Martin which increased by approximately$1.6 million and a decrease in sales to General Dynamics of approximately$185 thousand.The$5.5 million increase in the Service and System Integration segment product reven
210、ue was due to an$11.8 million increase in shipments of third-party products from the U.S.division of the segment,due mainly to an increase in sales to the U.S.divisions four largest customers,which accounted for approximately$10.3 million of the increase plus product sales of approximately$4.4 milli
211、on from the acquisition of R2,offset by a net decrease in sales to all other customers of approximately$2.9 million.R2 was acquired in late September of 2008,hence the year ended September 30,2008 included no sales from R2.Offsetting the increase from the U.S.division,product sales of the segments G
212、erman division decreased by approximately$6.4 million,due to a decrease in sales volume which accounted for approximately$4.7 million,and an unfavorable exchange rate fluctuation of the Euro versus the U.S.Dollar which accounted for approximately$1.7 million of the decrease.The decrease in product s
213、ales volume from the German division of$4.7 million was due to the economic and technology sector slowdown which resulted in lower sales volume from several of the divisions largest customers,including a cable and internet service provider and a large German systems integrator.In the U.K.division,pr
214、oduct sales increased by approximately$153 thousand due to a product order for a customer acquired from the R2 acquisition.Service revenues decreased by approximately$359 thousand.Service revenues in the Systems segment increased by approximately$1.6 million due to royalty revenues from Lockheed Mar
215、tin,while service revenues in the Service and System Integration segment for fiscal year 2009 decreased by approximately$2.0 million compared to fiscal 2008.The decrease in Service and System Integration segment service revenue was driven by lower service revenues from the segments German and U.K.di
216、visions which decreased by approximately$1.7 million and$900 thousand,respectively;which amounted to an aggregate decrease from the European subsidiaries of 20 Systems Service and System Integration Total%Increase (Decrease)(Dollar amounts in thousands)Increase(Decrease)Product$1,422$5,512$6,934 11%
217、Services 1,608 (1,967)(359)(2)%Total$3,030$3,545$6,575 9%Increase 61%5%9%Table of Contents approximately$2.6 million.This decrease from the European subsidiaries was driven,in large part,by the unfavorable exchange rate fluctuations of the Euro and GBP versus the U.S.Dollar which accounted for appro
218、ximately$1.5 million of the decrease and a decrease in sales volume which accounted for approximately$1.1 million of the decrease.This decrease in service revenue volume from the German and U.K.divisions was due to the economic and technology sector slowdown which resulted in lower sales volume from
219、 several of the segments largest customers in Germany,including a cable and internet service provider and a large German systems integrator.In the U.S.division of the Service and System Integration segment,service revenue increased by approximately$672 thousand,which resulted primarily from R2 which
220、 the Company acquired on September 25,2008.R2 generated$1.1 million in service revenues for year ended September 30,2009.Offsetting this increase,services revenues decreased in the legacy business of the U.S.division of the segment by approximately$402 thousand due primarily to a lower volume of mai
221、ntenance contracts for the year ended September 30,2009 versus the year ended September 30,2008.Cost of Sales,Gross Profit and Gross Margins The following table details our cost of sales by operating segment for fiscal years ended September 30,2009 and 2008:21 Systems Service and system integration
222、Total (Dollar amounts in thousands)2009 Cost of Sales:Product$3,134$53,475$56,609 Services 143 11,654 11,797 Total 3,277 65,129 68,406%of Total 5%95%100%of sales 41%86%82%Gross Profit:Product$2,921$7,707$10,628 Services 1,789 2,534 4,323 Total 4,710 10,241 14,951%of Total 32%68%100%Gross Margins:Pro
223、duct 48%13%16%Services 93%18%27%Total 59%14%18%2008 Cost of Sales:Product$2,916$47,395$50,311 Services 109 12,363 12,472 Total 3,025 59,758 62,783%of Total 5%95%100%of sales 61%83%82%Gross Profit:Product$1,717$8,275$9,992 Services 215 3,792 4,007 Total 1,932 12,067 13,999%of Total 14%86%100%Gross Ma
224、rgins:Product 37%15%17%Services 66%23%24%Total 39%17%18%Table of Contents Total cost of sales increased by approximately$5.6 million for the fiscal year ended September 30,2009,over the fiscal year ended September 30,2008,to$68.4 million,up from$62.8 million in the prior fiscal year.The increase in
225、cost of sales was the result of the increase in sales referred to above.The gross margin percentage was 18%for both years ended September 30,2009 and 2008.The Systems segment gross margin increased from 39%for the year ended September 30,2008 to 59%for the year ended September 30,2009,and was due pr
226、imarily to approximately$1.6 million in royalty income realized in the year ended September 30,2009.No royalty income was realized in the year ended September 30,2008.These royalty sales to Lockheed Martin carry no cost of sales.Gross profit margins for the Service and System Integration segment dec
227、reased from 17%for the year ended September 30,2008 to 14%for the year ended September 30,2009.This decrease was due to downward pressure on profit margins resulting from the global economic recession in fiscal 2009.In addition,the year ended September 30,2009 included sales of approximately$4.3 mil
228、lion with zero gross margin because of a pricing dispute that was settled with one of the segments largest vendors.The combination of the increase in gross margin in the Systems segment,offset by the decrease in gross margin in the Service and System Integration segment,resulted in the aggregate gro
229、ss margin remaining unchanged when comparing fiscal 2009 to fiscal 2008.Gross profit increased by approximately$952 thousand comparing the year ended September 30,2009 to the year ended September 30,2008,due to the overall increase in sales volume described above.Engineering and Development Expenses
230、 Systems Service and system integration Total (Dollar amounts in thousands)Increase(Decrease)Cost of Sales:Product$218$6,080$6,298 Services 34 (709)(675)Total 252 5,371 5,623%increase 8%9%9%of Sales (20)%3%Gross Profit:Product$1,204$(568)$636 Services 1,574 (1,258)316 Total 2,778 (1,826)952%Increase
231、(decrease)144%(15)%7%Change in Gross Margin percentage:Product 11%(2)%(1)%Services 27%(5)%3%Total 20%(3)%The following table details engineering and development expenses by operating segment for fiscal years ended September 30,2009 and 2008:22 2009%of Total 2008%of Total$Decrease%Decrease (Dollar am
232、ounts in thousands)By Operating Segment:Systems$1,970 100%$2,171 100%$(201)(9)%Service and System Integration%Total$1,970 100%$2,171 100%$(201)(9)%Table of Contents Engineering and development expenses decreased overall by approximately$201 thousand,or 9%,in fiscal 2009 compared to 2008.The decrease
233、 was primarily due to less research and development in the Systems segment related to the 3000 SERIES product line.Selling,General and Administrative The following table details selling,general and administrative(“SG&A”)expense by operating segment for fiscal years ending September 30,2009 and 2008:
234、Overall,selling,general and administrative costs increased by approximately$690 thousand,or 5%,in fiscal 2009 compared to 2008.The$118 thousand decrease in the Systems segment SG&A expenses was the result of lower consulting expenses of$94 thousand,lower pension costs of$96 thousand and lower audit
235、expense of$40 thousand.These decreases were offset by higher incentive compensation expenses(bonuses and commissions)of approximately$111 thousand,due to the higher sales volume and operating income in the Systems segment.The$808 thousand increase in the Service and System Integration segment SG&A e
236、xpenses was the result of an increase of approximately$1.8 million in the U.S.division,of which$1.6 million was from the acquisition of R2,approximately$97 thousand was due to increased bad debt expense and approximately$113 thousand was due to amortization of intangibles from the R2 acquisition.Off
237、setting the increase in SG&A expense in the U.S.,SG&A in the European divisions decreased on a constant dollar basis by approximately$470 thousand due to lower marketing expenses,salaries,wages and benefit expenses.Foreign exchange rate fluctuation due to the stronger U.S.Dollar versus the GBP and t
238、he Euro accounted for approximately$540 thousand in decreased SG&A expenses.Goodwill Impairment 2009%of Total 2008%of Total$Increase (Decrease)%Increase (Decrease)(Dollar amounts in thousands)By Operating Segment:Systems$3,367 24%$3,485 26%$(118)(3)%Service and System Integration 10,602 76%9,794 74%
239、808 8%Total$13,969 100%$13,279 100%$690 5%Our annual goodwill impairment test as of September 30,2008 and subsequent interim goodwill impairment tests as of March 31 and June 30,2009,indicated no impairment to our goodwill.However,the global economic downturn led to significant market volatility and
240、 a reduction in the Companys profitability in the second half of fiscal 2009.These changes to market and business conditions caused lower multiples and resulted in our lowering our projected forecast for 2010 and beyond.The fair value of our Systems and Solutions reporting unit declined due to these
241、 deteriorating market and business conditions,which ultimately resulted in a$3.9 million non-cash impairment charge to our goodwill as of September 30,2009.This impairment charge of$3.9 million was equal to the carrying value of the Companys goodwill prior to the impairment charge.Accordingly,the Co
242、mpany has written off all of its goodwill as of September 30,2009.23 Table of Contents Other Income/Expenses The following table details Other Income/Expenses for fiscal years ended September 30,2009 and 2008:The decrease in other income(expense),net,was due primarily to a decrease in interest incom
243、e that was primarily earned on money market funds in fiscal 2009 as opposed to our auction rate security(“ARS”)portfolio in fiscal 2008.We divested our holdings in ARSs since the year-ago period because of the preponderance of failed auctions in the ARS market.The ARSs earned higher rates of interes
244、t than do the money market funds.In addition,the balances of interest bearing assets in general were lower in the current fiscal year versus the prior year.In addition,the$104 thousand loss versus the$19 thousand gain on foreign exchange was the result of higher U.S.Dollar asset holdings in fiscal 2
245、009 by our European affiliates and the timing of the settlement of those assets.Income Tax Benefit 2009%of Total 2008%of Total$Increase (Decrease)%Increase (Decrease)(Dollar amounts in thousands)Interest income$225 (833)%$682 117%$(457)(67)%Interest expense (112)415%(91)(16)%(21)23%Gain(loss)on disp
246、osal of fixed assets%(27)(4)%27 Foreign exchange gain(loss)(104)385%19%(123)(647)%Other income,net (36)133%3%(36)Total other income(expense),net$(27)100%$583 100%$(610)(105)%The Company recorded an income tax benefit of$1.2 million for the fiscal year ended September 30,2009,reflecting an effective
247、income tax benefit rate of 24%,compared to income tax benefit of$461 thousand for the fiscal year ended September 30,2008,respectively,reflecting an effective tax benefit rate of 53%.The lower tax benefit rate for the fiscal year ended September 30,2009 was due primarily to a valuation allowance est
248、ablished for a substantial portion of the deferred tax asset related to the goodwill impairment charge.The tax benefit for the fiscal year ended September 30,2008 was due to the carryback of the operating loss of our U.S.operation for the year.In assessing the realizability of deferred tax assets,we
249、 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 p
250、rofitability beyond fiscal year 2010 in the U.S.and cumulative losses incurred in recent years in the U.K.represent sufficient negative evidence to record a valuation allowance against certain deferred tax assets.We maintained a substantial valuation allowance against our U.K.deferred tax assets as
251、we have experienced continued 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 projection
252、s would be affected and hence our assessment of realizability of our deferred tax asset may change.Liquidity and Capital Resources The Companys primary source of liquidity,after consideration of cash from operations,is our cash and cash equivalents and short-term investments,which increased by$410 t
253、housand to$18.9 million as of September 30,2009,as compared to$18.5 million as of September 30,2008.The primary objective of our investment policy is the preservation of capital.The Company generated approximately$3.4 million of cash from operating activities during the year ended September 30,2009.
254、The net loss of approximately$3.8 million was offset by several sources of cash which 24 Table of Contents resulted in this cash generated from operating activities.These sources of cash included net sources of cash from changes in operating assets and liabilities of approximately$3.1 million.Additi
255、onally,add-backs of non-cash expenses for the goodwill impairment charge of$3.9 million,depreciation and amortization of approximately$579 thousand,non-cash changes to accounts receivable of approximately$127 thousand,losses on disposals of property and equipment of approximately$119 thousand and st
256、ock-based compensation expense of$265 thousand,offset the book net loss of approximately$3.8 million.The change in deferred taxes of approximately$964 thousand was an additional significant use of cash from operating activities.Approximately$4.5 million of cash was provided from investing activities
257、 for the year ended September 30,2009,consisting primarily of$5.0 million from sales of our auction rate securities,offset by uses of cash from investing activities of approximately$402 thousand to purchase capital equipment and approximately$124 thousand to pay insurance premiums for officer and ke
258、y employee life insurance policies.We used approximately$2.3 million in financing activities during the year ended September 30,2009 which consisted of$1.5 million to pay off our line of credit balance and approximately$934 thousand to buy back CSPI stock.Offsetting these uses of cash,we generated a
259、pproximately$180 thousand in cash from proceeds for stock issued through the Employee Stock Purchase Plan.For the year ended September 30,2009,the effect of foreign exchange rate fluctuations on cash was a use of cash of approximately$174 thousand.This was due primarily to the significant reduction
260、in the value of the British Pound and the Euro versus the U.S.Dollar.The Company has estimated future benefit payment obligations of approximately$8.6 million related to pension and post-retirement plans in Germany,the U.K.,and the U.S.The Company expects to contribute$448 thousand to the plans in 2
261、010.If cash generated from operations is insufficient to satisfy working capital requirements,we may need to access funds through bank loans,sale of securities 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
262、 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.See note 13 in the Notes to Consolidated Financial Statements included in
263、Item 8 for additional information regarding the Companys line of credit facility.Based on our current plans and business conditions,management believes that the Companys available cash and cash equivalents and cash generated from operations and investments will be sufficient to provide for the Compa
264、nys working capital and capital expenditure requirements for the foreseeable future.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 accountin
265、g 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 uncoll
266、ectible receivables,inventory valuation,goodwill,income taxes,deferred compensation,revenue recognition,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,t
267、he 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.We believe the following critical accounting policies
268、affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:revenue recognition;valuation allowances,25 Table of Contents specifically the allowance for doubtful accounts and net deferred tax asset valuation allowance;inventory valuation;goodw
269、ill impairment;and pension and retirement plans.Revenue recognition The Company recognizes product revenue from customers at the time of transfer of title and risk of loss which is generally at the time of shipment,provided that persuasive evidence of an arrangement exists,the price is fixed or dete
270、rminable and collectability of sales proceeds is reasonably assured.When significant performance obligations remain after products are delivered,such as for installation,system integration or customer acceptance,revenue and related costs are deferred until such obligations are fulfilled,unless the d
271、elivered element has standalone value and we have objective,reliable evidence of fair value of the undelivered elements.We include freight billed to our customers as sales and the related freight costs as cost of sales.The Company reduces revenue for estimated customer returns.In certain multiple-el
272、ement revenue arrangements,the Company is obligated to deliver to its customers multiple products and/or services(“multiple elements”).In these transactions,the Company allocates the total revenue to be earned under the arrangement among the various elements based on their relative fair value.The al
273、location is based on vendor specific objective evidence and/or third party evidence of fair value which is the price charged when that element is sold separately.The Company recognizes revenue related to the delivered products or services only if:(1)the above revenue recognition criteria are met;(2)
274、the delivered element has standalone value;(3)there is objective and reliable evidence of fair value of the undelivered element;and(4)any remaining performance obligation is inconsequential or perfunctory.For example,in certain arrangements to provide hardware and services,the product is delivered;b
275、ut,objective,reliable evidence of fair value of undelivered services that are considered more than inconsequential or perfunctory is not established.Therefore,revenue is deferred for the entire arrangement until the services are complete.The Company recognizes revenue from software licenses when per
276、suasive evidence of an arrangement exists,delivery of the product has occurred and no significant Company obligations with regard to customization or implementation remain,the fee is fixed or determinable and collectability is probable.The Company also offers training,maintenance agreements and supp
277、ort services.The Company has established fair value on its training,maintenance and support services based on prices charged in separate sales to customers at prices established and published in its standard price lists.These prices are not discounted.Revenue from these service obligations under mai
278、ntenance contracts is deferred and recognized on a straight-line basis over the contractual period,which is typically three to twelve months,if all other revenue recognition criteria have been met.Support services provided on a time and material basis are recognized as provided if all of the revenue
279、 recognition criteria have been met for that element and the support services have been provided.Training revenue is recognized when performed.The following policies are applicable to the Companys major categories of segment revenue transactions:Systems Segment Revenue Revenue in the Systems Segment
280、 consists of product and service revenue.Generally,product revenue is recognized when product is shipped,provided that all revenue recognition criteria are met.Service revenue consists principally of royalty revenue related to the licensing of certain of the Companys proprietary system technology an
281、d repair services.The Company recognizes royalty revenues upon notification by the customer of shipment of the systems produced pursuant to the royalty agreement.Repair service revenue is generally based upon a fixed price and is recognized upon completion of the repair.From time to time we enter in
282、to multiple element arrangements in the Systems Segment.We follow the accounting policies described above for such arrangements.26 Table of Contents The Companys standard sales agreements generally do not include customer acceptance provisions.However,in certain instances when arrangements include a
283、 customer acceptance provision or there is uncertainty about customer acceptance,revenue is deferred until the Company has evidence of customer acceptance.Customers generally do not have the right of return,once customer acceptance has occurred.Service and System Integration Segment Revenue Revenue
284、in the Service and System Integration Segment consists of product and service revenue.Revenue from the sale of third-party hardware and third-party software is recognized when the revenue recognition criteria are met.The Companys standard sales agreements generally do not include customer acceptance
285、 provisions.However,in certain instances when arrangements include a customer acceptance provision or there is uncertainty about customer acceptance,revenue is deferred until the Company has evidence of customer acceptance.Customers do not have the right of return.Service revenue is comprised of inf
286、ormation technology consulting development and maintenance services.Time and material service contract revenue is recognized as the services are rendered.Maintenance services revenue under services level agreements is recognized ratably over the period covered by the service level agreement.Fixed pr
287、ice professional services contract revenue is generally recognized upon completion of the professional services contract,or using percentage of completion for contracts where the cost of the services can be reliably estimated.Losses on fixed price professional services contracts are recognized in th
288、e period in which the loss becomes known.For arrangements that include a customer acceptance provision,or if there is uncertainty about customer acceptance of services rendered,revenue is deferred until the Company has evidence of customer acceptance.We sell certain third-party service contracts,whi
289、ch are evaluated to determine whether the sale of such service revenue should be recorded as gross sales or net sales in accordance with the sales recognition criteria outlined in Securities and Exchange Commission(“SEC”)Staff Accounting Bulletin(“SAB”)104 and otherwise required by U.S.Generally Acc
290、epted Accounting Principles(“GAAP”).We must determine whether we act as a principal in the transaction and assume the risks and reward of ownership or if we are simply acting as an agent or broker.Under gross sales recognition,the entire selling price is recorded in sales and our cost to the third-p
291、arty service provider or vendor is recorded in cost of goods sold.Under net sales recognition,the cost to the third-party service provider or vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of goods sold.We use the
292、 gross sales recognition method for the third-party service contracts that we sell,as we have determined that we act as a principal in these sales transactions.Engineering and Development Expenses Engineering and development expenses include payroll,employee benefits,stock-based compensation,and oth
293、er headcount-related expenses associated with product development.Engineering and development expenses also include third-party development and programming costs and the amortization of purchased software code.We consider technological feasibility for our software products is reached upon the releas
294、e of the software and,accordingly,no internal software development costs have been capitalized.Product Warranty Accrual Our product sales generally include a 90-day to one-year hardware warranty.At time of product shipment,we accrue for the estimated cost to repair or replace potentially defective p
295、roducts.Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.27 Table of Contents Income Taxes We use the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the estimated future ta
296、x consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expec
297、ted to be recovered or settled.The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.We also reduce deferred tax assets by a valuation allowance if,based on the weight of available evidence,it is more likely
298、than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.This methodology requires estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.Valuation allowances are
299、recorded against the gross deferred tax assets that management believes,after considering all available positive and negative objective evidence,historical and prospective,with greater weight given to historical evidence,that it is more likely than not that these assets will not be realized.In addit
300、ion,we are required to recognize in the consolidated financial statements only those tax positions determined to be more-likely-than-not of being sustained upon examination,based on the technical merits of the positions as of the reporting date.If a tax position is not considered more-likely-than-no
301、t to be sustained based solely on its technical merits,no benefits of the position are recognized.This is a different standard for recognition than was previously required.The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefi
302、t.Upon adoption of this standard on October 1,2007,we were required to adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained.Any necessary adjustment was recorded directly to opening retained earnings in the period of adoption.In addition,t
303、he calculation of the Companys tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions.The Company records liabilities for estimated tax obligations in the U.S.and other tax jurisdictions.These estimated tax liabilities includ
304、e the provision for taxes that may become payable in the future.Inventory 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.The recoverability of inventories is based upon the types and l
305、evels 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 a
306、nd market conditions.If actual market conditions are less favorable than those projected by management,additional inventory write-downs may be required.Trade Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable are stated at amounts that have been billed to customers les
307、s an allowance for doubtful accounts.Allowances for doubtful accounts are recorded for the estimated losses resulting from the inability of our customers to make required payments.The estimates for allowance for doubtful accounts are based on the length of time the receivables are past due,current b
308、usiness environment and our historical experience.If the financial condition of our customers were to deteriorate,resulting in impairment of their ability to make payments,additional allowances may be required.Goodwill and Intangible Assets We test goodwill annually for impairment and more frequentl
309、y if events and circumstances indicate that the asset might be impaired.We recognize impairment losses to the extent that the carrying amount of goodwill exceeds its fair value.The impairment determination is made at the reporting unit level and consists of two steps.28 Table of Contents First,the C
310、ompany determines the fair value of the reporting unit and compares it to its carrying amount.Second,if the carrying amount of the reporting unit exceeds its fair value,an impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value
311、of that goodwill.The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.The Companys policy is to per
312、form its annual impairment testing for all reporting units as of the end of each fiscal year.For the year ended September 30,2009,we recorded a goodwill impairment charge for approximately$3.9 million.There was no impairment of goodwill for the year ended September 30,2008.Intangible assets other th
313、an goodwill that are not subject to amortization are also required to be tested annually,or more frequently if events or circumstances indicate that the asset may be impaired.We did not have intangible assets with indefinite lives other than goodwill at any time during the two years ended September
314、30,2009.Intangible assets subject to amortization are amortized over their estimated useful lives,generally three to ten years,and are carried at cost,less accumulated amortization.The remaining useful lives of intangible assets are evaluated on an annual basis.Intangible assets subject to amortizat
315、ion are also tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.If the fair value of an intangible asset subject to amortization is determined to be less than its carrying value,then an impairment charge is recorded to wri
316、te down that asset to its fair value.Pension and Retirement Plans The funded status of pension and other postretirement benefit plans is recognized prospectively on the balance sheet.Gains and losses,prior service costs and credits and any remaining transition amounts that have not yet been recogniz
317、ed through pension expense will be recognized in accumulated other comprehensive income,net of tax,until they are amortized as a component of net periodic pension/postretirement benefits expense.Additionally,plan assets and obligations are measured as of our fiscal year-end balance sheet date(Septem
318、ber 30).We have defined benefit and defined contribution plans in the U.K.,Germany and in the U.S.In the U.K.and Germany,the Company provides defined benefit pension plans for certain employees and former employees,and defined contribution plans for the majority of the employees.The defined benefit
319、plans in both the U.K.and Germany are closed to newly hired employees,and have been for the two years ended September 30,2009.In the U.S.,the Company also provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees and former employees who ar
320、e now retired.These supplementary retirement plans are also closed to newly hired employees,and have been for the two years ended September 30,2009.These supplemental plans are funded through whole life insurance policies.The Company expects to recover all insurance premiums paid under these policie
321、s in the future,through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the death of the participant.These whole life insurance policies are carried on the balance sheet at their cash surrender values as they are owned by the Company and are not as
322、sets of the defined benefit plans.In the U.S.,the Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to certain officers.The Company also funds these supplemental plans obligations through whole life insurance pol
323、icies on the officers.Pension expense is based on an actuarial computation of current future benefits using estimates for expected return on assets,expected compensation increases and applicable discount rates.Management has reviewed the discount rates with our consulting actuary and investment advi
324、sor and concluded they were reasonable.A decrease in the expected return on pension assets would increase pension expense.Expected compensation increases are estimated based on historical and expected increases in the future.Increases in estimated compensation increases would result in higher pensio
325、n expense while decreases would lower pension expense.Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefit.A decrease in the 29 Table of Contents discount
326、rate would result in greater pension expense while an increase in the discount rate would decrease pension expense.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
327、 these funding levels are accrued and reported in the consolidated balance sheets.Recent Accounting Pronouncements On October 1,2008,we adopted the new fair value measurements accounting standard issued by the Financial Accounting Standards Board(the“FASB”),which established a single definition of f
328、air value as“the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.The new standard also establishes a framework for measuring fair value and expands the disclosure requirements for fair value
329、measurements.The impact of this standard is reflected on our consolidated financial statements for fiscal year 2009 for financial assets and liabilities,as required by this new standard.In February 2008,the FASB issued a pronouncement which delayed the effective date of the fair value measurement st
330、andard for all non-financial assets and liabilities,except those that are recognized or disclosed at fair value in the financial statements on a recurring basis,until fiscal years beginning after November 15,2008(Fiscal year ending September 30,2010 for the Company.)We do not expect that the adoptio
331、n of the fair value measurement standards for non-financial assets and liabilities will have a material impact on our financial statements.In December 2008,the FASB issued new accounting guidance entitled,“Employers Disclosures about Postretirement Benefit Plan Assets”.The new guidance requires addi
332、tional disclosures about plan assets for sponsors of defined benefit pension and postretirement plans including expanded information regarding investment strategies,major categories of plan assets,and concentrations of risk within plan assets.Additionally,this guidance requires disclosures similar t
333、o those required under the fair value accounting principles with respect to the fair value of plan assets such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in terms of the hierarchy of the source of information used to determine their value(see Note 12).The disclosures under this new guidance are required for annual
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