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, 2011.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 000-10843
CSP Inc.
(Exact name of Registrant as specified in its Charter)
Massachusetts
(State of incorporation)
04-2441294
(I.R.S. Employer Identification No.)
43 Manning Road, Billerica, Massachusetts 01821-3901 (978) 663-7598
(Address and telephone number of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Exchange of Which Registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted 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 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
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, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $17,938,843
based on the closing sale price of $4.58 as reported on the Nasdaq Global Market.
As of January 9, 2012, we had outstanding 3,396,154 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the information required in Part III of this Form 10-K are incorporated by reference from our definitive proxy statement for
our 2012 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, 2011.
TABLE OF CONTENTS
Explanatory Note
Business
PART I.
Item 1.
Item 1A. Risk Factors
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
[Reserved]
PART II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 7.
Item 8.
Item 9.
Item 9A
Item 9B. Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Note: Items 1B, 6 and 7A are not required for smaller reporting companies and therefore not furnished.
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This Page Intentionally Left Blank
Explanatory Note
Overview of Restatement
In this Annual Report on Form 10-K, CSP Inc.:
1. Restates its Consolidated Statement of Operations for the year ended September 30, 2010, and the related
disclosures in Notes to Consolidated Financial Statements; and
Restates its Unaudited Quarterly Statements of Operations for the first three quarters in the year ended
September 30, 2011;
2.
Background on the Restatement
As previously disclosed in the Company’s press release dated December 14, 2011 the Company announced that
it was postponing its fourth quarter and fiscal-year 2011 financial results announcement and related conference call
originally scheduled for Wednesday, December 14, 2011, because the Company and its independent accounting firm
required additional time to complete the review and audit of the Company’s fiscal 2011 financial results.
In the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on
January 6, 2012, as amended by Form 8-K/A filed January 11, 2012, the Company announced that the Audit Committee
of its Board of Directors, upon the recommendation of management, had determined that its previously issued financial
statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2010 and its Quarterly
Reports on Forms 10-Q for the quarters ended December 31, 2010, March 31, 2011 and June 30, 2011, should no longer
be relied upon as a result of the re-evaluation of certain technical accounting guidance affecting the classification of
revenues and costs of revenues.
The restatements of the financial statements referred to above resulted from the identification of sales that are
maintenance and support services provided by third parties where the Company is not the primary obligor for the service,
which requires presentation of the revenue reported by the Company net of the cost of the services as opposed to
recognition as the gross sales value of the services. In addition, the Company identified certain other services provided
pursuant to third party contracts for which the Company is primary obligor and reported these services correctly at the
gross sales value; however these services were reported as product revenue and should have been included as service
revenue. We have therefore, reclassified both the revenue and cost of sales for these services from product revenue and
product cost of sales to service revenue and service cost of sales.
The adjustments made to the restated financial statements referred to above did not affect gross profit, income
before taxes, net income, cash flow, total assets, total liabilities, retained earnings or total shareholder equity.
The adjustments made as a result of the restatement are more fully discussed in Note 16, Restatement of
Previously Issued Financial Statements, of the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Annual Report. For a description of the control deficiencies identified by management as a result of our internal reviews,
and management’s plan to remediate those deficiencies, see Part II, Item 9A, Controls and Procedures.
Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for quarterly and annual
periods ended prior to December 31, 2010 have not been and will not be amended. Accordingly, investors should no
longer rely upon the Company’s previously released financial statements for those periods ended prior to December 31,
2010 and any earnings releases or other communications relating to those periods. The Company will file amendments to
the Forms 10-Q for the quarters ended December 31, 2010, March 31, 2011 and June 30, 2011 no later than March 2,
2012.
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Item 1. Business
PART I
CSP Inc. (“CSPI” or “the Company” or “we” or “our”) was incorporated in 1968 and is based in Billerica,
Massachusetts, just off Route 128 in the Boston computer corridor. To meet the diverse 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 Integration segment.
• The Systems segment consists primarily of CSPI’s 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 Division
products are based on an architectural solution that is open, standards-based, vendor independent, easily
integrated with third-party products and compatible with future product offerings. The MultiComputer
Division’s products are known as multicomputers or cluster computers, which use multiple microprocessors
linked together with a high performance network to achieve very high performance processing capabilities.
Our MultiComputer systems utilize “blades” (self-contained, high-density computer boards) to achieve a high
level of compute processing per-cubic-foot-per-watt. The blades and other components that make up the
system can be housed in commercially available air-cooled chassis or in ruggedized chassis, designed to
withstand physically demanding environments. In addition, CSPI’s MultiComputer products are designed to
operate in environments that require low power, or have limited cooling and/or space available. These systems
have traditionally been utilized for sonar and radar digital signal processing (“DSP”), image recognition and
simulation, image processing for medical and machine vision, and seismic data acquisition applications. 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 third-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 direct 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”).
Financial Information about Industry Segments
The following table details our sales by operating segment for fiscal years ending September 30, 2011 and 2010.
Additional segment and geographical information is set forth in Note 13 to our financial statements.
Segment
2011
%
2010
%
Systems
Service and System Integration
Total Sales
7,822
65,823
73,645
(Amounts in thousands)
11% $
89%
100% $
8,311
81,801
90,112
$
$
9%
91%
100%
2
Systems Segment
Products and Services
The Systems segment’s MultiComputer products utilize commercially available hardware components that are
compliant with industry standards as well as open source 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 real-time or in modeling and simulations. CSPI’s leadership in processing density, large memory subsystems,
high-bandwidth networking components, optimized signal processing libraries, and specialized algorithms make these
products a natural
the commercial/industrial, medical/biotechnology, geophysics,
scientific/engineering and military/defense markets.
for applications
fit
in
Hardware Products
Our MultiComputer Division cluster computer systems are currently marketed under the commercial brand name
FastCluster. Introduced in 1997, the first generation of FastCluster products was referred to as the FastCluster 2000
SERIES. Based upon industry standards, the 2000 SERIES systems included a VME 6U form factor (the form factor
best suited for use in rugged applications), the Motorola™ G4 PowerPC RISC processors with AltiVec™ technology,
high-speed memory and Myrinet-2000™ cluster interconnect. The 2000 SERIES product line is ideally suited for use by
customers in the 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 incorporate the latest
industry standard technologies and minimize the risks associated with proprietary solutions. The 2000 SERIES advanced
processing capabilities coupled with the smaller footprint was also suited for exploration operations in the geophysical
market.
Building upon the momentum of the 2000 SERIES, we announced the next generation FastCluster product line,
the 3000 SERIES, in fiscal 2006. The first prototype of a 3000 SERIES component was shipped to a customer for
evaluation purposes in September 2007. This prototype was successfully evaluated by the customer during fiscal 2008.
We received and shipped additional 3000 SERIES orders in fiscal 2010 and we shipped a significant order for 3000
SERIES systems in fiscal 2011. We expect to receive additional significant orders for 3000Series systems in fiscal 2012
and beyond. The 3000 SERIES product line is designed to deliver performance that is superior to our predecessor
products in interconnect bandwidth and processing density while preserving absolute code reuse at the application layer.
The 3000 SERIES product line targets high performance DSP, signal intelligence (“SIGINT”), radar and sonar
applications in airborne, 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 supports the most prevalent
networking standard found in both business and industrial settings.
In fiscal 2010, we announced 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,
multimode, integrated system environments. OpenVPXTM’s consideration of system-level requirements improves
interoperability between computing and communications platforms and reduces customization, testing, cost and risk.
Also, in fiscal 2010, we announced our new 4000 SERIES ATCA products. The 4000 SERIES is based on
InfiniBand, Advanced Telecom Computing Architecture (“AdvancedTCA” or “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 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 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.
3
All of the products of the MultiComputer Division offer the user a choice in selecting the system software best
suited to their application requirements. For customers wanting a lower cost solution, our cluster computer systems are
available with the 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 development tools suite.
All MultiComputer cluster computer systems use the best of open systems software technologies, such as message
passing interface (“MPI”) software for interprocessor communications and the highly optimized industry standard math
libraries: Industry Standard Signal Processing Library and Vector Signal and Image Processing Library. These libraries
facilitate the development of truly portable code for seamless reuse across applications, while taking advantage of
optimized performance on the PowerPC with AltiVec.
Markets, Marketing and Dependence on Certain Customers
Aerospace & Defense Market
We market our MultiComputer systems to defense and commercial markets 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 and 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 specifications, 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 revenue streams as products progress from development phases into deployment.
Our cluster computing technologies that support information exchange in real-time are becoming increasingly
significant to twenty-first century “network centric warfare”military operations. There has been 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 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 2012 and beyond, our focus is to build interest in
our 3000 SERIES and 4000 SERIES multicomputers among our existing customers as well as additional commercial
application customers.
Competition
The Systems segment’s markets are very competitive. Customer requirements coupled with advances in
technology drive our efforts to continuously improve existing products and develop new ones. Starting with Intel i860
microprocessors used in the SuperCards of the 1980s to the Motorola PowerPCs with AltiVec processors incorporated in
the 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 2011 involved
completing and launching new enhancements to our 3000 SERIES product line, with a focus on continuing to provide
our customers with increased processing capabilities based on the latest industry standard technologies: VXS (VITA 41),
multi-core processors, FPGAs and Myricom’s Myri-10G high speed interconnect with 10 Gigabit Ethernet support.
Applications expertise, product innovation, strong technical support and dedicated customer service allow us to
compete favorably as a provider of high-performance cluster computer systems.
Our direct competitors in the aerospace and defense market are Mercury Computer Inc., Kontron, Curtis Wright
and G. E. Intelligent 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, those companies manufacture
general-purpose computer systems incorporating multi-core processors and have the potential to become formidable
competitors in compute intensive applications, such as radar and sonar. While our products are designed to offer the best
overall value in combined performance, features and price, we may not overcome the capabilities of larger companies to
4
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 companies with greater technical resources and marketing
organizations could decide to compete in the future. The future growth of this market depends upon continued growth in
strategic partnerships and providing high density and scalability in a compact, low power and cost effective package that
can easily be integrated into OEM designs for high performance computation. Since the majority of sales are to prime
contractors, the principal barrier to gaining market share is the reluctance of established users to redesign their product
once it is in production. A key area of opportunity exists in design wins on new programs.
Manufacturing, Assembly and Testing
All MultiComputer systems are shipped to our customers directly from our plant in Billerica, Massachusetts. Our
manufacturing activities consist mainly of final assembly and testing of printed circuit boards and systems that are
designed by us and 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 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 comprehensive log is maintained of all past failures to monitor the ongoing reliability of our
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 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 headquarters 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 suppliers. 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 some of our 3000 Series products and
Intel for our microprocessors for our 3000 SERIES OpenVPXTM 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 new 3000 SERIES and 4000 SERIES systems are currently available in a timely manner.
Research and Development
For the year ended September 30, 2011, our expenses for research and development were approximately $1.8
million compared to approximately $2.0 million for fiscal year 2010. Expenditures for research and development are
expensed as they are incurred. Our Systems segment expects to continue to have substantial expenditures related to the
development of new hardware products and the software that enables the hardware to function. Our current development
plan is intended to extend the usefulness and marketability of existing products and introduce new products into existing
market segments, including the 3000 SERIES and 4000 SERIES product lines.
We do not have any patents that are material to our business.
5
Backlog
The backlog of customer orders and contracts in the Systems segment was approximately $1.4 million at
September 30, 2011 as compared to $2.0 million at September 30, 2010. Our backlog can fluctuate greatly. These
fluctuations can be due to the timing of receiving large orders representing prime contractor purchases. It is expected that
all of the customer orders in backlog will ship within the next twelve months.
Service and System Integration Segment
Products and Services
Integration Solutions
Over the past several years, the business of our Service and System Integration segment has evolved away from
selling our proprietary process control and data acquisition (“PCDA”) computer systems, into becoming a systems
integrator and VAR of integrated solutions including third-party hardware, software and technical computer-related
consulting services and managed services via a state of the art NOC. Our value proposition is our ability to integrate
diverse third-party components together into a complete solution and install the system at the customer site and to offer
high value IT consulting services to deliver solutions.
Third-Party Hardware and Software
Modcomp sells third-party hardware and software products in 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 from HP, Cisco Systems, Sun/Oracle, IBM, Juniper Networks, Hitachi, QLogic, Dell, Enterasys, Citrix, APC,
EMC, Intel, VMWare, Fortinet, nCirlce, Microsoft and Checkpoint. Through our supplier relationships with these
vendors, we are able to offer competitively priced best-of-breed products to meet our customers’ diverse technology
infrastructure, storage, security, unified
needs, providing procurement and engineering expertise
communications and networking, to the small-to-medium sized businesses (“SMBs”) and large enterprise businesses
(“LEBs”) with complex IT environments. We offer our customers a single point of 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-added 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.
in server
Professional 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 installation services.
Storage area network (“SAN”) solutions – We help our customers implement SAN solutions using products
from Hitachi, EMC, HP, DataDomain and NetApp. SANs allow system administrators to realize the benefits
of SANs over conventional storage architecture. These benefits include cost savings from better utilization of
hardware and lower 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 of 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 expenditure requirements, high availability of resources, better desktop
management, increased security and improved disaster recovery processes.
6
• Enterprise security intrusion prevention, network access control and unified threat management—Using third-
party products from companies like Checkpoint, Juniper Networks and Cisco Systems, our services are
designed to ensure data security and integrity through the establishment of virtual private networks, firewalls
and other technologies.
•
IT security compliance services—We provide services for IT security compliance with personal privacy laws
such as HIPAA 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 using 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 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 geographic areas of our sales offices and across the U.S.
We provide innovative IT solutions, including a myriad of infrastructure products with customized integration consulting
services and managed services to meet the unique requirements of our customers. We market the products we sell and
services we provide through various sales offices in the U.S., Germany and the U.K. using our direct sales force (for a
detailed list of our locations, see Item 2 of this Form 10-K).
Competition
The primary competition in the Service and System Integration segment are other VARs, ranging from small
companies that number in the thousands, to large enterprises such as CDW, PC Connection, Insight, MoreDirect,
Dimension Data, Bechtle AG, Presidio and Computacenter. 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, Hitachi and
others. In the network management, security and storage systems integration services business, our competitors are
extensive and vary to a certain degree in each of the geographical markets, but they include such competitors as
HP/EDS, IBM and Cap Gemini.
Nearly all of our product offerings are available through other channels. Favorable competitive factors for the
Service and System Integration segment include procurement capability, product diversity allowing for delivery of
complete and custom solutions to our customers, strength of key partner relationships with the major IT OEMs, ability to
supply unique and/or specialized needs of the SMB and LEB markets, strong knowledge of the IT products that we sell,
ability to provide managed services through our NOC and the consulting integration services required to design and
install the custom solutions that fit our customers’ IT needs. Unfavorable competitive factors include low name
recognition, limited geographic coverage and pricing.
Backlog
The backlog of customer orders and contracts for the Service and System Integration segment was approximately
$6.7 million at September 30, 2011, as compared to $6.3 million at September 30, 2010. Our backlog can fluctuate
greatly. These fluctuations can be due to the timing of receiving large orders for third- party products and/or IT services.
It is expected that all of the customer orders in backlog will ship and/or be provided within the next twelve months.
Significant Customers
See Note 13 for detailed information regarding customers which comprised 10% or more of consolidated revenues
for the years ended September 30, 2011 and 2010.
7
Employees
On September 30, 2011, we had approximately 138 full time equivalent employees worldwide for our
consolidated operations. None of our employees are represented by a labor union and we had no work stoppages. We
consider relations with our employees to be good.
Financial Information about Geographic Areas
Information regarding our sales by geographic area and percentage of sales based on the location to which the
products are shipped or services are rendered are in Note 13 of our consolidated financial statements.
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 the 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 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
services 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.
We Depend on Defense Business for a Significant Amount of our Revenue and the Loss or Decline of Existing or
Future Defense Business Could Adversely Affect our Financial Results
Sales of our products and services to the defense market accounted for approximately 10% and 9% of our
consolidated revenues and virtually all of the Systems segment sales for the fiscal years ended September 30, 2011 and
2010, respectively. Reductions in government spending on programs that incorporate our products could have a material
adverse effect on our business, financial condition and results of operations. Moreover, our subcontracts are subject to
special risks, such as:
•
•
•
•
•
delays in funding;
ability of the government agency to unilaterally terminate the prime contract;
reduction or modification in the event of changes in government policies or as the result of budgetary
constraints or political changes;
increased or unexpected costs under fixed price contracts; and
other factors that are not under our control.
In addition, consolidation among defense industry contractors has resulted in fewer contractors with increased
bargaining power relative to our bargaining power. No assurance can be given that such increased bargaining power will
not adversely affect our business, financial condition or results of operations in the future.
Changes in government administration, as well as changes in the geo-political environment such as the current
“War on Terrorism,” can have significant impact on defense spending priorities and the efficient handling of routine
contractual matters. Such changes could have a negative impact on our business, financial condition, or results of
operations in the future.
8
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 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 superior 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 entry into markets historically targeted by us may have a material adverse effect on
our business, financial condition and results of operations.
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or
internal controls over financial reporting.
The Company reported in this Form 10-K that we had a material weakness in our internal controls over financial
reporting for the period ended September 30, 2011, which resulted in our having to restate prior period financial
statements. (See “Explanatory Note” on page 3 and note 16 in the Notes to Financial Statements.)
Effective internal control over financial reporting and 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 financial
statements, as well as regarding the timely reporting of material information. If we cannot maintain effective internal
control or disclosure controls and procedures, or provide reliable financial statements or SEC reports or prevent fraud,
investors may lose confidence in our reported financial information, our common stock could be subject to delisting on
the stock exchange where it is traded, our operating results and the trading price of our common stock could suffer and
we might become subject to litigation.
While our management will continue to review the effectiveness of our internal control over financial reporting
and disclosure controls and procedures, there is no assurance that our disclosure controls and procedures or our internal
control over financial reporting will be effective in accomplishing all control objectives, including the prevention and
detection of fraud, all of the time.
Slowdown in the Economy Can Affect our Revenue and Profitability
The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital
investment and this may cause further reduction of demand for our products and services. These reductions have been
particularly severe in the electronics and technology industries.
Our Operating Results May Fluctuate Significantly
Our operating results have fluctuated widely on a quarterly and annual basis during the last several years and we
expect to experience significant fluctuations in future operating results. Many factors, some of which are beyond our
control, have contributed to these fluctuations in the past and may continue to do so. Such factors include:
•
•
•
sales in relatively large dollar amounts to a relatively small number of customers;
competitive pricing programs and volume discounts;
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;
9
•
•
•
•
•
•
•
•
timing of significant 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 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 meaningful 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.
We Rely on Single Sources for Supply of Certain Components and our Business may be Seriously Harmed if our
Supply of any of These Components or Other Components is 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 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. If 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 financial 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 performance issues, materials
shortages, excess demand, reduction in capacity and other factors that may disrupt the flow of goods to us or our
customers, which thereby may adversely affect our business and customer relationships.
We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers
will continue to meet our requirements. If our supply arrangements are interrupted, there can be no assurance that we
would be able to find another supplier on a timely or satisfactory basis. Any shortage or interruption in the supply of any
of the components used in our products, or the inability to procure these components from alternate sources on
acceptable terms, could have a material adverse effect on our business, financial condition and results of operations.
There can be no assurance that severe shortages of components will not occur in the future. Such shortages could
increase the cost or delay the shipment of our products, which could have a material adverse effect on our business,
financial condition and results of operations. Significant increases in the prices of these components would also
materially adversely affect our financial performance since we may not be able to adjust product pricing to reflect the
increase in component costs. We could incur set-up costs and delays in manufacturing should it become necessary to
replace any key vendors due to work stoppages, shipping delays, financial difficulties or other factors and, under certain
circumstances, these costs and delays could have a material adverse effect on our business, financial condition and
results of operations.
10
We Depend on Key Personnel and Skilled Employees and Face Competition in Hiring and Retaining Qualified
Employees
We are largely dependent upon the skills and efforts of our senior management, managerial, sales and technical
employees. None of our senior management personnel or other key employees are subject to any employment contracts
except Alex Lupinetti, our Chief Executive Officer, and Victor Dellovo, President of Modcomp. The loss of services of
any of our executives or other key personnel could have a material adverse effect on our business, financial condition
and results of operations. Our future success will depend to a significant extent on our ability to attract, train, motivate
and retain highly skilled technical professionals. Our ability to maintain and renew existing engagements and obtain new
business depends, in large part, on our ability to hire and retain technical personnel with the skills that keep pace with
continuing changes in industry standards and technologies. The inability to hire additional qualified personnel could
impair our ability to satisfy our growing client base, requiring an increase in the level of responsibility for both existing
and new personnel. There can be no assurance that we will be successful in retaining current or future employees.
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 Germany. Foreign-based revenue is determined based on the location to which the product is shipped or services are
rendered and represented 41% and 30% of our total revenue for the fiscal years ended September 30, 2011 and 2010,
respectively. If revenues generated by foreign activities are not adequate to offset the expense of establishing and
maintaining these foreign subsidiaries and activities, our business, financial condition and results of operations could be
materially adversely affected. In addition, there are certain risks inherent in transacting business internationally, such as
changes in applicable laws and regulatory 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 potential 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 more 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.
To be Successful, We Must Respond to the Rapid Changes in Technology
Our future success will depend in part on our ability to enhance our current products and to develop new products
on a timely and cost-effective basis in order to respond to technological developments and changing customer needs. The
defense market, in particular, demands constant technological improvements as a means of gaining military advantage.
Military planners historically have funded significantly more design projects than actual deployments of new equipment
and those systems that are deployed tend to contain the components of the subcontractors selected to participate in the
design process. In order to participate in the design of new defense electronics systems, 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 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 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 significant
delay in product developments or introductions, this could have a material adverse effect on our business, financial
condition and results of operations, including the risk of inventory obsolescence. Because of the complexity of our
products, we have experienced delays from time to time in completing products on a timely basis. If we are unable to
design, develop or introduce competitive new products on a timely basis, our future operating results would be adversely
affected, particularly in our Systems segment. There can be no assurance that we will be successful in developing new
products or enhancing our existing products on a timely or cost-effective basis, or that such new products or product
enhancements will achieve market acceptance.
11
We Need to Continue to Expend Resources on Research and Development Efforts to Meet the Needs of our
Customers
The industry in which our Systems segment competes is characterized by the need for continued investment in
research and development. If we fail to invest sufficiently in research and development, our products could become less
attractive to potential customers and our business and financial condition could be materially adversely affected. As a
result of our need to maintain or increase our spending levels in this area and the difficulty in reducing costs associated
with research and development, our operating results could be materially harmed if our revenues fall below expectations.
In addition, as a result of CSPI’s commitment to invest in research and development, spending as a percent of revenues
may fluctuate in the future.
We May be Unable to Successfully Integrate Acquisitions
In order to achieve strategic objectives to maintain and grow our market position, we may have a need to acquire
or make investments in complementary companies, products or technologies. Acquisitions may pose risks to our
operations, including:
•
•
•
•
•
•
•
•
•
•
•
•
problems and increased costs in connection with the integration of the personnel, operations, technologies or
products of the acquired companies;
unanticipated costs;
diversion of management’s attention from our core business;
adverse effects on business relationships with suppliers and customers and those of the acquired company;
acquired assets becoming impaired as a result of technical advancements or worse-than-expected performance
by the acquired company;
entering markets in which we have no, or limited, prior experience; and
potential loss of key employees, particularly those of the acquired organization.
In addition, in connection with any acquisitions or investments we could:
issue stock that would dilute existing shareholders’ percentage of ownership;
incur debt and assume liabilities;
obtain financing on unfavorable terms;
incur amortization expenses related to acquired intangible assets or incur large and immediate write-offs;
incur large expenditures related to office closures of the acquired companies, including costs relating to
termination of employees and leasehold improvement charges relating to vacating the acquired companies’
premises; and
•
reduce the cash that would otherwise be available to fund operations or to use for other purposes.
The failure to successfully integrate any acquisition or for acquisitions to yield expected results may negatively
impact our financial condition and operating results. Any resulting impairment of goodwill would have a negative effect
on results of operations.
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 significantly:
12
•
•
•
•
•
•
•
•
•
•
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 ventures 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 companies in particular,
have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. These broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating performance. In the past, following periods of
volatility in the market price of a company’s securities, securities class action litigation has often been instituted against
such companies.
Slowdown in the Economy Can Affect our Revenue and Profitability
The uncertainty regarding the growth rate of the worldwide economies has caused companies to reduce capital
investment and this may cause further reduction of demand for our products and services. These reductions have been
particularly severe in the electronics and technology industries.
Factors that may Affect Future Performance
This document contains forward-looking statements based on current expectations that involve a number of risks
and uncertainties. Further, any forward-looking statement speaks only as of the date on which such statement is made
and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking
statements should not be relied upon as a prediction of actual future financial condition or results. In response to
competitive pressures or new product introductions, we may take certain pricing 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 operations are not necessarily an indicator of future performance.
Markets for our products and services are characterized by rapidly changing technology, new product
introductions and short product life cycles. These changes can adversely affect our business and operating results. Our
success will depend upon our ability to enhance our existing products and services and to develop and introduce, on a
timely and cost effective basis, new products that keep pace with technological developments and address increasing
customer requirements. The inability to meet these demands could adversely affect our business and operating results.
13
Item 2. Properties
Listed below are our principal facilities as of September 30, 2011. Management considers all facilities listed
below to be suitable for the purpose(s) for which they are used, including manufacturing, research and development,
sales, marketing, service and administration.
Location
Principal Use
Systems Segment Properties:
CSP Inc.
43 Manning Road
Billerica, MA
Corporate Headquarters
Manufacturing, Sales,
Marketing and
Administration
Owned
or
Leased
Approximate
Floor Area
Leased 11,450 S.F.
Service and Systems Integration Segment Properties:
Modcomp, Inc.
1500 S. Powerline Road
Deerfield Beach, FL
Modcomp, Inc.
9155 South Dadeland Blvd, Suite 1112
Miami, FL
Division Headquarters
Sales, Marketing and
Administration
Leased 15,482 S.F.
Sales, Marketing and Service
Leased 1,356 S.F.
Modular Computer Systems GmbH
Sales, Marketing, Service
Leased 12,443 S.F.
Oskar-Jager-Strasse 50
D-50825 Koln
Germany
Modcomp, Ltd.
12a Oaklands Business Park, Fishponds Road
Wokingham Berkshire
United Kingdom
Modcomp AG
Gartenstr. 23-27
D-61352 Bad Homburg
Germany
Item 3. Legal Proceedings
and Administration
Sales, Marketing and
Administration
Leased 2,490 S.F.
Sales, Marketing and Service
Leased 323 S.F.
On September 4, 2011, the Company’s 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 “Summons”). 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 alleges that Modcomp US received approximately $1.1 million in preferential transfers and
approximately $0.2 million in otherwise avoidable transfers from the Debtor, in connection with the Debtor’s bankruptcy
petition.
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. has a strong defense against this complaint in that these payments were made to
Modcomp US from the Debtor in the ordinary course of business; therefore they were not in fact preferential or
otherwise avoidable transfers. We are in the process of vigorously defending our position with respect to this matter. In
accordance with this assessment however, despite our strong defense, we have estimated a loss contingency in
connection with the Summons in the amount of approximately $0.1 million.
We are currently not a party to any other material legal proceedings.
14
Item 4. [Reserved]
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market information. Our common stock is traded on the Nasdaq Global Market under the symbol CSPI. The
following table provides the high and low sales prices of our common stock as reported on the Nasdaq Global Market for
the periods indicated.
Fiscal Year:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2011
2010
High
Low
High
Low
$
5.25 $
4.60
4.95
4.52
3.61 $
3.69
3.94
3.26
4.06 $
3.98
4.70
4.65
3.30
3.20
3.32
3.85
Stockholders. We had approximately 80 holders of record of our common stock as of January 9, 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 (including shares held in street name) at that date was
approximately 1,300.
Dividends. Through our fiscal year ended September 30, 2011, we had never paid any cash dividends on our
common stock. We may from time to time consider the payment of a cash dividend. On January 12, 2012, our Board of
Directors declared a cash dividend of $.10 per share payable to stockholders of record as of January 27, 2012, the record
date. Payment of this dividend should not be considered to mean that dividends will be paid in the future.
Share Repurchase Plans. The following table provides information with respect to shares of our common stock
that we repurchased during the year ended September 30, 2011:
Total Number
of
Shares
Purchased
Average Price
Paid per
Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans (1)
Maximum
number of
Shares that
May
Yet Be
Purchased
Under
the Plans
7,940 $
9,500
28,221
44,393
3,543
3,000
—
4,145
8,692
1,251
12,315
42,731
165,731 $
4.53
4.52
3.98
3.98
4.01
4.20
—
4.47
4.36
4.35
3.64
3.44
3.91
7,940
9,500
28,221
44,393
3,543
3,000
—
4,145
8,692
1,251
12,315
42,731
165,731
228,825
Month Ended
October 31, 2010
November 30, 2010
December 31, 2010
January 31, 2011
February 28, 2011
March 31, 2011
April 30, 2011
May 31, 2011
June 30, 2011
July 31, 2011
August 31, 2011
September 30, 2011
Total
(1) All shares were purchased under publicly announced plans. For additional information about these publicly
announced plans please refer to Note 12 of our financial statements.
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion below contains certain forward-looking statements related to statements concerning future
revenues and future business plans. Actual results may vary from those contained in such forward-looking statements.
Overview of Fiscal 2011 Results of Operations
CSP Inc. operates in two segments:
•
•
Systems—the Systems segment 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 System 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 decreased by approximately $16.5 million, or 18%, to $73.6 million for the year ended
September 30, 2011 versus $90.1 million for the year ended September 30, 2010.
• Operating income decreased by approximately $0.3 million, to operating income of approximately $0.8
million for the year ended September 30, 2011 versus operating income of approximately $1.1 million for the
year ended September 30, 2010.
• Net income was approximately $0.4 million, for the year ended September 30, 2011 versus net income of
approximately $0.9 million for the year ended September 30, 2010, for an unfavorable variance of $0.5
million.
• Net cash provided by operating activities was approximately $1.5 million for the year ended September 30,
2011 compared to net cash used by operating activities of $1.9 million for the year ended September 30, 2010.
The decrease in revenues of $16.5 million was due in a large part to decreased revenues in our Service and System
Integration segment where revenues were down by approximately $16.0 million versus the year ended September 30,
2010. Revenues in fiscal 2011 in the Systems segment were $7.8 million compared with $8.3 million for fiscal 2010, for
a decrease of approximately $0.5 million versus the prior year.
It should be noted that despite the significant decrease in total revenue of $16.5 million, operating income and net
income decreased by significantly lesser amounts, as referred to above. This is because the overall gross profit margin
for the fiscal year ended September 30, 2011 was 22% compared to 19% for the fiscal year ended September 30,
2010. The gross margin in the Service and System Integration segment increased from 14% for the fiscal year ended
September 30, 2010 to 17% for the fiscal year ended September 30, 2011. This increase in gross profit margin for the
Service and System Integration segment was due to smaller orders with better margins (i.e., higher relative selling prices
per unit), on the product sales side. In the prior year, a higher percentage of our sales were to higher-volume-lower-
margin customers, particularly in the US division. Secondly, we had better utilization of service resources in the fiscal
year ended September 30, 2011 versus the prior year, which resulted in lower service cost of sales as a percent of
revenue in fiscal 2011. In the Service and System Integration segment product gross margin improved by two
percentage points, and services gross margin improved by five percentage points, for an overall increase in the gross
profit margin for the segment of three percentage points. The gross margin in the Systems segment decreased to 65%
from 67% as described above. This decrease in Systems segment gross margin had a lesser impact on the overall gross
margin, because Systems segment revenues are a far lower percentage of total revenues versus the Service and System
Integration segment.
Also, in fiscal 2011, we were engaged in research and development efforts in the Systems segment making
significant progress with on-going development of our newest product lines, the Fast Cluster Series 3000 and 4000
SERIES product lines, which are designed to provide what we believe is the most advanced interconnect technology
16
available today. The 3000 and 4000 SERIES products are expected to provide our customers with another state-of-the-
art, fully ruggedized open source system, which will be essential to our future growth opportunities.
Revenues in the Service and System Integration segment for fiscal 2011 were $65.8 million versus fiscal 2010
revenues of $81.8 million, for a decrease of $16.0 million year over year. The U.S. operations of this segment
experienced a decline in sales for fiscal 2011 versus fiscal 2010 of $17.6 million, for a 31% decrease. This decrease was
due in large part to a decrease in sales to our largest customer of approximately $11.5 million and a decrease in sales to
our second largest customer of approximately $3.3 million. These customers are both IT managed service providers,
which did not require the level of expansion of capacity as in prior years due to lost customers and a general leveling off
of the size of their infrastructure. Decreases in sales to other large customers accounted for the remainder of the
decrease in sales in the US division of this segment. Offsetting the decline in the U.S. operation’s sales, revenues in the
German division of the segment for fiscal year 2011 versus fiscal 2010 increased by approximately $1.6 million, or 7%.
The increase was due primarily to favorable foreign exchange fluctuation of the Euro versus the US doller, which
accounted for approximately $0.8 million, and an increase in sales volume primarily to a large telecom customer of
approximately $0.8 million.
Based on the current economic environment, we plan to manage the Service and System Integration segment
assuming relatively weak demand in fiscal 2012. We plan to focus our attention and resources on higher-margin business
and away from low margin business as we move forward. While this may put pressure on sales growth in fiscal 2012, we
believe this strategy will accelerate profitable growth for the long term.
The following table sets forth certain information which is based on data from our Consolidated Statements of
Operations:
Percentage of sales
Fiscal year ended September
2011
2010
(Dollar amounts in thousands)
100.0%
100.0% $
77.8%
2.4%
18.7%
98.9%
1.1%
(0.1)%
1.0%
0.5%
0.5%
80.9%
2.2%
15.6%
98.7%
1.3%
—%
1.3%
0.3%
1.0% $
Period to
Period
Dollar
increase
(decrease)
2011
compared
to 2010
(16,467)
(15,645)
(168)
(321)
(16,134)
(333)
(101)
(434)
111
(545)
Sales
Costs and expenses:
Cost of sales
Engineering and development
Selling, general and administrative
Total costs and expenses
Operating income
Other income (expense)
Income (loss) before income taxes
Income tax expense
Net income
Results of Operations—2011 Compared to 2010
For the fiscal year ended September 30, 2011, sales decreased to $73.6 million, compared to $90.1 million for
fiscal year ended September 30, 2010. Net income for the year ended September 30, 2011 was $0.4 million, or $0.10 per
diluted share compared with net income of $0.9 million, or $0.25 per diluted share for fiscal year ended September 30,
2010.
17
Revenue
The following table details the Company’s sales by geographical region for fiscal years September 30, 2011 and
2010:
Americas
Europe
Asia Pacific
Totals
September
30,
2011
For the Year Ended
September
30,
2010
%
(Dollar amounts in thousands)
63,750
59% $
25,256
36%
1,106
5%
90,112
100% $
43,528
26,273
3,844
73,645
$
$
%
%
$ Increase/
Increase
(Decrease) (Decrease)
71% $
28%
1%
100% $
(20,222)
1,017
2,738
(16,467)
(32)%
4%
248%
(18)%
The decrease in Americas revenue for the year ended September 30, 2011 versus the year ended September 30,
2010 was primarily the result of the changes in revenues described below in the Systems segment relating to product and
services sales to US defense programs, which accounted for approximately $3.2 million of the decrease and the
decreases in sales to customers in the Americas from the U.S. division of our Service and System Integration segment,
which accounted for the remaining $17.0 million of the decrease.
The increase in sales in Europe was primarily the result of the higher sales described above from the German
division of the Service and System Integration segment which accounted for approximately $1.8 million in increased
sales to Europe, offset by decreases in sales to European customers of approximately $0.5 million and $0.1 million from
the US and UK divisions of the Service and System Integration segment, respectively. The increase in Asia sales was the
result of the increase in sales to our existing customer which supplies a large Japanese defense program.
The following table details the Company’s sales for products and services by operating segment for the fiscal
years ended September 30, 2011 and 2010:
2011
Product
Services
Total
% of Total
2010
Product
Services
Total
% of Total
Service and
System
Integration
Systems
Total
% of
Total
(Dollar amounts in thousands)
$
$
$
$
5,624 $
2,198
7,822 $
49,110 $
16,713
65,823 $
54,734
18,911
73,645
74%
26%
100%
11%
89%
100%
4,888 $
3,423
8,311 $
64,746 $
17,055
81,801 $
69,634
20,478
90,112
77%
23%
100%
9%
91%
100%
(Dollar amounts in thousands)
Increase (Decrease)
Product
Services
Total
$
$
736
(1,225)
(489)
$
$
(15,636)
(342)
(15,978)
$
$
(14,900)
(1,567)
(16,467)
(21 )%
(8 )%
(18 )%
% Decrease
(6) %
(20)%
(18)%
18
As shown above, total revenues decreased by approximately $16.5 million, or 18%, for the year ended September
30, 2011 compared to the same period of fiscal year 2010. Revenue in the Systems segment decreased for the current
year versus the prior year by approximately $0.5 million, while revenues in the Service and System Integration segment
decreased by approximately $16.0 million, resulting in the overall decrease of approximately $16.5 million.
Product revenues decreased by approximately $14.9 million, or 21% for the year ended September 30, 2011
compared to the year ended September 30, 2010. This change in product revenues was made up of a decrease in product
revenues in the Service and System Integration segment of approximately $15.6 million offset by an increase in the
Systems segment of approximately $0.7 million versus the prior year.
The decrease in the Service and System Integration segment product sales of approximately $15.6 million was due
primarily to a decrease in product sales in the U.S. division of the segment of approximately $17.5 million, offset by an
increase in this segment’s German division of approximately $1.7 million and an increase in the UK division of
approximately $0.2 million.
In the US division, product sales to our five largest customers of fiscal 2010 decreased by a total of
approximately $19.1 million, including a decrease in sales to our largest customer of approximately $12.0 million and a
decrease in product sales to our second largest customer of approximately $3.3 million. These customers are both IT
managed service providers, which did not require the level of expansion of capacity as in prior years due to lost
customers and a general leveling off of the size of their infrastructure. Aggregate product sales to these five largest
customers in fiscal year 2010 were approximately $34.4 million or 64% of total product revenues for the US division
versus $15.3 million in fiscal year 2011, or 42% of total product revenues for the US division. In Germany, sales
volume was up $1.3 million in constant dollars versus the prior year. This constant dollar increase in sales was due
primarily to an increase in sales to one of our largest systems integration customers. The remainder of the increases in
sales was due to the favorable impact of currency fluctuation of approximately $0.4 million affecting a weaker US dollar
versus the Euro for the year ended September 30, 2011 versus 2010. In the UK, product revenue increased by
approximately $0.2 million as a result of the commencement of a hardware reseller business in this location. Prior to
fiscal year 2011, the UK location was focused on their custom application development business. The hardware reseller
business line was subsequently added to the offerings of the UK location.
The increase in product revenues in the Systems segment of approximately $0.7 million was due to an increase of
approximately $2.6 million in product sales in the current year versus the prior year, to an existing customer that supplies
equipment to the Japanese defense market. This increase in shipments included a $1.3 million order for our 3000 Series
product line. In addition we realized increases in product sales to two other major customers that supply US defense
programs that totaled approximately $1.5 million. Offsetting these increases, sales to another large U.S. defense
department customer decreased due to having shipped a large order in the year ended September 30, 2010, for
approximately $3.6 million, consisting of two major systems to this customer, which was a follow on order for a major
US defense program, that we began supplying in fiscal 2007. No sales of this nature were made in the year ended
September 30, 2011.
As shown in the table above, service revenues decreased by approximately $1.6 million, or 8% for the year ended
September 30, 2011 compared to fiscal 2010. Service revenue in the Systems segment decreased by approximately $1.2
million, while service revenue in the Service and System Integration segment decreased by approximately $0.3 million.
The $1.2 million decrease in Systems segment service revenue was the result of a decrease in royalty revenue
from a large US defense program supplier which was approximately $3.0 million for the year ended September 30, 2010,
versus approximately $1.6 million for the year ended September 30, 2011, for a total decrease of approximately $1.4
million. Offsetting this decrease, maintenance and repair revenue in the Systems segment increased by approximately
$0.2 million when comparing fiscal year 2011 to fiscal year 2010.
Service revenue in the Service and System Integration segment service overall was largely consistent year over
year, only decreasing by approximately $0.3 million.
19
Cost of Sales, Gross Profit and Gross Margins
The following table details our cost of sales by operating segment for fiscal years ended September 30, 2011 and
2010:
Service and
system
integration
(Dollar amounts in thousands)
Total
Systems
2011
Cost of Sales:
Product
Services
Total
% of Total
% of sales
Gross Profit:
Product
Services
Total
% of Total
Gross Margins:
Product
Services
Total
2010
Cost of Sales:
Product
Services
Total
% of Total
% of sales
Gross Profit:
Product
Services
Total
% of Total
Gross Margins:
Product
Services
Total
Increase (Decrease)
Cost of Sales:
Product
Services
Total
% Decrease
% of Sales
Gross Profit:
Product
Services
Total
% decrease
Change in Gross Margin
percentage:
Product
Services
Total
$
$
$
$
$
$
42,419 $
12,136
54,555
95%
83%
6,691 $
4,577
11,268
69%
14%
27%
17%
57,012 $
13,154
70,166
96%
86%
7,735 $
3,900
11,635
68%
12%
23%
14%
44,810
12,466
57,276
100%
78%
9,924
6,445
16,369
100%
18%
34%
22%
59,461
13,460
72,921
100%
81%
10,174
7,017
17,191
100%
15%
34%
19%
$
(14,593)
(1,018)
(15,611)
(22)%
(3)%
$
(1,044)
677
(367)
(3)%
2%
4%
3%
(14,651)
(994)
(15,645)
(21)%
(3)%
(250)
(572)
(822)
(5)%
3%
―%
3%
2,391 $
330
2,721
5%
35%
3,233 $
1,868
5,101
31%
57%
85%
65%
2,449 $
306
2,755
4%
33%
2,439 $
3,117
5,556
32%
50%
91%
67%
$
(58)
24
(34)
(1)%
2%
$
794
(1,249)
(455)
(8)%
7%
(6)%
(2)%
20
Total cost of sales decreased by approximately $15.6 million when comparing the fiscal year ended September 30,
2011 versus the fiscal year ended September 30, 2010. This decrease in cost of sales of 21% overall, compares with a
decrease in sales of 18%.
Cost of sales in the Systems segment was essentially unchanged, having decreased by less than $0.1 million, when
comparing the current fiscal year with the prior year fiscal year, while sales in the Systems segment decreased by
approximately $0.5 million, or 6%. This occurred because more of fiscal year 2010 revenues consisted of royalties
versus fiscal year 2011, and because royalty revenues carries no cost of sales, cost of sales did not decrease in proportion
to the decrease in sales. This is also reflected in the decrease in the gross profit and the gross profit margins as shown in
the table above.
Cost of sales in the Service and System Integration segment decreased by approximately $15.6 million, which is a
22% decrease when comparing the current fiscal year with the prior fiscal year. While this trend is relatively consistent
with the decrease in sales over the prior year, the rate of decrease of 22% in cost of sales is greater than the rate of
decrease in sales, which was 20%. The reason for this is two-fold. First, on the product sales side we experienced
smaller deal size with better margins (i.e., higher relative selling prices per unit). In the prior year, a higher percentage
of our sales were to higher-volume-lower-margin customers, particularly in the US division. Secondly, we had better
utilization of service resources in the fiscal year ended September 30, 2011 versus the prior year, which resulted in lower
cost as a percent of revenue. This is also reflected in the higher gross margin percentages for fiscal year 2011 as shown
in the table above.
The overall gross profit margin for the fiscal year ended September 30, 2011 was 22% compared to 19% for the
fiscal year ended September 30, 2010. The gross profit margin in the Systems segment decreased to 65% from 67% as
described above. The gross margin in the Service and System Integration segment increased from 14% for the fiscal
year ended September 30, 2010 to 17% for the fiscal year ended September 30, 2011. This increase in gross profit
margin for the Service and System Integration segment was also due to the reasons described in the preceding paragraph.
Engineering and Development Expenses
The following table details engineering and development expenses by operating segment for fiscal years ended
September 30, 2011 and 2010:
2011
% of
Total
2010
% of
Total
$
Decrease
%
Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems
Service and System
Integration
Total
$
1,785
100% $
1,953
100% $
(168)
(9)%
—
1,785
$
—%
100% $
—
1,953
—%
100% $
—
(168)
—%
(9)%
The decrease 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.
21
Selling, General and Administrative
The following table details selling, general and administrative (“SG&A”) expense by operating segment for fiscal
years ending September 30, 2011 and 2010:
2011
% of
Total
2010
% of
Total
$
Decrease
%
Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems
Service and System
Integration
Total
$
3,908
28% $
3,919
28% $
(11)
---%
9,867
$ 13,775
72%
100% $
10,177
14,096
72%
100% $
(310)
(321)
(3)%
(2)%
The decrease in selling, general and administrative (“SG&A”) expenses displayed above was predominantly in the
Service and System Integration segment. The decrease was due to lower commission expense of approximately $0.4
million resulting from lower gross profit and lower sales, lower salaries and fringe benefit costs of approximately $0.2
million due to reductions of sales personnel, offset by a charge for $0.1 million for a contingency loss, relating to the
bankruptcy of a former customer in the US division of the segment. In the European segments, SG&A expenses
increased by approximately $0.2 million, which was driven primarily from foreign exchange fluctuation of the stronger
Euro and British pound versus the dollar on average for the year ended September 30, 2011, versus 2010.
Other Income/Expenses
The following table details Other Income/(Expense) for fiscal years ended September 30, 2011 and 2010:
2011
% of
Total
2010
% of
Total
$ Increase
(Decrease)
%
Increase
(Decrease)
$
44
(86)
(16)
(36)
(Dollar amounts in thousands)
61
871% $
(1286)%
(90)
(14)%
(1)
529%
37
(47)% $
92%
17%
38%
(17)
4
(15)
(73)
(28)%
(4)%
15%
(197)%
$
(94)
100% $
7
100% $
(101)
(1443)%
Interest income
Interest expense
Foreign exchange loss
Other income (expense), net
Total other income
(expense), net
Total other income (expense), net, changed from other, net income of $7 thousand for fiscal year 2010, to other
net expense of approximately $0.1 million for fiscal year 2011. This change was primarily due to lower interest income
and greater losses on foreign exchange transactions for fiscal 2011 versus fiscal 2010.
Income Taxes
For the year ended September 30, 2011, the Company recorded an income tax provision of $0.3 million reflecting
an effective income tax rate of 48% compared to an income tax provision of $0.2 million for the fiscal year ended
September 30, 2010, which reflected an effective tax rate of 20%. The effective tax rate for the year ended September
30, 2010, was impacted favorably by the de-recognition of a liability of approximately $0.3 million for an unrecognized
tax benefit, which the Company had recorded pursuant to accounting principles regarding uncertain tax positions. This
de-recognition was the result of the lapsing of the statute of limitations and the completion of an audit by the Internal
Revenue Service, which did not result in any adjustments.
In assessing the realizability of deferred tax assets, we considered our taxable future earnings and the expected
timing of the reversal of temporary differences. Accordingly, we have recorded a valuation allowance which reduces the
gross deferred tax asset to an amount which we believe will more likely than not be realized. Our inability to project
future profitability beyond fiscal year 2012 in the U.S. and cumulative losses incurred in recent years in the UK represent
sufficient negative evidence to record a valuation allowance against certain deferred tax assets. We maintained a
substantial valuation allowance against our UK 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
22
net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections
would be affected and hence our assessment of realizability of our deferred tax asset may change. Our German
subsidiary has no valuation allowance recorded against its gross deferred tax assets because it has projected sufficient
future income that we believe it is more likely than not will be realized.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which increased by approximately $0.4 million
to $15.9 million as of September 30, 2011. This compares to $15.5 million as of September 30, 2010. At September 30,
2011, the Company’s cash equivalents of $3.5 million were held in money market funds.
Significant sources of cash for the fiscal year ended September 30, 2011 were net income of approximately $0.4
million, depreciation and amortization of approximately $0.5 million, a decrease in refundable income taxes of
approximately $0.5 million and a increase in accounts payable and accrued expenses of approximately $2.2 million. The
significant uses of cash during the period were an increase in accounts receivable of approximately $1.2 million, an
increase in inventories of approximately $0.9 million, the repurchase of CSPI common stock of approximately $0.6
million, the purchase of property, plant and equipment for approximately $0.3 million and a decrease in income taxes
payable of approximately $0.3 million.
As of September 30, 2011 and September 30, 2010, cash held by our foreign subsidiaries located in Germany and
the UK totaled approximately $5.6 million and $6.0 million, respectively. 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 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 capital on terms
acceptable to us, on a timely basis or at all. If we are unable to secure additional financing, we may not be able to
complete development or enhancement of products, take advantage of future opportunities, respond to competition or
continue to effectively operate our business.
Based on our current plans and business conditions, management believes that the Company’s available cash and
cash equivalents, the cash generated from operations and availability on our lines of credit will be sufficient to provide
for the Company’s working capital and capital expenditure requirements for the foreseeable future.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including
those related to uncollectible receivables, inventory valuation, goodwill and intangibles, income taxes, deferred
compensation, revenue recognition, retirement plans, restructuring costs and contingencies. We base our estimates on
historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements: revenue recognition; valuation allowances, specifically the
allowance for doubtful accounts and net deferred tax asset valuation allowance; inventory valuation; intangibles; and
pension and retirement plans.
Revenue recognition
The Company recognizes product revenue from customers at the time of transfer of title and risk of loss which is
generally at the time of shipment, provided that persuasive evidence of an arrangement exists, the price is fixed or
determinable and collectability of sales proceeds is reasonably assured. We include freight billed to our customers as
sales and the related freight costs as cost of sales. The Company reduces revenue for estimated customer returns.
23
The Company recognizes revenue from the sale of third party software licenses when persuasive evidence of an
arrangement exists, delivery of the product has occurred and the fee is fixed 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 recognized as the services are performed. If no pattern of performance is discernable, 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 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 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 provided. 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 arrangement among the various elements based on the Company’s 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 delivered products or services
only if the above revenue recognition criteria are met and the delivered element has standalone value.
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2009-13 - “Multiple-Deliverable Revenue Arrangements—a Consensus of the FASB Emerging Issues Task
Force” (“ASU 2009-13”) and ASU 2009-14 – “Certain Revenue Arrangements that Contain Software Elements.” (‘ASU
2009-14”). ASU 2009-13 amends existing revenue recognition accounting principles regarding multiple-deliverable
revenue arrangements. The consensus provides accounting principles and application guidance 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 residual method of allocating arrangement consideration. The new guidance
provides for separate revenue recognition based upon management’s 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 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 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning 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 product’s essential functionality from the scope of software
revenue recognition guidance.
The Company adopted these standards as of October 1, 2009.
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 recognition guidance, has been recognized pursuant to the newly issued guidance. This is because in some cases
we are not able to determine VSOE or third-party evidence of the service element in our arrangements. Under the new
guidance, because the requirement to determine 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 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 software 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 timing of the delivery
and performance of deliverables may vary case-by-case. We evaluate whether we can determine vendor-specific
objective evidence (“VSOE”) or third-party evidence to allocate revenue among the various elements in an arrangement.
24
When VSOE or third-party evidence cannot be determined, we use estimated selling prices to allocate 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 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 completion 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 recognized as the services are performed. If no pattern of performance is discernable, 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 containing 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 product’s essential functionality, software
revenue recognition guidance is not applied, but rather other appropriate revenue recognition guidance as described
above.
The following policies are applicable to the Company’s major categories of segment revenue transactions:
Systems Segment Revenue
Revenue in the Systems Segment consists of product and service revenue. Generally, product revenue is
recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists
principally of royalty revenue related to the licensing of certain of the Company’s proprietary system technology and
repair services. The Company recognizes royalty revenues upon notification by the customer of shipment of the systems
produced pursuant to the royalty agreement. Repair service revenue is generally based upon a fixed price and is
recognized upon completion of the repair.
From time to time we enter into multiple element arrangements in the Systems Segment. We follow the
accounting policies described above for such arrangements.
The Company’s standard sales agreements generally do not include customer acceptance provisions. However, in
certain instances when arrangements include a customer acceptance provision or there is uncertainty about customer
acceptance, revenue is deferred until the Company has evidence of customer acceptance. Customers 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 Integration Segment consists of product and service revenue.
Revenue from the sale of third-party hardware and third-party software is recognized when the revenue
recognition criteria are met. The Company’s standard sales agreements generally do not include customer acceptance
provisions. However, in certain instances when arrangements include a customer acceptance provision or there is
uncertainty about customer acceptance, revenue is deferred until the Company has evidence of customer acceptance.
Customers do not have the right of return.
Service revenue is comprised of information technology consulting 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 deferred 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.
25
We sell certain third party 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 principal in the transaction
and assume the risks and reward of ownership or if we are simply acting as an agent or broker. Under gross sales
recognition, the entire selling price is recorded in sales and our cost to the third-party service provider or vendor is
recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is
recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of
goods sold. We use the net sales recognition method for the third party service contracts that we sell when we are not the
primary obligor on the contract. We use the gross sales recognition for the third party services that we sell when we act
as principal and are the primary obligor.
Engineering and Development Expenses
Engineering and development expenses include payroll, 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 is
reached upon the release of the software and, accordingly, no internal software development costs have been capitalized.
Product Warranty Accrual
Our product sales generally include a 90-day to one-year hardware warranty. At time of product shipment, we
accrue for the estimated cost to repair or replace potentially defective products. Estimated warranty costs are based upon
prior actual warranty costs for substantially similar products.
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 differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are 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 the period
that includes the enactment date. We also reduce deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability
of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross
deferred tax assets that management believes, after considering all available positive and negative objective evidence,
historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets
will not be realized.
In addition, we are required to recognize in the consolidated financial statements, those tax positions determined
to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the
reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical
merits, no benefits of the position are recognized. This is a different standard for recognition than was previously
required. The more-likely-than-not threshold must continue to be met in each reporting period to support continued
recognition of a benefit.
In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application
of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations
in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become
payable in the future.
Inventory
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The
recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing,
competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
26
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at amounts that have been billed to customers less an allowance for doubtful
accounts. Allowances for doubtful accounts are recorded for the estimated losses resulting from the inability of our
customers to make required payments. The estimates for allowance for doubtful accounts are based on the length of time
the receivables are past due, current business environment and our historical experience. If the financial condition of our
customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be
required.
Intangible Assets
Intangible assets that are not subject to amortization are required to be tested annually, or more frequently if
events or circumstances indicate that the asset may be impaired. We did not have intangible assets with indefinite lives at
any time during the two years ended September 30, 2011. Intangible assets subject to amortization are amortized over
their estimated useful lives, generally three to ten years, and are carried at cost, less accumulated amortization. The
remaining useful lives of intangible assets are evaluated on an annual basis. Intangible assets subject to amortization are
also tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not
be recoverable. If the fair value of an intangible asset subject to amortization is determined to be less than its carrying
value, then an impairment charge is recorded to write down that asset to its fair value.
Pension and Retirement Plans
The funded status of pension and other postretirement benefit plans is recognized prospectively on the balance
sheet. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been
recognized through pension expense will be recognized in accumulated other comprehensive income, net of tax, until
they are amortized as a component of net periodic pension/postretirement benefits expense. Additionally, plan assets and
obligations are measured as of our fiscal year-end balance sheet date (September 30).
We have defined benefit and defined contribution plans in the U.K., Germany and in the U.S. In the U.K. and
Germany, the Company provides defined benefit pension plans for certain employees and former employees and defined
contribution plans for the majority of the employees. The defined benefit plans in both the U.K. and Germany are closed
to newly hired employees and have been for the two years ended September 30, 2011. In the U.S., the Company also
provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees
and former employees who are now retired. These supplementary retirement plans are also closed to newly hired
employees and have been for the two years ended September 30, 2011. These supplemental plans are funded through
whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the
future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the
death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values
as they are owned by the Company and are not assets of the defined benefit plans. In the U.S., the Company also
provides for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement
plans to certain officers. The Company also funds these supplemental plans’ obligations through whole life insurance
policies on the officers.
Pension expense is based on an actuarial computation of current future benefits using estimates for expected
return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount
rates and expected returns with our consulting actuary and investment advisor and concluded they were reasonable. A
decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are
estimated based on historical and expected increases in the future. Increases in estimated compensation increases would
result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon
rates of return on high quality fixed income investments currently available and expected to be available during the
period to maturity of the pension benefit. A decrease in the discount rate would result in greater pension expense while
an increase in the discount rate would decrease pension expense.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable
employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and
reported in the consolidated balance sheets.
27
Recent Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220) –
Presentation of Comprehensive Income (“ASU 2011-05”), which requires all non-owner changes in stockholders’ equity
to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. ASU 2011-05 is effective for fiscal years and interim periods within those years beginning after December
15, 2011.
Inflation and Changing Prices
Management does not believe that inflation and changing prices had significant impact on sales, revenues or
income (loss) during fiscal 2011 or 2010. There is no assurance that the Company’s business will not be materially and
adversely affected by inflation and changing prices in the future.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements are included herein.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2011 and 2010
Consolidated Statements of Operations for the years ended September 30, 2011 and 2010
Consolidated Statements of Shareholders’ Equity and Comprehensive income (loss) for the years ended
September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended September 30, 2011 and 2010
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures
Page
36
37
38
39
40
41
Disclosure Controls and Procedures. The Company evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2011. Our chief executive officer, our chief financial officer and
other members of our senior management team supervised and participated in this evaluation. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of September 30, 2011, the Company’s chief executive officer and chief financial officer
concluded that, as of such date, our disclosure controls and procedures were effective.
28
Management’s Report on Internal Control over Financial Reporting. The Company’s management is
responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-
15(f) under the Exchange Act, internal control over financial reporting is a process designed by or under the supervision
of a company’s principal executive and principal financial officers and effected by a company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in
the United States of America. It includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of a company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles and that receipts and expenditures of a
company are being made only in accordance with authorizations of management and the board of directors of
a company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of a company’s assets that could have a material effect on its financial statements.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of
September 30, 2011. In making its assessment of internal control, management used the criteria described in “Internal
Control—Integrated Framework” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission. As a result of its assessment, management has concluded that the Company’s internal control over
financial reporting was not effective as of September 30, 2011.
We have identified the following material weaknesses in our system of internal controls over financial
reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected in a timely basis.
We did not file our Annual Report on Form 10-K for the fiscal year 2011 by the due date in order to allow us
additional time for the reexamination of our revenue recognition under Accounting Standards Codification (ASC) 605-
45-45, Principal Agent Considerations, previously referred to as Emerging Issues Task Force No. 99-19, “Reporting
Revenue Gross as a Principal versus Net as an Agent”.
In our Current Report on Form 8-K filed with the SEC on January 6, 2012, as amended by Form 8-K/A filed
January 11, 2012, we announced that the Audit Committee of our Board of Directors, upon the recommendation of
management, had determined that our previously issued financial statements included in our Annual Report on Form 10-
K for the fiscal year ended September 30, 2010 and our Quarterly Reports on Forms 10-Q for the quarters ended
December 31, 2010, March 31, 2011 and June 30, 2011, should no longer be relied upon as a result of certain errors
affecting recognition of revenues and costs of revenues.
In this Form 10-K filing and in Forms 10-Q/A which we shall subsequently file for the first three quarters of 2011,
we restate our financial statements for the fiscal 2011 quarterly and fiscal year 2010 annual periods.
In connection with the efforts which we undertook to perform the restatement, we determined that we did not
sufficiently assess and apply certain aspects of ASC 605-45-45 Principal Agent Considerations to the particular facts and
circumstances of many of our revenue arrangements. Accordingly, we have determined that this failure to accurately
assess an accounting principal amounts to a material weakness in our controls over financial reporting. As a result of
this material weakness, we have concluded that the Company’s internal control over financial reporting was not effective
as of September 30, 2011.
Management is in the process of assessing various alternatives it may deploy to modify our existing internal
control processes and systems to remediate this material weakness. Currently, we have devised a method whereby we
are able to utilize data-mining techniques to identify the applicable transactions, and then apply the appropriate
accounting treatment to them. We have incorporated this process into our existing internal control structure to insure
that we apply the appropriate accounting for these transactions beginning in the quarter ended December 31, 2011 (the
first fiscal quarter of fiscal year 2012).
29
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s assessment of the effectiveness
of the Company’s internal control over financial reporting as of September 30, 2011 was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to rules of the SEC that call for the Company to
provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting.
During the quarter ended September 30, 2011, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
30
Item 10. Directors, Executive Officers and Corporate Governance
PART III
We incorporate the information required by this item by reference to the sections captioned “Nominees for
Election”, “Our Board of Directors”, “Our Executive Officers”, “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance” in our Schedule 14A Proxy Statement for our 2012 Annual Meeting of
Stockholders, to be filed with the SEC within 120 days after the end of our fiscal year ended September 30, 2011.
Item 11. Executive Compensation
We incorporate the information required by this item by reference to the sections captioned “Compensation of
Executive Officers” and “Compensation of Non-Employee Directors” in our Schedule 14A Proxy Statement for our
2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended
September 30, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans.
The equity compensation plans approved by our stockholders consist of the CSP, Inc. 1991 Incentive Stock
Option Plan, 1997 Incentive Stock Option Plan, 2003 Stock Incentive Plan, 2007 Stock Incentive Plan and 1997
Employee Stock Purchase Plan (the “ESPP”). The equity compensation plan not approved by our stockholders is a stock
option plan for certain employees of Modcomp. Stock options issued under this plan were granted at the fair market
value of our common stock on the date of grant, have a term of ten years and vest at the rate of 25% per year starting one
year from the date of grant. In fiscal 2010 and 2011, the Company granted certain officers including its Chief Executive
Officer and non-employee directors shares of non-vested common stock instead of stock options. The vesting periods for
the officers’, the Chief Executive Officer’s and the directors’ non-vested stock awards are four years, three years and one
year, respectively. The following table sets forth information as of September 30, 2011 regarding the total number of
securities outstanding under these stock option and stock purchase plans.
(a)
(b)
Number of securities
to be
issued upon exercise of
outstanding options,
warrants
and rights, and non-
vested shares issued
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(c)
Number of securities
remaining available
for future
issuance under equity
compensation plans
(excluding
securities reflected in
column
(a))
(1) 296,725 $
40,000 $
336,725 $
5.53
2.70
5.20
151,200
—
151,200
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
(1) Includes 91,300 non-vested shares issued.
We incorporate additional information required by this Item by reference to the section captioned “Security
Ownership of Certain Beneficial Owners and Management” in our Schedule 14A Proxy Statement for our 2012 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30,
2011.
31
Item 13. Certain Relationships and Related Transactions and Director Independence
We incorporate the information required by this item by reference to the section captioned “Corporate
Governance” in our Schedule 14A Proxy Statement for our 2012 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of our fiscal year ended September 30, 2011.
Item 14. Principal Accountant Fees and Services
We incorporate the information required by this item by reference to the section captioned “Fees for Professional
Services” and “Pre-approval Policies and Procedures” in our Schedule 14A Proxy Statement for our 2012 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended September 30,
2011.
32
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial statements filed as part of this report:
Consolidated Balance Sheets as of September 30, 2011 and 2010
Consolidated Statements of Operations for the years ended September 30, 2011 and 2010
Consolidated Statements of Shareholders’ Equity and Comprehensive income (loss) for the years ended
September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended September 30, 2011 and 2010
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All other financial statements and schedules not listed have been omitted since the required information is
included in the consolidated financial statements or the notes thereto included in Item 8, or is not applicable, material or
required.
33
Filed with
this Form
10-K
Incorporated by Reference
Form
Filing Date
Exhibit
No.
10-K December 26, 2007
3.1
10-K December 26, 2007
3.2
(3) Exhibits
Exhibit
No.
Description
3.1
3.2
10.1
10.2
Articles of Organization and amendments thereto
By-laws, as amended January 8, 1998
Form of Employee Invention and Non-Disclosure Agreement
10-K November 22, 1996
10.3
CSPI Supplemental Retirement Income Plan
10.4*
1991 Incentive Stock Option Plan
10-K December 29, 2008
10.2
10-K December 29, 2008
10.4
10.5*
Employment Agreement with Alexander R. Lupinetti dated September 12, 1996
10-K November 27, 1996
10.14
10.6*
1997 Incentive Stock Option Plan, as amended
DEF 14A December 1, 1997
A
10.7*
1997 Employee Stock Purchase Plan
10.8*
2003 Stock Incentive Plan
10.9*
2007 Stock Incentive Plan
DEF 14A December 1, 1997
B
DEF 14A December 23, 2003
B
DEF 14A March 30, 2007
B
10.10*
10.11*
10.12*
10.13*
2011 Variable Compensation (Executive Bonus) and Base Programs dated November 9,
2010
X
Form of Change of Control Agreement with Alexander R. Lupinetti dated January 11,
2008
10-K December 22, 2009
10.11
Form of Change of Control Agreement with Gary W. Levine, Walter Pastucha
and William E. Bent Jr. each dated January 11, 2008
10-K December 22, 2009
10.11
Form of Change of Control Agreement with Robert A. Stellato, Andrew Shieh, Robert
Gove, Joseph Parent, William M. Newbanks, Ronald Cook, Michael Schumacher, Peter
Haebler, Kevin Magee and Stephen Pfeil each dated January 11, 2008
10-K December 22, 2009
10.11
10.14*
Employment Agreement with Victor Dellovo dated April 11, 2003
10-K December 22, 2009
10.11
21.1
23.1
31.1
31.2
32.1
32.2
Subsidiaries
Consent of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS** XBRL Instance
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation
101.DEF** XBRL Taxonomy Extension Definition
101.LAB** XBRL Taxonomy Extension Labels
101.PRE** XBRL Taxonomy Extension Presentation
X
X
X
X
X
X
X
X
X
X
X
X
*
**
Management contract or compensatory plan.
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the
Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise is not subject to liability under these sections.
34
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CSP INC.
By: /s/ Alexander R. Lupinetti
Alexander R. Lupinetti
Chief Executive Officer, President and Chairman
Date: January 13, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Alexander R. Lupinetti
Alexander R. Lupinetti
Chief Executive Officer,
President and Chairman
January 13, 2012
/s/ Gary W. Levine
Gary W. Levine
Chief Financial Officer
January 13, 2012
(Principal Financial Officer)
/s/ Robert A. Stellato
Robert A. Stellato
Vice President of Finance
(Chief Accounting Officer)
January 13, 2012
/s/ J. David Lyons
J. David Lyons
/s/ Shelton James
C. Shelton James
/s/ Robert M. Williams
Robert M. Williams
/s/ Christopher J. Hall
Christopher J. Hall
Director
January 13, 2012
Director
January 13, 2012
Director
January 13, 2012
Director
January 13, 2012
35
CSP INC.
ANNUAL REPORT ON FORM 10-K
Item 8
Financial Statements
Years Ended September 30, 2011 and 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CSP Inc.
We have audited the accompanying consolidated balance sheets of CSP Inc. and subsidiaries as of September 30, 2011
and 2010, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss),
and cash flows for the years then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of CSP Inc. and subsidiaries as of September 30, 2011 and 2010, and the results of their operations and their
cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, the 2010 consolidated statement of operations has been
restated to correct a misstatement in the presentation of revenue and cost of sales related to certain maintenance and
support services performed by third parties.
January 13, 2012
/s/ McGladrey & Pullen, LLP
36
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $302 in 2011
$
15,874 $
15,531
September 30,
2011
September 30,
2010
and $288 in 2010
Inventories, net
Refundable income taxes
Deferred income taxes
Other current assets
Total current assets
Property, equipment and improvements, net
Other assets:
Intangibles, net
Deferred income taxes
Cash surrender value of life insurance
Other assets
Total other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Deferred revenue
Pension and retirement plans
Income taxes payable
Total current liabilities
Pension and retirement plans
Capital lease obligation
Other long term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par; authorized, 7,500 shares; issued and outstanding
3,417 and 3,520 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
13,148
6,777
231
158
1,690
37,878
833
574
663
2,918
242
4,397
43,108 $
12,103 $
2,937
709
121
15,870
9,056
—
286
25,212
34
10,880
12,885
(5,903)
17,896
43,108 $
12,190
5,862
721
124
1,523
35,951
873
687
880
2,689
299
4,555
41,379
10,049
3,078
441
380
13,948
8,928
24
—
22,900
35
11,280
12,516
(5,352)
18,479
41,379
$
$
$
See accompanying notes to consolidated financial statements.
37
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)
Sales:
Product
Services
Total sales
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating expenses:
Engineering and development
Selling, general and administrative
Total operating expenses
Operating income
Other income (expense):
Interest income
Interest expense
Foreign exchange loss
Other income (expense), net
Total other income (expense), net
Income before income tax
Income tax expense
Net income
Net income attributable to common stockholders
Net income per share-basic
Weighted average shares outstanding-basic
Net income per share-diluted
Weighted average shares outstanding-diluted
Years ended September 30,
2011
2010
Restated (See
note 16)
$
54,734 $
18,911
73,645
44,810
12,466
57,276
16,369
1,785
13,775
15,560
809
44
(86)
(16)
(36)
(94)
715
346
369 $
363 $
0.11 $
3,439
0.10 $
3,482
$
$
$
$
69,634
20,478
90,112
59,461
13,460
72,921
17,191
1,953
14,096
16,049
1,142
61
(90)
(1)
37
7
1,149
235
914
905
0.26
3,538
0.25
3,567
See accompanying notes to consolidated financial statements.
38
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years ended September 30, 2011 and 2010
(Amounts in thousands)
Balance September 30, 2009
Comprehensive loss:
Net income
Other comprehensive loss:
Effect of foreign currency
translation
Increase in minimum
pension liability
Total
comprehensive loss
Stock-based compensation
Issuance of shares under
employee stock purchase
plan
Restricted stock shares issued
Purchase of common stock
Balance September 30, 2010
Comprehensive loss:
Net income
Other comprehensive loss:
Effect of foreign currency
translation
Increase in minimum
pension liability
Total
comprehensive loss
Stock-based compensation
Issuance of shares under
employee stock purchase
plan
Restricted stock shares issued
Purchase of common stock
Balance September 30, 2011
Shares
Amount
Additional
paid-in
Capital
Retained
Earnings
Accumulated
other
comprehensive
loss
Total
Shareholders’
Equity
Comprehensive
loss
3,542 $
36 $
11,325 $
11,602 $
(4,268) $
18,695
—
—
—
914
—
914 $
914
—
—
—
—
—
—
—
—
(282)
(282)
(802)
(802)
(282)
(802)
—
—
154
—
—
154
$
(170)
42
31
(95 )
3,520 $
—
—
—
—
—
(1)
35 $
—
—
—
114
69
(382)
11,280 $
—
—
—
12,516 $
—
—
—
(5,352) $
114
69
(383)
18,479
—
369
—
369 $
369
—
—
—
—
(95)
(95)
(456)
(456)
(95)
(456)
$
(182)
—
—
68
—
—
68
25
37
(165 )
3,417 $
—
1
(2)
34 $
75
100
(643)
10,880 $
—
—
—
12,885 $
—
—
—
(5,903) $
75
101
(645)
17,896
See accompanying notes to consolidated financial statements.
39
CSP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
Years ended September 30,
2011
2010
$
369 $
914
activities:
Depreciation and amortization
Amortization of intangibles
Loss on disposal of property, net
Foreign exchange loss
Non-cash changes in accounts receivable
Deferred income taxes
Increase in cash surrender value of life insurance
Stock based compensation expense
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
Decrease (increase) in inventories
Decrease (increase) in refundable income taxes
Decrease (increase) in other current assets
Decrease (increase) in other assets
Increase (decrease) in accounts payable and accrued expenses
Increase (decrease) in deferred revenue
Increase (decrease) in pension and retirement plans
Increase (decrease) in income taxes payable
Increase (decrease) in other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of investments
Sale of investments
Life insurance premiums paid
Purchases of property, equipment and improvements
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of shares under employee stock purchase plan
Purchase of common stock
Capital lease obligations
Net cash used in financing activities
Effects of exchange rate on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary cash flow information:
Cash paid for income taxes
Cash paid for interest
370
113
4
16
16
179
(86)
169
(1,150)
(938)
497
(189)
56
2,199
(103)
(7)
(258)
286
1,543
—
—
(143)
(339)
(482)
74
(645)
(25)
(596)
(122)
343
15,531
15,874 $
(220) $
(85) $
399
113
12
1
(8)
(360)
(104)
223
(4,914)
58
405
235
(45)
(183)
1,108
230
350
(365)
(1,931)
(1,100)
1,100
(124)
(483)
(607)
114
(383)
—
(269)
(566)
(3,373)
18,904
15,531
(535)
(89)
$
$
$
See accompanying notes to consolidated financial statements.
40
CSP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2011 and 2010
Organization and Business
CSP Inc. (“CSPI” or “the Company” or “we” or “our”) was founded in 1968 and is based in Billerica,
Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSPI
and its subsidiaries develop and market IT integration solutions and high-performance cluster computer systems. The
Company operates in two segments, its Systems segment and its Service and System Integration segment.
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Foreign Currency Translation
The U.S. Dollar is the reporting currency for all periods presented. The financial information for entities outside
the United States is measured using the local currency as the functional currency. Assets and liabilities of the Company’s
foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at average rates in effect during the period. The resulting translation adjustment is reflected as
accumulated other comprehensive income (loss), a separate component of shareholders’ equity on the consolidated
balance sheets. The translation adjustment for intercompany foreign currency loans that are of a long-term-investment
nature is also reflected as accumulated other comprehensive income (loss). Currency transaction gains and losses are
recorded as other income (expense) in the statements of operations.
Cash Equivalents
For purposes of the consolidated statement of cash flows, highly liquid investments with original maturities of
three months or less at the time of acquisition are considered cash equivalents.
Fair Value Measurements
We follow current accounting standards for fair value measurements, which define fair value as “the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date” and establish a fair value hierarchy that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
There are three levels of inputs that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1
that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted
prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or
corroborated by, observable market data.
41
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are significant to the measurement of the fair value of the assets or liabilities.
Investments
The Company classifies its investments at the time of purchase as either held-to-maturity or available-for-sale.
Held-to-maturity securities are those investments that the Company has the ability and intent to hold until maturity.
Held-to-maturity securities are recorded at cost, adjusted for the amortization of premiums and discounts, which
approximates market value at the purchase date. Available-for-sale securities are recorded at fair value. Unrealized gains
and losses net of the related tax effect, if any, on available-for-sale securities is reported in accumulated other
comprehensive income (loss), a component of shareholders’ equity, until realized. The fair value of available-for-sale
investments are measured based on quoted market prices as of the end of the reporting period (ie., Level 1 inputs.)
Interest income is accrued as earned. Dividend income is recognized as income on the date the stock trades “ex-
dividend.” The cost of marketable securities sold is determined by the specific identification method and realized gains
or losses are reflected in income.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including intangible assets subject to amortization, for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Management assesses the recoverability of the long-lived assets (other than goodwill) by comparing the estimated
undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts.
The amount of impairment, if any, is calculated based on the excess of the carrying amount over the fair value of those
assets.
Intangible Assets
Intangible assets that are not subject to amortization are also required to be tested annually, or more frequently if
events or circumstances indicate that the asset may be impaired. We did not have intangible assets with indefinite lives
other than goodwill at any time during the two years ended September 30, 2011. Intangible assets subject to amortization
are amortized over their estimated useful lives, generally three to ten years, and are carried at cost, less accumulated
amortization. The remaining useful lives of intangible assets are evaluated on an annual basis. Intangible assets subject to
amortization are also tested for recoverability whenever events or changes in circumstances indicate that their carrying
amount may not be recoverable. If the fair value of an intangible asset subject to amortization is determined to be less
than its carrying value, then an impairment charge is recorded to write down that asset to its fair value.
Inventories
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. The
recoverability of inventories is based upon the types and levels of inventories held, forecasted demand, pricing,
competition and changes in technology. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
Property, Equipment and Improvements
The components of property, equipment and improvements are stated at cost. The Company provides for
depreciation by use of the straight-line method over the estimated useful lives of the related assets (three to seven years).
Leasehold improvements are amortized by use of the straight-line method over the lesser of the estimated useful life of
the asset or the lease term. Repairs and maintenance costs are expensed as incurred. Property, equipment and
improvements are tested for recoverability whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. If the fair value of property, equipment and improvements is determined to be less than
their carrying value, then an impairment charge is recorded to write down that asset to its fair value.
42
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at amounts that have been billed to customers less an allowance for doubtful
accounts. Allowances for doubtful accounts are recorded for the estimated losses resulting from the inability of our
customers to make required payments. The estimates for the allowance for doubtful accounts are based on the length of
time the receivables are past due, current business environment and our historical experience. If the financial condition
of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances
may be required.
Pension and Retirement Plans
The funded status of pension and other postretirement benefit plans is recognized prospectively on the balance
sheet. Gains and losses, prior service costs and credits and any remaining transition amounts that have not yet been
recognized through pension expense will be recognized in accumulated other comprehensive income, net of tax, until
they are amortized as a component of net periodic pension/postretirement benefits expense. Additionally, plan assets and
obligations are measured as of our fiscal year-end balance sheet date (September 30).
We have defined benefit and defined contribution plans in the United Kingdom (the “U.K.”), Germany and in the
U.S. In the U.K. and Germany, the Company provides defined benefit pension plans for certain employees and former
employees and defined contribution plans for the majority of the employees. The defined benefit plans in both the U.K.
and Germany are closed to newly hired employees and have been for the two years ended September 30, 2011. In the
U.S., the Company also provides defined contribution plans that cover most employees and supplementary retirement
plans to certain employees and former employees who are now retired. These supplementary retirement plans are also
closed to newly hired employees and have been for the two years ended September 30, 2011. These supplementary plans
are funded through whole life insurance policies. The Company expects to recover all insurance premiums paid under
these policies in the future, through the cash surrender value of the policies and any death benefits or portions thereof to
be paid upon the death of the participant. These whole life insurance policies are carried on the balance sheet at their
cash surrender values as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the
Company also provides for officer death benefits and post-retirement health insurance benefits through supplemental
post-retirement plans to certain officers. The Company also funds these supplemental plans’ obligations through whole
life insurance polices on the officers.
Pension expense is based on an actuarial computation of current future benefits using estimates for expected
return on assets, expected compensation increases and applicable discount rates. Management has reviewed the discount
rates and rates of return with our consulting actuaries and investment advisor and concluded they were reasonable. A
decrease in the expected return on pension assets would increase pension expense. Expected compensation increases are
estimated based on historical and expected increases in the future. Increases in estimated compensation increases would
result in higher pension expense while decreases would lower pension expense. Discount rates are selected based upon
rates of return on high quality fixed income investments currently available and expected to be available during the
period to maturity of the pension benefit. A decrease in the discount rate would result in greater pension expense while
an increase in the discount rate would decrease pension expense.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable
employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and
reported in the consolidated balance sheet.
Revenue Recognition
The Company recognizes product revenue from customers at the time of transfer of title and risk of loss which is
generally at the time of shipment, provided that persuasive evidence of an arrangement exists, the price is fixed or
determinable and collectability of sales proceeds is reasonably assured. We include freight billed to our customers as
sales and the related freight costs as cost of sales. The Company reduces revenue for estimated customer returns.
The Company recognizes revenue from software licenses when persuasive evidence of an arrangement exists,
delivery of the product has occurred and the fee is fixed 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
recognized as the services are performed. If no pattern of performance is discernable, the fee is recognized straight line
over the service period.
43
The Company also offers training, maintenance agreements and support services. The Company has established
fair value on its training, maintenance and support services based on prices charged in separate sales to customers at
prices established and published in its standard price lists. These prices are not discounted. Revenue from these service
obligations under maintenance contracts is deferred and recognized on a straight-line basis over the contractual period,
which is typically three to twelve months, if all other revenue recognition criteria have been met. Support services
provided on a time and material basis are recognized as provided if all of the revenue recognition criteria have been met
for that element and the support services have been provided. 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 arrangement among the various elements based on the Company’s 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 delivered 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 2009-13”) and ASU 2009-14
– “Certain Revenue Arrangements that Contain Software Elements.” (“ASU 2009-14”). ASU 2009-13 amends existing
revenue recognition accounting principles regarding multiple-deliverable revenue arrangements. The consensus provides
accounting principles and application guidance 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 residual
method of allocating arrangement consideration. The new guidance provides for separate revenue recognition based
upon management’s 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 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 is effective prospectively for revenue arrangements entered into or materially modified
in fiscal years beginning 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 product’s essential functionality from the scope of software
revenue recognition guidance.
The Company adopted these standards as of October 1, 2009.
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 recognition 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 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 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 software 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 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 allocate 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
relative values.
44
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 completion 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 recognized as the services are performed. If no pattern of performance is discernable, 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 containing 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 product’s essential functionality, software
revenue recognition guidance is not applied, but rather other appropriate revenue recognition guidance as described
above.
The following policies are applicable to the Company’s major categories of segment revenue transactions:
Systems Segment Revenue
Revenue in the Systems Segment consists of product and service revenue. Generally, product revenue is
recognized when product is shipped, provided that all revenue recognition criteria are met. Service revenue consists
principally of royalty revenue related to the licensing of certain of the Company’s proprietary system technology and
repair services. The Company recognizes royalty revenues upon notification by the customer of shipment of the systems
produced pursuant to the royalty agreement. Repair service revenue is generally based upon a fixed price and is
recognized upon completion of the repair.
From time to time we enter into multiple element arrangements in the Systems Segment. We follow the
accounting policies described above for such arrangements.
The Company’s standard sales agreements generally do not include customer acceptance provisions. However, in
certain instances when arrangements include a customer acceptance provision or there is uncertainty about customer
acceptance, revenue is deferred until the Company has evidence of customer acceptance. Customers 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 Integration Segment consists of product and service revenue.
Revenue from the sale of third-party hardware and third-party software is recognized when the revenue
recognition criteria are met. The Company’s standard sales agreements generally do not include customer acceptance
provisions. However, in certain instances when arrangements include a customer acceptance provision or there is
uncertainty about customer acceptance, revenue is deferred until the Company has evidence of customer acceptance.
Customers do not have the right of return.
Service revenue is comprised of information technology consulting 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 deferred 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 party 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 principal in the transaction
and assume the risks and reward of ownership or if we are simply acting as an agent or broker. Under gross sales
recognition, the entire selling price is recorded in sales and our cost to the third-party service provider or vendor is
recorded in cost of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is
recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no costs of
45
goods sold. We use the net sales recognition method for the third party service contracts that we sell 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 time 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, 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 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 differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are 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 the period
that includes the enactment date. We also reduce deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. This methodology requires estimates and judgments in the determination of the recoverability
of deferred tax assets and in the calculation of certain tax liabilities. Valuation allowances are recorded against the gross
deferred tax assets that management believes, after considering all available positive and negative objective evidence,
historical and prospective, with greater weight given to historical evidence, that it is more likely than not that these assets
will not be realized.
In addition, we are required to recognize in the consolidated financial statements, those tax positions determined
to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the
reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical
merits, no benefits of the position are recognized.
In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application
of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations
in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become
payable in the future.
Earnings per Share of Common Stock
Basic net income per common share is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted net income per common share reflects
the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock
options and is computed by dividing net income by the assumed weighted average number of common shares
outstanding.
We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding,
non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which
are considered participating securities.
46
Basic and diluted earnings per share computations for the Company’s reported net income attributable to common
stockholders are as follows:
Net income
Less: Net income attributable to nonvested common stock
Net income attributable to common stockholders
Weighted average total shares outstanding – basic
Less: weighted average non-vested shares outstanding
Weighted average number of common shares outstanding – basic
Potential common shares from non-vested stock awards and the assumed
exercise of stock options
Weighted average common shares outstanding – diluted
Net income per share – basic
Net income per share – diluted
For the year ended
September
30,
2011
September
30,
2010
(Amounts in thousands
except per share data)
369 $
6
363 $
3,491
52
3,439
914
9
905
3,574
36
3,538
43
3,482
0.11 $
0.10 $
29
3,567
0.26
0.25
$
$
$
$
All anti-dilutive securities, including stock options, are excluded from the diluted income per share computation.
For the year ended September 30, 2011, 204 thousand options were excluded from the diluted income per share
calculation because their inclusion would have been anti-dilutive. For the year ended September 30, 2010,
approximately 240 thousand options were excluded from the diluted income per share calculation because their inclusion
would have been anti-dilutive.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates under
different assumptions or conditions.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payment awards made to employees and
directors including stock options and nonvested shares of common stock based on estimated fair values of stock-based
payment awards on the date of grant. The Company uses the Black-Scholes option-pricing model to calculate the fair
value of stock option grants. The fair value of nonvested share awards is equal to the quoted market price of our common
stock as quoted on the Nasdaq Global Market on the date of grant. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated
Statement of Operations.
Because stock-based compensation expense recognized in the Consolidated Statements of Operations for the
fiscal years ended September 30, 2011 and 2010 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
Stock-based compensation expense recognized for the fiscal years ended September 30, 2011 and 2010 consisted
of stock-based compensation expense related to options and nonvested stock granted pursuant to the Company’s stock
incentive and employee stock purchase plans of approximately $168 thousand and $223 thousand, respectively.
47
Concentrations of Credit Risk
Cash and cash equivalents are maintained with several financial institutions in the US, Germany and in the UK.
Deposits held with banks may exceed the amount of insurance on such deposits. Generally, these deposits may be
redeemed upon demand. The Company has not experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash and cash equivalents.
Subsequent Events
The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of the statement of financial position, including the estimates
inherent in the process of preparing financial statements.
New Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220) –
Presentation of Comprehensive Income (“ASU 2011-05”), which requires all non-owner changes in stockholders’ equity
to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. ASU 2011-05 is effective for fiscal years and interim periods within those years beginning after December
15, 2011.
2. Inventories
Inventories consist of the following:
Raw materials
Work-in-process
Finished goods
Total
September 30,
2011
2010
(Amounts in thousands)
$
$
886 $
539
5,352
6,777 $
1,029
439
4,394
5,862
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not
been met of approximately $3.4 million and $2.4 million as of September 30, 2011 and 2010, respectively.
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.3
million and $4.1 million as of September 30, 2011 and 2010, respectively.
3. Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as follows:
Effect of
Foreign
Currency
Translation
Minimum
Pension
Liability
(Amounts in thousands)
Accumulated
Other
Comprehensive
Loss
Balance September 30, 2009
Change in period
Tax effect of change in period
Balance September 30, 2010
Change in period
Tax effect of change in period
Balance September 30, 2011
(1,851) $
(282)
—
(2,133) $
(95)
—
(2,228) $
(2,417) $
(995)
193
(3,219) $
(439)
(17)
(3,675) $
(4,268)
(1,277)
193
(5,352)
(534)
(17)
(5,903)
$
$
$
48
The changes in the minimum pension liability are net of amortization of net loss of $147 thousand in 2011 and
$137 thousand in 2010 included in net periodic pension cost.
4. Income Taxes:
The components of income (loss) before income tax and income tax expense (benefit) are comprised of the
following:
Income (loss) before income tax:
U.S.
Foreign
Income tax expense (benefit):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Years Ended September 30,
2011
2010
(Amounts in thousands)
$
$
$
$
501 $
214
715 $
157 $
39
(12)
184
(16)
19
159
162
346 $
1,448
(299)
1,149
410
51
(158)
303
(59)
(9)
--
(68)
235
Reconciliation of “expected” income tax expense (benefit) to “actual” income tax expense (benefit) is as follows:
Computed “expected” tax expense
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit
Foreign operations
Change in valuation allowance
Permanent differences
Stock-based compensation
Foreign net operating loss
Uncertain tax liability adjustment
Tax refund adjustment
Other items
Income tax expense
Years Ended September 30,
2011
2010
(Dollar amounts in thousands)
$
243
34.0% $
391
34.0%
38
(85)
(46)
8
11
163
14
--
--
346
5.2%
(11.9)%
(6.4)%
1.1%
1.6%
22.8%
2.0%
--
-- .
48.4% $
28
(57)
70
4
34
--
(320)
79
6
235
2.4%
(5.0)%
6.1%
0.4%
3.0%
--
(27.8)%
6.9%
0.5%
20.5%
$
The Company recorded a consolidated income tax expense of $346 thousand in fiscal year 2011 reflecting an
effective tax rate of 48.4% compared to a tax expense of $235 thousand in fiscal year 2010 with an effective tax rate of
20.5%. We utilized approximately $142 thousand of our net operating loss carryovers which were applied against our
2010 U.S. taxable income.
49
For the years ended September 30, 2011 and 2010, temporary differences, which give rise to deferred tax assets
(liabilities), are as follows:
September 30,
September 30,
2011
2010
(Amounts in thousands)
Deferred tax assets:
Pension
Goodwill
Other reserves and accruals
Inventory reserves and other
State credits, net of federal benefit
Federal and state net operating loss carryforwards
Foreign net operating loss carryforwards
Foreign tax credits
Depreciation and amortization
Gross deferred tax assets
Less: valuation allowance
Realizable deferred tax asset
Deferred tax liabilities:
Pension
Reserves
Gross deferred tax liabilities
Net deferred tax assets
$
$
2,142 $
821
483
566
86
54
1,898
7
111
6,168
(5,347)
821
—
—
—
821 $
2,502
954
409
618
485
132
2,874
7
228
8,209
(7,205)
1,004
—
—
—
1,004
The deferred tax valuation allowance decreased by $1.9 million, from $7.2 million at September 30, 2010, to $5.3
million at September 30, 2011. In assessing the realizability of deferred tax assets, the Company considers its taxable
future earnings and the expected timing of the reversal of temporary differences. Accordingly, the Company has
recorded a valuation allowance which reduces the gross deferred tax asset to an amount which management believes will
more likely than not be realized. The valuation allowance was determined, by assessing both positive and negative
evidence, whether it is more likely than not that deferred tax assets are realizable. Such assessment is done on a
jurisdiction-by-jurisdiction basis. The Company’s inability to project future profitability beyond fiscal year 2013 in the
U.S. and the cumulative losses incurred in recent years in the U.K. represent sufficient negative evidence to record a
valuation allowance against certain deferred tax assets.
As of September 30, 2011 and 2010, the Company had U.S. net operating loss carryforwards for state tax
purposes of approximately $ 1.5 million and $1.9 million, respectively which are available to offset future taxable
income through 2029.
As of September 30, 2011, the Company had U.K. net operating loss carryforwards of approximately $8.8 million
that have an indefinite life with no expiration.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $3.0 million and $3.7
million at September 30, 2011and 2010, respectively. The Company’s policy is that its undistributed foreign earnings are
indefinitely reinvested and, accordingly, no U.S. federal and state deferred tax liabilities have been recorded.
In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application
of complex tax regulations in a multitude of jurisdictions. The Company records liabilities for estimated tax obligations
in the U.S. and other tax jurisdictions. These estimated tax liabilities include the provision for taxes that may become
payable in the future.
As of September 30, 2011, the total amount of uncertain tax liabilities was $0.5 million all of which would affect
our effective tax rate if recognized. We do not expect any of these uncertain tax liabilities to reverse in the next twelve
months. We recognize interest and potential penalties accrued related to unrecognized tax benefits in our provision for
income taxes.
50
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as
follows:
Balance, beginning of year
Increases in tax positions in the current year
Settlements
Accrued penalties and interest
Decrease in current and prior year tax positions
Balance, end of year
Year Ended
Year Ended
September 30,
September 30,
2011
2010
(Amounts in thousands)
— $
458
—
14
—
472 $
320
—
—
14
(334)
—
$
$
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The
Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open
years, generally 2008 through 2011, and believes that tax adjustments in any audited year will not be material.
5. Property, Equipment and Improvements, Net
Property, equipment and improvements, net consist of the following:
Leasehold improvements
Equipment
Automobiles
Less accumulated depreciation and amortization
Property, equipment and improvements, net
September 30,
September 30,
2010
2011
(Amounts in thousands)
$
$
364 $
6,717
118
7,199
(6,366)
833 $
305
6,993
118
7,416
(6,543)
873
The Company uses the straight-line method over the estimated useful lives of the assets to record depreciation
expense. Depreciation expense was $370 thousand and $399 thousand for the years ended September 30, 2011 and 2010,
respectively.
6. Acquired Intangible Assets
As of September 30, 2011 and 2010 intangible assets are as follows:
September 30, 2011
September 30, 2010
Weighted
Average
Remaining
Amortization
Period
Gross
Accumulated
Amortization Net
Weighted
Average
Remaining
Amortization
Period
Gross
Accumulated
Amortization Net
Customer list 7 years
Non-Compete
agreements
Total
7 years
$
820 $
246 $
574 8 years
$
820 $
164 $
656
(Amounts in thousands)
---
$
93
913 $
93
339 $
--- 1 year
574 7.7 years
$
93
913 $
62
226 $
31
687
Amortization expense on these intangible assets was $113 thousand and $113 thousand for fiscal 2011 and 2010,
respectively.
51
Annual amortization expense related to intangible assets for each of the following successive fiscal years is as
follows:
Fiscal year ending September 30:
2012
2013
2014
2015
2016
Thereafter
Total
$
$
(Amounts in
thousands)
82
82
82
82
82
164
574
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable
Commissions
Compensation and fringe benefits
Professional fees and shareholders’ reporting costs
Taxes, other than income
Warranty
Current portion of capital lease
Other
September 30,
2010
2011
(Amounts in thousands)
$
$
8,974 $
155
1,719
501
174
150
24
406
12,103 $
6,349
186
1,827
513
633
143
55
343
10,049
8. Stock Options and Awards
In 1991, the Company adopted the 1991 Stock Option Plan (the “1991 Plan”), and authorized 332,750 shares of
common stock to be reserved for issuance pursuant to the 1991 Plan. The 1991 Plan expired on October 23, 2001. In
1997, the Company adopted the 1997 Stock Option Plan (the “1997 Plan”), and authorized 199,650 shares of common
stock to be reserved for issuance pursuant to the 1997 Plan. The 1997 plan expired in 2007. Because the 1991 Plan and
the 1997 Plan have expired, no further awards will be issued under these plans. In 2003, the Company adopted the 2003
Stock Incentive Plan (the “2003 Plan”) and authorized 200,000 shares of common stock to be reserved for issuance
pursuant to the 2003 Plan. As of September 30, 2011, there were 7,500 shares available to be granted under the 2003
Plan. In 2007, the Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”) and authorized 250,000 shares of
common stock to be reserved for issuance pursuant to the 2007 Plan. As of September 30, 2011, there were 143,700
shares available to be granted under the 2007 Plan. In 2003, the Company issued non-qualified stock options to non-
officer employees hired as part of the Technisource acquisition. These options were granted at their fair value on the date
of grant. These options vested over a period of four years and expire ten years from the date of grant. Under all of the
stock incentive plans, both incentive stock options and non-qualified stock options may be granted to officers, key
employees and other persons providing services to the Company. The 2003 Plan and 2007 Plan also provide for awards
of nonvested shares of common stock. All of the Company’s stock incentive plans have a ten year life. The total number
of available shares under all plans for future awards was 151,200 as of September 30, 2011.
Options issued under any of the stock option plans are not affected by termination of the plan. The Company
issues stock options at their fair market value on the date of grant. Vesting of stock options granted pursuant to the
Company’s stock incentive plans is determined by the Company’s compensation committee. Generally, options granted
to employees vest over four years and expire ten years from the date of grant. Options granted to non-employee
directors, have historically been cliff vesting after six months from the date of grant and expire three years from the date
of grant. In fiscal 2009, 2010 and 2011, the Company granted certain officers including its Chief Executive Officer and
non-employee directors shares of nonvested common stock instead of stock options. The vesting periods for the officers’,
the Chief Executive Officer’s and the directors’ nonvested stock awards are four years, three years and one year,
respectively.
52
We measure and recognize compensation expense for all stock-based payment awards made to employees and
directors including employee stock options and awards of nonvested stock based on estimated fair values, as described in
note 1. Stock-based compensation expense incurred and recognized for the years ended September 30, 2011 and 2010
related to stock options and nonvested stock granted to employees and non-employee directors under the Company’s
stock incentive and employee stock purchase plans totaled approximately $168 thousand and $223 thousand,
respectively. The classification of the cost of share-based compensation, in the statements of operations, is consistent
with the nature of the services being rendered in exchange for the share based payment. The following table summarizes
stock-based compensation expense in the Company’s consolidated statements of operations:
Years ended
Cost of sales
Engineering and development
Selling, general and administrative
Total
September 30,
September 30,
2011
2010
(Amounts in thousands)
1 $
12
156
169 $
1
28
194
223
$
$
For the year ended September 30, 2011, the Company granted 1,750 share options to certain key employees,
27,000 nonvested shares to certain officers including the Chief Executive Officer and 10,000 nonvested shares to its non-
employee directors. For the year ended September 30, 2010, the Company granted 2,250 share options to certain key
employees, 21,000 nonvested shares to certain officers including its Chief Executive Officer and 10,000 nonvested
shares to its non-employee directors.
The Company measures the fair value of nonvested stock awards based upon the market price of its common
stock as of the date of grant. The Company uses the Black-Scholes option-pricing model to value stock options. The
Black-Scholes model requires the use of a number of assumptions including volatility of the Company’s stock price, the
weighted average risk-free interest rate and the weighted average expected life of the options, at the time of grant.
Because the Company had never paid a dividend prior to and including the grant dates in fiscal year 2011, the dividend
rate variable in the Black-Scholes model is zero. The table below summarizes the assumptions used to value these
options:
Expected volatility
Expected dividend yield
Risk-free interest rate
Expected term (in years)
Years ended
September 30,
2011
57%
—
2.88%
6.88
September 30,
2010
59%
—
2.72%-3.08%
6.1-7.6
The volatility assumption is based on the historical weekly price data of the Company’s stock over a period
equivalent to the weighted average expected life of the Company’s options. Management evaluated whether there were
factors during those periods which would distort the volatility figures if used to estimate future volatility and concluded
that there were no such factors.
The risk-free interest rate assumptions are based on U.S. Treasury rates determined at the date of option grant.
The expected terms of employee stock options represent weighted-average periods that the stock options are
expected to remain outstanding. They are based upon the historical average of the actual terms that stock options were
outstanding, or are expected to be outstanding. Management believes this historical data is representative of the expected
term of options granted for the years ended September 30, 2011 and 2010.
53
As stock-based compensation expense recognized in the consolidated statements of operations is based on awards
ultimately expected to vest, expense for grants beginning upon adoption on October 1, 2005 has been reduced for
estimated forfeitures. Forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The forfeiture rates for the years ended September 30, 2011 and 2010 were
based on actual forfeitures.
No cash was used to settle equity instruments granted under share-base payment arrangements in any of the years
in the two-year period ended September 30, 2011.
The following tables provide summary data of stock option award activity:
Weighted
average
exercise
price
Weighted
Average
Remaining
Contractual
Term
Number
of Shares
Aggregate
Intrinsic
Value
(in
thousands)
—
—
—
—
—
—
—
—
—
—
38
35
38
Outstanding at September 30, 2009
Granted
Expired
Forfeited
Exercised
Outstanding at September 30, 2010
Granted
Expired
Forfeited
Exercised
Outstanding at September 30, 2011
Exercisable at September 30, 2011
Vested and expected to vest at September 30, 2011
370,962 $
2,250 $
(98,437) $
—
—
274,775 $
1,750 $
(31,100) $
—
—
245,425 $
229,298 $
245,425 $
6.61
3.85
5.61
—
—
6.95
3.85
5.05
—
—
7.13
7.31
7.13
—
—
—
—
—
—
—
—
—
—
4.17 Years $
3.96 Years $
4.17 Years $
The weighted average grant date fair value of share options granted during the years ended September 30, 2011
and 2010 was $2.27 and $2.32, respectively. The aggregate intrinsic value of stock options exercised during the years
ended September 30, 2011 and 2010 was zero (there were no stock options exercised in fiscal 2011 and 2010).
54
The following table provides summary data of nonvested stock award activity:
Weighted
Average
grant date
Fair
Value
Weighted
Average
Remaining
Contractual
Term
Number of
nonvested
shares
23,300 $
3.17
Nonvested shares outstanding at September 30, 2009
Activity in 2010:
Granted
Vested
Forfeited
Nonvested shares outstanding at September 30, 2010
Activity in 2011:
Granted
Vested
Forfeited
Nonvested shares outstanding at September 30, 2011
Vested at September 30, 2011
Vested and expected to vest at September 30, 2011
31,000 $
(14,434) $
—
39,866 $
37,000 $
(21,017) $
—
55,849 $
35,451 $
91,300 $
Aggregate
Intrinsic
Value
(in
thousands)
—
—
—
—
—
—
—
—
195
124
320
3.79
3.28
—
3.61
—
—
—
—
—
3.97
3.58
—
3.86
3.46
3.71
—
—
—
8.82 Years $
7.76 Years $
8.41 Years $
As of September 30, 2011 there was $160 thousand of total unrecognized compensation cost related to nonvested
share-based compensation arrangements (including share option and nonvested share awards) granted under the
company’s stock incentive plans. This cost is expected to be expensed over a weighted average period of approximately
2.22 years. The total fair value of shares vested during the years ended September 30, 2011 and 2010 was $154 thousand
and $169 thousand, respectively.
9. Stock Purchase Plan
In October 1997, the Board of Directors of the Company adopted an Employee Stock Purchase Plan (the “1997
Purchase Plan”), which was ratified by the shareholders. There are 332,750 shares of common stock reserved for
issuance under the 1997 Purchase Plan. Under the 1997 Purchase Plan, the Company’s employees may purchase shares
of common stock at a price per share that is 85% of the lesser of the fair market value as of the beginning or end of semi-
annual option periods. Compensation expense recorded for shares issued pursuant to the 1997 Purchase Plan for the
years ended September 30, 2011 and 2010 was approximately $1 thousand and $46 thousand, respectively. For the years
ended September 30, 2011 and 2010, 25,023 and 42,121 shares were issued pursuant to the 1997 Purchase Plan,
respectively. Since inception of the plan, all 332,750 shares have been issued and there are no shares available for future
issuance under the 1997 Purchase Plan as of September 30, 2011.
10. Pension and Retirement Plans
We have defined benefit and defined contribution plans in the U.K., Germany and in the U.S. In the U.K. and
Germany, the Company provides defined benefit pension plans for certain employees and former employees and defined
contribution plans for the majority of the employees. The defined benefit plans in both the U.K. and Germany are closed
to newly hired employees and have been for the two years ended September 30, 2011. In the U.S., the Company also
provides defined contribution plans that cover most employees and supplementary retirement plans to certain employees
and former employees who are now retired. These supplementary retirement plans are also closed to newly hired
employees and have been for the two years ended September 30, 2011. These supplementary plans are funded through
whole life insurance policies. The Company expects to recover all insurance premiums paid under these policies in the
future, through the cash surrender value of the policies and any death benefits or portions thereof to be paid upon the
death of the participant. These whole life insurance policies are carried on the balance sheet at their cash surrender values
as they are owned by the Company and not assets of the defined benefit plans. In the U.S., the Company also provides
for officer death benefits and post-retirement health insurance benefits through supplemental post-retirement plans to
certain officers. The Company also funds these supplemental plans’ obligations through whole life insurance polices on
the officers.
55
Defined Benefit Plans
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable
employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and
reported in the consolidated balance sheet.
The German Plan does not have any assets and therefore all costs and benefits of the plan are funded annually
with cash flow from operations.
The domestic supplemental retirement plans have life insurance policies which are not considered plan assets but
were purchased by the Company as a vehicle to fund the costs of the plan. These insurance policies are included in the
balance sheet at their cash surrender value, net of policy loans, aggregating $1.8 million and $1.8 million as of
September 30, 2011 and 2010, respectively. The loans against the policies have been taken out by the Company to pay
the premiums. The costs and benefit payments for these plans are paid through operating cash flows of the Company to
the extent that they can not be funded through the use of the cash values in the insurance policies. The Company expects
that the recorded value of the insurance policies will be sufficient to fund all of the Company’s obligations under these
plans.
Assumptions:
The following table provides the weighted average actuarial assumptions used to determine the actuarial present
value of projected benefit obligations at:
Discount rate:
Expected return on plan assets:
Rate of compensation increase:
Domestic
September 30,
International
September 30,
2011
2010
2011
2010
4.75%
—%
—%
5.25%
—%
—%
5.04 %
5.40 %
1.12 %
4.66%
6.20%
1.20%
The following table provides the weighted average actuarial assumptions used to determine net periodic benefit
cost for years ended:
Discount rate:
Expected return on plan assets:
Rate of compensation increase:
Domestic
September 30,
International
September 30,
2011
2010
2011
2010
5.25%
—%
—%
5.75%
—%
—%
4.66 %
6.20 %
1.20 %
5.63%
6.20%
1.17%
For domestic plans, the discount rate was determined by comparison against the Citigroup Pension Discount
Curve and Liability Index for AA rated corporate instruments. The Company monitors other indices to assure that the
pension obligations are fairly reported on a consistent basis. The international discount rates were determined by
comparison against country specific AA corporate indices, adjusted for duration of the obligation.
The periodic benefit cost and the actuarial present value of projected benefit obligations are based on actuarial
assumptions that are reviewed on an annual basis. The Company revises these assumptions based on an annual
evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement
benefits.
56
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
Pension:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service gains
Amortization of net (gain)/loss
Net periodic benefit cost
Post Retirement:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service costs/(gains)
Amortization of net (gain)/loss
Net periodic benefit cost
Pension:
Increase in minimum liability included
in other comprehensive income
(loss)
Post Retirement:
Increase (decrease) in minimum liability
included in other comprehensive
income (loss)
Total:
Increase (decrease) in minimum liability
included in comprehensive income
(loss)
Years Ended September 30
Foreign
2011
U.S.
Total
2010
Foreign U.S.
Total
(amounts in thousands)
$
$
$
$
73 $
688
(503)
—
69
327 $
— $
—
—
—
—
— $
10 $
99
—
—
31
140 $
20 $
68
—
—
47
135 $
83 $
787
(503)
—
100
467 $
20 $
68
—
—
47
135 $
58 $
669
(448)
—
42
321 $
— $
—
—
—
—
— $
9 $
116
—
—
30
155 $
18 $
69
—
—
65
152 $
67
785
(448)
—
72
476
18
69
—
—
65
152
$
373 $
(3) $
370 $
1,048 $
2 $
1,050
—
69
69
—
(55)
(55)
$
373 $
66 $
439 $
1,048 $
(53) $
995
57
The following table presents an analysis of the changes in 2011 and 2010 of the benefit obligation, the plan assets
and the funded status of the plans:
Foreign
2011
U.S.
Years Ended September 30
Total
Foreign
(Amounts in thousands)
2010
U.S.
Total
Pension:
Change in projected benefit
obligation (“PBO”)
Balance beginning of year
Service cost
Interest cost
Changes in actuarial
assumptions
Foreign exchange impact
Benefits paid
Projected benefit obligation at
end of year
$
Changes in fair value of plan assets:
Fair value of plan assets at
beginning of year
Actual gain (loss) on plan assets
Company contributions
Foreign exchange impact
Benefits paid
Fair value of plan assets at end
of year
Funded status
Unamortized net loss
Net amount recognized
Post Retirement:
Change in projected benefit
obligation (“PBO”):
Balance beginning of year
Service cost
Interest cost
Changes in actuarial
assumptions
$
$
$
$
$
Foreign exchange impact
Benefits paid
Projected benefit obligation at
end of year
$
Changes in fair value of plan assets:
Fair value of plan assets at
beginning of year
Actual gain/(loss) on plan assets
Company contributions
Foreign exchange impact
Benefits paid from plan assets
Fair value of plan assets at end
of year
Funded status
Unamortized net loss
Net amount recognized
$
$
$
$
14,118 $
73
687
1,895 $
10
99
16,013 $
83
786
12,769 $
58
669
(294)
(154)
(324)
28
—
(273)
(266)
(154)
(597)
1,248
(357)
(269)
2,011 $
9
116
32
—
(273 )
14,780
67
785
1,280
(357)
(542)
14,106 $
1,759 $
15,865 $
14,118 $
1,895 $
16,013
7,937 $
(270)
309
(55)
(323)
7,598 $
(6,508) $
—
(6,508) $
— $
—
—
—
—
—
— $
—
273
—
(273)
— $
(1,759) $
—
(1,759) $
1,293 $
20
68
116
—
—
7,937 $
(270)
582
(55)
(596)
7,598 $
(8,267) $
—
(8,267) $
1,293 $
20
68
116
—
—
7,410 $
606
306
(117)
(268)
7,937 $
(6,181) $
—
(6,181) $
— $
—
273
—
(273 )
— $
(1,895 ) $
—
(1,895 ) $
— $
—
—
—
—
—
1,197 $
18
68
10
—
—
7,410
606
579
(117)
(541)
7,937
(8,076)
—
(8,076)
1,197
18
68
10
—
—
— $
1,497 $
1,497 $
— $
1,293 $
1,293
—
—
—
—
—
— $
— $
—
— $
—
—
—
—
—
—
—
—
—
—
— $
(1,497) $
—
(1,497) $
— $
(1,497) $
—
(1,497) $
—
—
—
—
—
— $
— $
—
— $
—
—
—
—
—
—
—
—
—
—
— $
(1,293 ) $
—
(1,293 ) $
—
(1,293)
—
(1,293)
58
The amounts recognized in the consolidated balance sheet consist of:
Foreign
2011
U.S.
Years Ended September 30
Total
Foreign
(Amounts in thousands)
2010
U.S.
Total
Pension:
Accrued benefit liability
Deferred tax
Accumulated other
comprehensive income
Net amount recognized
Post Retirement:
Accrued benefit liability
Deferred tax
Accumulated other
comprehensive income
Net amount recognized
Total pension and post
retirement:
Accrued benefit liability
Deferred tax
Accumulated other
comprehensive income
Net amount recognized
Accumulated Benefit
Obligation:
Pension
Post Retirement
Total accumulated benefit
$
$
$
$
$
$
$
(6,508) $
31
(1,759) $
—
(8,267) $
31
(6,181) $
48
(1,895) $
—
3,376
(3,101) $
89
(1,670) $
3,465
(4,771) $
2,985
(3,148) $
92
(1,803) $
— $
—
—
— $
(1,497) $
—
(1,497) $
—
— $
—
(1,293) $
—
209
(1,288) $
209
(1,288) $
—
— $
142
(1,151) $
(6,508) $
31
(3,257) $
—
(9,765) $
31
(6,181) $
48
(3,188) $
—
3,376
(3,101) $
298
(2,959) $
3,674
(6,060) $
2,985
(3,148) $
234
(2,954) $
(8,076)
48
3,077
(4,951)
(1,293)
—
142
(1,151)
(9,369)
48
3,219
(6,102)
(14,029) $
—
(1,759) $
(1,498)
(15,788) $
(1,498)
(14,006) $
—
(1,895) $
(1,293)
(15,901)
(1,293)
obligation
$
(14,029) $
(3,257) $
(17,286) $
(14,006) $
(3,188) $
(17,194)
Plans with projected benefit obligations in excess of plan assets are attributable to unfunded domestic
supplemental retirement plans, our German plans which are legally not required to be funded and our U.K. retirement
plan.
Accrued benefit liability reported as:
Current accrued benefit liability
Noncurrent accrued benefit liability
Total accrued benefit liability
September 30,
2011
2010
(Amounts in thousands)
$
$
709 $
9,056
9,765 $
441
8,928
9,369
As of September 30, 2011 and 2010 the amounts included in accumulated other comprehensive income, consisted
of deferred net losses totaling approximately $3.7 million and $3.2 million, respectively.
The amount of net deferred loss expected to be recognized as a component of net periodic benefit cost for the year
ending September 30, 2012, is approximately $187 thousand.
Contributions
The Company expects to contribute $709 thousand to its pension plans for fiscal 2012.
59
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
(amounts in thousands):
Fiscal year ending September 30:
2012
2013
2014
2015
2016
Thereafter
(Amounts in thousands)
643
$
668
764
819
837
4,451
Plan Assets
At September 30, 2011, our pension plan in the U.K. was the only plan with assets, holding investments of
approximately $7.6 million. Pension plan assets are managed by a fiduciary committee. The Company’s investment
strategy for pension plan assets is to maximize the long-term rate of return on plan assets within an acceptable level of
risk while maintaining adequate funding levels. Local regulations, local funding rules, and local financial and tax
considerations are part of the funding and investment process. In deciding on the investments to be held, the trustees
take into account the risk of possible fluctuations in income from, and market values of, the assets as well as the risk of
departing from an asset profile which broadly matches the liability profile. The committee has invested the plan assets in
a single pooled fund with an authorized investment company (the “Fund”). The Fund selected by the trustees is
consistent with the plan’s overall investment principles and strategy described herein. There are no specific targets as to
asset allocation other than those contained within the Fund that is managed by the authorized investment company.
The fair value of the assets held by the UK pension plan by asset category are as follows:
Fair Value at September 30, 2011
Fair Value Measurements Using Inputs
Considered as
Level
I
Level
III
Level
II
Fair Value at September 30, 2010
Fair Value Measurements Using Inputs
Considered as
Level
Level
II
I
Level
III
Total
—
375 $
—
7,223
375 $ 7,223
389 $
— $
—
7,548
— $ 7,937 $
389
—
— 7,548
389 $ 7,548
—
—
—
(Thousands)
Asset Category
Cash on deposit
Pooled Funds
Total Plan Assets
Total
$
375 $
7,223
$ 7,598 $
The expected long-term rates of return on plan assets are equal to the yields to maturity of appropriate indices for
government and corporate bonds and by adding a premium to the government bond return for equities. The expected rate
of return on cash is the Bank of England base rate in force at the effective date. The Fund is not exchange traded. The
Fund is not subject to any redemption notice periods or restrictions and can be redeemed on a daily basis. No gates or
holdbacks or dealing suspensions are being applied to the Fund. The Fund is of perpetual duration.
Defined Contribution Plans
The Company has defined contribution plans in domestic and international locations under which the Company
matches a portion of the employee’s contributions and may make discretionary contributions to the plans. The
Company’s contributions were $170 thousand and $141 thousand for the years ended September 30, 2011 and 2010,
respectively.
11. Lines of Credit
As of September 30, 2011 and September 30, 2010, the Company maintained lines of credit notes that allow for
borrowings of up to $2.5 million. Availability under these facilities is reduced by outstanding borrowings thereunder.
The interest rates on outstanding borrowings range from 2.5% over the London Inter-Bank Offer Rate (“LIBOR”) with a
floor of 4% to Prime plus 1%. Borrowings under the credit agreements are required to be repaid on demand by the lender
in some cases, upon termination of the agreements or may be prepaid by the Company without penalty. The credit
60
agreements contain various covenants including financial covenants which require the Company to maintain various
financial ratios at prescribed levels. The Company is in compliance with all covenants as of September 30, 2011.
The Company had no borrowings outstanding under its lines of credit as of September 30, 2011 and
September 30, 2010.
12. Commitments and Contingencies
Leases
The Company occupies office space under lease agreements expiring at various dates during the next five years.
The leases are classified as operating leases and provide for the payment of real estate taxes, insurance, utilities and
maintenance.
The Company was obligated under non-cancelable operating leases as follows:
Fiscal year ending September 30:
2012
2013
2014
2015
2016
Thereafter
(Amounts in
thousands)
991
688
744
232
16
-
2,671
$
Occupancy expenses under the operating leases approximated $1.2 million in 2011 and $1.4 million in 2010.
Common Stock Repurchase
On February 8, 2011, the Board of Directors authorized the Company to purchase up to 250 thousand additional
shares of the Company’s outstanding common stock at market price. On February 3, 2009, the Board of Directors
authorized the Company to purchase up to 350 thousand additional shares of the Company’s outstanding common stock
at market price. Pursuant to the aforementioned authorizations and an authorization by our board of directors on
November 13, 2007 to purchase 250 thousand shares, the Company repurchased approximately 165 thousand shares of
its outstanding common stock during the year ended September 30, 2011. As of September 30, 2011, approximately
229 thousand shares remain authorized to repurchase under its stock repurchase program.
61
13. Segment and Geographical Information
The following table presents certain operating segment information.
Years Ended September 30,
Systems
Segment Germany
UK
US
Total
(Amounts in thousands)
Consolidated
Total
Service and System Integration Segment
$
$
2011
Sales:
Product
Service
Total sales
Profit (loss) from operations
Assets
Capital expenditures
Depreciation and amortization
2010
Sales:
Product
Service
Total sales
Profit (loss) from operations
Assets
Capital expenditures
Depreciation and amortization
5,624 $
2,198
7,822
(592)
12,819
148
89
12,703 $
12,025
24,728
387
12,662
95
183
200 $
1,429
1,629
(24)
3,632
20
27
36,207 $
3,259
39,466
1,141
13,995
76
184
49,110 $
16,713
65,823
1,504
30,289
191
394
4,888 $
3,423
8,311
(316)
13,400
78
114
10,995 $
12,093
23,088
(153)
11,565
260
171
50 $
1,585
1,635
(81)
3,667
30
27
53,701 $
3,377
57,078
1,722
12,747
115
200
64,746 $
17,055
81,801
1,488
27,979
405
398
54,734
18,911
73,645
912
43,108
339
483
69,634
20,478
90,112
1,142
41,379
483
512
Profit (loss) from operations is sales less cost of sales, engineering and development, selling, general and
administrative expenses but is not affected by either non-operating charges/income or by income taxes. Non-operating
charges/income consists principally of interest income/expense and foreign exchange gain/loss.
All intercompany transactions have been eliminated.
The following table details the Company’s sales by operating segment for fiscal years September 30, 2011 and
2010. The Company’s sales by geographic area based on the location of where the products were shipped or services
rendered are as follows:
2011
Systems
Service and System Integration
Total
% of Total
2010
Systems
Service and System Integration
Total
% of Total
Americas Europe
Asia
(Amounts in thousands)
Total
$
$
4,012 $
39,517
43,529 $
59%
— $
26,273
26,273 $
36%
3,810 $
33
3,843 $
5%
7,822
65,823
73,645
100%
Americas Europe
Asia
(Amounts in thousands)
Total
$
$
7,239 $
56,511
63,750 $
71%
— $
25,256
25,256 $
28%
1,072 $
34
1,106 $
1%
8,311
81,801
90,112
100%
% of
Total
11%
89%
100%
% of
Total
9%
91%
100%
Substantially all Americas amounts are United States.
62
Long-lived assets by geographic location at September 30, 2011 and 2010 were as follows:
North America
Europe
Totals
September 30,
September 30,
2011
2010
(Amounts in thousands)
$
$
934 $
473
1,407 $
985
575
1,560
Deferred tax assets by geographic location at September 30, 2011 and 2010 were as follows:
North America
Europe
Totals
September 30,
September 30,
2011
2010
(Amounts in thousands)
$
$
374 $
447
821 $
377
627
1,004
The Company had two customers from which we derived revenues in excess of 10% of total revenues for the years
ended September 30, 2011 and 2010, listed below.
Years Ended
September 30, 2011 September 30, 2010
% of
Revenues
Amount
% of
Revenues Amount
(Dollar amounts in thousands)
22.3
14% $
8.7
12% $
10.2
9.0
25 %
10 %
Customer A
Customer B
$
$
14. Loss Contingency
We record estimated loss contingencies when information is available that indicates that it is probable that a
material loss has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. We
disclose if the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible,
or is probable but cannot be estimated, or if an exposure to loss exists in excess of the amount accrued. Loss
contingencies considered remote are generally not disclosed. Determining the likelihood of incurring a liability and
estimating the amount of the liability involves judgment by management. If the event results in an outcome that has
greater adverse consequences to us than management expects, then we may have to record additional charges in future
periods.
On September 4, 2011, the Company’s 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 “Summons”). 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 alleges that Modcomp US received approximately $1.1 million in preferential transfers and
approximately $0.2 million in otherwise avoidable transfers from the Debtor, in connection with the Debtor’s bankruptcy
petition.
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. has a strong defense against this complaint in that these payments were made to
Modcomp US from the Debtor in the ordinary course of business; therefore they were not in fact preferential or
otherwise avoidable transfers. We are in the process of vigorously defending our position with respect to this matter. In
accordance with this assessment however, despite our strong defense, we have estimated a loss contingency in
connection with the Summons in the amount of approximately $0.1 million. Our assessment indicates that this loss
contingency is probable.
Accordingly, we have accrued approximately $0.1 million for this contingent loss in our Consolidated Statement
of Operations for the year ended September 30, 2011.
63
15. Fair Value Measures
Assets and Liabilities measured at fair value on a recurring basis are as follows:
Fair Value Measurements Using
Quoted Prices in
Active
Markets for
Identical
Instruments
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Input
(Level 3)
As of September 30, 2011
(Amounts in thousands)
Total
Balance
Gain
or
(loss)
Assets:
Money Market funds
Total assets measured at
fair value
Assets:
Money Market funds
Total assets measured at
fair value
$
$
$
$
3,493 $
3,493 $
— $
— $
— $
3,493 $
— $
3,493 $
As of September 30, 2010
(Amounts in thousands)
3,482 $
3,482 $
— $
— $
— $
3,482 $
— $
3,482 $
—
—
—
—
These assets are included in cash and cash equivalents in the accompanying consolidated balance sheets. All
other monetary assets and liabilities are short-term in nature and approximate their fair value.
The Company had no liabilities measured at fair value as of September 30, 2011. The Company had no assets or
liabilities measured at fair value on a non recurring basis as of September 30, 2011.
16. Restatement of Financial Statements for the periods ended September 30, 2010, December 31, 2010,
March 31, 2011 and June 30, 2011
The Company has restated its Consolidated Statements of Operations for the year ended September 30, 2010, and
the three months ended December 31, 2010,the three months and six months ended March 31, 2011 and the three months
and nine months ended June 30, 2011 to reflect adjustments and reclassifications of revenue and cost of sales, in
connection with the identification of saless that are maintenance and support services provided by third parties where the
Company is not the primary obligor of the service, which requires presentation of the revenue reported by the Company
net of the cost of the services as opposed to recognition of the gross sales value of the services. In addition, the
Company identified certain other services provided pursuant to third party contracts for which the Company is the
primary obligor and reported these services correctly at the gross sales value; however these services were reported as
product revenue and should have been included as service revenue. We have therefore, reclassified both the revenue and
cost of sales for these services from product revenue and product cost of sales to service revenue and service cost of
sales.
The adjustments made to the restated financial statements referred to above did not affect gross profit, income
before taxes, net income, cash flow, total assets, total liabilities, retained earnings or total shareholder equity.
64
The tables below show the impact to the balance sheets and statements of operations for the restated periods.
September 30, 2010
Restated Consolidated Statements of Operations
Year ended September 30, 2010
Restatement
As
Adjustment Restated
reported
(Amounts in thousands except per
share date)
$
78,743 $
16,275
95,018
(9,109) $
4,203
(4,906)
69,634
20,478
90,112
67,385
10,442
77,827
17,191
16,049
1,142
7
1,149
235
914
0.26
3,538
0.25
3,567
(7,924)
3,018
(4,906)
$
$
$
59,461
13,460
72,921
17,191
16,049
1,142
7
1,149
235
914
0.26
3,538
0.25
3,567
Sales:
Product
Services
Total sales
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating Expenses
Operating income
Total other income (expense), net
Income before income taxes
Income tax expense
Net income
Net income per share – basic
Weighted average shares outstanding – basic
Net income per share – diluted
Weighted average shares outstanding – diluted
$
$
$
65
December 31, 2010
Restated Consolidated Statements of Operations
Sales:
Product
Services
Total sales
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating expenses
Operating income
Other expense, net
Income before income taxes
Income tax expense
Net income
Net income per share – basic
Weighted average shares outstanding – basic
Net income per share – diluted
Weighted average shares outstanding – diluted
For the three months ended
December 31, 2010 (unaudited)
Restatement
As
Adjustment Restated
reported
(Amounts in thousands except for per
share data)
$
17,424 $
4,686
22,110
(2,132) $
649
(1,483)
15,292
5,335
20,627
15,293
2,289
17,582
4,528
3,885
643
(21)
622
233
389
0.11
3,485
0.11
3,521
$
$
$
(1,878)
395
(1,483)
13,415
2,684
16,099
4,528
$
$
$
3,885
643
(21)
622
233
389
0.11
3,485
0.11
3,521
66
March 31, 2011
Restated Consolidated Statements of Operations
Three months ended March 31, 2011
(unaudited)
Restatement
Adjustment Restated
As
reported
Six months ended March 31, 2011
(unaudited)
Restatement
Adjustment Restated
reported
As
Sales:
Product
Services
Total sales
$
15,726 $
3,483
19,209
(2,959) $
1,379
(1,580)
12,767 $
4,862
17,629
33,150 $
8,169
41,319
(5,092) $
2,029
(3,063)
28,058
10,198
38,256
(Amounts in thousands except for per share data)
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating expenses
Operating income
Other income (expense), net
Income before income
taxes
Income tax expense
Net income
Net income per share – basic
Weighted average shares
outstanding – basic
Net income per share – diluted
Weighted average shares
outstanding – diluted
$
$
$
12,457
2,503
14,960
4,249
3,818
431
(1)
430
144
286
0.08
3,437
0.08
(2,496)
916
(1,580)
9,961
3,419
13,380
4,249
27,750
4,792
32,542
8,777
(4,374)
1,311
(3,063)
23,376
6,103
29,479
8,777
$
$
$
3,818
431
7,703
1,074
(1)
(22)
430
144
286 $
0.08 $
1,052
377
675
0.19
3,437
3,455
0.08 $
0.19
$
$
$
7,703
1,074
(22)
1,052
377
675
0.19
3,455
0.19
3,471
3,471
3,491
3,491
67
June 30, 2011
Restated Consolidated Statements of Operations
Three months ended June 30, 2011
(unaudited)
Restatement
Adjustment Restated
reported
As
Nine months ended June 30, 2011
(unaudited)
Restatement
Adjustment Restated
reported
As
Sales:
Product
Services
Total sales
$
16,416 $
3,265
19,681
(1,690) $
798
(892)
14,726 $
4,063
18,789
49,566 $
11,434
61,000
(6,782) $
2,827
(3,955)
42,784
14,261
57,045
(Amounts in thousands except for per share data)
Cost of sales:
Product
Services
Total cost of sales
Gross profit
Operating expenses
Operating income (loss)
Other income (expense), net
Income (loss) before
income taxes
Income tax expense
(benefit)
Net income(loss)
Net income (loss) per share –
basic
Weighted average shares
outstanding – basic
Net income (loss) per share –
3,892
(271)
(33)
(304)
(90)
(214)
(0.06)
3,428
$
$
13,690
2,370
16,060
3,621
(1,434)
542
(892)
12,256
2,912
15,168
3,621
41,440
7,162
48,602
12,398
(5,809)
1,854
(3,955)
$
3,892
(271)
11,595
803
(33)
(55)
(304)
(90)
(214) $
748
287
461
$
(0.06) $
0.13
$
$
35,631
9,016
44,647
12,398
11,595
803
(55)
748
287
461
0.13
3,428
3,446
3,446
diluted
$
(0.06)
$
(0.06) $
0.13
$
0.13
Weighted average shares
outstanding – diluted
3,428
3,428
3,485
3,485
68
Corporate Information
Board of Directors
Officers
Alexander R. Lupinetti
Chairman of the Board,
President and Chief Executive Officer
CSP Inc.
Alexander R. Lupinetti
Chairman of the Board,
President and Chief Executive Officer
CSP Inc.
Christopher J. Hall
Municipal Bond Investor
(Self Employed)
C. Shelton James
Principal
C. Shelton James Associates
J. David Lyons
Retired Managing Director
The Carter Group, L.L.C.
Robert M. Williams
Retired Vice President
IBM Corporation
General Counsel
Foley Hoag LLP
Boston, MA
Gary W. Levine
Chief Financial Officer, Clerk and Treasurer
CSP Inc.
William E. Bent, Jr.
Vice President and General Manager
MultiComputer Division
CSP Inc.
Robert A. Stellato
Vice President of Finance
Chief Accounting Officer
CSP Inc.
Victor Dellovo
Vice President and General Manager
Modcomp Division
CSP Inc.
Annual Meeting of Stockholders
All interested parties are cordially invited to
attend the Annual Meeting of Stockholders on Thursday,
February 23, 2012 at 9:00 a.m.
at the Company’s corporate offices at
43 Manning Road, Billerica, MA 01821
Auditors
Investor Relations
McGladrey & Pullen, LLP
Boston, MA
Transfer Agent
To obtain additional copies of the Company’s
Annual Report for the Fiscal Year 2011, including
Form 10-K as filed with the Securities and Exchange Commission,
contact the Vice President of Finance at CSP Inc.
American Stock Transfer Company
New York, NY
Financial data may also be accessed online at
www.cspi.com
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