Qsgi, Inc - Indicate by check mark whether the registrant is a...

Qsgi, Inc - Recent Material Event

Item 405 of Regulation S-X ( §229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x

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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Small Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 29, 2007 (the business day of the Registrant’s most recently completed second fiscal quarter), was $22,756,083 (31,172,716 shares x $0.73 per share).

Number of shares outstanding of the Registrant’s Common stock, as of March 1, 2008, is 31,172,716.

A description of “Documents Incorporated by Reference” is contained in Item 15 Exhibits and Financials Statements.

	Table Of Contents

Item		Description	Page

		Part I

1.		Business	1
1A.		Risk Factors	8
1B.		Unresolved Staff Comments	13
2.		Property	13
3.		Legal Proceedings	14
4.		Submissions of Matters to a Vote of Security Holders	14

		Part II

5.		Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
6.		Selected Financial Data	18
7.		Management’s Discussion And Analysis of Financial Condition and Results of Operations	18
7A.		Quantitative and Qualitative Disclosures About Market Risk	27
8.		Financial Statements and Supplementary Data	27
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
9A(T)		Controls and Procedures	29
9B.		Other Information	31

		Part III

10.		Directors, Executive Officers and Corporate Governance	31
11.		Executive Compensation	34
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
13.		Certain Relationships and Related Transactions, and Director Independence	42
14.		Principal Accountant Fees and Services	44

		Part IV
15.		Exhibits, Financial Statement Schedules	45



		Signatures	46
		Financial Statements and Exhibits	48

PART I

Item 1. Business

Forward-Looking Statements And Associated Risk

The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein.

Certain statements in this Report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby.

All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control. These factors include:

Our growth strategies.

Anticipated trends in our business and demographics.

Our ability to successfully integrate the business operations of recently acquired companies; and

· Regulatory, competitive or other economic influences.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our continued ability to sustain our growth through continuing vendor relationships; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

References

References in this form 10-K to “we”, “us,” “our,” “the Company,” “WindsorTech,” and “QSGI” mean QSGI INC. and our subsidiaries, unless the context otherwise requires.

What We Do

We are a technology services and maintenance company. Our Data Center Maintenance and Hardware services as well as our Data Security and Compliance services are geared towards both the users of enterprise-class hardware (mainframes, midrange processors, large storage, controllers, etc.) as well as the users of business-computing hardware (desktops, laptops, related peripherals and servers). We use the trade name “QSGI” in order to build cohesion among the various technology services that we offer and build brand recognition and preference through strong cross-marketing opportunities.

Segments

Our company operates in three segments that clearly focus our services into easy-to-understand categories for our target customers:

A.	Data Center Maintenance

We provide hardware maintenance services for enterprise-class hardware and associated peripheral products and Data Center consulting to companies throughout the United States.

B.	Data Center Hardware

We are a reseller of refurbished enterprise-class hardware and associated peripheral products to companies. We remarket refurbished IBM mainframe processors, IBM midrange processors and associated peripheral products including tape and disk products and connectivity products.

C.	Data Security and Compliance

We provide data security and regulatory compliance services for end-of-life business-computing Information Technology (IT) assets. We offer a variety of solutions to companies whose business computing technologies (desktops, laptops, printers, servers and enterprise storage systems) have come to the end of their life cycle. These services include:

	- Data erasure to Department of Defense standards for hard drives
	- Asset Auditing/Life Cycle Management, which allows customers to minimize their overall IT expenditure and maximize their return on investment.
	- IT asset remarketing for IT assets with market value

- Environmental compliance (proper recycling or safe disposal) for IT assets

These services can be custom tailored to meet our customers' needs and implemented at QSGI facilities or at one client location or at multiple client-site locations, through the use of one of our client-site solutions including our mobile audit and erasure truck and our client suitcase server.

Across all three segments, we purchase excess, used, off-lease and refurbished hardware from a variety of sources including Fortune 1000 companies, as well as leasing and finance companies.

Data Center Maintenance Segment:

We provide hardware maintenance services on enterprise-class hardware and associated peripheral products to companies around the United States. Either as a separate service from the hardware sale or sold as a service along with a sale of hardware, our maintenance programs are a source of significant savings and reliability for clients. We offer:

24/7/365 Call Center capabilities

"Call Home" feature on hardware

Escalation planning (customizable)

Industry-leading field engineers backed by supervisory-level technical support

Comprehensive inventory of whole systems and critical back-up parts

Upgrades, features, add-ons in inventory

Preventive maintenance

Current patch and EC-level upgrades

Products we maintain include:

-	IBM mainframe products including z9 BC, z9 EC, z990, z890, z800, z900, 9672(G5 & G6)

-	IBM midrange products including pSeries, Sun and Hewlett Packard

-	IBM/OEM tape storage

-	IBM/OEM disk storage

-	Hitachi Data Systems (HDS) products

-	SAN and Storage maintenance including IBM, EMC and Hitachi Data System (HDS)

-	Tape: IBM, Sun/STK products

-	Connectivity products and controllers

Our competitive advantages that make our services valuable for our corporate end-users as well as leasing companies needing to manage “off-lease” enterprise-class hardware include:

-	our technical expertise.

-	our ready access to a strategic inventory of critical back-up parts.

-	our reduced pricing as compared to our competitors.

-	our greater expertise on multiple platforms including the heart of the data center, “the Mainframe.”

All training and back-up parts management for Data Center Maintenance is located in Minnesota. In addition, we have technical coverage and sales offices in 15 other states including Colorado, Illinois, Indiana, Kansas, Maine, Michigan, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Wyoming.

Data Center Hardware Segment:

We support our Data Center Maintenance clients' IT hardware needs as well as the IT needs of companies nationwide through our selling of refurbished enterprise-class hardware and associated peripheral products.

The enterprise-class products that we market include:

-	IBM mainframe products

-	IBM midrange products (AS/400 and RS/6000)

-	IBM/OEM tape storage

-	IBM/OEM disk storage

-	Hitachi Data Systems (HDS) products

-	EMC products

-	Connectivity products, controllers and mainframe printers

Very few resellers of enterprise-class hardware are able to offer data center managers refurbished mainframe products as well as technical expertise across all hardware categories found in the typical data center.

Because enterprise-class hardware is designed and manufactured to be reliable spanning several years, an alternative – such as QSGI – to choosing “new” hardware offers significant savings to our target audience.

Businesses that have already made purchasing decisions and saved money in the secondary market understand that there is often a fine line between “latest” technology and “current” technology. Others understand, however, that technology that is only one year old can easily meet their data center requirements – that year-old technology is still “current” for their purposes. Yet, the key difference is that those who choose “current” technology (as opposed to “latest”) do not absorb the initial depreciation and may pay only a fraction of the price of “new” technology.

Currently, IBM is the only manufacturer of mainframes in the world marketplace. This gives IBM the luxury of having no competition for new mainframes. Subject to our ability to re-furbish or reconfigure a used mainframe, the lack of competition for new mainframes creates a unique opportunity for us to sell used mainframes to customers needing to control capital budgets for IT hardware.

Technology that is introduced by IBM can be available in the used marketplace as early as 9-12 months after being introduced as a result of companies merging data centers, upgrading to the latest technology, filing bankruptcy or when hardware goes off lease.

During the third quarter, IBM significantly diminished our ability to resell zSeries mainframe systems by setting onerous restrictions around the ability to upgrade or downgrade the configuration deployed on a system. As a result, we discontinued the hardware trading portion of our hardware business. This caused goodwill and intangible impairment and the Company had to totally write off the goodwill and intangibles related to this segment. The Company believes these restrictions to be actionable, anti-competitive practices. The Company will continue to support the IT hardware needs of its maintenance customers.

Our Data Center Hardware group has its technical facilities in Minnesota along with sales and marketing.

Data Security & Compliance Segment:

We are a “best practice” provider of data security and regulatory compliance services for end-of-life business-computing IT assets. We offer a variety of services on a global basis to help companies with these assets to ensure compliance with federal and state mandates regulating the donation or disposal of such assets.

The primary services that we offer are:

Data security and regulatory compliance services:

§	Auditing and Detagging

§	Erasing of Hard Drive

- Department of Defense standard 3x up to 99X hard drive data erasure with no human intervention

- Automated process that generates a self validated digital certificate of erasure

§	Tape and Hard Drive Degaussing

- For failed or older storage media, QSGI uses (on-site at a client location or in our QSGI facility) a DoD grade degaussing machine to permanently destroy the storage media.

§	Regulatory Compliance Certification and Indemnification

- QSGI, through its data security processes, indemnifies our clients for all assets we process. This is to ensure our clients exceed all federal, state and local regulatory compliance statutes.

§	Real Time Extranet Reporting

- All reporting of assets (processed on-site at a client’s location or in our QSGI facility) is performed online. Clients have access to each asset processed and can track the progress from pick up to final audit and erasure.

§	Remarketing and Revenue Sharing Program

- Remarketing services to reduce or eliminate fees associated with hard drive data erasure and auditing

§	EPA Compliant Recycling

- All assets that need to be recycled are done via EPA approved partners.

Reverse Logistics:

§	Pack and ship service

§	Full logistics management

Client-Site Audit & Erasure Solutions:

Eliminating any risk even a single data breach that arises during transport from a client’s company’s facilities is why QSGI’s full suite of services described above, can be provided directly at the client’s facilities. QSGI provides all on-site services tailored to the client’s specific needs any where in the world regardless of the amount of equipment to be processed. QSGI’s current client-site Data Security & Compliance offerings include:

§	High Volume Solution— Mobile Audit & Erasure Vehicle Solution-All assets that need to be recycled are done via EPA approved partners.

§	Mid Volume Solution— Transportable On-Site Server Solution (OSS)

§	Low Volume & Multiple/Remote Site Solution— Web-Based Or Wan-Deployed Disk Drive Erasure Solution as well as QSGI’s eraseyourharddrive.com

Our data security and destruction services help companies achieve regulatory compliance with federal legislation including:

-	Gramm-Leach-Bliley Act - Requires companies which engage in financial activities such as insurance companies, banks, brokerage firms, etc. to ensure the security and confidentiality of customer information and protect against anticipated threats or hazards to information.

-	Health Insurers Portability & Accounting Act of 1996 (HIPAA) – Requires healthcare companies to ensure the confidentially of all protected health information and protect against anticipated threats or hazards to information.

-	Sarbanes-Oxley Act - Requires all publicly traded companies to protect investors by improving the accuracy and reliability of corporate disclosures. Requires companies to track the complete life cycle of all IT assets for seven years.

-	FTC FACT Act – Requires companies to protect consumers against unauthorized access to credit report information “in connection with the disposal” of computer and other records by erasure of hard drives.

-	Environmental Compliance – requires that the recycling of computers and related products be managed in a manner that is protective of human health and the environment.

In summary, our services are designed to help our clients to:

-	reduce the burdens of liability associated with regulatory compliance of IT assets.

-	reduce the overall expense of achieving regulatory compliance.

-	reduce the total cost of ownership for IT hardware.

-	permit IT professionals to focus on rapid changes in technology, service their internal clients and make sure their IT infrastructure is proactively helping their company maintain a competitive edge in the marketplace.

The market is highly fragmented with critical legislation driving the demand. There is no other technology services company offering similar IT “life cycle” services ranging from PCs to Mainframes.

In addition, the Data Security and Compliance segment re-sells a wide range of used and refurbished computer products, including servers, laptop and desktop computers, monitors, PC processors, CD/DVD disk drives, modems, printers and memory.

Our Data Security & Compliance group has technical facilities in New Jersey and New York, and sales, marketing and business development offices in New Hampshire, Florida, Oklahoma and Colorado.

Dependence on Major Customers

With the exception of several of our hardware maintenance contracts and data security contracts, which can be up to three years in length, we do not have any exclusive long-term arrangements with our customers for the continued sales of our products or services. At present, we operate primarily in the United States and have minimal assets in foreign countries.

We sell and deliver our technology services to customers throughout the United States and on 6 continents worldwide. For the years ended December 31, 2007 and 2006, sales to our top ten customers comprised 31% and 44% of our revenue, respectively.

A portion of our revenues is also derived from export sales. For the years ended December 31, 2007 and 2006, export sales comprised 17% and 14% of revenue, respectively.

Backlog

Customers typically do not place recurring "long-term" orders with us, resulting in a limited order backlog at any point in time. Our failure to receive orders from customers on a continuous basis could have a material adverse effect on our financial condition, results of operations and cash flows given our lack of recurring orders.

Employees

As of March 1, 2008, we employed 83 full-time and 16 part-time employees. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and senior management personnel, and our ability to attract and retain additional qualified personnel. If we are unable to hire and retain qualified personnel, our business will be seriously harmed.

Available Information

Our Internet website address is http://www.qsgi.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Compliance With Environmental Regulations

Federal, state, and local laws or regulations which have been enacted or adopted regulating the discharge of materials into the environment have not had, and under present conditions we do not foresee that they will have, a material adverse effect on our capital expenditures, earnings, cash flows or our competitive position. We will continue to monitor our operations with respect to potential environmental issues and costs, including changes in legally mandated standards.

We recycle used equipment that may contain hazardous materials through one of several EPA certified recyclers. For a fee, these recyclers manage commodities and materials for recycling in accordance with applicable local, state and federal laws, rules and regulations. Upon receipt of materials for recycling, they provides us with a Certification of Destruction that, in part, certifies that the materials were accepted for the purpose of recycling and/or destruction in accordance with all applicable standards including federal, state and local requirements.

Recent Developments

Other Information

On June 22, 2006, under the terms of the acquisition agreement, as amended, with Qualtech International Corporation and its affiliate, Qualtech Services Group, Inc. that was completed on May 28, 2004, additional merger consideration was paid to the selling shareholders. The selling shareholders were entitled to receive additional merger consideration in the form of restricted shares of the Company. 2,063,545 shares were issued at a value of approximately $1.66 per share resulting in additional goodwill in the amount of $3,432,089.

On January 17, 2007, the Company completed the financing of a new $7.5 million working facility with Wells Fargo Bank, which increased and replaced a similar based line of credit of $4.25 million. The new revolving line of credit agreement provides for borrowing limited to the lesser of $7,500,000 or the borrowing base of 85% of eligible accounts receivable plus 45% of eligible inventory, with eligible inventory not to exceed $3,000,000. On June 29, 2007, we completed an amendment to the revolving line-of-credit which reset some of the covenants.

On September 17, 2007, the Company held its annual stockholders meeting in Palm Beach, Florida and re-elected Seth A. Grossman and R. Keith Elliott to the Company's Board of Directors to hold office until the Company's Annual Meeting of Stockholders in 2010 or until their successors are duly elected and qualified; ratified the appointment of RubinBrown LLP as the Company's independent certified public accountant for the fiscal year ending December 31, 2007.

On February 6, 2008, Wells Fargo Bank notified the Company that although the Company has performed its monetary obligations pursuant to its credit facility, the Company did not meet certain operating metrics in its credit facility for the fiscal year ended December 31, 2007. While Wells Fargo Bank has indicated to the Company that such an event constitutes a default under the credit facility, it continues to work with the Company in a cooperative and constructive manner in order to allow the Company to continue toward meeting the operating metrics. As a consequence, Wells Fargo Bank has charged the Company a fee of $20,000 for maintaining the existing credit facility and notified the Company that it will amend its borrowing rate to that of the prime rate plus 2.5%. Should the Company come back into compliance, interest will be reduced to the prime rate.

Item 1A. Risk Factors

Factors Affecting Future Operating Results

You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our