1、 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 1934 For the Fiscal Year Ended September 30,2012.?TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 Fo
2、r 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 incorporation)(I.R.S.Employer Identification No.)43 Manning Road,Billerica,Massachusetts 01821-3901(978)663-7598 (Address and telephone nu
3、mber 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 Stock,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 t
4、he 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 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 re
5、quired to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such filing requirements for the past 90 days.Yes No?.Indicate by check mark whet
6、her the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and
7、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 contained,to the best of registrants knowledge,in definitive proxy or information statements incorporated by reference in Part III of this
8、 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 filer,or a smaller reporting company.See the definitions of“large accelerated filer”,“accelerated filer”and“smaller reporting company”in Ru
9、le 12b-2 of the Exchange Act.Large accelerated filer?Accelerated filer?Non-accelerated filer?Smaller Reporting Company Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act.Yes?No As of March 31,2012,the aggregate market value of the registrant
10、s common stock held by non-affiliates of the registrant was$11,912,731 based on the closing sale price of$4.02 as reported on the Nasdaq Global Market.As of November 30,2012,we had outstanding 3,399,342 shares of common stock.DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the information re
11、quired in Part III of this Form 10-K are incorporated by reference from our definitive proxy statement for our 2013 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30,2012.2 TABLE OF CONTENTS Page
12、 PART I.Item 1.Business 3Item 1A.Risk Factors 8Item 2.Properties 15Item 3.Legal Proceedings 15Item 4.Mine Safety Disclosures 16 PART II.Item 5.Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities 16Item 7.Managements Discussion and Analysis of Fi
13、nancial Condition and Results of Operations 18Item 8.Financial Statements and Supplementary Data 36Item 9.Change in and Disagreements with Accountants on Accounting and Financial Disclosures 30Item 9A.Controls and Procedures 31Item 9B.Other Information 31 PART III.Item 10.Directors,Executive Officer
14、s and Corporate Governance 32Item 11.Executive Compensation 32Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 32Item 13.Certain Relationships,Related Transactions and Director Independence 32Item 14.Principal Accountant Fees and Services 32 PART
15、 IV.Item 15.Exhibits and Financial Statement Schedules 33 Note:Items 1B,6 and 7A are not required for Smaller Reporting Companies and therefore are not furnished.3 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.To m
16、eet the diverse requirements 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 Integrat
17、ion segment.The Systems segment consists primarily of CSPIs MultiComputer Division(the“MultiComputer Division”)which designs and manufactures commercial high-performance computer signal processing systems for a variety of complex real time applications in defense and commercial markets.MultiComputer
18、 Division products are based on an architectural solution that is open,standards-based,vendor independent,scalable,easily integrated with third-party products and compatible with future product offerings.These products utilize cluster technologies,multi-core processors,and many-core General Purpose
19、Graphics Processing Units(GPGPUs).MultiComputer systems consist of“blades”(self-contained,high-density computer boards)and are designed to achieve a high level of computer processing and to operate in environments with size,weight and power(SWaP)limitations.The blades and other components that make
20、up the system can be housed in commercially available air-cooled chassis or in ruggedized chassis,designed to withstand physically demanding environments.These systems have traditionally been utilized for sonar and radar digital signal processing(“DSP”),image recognition and simulation applications.
21、The MultiComputer Division sells all its products through its own direct sales force in the United States and via distributors and authorized resellers in Europe and the Asia-Pacific region.The Service and System Integration Segment consists of the computer maintenance and integration services and t
22、hird-party computer hardware and software value added reseller(“VAR”)businesses 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 direc
23、t sales force.Modcomp provides solutions and services for complex IT environments 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”).Finan
24、cial Information about Industry Segments The following table details our sales by operating segment for fiscal years ending September 30,2012 and 2011.Additional segment and geographical information is set forth in Note 12 to our financial statements.Segment 2012%2011%(Amounts in thousands)Systems$1
25、1,14113%$7,822 11%Service and System Integration 73,66687%65,823 89%Total Sales$84,807100%$73,645 100%Systems Segment Products and Services The Systems segments MultiComputer products utilize commercially available hardware components that are compliant with industry standards as well as open source
26、 software and deliver a high-performance,high density and low power consuming computer solution to our customers.These systems 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 r
27、eal-time or in modeling and simulations.CSPIs leadership in processing density,large memory subsystems,high-bandwidth networking components,optimized signal processing libraries,and specialized algorithms make these products a natural fit for applications in the commercial/industrial,medical/biotech
28、nology,geophysics,scientific/engineering and military/defense markets.Hardware Products 4 Historically MultiComputer Division products have integrated industry standard software,hardware and architecture technologies to minimize the risks associated with proprietary solutions.Over the years CSPI has
29、 met customer requirements with scalable products based on cluster technologies,multi-core processors,and many-core GPGPUs.Introduced in 1997,the first generation of MultiComputer Division cluster computer systems was referred to as the FastCluster 2000 SERIES.Based upon industry standards,the 2000
30、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 was ideally suited for use by customers in the
31、 aerospace,commercial and defense markets seeking Commercial-Off-The-Shelf(“COTS”)solutions to reduce costs and ensure widespread availability.To remain competitive,our COTS solutions incorporated the latest industry standard technologies and minimized the risks associated with proprietary solutions
32、.The 2000 SERIES advanced processing capabilities coupled with the smaller footprint was also suited for exploration operations in the geophysical market.In fiscal 2006,we announced the next generation FastCluster product line,the 3000 SERIES VXS.The 3000 SERIES VXS product line was designed to deli
33、ver performance that was superior to our predecessor products in interconnect bandwidth and processing density while preserving absolute code reuse at the application layer.The 3000 SERIES VXS product line targeted high performance DSP,signal intelligence(“SIGINT”),radar and sonar applications in ai
34、rborne,shipboard and unmanned aerial vehicle(“UAV”)platforms where space,power and cooling are at a premium.With its built-in 10-Gigabit Ethernet technology,the 3000 SERIES VXS supported the most prevalent networking standard found in both business and industrial settings.In fiscal 2010,we announced
35、 the development of the 3000 SERIES OpenVPXTM with Intel multi-core processors and the OpenVPXTM VITA/ANSI standard(Vita 65)to support high performance radar,sonar,C4ISR and SIGINT applications.OpenVPXTM is the architecture framework that defines system-level interoperability for multivendor,multimo
36、de,integrated system environments.OpenVPXTMs consideration of system-level requirements improves interoperability between computing and communications platforms and reduces customization,testing,cost and risk.Since our initial development of the first 3000 SERIES OpenVPXTM processor blade,we have in
37、troduced several enhancements including converged fabric technology and our 3300GTX NVIDIA GPGPU coprocessor board.The CSPI Converged Fabric integrates the Mellenox SwitchXTM Virtual Protocol Interconnect technology-allowing Infiniband,Ethernet,and Fibre Channel traffic to exist on a single“one-wire
38、”fabric.The 3300GTX coprocessor enables Teraflop levels of performance for applications that require high bandwidth data streaming and can benefit from massively parallel processing.The 3000 SERIES OpenVPXTM platform with these enhancements,is currently being marketed as our TeraXP Embedded Server.W
39、e expect significant development efforts to continue on the TeraXP platform,as we pursue initial sales opportunities for this new product line.In fiscal 2011,we announced our new 4000 SERIES ATCA products.The 4000 SERIES is based on InfiniBand,Advanced Telecom Computing Architecture(“AdvancedTCA”or“
40、ATCA”)and Network Building Equipment System(“NEBS”)standards to deliver affordability,sustainability and high availability to manned and unmanned large mobile platforms(land,sea and air.)ATCA was originally designed to address the high availability,robust system management and DC power distribution
41、needs of the telecom and communications markets.ATCA has since become attractive to defense markets as well as commercial markets.The 4000 Series ATCA products target computing and communication applications that share the need for increased bandwidth and reliability,extremely robust mechanical and
42、electrical definitions,power efficiency and unprecedented processor density.ATCA provides built-in high reliability features such as a 40-gigabit Ethernet backplane,redundant shelf managers,fail-over capability and support of live insertion of boards,power supplies and fans.We will expend developmen
43、t resources we consider necessary as we pursue initial sales opportunities for the 4000 SERIES ATCA product line.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
44、 solution,our cluster computer systems are available with the commercially available open-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 de
45、velopment tools suite.All MultiComputer cluster computer systems use open systems software technologies including message passing interface(“MPI”)software for interprocessor communications and CSPIs highly optimized industry standard math libraries.This software facilitates the development of truly
46、portable code for seamless reuse across applications,while taking advantage of optimized performance on both PowerPC with AltiVec and Intel processors.Markets,Marketing and Dependence on Certain Customers Aerospace&Defense Market 5 We market our MultiComputer products to defense and commercial marke
47、ts with an emphasis on applications requiring the analysis of complex signals such as seismic exploration,scientific/engineering research,sonar and radar.We commercially distribute our products in these markets as an original equipment manufacturer(“OEM”)supplier to system integrators,distributors a
48、nd value-added resellers.In these markets,the supplier/customer relationship is viewed as a long-term strategic partnership.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 speci
49、fications,prototype units and long term product availability 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 r
50、evenue streams as products progress from development phases into deployment.Our use of high performance embedded computing technologies to support information exchange in real-time are becoming increasingly significant to twenty-first century“network centric warfare”military operations.There has bee
51、n steady growth of new programs requiring signal/image processing and analysis 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
52、 substantial investment in development and evaluation before products deploy 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 2013 and beyond,our focus is to continue to build interest
53、 in our 3000 SERIES VXS products by integrating the latest PowerPC with AltiVec processor,and to market our 4000 SERIES ATCA and TeraXP OpenVPXTM embedded server products among our existing customers as well as additional commercial application customers.Competition The Systems segments markets are
54、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 incorporated in th
55、e early FastCluster 2000 SERIES and later the addition of Linux open source software,we have responded with product offerings that are vital to remaining competitive.Product development efforts in fiscal year 2012 involved completing and launching new enhancements to our OpenVPX product line,with a
56、focus on continuing to provide our customers with increased processing capabilities based on the latest industry standard technologies:Intel Xeon,multi-core processors,GPGPUs and the Mellanox Converged Fabric interconnect supporting fast data rate Infiniband and 10/40 Gigabit Ethernet support.Applic
57、ations expertise,product innovation,strong technical support and dedicated customer service allow us to compete favorably as a provider of high-performance embedded computing systems.Our direct competitors in the aerospace and defense market are Mercury Computer Inc.,Kontron,Curtis Wright and G.E.In
58、telligent Platforms.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.Today,thos
59、e 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 performance,featu
60、res 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 and larger co
61、mpanies 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 that can ea
62、sily 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 exists in design
63、 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 designed by us a
64、nd fabricated by outside vendors.Upon receipt of material and components by us from outside suppliers,our quality assurance technicians inspect these products and components.During manufacture and assembly,both subassemblies and completed systems are subjected to extensive testing,including burn-in
65、and environmental 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 6 comprehensive log is maintained of all past failures to monitor the ongoing reliability of our
66、 products and improve design standards.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
67、 service,system installation,training 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.We offer training courses at our corporate headquar
68、ters or the customer 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 segment products are obtained from sole-source s
69、uppliers.We are dependent on key vendors like Myricom,Inc.and Mellanox Technologies for our high-speed interconnect components,Freescale Semiconductor,Inc.for PowerPC processors for our 2000 SERIES and our 3000 SERIES VXS products and Intel for our microprocessors for our TeraXP OpenVPXTM embedded s
70、ervers 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 supply to be significant to meet our projected revenue requirements for the near term.Also,all components used to build our 300
71、0 SERIES VXS,4000 SERIES and TeraXP OpenVPXTM products are currently available in a timely manner.Research and Development For the year ended September 30,2012,our expenses for research and development were approximately$1.7 million compared to approximately$1.8 million for fiscal year 2011.Expendit
72、ures 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 software that enables the hardware to function.Our current development plan is intended to extend t
73、he usefulness and marketability of existing products by continuing to develop enhancements to our 3000 SERIES VXS,4000 SERIES and TeraXP OpenVPXTM product lines and introduce new products into existing market segments.We do not have any patents that are material to our business.Backlog The backlog o
74、f customer orders and contracts in the Systems segment was approximately$3.1 million at September 30,2012 as compared to$1.4 million at September 30,2011.Our backlog can fluctuate greatly.These fluctuations can be due to the timing of receiving large orders representing prime contractor purchases.It
75、 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 System Integration segment has evolved away from selling our
76、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 services via a state of the art NOC.Our value proposition
77、 is our ability to integrate diverse third-party components together into a complete solution and install the system at the customer site and to offer high value IT consulting services to deliver solutions.7 Third-Party Hardware and Software Modcomp sells third-party hardware and software products i
78、n the information technology market,with a strategic focus on industry standard servers and data center infrastructure solutions,midrange data storage infrastructure products,network products,unified communications and IT security hardware and software solutions.Our key offerings include products fr
79、om HP,Cisco Systems,Sun/Oracle,IBM,Juniper Networks,Hitachi,QLogic,Dell,Enterasys,Citrix,APC,EMC,Intel,VMWare,Fortinet,nCirlce,Microsoft,Arcsight and Checkpoint.Through our supplier relationships with these vendors,we are able to offer competitively priced best-of-breed products to meet our customer
80、s diverse technology 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 singl
81、e point of contact 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-ad
82、ded services that customers may require.Our current customers are in web and infrastructure hosting,education,telecommunications,health services,distribution,financial services,professional services,manufacturing and entertainment industries.We target SMB and LEB customers across all industries.Prof
83、essional Services We provide professional IT consulting services in the following areas:Maintenance and technical support both for third-party products and proprietary Modcomp legacy PCDA systems-hardware and software,operating system and user support.Implementation,integration,configuration and ins
84、tallation services.Storage area network(“SAN”)solutions.We help our customers implement SAN solutions using products from Hitachi,EMC,HP,DataDomain and NetApp.SANs have advantages over conventional storage architecture.These advantages include cost savings from better utilization of hardware and low
85、er headcount requirements to run and maintain data storage systems,higher availability and faster data access rates resulting in increased productivity.Virtualization-We implement virtualization solutions using products from companies such as VMWare.Virtualization allows one computer to do the job o
86、f multiple computers by sharing resources of a single computer across multiple environments.With virtual servers and desktops,users can host multiple operating systems and applications,which can eliminate physical and geographical limitations.Other benefits include energy cost savings,lower capital
87、expenditure requirements,high availability of resources,better desktop management,increased security and improved disaster recovery processes.Enterprise security intrusion prevention,network access control and unified threat management.Using third-party products from companies like Checkpoint,Junipe
88、r Networks and Cisco Systems,our services are designed to ensure data security and integrity through the establishment of virtual private networks,firewalls and other technologies.IT security compliance services.We provide services for IT security compliance with personal privacy laws such as HIPAA
89、and internal control regulations under the Sarbanes-Oxley Act.Unified communications,wireless and routing and switching solutions using Cisco Systems products and services.Custom software applications and solutions development and support.We develop custom applications to customer specifications usi
90、ng industry standard platforms such as Microsoft.Net,Sharepoint and OnBase.We are a Microsoft Gold Partner.NOC managed IT services that include monitoring,reporting and management of alerts for the resolution and preventive general IT and IT security support tasks.Markets,Marketing and Dependence on
91、 Certain Customers We are an IT systems integrator and computer hardware and software Value Added Reseller(“VAR”).We also provide technical services to achieve a value-add to our customers.We operate within the VAR sales channels of major computer hardware and software OEMs,primarily within the geog
92、raphic 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 and managed services to meet the unique requirements of our customers.We market the products we sell and services we p
93、rovide through various sales offices in the U.S.,Germany and the U.K.using our direct sales force(for a detailed list of our locations,see Item 2 of this Form 10-K).8 Competition The primary competition in the Service and System Integration segment are other VARs,ranging from small companies that nu
94、mber in the thousands,to large enterprises such as CDW,PC Connection,Insight,MoreDirect,Dimension Data,Bechtle AG,Presidio and Computacenter AG&Co oHG.In addition,we compete directly with many of the companies who manufacture the third-party products that we sell including Cisco Systems,IBM,HP EMC,H
95、itachi 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 such competitors as HP/EDS,IBM and Cap Gemini.Nearly all of our product offerings are
96、 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 custom solutions to our customers,strength of key partner relationships with the major IT OEMs,ability
97、 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 integration services required to design and install the custom solutions that fit our customers IT needs.Unfav
98、orable 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 was approximately$7.1 million at September 30,2012,as compared to$6.7 million at September 30,2011.Our b
99、acklog 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 backlog will ship and/or be provided within the next twelve months.Significant Customers See Note 12 for de
100、tailed information regarding customers which comprised 10%or more of consolidated revenues for the years ended September 30,2012 and 2011.Employees On September 30,2012,we had approximately 147 full time equivalent employees worldwide for our consolidated operations.None of our employees are represe
101、nted 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 area and percentage of sales based on the location to which the products are shipped or services are rende
102、red are in Note 12 of our consolidated financial statements.Corporate By-laws On December 13,2012,the Companys Board of Directors approved an amendment to Section Article II,Section 3 of the Companys by-laws.As so amended,the section reads:“All meetings of the stockholders shall be held at the princ
103、ipal office of the corporation in Massachusetts,unless a different place within Massachusetts or elsewhere within the United States is designated by the Board of Directors;provided,however,that special meetings called upon stockholders applications shall be held in the same county as the principal o
104、ffice of the corporation,unless some other meeting place in Massachusetts specified in the application shall be approved by the Directors.Any adjourned session of any meeting of the stockholders shall be held at such place with Massachusetts or elsewhere within the United States as is designated in
105、the vote of adjournment.”The prior by-law did not by its terms limit the location of meetings to the United States,nor did it address adjournment.Item 1A.Risk Factors We depend on a small number of customers for a significant portion of our revenue and loss of any customer could significantly affect
106、 our business We are dependent on a small number of customers for a large portion of our revenues.Both the Systems and Service and System 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
107、significant diminution in the sales to or loss of any of our major customers would have a material adverse effect on our business,financial 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 servic
108、es or to develop and sell products that incorporate our products.No assurance can be given that our customers will not experience financial or other difficulties that could adversely affect their operations and,in turn,our results of operations.9 We depend on contracts with the federal government fo
109、r a significant portion of our revenue,and our business could be seriously harmed if the government significantly decreased or ceased doing business with us.We derived 13%of our total revenue in FY2012 and 10%of our total revenue in FY2011 from the Department of Defense(DoD)as a subcontractor.We exp
110、ect that the DoD contracts will continue to be important to our business for the foreseeable future.If we were suspended or debarred from contracting with the federal government generally,the General Services Administration,or any significant agency in the intelligence community or the DoD,or if our
111、 reputation or relationship with government agencies were to be impaired,or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us,our business,prospects,financial condition and operating results could be materially and adversely a
112、ffected.Our business could be adversely affected by changes in budgetary priorities of the federal government.Because we derive a significant percentage of our revenue from contracts with the federal government,changes in federal government budgetary priorities could directly affect our financial pe
113、rformance.A significant decline in government expenditures,a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts,to exercise their right to terminate contract
114、s at any time without penalty or not to exercise options to renew contracts.During 2011,the federal government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011(Budget Act)passed by Congress.Unless Congress and the Administration take further actio
115、n,the Budget Act will trigger automatic reductions in both defense and discretionary spending in January 2013.While the impact of sequestration is yet to be determined,automatic across-the-board budget cuts in sequestration could have significant consequences to our business and industry.In years wh
116、en Congress does not complete its budget process before the end of its fiscal year(September 30),government operations are funded through a continuing resolution(CR)that temporarily funds federal agencies.Recent CRs have generally provided funding at the levels provided in the previous fiscal year a
117、nd have not authorized new spending initiatives.When the federal government operates under a CR,delays can occur in the procurement of products and services.Historically,such delays have not had a material effect on our business;however,should funding of the federal government by CR be prolonged or
118、extended through the entire government 2013 fiscal year,and sequestration take place in January 2013 as part of the implementation of the Budget Act,it could have significant consequences to our business and our industry.Additionally,our business could be seriously affected if the demand for and pri
119、ority of funding for combat operations in Afghanistan decreases which may reduce the demand for our services on contracts supporting some operations and maintenance activities in the Department of Defense or if we experience an increase in set-asides for small businesses,which could result in our in
120、ability to compete directly for prime contracts.Federal government contracts contain numerous provisions that are unfavorable to us.Federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies,some of which are not typically fou
121、nd in commercial contracts,including allowing the government to:cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;claim rights in systems and software developed by us;suspend or debar us from doing business with the federal go
122、vernment or with a governmental agency;impose fines and penalties and subject us to criminal prosecution;and control or prohibit the export of our data and technology.If the government terminates a contract for convenience,we may recover only our incurred or committed costs,settlement expenses and p
123、rofit on work completed prior to the termination.If the government terminates a contract for default,we may be unable to recover even those amounts,and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source.Depending on the v
124、alue of a contract,such termination could cause our actual results to differ materially and adversely from those anticipated.As is common with government contractors,we have experienced and continue to experience occasional performance issues under certain of our contracts.Depending upon the value o
125、f the matters affected,a performance problem that impacts our performance of a program or contract could cause our actual results to differ materially and adversely from those anticipated.10 We rely on single sources for supply of certain components and our business may be seriously harmed if our su
126、pply of any of these components or other components is disrupted Several components used in our Systems products are currently obtained from sole-source suppliers.We are dependent on key vendors like Myricom,Inc.and Mellanox Technologies for our high-speed interconnect components,Freescale for many
127、of our PowerPC line of processors and Intel for our microprocessors,and Wind River Systems,Inc.for VxWorks operating system software.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.Although we
128、 do not consider the risk of interruption of supply to be a significant risk in the near term,if in the future,Myricom or Freescale were to limit or reduce the sale of such components to us,or if these or other component suppliers to us,some of which are small companies,were to experience future fin
129、ancial difficulties or other problems which could prevent 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 source and other suppliers are each subject to quality and performa
130、nce 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.We have no guaranteed supply arrangements with our suppliers and there can be no a
131、ssurance 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 basis.Any shortage or interruption in the supply of any of the components used in our pro
132、ducts,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 assurance that severe shortages of components will not occur in the future.Such shortages c
133、ould 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 components would also materially adversely affect our financial performance since we may
134、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,shipping delays,financial difficulties or other factors and,under certain circumstances
135、,these costs and delays could have a material adverse effect on our business,financial condition and results of operations.Our 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
136、Germany.Foreign-based revenue is determined based on the location to which the product is shipped or services are rendered and represented 44%and 41%of our total revenue for the fiscal years ended September 30,2012 and 2011,respectively.If revenues generated by foreign activities are not adequate to
137、 offset the expense of establishing and maintaining these foreign subsidiaries and activities,our business,financial condition and results of operations could be materially adversely affected.In addition,there are certain risks inherent in transacting business internationally,such as changes in appl
138、icable laws and regulatory requirements,export and import restrictions,export controls relating to technology,tariffs and other trade barriers,longer payment cycles,problems in collecting accounts receivable,political instability,fluctuations in currency exchange rates,expatriation controls and pote
139、ntial adverse tax consequences,any of which could adversely impact the success of our international 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 m
140、ore of such factors will not have a material adverse effect on our future international activities and,consequently,on our business,financial condition or results of operations.We depend on key personnel and skilled employees and face competition in hiring and retaining qualified employees.We are la
141、rgely dependent upon the skills and efforts of our senior management,managerial,sales and technical employees.None of our senior management personnel or other key employees are subject to any employment contracts except Victor Dellovo,our Chief Executive Officer and President.The loss of services of
142、 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,motivate and retain highly skilled technical professionals.Our abili
143、ty 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 technologies.The inability to hire additional qualified personnel could i
144、mpair 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.New regulations related to conflict minerals may force us to inc
145、ur additional expenses,may make our supply chain more complex and may result in damage to our relationships with customers.11 On August 22,2012,as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,the SEC adopted new disclosure regulations for public companies that ma
146、nufacture products that contain certain minerals and their derivatives,namely tin,tantalum,tungsten or gold,known as“conflict minerals,”if these minerals are necessary to the functionality or production of the companys products.These regulations require such issuers to report annually whether or not
147、 such minerals originate from the Democratic Republic of Congo(DRC)and adjoining countries and in some cases to perform extensive due diligence on their supply chains for such minerals.The implementation of these new requirements could adversely affect the sourcing,availability and pricing of confli
148、ct minerals used in the manufacture of our products.In addition,we may incur additional costs to comply with the disclosure requirements,including costs related to determining the source of any of the relevant minerals used in our products.Because our supply chain is complex,the due diligence proced
149、ures that we implement may not enable us to ascertain the origins for these minerals or determine that these minerals are DRC conflict-free,which may harm our reputation.We may also face difficulties in satisfying customers who may require that our products be certified as DRC conflict-free,which co
150、uld harm our relationships with these customers and lead to a loss of revenue.These new requirements also could have the effect of limiting the pool of suppliers from which we source these minerals,and we may be unable to obtain conflict-free minerals at competitive prices,which could increase our c
151、osts and adversely affect our manufacturing operations and our profitability.Systems failures may disrupt our business and have an adverse effect on our results of operations.Any systems failures,including network,software or hardware failures,whether caused by us,a third party service provider,unau
152、thorized intruders and hackers,computer viruses,natural disasters,power shortages or terrorist attacks,could cause loss of data or interruptions or delays in our business or that of our clients.Like other companies,we have experienced cyber security threats to our data and systems,our company sensit
153、ive information,and our information technology infrastructure,including malware and computer virus attacks,unauthorized access,systems failures and temporary disruptions.We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.Prior cyber a
154、ttacks directed at us have not had a material adverse impact on our business or our financial results,and we believe that our continuing commitment toward threat detection and mitigation processes and procedures will avoid such impact in the future.Due to the evolving nature of these security threat
155、s,however,the impact of any future incident cannot be predicted.In addition,the failure or disruption of our mail,communications or utilities could cause us to interrupt or suspend our operations or otherwise harm our business.Our property and business interruption insurance may be inadequate to com
156、pensate us for all losses that may occur as a result of any system or operational failure or disruption and,as a result,our actual results could differ materially and adversely from those anticipated.The systems and networks that we maintain for our clients,although highly redundant in their design,
157、could also fail.If a system or network we maintain were to fail or experience service interruptions,we might experience loss of revenue or face claims for damages or contract termination.Our errors and omissions liability insurance may be inadequate to compensate us for all the damages that we might
158、 incur and,as a result,our actual results could differ materially and adversely from those anticipated.We face competition that could adversely affect our sales and profitability.The markets for our products are highly competitive and are characterized by rapidly changing technology,frequent product
159、 performance improvements and evolving industry standards.Due to the rapidly changing nature of technology,new competitors may 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 supe
160、rior to our products,resulting in reduced demand for our products.Such competitors could have a negative impact on our ability 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 en
161、try into markets historically targeted by us may have a material adverse effect on our business,financial condition and results of operations.Our operating results may fluctuate significantly.Our operating results have fluctuated widely on a quarterly and annual basis during the last several years a
162、nd we expect to experience significant fluctuations 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
163、 customers;competitive pricing programs and volume discounts;12 loss of customers;market acceptance of our products;product obsolescence;general economic conditions;change in the mix of products sold;whether or not we are able to secure design wins for significant customer systems;timing of signific
164、ant orders;delays in completion of internal product development 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
165、 previous generations of products following announcement of replacement products containing more advance technology;and fixed nature of our expenditures on personnel,facilities and marketing programs.We believe that period-to-period comparisons of our results of operations will not necessarily be me
166、aningful and should not be relied upon as indicative of our future performance.It is also possible that in some periods,our operating results may be below the expectations of securities analysts and investors.In such circumstances,the price of our common stock may decline.To be successful,we must re
167、spond 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 developments and changing customer needs.The defense market,in particul
168、ar,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 deployed tend to contain the components of the subcontractors sele
169、cted 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 basis.There can be no assurance that we will be able to secure an
170、 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 is eventually deployed.The design-in process is typically lengthy
171、 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 in technology and customer preferences,or if there is any signifi
172、cant 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 products,we have experienced delays from time to time in completin
173、g 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,particularly in our Systems segment.There can be no assurance that we will be successful in developing new products or enha
174、ncing 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.13 The industry in which our Systems segment
175、 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 materially adversely affected.A
176、s 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 CSPIs commitment to invest
177、 in research and development,spending as a percent of revenues may fluctuate in the future.Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting.Effective internal control over financial reporting and
178、disclosure controls 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 preparation of our finan
179、cial 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 statements or SEC reports or prevent fraud,investors may lose confidence in our reported financial in
180、formation,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 effectiveness of our internal cont
181、rol 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 and detection of fraud,all of the
182、time.Our Stock Price May Continue to be Volatile Historically,the market for technology stocks has been extremely volatile.Our common stock has experienced and may continue to experience,substantial price volatility.The following factors could cause the market price of our common stock to fluctuate
183、significantly:loss of a major customer;loss of a major supplier;the addition or departure of key personnel;variations in our quarterly operating results;announcements by us or our competitors of significant contracts,new products or product enhancements;acquisitions,distribution partnerships,joint v
184、entures or capital commitments;regulatory changes;sales of our common stock or other securities in the future;changes in market valuations of technology companies;and fluctuations in stock market prices and volumes.In addition,the stock market in general and the NASDAQ Global Market and technology c
185、ompanies in particular,have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.These broad market and industry factors may materially adversely affect the market price of our common stock,regardless of o
186、ur 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 against such companies.Factors that may Affect Future Performance This document contains forward-looking statements ba
187、sed on current expectations that involve a number of risks and uncertainties.Further,any forward-looking statement speaks only as of the date on which such statement is made and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on wh
188、ich such statement is made.As it is not possible to predict every new factor that may emerge,forward-looking statements should not be relied upon as a prediction of actual future financial condition or results.In response to competitive pressures or new product introductions,we may take certain pric
189、ing or marketing actions 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
190、 operations are not necessarily an indicator of future performance.14 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
191、depend upon our ability to enhance our existing products and services and to develop and introduce,on a timely and cost effective basis,new products that keep pace with technological developments and address increasing customer requirements.The inability to meet these demands could adversely affect
192、our business and operating results.15 Item 2.Properties Listed below are our principal facilities as of September 30,2012.Management considers all facilities listed below to be suitable for the purpose(s)for which they are used,including manufacturing,research and development,sales,marketing,service
193、 and administration.Location Principal Use Owned or Leased Approximate Floor Area Systems Segment Properties:CSP Inc.Corporate Headquarters Leased 11,450 S.F.43 Manning Road Manufacturing,Sales,Billerica,MA Marketing and Administration Service and Systems Integration Segment Properties:Modcomp,Inc.D
194、ivision Headquarters Leased 15,482 S.F.1500 S.Powerline Road Sales,Marketing and Deerfield Beach,FL Administration Modcomp,Inc.Sales,Marketing and Service Leased 1,356 S.F.9155 South Dadeland Blvd,Suite 1112 Miami,FL Modular Computer Systems GmbH Sales,Marketing,Service Leased 12,443 S.F.Oskar-Jager
195、-Strasse 50 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 AG Sales,Marketing and Service Leased 323 S.F.Gartenstr.23-27 D-61352 Bad Homburg Germany Item 3.Le
196、gal Proceedings On September 4,2011,the Companys U.S.Modcomp division(“Modcomp U.S.”),which is part of the Service and System Integration segment,received a summons entitled“Complaint to Avoid Preferential and Fraudulent Transfers and to Recover Property Transferred Pursuant to 11 U.S.C.550”(the“Sum
197、mons”).The Summons is in regard to a former customer of Modcomp U.S.(the“Debtor”)who commenced a chapter 11 bankruptcy case on August 14,2009.The Summons alleged that Modcomp U.S.received approximately$1.1 million in preferential transfers and approximately$0.2 million in otherwise avoidable transfe
198、rs from the Debtor,in connection with the Debtors bankruptcy petition.As of September 30,2011,after reviewing this matter with counsel to assess the likelihood of a loss and estimate the amount of any loss,we determined that Modcomp U.S.had a strong defense against this complaint in that these payme
199、nts were made to Modcomp U.S.from the Debtor in the ordinary course of business;therefore they were not in fact preferential or otherwise avoidable transfers.However,despite our strong defense,we estimated a loss contingency in connection with the Summons in the amount of approximately$0.1 million a
200、s of September 30,2011.On June 28,2012,we entered into a stipulation of settlement(the Settlement)with the Debtor,and agreed to make a payment to the Debtor of approximately$0.2 million in settlement of all claims in connection with the Summons.Accordingly,we consider this matter closed.16 We are cu
201、rrently not a party to any other material legal proceedings.Item 4.Mine Safety Disclosures Not Applicable.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 Marke
202、t under the symbol CSPI.The following table provides the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated.2012 2011 Fiscal Year:High Low High Low 1st Quarter$3.73$3.15$5.25$3.612nd Quarter 4.483.044.60 3.693rd Quarter 4.533.824.95 3.944t
203、h Quarter 4.993.844.52 3.26 Stockholders.We had approximately 68 holders of record of our common stock as of December 14,2012.This number does not include stockholders for whom shares were held in a“nominee”or“street”name.We believe the number of beneficial owners of our shares of common stock(inclu
204、ding shares held in street name)at that date was approximately 1,300.Dividends.On January 12,2012,our Board of Directors declared a cash dividend of$0.10 per share which was paid on February 3,2012 to stockholders of record as of January 27,2012,the record date.On August 7,2012,our board of director
205、s declared a cash dividend of$0.12 per share payable on August 31,2012 to stockholders of record as of August 23,2012,the record date.On December 10,2012,our board of directors declared a cash dividend of$0.20 per share payable on December 28,2012 to stockholders of record as of December 20,2012,the
206、 record date.Payment of these dividend should not be considered to mean that dividends will be paid in the future.17 Purchases of Equity Securities by the Issuer and Affiliated Purchasers Share Repurchase Plans.The following table provides information with respect to shares of our common stock that
207、we repurchased during the year ended September 30,2012:Period Total Number ofShares Purchased Average PricePaid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans(1)Maximum Number of Shares that May Yet Be Purchased Underthe Plans October 1-31,2011 6,9143.476,914 November
208、1-30,2011 1,5003.501,500 December 1-31,2011 8,4133.448,413 January 1-31,2012 5,8953.345,895 February 1-29,2012 March 1-31,2012 7003.84700 April 1-30,2012 May 1-31,2012 9004.17900 June 1-30,2012 3,7784.113,778 July 1-31,2012 2004.20200 August 1-31,2012 September 1-30,2012 Total 28,3003.5628,300 200,5
209、25 (1)All shares were purchased under publicly announced plans.For additional information about these publicly announced plans,please refer to Note 11 of our financial statements.18 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The discussion below conta
210、ins 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 2012 Results of Operations CSP Inc.operates in two segments:Systems-the Systems segment
211、 consists of our MultiComputer Division which designs,commercially 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.Service and S
212、ystem Integration-the 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.Highlights include:Revenue increased by approximately$11.2 million,or 15%,to$84
213、.8 million for the year ended September 30,2012 versus$73.6 million for the year ended September 30,2011.For the year ended September 30,2012,we had an operating profit of approximately$5.0 million versus an operating profit of approximately$0.8 million for the year ended September 30,2011,for an in
214、crease of approximately$4.2 million.For the year ended September 30,2012,net income was approximately$6.6 million,which includes$1.7 million of tax benefit versus net income of approximately$0.4 million for the year ended September 30,2011,for an increase of approximately$6.2 million.Net cash provid
215、ed by operating activities was approximately$6.3 million for the year ended September 30,2012 compared to net cash provided by operating activities of$1.5 million for the year ended September 30,2011.The increase in revenues of$11.2 million referred to above resulted from significant growth in reven
216、ues from both our Systems and our Service and System Integration segments.Revenues in the Systems segment increased from$7.8 million for fiscal 2011 to$11.1 million for fiscal 2012 for an increase of approximately$3.3 million,while,in our Service and System Integration segment revenues increased by
217、approximately$7.8 million from$65.8 million the year ended September 30,2011 to$73.7 million for the year ended September 30,2012.The revenue increase in the Systems segment was largely driven by higher royalty revenues which were$6.4 million for fiscal 2012 versus$1.7 million in fiscal 2011.Royalty
218、 revenues are particularly significant because there is no cost of sales associated with royalty revenues,hence the profit margin is 100%on this revenue.This$4.7 million increase in royalty revenue was partially offset by lower product revenue in fiscal 2012 versus fiscal 2011 which decreased produc
219、t revenue by$1.4 million.In the Service and System Integration segment we experienced significant growth in both product and service revenues.Product revenues for the segment increased by$6.3 million which was a 13%increase from$49.1 million in fiscal 2011 to$55.4 million in fiscal 2012.Service reve
220、nue in the segment increased by$1.6 million which was a 9%increase from$16.7 million in fiscal 2011 to$18.3 million in fiscal 2012.The product revenue increase was derived in large part from our German operation,where product sales increased by$4.1 million.This increase was due substantially to a si
221、gnificant contract with a large European telecommunications customer,pursuant to which we were engaged as a significant supplier for their global IT security infrastructure build out.The increase in services revenue in the segment was derived entirely from our German operation and was also as a resu
222、lt of this telecommunications customer.In assessing the outlook for fiscal 2013,anticipating that we will not realize significant royalty revenue,we must assume a less optimistic view for the Systems segment for next year in comparison to the robust operating results we realized for fiscal 2012.In a
223、ddition,based on the risks associated with the economic environment within the defense market,we plan to manage the Systems segment assuming relatively weak demand for fiscal 2013.In the Service and System Integration segment,we will continue to have a cautiously optimistic outlook for fiscal 2013,i
224、n terms of revenue,where much will depend upon the level of overall growth in the private sector economy both domestically and in our European markets.We plan to focus our attention and resources in the Service and System Integration segment on higher-margin business and away from low margin busines
225、s as we move forward.While this may put pressure on sales growth in fiscal 2013,we believe this strategy will achieve profitable growth for the long term.19 The following table details our results of operations in dollars and as a percentage of sales for the years ended September 30,2012 and 2011:Se
226、ptember 30,2012%of sales September 30,2011%of sales (Dollar amounts in thousands)Sales$84,807100%$73,645100%Costs and expenses:Cost of sales 64,38676%57,27678%Engineering and development 1,7202%1,7852%Selling,general and administrative 15,84719%13,77519%Total costs and expenses 81,95397%72,83699%Inc
227、ome from proceeds of officer life insurance settlement 2,1153%Operating income 4,9696%8091%Other expense(100)(94)Income before income taxes 4,8696%7151%Income tax expense(benefit)(1,740)(2)%346Net income$6,6098%$3691%Sales The following table details our sales by operating segment for the years ende
228、d September 30,2012 and 2011:Systems Service andSystem Integration Total%of Total (Dollar amounts in thousands)For the Year Ended September 30,2012:Product$4,214$55,369$59,583 70%Services 6,92718,297 25,224 30%Total$11,141$73,666$84,807 100%of Total 13%87%100%Systems Service andSystem Integration To
229、tal%of Total For the Year Ended September 30,2011:Product$5,624$49,110$54,734 74%Services 2,19816,713 18,911 26%Total$7,822$65,823$73,645 100%of Total 11%89%100%Systems Service andSystem Integration Total%increase Increase(Decrease)Product$(1,410)$6,259$4,849 9%Services 4,7291,584 6,313 33%Total$3,3
230、19$7,843$11,162 15%increase 42%12%15%20 As shown above,total revenues increased by approximately$11.2 million,or 15%,for the year ended September 30,2012 compared to the year ended September 30,2011.Revenue in the Systems segment increased for the current year versus the prior year by approximately$
231、3.3 million,while revenues in the Service and System Integration segment increased by approximately$7.8 million.Product revenues increased by approximately$4.8 million,or 9%,for the year ended September 30,2012 compared to the comparable period of the prior fiscal year.Product revenues in the Servic
232、e and System Integration segment increased by approximately$6.3 million while in the Systems segment product revenue decreased by approximately$1.4 million for the year ended September 30,2012 versus the year ended September 30,2011.In the US division of the Service and System Integration segment,pr
233、oduct sales increased by approximately$0.8 million,sales in this segments German division increased by of approximately$4.1 million and in the UK division sales increased by approximately$1.3 million.In the US division,product sales were bolstered by sales to several new customers in both the IT Inf
234、rastructure,Higher Education and Healthcare industry verticals.While we did experience decreases in sales to some of our prior year large customers across several industry verticals,the acquisition of new customers was enough to overcome the decreases in product sales to previously acquired customer
235、s.Therefore,while we experienced significant customer turnover,the pipeline for sales to new customers more than made up for the turnover.In Germany,the$4.1 million increase was net of an unfavorable foreign currency impact of approximately$1.3 million,which means on a volume basis in constant dolla
236、rs the increase was approximately$5.4 million.This sales volume increase was driven by increased sales to the divisions largest customer,a large UK-based wireless carrier,of approximately$4.6 million,and sales to a newly acquired customer of$5.7 million.There can be no assurance that there will be s
237、ignificant sales to either or both of these customers in the future.These increases were offset by decreases to two of the divisions long-term customers.The aggregate decrease in sales volume to these two customers amounted to approximately$3.3 million.Additionally,sales to all other customers in th
238、e German division decreased by an aggregate of approximately$1.6 million.The increase in sales in the UK division was the result of increased third party product sales versus the prior year.This was the result of the Companys efforts to start up a third-party reseller business,offering a wider array
239、 of third-party technology products within the UK operation.The decrease in product revenues in the Systems segment of approximately$1.4 million was due to a decrease in sales to our Japanese defense department customer of approximately$0.2 million,and a decrease of$1.2 million in sales of parts,com
240、ponents and spares to existing US defense department customers.As shown in the table above,service revenues increased by approximately$6.3 million,or 33%.This increase was made up of an increase in the Systems segment of$4.7 million and an increase in the Service and System Integration segment of ap
241、proximately$1.6 million.The increase in the Systems segment service revenue was due to higher royalty income recorded in the year ended September 30,2012 which was approximately$6.4 million versus$1.7 million for the year ended September 30,2011.The increase in service revenues in the Service and Sy
242、stem Integration segment was primarily from the German division,where service revenue increased by approximately$1.7 million.In Germany,there was an unfavorable currency fluctuation impact to service revenues of approximately$1.0 million,which means sales volume in constant dollars increased by appr
243、oximately$2.7 million.This increase in sales volume was driven by increased service revenues to the German divisions largest customer,a UK-based wireless carrier,of approximately$2.8 million,offset by decreases in service revenues of approximately$0.1 million of all other customers combined.21 Our s
244、ales by geographic area,based on the location to which the products were shipped or services rendered,are as follows:For the Year ended,September 30,2012%September 30,2011%$Increase(Decrease)%Increase(Decrease)(Dollar amounts in thousands)Americas$47,163 56%$43,52859%$3,635 8%Europe 34,053 40%26,273
245、36%7,780 30%Asia 3,591 4%3,8445%(253)(7)%Totals$84,807 100%$73,645100%$11,162 15%The increase in Americas revenue for the year ended September 30,2012 versus the year ended September 30,2011 was primarily the result of the fluctuations described above in the Systems segment where combined product an
246、d service sales to US customers increased by an aggregate$3.6 million.The increase in sales in Europe was primarily the result of the higher sales described above from the German and UK divisions of the Service and System Integration segment.The decrease in Asia sales was the result of the decrease
247、in sales to our existing customer that supplies a large Japanese defense program(see discussion above).Cost of Sales,Gross Profit and Gross Margins The following table details our cost of sales,gross profit and gross margins by operating segment for the fiscal years ended September 30,2012 and 2011:
248、Systems Service andSystem Integration Total%of Total (Dollar amounts in thousands)For the Year Ended September 30,2012:Cost of Sales:Product$2,508$47,718$50,226 78%Services 28313,877 14,160 22%Total$2,791$61,595$64,386 100%of Total 4%96%100%of Sales 25%84%76%Gross Profit:Product$1,706$7,651$9,357 46
249、%Services 6,6444,420 11,064 54%Total$8,350$12,071$20,421 100%of Total 41%59%100%Gross Margins:Product 40%14%16%Services 96%24%44%Total 75%16%24%For the Year Ended September 30,2011:Cost of Sales:Product$2,391$42,419$44,810 78%Services 33012,136 12,466 22%Total$2,721$54,555$57,276 100%of Total 5%95%1
250、00%of Sales 35%83%78%Gross Profit:22 Systems Service andSystem Integration Total%of Total Product$3,233$6,691$9,924 61%Services 1,8684,577 6,445 39%Total$5,101$11,268$16,369 100%of Total 31%69%100%Gross Margins:Product 57%14%18%Services 85%27%34%Total 65%17%22%Increase(decrease)Cost of Sales:Product
251、$117$5,299$5,416 12%Services(47)1,741 1,694 14%Total$70$7,040$7,110 12%Increase(decrease)3%13%12%of Sales(10)%1%(2)%Gross Profit:Product$(1,527)$960$(567)(6)%Services 4,776(157)4,619 72%Total$3,249$803$4,052 25%increase(decrease)64%7%25%Change in Gross Margin percentage:Product(17)%(2)%Services 11%(
252、3)%10%Total 10%(1)%2%Total cost of sales increased by approximately$7.1 million when comparing the year ended September 30,2012 versus the year ended September 30,2011.This increase in cost of sales of 12%overall is consistent with the increase in sales of 15%overall as described previously.The resu
253、lting higher gross profit margin(GPM)of 24%for the year ended September 30,2012 versus 22%for 2011 was due to several factors which are discussed below.In the Service and System Integration segment,the overall GPM was 16%for the year ended September 30,2012 versus 17%for the prior year.Product GPM i
254、n the segment remained unchanged at 14%when comparing the year ended September 30,2012 to the year ended September 30,2011,while the segments service GPM decreased from 27%to 24%.This decrease in service GPM was attributable primarily to increased costs of training new billable service engineer empl
255、oyees due to significant employee turnover in the German division of the segment.Additionally,we experienced greater use of contractors versus in-house resources to provide billable services in Germany.In the Systems segment,the overall GPM increased from 65%to 75%as shown in the table above.This wa
256、s because in the current year period,royalty revenue,which carries a 100%GPM,made up a much greater percentage of total Systems segment revenue(57%),versus the prior year royalty revenue which was 21%of total Systems segment revenue.Offsetting the favorable GPM impact of the greater royalty revenue
257、in the current year however,was the impact of significantly lower product GPM in the current year versus the prior year.As shown in the table above,the GPM on product sales was 40%for the current year versus the prior year product GPM of 57%.This is due to the current year lower volume of production
258、 and product sales resulting in proportionately lower absorption of fixed factory overhead,therefore these fixed costs were proportionately higher versus production and sales volume,which resulted in the low GPM on product sales in the current year.In addition,we incurred significantly higher nonrec
259、urring engineering charges for re-tooling and other services from our outside fabrication houses for the year ended September 30,2012 versus the prior year.23 Engineering and Development Expenses The following table details our engineering and development expenses by operating segment for the year e
260、nded September 30,2012 and 2011:For the Year ended,September 30,2012%of Total September 30,2011%of Total$Decrease%Decrease (Dollar amounts in thousands)By Operating Segment:Systems$1,720 100%$1,785100%$(65)(4)%Service and System Integration Total$1,720 100%$1,785100%$(65)(4)%The$0.1 million decrease
261、 in engineering and development expenses displayed above was due to lower engineering consulting expenditures in connection with the development of the next generation of MultiComputer products in the Systems segment.Selling,General and Administrative The following table details our selling,general
262、and administrative(“SG&A”)expense by operating segment for the years ended September 30,2012 and 2011:For the Year ended,September 30,2012%of Total September 30,2011%of Total$Increase%Increase (Dollar amounts in thousands)By Operating Segment:Systems$5,51535%$3,90828%$1,607 41%Service and System Int
263、egration 10,33265%9,86772%465 5%Total$15,847100%$13,775100%$2,072 15%The increase in SG&A expense in the Systems segment was was due in part to approximately$0.7 million in higher incentive compensation expense resulting from the higher revenues,gross profit and operating results for the year ended
264、September 30,2012,versus the prior year and a decrease in the cash surrender value of officer life insurance policies of approximately$1.0 million,related to a policy on our former chief executive,who became deceased in fiscal 2012.The increase in the Service&System Integration segment was due to an
265、 increase in incentive compensation expense from the more favorable revenue,gross profit and overall operating results for the year ended September 30,2012 versus the comparable period in the prior year.Proceeds from officer life insurance settlement We recognized approximately$2.1 million for the s
266、ettlement from a life insurance policy for our former chief executive officer,who died during fiscal 2012.We received the cash proceeds from this settlement subsequent to year end,in October 2012.24 Other Income/Expenses The following table details our other income/expenses for the years ended Septe
267、mber 30,2012 and 2011:For the Year ended,September 30,2012 September 30,2011 Increase(Decrease)(Amounts in thousands)Interest expense$(85)$(86)$1Interest income 4444 Foreign exchange gain(loss)(60)(16)(44)Other income(expense),net 1(36)37Total other expense,net$(100)$(94)$(6)Other income(expense),ne
268、t,for the years ended September 30,2012 and 2011was not significant nor was the change from the prior year period to that of the current year.Income Taxes The Company recorded an income tax benefit of approximately$1.7 million,which reflected an effective tax benefit rate of(36)%for the year ended S
269、eptember 30,2012,compared to income tax expense of approximately$0.3 million for the year ended September 30,2011,which reflected an effective tax rate of 48%.We realized a tax benefit for the year ended September 30,2012,despite the fact that we had positive earnings before taxes for the year.This
270、was because we reduced the valuation allowance on our deferred tax assets,which had been accumulated over the past several years.The recording and ultimate reversal of valuation allowances for our deferred tax asset requires significant judgment associated with past and projected performance.In asse
271、ssing the realizability of deferred tax assets,we consider our taxable future earnings and the expected timing of the reversal of temporary differences.In prior years,we recorded a valuation allowance which reduced the gross deferred tax asset to an amount that we believed was more likely than not t
272、o be realized because our inability to project future profitability beyond fiscal year 2012 in the U.S.and cumulative losses incurred in recent years in the United Kingdom represented sufficient negative evidence to record a valuation allowance against certain deferred tax assets.As of September 30,
273、2012,management assessed the positive and negative evidence in the U.S operations,and estimated we will have sufficient future taxable income to utilize the existing deferred tax assets.Significant objective positive evidence included the cumulative profits that we realized over the most recent year
274、s.This evidence enhances our ability to consider other subjective evidence such as our projections for future growth.Other factors we considered are the likelihood for continued royalty income in future years,and our expectation that the Service and Systems Integration segment will continue to be pr
275、ofitable in future years.On the basis of this evaluation,as of September 30,2012,we have concluded that our US deferred tax asset is more likely than not to be realized.Therefore,we reversed the U.S.valuation allowance of$3.0 million,resulting in an overall tax benefit for the year ended September 3
276、0,2012.It should be noted however,that the amount of the deferred tax asset realized could be adjusted in future years,if estimates of taxable income during the carryforward periods are reduced,or if objective negative evidence in the form of cumulative losses is present.We continue to maintain a fu
277、ll valuation allowance against our United Kingdom deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards.To the extent that
278、 actual experience deviates from our assumptions,our projections would be affected and hence our assessment of realizability of our deferred tax assets may change.Liquidity and Capital Resources Our primary source of liquidity is our cash and cash equivalents,which increased by approximately$4.6 mil
279、lion to$20.5 million as of September 30,2012 from$15.9 million as of September 30,2011.At September 30,2012,cash equivalents consisted of money market funds which totaled$3.5 million.Significant sources of cash for the year ended September 30,2012 included net income of approximately$6.6 million,an
280、increase in A/P and accrued expenses of approximately$1.6 million,an increase in deferred revenue of approximately$0.8 25 million,a decrease in inventories of approximately$0.5 million,a decrease in accounts receivable of approximately$0.8 million,a decrease in cash surrender value of officers life
281、insurance of approximately$0.9 million and depreciation and amortization of approximately$0.4 million.Offsetting these sources of cash,significant uses of cash were an increase in officer life insurance settlement receivable of approximately$2.2 million,a decrease in deferred tax assets of approxima
282、tely$2.9 million,an increase in other assets of approximately$0.7 million,purchases of property and equipment of$0.6 million and payment of dividends of approximately$0.8 million.Cash held by our foreign subsidiaries located in Germany and the United Kingdom totaled approximately$9.8 million as of S
283、eptember 30,2012 and$5.6 million as of September 30,2011.This cash is included in our total cash and cash equivalents reported above.We consider this cash to be permanently reinvested into these foreign locations because repatriating it would result in unfavorable tax consequences.Consequently,it is
284、 not available for activities that would require it to be repatriated to the U.S.If cash generated from operations is insufficient to satisfy working capital requirements,we may need to access funds through bank loans or other means.There is no assurance that we will be able to raise any such capita
285、l on terms acceptable to us,on a timely basis or at all.If we are unable to secure additional financing,we may not be able to complete development or enhancement of products,take advantage of future opportunities,respond to competition or continue to effectively operate our business.Based on our cur
286、rent plans and business conditions,management believes that the Companys available cash and cash equivalents,the cash generated from operations and availability on our lines of credit will be sufficient to provide for the Companys working capital and capital expenditure requirements for the foreseea
287、ble future.26 Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generally accepted in the United States.The preparation o
288、f these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,liabilities,revenues and expenses.On an on-going basis,we evaluate our estimates,including those related to uncollectible receivables,inventory valuation,goodwill and intangibles,incom
289、e 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,the results of which form the basis for making judgment
290、s 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 affect our more significant judgments and estimates us
291、ed in the preparation of our consolidated financial statements:revenue recognition;valuation allowances,specifically the allowance for doubtful accounts and net deferred tax asset valuation allowance;inventory valuation;intangibles;and pension and retirement plans.Revenue Recognition The Company rec
292、ognizes 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 determinable and collectability of sales proceeds is reasonably assured.We include frei
293、ght billed to our customers as sales and the related freight costs as cost of sales.The Company reduces revenue for estimated customer returns.The Company recognizes revenue from software licenses when persuasive evidence of an arrangement exists,delivery of the product has occurred and the fee is f
294、ixed or determinable and collectability is probable.When delivery of services accompany software sales,and vendor specific objective evidence does not exist,and the only undelivered element is services that do not involve significant modification,or customization,of software,then the entire fee is r
295、ecognized as the services are performed.If no pattern of performance is discernible,the fee is recognized straight line over the service period.The Company also offers training,maintenance agreements and support services.The Company has established fair value on its training,maintenance and support
296、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 maintenance contracts is deferred and recognized on a straight-line basis over the contractual
297、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 recognition criteria have been met for that element and the support services have been prov
298、ided.Training revenue is recognized when performed.In certain multiple-element 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 arrange
299、ment among the various elements based on the Companys best estimate of the standalone selling price.The allocation is based on vendor specific objective evidence,third party evidence or estimated selling price when that element is sold separately.The Company recognizes revenue related to the deliver
300、ed products or services only if the above revenue recognition criteria are met and the delivered element has standalone value.In October 2009,the FASB issued Accounting Standards Update(“ASU”)2009-13-“Multiple-Deliverable Revenue Arrangements-a Consensus of the FASB Emerging Issues Task Force”(“ASU
301、2009-13”)and ASU 2009-14-“Certain Revenue Arrangements that Contain Software Elements.”(“ASU 2009-14”).ASU 2009-13 amended previously existing revenue recognition accounting principles regarding multiple-deliverable revenue arrangements.The consensus provides accounting principles and application gu
302、idance on whether multiple deliverables exist,how the arrangement should be separated,and how the consideration should be allocated.This guidance eliminates the requirement to establish verifiable,objective evidence of the fair value of undelivered products and services and also eliminates the resid
303、ual method of allocating arrangement consideration.The new guidance provides for separate revenue recognition based upon managements estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item.Under the previous guidance,if
304、the fair value of all of the elements in the arrangement was not determinable,then revenue was deferred until all of the items were delivered or fair value was determined.This pronouncement was effective prospectively for revenue arrangements entered into or materially modified in fiscal years begin
305、ning on or after June 15,2010,with early adoption permitted.ASU 2009-14 removes the sale of tangible products containing software components and non-software components that function together to deliver the tangible products essential functionality from the scope of software revenue recognition guid
306、ance.The Company adopted these standards as of October 1,2009.27 Adoption of the new revenue recognition guidance has had an impact on the pattern and timing of revenue recognition.In some cases,revenue that would have been deferred pursuant to the previously existing multiple-element revenue recogn
307、ition guidance,has been recognized pursuant to the newly issued guidance.This is because in some cases we are not able to determine vendor-specific objective evidence(“VSOE”)or third-party evidence of the service element in our arrangements.Under the new guidance,because the requirement to determine
308、 fair value of undelivered elements has been eliminated,and we may use estimated selling price to allocate revenue to elements in an arrangement,we are now more likely to be able to separate arrangements into separate units of accounting,and thereby recognize the delivered elements(typically product
309、 revenue)without having delivered the other elements in the arrangements(typically services).Description of multiple-deliverable arrangements and Software Elements In many cases,our multiple-deliverable arrangements involve initial shipment of hardware(including tangible products that include softwa
310、re and non-software elements),software products and subsequent delivery of services which add value to the products that have been shipped.In some instances,services are performed prior to product shipment,but more typically services are performed subsequent to shipment of the hardware products.The
311、timing of the delivery and performance of deliverables may vary case-by-case.We evaluate whether we can determine VSOE or third-party evidence to allocate revenue among the various elements in an arrangement.When VSOE or third-party evidence cannot be determined,we use estimated selling prices to al
312、locate revenue to the various elements.Estimated selling prices are determined using the targeted gross margin for each element and calculating the gross revenue for each element that would have been required to achieve the targeted gross margin,and allocating revenue to each element based on those
313、relative values.Typically,product revenue which may consist of hardware(including tangible products that include software and non-software elements)and/or software elements are recognized upon shipment,or when risk of loss passes to the customer.Services elements are typically recognized upon comple
314、tion for fixed-price service arrangements,and as services are performed for time and materials service arrangements.For software elements that include services that do not involve significant production,modification or customization,and VSOE does not exist,the entire fee allocable to that element is
315、 recognized as the services are performed.If no pattern of performance is discernible,the fee is recognized straight line over the service period.The period over which services are delivered typically ranges from approximately sixty to ninety days,or longer in some cases.For tangible products contai
316、ning software components and non-software components,we determine whether these elements function together to deliver the tangible product essential functionality.If the software and non-software components of the tangible product function together to deliver the tangible products essential function
317、ality,software revenue recognition guidance is not applied,but rather other appropriate revenue recognition guidance as described above.The following policies are applicable to the Companys major categories of segment revenue transactions:Systems Segment Revenue Revenue in the Systems segment consis
318、ts 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 and repai
319、r 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 into mult
320、iple element arrangements in the Systems segment.We follow the accounting policies described above for such arrangements.The Companys standard sales agreements generally do not include customer acceptance provisions.However,in certain instances when arrangements include a customer acceptance provisi
321、on 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 in the Service and System In
322、tegration 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 provisions.However,in certa
323、in 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.28 Service revenue is comprised of information technology consu
324、lting development,installation,implementation and maintenance services.We follow the accounting policies described above for service transactions.For arrangements that include a customer acceptance provision,or if there is uncertainty about customer acceptance of services rendered,revenue is deferre
325、d until the Company has evidence of customer acceptance.For sales that are financed by customers through leases with a third party,when risk of loss does not pass to the customer until the lease is executed,revenue is recognized upon cash receipt and execution of the lease.We sell certain third part
326、y service contracts,which 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 as required by accounting principles generally accepted in the U.S.We must determine whether we act as a prin
327、cipal in the transaction and assume the risks and rewards 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-party service provider or vendor is recorded in cost of goods sold.Under net s
328、ales 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 net sales recognition method for the third party service contracts that we s
329、ell when we are not the primary obligor on the contract.We use the gross sales recognition for the third party service contracts that we sell when we act as principal and are the primary obligor.Product Warranty Accrual Our product sales generally include a 90-day to one-year hardware warranty.At ti
330、me of product shipment,we accrue for the estimated cost to repair or replace potentially defective products.Estimated warranty costs are based upon prior actual warranty costs for substantially similar products.Engineering and Development Expenses Engineering and development expenses include payroll
331、,employee benefits,stock-based compensation and other headcount-related expenses associated with product development.Engineering and development expenses also include third-party development and programming costs.We consider technological feasibility for our software products to be reached upon the
332、release of the software,accordingly,no internal software development costs have been capitalized.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 tax consequences attributable to diff
333、erences 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 expected to be recovered or settled.The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in th
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