** **

**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,  2005** | **Commission File No.  0-11336** |
|---------------------------------------------------|----------------------------------|

 

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**CIPRICO INC.**

(Exact Name of Registrant asSpecified in its Charter)

 
| **Delaware**                                                    | ** ** | **41-1749708**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**17400 Medina Road**

**Plymouth, Minnesota 55447**

(Address of Principal Executive Offices,Including Zip Code)

 

Registrant’s Telephone Number,

Including Area Code:  **(763) 551-4000**

 

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Securities registered pursuant to Section12(b) of the Exchange Act:**None**

 

Securities registered pursuant to Section12(g) of the Exchange Act:**Common Stock (par value $0.01 per share)**

 

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Indicate by checkmark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirement for the past 90 days.  Yes ý   No o

 

Indicateby checkmark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K  ý

 

Indicate by checkmark whetherthe registrant is an accelerated filer (as defined by Rule 12b-2 of theAct).  Yes o  No ý

 

Indicate by checkmark whetherthe registrant is shell company (as defined by Rule 12b-2 of the Act).  Yes o  No ý

 

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Theaggregate market value of shares held by non-affiliates was approximately $22.5million computed by reference to the last sale price of the Company’s CommonStock, as reported in the NASDAQ National Market system, on March 31, 2005, thelast business day of the Company’s most recently completed second fiscalquarter.

 

As ofOctober 31, 2005, the Company had outstanding 4,787,257 shares of Common Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions ofthe Proxy Statement for the Annual Meeting of Stockholders to be held on orabout January 26, 2006 are incorporated by reference into Part III of thisreport.

 

 

 

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CIPRICOINC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED SEPTEMBER 30, 2005

 
| PART  I  |                                                                                                                |   |
|----------|---------------------------------------------------------------------------------------------------------------------|--------|
| Item  1  | Business                                                                                                            | 3      |
| Item  2  | Properties                                                                                                          | 15     |
| Item  3  | Legal  Proceedings                                                                                                  | 15     |
| Item  4  | Submission  of Matters to a Vote of Security Holders                                                                | 15     |
|     | Executive  Officers of the Registrant                                                                               | 15     |
|     |                                                                                                                |   |
| PART  II |                                                                                                                |   |
| Item  5  | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 16     |
| Item  6  | Selected  Financial Data                                                                                            | 16     |
| Item  7  | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 17     |
| Item  7A | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 21     |
| Item 8   | Financial Statements and Supplementary  Data                                                                        | 22     |
| Item 9   | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                               | 35     |
| Item 9A  | Controls and Procedures                                                                                             | 35     |
| Item 9B  | Other Information                                                                                                   | 35     |
|     |                                                                                                                |   |
| PART III |                                                                                                                |   |
| Item 10  | Directors and Executive Officers of the  Registrant                                                                 | 36     |
| Item 11  | Executive Compensation                                                                                              | 36     |
| Item 12  | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     | 37     |
| Item 13  | Certain Relationships and Related  Transactions                                                                     | 37     |
| Item 14  | Principal Accounting Fees and Services                                                                              | 38     |
|     |                                                                                                                |   |
| PART IV  |                                                                                                                |   |
| Item 15  | Exhibits and Financial Statement  Schedules                                                                         | 38     |
|     |                                                                                                                |   |
|     | Signatures                                                                                                          | 39     |
|     | Exhibit Index to Form 10-K                                                                                          | 40     |

 

 

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**NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certainstatements contained in this Annual Report on Form 10-K, including, butnot limited to, statements regarding the development and growth of our business,our intent, belief or current expectations, primarily with respect to ourfuture operating performance and the products we expect to offer and otherstatements contained herein regarding matters that are not historical facts are“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, and are subject to the “safe harbor” created by thosesections.  Generally, words such as “may,”“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “will,” “predict,”“intend,” or “potential” and similar expressions identify forward-lookingstatements.  Because such statementsinclude risks and uncertainties, many of which are beyond our control, actualresults may differ materially from those expressed or implied by theseforward-looking statements.  These risksand uncertainties include, but are not limited to: (i) competitivefactors, including pricing pressures; (ii) variability in quarterly sales;(iii) economic trends generally and in various markets; (iv) generaleconomic conditions; (v) unanticipated risks associated with introducingnew products and features; and (vi) other events and important factorsdisclosed previously and from time to time in our filings with the U.S.Securities and Exchange Commission (SEC). Future SEC filings, future pressreleases and oral or written statements made by us or with our approval, whichare not statements of historical fact, may also contain forward-lookingstatements.

 

Readers arecautioned not to place undue reliance on these forward-looking statements.  Forward-looking statements speak only as ofthe date on which they were made, and except as required by law, we assume noobligation to update any forward-looking statements. Although we believe thatthe expectations reflected in these statements are reasonable, we cannotguarantee future results, levels of activity, performance or achievements.  We do not intend to update or revise anyforward-looking statements whether as a result of new information, futureevents or otherwise.

 

 

**PART I**

 
| **ITEM 1.** | ** ** | **BUSINESS** |
|-------------|------------|--------------|

 

**General Development of Business**

 

Ciprico Inc. designs, manufactures andmarkets appliances, services and solutions for digital media applications.  Our solutionscombine storage, networking and computing technologies to improve theproductivity of customer workflows for the capture, creation, manipulation,archival, management and distribution of digital assets.   Our storage appliances are designedprimarily for visual computing applications ranging from high-speed image datacapture, through processing and analysis, to real-time playback at sustainedperformance levels within our target markets: content creation (including bothpre-media and video), post production (including digital cinema), broadcast,military and government and other rich media application markets.

 

We were incorporated under thename Computer Products Corporation in February 1978 and changed our name toCiprico Inc. in May 1983.  Until 1990, wedeveloped and manufactured controller-based products for manufacturers and endusers of computer systems.  In late 1990,we introduced for sale our first RAID (Redundant Array of Independent Disks)data storage product.   Throughout the 1990’s,we provided the industry standard for reliability in disk arrays with the 6700,6900 and 7000 FibreSTORE*®*series.  In January 2005, we purchasedsubstantially all of the assets of Huge Systems, Inc. including theirMediaVault product line, which was focused on the video and graphic contentcreation marketplace.

 

                Today, our business is primarily focused onproviding products and services that provide superior performance-based valueto meet the demanding data transfer rate, storage capacity and data redundancyneeds of digital media workflows.  Weoffer a range of open platform, disk-based solutions, including products thatimplement a variety of RAID techniques including RAID 0 or 3 for single streambandwidth, RAID 4 for multi-stream high bandwidth, RAID 5 for high input/output(I/O) oriented uses and RAID 6 for continued performance with two faileddrives.  We also provide NAS (NetworkAttached Storage) systems, focused on meeting the multi-stream demands of networkeddigital media workgroup applications.

 

**Narrative Description ofBusiness**

 

(1)**           Products and Services.**

 

***Products*.**

 

We design, develop and manufacture all of ourproducts to operate at peak performance levels while maintaining highreliability.  We offer customers a choice of several differentsolutions depending on their value and performance needs with List Prices forour products ranging from approximately $3,000 to $67,000 per system dependingon the features selected by the

 

 

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customer.  Very high performance applications mayrequire one or several systems.  Ourproducts are organized into four product line families: MediaVaultTM, FibreSTORE*®*,NETarray*®* and DiMeda*®*.

 

Our *MediaVault**TM* product line family is marketed primarily throughdealers and integrators in the pre-media and video content creation industrywho combine the high bandwidth attributes of MediaVault with high definitionand film resolution software/hardware components for a complete solution fortheir end user customers. Our current product offerings come in two principalversions: the S models have stationary or non-removable drives and the R modelshave removable drives for improved field service.

 

MediaVaultU320-S and U320-S Dual are respectively single channel and dual channelappliances with Ultra 320 SCSI (Small Computer System Interface) hostinterfaces and ATA (Advanced Technology Attachment) drive interfaces using thesame desktop chassis. The MediaVault U320-S****isa 5-drive system with capacities from 800 GB (Gigabytes) to 2 TB (Terabytes) and the U320-S Dual, a 10-drivesystem, having capacities from 1.6 to 4TB, each channel capable of data ratesin excess of 200MB (Megabytes) per second (which translates in our markets tothe ability to stream 10 bit uncompressed HD (High Definition) resolutionfiles). Each system has dual cooling fans and a single 200 watt power supply.The MediaVault U320-S Dual is essentially two MediaVault U320-S disk arrays ina single chassis. Each disk array is independent with its own disk drives andU320 controller. The U320-S and S Dual****canbe configured in RAID 0 (performance) or RAID 3 (protected) operation.

 

MediaVaultU320-R and RX are next generation versions of the S products in anergonomically designed chassis, with the same hardware RAID technologyproviding identical performance as the S models, but having greater userserviceability through removable drives and, in the case of the RX version,redundant power supplies. The RX version has the added benefit of being rackmountable.

 

MediaVault4105 and 4210 are the Company’s first 4Gb (Gigabit) Fibre Channel storageappliances and are market-leaders in this format, utilizing ATA disk technologyto provide both excellent value/performance metrics and quiet, heat minimizingfeatures. They share the same chassis as the R and RX systems, the 4105 being asingle channel, 5-drive system and the 4210 a dual channel 10 drive system,each channel capable of data rates in excess of 250MB/second, making theseproducts ideal for use in HDTV and film resolution applications. These productswere launched at 2005 NAB show (National Association of Broadcasters).

 

MediaVault4110 employs the same 4Gb Fibre Channel RAID controller as the 4105/4210systems but offered in a 1U (one rack mount unit) chassis. Having a single 4GbFibre Channel, this product is capable of similar data transfer rates to the4105, but the product density lends it much more to near line storage solutionssuch as archiving and digital asset management at a very low cost per MB. Thissystem was released in late September 2005.

 

Upgradedversions of the 4Gb MediaVault products allow for multiple product “daisychaining” in archiving applications and is expected to be released in late2005.  A RAID 6 dual controller productwas also demonstrated at NAB 2005 and is expected to ship in early 2006.

 

Infinibandbased MediaVault products are also being developed for the 4K digital filmcapture market and are expected to be the price performance leader in digitalcinema workflows.

 

Our *FibreSTORE®*product line family utilizes RAIDtechnology based on Ciprico design and manufacturing, and incorporates ourcommon RAID software platform described below. The FibreSTORE software platformwas designed for flexibility and is primarily marketed as an OEM (OriginalEquipment Manufacturer) product available as a completed product or as acontroller only.  In addition, beginningin fiscal 2006 FibreSTORE will be available through a software licensearrangement.

 

*FibreSTORE2210*is a continuation of previous generations ofCiprico RAID technology and offers 2Gb Fibre Channel technology for both thehost and drive interfaces.  The basesystem is comprised of two RAID controllers, ten disk drives and redundantpower supplies.  The product scales incapacity to 24 TB per system by utilizing expansion chassis, each of whichcomprises two interfaces, ten disk drives and redundant power supplies.  Its unique set of benefits to the customerare in the area of enhanced application performance as it pertains to ensured,uninterrupted data availability at full performance levels withoutdisruption.  These features make theproduct best-in-class for high bandwidth applications for the military andbroadcast markets.

 

*FibreSTORE 2212A* isa dual RAID system with 2Gb Fibre Channel host interfaces and twelve SATA(Serial ATA) disk drives. The product was designed employing Ciprico’sAccelerated Drive TeamingTM software as the key differentiated feature.  Accelerated Drive Teaming, or XDT for short,is a methodology utilizing hardware and software techniques to overcome theinherent drive delays found in desktop drives.  A 4Gb version is planned for release in early 2006, as is an iSCSI(internet Small Computer System Interface) based capability by mid 2006.

 

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*TALONTM 2211* is a highly ruggedized product for militaryapplications.   The mechanical chassis isdesigned to enable the operation of a disk array in harsh environments oftemperature, shock, vibration, salt-fog, etc. Additionally, the patent pending removable disk pack feature is a keydifferentiation, enabling the portability benefits of tape, with the randomaccess benefits of disk drives.  TALON2211 uses the same Ciprico developed RAID technology as our FibreSTORE 2210family.  This enables the TALON toachieve 2Gb/second performance through each of the two active RAID controllersin the product for high data rate recording and playback applications.  The TALON 2211 can be configured with up toeleven (11) 300GB drives for a total unit capacity of 3.3TB.  The next generation TALON product is beingdeveloped for a military client, utilizing low cost SATA drives and a lightermore compact chassis.

 

                Our *NETarray®*productline family is targeted at both digital media and general-purpose storageapplications.  The NETarray products areprovided in conjunction with third party alliances to provide reliable, costeffective solutions for our existing customers. The NETarray family is designed for simplicity of use, enabling ourchannel partners to successfully sell and support the products in a widevariety of end user applications.

 

The *NETarray2215AH,**2215AM* and *2215F* are RAID subsystems consisting oftwo RAID controllers, each with 2Gb Fibre Channel host interfaces.  Each of these systems includes fifteen (15)SATA disk drives and redundant power supplies. The RAID controllers support RAID levels 0,1, 1+0 and 5 and can beconfigured in single or dual RAID configurations.

 

Our *DiMeda®* product line family isbased on the industry technology known as Network Attached Storage (NAS). The first offering in the DiMeda family wasreleased in March 2002.  This product was designed to provide high performance, high-availability, sharedstorage utilizing IP based networking protocols.  The DiMeda family utilizes the industry standard networkingprotocols of CIFS (Common Internet File System) and NFS (Network File System) in a file based sharedstorage system deliveringnear-Fibre Channel SAN (Serial Attached Network) performance with theease-of-use of an appliance.  It is builton standard off the shelf PC motherboard and chassis hardware with Linux basedsoftware components. Our ongoing product development in the DiMeda area isfocused on adding additional software features to further enhance thescalability and performance, simplifying the installation and maintenance, aswell as providing premium software services. All product offerings within the family share the same network attachedsoftware libraries.

 

The *DiMeda 3600* provides flexibleconfiguration options so that it may be purchased in single head or dual serverconfigurations, expandable capacities and a variety of software enhancements tothe basic functionality.  It is the modelin the DiMeda family that offers complete failover and fail-back of the NASservers and attached storage — a requirement for high availabilityapplications.

 

                The *DiMeda 1700* is configured as a single,integrated solution which includes the NAS server processor board, an internalRAID controller manufactured by a third party and twelve (12) SATA disk drives.It is targeted at workgroup-based applications requiring multi-stream sharingof digital media content such as in video editing.

 

                The *DiMeda 1724* is an extension of theoriginal 1700 model and targeted at applications with larger capacityrequirements.  The 1724 is configured asa single, integrated solution which includes the NAS server processor board,two internal RAID controllers and twenty-four (24) SATA disk drives.

 

                The *DiMeda 10G* is a 10Gb NAS system and is anextension of the original 1700 model. It is targeted at applications thatrequire sustained data rates exceeding 300 MB/second such as multi-stream HDediting.  The DiMeda 10G is configured asa single, integrated solution, which includes the NAS server processor board,two internal RAID controllers, and twenty-four (24) SATA disk drives.  DiMeda 10G is expected to be available forproduction in early 2006.  DiMeda 1724customers can be upgraded to 10Gb ethernet technology via an upgrade kit.

 

                The *TALON-NAS* combines the NAS functionalityfound in our DiMeda 3600 with our TALON 2211 disk array.  This product is targeted at militarycustomers, who require the ease-of-use of NAS, with the removable disk packfunctionality of the TALON product.  Thisproduct is under development and is currently scheduled for production releasein early 2006.

 

The foundationof our product strategy is a Common Software Platform across all ourproducts.  This commonality includesthree primary libraries — MediaVault RAID software, FibreSTORE RAID softwareand DiMeda NAS software.  The FibreSTOREfamily is based on the FibreSTORE RAID array software and includes uniquefeatures of Accelerated Drive Teaming, guaranteed performance in degradedmodes, as well as premium software packages enabling entire disk packs to beremoved and replaced from the base unit. Future additions to the FibreSTORE family will continue to employ thecommon array software.  Additionally, itis planned for DiMeda to utilize both FibreSTORE and TALON storage products asback-end storage options.  As theseproducts evolve, we have developed the software to be able to port easily tofaster and more powerful processors or interface technologies as they becomeavailable in the marketplace, thus improving our time-to-

 

 

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market in introducing newproducts.  The focus on software willalso result in greater utilization of commodity-based hardware components thatwill maintain cost competitiveness and focus our engineering resources on theintellectual property unique to Ciprico. While our software is most often bundled with hardware and sold as acomplete solution, in fiscal 2006 we have begun marketing our software vialicensing to select strategic customers.

 

The MediaVaultRAID software family is a third generation code set that is focused onproviding very high performance throughput for video applications using RAID 0and RAID 3 in a very low cost hardware architecture thus providing a superiorvalue for the content creation market.

 

The DiMedafamily utilizes our common NAS software. This software consists of several code sub-libraries, including opensource operating and file systems. Ciprico also developed components for the clustering and management ofdevices, capacity and performance for multi-stream environments. Ciprico’snetwork attached software provides reliable and efficient shared file servicesacross ubiquitous IP network infrastructure. Demand for storage services at the shared file system level is expectedto increase as networking technology improves to enable high end digitalimagery processing and distribution across multiple heterogeneous servers.Software distribution is controlled by a set of licensing keys on the basefunctionality as well as for premium options like capacity and bandwidthmanagement enabling third party manufacturing and multiple end userconfigurations.

 

***CustomerServices.***

 

***                Standard Warranty.***

Included with almost everyproduct sale is our standard warranty (generally 3 years), which comprisesstandard business hours telephone support to record, diagnose, advise on andsolve issues of operational nature relating to all products.  Standard warranty technical support can alsobe accessed through e-mail or by filling out and submitting the appropriateform on our website.  In the event ofproduct or component failure, the technical support team works with salessupport to respond appropriately. Shipped products are supplied with a standardreturn-to-factory warranty.

 

## ***Product Service Programs.***

## **In addition to the standard warranty offered on product sales, we offera range of contract-based service programs with ascending levels of productservice coverage.  These service programsare adjunct to the standard warranty and comprise the following:**

 

i)                                         Lights On — 24x7 telephone support. Essentiallyan all-hours version of the technical support detailed above.

ii)                                      Hot Spare — Advanced Parts Replacement availableas 1, 2 or 3 year contracts whereby in the event of a part failure the customercan request the shipment of a new replacement part before the failed part isreturned.

iii)                                   Hot Spare with Secure Site Rider — As above but intendedfor those with equipment in a secure environment.

iv)                                  On Site Service — 1, 2 or 3 year contractsproviding different support levels: Next business day or same day; 4 hour or 8hour response; Monday-Friday or 24x7 coverage. These services are offeredthrough a third-party service partner. Telephone support matching the coveragepurchased is automatically included with these services.

 

                Our Hot Spare Programs provide customers withdelivery of replacement parts from an authorized Ciprico parts depot.  Depots are currently located in Minneapolis,Louisville, the United Kingdom and Singapore.

 

## ***OtherCustomer Services.***

We also offerprofessional services as our systems engineering group provides design, prototyping,performance tuning, testing, statements of work and proposals for storagesolutions when requested by customers. In the event that an engineer has to goto customer site to provide any or all of the above, a fixed daily fee mayapply.  In addition to professionalservices we also provide technical training, which may include classes that are offered at a customer siteor at Ciprico headquarters for up to 6 students.  Standard repair outside of the standardwarranty provides 10-day turn-around of repaired part for most productsand 2-day turn around for MediaVault products.

 

 

(2)**           Marketing and Distribution.**

 

***Markets.***

 

Our marketfocus is digital media workflows, with our primary focus on content creation(including both pre-media and video), post-production, broadcast, and militaryand government.  In each of thesemarkets, we concentrate on applications where our customers need performance,high reliability and value to accelerate their workflow and improve theirprofitability.

 

 

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Inherent toall the applications within each of our primary markets is a “digital mediaworkflow” which is that industry’s version of a production line.  For the content creation market, the workflowcenters around the “raw material” stage of production as the digital or videoasset is created at this level. In post production the workflow starts withingest of content from a video tape or film that is scanned and taken through aprocess, defined as Digital Intermediate, where editing, rendering, colorgrading or correction and other effects produce finished content that isrecorded back onto tape or film or played out digitally.  In the case of the broadcast market, theworkflow is characterized by ingesting incoming video feeds from satellites andremote news crews, editing the raw video to prepare the news story and then a “play-to-air”process where the video is broadcast from the network feed.  For military applications the workflow beginswith surveillance gathering followed by image processing and concludes with thedissemination of data to military commanders in the field.  We believe our understanding of theseapplication workflows positions our products to be successful in our targetmarkets.  Our technology development isfocused on solutions that improve the productivity of these workflows for theend users.

 

*Content Creation. *Companies involvedin video content creation such as advertising agencies, post-production housesand video production companies are our primary focus.  As these workflows move from SD (StandardDefinition) assets to HD (High Definition) the need for storage increasesexponentially.  Applications within thisrapidly expanding global market segment have traditionally included 3Danimation, special effects, film restoration, editing and archive.

 

*Post-Production. *Traditionallypost-production has referred to the special effects and post capture market inthe film industry.  In the future thecapture of the image will be done with a digital camera, rather than film,creating a significant opportunity for the next generation of “ digital film”and archives for the digital intermediate work (i.e. special effects, lightingchanges, etc.) and ultimately the permanent archiving of these assets.

 

*Broadcast*.  Thismarket segment includes companies that create, edit, manipulate and broadcastimages, in real-time using digital technology, which provides reduced cost ofownership and increased productivity over traditional film and tape basedmethods.  The expansion of HDTV worldwideprovides opportunity for vendors with solutions that improve the productivityof creating, managing and storing HD content. Our solutions meet the requirements of broadcast and video services applications,which require very high bandwidth and absolute reliability to supply manysimultaneous video streams to multiple users where interruption of service anddead airtime is not acceptable.  Withimages stored as data, applications for storage devices within the televisionbroadcast segment include electronic news gathering, commercial and promotionalinsertion and TV broadcast.

 

*Military and Government*.  Ourprimary focus in this market segment are applications commonly referred to as “Commandand Control” or C4I.  The primaryapplications within the C4I are those involving the collection, processing anddissemination of visual reconnaissance and surveillance data.  Mission planning, intelligence gathering andtargeting applications involve capturing visual data via airborne or space-basedsatellite sensors in reconnaissance and surveillance applications.  A single image frame ranges from a fewmegabytes up to 14 GB in size, with the data capture phase requiring thecollection of hundreds to thousands of frames per day.  In the case of satellite-based imagerysensors, our products are used at the supporting ground stations.   For airborne applications, our products areonboard aircraft and imagery data is captured at a very high transfer rate.  In the image processing and archivingapplications, the imagery data created from the capture phase must be processedbefore it is usable for end-users.  Onceprocessed, the imagery data is stored in digital asset management databases forfast query and retrieval.  Thesedatabases often reach multiple terabytes in size and require the high bandwidthperformance our products provide.

 

                *Other Markets*.  Our products are also used in other richmedia applications in medical imaging and digital security.  For medical imaging, picture archive andcommunications systems (PACs) involves the archiving and retrieval of medicalimages such as digital x-rays, mammography, CAT scans, MRIs, etc.  PACs application requirements for storagesystems include low-cost, easy-to-use, ability to add capacity over time,on-site support capability and features to protect the medical images utilizingdisaster recovery methods.  DigitalSecurity markets employ disk-based storage as a repository for images recordedfrom Digital Video Recorders (DVRs) and with the advent of IP based cameras,are increasingly using networked recorders and storage to meet customer demandfor more easily manageable and trackable images.

 

                ***Sales Channels.***

 

Our products are sold through adirect sales force calling on a combination of OEMs, system integrators,distribution partners and dealers.  Ourdirect sales organization is primarily responsible for “demand creation”activities and customer development within these distribution channels in theUnited States.  We also haverepresentation in Canada and Europe via independent representativeorganizations.  In addition to our salesforce, we have inside sales and pre-sales system engineering resources thatwork closely with the sales teams.  Theseresources complement our direct sales forces, as well as our representativeorganizations.

 

 

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As a part ofour marketing and sales strategy, we enter into relationships with companiesthat could play an important role in the successful marketing of our products.Historically, our storage solutions have been sold to OEMs and systemsintegrators for inclusion in their own solutions delivered to end-users. Theinitial sales process for OEMs and system integrators is complex, requiringinteraction with several layers of the customer’s organization and extensivetechnical exchanges as well as product demonstrations with sales cycles rangingfrom three to eighteen months.  Duringfiscal 2005, we focused a portion of our sales efforts on distribution partnerswith an existing network of dealers, integrators, and resellers, and to alimited degree, large end-users including government departments andagencies.  Typically, these distributionpartners provide a wide range of storage products to both general purpose andvertical markets.  Distribution anddealer sales cycles are typically shorter and range from two weeks to threemonths.

 

 

(3)**           Status of New Products.**

 

See item (10) below.

 

(4)**           Competition.**

 

The market forall levels of storage solutions is highly competitive.  We compete against independent storagesuppliers, including but not limited to EMC Corporation, Dot Hill Corporation,Infortrend Technology, Inc., Xyratex,  aswell as numerous privately-held companies including Isilon, Data Direct, BlueArc and Pillar Data.

 

The markets inwhich we operate are characterized by rapidly changing technology and evolvingindustry standards, resulting in rapid product obsolescence and frequentproduct and feature introductions and improvements. We compete with severalcompanies that have greater engineering and development resources, marketingresources, financial resources, manufacturing capability, customer supportresources and name recognition. As a result, our competitors may have greatercredibility with existing and potential customers. They also may be able toadopt more aggressive pricing policies and devote greater resources to thedevelopment, promotion and sale of their products than we can to ours, whichwould allow them to respond more quickly than we can to new or emergingtechnologies and changes in customer requirements. These competitive pressuresmay materially harm our business.

 

Our ability to competesuccessfully depends upon our ability to continue to develop high performanceand high reliability products in a timely manner that obtain market acceptanceand can be sold at competitive prices. Although we believe that our solutions have certain competitiveadvantages, there can be no assurance that we will be able to competesuccessfully in the future or that other companies may not develop productswith greater performance and thus reduce the demand for our products, or thatwe will not encounter increased price competition for such products which couldmaterially and adversely affect our operating results.  Also, our customers and other manufacturerscould develop their own solutions rather than use our products, which couldmaterially and adversely affect our operating results.

 

(5)           **Manufacturing andSuppliers.**

 

Our productsare manufactured utilizing both configure-to-order and inventory fulfillmentoperations models.  In-housemanufacturing activities for our products primarily involve quality assurancetesting of subassemblies, final system assembly, integration and final test.Our assembly operations are ISO 9001:2000 certified, located in Plymouth,Minnesota and are typical of the electronics industry with no unusual methodsor equipment required.  The sophisticatednature of some of our products does, however, require extensive testing byskilled personnel.  With the purchase ofthe MediaVault product line in January 2005 our product line wasbroadened.  The manufacturing of theexisting MediaVault product line was transitioned to Plymouth, MN in April of2005.

 

We purchasecertain raw materials and components for our MediaVault and DiMeda productlines based on historical demand levels. Procurement for all other product lines is demand driven.  Customers may generally cancel or rescheduleorders without penalties. Accordingly, we believe that backlog is generally notmeaningful for purposes of predicting our revenue for any fiscal period.

 

Our storageproducts are comprised mainly of a controller, an enclosure, disk drives, powersupply and other miscellaneous parts. Although the subsystems are unique and not readily available, they docontain many components that are industry standard parts that are readilyavailable from many suppliers at competitive prices.  Our controller board assemblies are purchasedfrom ISO 9001 contract manufacturing companies, which manufacture theassemblies to our specifications.  Thecompleted board assembly is received at our facility where it is subject totest procedures to insure product performance, reliability and quality.  The metal enclosure and power supply arespecified to our needs, but alternative sources for the components areavailable.  Some of our DiMeda productsare sourced as a fully-integrated hardware solution 

 

 

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from our supplier, with oursoftware loaded at their location.  Insome instances, these DiMeda products can be final tested and shipped directlyto our customers from our supplier.

 

We dependheavily on our suppliers to provide high quality materials on a timely basisand at reasonable prices.  We purchase asubstantial amount of disk drives manufactured by Seagate Technology Inc. (“Seagate”),Hitachi Global Storage Technologies (“Hitachi”) and Maxtor Corporation (“Maxtor”).  We purchase substantially all our disk drivesand certain other components via a consignment purchase program through adistributor, Bell Microproducts Inc. (“Bell”) or on the “on the spot” marketdepending on price trends.  All othercomponents are procured pursuant to purchase orders, although we do haveagreements with certain suppliers for the procurement of components thatinclude provisions for purchase commitments of up to ninety (90) days offorecasted demand.  Furthermore, becauseof increased industry demand for many of those components, our suppliers may,from time to time, not be able to make delivery on orders on a timelybasis.  In addition, manufacturers ofcomponents on which we rely may choose, for numerous reasons, not to continueto make those components or the next generation of those components availableto us.

 

For certaincomponents, such as disk drives or controller boards, if we had to seekalternative sources of supply, the incorporation of such components fromalternative suppliers and the manufacture and shipment of the our productscould be delayed while modifications to such products and the accompanyingsoftware were made to accommodate the introduction of the alternative suppliers’components. We estimate that replacing certain components, such as ourcontroller board, or changing manufacturers would involve several months ofhardware and software modifications and would disrupt sales.

 

We have nolong-term supply contracts.  There can beno assurance that we will be able to obtain, on a timely basis, all of thecomponents we require.  If we cannotobtain essential components as required, we could be unable to meet demand forour products, thereby materially adversely affecting our operating results andallowing competitors to gain market share. In addition, scarcity of such components could result in cost increasesand adversely affect our operating results. Our principal suppliers are Bell, Plexus Inc., Du Fresne ManufacturingCo., Arrow, JMR and Adaptec Inc.

 

 

(6)**           Customer Dependence.**

 

Our products are sold to a broad base ofcustomers.  As a percentage of sales,Thomson Broadcast Solutions, represented 18% and 35% of net sales in fiscal2005 and 2004, respectively.

 

(7)           **Patents and Trademarks.**

 

As part of theacquisition of the assets of Huge Systems, Inc. in January 2005, the Companyobtained rights to a patent pending for Media Server with single chip storagecontroller.  In September 2005, thispatent was awarded to Ciprico and will be issued in November 2005.  This patent relates to the conversion ofdigital medium direct from disk to TCP/IP (Transmission ControlProtocol/Internet Protocol) format for distribution.   The market applications are in digitalcinema, Video on Demand and related remote play out applications.

 

In March 2004,we were granted a patent related to the interprocessor communication technologysuitable for use in high reliability / availability storage serverproducts.  We have also submitted twoadditional patent applications on certain key attributes of the TALON product.  These patent applications disclose aspects ofremovable disk pack technology as it relates to a redundant array ofindependent drives.

 

We intend topursue other patent applications to the extent we identify technologies orprocesses that may be patentable in the digital media workflows.  Protection of our proprietary hardware,firmware and software is very important to us.

 

We also relyupon copyright, trade secret protection and confidentiality agreements with ouremployees, customers, suppliers and partners, to preserve our intellectualproperty rights in this material.  Wehave obtained federal registrations for the trademarks Ciprico®, NETarray®,DiMeda®, SANITY® and FibreSTORE® and have a registration application pendingfor our trademark Accelerated Drive TeamingTM. As Part of the asset purchase from Huge Systems, Inc. we obtained therights for the use of trade names Huge Systems, Huge Sanstream and HugeMediaVault.

 

(8)**           Backlog.**

 

We historically have operatedon low levels of backlog, and therefore, do not consider the level of backlogto be indicative of future operating results. As of September 30, 2005, we had approximately $103,000 in backlog thatis scheduled to ship in fiscal 2006.

 

 

9

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(9)           **Government Approvalsand Effect of Government Regulations.**

 

Certain of our products mayincorporate encryption or other technology subject to the “dual use” exportregulations as administered by the U.S. Department of Commerce.

 

We are not required to obtaingovernment approval of our products when they are not exported.  We do not believe that any existing orproposed governmental regulations not pertaining to export regulation will havea material effect on our business.

 

(10)**         Research and New Product Development.**

 

We operate in an industrysubject to rapid technological change. Our goals in research and development are to develop performance basedsolutions that meet the needs of our customers and provide a return consistentwith our corporate objectives.  Ourability to achieve this goal is largely dependent upon our ability toanticipate and respond to change.  We useengineering design teams that work cross-functionally with sales and marketing,system engineering and customers to develop products and product enhancements.  As part of our development strategy, we activelyseek available, cooperative and co-development activities with industry leadersin the hardware, software and systems businesses.

 

The majority of our researchand development efforts are focused on the development of stand-alone storageappliances.  We were the firstmanufacturer to introduce a disk array integrating the Fibre Channel interfacein 1996. Through 1999 our products were focused on high-bandwidth RAID 3 and 4applications.  With the introduction ofour Common RAID Software and our NETarray family of products, we have broadenedour product offering to include transaction-based RAID 5 capabilities, whilestill satisfying the needs of bandwidth applications.

 

A focus of our current productdevelopment activities is in the film and video workflow markets utilizing RAID6, Infiniband and unique archival strategies.  In addition, the FibreSTORE common software platform will be enhancedwith an iSCSI interface specifically for a military client who is paying forits development and the capability to run at 4Gb speeds.   Our DiMeda products will be enhanced withcompletion of the TALON NAS product and updated for ROHS (see below) complianceduring 2006 as well as software updates.

 

Our research and developmentexpenses were $3.5 million, $5.2 million and $6.2 million in fiscal 2005, 2004and 2003 respectively.  All of ourresearch and development expenditures are expensed as incurred.  As of November 1, 2005, we had 17 full-timeemployees engaged in research and development activities.

 

We do not have significant firmorders for our development stage products. There is no assurance that any of our development programs will becompleted or that the resulting products, if any, will be marketedsuccessfully.

 

(11)         **Environmental Regulation.**

 

Compliance with presentfederal, state and local provisions regulating the discharge of material intothe environment, or otherwise relating to the protection of the environment,has not had and is not expected to have any material effect upon our capitalexpenditures, earnings or competitive position. We are in the process of assuring we will be compliant on applicableproducts as it relates to the European Union doctrine - ROHS (Restriction ofHazardous Substances) as well as finalizing our compliance with WEEE (WasteElectrical and Electronic Equipment).

 

(12)         **Employees.**

 

As of November1, 2005, we had 51 full-time employees, of which 20 were in engineering,research and development and technical support, 15 in sales, marketing andcustomer service, 9 in manufacturing, operations and quality assurance, and 7in general management, accounting, information systems and administration.  None of our employees are represented by alabor union.  We have experienced no workstoppages and believe that our employee relations are satisfactory.

 

We believe that the futuresuccess of our business will depend in part on our ability to attract andretain qualified technical, management and marketing personnel.  Such experienced personnel are in demand, andwe must compete for their services with other firms, which may be able to offermore favorable benefits.

 

 

10

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##### **Certain Risk Factors Related toCompany’s Business**

 

                Our business facessignificant risks. The risks described below may not be the only risks we face.Additional risks that we do not yet know of or that we currently think areimmaterial may also impair our business operations. If any of the events orcircumstances described in the following risks actually occur, our business,financial condition or results of operations could suffer, and the tradingprice of our common stock could decline.

 

WE HAVE INCURRED LOSSES AND MAYNOT BE ABLE TO ACHIEVE AND MAINTAIN PROFITABILITY.

 

We experiencedlosses of $2.4 million, $7.4 million and $3.9 million for the years endedSeptember 30, 2005, 2004 and 2003, respectively.  There can be no assurance that we will beprofitable on a quarterly or annual basis. If we are unable to generate netincome from operations, our business will be adversely affected and our stockprice will likely decline.

 

Our revenueswill have to significantly increase in order for us to support our current andexpected level of operating expenses. We may not be able to achieveprofitability without this revenue increase.

 

AN ECONOMIC DOWNTURN IN MARKETSIN WHICH WE ARE CONCENTRATED OR THE LOSS OF KEY CUSTOMERS COULD MATERIALLY ANDADVERSELY AFFECT REVENUES AND OPERATING RESULTS.

 

Our revenueshave been derived primarily from sales to customers in the Broadcast, ContentCreation, and Military and Government markets. We are not able to predict with any certainty the demand for ourproducts in each of our primary markets.

 

Sales in the Broadcastsegment decreased approximately $4.6 million or 62% in fiscal 2005 versus 2004.  In that we market to OEMs or integrators whoare dependent on capital spending levels at television stations demand fromcustomers in this market can be dependent, in part, on overall levels ofadvertising revenues and general economic conditions.  Furthermore, the storage market within the Broadcastindustry is highly competitive, which has adversely impacted our sales.   During fiscal 2005, we experienced asignificant reduction in demand from our key customers in this market.  Our ability to predict the demand levels inthis segment is limited given the general economic uncertainties and theongoing impacts from competition.

 

Sales in theMilitary and Government market as a percentage of net sales were 40% and 49% infiscal 2005 and 2004, respectively. Demand for our products in this market have been historically cyclicaland fluctuate based on timing of defense spending and technology upgradeswithin programs that currently specify our products.  It is difficult to assess the specific timingof the deployment and funding of these programs, which adversely impacts ourability to forecast demand for our products in this segment.  There can be no assurances that we willexperience growth in this market segment during fiscal 2006.

 

Historically,a material percentage of our net sales in each year have been derived from alimited number of customers. For fiscal 2005 this has improved somewhat as ourtop four customers accounted for approximately 34% of our net sales in 2005 ascompared to 54% for 2004.  While this isan improvement we still expect that a high percentage of our sales for theforeseeable future will continue to come from a relatively small number ofcustomers. There can be no assurance that orders from existing customers willcontinue at their historical levels, or that we will be able to obtain ordersfrom new customers. An economic downturn in one of our primary markets, or theloss of one or more customers, particularly a significant customer, couldresult in a material decrease in revenues, thereby adversely affecting ourbusiness.  Further, because our customersinclude numerous distributors and dealers who work on relatively thin marginsor are thinly capitalized, a significant change in the liquidity or financialposition of any one of these customers could have a material adverse impact onthe collectibility of our accounts receivable and our future operating results.

 

WE MAY HAVE DIFFICULTYPREDICTING RESULTS WHICH WOULD LIKELY RESULT IN A DECLINE IN OUR STOCK PRICE.

 

Our quarterlyrevenues and operating results have varied significantly in the past and arelikely to vary significantly in the future due to a number of factors, any ofwhich may cause our stock price to fluctuate. The primary factors that mayaffect our quarterly financial performance include the following:

 

•                    thetiming of customer orders for the FibreSTORE product line, which are oftenconcentrated toward the end of a quarter, particularly large orders or whetherany orders are cancelled;

 

•                    generaleconomic trends and factors;

 

 

11

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•                    marketacceptance of new products and product enhancements;

 

•                    mixof product sales within a quarter;

 

•                    ourability to develop, introduce, ship and support new products and productenhancements;

 

•                    oursales cycle can be long on some products, up to 12 months or more;

 

•                    ourability to attain and maintain production volumes and quality levels for ourproducts; and the level of competition;

 

•                    announcementsand new product introductions by our competitors and deferrals of customerorders in anticipation of new products, services or product enhancementsintroduced by us or our competitors;

 

•                    Decreasesover time in the prices at which we can sell our products; and

 

•                    ourability to obtain sufficient supplies of components, including limited sourcedcomponents, at reasonable prices, or at all.

 

Sales for anyfuture quarter are not predictable and therefore we may experience asignificant degree of uncertainty. We generally operate with limited orderbacklog because our products are typically shipped shortly after orders arereceived. Further, we generally do not enter into long-term purchase contractswith customers. As a result, sales in any quarter are generally dependent onorders booked and shipped in that quarter. Due to the unpredictable timing ofcustomer orders, we may ship products representing a significant portion of ournet sales for a quarter during the last month of that quarter.

 

Anysignificant deferral of these sales could have a material adverse effect on theresults of operations in any particular quarter. Our expense levels are based,in part, on our expectations as to future sales.  In addition, our research and developmentexpenses have fluctuated quarter to quarter based on timing of prototype costsassociated with new product development. There is no assurance that we will experience sales growth with respectto new product introductions in future periods. As a result, if sales levelsare below expectations, net income may be disproportionately affected.

 

Fluctuatingoperating results may have an adverse effect on the price of our common stock.

 

WE HAVE LIMITED PRODUCTOFFERINGS AND DEPEND ON THE WIDESPREAD MARKET ACCEPTANCE OF OUR EXISTING ANDNEW PRODUCTS.

 

We onlyaddress a small fraction of the overall global computer storage market, ourfocus on our limited markets is with a limited number of existing products. Inaddition, we are dependent on new products for a substantial part of ourrevenue.  Specifically, during fiscal 2005and 2004 we derived approximately $0.9 million and $6.4, respectively, of ourrevenue from our legacy and NETarray products.  We derivedapproximately 28% and 29% in 2005 and 2004, respectively, of our revenue fromour FibreSTORE 2210 product, and approximately 22% and 18%, respectively of ourrevenue from our DiMeda product family. As a result of the asset acquisition in January 2005, new to Ciprico isthe MediaVault product line which accounted for 31% of net sales in 2005.

 

We expect theMediaVault and DiMeda  products willaccount for a substantial and growing portion of our total revenue for theforeseeable future. However, the demand for, and market acceptance of theseproducts is uncertain. Historically, our product offerings consist of a limited number of product lines.  As such, the widespread market acceptance ofnew products in our markets is critical to our future success.

 

 

Factors thatmay affect the market acceptance of our products, some of which are beyond ourcontrol, include the following:

 

•                    Growthof storage networking product markets;

 

•                    performance,quality, price and total cost of ownership of our existing products;

 

•                    continueddevelopment of technologies that allow our storage products to function overWANs and over IP-based networks; and

 

•                    availability,price, quality and performance of competing products and technologies.

 

 

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OUR INDUSTRIES ARE SUBJECT TORAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION AND WE MUST KEEP PACE WITHTHE CHANGES TO SUCCESSFULLY COMPETE.

 

The marketsfor our products are characterized by rapidly changing technology, evolvingindustry standards and the frequent introduction of new products andenhancements. Our future success depends in large part on our ability toenhance our existing products and to introduce new products on a timely basisto meet changes in customer preferences and evolving industry standards. Wecannot be certain that we will be successful in developing, manufacturing andmarketing new products or product enhancements that respond to such changes ina timely manner and achieve market acceptance. We also cannot be certain thatwe will be able to develop the underlying core technologies necessary to createnew products and enhancements.

 

Additionally,changes in technology and consumer preferences could potentially render ourcurrent products noncompetitive or obsolete. If we are unable, fortechnological or other reasons, to develop new products or enhance existingproducts in a timely manner in response to technological and market changes,our business, results of operations and financial condition would be harmed.

 

The marketsfor our products are competitive and are likely to become even morecompetitive. Increased competition could result in pricing pressures, reducedsales, reduced margins, reduced profits, reduced market share or the failure ofour products to achieve or maintain market acceptance. Our products facecompetition from multiple sources, including the ability of some of ourcustomers to design solutions to the problems targeted by our products. Many ofour competitors and potential competitors have greater name recognition, accessto larger customer bases or substantially greater resources than we have. As aresult, they may be able to respond more quickly than we can to new or changingopportunities, technologies, standards or customer requirements. For all of theforegoing reasons, we may not be able to compete successfully against ourcurrent and future competitors.

 

WE DEPEND ON A LIMITED NUMBEROF SUPPLIERS FOR CERTAIN COMPONENTS.

 

We depend upona limited number of suppliers for several components used in the manufacture ofour products, such as disk drives, and other components. In the future, we mayexperience shortages of or difficulties in acquiring these components. Failureto manufacture our products on a timely basis would have a negative impact onour business and operating results.  Ifwe had to seek alternative sources of supply, the incorporation of suchcomponents from alternative suppliers and the manufacture and shipment of ourproducts could be delayed while modifications to such products and theaccompanying software were made to accommodate the introduction of thealternative suppliers’ components.

 

We purchasecertain raw materials and components based on forecasted order levels.  Forecasting orders is difficult. Some of ourOEM customers provide us with a forecast of expected order delivery dates, butgenerally customers place orders for immediate delivery, not in advance ofneed.  Lead times for materials andcomponents that we order vary significantly and depend on factors such asspecific supplier requirements, contract terms and current market demand forsuch components. As a result, our component requirement forecasts may not beaccurate. If we overestimate our component requirements, then we may haveexcess inventory, which would increase our costs. If we underestimate ourcomponent requirements, then we may have inadequate inventory, which couldinterrupt our manufacturing and delay delivery of our products to ourcustomers. Either of these occurrences would negatively impact our business andoperating results.

 

 

WE MAY ENGAGE IN FUTUREACQUISITIONS THAT MAY DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT ORASSUME CONTINGENT LIABILITIES.

 

As part of ourstrategy, we expect to review opportunities to buy other businesses ortechnologies that would complement our current products and services, expandthe breadth of our markets, enhance our technical capabilities, or otherwiseoffer growth opportunities.  In the eventof any future purchases, we could:

 

•                    spendsignificant amounts of cash;

 

•                    issuestock that would dilute our current stockholders’ percentage ownership;

 

•                    incurwritedowns of goodwill, purchased in-process reasearch and development or amortizationexpenses related to other intangible assets; or

 

•                    incurdebt or assume liabilities.

 

 

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Thesepurchases also involve numerous risks, including:

 

•                    problemsintegrating the purchased operations, technologies, personnel or products;

 

•                    unanticipatedcosts;

 

•                    adverseeffects on existing business relationships with suppliers or customers;

 

•                    risksassociated with entering markets in which we have no or limited priorexperience;

 

•                    potentialloss of key employees of acquired or merged organizations; and

 

•                    thegrowth rates of any acquired company may be less than those projected byanalysts or anticipated by markets, which could have an adverse effect on ourstock price.

 

We cannotassure that we will be able to successfully integrate any businesses, products,technologies or personnel related to organizations that we might acquire ormerge with in the future.

 

UNDETECTED SOFTWARE OR HARDWAREERRORS COULD INCREASE OUR COSTS AND DELAY PRODUCT INTRODUCTION.

 

Our productsfrequently contain undetected software or hardware errors when first introducedor as new versions are released. Our products are complex and errors may befound from time to time in our products, including new or enhanced products. Inaddition, our products are combined with products from other vendors. As aresult, when problems occur, it may be difficult to identify the source of theproblem. These problems may cause us to incur significant warranty and repaircosts, divert the attention of our engineering personnel from our productdevelopment efforts and cause significant customer relations problems.Moreover, the occurrence of hardware and software errors, whether caused by ouror another vendor’s products, could delay or prevent the development of themarkets in which we compete.

 

THE LOSS OF KEY PERSONNEL ORTHE INABILITY TO HIRE AND RETAIN ADDITIONAL PERSONNEL WITH STORAGE NETWORKINGEXPERTISE COULD ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF OPERATION.

 

Our futureperformance depends in part upon the continued service and contributions of keymanagement, engineering, sales and marketing personnel, many of whom would bedifficult to replace quickly.  We alsobelieve that our success depends to a significant extent on the ability of ourmanagement to operate effectively, both individually and as a group. The lossof any one of our key employees could adversely affect our sales or delay thedevelopment or marketing of existing or future products.

 

We believe ourfuture success will depend also in part upon our ability to attract and retainhighly skilled and qualified managerial, engineering, sales and marketing andoperations personnel. Competition for these personnel is intense. The inabilityto attract or retain qualified personnel in the future or delays in hiringrequired personnel, particularly engineers and sales personnel, could delay thedevelopment and introduction of and negatively impact our ability to sell ourproducts which would have a material adverse impact on our business and resultsof operation.

 

WE HAVE APPLIED FOR A LIMITEDNUMBER OF PATENTS AND WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY,WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE.

 

Historically,we have not pursued patents on all of our intellectual property and we reliedon a combination of patent, copyright, trademark and trade secret laws andrestrictions on disclosure to protect our intellectual property rights. We alsoenter into confidentiality agreements with substantially all our employees,consultants and corporate partners, and control access to and distribution ofour software, documentation and other proprietary information.

 

We have submitted two patent applications oncertain key attributes of the TALON product. These patent applications disclose aspects of removable disk packtechnology as it relates to a redundant array of independent drives.  There is no assurance these patentapplications will be successfully prosecuted or, if successful, whether thesepatents will provide us with competitive advantages or would not be challengedby third parties.

 

Although webelieve that we possess all required proprietary rights to the technologyinvolved in our products and that our products, trademarks and otherintellectual property rights do not infringe upon the proprietary rights ofthird parties, we cannot assure that others will not claim a proprietaryinterest in all or part of our technology or assert claims of 

 

 

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infringement. All such claims,regardless of their merits, could expose us to costly litigation and couldsubstantially harm our operating results.

 
| **ITEM 2. ** | ** ** | **PROPERTIES** |
|-------------------|------------|----------------|

 

Our administrativeheadquarters, manufacturing as well as some of our operations are located inone building in Plymouth, Minnesota, totaling approximately 39,000 squarefeet.  This facility is leased under a operatinglease through October 2009.  The lease provides for base rental paymentsof approximately $335,000 through October 2005 with increases of approximately3% each subsequent 12-month period.  The lease also includes provisionsfor early termination as of October 2007. Additionally, we are responsible for our proportionate share of real estatetaxes and operating expenses associated with operating the facility, as definedby the lease agreement.  As part of thepurchase of substantially all of the assets of Huge Systems, Inc. in January2005, we assumed leases of 4,300 square feet of space in Agoura Hills,California for sales, service and researchand development.  The leases expire inJune 2006 and provide for gross rental payments of approximately $7,000 permonth.  There is an option to extend theCalifornia leases for two years at market rate.   We believe that our existing facilities andequipment are well maintained and in good operating condition.  We own most of the equipment used in ouroperations.  Such equipment consistsprimarily of manufacturing and test equipment, tools, fixtures and computerhardware and software.

 

                In connection with a work force reduction and restructuring implementedin April 2004, we abandoned approximately 17,000 square feet of ourheadquarters facility and in December 2004 sublet this space.  The sublease is to a third party at a ratelower than our lease rate.  As a resultof this sublease, we reversed $466,000 of the charge we recorded for leaseabandonment in December 2004.

 
| **ITEM 3. ** | ** ** | **LEGAL PROCEEDINGS** |
|-------------------|------------|-----------------------|

 

We are not aparty to, nor is any of our property subject to any material pending legalproceedings, nor are any material legal proceedings known to be contemplated bygovernmental authorities or others.

 
| **ITEM 4. ** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------------|------------|---------------------------------------------------------|

 

**               **No matter was submitted to a vote of securityholders through the solicitation of proxies or otherwise during the fourthquarter of our fiscal year.

 

 

**EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

The names, ages and positionsof the executive officers are as follows:

** **

| James W. Hansen   |   | 50 |   | Chief Executive  Officer and Chairman of the Board     |
|-------------------|--------|----|--------|--------------------------------------------------------|
| Monte S.  Johnson |   | 47 |   | Vice  President of Finance and Chief Financial Officer |

 

                James W. Hansen has been Chief Executive Officer of the Company sinceSeptember 30, 2004 and Chairman of theBoard since April 2005.  Mr.Hansen previously served as Interim Chief Executive Officer of the Company fromMarch 18, 2004 to September 30, 2004 and has been a director of the Company since April 2001.  Mr. Hansen also served as Chairman of theBoard from January 2003 to March 2004. Since 1992 Mr. Hansen has served as an investor, director, president orvice president of several private companies in the medical services andtechnology industry.  Mr. Hansen wasPresident, CEO and Treasurer of E.mergent Incorporated (NASDAQ: EMRT) fromNovember 1996 and Chairman of the Board of Directors from May 1997 until thesale of the company in May 2002.  From1986 to 1992, he was Senior Vice President and General Manager of the pensiondivision of Washington Square Capital, a Reliastar Company, a NYSE-tradedfinancial services company now known as ING Reliastar.  From 1983 to 1986, he was Vice President ofApache Corporation, a NYSE-traded oil and gas exploration company.  From 1979 to 1983, Mr. Hansen was a teacherand management consultant.  He has alsoserved as a director of three public companies and has taught in the MBAprogram at the University of St. Thomas since 1984.

 

                Monte S. Johnson has been Vice President ofFinance and Chief Financial Officer since June 1, 2005.  Mr. Johnson previously servedas Interim Chief Financial Officer of the Company from March 10, 2005 to June1, 2005. Prior to joining Ciprico Mr. Johnson was the lead consultant of MSJ& Associates, LLC, a business consulting company focused on finance,strategic planning and operational consulting for public and privatecompanies.  Mr. Johnson is President of MSJ & Associates, LLC.  From 1999 to 2001, Mr. Johnson was SeniorVice President, Chief Financial Officer and Chief Administrative Officer of ProStaff Personnel Services.  From 1991 to 1999, Mr. Johnson served invarious financial and management positions at General Electric Company andHoneywell Inc.  Prior to 1991, Mr. Johnson worked 11 years at Deloitte& Touche International.  Mr. Johnson is a CPA and MBA.

 

 

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**PART II**

 
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|

 

STOCK TRADING

 

Ciprico common stock is traded on the Nasdaq National Market under thesymbol CPCI. As of October 31, 2005, there were approximately 1,600stockholder accounts of record. Closing stock sale price ranges for the yearsended September 30, 2005 and 2004, were:

 

| ** **  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 4.45       |     | $          | 3.72 |   | $ | 5.39 |   | $ | 4.72 |   |
| Second      |       | 4.73     |       | 3.82     |       | 6.12 |   | 4.72 |   |
| Third       |       | 4.75     |       | 4.03     |       | 5.59 |   | 4.40 |   |
| Fourth      |       | 4.97     |       | 3.82     |       | 4.54 |   | 3.27 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

We have not, and do not intend to pay cash dividends on any of oursecurities for the foreseeable future. We made no sales of unregisteredsecurities, and made no repurchase of equity securities, during the quarterended September 30, 2005.

 

EQUITY COMPENSATION PLAN INFORMATION - See Item 12.

 
| **ITEM 6. ** | ** ** | **SELECTED FINANCIAL DATA** |
|-------------------|------------|-----------------------------|

 

Ciprico Inc. and Subsidiaries

Amounts in thousands (except per share data)

 

SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA

 
| **Years ended September 30**                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                              |       | $        | 13,213     |     | $          | 18,081   |       | $        | 31,215     |     | $          | 31,440 |   | $ | 32,983 |   |
| Gross profit                                           |       | 4,779    |       | 6,152    |       | 11,375   |       | 10,917   |       | 13,623   |       |
| % of sales                                             |       | 36.2     | %          | 34.0     | %          | 36.4     | %          | 34.8     | %          | 41.3     | %          |
| Operating  expenses                                    |       | 7,780    |       | 13,956   |       | 15,740   |       | 20,327   |       | 22,611   |       |
| % of sales                                             |       | 58.9     | %          | 77.2     | %          | 50.4     | %          | 64.7     | %          | 68.6     | %          |
| Loss from  operations                                  |       | (3,001   | )          | (7,804   | )          | (4,365   | )          | (9,410   | )          | (8,988   | )          |
| % of sales                                             |       | (22.7    | )%         | (43.2    | )%         | (14.0    | )%         | (29.9    | )%         | (27.3    | )%         |
| Other  income, net                                     |       | 562      |       | 426      |       | 450      |       | 956      |       | 1,866    |       |
| Income tax  expense (benefit)                          |       | —   |       | —   |       | —   |       | (1,950   | )          | 440      |       |
| Net loss                                               |       | $        | (2,439     | )        | $          | (7,378   | )          | $        | (3,915     | )        | $          | (6,504 | ) | $ | (7,562 | ) |
| Shares used  to calculate net loss per share           |       |     |       |     |       |     |       |     |       |     |       |
| Basic                                                  |       | 4,762    |       | 4,717    |       | 4,676    |       | 4,895    |       | 5,050    |       |
| Diluted                                                |       | 4,762    |       | 4,717    |       | 4,676    |       | 4,895    |       | 5,050    |       |
| Net loss per  share—Basic                         |       | $        | (0.51      | )        | $          | (1.56    | )          | $        | (0.84      | )        | $          | (1.33 | ) | $ | (1.50 | ) |
| Diluted                                                |       | $        | (0.51      | )        | $          | (1.56    | )          | $        | (0.84      | )        | $          | (1.33 | ) | $ | (1.50 | ) |
|                                                   |       |     |       |     |       |     |       |     |       |     |       |   |   |   |   |   |
| SELECTED CONSOLIDATED BALANCE SHEET DATA               |       |     |       |     |       |     |       |
|                                                   |       |     |       |     |       |     |       |
| **September 30**                                       |       | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** |       |
| Working  capital (including all marketable securities) |       | $        | 15,671     |     | $          | 20,318   |       | $        | 25,972     |     | $          | 29,576 |   | $ | 35,531 |   |
| Total assets                                           |       | 22,172   |       | 25,162   |       | 32,336   |       | 28,115   |       | 44,679   |       |
| Stockholders’  equity                             |       | 18,632   |       | 20,857   |       | 27,986   |       | 32,238   |       | 39,530   |       |

 

CONTRACTUALOBLIGATIONS

 

TheCompany’s only material contractual obligations pursuant to this item are theoperating leases noted in Note 8. “Commitments” to the Consolidated Financial Statements.

 

 

16

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| **ITEM 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATION** |
|-------------|------------|------------------------------------------------------------------------------------------------|

 

Critical Accounting Policiesand Estimates

 

FinancialReporting Release No. 60 of the Securities and Exchange Commission, requeststhat all companies include a discussion of critical accounting policies ormethods used in the preparation of financial statements. Note 1 of the Notes tothe Consolidated Financial Statements includes a summary of the significantaccounting policies and methods used in the preparation of our ConsolidatedFinancial Statements. The following is a brief discussion of the moresignificant accounting policies and methods used by Ciprico Inc.

 

General

 

Management’sdiscussion and analysis of Ciprico’s financial condition and results ofoperations are based upon our Consolidated Financial Statements, which havebeen prepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. The most significant estimates and assumptions relate to therecoverability of receivables and inventories. Actual amounts could differsignificantly from these estimates.

 

Revenue Recognition

 

We recognizerevenue in accordance with SEC Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements” (“SAB 101”), as amended by SAB 101A and101B. SAB 101 requires that four basic criteria must be met before revenue canbe recognized: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services rendered; (3) the fee is fixed and determinable; and(4) collectibility is reasonably assured. Pursuant to this, in virtually all cases revenue is recognized uponshipment of products.

 

Products soldare generally covered by a standard warranty for periods up to three years. Weaccrue a warranty reserve within cost of sales for estimated costs to providewarranty services. We estimate the costs to service our warranty obligationsbased on historical experience and expectation of future conditions.

 

In addition tothe standard warranty offered with each product sale, we offer separate servicecontracts to our customers with varying levels of service.  Revenue from the sale of these contract-basedservice programs is deferred and recognized on a straight-line basis over theterm of the related agreement.

 

Any otherservices provided (such as professional services, technical training and out ofwarranty repair) for customers are done a fee basis and revenue is recognizedwhen these services are provided.

 

In 2006, wewill begin to offer certain of our developed technologies to customers under asoftware license arrangement.  We intendto account for these transactions under the applicable sections of Statement ofPosition 97-2 “Software Revenue Recognition” and Statement of FinancialAccounting Standards No. 86 “Accounting for the Costs of Computer Software toBe Sold, Leased, or Otherwise Marketed”.

 

Accounts Receivable

 

We performongoing credit evaluations of our customers and adjust credit limits based uponpayment history and the customer’s current credit worthiness, as determined byour review of their current credit information. We continuously monitorcollections and payments from our customers and maintain a provision forestimated credit losses based upon our historical experience and any specificcustomer collection issues that we have identified. While such credit losseshave historically been within our expectations and the provisions established,we did increase our allowance by approximately $300,000 when a key distributorfiled for bankruptcy.  Since many of ouraccounts receivable are with distributors, dealers and other resellers, many ofwhich have thin profit margins and may be thinly capitalized, a significantchange in the liquidity or financial position of any one of these customerscould have a material adverse impact on the collectibility of our accountsreceivable and our future operating results.

 

Inventories

 

We value ourinventory at the lower of the actual cost to purchase and/or manufacture theinventory or the current estimated market value of the inventory. Cost isdetermined using an average cost method. We regularly review inventory quantities on hand and record a provisionto reduce excess and obsolete inventory to estimated market value basedprimarily 

 

 

17

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on our estimated forecast ofproduct demand and production requirements for the next twelve months orexpected life of the representative product. A significant decrease in demandcould result in an increase in the amount of excess inventory quantities onhand. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required. Additionally, ourestimates of future product demand may prove to be inaccurate, in which case wemay have understated or overstated the provision required for excess andobsolete inventory. If our inventory is determined to be overvalued, we wouldbe required to recognize such costs in our cost of goods sold at the time ofsuch determination.

 

We make everyeffort to ensure the accuracy of our forecasts of future product demand,however any significant unanticipated changes in demand or technologicaldevelopments could have a significant impact on the value of our inventory andour reported operating results

 

Warranty

 

Our warrantyreserve is established based on our best estimate of the amounts necessary tosettle future and existing claims on products sold as of each balance sheetdate. While we believe that our warranty reserve is adequate and that ourestimate is appropriate, such amounts estimated to be due and payable coulddiffer materially from what will actually transpire in the future.  To the extent we experience increasedwarranty claim activity or increased costs associated with servicing thoseclaims, we would increase our warranty accrual resulting in decreased grossprofit.  Similarly, if the oppositeoccurs and we experience better than expected results, we would decrease ourwarranty accrual.

 

Deferred Taxes

 

We record avaluation allowance to reduce our net deferred tax assets to the amount that ismore likely than not to be realized. We recognize deferred tax assets andliabilities based on the differences between the financial statement carryingamounts and the tax basis of assets and liabilities. We regularly review thedeferred tax assets for recoverability and establish a valuation allowancebased on historical taxable income or loss, projected future taxable income orloss, and the expected timing of the reversals of existing temporarydifferences.

 

 

OVERVIEW:

The followingdiscussion and analysis of the financial condition and results of operations ofCiprico Inc. should be read in conjunction with the Consolidated FinancialStatements and the Notes thereto, included elsewhere in this Annual Report onForm 10-K.

 

We are a leading provider of digital mediaworkflow solutions.  Our solutionscombine storage, networking and computing solutions to simplify and acceleratedigital media workflows. Our primary markets are content creation (whichincludes applications in pre-media and video), post-production (which includesapplications in digital video production), broadcast and entertainment (whichinclude applications in digital cinema, broadcast and film) and military andgovernment (which include applications involving the data capture, processingand dissemination of surveillance images).

 

The following table sets forth certain items from Ciprico’s ConsolidatedStatements of Operations, as a percentage of net sales for the years endingSeptember 30.

 

| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                  |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of  sales             |       | 63.8     |       | 66.0     |       | 63.6     |       |
| Gross profit               |       | 36.2     |       | 34.0     |       | 36.4     |       |
|                       |       |     |       |     |       |     |       |
| Operating  expenses:       |       |     |       |     |       |     |       |
| Research and development   |       | 26.2     |       | 28.5     |       | 19.9     |       |
| Sales and marketing        |       | 21.1     |       | 25.4     |       | 21.3     |       |
| General and administrative |       | 13.7     |       | 9.5      |       | 7.6      |       |
| Restructuring charges      |       | (2.2     | )          | 13.8     |       | 1.6      |       |
| Total operating expenses   |       | 58.8     |       | 77.2     |       | 50.4     |       |
| Loss from operations       |       | (22.6    | )%         | (43.2    | )%         | (14.0    | )%         |

 

 

18

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NET SALES:

There is a convergence in the marketplace as evidenced by customersinvolved in multiple stages of digital media workflows.  Customers use our products in a variety ofdigital workflow applications including content creation, post production(including digital film and video) and digital broadcast.  Because of this convergence it isincreasingly difficult to define a certain market into which our solutions maybe sold and in addition, more difficult to define a particular customer into adefinitive market space.

 

For purposes of this analysis of our net sales we have separated salesinto 3 major categories:

Broadcast — sales of our products primarily to OEM’s that include ourproduct in a larger application

Military& Government — any product sold into this fairly well defined customer base

ContentCreation — product sales to users of digital video and graphics customers

 

Comparative information on sales by market is shown in the charts below(in millions):

 
| ** **                 | ** ** | **2005**  | ** ** | **2004**        | ** ** | **2003**  | ** ** |
|----------------------------|------------|-----------|------------|-----------------|------------|-----------|------------|
| **Market**                 | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** |
| Broadcast                  |       | $         | 3.9        |            | 30         | %         | $          | 8.5 |   | 47 | % | $ | 20.1 |   | 64 | % |
| Military  & Government |       | 5.2       |       | 39              |       | 8.9       |       | 49 |   | 10.6 |   | 34 |   |
| Content  Creation          |       | 3.8       |       | 29              |       | —    |       | — |   | — |   | — |   |
| Other                      |       | 0.3       |       | 2               |       | 0.7       |       | 4 |   | 0.5 |   | 2 |   |
| Total                      |       | $         | 13.2       |            | 100        | %         | $          | 18.1 |   | 100 | % | $ | 31.2 |   | 100 | % |

 

 

Sales for 2005 decreased 27% from 2004 sales, which decreased 42% from2003 levels. In January of 2005 the MediaVault product line, principally soldinto the Content Creation marketplace, was purchased from Huge Systems,Inc.   We believe there is considerablegrowth in the Content Creation marketplace and that our solutions are designedto meet the specific needs of these customers. We also believe that we have and are developing applications for thelatter stages in the digital workflow process, including capture, management,archival and distribution of digital assets.

 

Sales in the Broadcast segment decreased 54% in 2005 and 58% in2004.   We believe the decreases in thelast two years are the result of lost business from competitive effects at eachof our largest broadcast OEMs and, to a lesser extent, the result of softerdemand within the broadcast industry. Sales to our two largest OEM’s decreased over $4 million from 2004 to2005.

 

Sales in the Military and Government market decreased 42% in 2005versus 16% in fiscal 2004.  The decreasesin the past two fiscal years reflect reduced spending levels from systemintegrators associated with defense related programs.  Sales in the Military segment are to someextent dependent upon the actual appropriation and funding of governmentprograms that specify our products.  Webelieve our sales in this segment have been adversely impacted by delays in thedeployment and funding of certain programs in which our products have beenspecified. Sales in the Military segment have historically fluctuated betweenyears due to the timing of spending on defense-related programs.

 

Sales of the NETarray and legacy products decreased from $6.4 millionin 2004 to $0.9 million in 2005.  Salesof both FibreSTORE and TALON products decreased approximately 30% from2004.   Over 53% of sales in 2005 camefrom the DiMeda and MediaVault family of products and we expect that thispercentage will increase in 2006.  Webelieve that our revenue growth in the future is dependent on our ability toprovide new products and expand the applications of our products into targetedmarket segments, particularly digital video, digital broadcast and digitalcinema.  From a strategic standpoint webelieve that part of our future revenue streams may come from the license ofour proprietary software.  In 2005 we didnot sell software separately from our hardware. However, beginning in fiscal 2006 we are making this an option for ourcustomers.

 

COST OF SALES AND GROSS PROFIT:

Gross profit,as a percentage of net sales, was 36.2% in 2005, and 34.0% in 2004.  The decrease in 2004 can primarily beattributed to unfavorable overhead absorption due to lower unit volumes and theimpact of a third quarter charge of $900,000 to cost of sales and inventory toreduce certain legacy products to market value. The gross margin in 2005 was substantially affected by the addition ofthe MediaVault product line through acquisition in January 2005.  These products carry a slightly higher grossmargin percentage than the other product lines.

 

Gross profit on product sales is highly dependent on the cost ofvarious components including disk drives and may

 

 

19

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fluctuate from quarter to quarter. We believe our strong vendorrelations will aid in component availability and cost sensitivity.  We expect to experience continued competitivepressures on gross profit margins throughout fiscal 2006. We intend topartially offset these margin pressures through new product introductions andcost reductions.

 

RESEARCH AND DEVELOPMENTEXPENSES:

Research anddevelopment expenses decreased approximately $1.7 million or 33% in 2005compared to a decrease of $1.1 million or 17% in 2004 versus 2003.  These decreases are primarily a result ofdecreased prototype spending on development projects, a continued shift towardssoftware development activities and reduced staffing levels between years.  The decrease for 2005 would have been greaterbased on reduced staffing levels implemented in the second half of fiscal 2004,however several people were added as a result of the purchase of the MediaVaultproduct line in January 2005.

 

SALES AND MARKETING EXPENSES:

Sales and marketing expenses decreased approximately $1.8 million or39% versus a decrease of  $2.0 million or31% for 2004 compared to 2003.  Thereduction in both years reflects reduced headcount, resulting from ourrestructuring efforts implemented in each of the past three fiscal years.  The net decrease also takes intoconsideration the addition of headcount as part of the asset purchase inJanuary 2005.  The reduction in expensesduring fiscal 2005 and 2004 also reflects reduced spending on trade show andpromotional activities.  We expect theseexpenses to increase in absolute dollars during fiscal 2006 as a result ofadditional sales personnel being added in the past few months and an increasein trade show attendance.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses increased a net $100,000 from2004.  This net number is a result ofmany factors including the addition of the California facility and the othercosts related to the acquisition, increased costs of regulation compliance, andincreased costs of insurance — offset by a reduction in personnel costs as aresult of restructuring efforts implemented during the second quarter of 2005and the third quarter of fiscal 2004. Overall expenses decreased $683,000 in 2004 compared to fiscal 2003 as aresult of the reduction in personnel costs tied to the restructuring effortsimplemented during the third quarter of fiscal 2004, a reduction in theallowance for bad debt and a reduction in legal expenses.  We expect general and administrative expensesto increase in fiscal 2006 due to anticipated higher insurance costs andincreased accounting and audit fees related to Sarbanes-Oxley Section 404compliance.

 

RESTRUCTURING:

During both the second quarter of 2005 and the third quarter of 2004,we implemented workforce reductions, the larger of which was the one in 2004, a40% reduction in personnel.  As a resultof the 2005 restructuring we recorded a charge of $285,000 related to employeetermination costs.  In April 2004 arestructuring charge of $3.4 million was recorded, of which approximately $1.1million was for employee termination costs, $900,000 was related to a non-cash charge to cost of sales for reducingcertain legacy product inventory to market value, and $1.4 million was relatedto the abandonment of a portion of Ciprico’s headquarter facility and the writedown of certain fixed assets.   Due tothe sublease of the abandoned space in December 2004 and the additionalmitigation of other costs associated with previous restructuring charges,$576,000 of earlier restructuring charges were reversed in fiscal 2005.  We do not anticipate any furtherrestructuring efforts in the near future.

 

OTHER INCOME:

Other income of $562,000 and $426,000 in fiscal 2005 and 2004,respectively, is primarily attributable to interest income on cash andmarketable securities. The increase for 2005, despite lower principal balancesis the result of overall higher market interest rates and active management ofthe investments.

 

INCOME TAX EXPENSE:

For fiscal 2005 and 2004, no income tax benefit was recognized, as wedo not expect to realize any current income tax benefits.  The effective income tax expense was 0% in2005 and 2004. See Note 4 to the Consolidated Financial Statements.

 

LIQUIDITY AND CAPITAL RESOURCES:

As of September 30, 2005, we had a total of cash, cash equivalents,marketable securities and asset-backed short-term investments of $16.1 millioncompared to $21.3 million at the end of 2004 and $22.0 million at the end of2003.  The September 30, 2005 amount of$16.1 million includes $2.6 million which is classified as non-current as itmatures in fiscal 2007, however it could be available for Company use withminimal cost.

 

Cash flows used in operating activities were $3.5 million, $299,000,and $3.4 million in 2005, 2004, and 2003, respectively. The use of cash in allyears reflects the net loss and the impacts of depreciation and changes inworking capital.   The change in totalcash and investments between 2005 and 2004 relates to the cash flow to supportthe net loss, change in working capital and $1.8 million of cash paid out aspart of the acquisition of substantially all of the assets of Huge Systems,Inc. in January 2005.   Capitalexpenditures were $98,000, $380,000, and $1.2 million in 2005, 2004, and 2003,respectively.

 

 

20

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We anticipate that capital expenditures and related expenses forproduct development activities in 2006 will approximate $500,000.   Some of our development work may becomereimbursable via non-recurring engineering fees we anticipate receiving fromcertain customers.  There were no sharesrepurchased in fiscal 2005 or 2004. During 2003, we repurchased 198,000 shares at a total cost ofapproximately $692,000.  The total amountauthorized to be expended under the stock buyback program is $12.0million.  This program is currentlysuspended.  As of September 30, 2005 and2004, 1,037,035 shares of common stock had been repurchased for $7.8 million.

 

Despite the cost reduction efforts implemented during 2005 and 2004, weare uncertain as to when we can expect to return to profitability due to thelack of any ability to forecast sales in our markets and continued investmentsexpected in new product development.  Weare dependent on a substantial increase in sales to be able to achieveprofitability. We believe that current cash balances and cash generated fromoperations will be adequate to fund requirements for operating losses, workingcapital and capital expenditures, as well as any potential acquisitions infiscal 2006.

 

As ofSeptember 30, 2005, we have lease commitments, including base rents andoperating costs, on our corporate headquarters of about $400,000 for each ofthe next two years.  The lease contains abuy-out clause, which would allow us to leave the premises in October of 2007for a fee of $60,000.  The lease expiresin October of 2009.  We have a sublease in place with a third party forpart of this space through October of 2007 which provides us with subleaseincome of approximately $139,000 per year for the next two years.  Our lease commitments for our Californiaoffice only go through June 2006 at a monthly gross rent of approximately$7,000.

 

 

NEW ACCOUNTING PRONOUNCEMENTS:

In December2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards No. 123 (Revised 2004) (“SFAS 123R”) “Share-BasedPayment”.  SFAS 123R requires companiesto measure all employee stock-based compensation awards using a fair valuemethod and record such expense in its financial statements.  SFAS 123R will be effective for the Companyat the beginning of fiscal 2007 (October 1, 2006).  We have not completed the process ofevaluating the impact that the adoption of SFAS 123R will have on our financialstatements.  In the Notes to ConsolidatedFinancial Statements we have added disclosure related to using the fair valuemethod to evaluate stock-based employee compensation.

 

CAUTIONARY STATEMENTS:

Any forward-looking statements included in this section or elsewhere inthis Form 10-K are subject to various risks and uncertainties, which may causeactual results to differ from the expectations set forth in theseforward-looking statements. These risks and uncertainties include, but are notlimited to, the risk factors set forth in Item 1 to this Form 10-K.

 
| **ITEM 7A.** | ** ** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|--------------|------------|-----------------------------------------------------------------|

 

The Companyinvests its excess cash in money market mutual funds, highly rated corporatedebt securities and certain asset-backed investments.  All investments are held to maturity.  The market risk on such investments isminimal.  Receivables from sales toforeign customers are denominated in U.S. Dollars.

 

 

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| **ITEM 8.** | ** ** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|------------|-------------------------------------------------|

 

CONSOLIDATEDBALANCE SHEETS

CipricoInc.

Amountsin thousands, except share data

 
| **September 30**                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                         |       |     |       |     |       |
| **ASSETS**                                                                                   |       |     |       |     |       |
|                                                                                         |       |     |       |     |       |
| CURRENT ASSETS:                                                                              |       |     |       |     |       |
| Cash and cash equivalents                                                                    |       | $        | 4,094      |     | $          | 4,394 |   |
| Marketable securities and short term investments                                             |       | 9,406    |       | 16,946   |       |
| Accounts receivable, less allowance of $467 in 2005 and $401 in 2004                         |       | 1,126    |       | 1,665    |       |
| Inventories                                                                                  |       | 1,724    |       | 1,330    |       |
| Other current assets                                                                         |       | 270      |       | 288      |       |
| Total current assets                                                                         |       | 16,620   |       | 24,623   |       |
|                                                                                         |       |     |       |     |       |
| PROPERTY AND EQUIPMENT, AT  COST:                                                            |       |     |       |     |       |
| Furniture and fixtures                                                                       |       | 505      |       | 501      |       |
| Equipment                                                                                    |       | 4,635    |       | 4,991    |       |
| Leasehold improvements                                                                       |       | 632      |       | 632      |       |
|                                                                                         |       | 5,772    |       | 6,124    |       |
| Accumulated depreciation and amortization                                                    |       | (5,525   | )          | (5,626   | )          |
| Net property and equipment                                                                   |       | 247      |       | 498      |       |
|                                                                                         |       |     |       |     |       |
| NON-CURRENT MARKETABLE  SECURITIES                                                           |       | 2,591    |       | —   |       |
| GOODWILL                                                                                     |       | 2,430    |       | —   |       |
| OTHER INTANGIBLES, NET                                                                       |       | 237      |       | —   |       |
| OTHER ASSETS                                                                                 |       | 47       |       | 41       |       |
|                                                                                         |       | $        | 22,172     |     | $          | 25,162 |   |
|                                                                                         |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                               |       |     |       |     |       |
|                                                                                         |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                         |       |     |       |     |       |
| Accounts payable                                                                             |       | $        | 1,131      |     | $          | 1,432 |   |
| Acquisition payable                                                                          |       | 1,014    |       | —   |       |
| Accrued compensation                                                                         |       | 357      |       | 537      |       |
| Warranty accrual                                                                             |       | 220      |       | 240      |       |
| Accrued restructuring                                                                        |       | 184      |       | 1,217    |       |
| Other accrued expenses                                                                       |       | 476      |       | 587      |       |
| Deferred revenue                                                                             |       | 158      |       | 292      |       |
| Total current liabilities                                                                    |       | 3,540    |       | 4,305    |       |
|                                                                                         |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY:                                                                   |       |     |       |     |       |
| Common stock, 4,783,457 shares and 4,738,595 shares issued and  outstanding in 2005 and 2004 |       | 47       |       | 47       |       |
| Additional paid-in capital                                                                   |       | 35,288   |       | 35,118   |       |
| Retained deficit                                                                             |       | (16,698  | )          | (14,259  | )          |
| Deferred compensation from restricted stock                                                  |       | (5       | )          | (49      | )          |
| Total stockholders’ equity                                                              |       | 18,632   |       | 20,857   |       |
|                                                                                         |       | $        | 22,172     |     | $          | 25,162 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

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CONSOLIDATEDSTATEMENTS OF OPERATIONS

CipricoInc. and Subsidiary

Amountsin thousands, except per share amounts

 
| **Years ended September 30**                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                     |       | $        | 13,213     |     | $          | 18,081   |       | $ | 31,215 |   |
| Cost of sales                                 |       | 8,434    |       | 11,929   |       | 19,840   |       |
| Gross profit                                  |       | 4,779    |       | 6,152    |       | 11,375   |       |
| Operating expenses:                           |       |     |       |     |       |     |       |
| Research and development                      |       | 3,467    |       | 5,154    |       | 6,214    |       |
| Sales and marketing                           |       | 2,792    |       | 4,597    |       | 6,638    |       |
| General and administrative                    |       | 1,812    |       | 1,705    |       | 2,388    |       |
| Restructuring charges                         |       | (291     | )          | 2,500    |       | 500      |       |
| Total operating expenses                      |       | 7,780    |       | 13,956   |       | 15,740   |       |
| Loss from operations                          |       | (3,001   | )          | (7,804   | )          | (4,365   | )          |
|                                          |       |     |       |     |       |     |       |
| Other income net,  primarily interest         |       | 562      |       | 426      |       | 450      |       |
| Loss before income taxes                      |       | (2,439   | )          | (7,378   | )          | (3,915   | )          |
|                                          |       |     |       |     |       |     |       |
| Income tax benefit                            |       | —   |       | —   |       | —   |       |
| Net loss                                      |       | $        | (2,439     | )        | $          | (7,378   | )          | $ | (3,915 | ) |
| Shares used to calculate  net loss per share: |       |     |       |     |       |     |       |
| Basic and diluted                             |       | 4,762    |       | 4,717    |       | 4,676    |       |
|                                          |       |     |       |     |       |     |       |
| Net loss per share:                           |       |     |       |     |       |     |       |
| Basic and diluted                             |       | $        | (0.51      | )        | $          | (1.56    | )          | $ | (0.84 | ) |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

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CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

CipricoInc. and Subsidiary

Amountsin thousands, except share data

 
| **Years ended September 30, 2005,  2004 and 2003** | ** ** | **Shares** | ** ** | **Common  stock and  additional  paid-in-  capital** | ** ** | **Translation  Adjustment** | ** ** | **Retained  deficit** | ** ** | **Deferred  compensation  from  restricted  stock** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|-----------------------------------------------------|------------|-----------|------------|
|                                               |       |       |       |                                                 |       |                        |       |                  |       |                                                |       |      |       |
| Balance, September 30, 2002                        |       | 4,812,167  |       | $                                                    | 35,355     |                        | $          | (119                  | )          | $                                                   | (2,966     | )         | $          | (32 | ) | 32,238 |   |
| Employee plan stock purchases                      |       | 44,338     |       | 146                                                  |       | —                      |       | —                |       | —                                              |       | 146       |       |
| Exercise of employee stock options                 |       | 12,825     |       | 51                                                   |       | —                      |       | —                |       | —                                              |       | 51        |       |
| Restricted stock issued                            |       | 6,500      |       | 27                                                   |       | —                      |       | —                |       | (27                                                 | )          | —    |       |
| Cumulative unrealized translation gain             |       | —     |       | —                                               |       | (61                         | )          | —                |       | —                                              |       | (61       | )          |
| Realization of translation loss.                   |       | —     |       | —                                               |       | 180                         |       | —                |       | —                                              |       | 180       |       |
| Amortization of restricted stock                   |       | —     |       | —                                               |       | —                      |       | —                |       | 39                                                  |       | 39        |       |
| Net loss                                           |       | —     |       | —                                               |       | —                      |       | (3,915                | )          | —                                              |       | (3,915    | )          |
| Repurchase of common stock                         |       | (197,995   | )          | (692                                                 | )          | —                      |       | —                |       | —                                              |       | (692      | )          |
| Balance, September 30, 2003                        |       | 4,677,835  |       | 34,887                                               |       | —                      |       | (6,881                | )          | (20                                                 | )          | 27,986    |       |
|                                               |       |       |       |                                                 |       |                        |       |                  |       |                                                |       |      |       |
| Employee plan stock purchases                      |       | 24,760     |       | 117                                                  |       | —                      |       | —                |       | —                                              |       | 117       |       |
| Exercise of employee stock options                 |       | 16,250     |       | 61                                                   |       | —                      |       | —                |       | —                                              |       | 61        |       |
| Restricted stock issued                            |       | 19,750     |       | 100                                                  |       | —                      |       | —                |       | (100                                                | )          | —    |       |
| Amortization of restricted stock                   |       | —     |       | —                                               |       | —                      |       | —                |       | 71                                                  |       | 71        |       |
| Net loss                                           |       | —     |       | —                                               |       | —                      |       | (7,378                | )          | —                                              |       | (7,378    | )          |
| Balance, September 30, 2004                        |       | 4,738,595  |       | 35,165                                               |       | —                      |       | (14,259               | )          | (49                                                 | )          | 20,857    |       |
|                                               |       |       |       |                                                 |       |                        |       |                  |       |                                                |       |      |       |
| Employee plan stock purchases                      |       | 19,162     |       | 78                                                   |       | —                      |       | —                |       | —                                              |       | 78        |       |
| Exercise of employee stock options                 |       | 27,200     |       | 93                                                   |       | —                      |       | —                |       | —                                              |       | 93        |       |
| Restricted stock cancelled                         |       | (1,500     | )          | (21                                                  | )          | —                      |       | —                |       | 14                                                  |       | (7        | )          |
| Amortization of restricted stock                   |       | —     |       | —                                               |       | —                      |       | —                |       | 30                                                  |       | 30        |       |
| Net loss                                           |       | —     |       | —                                               |       | —                      |       | (2,439                | )          | —                                              |       | (2,439    | )          |
| Warrants issued                                    |       | —     |       | 20                                                   |       | —                      |       | —                |       | —                                              |       | 20        |       |
| Balance, September 30, 2005                        |       | 4,783,457  |       | $                                                    | 35,335     |                        | $          | —                |       | $                                                   | (16,698    | )         | $          | (5 | ) | $ | 18,632 |   |
|                                                    |            |            |            |                                                      |            |                             |            |                       |            |                                                     |            |           |            |  |  |  |  |  |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

24

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS

CipricoInc. and Subsidiary

Amountsin thousands

 
| **Years ended September 30**                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from Operating Activities:                                              |       |     |       |     |       |     |       |
| Net loss                                                                           |       | $        | (2,439     | )        | $          | (7,378   | )          | $ | (3,915 | ) |
| Adjustments to reconcile net loss to net cash flows used in operating  activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                      |       | 349      |       | 1,278    |       | 1,802    |       |
| Loss on disposal of equipment                                                      |       | —   |       | 576      |       | —   |       |
| Unrealized translation gain.                                                       |       | —   |       | —   |       | (61      | )          |
| Realized translation loss                                                          |       | —   |       | —   |       | 180      |       |
| Compensation related to stock transactions                                         |       | 44       |       | (29      | )          | 39       |       |
| Changes in operating assets and liabilities, net of assets acquired:               |       |     |       |     |       |     |       |
| Accounts receivable, net                                                           |       | 539      |       | 2,351    |       | (426     | )          |
| Inventories                                                                        |       | (394     | )          | 2,598    |       | (783     | )          |
| Other assets                                                                       |       | 11       |       | 352      |       | 457      |       |
| Accounts payable                                                                   |       | (301     | )          | (719     | )          | (573     | )          |
| Accrued expenses                                                                   |       | (1,158   | )          | 692      |       | (868     | )          |
| Income taxes                                                                       |       | —   |       | —   |       | 789      |       |
| Deferred revenue                                                                   |       | (134     | )          | (20      | )          | (86      | )          |
| Net cash flows used in operating activities                                        |       | (3,483   | )          | (299     | )          | (3,445   | )          |
| Cash Flows from Investing Activities:                                              |       |     |       |     |       |     |       |
| Equipment purchases                                                                |       | (98      | )          | (380     | )          | (1,166   | )          |
| Business acquisition                                                               |       | (1,839   | )          | —   |       | —   |       |
| Purchase of marketable securities                                                  |       | (15,769  | )          | (23,439  | )          | (26,392  | )          |
| Proceeds from sale or maturity of marketable securities                            |       | 20,718   |       | 23,175   |       | 30,244   |       |
| Net cash flows provided by (used in) investing activities                          |       | 3,012    |       | (644     | )          | 2,686    |       |
| Cash Flows from Financing Activities:                                              |       |     |       |     |       |     |       |
| Proceeds from issuance of common stock                                             |       | 171      |       | 178      |       | 197      |       |
| Repurchase of common stock                                                         |       | —   |       | —   |       | (692     | )          |
| Net cash flows provided by (used in) financing activities                          |       | 171      |       | 178      |       | (495     | )          |
| Net Decrease in Cash and Cash Equivalents                                          |       | (300     | )          | (765     | )          | (1,254   | )          |
| Cash and Cash Equivalents at Beginning of Year                                     |       | 4,394    |       | 5,159    |       | 6,413    |       |
| Cash and Cash Equivalents at End of Year                                           |       | 4,094    |       | 4,394    |       | 5,159    |       |
| Marketable Securities—Current                                                 |       | 9,406    |       | 16,946   |       | 16,766   |       |
| Marketable Securities—Long-term                                               |       | 2,591    |       | —   |       | —   |       |
| Total Cash and Investments at End of Year                                          |       | $        | 16,091     |     | $          | 21,340   |       | $ | 21,925 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATEDFINANCIAL STATEMENTS.

 

25

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

CipricoInc. and Subsidiary - September 30, 2005, 2004 and 2003

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BUSINESS:The principal business activity of Ciprico Inc. (the Company) is the design,manufacture and marketing of appliances and solutions for digital mediaapplications.

 

CONSOLIDATION:The accompanying consolidated financial statements for fiscal 2003 include theaccounts of Ciprico Inc. and its wholly owned subsidiary, Ciprico InternationalLimited. All significant intercompany balances and transactions have beeneliminated.  In the fourth quarter of2003, the Company closed its European sales office and as such no consolidationwas necessary for 2005 and 2004.

 

ACCOUNTING ESTIMATES: In the preparation ofthe Company’s consolidated financial statements in accordance with accountingprincipals generally accepted in the United States of America, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and related revenue and expenses. Actual results coulddiffer from those estimates used by management.

 

REVENUE RECOGNITION: TheCompany recognizes revenue in accordance with SEC Staff Accounting Bulletin No.101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amended bySAB 101A and 101B. SAB 101 requires that four basic criteria must be met beforerevenue can be recognized: (1) persuasive evidence of an arrangement exists;(2) delivery has occurred or services rendered; (3) the fee is fixed anddeterminable; and (4) collectibility is reasonably assured.  Pursuant to this, in virtually all casesrevenue is recognized upon shipment of products.

 

Products sold are generallycovered by a standard warranty for periods up to three years. We accrue awarranty reserve within cost of sales for estimated costs to provide warrantyservices. We estimate the costs to service our warranty obligations based onhistorical experience and expectation of future conditions.

 

In addition to the standardwarranty offered with each product sale, we offer separate service contracts toour customers with varying levels of service. Revenue from the sale of these contract-based service programs isdeferred and recognized on a straight-line basis over the term of the relatedagreement.

 

Any other services provided(such as professional services, technical training and out of warranty repair)for customers are done a fee basis and revenue is recognized when theseservices are provided.

 

PRODUCTWARRANTY COSTS: Estimated future warranty costs are provided for at the time ofrevenue recognition.  Activity of thewarranty account is as follows for the years ended September 30, 2005, 2004 and2003:

 
| ** **         | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End  of Period** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|----------------|------------|--------------------------------|------------|
|               |       |                                 |       |                                |       |           |       |                           |       |
| September 30, 2005 |       | $                                    | 240,000    |                                | $          | 170,000        |       | $                              | (190,000   | ) | $ | 220,000 |   |
| September 30, 2004 |       | 387,000                              |       | 92,000                              |       | (239,000       | )          | 240,000                        |       |
| September 30, 2003 |       | 502,000                              |       | 140,000                             |       | (255,000       | )          | 387,000                        |       |
|                    |            |                                      |            |                                     |            |                |            |                                |            |  |  |  |  |

 

Deductionsrepresent warranty work performed during the year.

 

INVENTORIES:Inventories are stated at the lower of cost or replacement market. Inventorycosts include outside assembly charges, allocated manufacturing overhead anddirect material costs.  Cost isdetermined using an average cost method. In the third quarter of 2004 the Company recorded an adjustment of$900,000 to reduce certain legacy product inventory to market value due toexcess estimated inventory levels of certain legacy products discontinuedduring prior fiscal years.  Inventoryconsists of the following (in thousands) at September 30:

 

 

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Finished Goods  |       | $        | 1,051      |     | $          | 995 |   |
| Work-In-Process |       | 332      |       | 125      |       |
| Raw Materials   |       | 341      |       | 210      |       |
|            |       | $        | 1,724      |     | $          | 1,330 |   |

 

26

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SHIPPINGAND HANDLING COSTS:  The Company includesshipping and handling fees billed to customers in net sales.  Shipping and handling costs associated withoutbound freight are included in cost of sales.

 

RESEARCHAND DEVELOPMENT COSTS: Research and development costs are charged to expense asincurred.

 

ADVERTISING COSTS:Advertising costs are charged to expense as incurred.  For the years ended September 30, 2005, 2004and 2003, advertising expenses were approximately $50,000, $33,000 and $127,000respectively.

 

CASHAND CASH EQUIVALENTS: The Company considers all highly liquid temporaryinvestments with original maturities of three months or less to be cashequivalents. At September 30, 2005 and 2004 the Company’s cash and cashequivalents were invested in a money market fund and/or commercial paper.  The Company maintains cash balances atseveral financial institutions, and at times, such balances exceed insuredlimits.  The Company has not experiencedany losses in such accounts and believes it is not exposed to any significantcredit risk on cash.

 

ACCOUNTSRECEIVABLE: Credit isextended based on an evaluation of a customer’s finan­cial condition and,generally, collateral is not required. Accounts receivable are typically due from customers within 30 days andare stated at amounts due from customers net of an allow­ance for doubtfulaccounts.  Accounts outstanding longerthan the contractual payment terms are con­sidered past due.  The Company determines its allowances byconsidering a number of factors, including the length of time receivables arepast due, the Company’s previous loss his­tory, the customer’s current abilityto pay its obligation to the Company, and the condi­tion of the general economyand the industries as a whole.  TheCompany writes-off accounts receivable when they become uncollectible, andpayments subsequently received on such receivables are credited to theallowance for doubtful accounts.

 

Changes in the Company’sallowance for doubtful accounts are as follows:

 
| ** **         | ** ** | ** **                           | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **         | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | **(A)**    | **Deductions** | **(B)**    | **Balance at  End  of Period** | ** ** |
| ** **         | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| September 30, 2005 |       | $                                    | 401,000    |                                | $          | 377,000                         |       | $              | (311,000   | ) | $ | — |   | $ | 467,000 |   |
| September 30, 2004 |       | 652,000                              |       | —                              |       | (118,000                        | )          | (133,000       | )          | 401,000 |   |
| September 30, 2003 |       | 560,000                              |       | 92,000                              |       | —                          |       | —         |       | 652,000 |   |
|                    |            |                                      |            |                                     |            |                                 |            |                |            |  |  |  |  |  |  |  |

----

A- Represents the reversal of over accruals of various accounts relatedto accounts receivable.

B - Deductions represent accounts receivable written-off during theyear.

 

MARKETABLESECURITIES AND SHORT TERM INVESTMENTS: The Company has invested its excess cashin commercial paper, government agencies and other asset-backed short terminvestments. These investments are classified as held-to-maturity given theCompany’s intent and ability to hold the securities to maturity and are carriedat amortized cost. Investments that have maturities of less than one year havebeen classified as current marketable securities.  Investments that have maturities of greaterthan one year have been classified as non-current.  The non-current investments listed in thetable below have maturity dates in fiscal 2007.

 

Amortizedcost approximates fair value of held-to-maturity investments, which consist ofthe following (in thousands) at September 30:

 

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Current                  |       |     |       |     |       |
| Commercial Paper         |       | $        | 5,544      |     | $          | 14,055 |   |
| Asset-backed investments |       | 3,862    |       | 2,891    |       |
|                     |       | 9,406    |       | 16,946   |       |
| Non-current              |       |     |       |     |       |
| Commercial Paper         |       | 2,591    |       | —   |       |
|                     |       | 2,591    |       | —   |       |
|                     |       | $        | 11,997     |     | $          | 16,946 |   |

 

PROPERTYAND EQUIPMENT: Property and equipment are carried at cost, less accumulateddepreciation and amortization. Depreciation is provided using the straight-linemethod over estimated useful lives of eighteen months to seven years or, in thecase of leasehold improvements, over the period of the related lease, ifshorter. Major replacements and improvements are capitalized; repairs andmaintenance are expensed as incurred. Accelerated and straight-line methods ofdepreciation are used for income tax reporting.

 

27

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VALUATIONOF GOODWILL: In accordance with SFAS No. 142, goodwill and other intangibleassets with indefinite lives are not amortized, they are instead tested forimpairment annually or whenever events or changes in circumstances indicatethat the asset may be impaired.

 

EARNINGSPER SHARE: The Company’s basic earnings per share amounts are computed bydividing net income by the weighted average number of outstanding commonshares. Diluted earnings per share is computed by dividing net income by theweighted average number of outstanding common shares and common shareequivalents attributable to the assumed exercise of dilutive stock options.

### * *

### *STOCK OPTION PLANS: The Company has a stock option plan under whichofficers, directors, employees and consultants have been or may be grantedincentive and nonqualified stock options to purchase the Company’s common stockat fair market value on the date of grant. The options become exercisable over varying periods and expire up to 10years from the date of grant.  TheCompany uses the intrinsic value method in accounting for its plans.  No stock-based employee compensation cost isreflected in net loss, as all options granted under this plan had an exerciseprice equal to the market value of the underlying common stock on the date ofthe grant.  The following tableillustrates the effect on net loss and earnings per share if the Company hadapplied the fair value method to its stock-based employee compensation (inthousands, except per share amounts).*

 
| ** **            | ** **                                                                                                                                              | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------------|----------|------------|----------|------------|
| Net loss, as reported |                                                                                                                                                    | $        | (2,439     | )        | $          | (7,378   | )          | $ | (3,915 | ) |
| Deduct:               | Total stock-based employee  compensation determined under fair value based method for awards granted,  modified, or settled, net of related tax effects |     | (278       | )        | (442       | )        | (481       | ) |
| Pro forma net loss    |                                                                                                                                                    | $        | (2,717     | )        | $          | (7,820   | )          | $ | (4,396 | ) |
|                  |                                                                                                                                                    |     |       |     |       |     |       |
| Net loss per share    |                                                                                                                                                    |     |       |     |       |     |       |
|                  | Basic and Diluted — as  reported                                                                                                                   |     | $          | (0.51    | )          | $        | (1.56      | ) | $ | (0.84 | ) |
|                  | Basic and Diluted — pro  forma                                                                                                                     |     | $          | (0.57    | )          | $        | (1.66      | ) | $ | (0.94 | ) |

 

The weighted average fair value of optionsgranted in 2005, 2004 and 2003 was $1.08, $1.41 and $1.46 per share,respectively. The fair value of each option grant is estimated on the date ofgrant using the Black-Scholes option pricing model with the following weighted averageassumptions used for grants in 2005, 2004 and 2003: no dividend yield;risk-free rate of return of 3.2%, 2.6% and 1.7%, respectively; volatility of32.7%, 38.5% and 46.0%, respectively; and an average term of 3.0 years.  These effects may not be representative ofthe future effects of applying the fair value method.

 

FOREIGN CURRENCY: The financial statements ofCiprico International Limited were translated into U.S. dollars at the year-endexchange rate, while income and expenses are translated at the average exchangerates during the year.  Included in therestructuring charge in fiscal 2003 is a non-cash charge of $180,000 ofcumulative foreign currency translation adjustments recognized in connectionwith the closure of Ciprico International Limited.

 

NEWACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 123(Revised 2004) (“SFAS 123R”) “Share-Based Payment”.    SFAS 123R requires companies to measure allemployee stock-based compensation awards using a fair value method and recordsuch expense in its financial statements. SFAS 123R will be effective for the Company at the beginning of fiscal2007 (October 1, 2006).  We have notcompleted the process of evaluating the impact that the adoption of SFAS 123Rwill have on our financial statements. In the Notes to Consolidated Financial Statements we have addeddisclosure related to using the fair value method to evaluate stock-basedemployee compensation.

 

2.ACQUISITION

 

Inaccordance with SFAS No. 141, *BusinessCombinations* (“SFAS 141”), the Company allocates the purchase priceof its acquisitions to the tangible assets, liabilities and intangible assetsacquired, including in-process research and development when applicable, basedon their estimated fair values.  Theexcess purchase price over those fair values is recorded as goodwill.  The fair value assigned to intangible assetsacquired is based on a number of factors including a valuation prepared by anindependent third party appraisal firm. In accordance with SFAS No. 142, goodwill and other intangible assetswith indefinite lives are not amortized, they are instead tested for impairmentannually or whenever events or changes in circumstances indicate that the assetmay be impaired.  Intangible assets withfinite lives are amortized on a straight-line basis over their respectiveuseful lives.

 

28

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OnJanuary 31, 2005, Ciprico Inc. completed the acquisition of substantially allof the assets and business of Huge Systems, Inc. (“Huge”).  Huge was a privately held company based inAgoura Hills, California, and a leading supplier of data storage solutions forgraphic and video content creation marketplace.

 

The purchase price includesan amount paid in March of 2005 of approximately $1.4 million (consideration of$1,325,000 at closing, a preliminary working capital adjustment of $37,000 anda $50,000 advance), a promissory note in the original principal amount ofapproximately $300,000 with a maturity date of January 31, 2007, and acontingent consideration amount based upon certain performance of the businessthrough January 31, 2006.   Thepromissory note requires Ciprico to make six equal quarterly installments ofinterest and principal, which began in June of 2005. The remaining note amountof $200,000 is included in the Acquisition payable line item on the balancesheet. This note bears interest at a rate of 5% per annum.  Based on performance of the business as ofSeptember 30, 2005, the Company has paid $377,000 in contingent considerationand recorded a payable for the contingent consideration of approximately$800,000.

 

In conjunction with the acquisition Ciprico has also entered intoemployment agreements with the two principals of Huge and issued certainwarrants to purchase an aggregate of 30,000 shares of Ciprico common stock at aprice of $5.00 per share to certain stockholders of Huge.  The warrants become exercisable ratably overthe course of the next four years and terminate five years from the date ofissuance.

 

The total transaction cost of approximately $3.1 million has beenallocated as follows (in thousands):

 

**PURCHASE PRICE ALLOCATION**

 

| Assets                   |   |   |   |
|--------------------------|--------|--------|--------|
| Tangible assets          |   |   |   |
| Accounts receivable      |   | $      | 402    |   |
| Inventories              |   | 94     |   |
| Prepaids & other     |   | 68     |   |
| Property & equipment |   | 32     |   |
| Intangible assets        |   |   |   |
| Developed technology     |   | 170    |   |
| Noncompete agreements    |   | 135    |   |
| Goodwill                 |   | 2,430  |   |
| Assets acquired          |   | $      | 3,331  |   |
| Liabilities assumed      |   |   |   |
| Accounts payable         |   | (241   | )      |
|                     |   |   |   |
| Net assets acquired      |   | $      | 3,090  |   |

 

As part of the analysis of the acquisition it was determined there wasno material in-process research and development at the date of acquisition.

 

Thefollowing unaudited pro forma results of operations present the impact onresults of operations for the twelve-months ended September 30, 2005 and 2004as if the acquisition had been completed as of the beginning of the reportedperiod.  The pro forma amounts for thetwelve-month periods do not include $102,000 of expense related to theamortization of intangible assets or $55,000 of interest related to theacquisition.

 
| ** **                           | ** ** | **Twelve Months Ended  September 30, 2005** | ** ** | **Twelve Months Ended  September 30, 2004** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **Historical**                              | ** ** | **Pro  Forma**                              | ** ** | **Historical** |   | **Pro  Forma** |   |
| Net sales                            |       | $                                           | 13,213     |                                        | $          | 15,058 |   | $ | 18,081 |   | $ | 22,660 |   |
| Net loss                             |       | $                                           | (2,439     | )                                           | $          | (2,414 | ) | $ | (7,378 | ) | $ | (14,520 | ) |
| Basic and diluted net loss per share |       | $                                           | (0.51      | )                                           | $          | (0.51 | ) | $ | (1.56 | ) | $ | (1.52 | ) |

 

29

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                                Intangibleassets with finite lives that are subject to amortization are listed in thetable below as of September 30, 2005 (in thousands):

 
| ** **            | ** ** | **Estimated Life  (in years)** | ** ** | **Estimated  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-----------------------|------------|--------------------------------|------------|----------------------|------------|-------------------------------|------------|---------|------------|
| Developed technology  |       | 3                              |       | $                    | 170        |                          | $          | (38     | )          | $ | 132 |   |
| Noncompete agreements |       | 3                              |       | 135                  |       | (30                           | )          | 105     |       |
|                  |       |                           |       |                 |       |                          |       |    |       |
|                  |       |                           |       | $                    | 305        |                          | $          | (68     | )          | $ | 237 |   |

 

Estimatedamortization expense for the years ending September 30, 2006, 2007 and 2008 is$102,000, $102,000 and $33,000 respectively.

 

3.RESTRUCTURING ACTIVITY

 

In December 2004, theCompany entered into an agreement to sub-lease a portion of its headquarterfacility that had been abandoned in fiscal 2004.  Due to the sublease of the abandoned space inDecember 2004 and the additional mitigation of other costs associated with previousrestructuring charges, $576,000 of earlier restructuring charges were reversedin fiscal 2005.  The amount of therestructuring adjustment was based upon expected future rental income, which isless than our lease requires us to pay, net of any costs associated with thesub-lease agreement.

 

In the second quarter offiscal 2005 the Company recorded a charge of $285,000 for restructuring relatedto a 15% workforce reduction in March.

 

During the third quarter of2004, we implemented a workforce reduction of 40%.  As a result of the restructuring, we recordeda charge of $3.4 million, of which approximately $1.1 million is employeetermination costs, $1.0 million is related to the abandonment of a portion ofCiprico’s headquarter facility and $400, 000 related to the write down ofcertain fixed assets.   In addition, theCompany recorded a non-cash adjustment of $900,000 to cost of sales andinventory to reduce certain legacy product inventory to market value.

 

In the fourth quarter of2003,the Company implemented a workforce reduction of 17%, including theclosure of its European sales offices. As a result of the restructuring, we recorded a charge of $500,000during the fourth quarter of 2003, of which approximately $320,000 is employeetermination costs and $180,000 is a non-cash charge for cumulative foreigncurrency translation adjustments recognized in connection with the closure ofour European operations.

 

Employee termination costsconsist primarily of severance payments for terminated employees. The facilityclosure and related costs consist of lease termination costs related to theclosing of the international sales offices, write down of certain fixed assetsand the abandonment of a portion of our headquarter facility, offset by thesubsequent sublease of that portion of our headquarter facility.

 

The following is a summaryof the accrued restructuring activity (in thousands):

 

| **Years ended September 30, 2005, 2004 and 2003** | ** ** | **Employee  Termination  Costs** | ** ** | **Facility  closure and  related costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|-----------|------------|
| Balance, September 30,  2002                      |       | $                                | 328        |                                     | $          | 42        |       | $ | 370 |   |
|                                              |       |                             |       |                                     |       |      |       |
| Restructuring charges                             |       | 320                              |       | 180                                      |       | 500       |       |
| Amounts utilized                                  |       | (527                             | )          | (222                                     | )          | (749      | )          |
| Balance, September 30,  2003                      |       | 121                              |       | —                                   |       | 121       |       |
|                                              |       |                             |       |                                     |       |      |       |
| Restructuring charges                             |       | 1,100                            |       | 1,400                                    |       | 2,500     |       |
| Amounts utilized                                  |       | (924                             | )          | (480                                     | )          | (1,404    | )          |
| Balance, September 30,  2004                      |       | 297                              |       | 920                                      |       | 1,217     |       |
|                                              |       |                             |       |                                     |       |      |       |
| Restructuring charges  (reversal)                 |       | 285                              |       | (576                                     | )          | (291      | )          |
| Amounts utilized                                  |       | (577                             | )          | (165                                     | )          | (742      | )          |
| Balance, September 30,  2005                      |       | $                                | 5          |                                     | $          | 179       |       | $ | 184 |   |

 

30

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4.INCOME TAXES

 

Incometax expense (benefit) consists of the following (in thousands):

 

| **Years ended September 30** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                     |       |     |       |     |       |     |       |
| Federal                      |       | $        | —     |     | $          | —   |       | $ | — |   |
| State                        |       | —   |       | —   |       | 9        |       |
| Foreign                      |       | —   |       | —   |       | (9       | )          |
|                         |       | —   |       | —   |       | —   |       |
| Deferred                     |       | —   |       | —   |       | —   |       |
|                         |       | $        | —     |     | $          | —   |       | $ | — |   |

 

Deferredincome taxes arise from temporary differences between financial and taxreporting. The tax effects of the cumulative temporary differences resulting inthe net deferred tax assets are as follows (in thousands):

 

| **As of September 30**          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Current deferred tax  assets:   |       |     |       |     |       |
| Inventory                       |       | $        | 317        |     | $          | 290 |   |
| Allowance for doubtful accounts |       | 174      |       | 149      |       |
| Warranty accrual                |       | 82       |       | 89       |       |
| Loss and credit carryforwards   |       | 8,286    |       | 6,984    |       |
| Compensation accrual            |       | 96       |       | 188      |       |
| Other                           |       | 75       |       | 487      |       |
| Less — valuation allowance |       | (9,030   | )          | (8,187   | )          |
| Current deferred tax asset      |       | —   |       | —   |       |
|                            |       |     |       |     |       |
| Long-term deferred tax  assets: |       |     |       |     |       |
| Depreciation                    |       | 245      |       | 187      |       |
| Less — valuation allowance |       | (245     | )          | (187     | )          |
| Long-term deferred tax asset    |       | —   |       | —   |       |
|                            |       | $        | —     |     | $          | — |   |

 

Asof September 30, 2005, the Company had net operating loss carry forwards ofapproximately $19.0 million, which expire at various dates from 2022 to 2025,and general business credit carry forwards of approximately $1.3 million, whichexpire at various dates from 2016 to 2025.

 

Thefollowing is a reconciliation of the federal statutory income tax rate to theconsolidated effective tax rate:

 

| **Years ended September 30**                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory rate                                                |       | (34.0    | )%         | (34.0    | )%         | (34.0    | )%         |
| State taxes, net of federal income tax benefit                        |       | (3.2     | )          | (3.1     | )          | (3.4     | )          |
| Change in valuation allowance                                         |       | 37.2     |       | 34.0     |       | 35.9     |       |
| Permanent difference — foreign subsidiary liquidation adjustment |       | —   |       | 3.1      |       | —   |       |
| Other, net                                                            |       | —   |       | —   |       | 1.5      |       |
|                                                                  |       | —   | %          | —   | %          | —   | %          |

 

Cashreceived (paid) for income taxes was approximately $0 in 2005, $0 in 2004 and$789,000 in 2003.

 

5.STOCKHOLDERS’ EQUITY

 

### *AuthorizedShares*

 

TheCompany is authorized to issue 1,000,000 shares of Preferred Stock at $.01 parvalue and 9,000,000 shares of Common Stock at $.01 par value. The Company hasnot issued any shares of Preferred Stock.

### * *

### *StockRepurchase*

 

TheCompany’s stock buyback program is currently suspended. Under the plan $12.0million was authorized to be used for the repurchase program. There were noshares repurchased in fiscal 2005 and 2004. During 2003 the Company repurchased 198,000 shares.  As of September 30, 2005 and 2004, 1,037,035shares of common stock had been repurchased for $7.8 million.

 

31

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#### *Stock OptionExchange*

 

On December 4, 2002, theCompany accepted for exchange stock options to purchase 159,500 shares ofcommon stock granted under the Ciprico Inc. 1999 Amended and RestatedStock Option Plan pursuant to a Tender Offer Statement on Schedule TO datedNovember 4, 2002 (“Schedule TO”) offered to certain eligible employees (the “exchange”).    The exchange was offered to non-managementemployees who held stock options effective October 25, 2002 with an exerciseprice of $7.00 per share or more and expiring after January 1, 2004, whowere option holders that had not received options after May 8, 2002.  On June 10, 2003, the Company granted optionsto purchase 127,600 shares of common stock at a price of $5.75. There was nocompensation expense recognized as a result of this exchange.

 

#### *StockholdersRights Plan*

 

                                On January 8, 2003, the Board ofDirectors adopted a stockholder rights plan under which the Board declared adividend distribution of one right for each outstanding share of Ciprico commonstock as of January 14, 2003.  Uponbecoming exercisable, each right would entitle its holder to buy oneone-hundredth of a share of a new series of preferred stock at an exerciseprice of $32.00 per right.  Subject tocertain allowable actions by the Board, the rights will become exercisable if aperson or group acquires 15% or more of the Company’s common stock or announcesa tender offer for 15% or more of its common stock.  Unless the Board exercises certain otherrights, if such a person acquires 15% or more of the Company’s common stock,each right would enable a Ciprico stockholder to acquire Ciprico stock having amarket value of twice the right’s exercise price.  The rights are redeemable at the option ofthe Company in certain instances.

 

### *Stock Options*

 

Optiontransactions under the Company’s stock option plans during the three yearsended September 30, 2005 are summarized as follows:

 

| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|
| Outstanding at September  30, 2002    |       | 1,150,625             |       | $                                     | 8.07       |   |
| Granted                               |       | 279,800               |       | 4.39                                  |       |
| Exercised                             |       | (12,825               | )          | 4.00                                  |       |
| Canceled                              |       | (481,275              | )          | 8.73                                  |       |
| Outstanding at September  30, 2003    |       | 936,325               |       | 6.70                                  |       |
| Granted                               |       | 344,500               |       | 4.84                                  |       |
| Exercised                             |       | (16,250               | )          | 3.77                                  |       |
| Canceled                              |       | (352,900              | )          | 6.84                                  |       |
| Outstanding at September  30, 2004    |       | 911,675               |       | 6.04                                  |       |
| Granted                               |       | 298,500               |       | 4.06                                  |       |
| Exercised                             |       | (27,200               | )          | 3.64                                  |       |
| Canceled                              |       | (332,125              | )          | 6.85                                  |       |
| Outstanding at September  30, 2005    |       | 850,850               |       | 5.13                                  |       |
| Options exercisable at  September 30: |       |                  |       |                                  |       |
| 2003                                  |       | 494,063               |       | $                                     | 8.42       |   |
| 2004                                  |       | 516,675               |       | 7.19                                  |       |
| 2005                                  |       | 474,412               |       | 5.97                                  |       |

 

 

Thefollowing table summarizes information regarding outstanding and exercisablestock options:

 
| **Options Outstanding**         | ** ** | **Options Exercisable**  | ** ** |
|---------------------------------|------------|--------------------------|------------|
| **Range of   Exercise  Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted  Average   Remaining  Life** | ** ** | **Weighted  Average   Exercise  Price** | ** ** | **Number   Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $                               | 2.82       | —                   | 4.23       |   | 386,300 |   | 3.1  years |   | $ | 3.74 |   | 115,550 |   | $ | 3.57 |   |
| 4.24                            | —     | 6.36                     |       | 324,550 |   | 3.5  years |   | 5.04 |   | 218,862 |   | 5.17 |   |
| 7.17                            | —     | 10.76                    |       | 110,000 |   | 1.2  years |   | 8.69 |   | 110,000 |   | 8.69 |   |
| 11.00                           | —     | 12.88                    |       | 30,000 |   | 1.3  years |   | 11.00 |   | 30,000 |   | 11.00 |   |
|                            |       |                     | 850,850    |   |   |   |   |   | 474,412 |   |   |   |
|                                 |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Asof September 30, 2005, the Company had 524,144 shares reserved for futureissuance under the plan.

 

32

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*Employee Stock Purchase Plan*

 

The1996 Employee Stock Purchase Plan (“ESPP”) provides for the purchase byeligible employees of Company common stock at a price equal to 85% of themarket price on either the commencement or the termination date of eachsix-month plan phase, whichever is lower. Participants may authorize payrolldeductions up to 10% of their base salary during the plan phase to purchase thestock. Since inception of the ESPP, a total of 219,651 shares have been issued.At September 30, 2005, the Company had 30,349 shares reserved for futureissuance under the ESPP.

 

### *RestrictedStock Plan*

 

The1996 Restricted Stock Plan (“RSP”) provides for common stock awards toofficers, directors and certain key employees of the Company. Restricted stockvests generally after continued employment for a period of up to five years.All restricted stock awards entitle the participant to full dividend and votingrights. Since inception of the RSP, a total of 74,773 shares have been issued.At September 30, 2005, the Company had 68,380 shares reserved for futureissuance under the RSP.

 

6.EMPLOYEE BENEFIT PLAN

 

The Company participates in a 401(k) savingsplan covering substantially all of its employees. Minimum contributions to theplan by the Company are 50 percent of employee contributions up to the first 6percent of the participants’ salaries. Contributions in addition to the minimummay also be made by the Company based on the Company’s financial performance.The Company’s contributions to the plan in 2005, 2004 and 2003 wereapproximately $114,000, $180,000 and $220,000.

 

7.SEGMENT INFORMATION

 

TheCompany has no material long-lived assets outside of the United States.

 

Salesas a percentage of net sales, to a significant customer at September 30, 2005,2004 and 2003 were 18%, 35% and 40% respectively.

Receivablesfrom that significant customer at September 30, 2005, 2004 and 2003 were$297,000, $966,000 and $2,300,000 respectively.

 

TheCompany operates in a single reportable segment.

 

 

8.COMMITMENTS

 

TheCompany has operating leases for office and manufacturing space that expire atvarying dates through October 31, 2009. In December 2004 the Company entered into an agreement to sublease partof its office space through October 31, 2007. Future minimum payments under these leases are as follows (in thousands)for the fiscal years ending September 30:

 

| 2006       |   | $      | 406    |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 354    |   |
| 2008       |   | 361    |   |
| 2009       |   | 361    |   |
| 2010       |   | 30     |   |
| Thereafter |   | — |   |
|       |   | $      | 1,512  |   |

 

For the years endedSeptember 30, 2005, 2004, and 2003, operating lease expenses were $550,000,$542,000 and $491,000.  For the fiscalyears ending September 30, 2006, 2007 and 2008 base sublease income willapproximate, $131,000, $135,000 and $11,000 respectively.

 

33

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

THE BOARD OF DIRECTORS AND STOCKHOLDERS — CIPRICO INC.

 

We have audited the accompanying balance sheets of Ciprico Inc. andsubsidiary as of September 30, 2005 and 2004, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2005.  These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofCiprico Inc and subsidiary as of September 30, 2005 and 2004, and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended September 30, 2005 in conformitywith accounting principles generally accepted in the United States of America.

 

/s/ GRANT THORNTON LLP (typed)

Minneapolis, Minnesota

October 26, 2005

 

34

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QUARTERLYFINANCIAL DATA

(unaudited)amounts in thousands, except per share amounts

 
| ** **                           | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| 2005                                 | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** ** | ** ** |
| Net sales                            |       | $                  | 3,018      |                | $          | 3,008              |       | $                   | 3,107      |       | $          | 4,080 |   | $ | 13,213 |   |
| Net income (loss)                    |       | 21                 |       | (1,182              | )          | (841               | )          | (437                | )          | (2,439     | )          |
| Net income (loss) per  share-diluted |       | —             |       | (0.25               | )          | (0.18              | )          | (0.09               | )          | (0.51      | )          |
|                                 |       |               |       |                |       |               |       |                |       |       |       |
| 2004                                 |       |               |       |                |       |               |       |                |       |       |       |
| Net sales                            |       | $                  | 6,042      |                | $          | 4,186              |       | $                   | 4,588      |       | $          | 3,265 |   | $ | 18,081 |   |
| Net loss                             |       | (892               | )          | (1,618              | )          | (4,275             | )          | (593                | )          | (7,378     | )          |
| Net loss per share-diluted           |       | (0.19              | )          | (0.34               | )          | (0.90              | )          | (0.13               | )          | (1.56      | )          |
|                                 |       |               |       |                |       |               |       |                |       |       |       |
| 2003                                 |       |               |       |                |       |               |       |                |       |       |       |
| Net sales                            |       | $                  | 8,112      |                | $          | 8,571              |       | $                   | 8,431      |       | $          | 6,101 |   | $ | 31,215 |   |
| Net loss                             |       | (683               | )          | (675                | )          | (992               | )          | (1,565              | )          | (3,915     | )          |
| Net loss per share-diluted           |       | (0.14              | )          | (0.14               | )          | (0.21              | )          | (0.33               | )          | (0.84      | )          |

 
| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING  AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

None.

** **
| **ITEM 9A.** | ** ** | **CONTROLS AND PROCEDURES** |
|--------------|------------|-----------------------------|

 

                Cipricomanagement, including the Chief Executive Officer and Chief Financial Officer,have conducted an evaluation of the effectiveness of disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14.  Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer concluded that the disclosure controlsand procedures are effective in ensuring that all information required to bedisclosed by the Company in reports that it files under the Exchange Act arerecorded, processed, summarized and reported within the time period covered bythis report.  There have been no changesin the Company’s internal control over financial reporting that occurred duringthe period covered by this report that have materially affected or arereasonably likely to materially affect the Company’s internal control over financialreporting.

 
| **ITEM 9B.** | ** ** | **OTHER INFORMATION** |
|--------------|------------|-----------------------|

 

None.

 

35

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**PART III**

 
| **ITEM 10.** | ** ** | **DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT** |
|--------------|------------|--------------------------------------------------------|

 

Reference is madeto the table entitled Executive Officers of the Registrant in Part I of thisreport and to the information included under the caption “Election of Directors”in the Company’s Proxy Statement for the Annual Meeting of Stockholdersscheduled to be held January 26, 2006, which information is incorporated byreference herein.

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTINGCOMPLIANCE

 

Section16(a) of the Securities Exchange Act of 1934 requires executive officers anddirectors of the Company, and persons who beneficially own more than 10 percentof the Company’s outstanding shares of Common Stock, to file initial reports ofownership and reports of changes in ownership of securities of the Company withthe Securities and Exchange Commission. Officers, directors and greater than 10percent stockholders are required by Securities and Exchange Commissionregulations to furnish the Company with copies of all Section 16(a) forms theyfile.

 

Basedupon a review of the copies of such reports furnished to or obtained by theCompany and upon other information known to the Company, the Company believesthat during the fiscal year ended September 30, 2005, all filing requirementsapplicable to its directors, officers or beneficial owners of more than 10% ofthe Company’s outstanding shares of Common Stock were complied with.

 

CODEOF ETHICS AND BUSINESS CONDUCT

 

                                We have adopted the Ciprico Code ofEthics and Business Conduct (the “Code of Conduct”), a code of conduct thatapplies to our employees, officers and directors.  The Code of Conduct is publicly available onour website at http://www.ciprico.com. If we make any substantive amendments to the Code of Conduct or grantany waiver, including any implicit waiver from a provision of the Code ofConduct to our directors or executive officers, we will disclose the nature ofsuch amendment or waiver on our website or in a report on Form 8-K.

 

 
| **ITEM 11.** | ** ** | **EXECUTIVE COMPENSATION** |
|--------------|------------|----------------------------|

** **

                The information required by Item 11 isincorporated herein by reference to the section labeled “Executive Compensation”which appears in the definitive Proxy Statement for its 2005 Annual Meeting ofStockholders scheduled to be held January 26, 2006.

 

36

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| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|

 

The information required by Item 12 is incorporatedherein by reference to the sections labeled “Principal Stockholders” and “ManagementStockholdings” which appear in the definitive Proxy Statement for our 2005Annual Meeting of Stockholders scheduled to be held January 26, 2006.

 

EQUITYCOMPENSATION PLAN INFORMATION

 

The following table sets forth certain information as of September 30,2005 regarding compensation plans under which equity securities of our companyare authorized for issuance:

 

| **Plan Category**                                       | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights  (a)** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights  (b)** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))  (c)** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders     |       | 850,850                                                                                                 |       | $5.13                                                                                   |       | 622,873                                                                                                                                                    |       |
| Equity compensation plans not approved by  stockholders |       | —                                                                                                  |       | —                                                                                  |       | —                                                                                                                                                     |       |
| Total                                                   |       | 850,850                                                                                                 |       | $5.13                                                                                   |       | 622,873                                                                                                                                                    |       |

 

 

                The equity compensation plans approved by ourstockholders are the 1999 Amended and Restated Sock Option Plan and the 1966Restricted Stock Plan.

 

The Company also maintainsan Employee Stock Purchase Plan, participation in which is available to substantiallyall of the Company’s employees. Participating employees may purchase the Company’s common stock at theend of each participation period at a purchase price equal to 85% of the lowerof the fair market value of the stock at the beginning or end of theperiod.  The six-month participationperiod runs from January 1 to June 30 and from July 1 to December 31 eachyear.  Employees may contribute up to 10%of their base compensation to the plan subject to certain IRS limits on stockpurchases through the plan.  The Company’sstockholders approved this plan.

 

 

 
| **ITEM 13.** | ** ** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** |
|--------------|------------|----------------------------------------------------|

 

                The information required by Item 13 is incorporatedherein by reference to the sections labeled “Certain Transactions” and “OtherCompensation Arrangements” which appear in the definitive Proxy Statement forour 2005 Annual Meeting of Stockholders scheduled to be held January 26, 2006.

 

37

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| **ITEM 14.** | ** ** | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|------------|--------------------------------------------|

 

                Grant Thornton LLPhas acted as the Company’s independent registered public accountants for thefiscal year ended September 30, 2005.

 

                ***Audit Fees.***  The aggregate fees billed by Grant ThorntonLLP for professional services rendered in connection with the audit of theCompany’s annual financial statements for fiscal 2005 and 2004 and included inthe Company’s Forms 10-Q for fiscal 2005 and 2004 were $67,800 and $56,000,respectively.

 

                ***Audit Related Fees.***  The aggregate fees billed by Grant ThorntonLLP for products and services provided by the principal accountant, other thanthe Company’s annual financial statements and the Company’s Forms 10-Q for thefiscal year ended September 30, 2005 and 2004 were $8,000 and $5,500,respectively.  These fees were primarilyfor the audit of the Company’s benefit plan.

 

                ***Tax Fees.***  The aggregate fees billed by Grant ThorntonLLP for professional services rendered by the principal accountant for taxcompliance, tax advice and tax planning for the fiscal year ended September 30,2005 and 2004 were $13,400 and $22,500, respectively.  These fees were primarily for the preparationof the Company’s income tax returns.

 

                ***All Other Fees.***  There were no aggregate fees billed by GrantThornton LLP for products and services provided by the principal accountantother than Audit Fees, Audit Related Fees and Tax Fees for the fiscal yearended September 30, 2005 and 2004.

 

##### **Pre-Approval Policy**

 

                Pursuant to itswritten charter, the Audit Committee is required to pre-approve all audit andnon-audit services performed by the Company’s independent registered publicaccountants in order to assure that the provision of such services does notimpair the independence of the Company’s independent registered publicaccountants.

 

                The AuditCommittee’s Pre-Approval Policy was recommended by the Audit Committee andapproved by the Board on June 24, 2004.  Unless aparticular service has received general pre-approval by the Audit Committee,each service provided must be specifically pre-approved.  Any proposed services exceeding pre-approvedcosts levels will require specific pre-approval by the Audit Committee.  The Audit Committee has delegatedpre-approval authority to Michael M. Vekich, the Chairman of the AuditCommittee, who will then report any pre-approval decisions to the AuditCommittee at its next scheduled meeting.

 

**PART IV**

 
| **ITEM 15.** | ** ** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|------------|------------------------------------------------|

 

(a)                    Exhibits.  See “Exhibit Index” on page followingfinancial statement schedules.

 

38

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                    |   |    CIPRICO  INC.                 |
|-------------------------|--------|-------------------------------------------------|
|                    |   |    (the  “Registrant”) |
|                    |   |                                            |
| Date:  December 6, 2005 | By     | /s/  James W. Hansen                            |
|                    |   |    James  W. Hansen,             |
|                    |   |    Chief  Executive Officer      |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the Registrant and in the capacities and on the dates indicated.

 

 

 
| **Signature**           | ** ** | **Title**                                          | ** ** | **Date**          |
|-------------------------|------------|----------------------------------------------------|------------|-------------------|
|                    |       |                                               |       |              |
| /s/  James W. Hansen    |       | Chief  Executive Officer and Chairman of the Board |       | December  6, 2005 |
| James  W. Hansen        |       | (Principal  executive officer)                     |       |              |
|                    |       |                                               |       |              |
| /s/  Monte S. Johnson   |       | Vice  President - Finance and Chief                |       | December  6, 2005 |
| Monte  S. Johnson       |       | Financial  Officer (Principal                      |       |              |
|                    |       | financial  and accounting officer)                 |       |              |
|                    |       |                                               |       |              |
| /s/  Michael M. Vekich  |       | Lead  Director                                     |       | December  6, 2005 |
| Michael  M. Vekich      |       |                                               |       |              |
|                    |       |                                               |       |              |
| /s/  Robert H. Kill     |       | Director                                           |       | December  6, 2005 |
| Robert  H. Kill         |       |                                               |       |              |
|                    |       |                                               |       |              |
| /s/  Mark D. Griffiths  |       | Director                                           |       | December  6, 2005 |
| Mark  D. Griffiths      |       |                                               |       |              |
|                    |       |                                               |       |              |
| /s/  Gary L. Hokkanen   |       | Director                                           |       | December  6, 2005 |
| Gary  L. Hokkanen       |       |                                               |       |              |
|                    |       |                                               |       |              |
| /s/  Thomas F. Burniece |       | Director                                           |       | December  6, 2005 |
| Thomas  F. Burniece     |       |                                               |       |              |

 

39

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

EXHIBIT INDEX TO FORM 10-K

 
| For  the fiscal year ended |   | Commission File No.: 0-11336 |
|----------------------------|--------|------------------------------|
| September  30, 2005        |   |                         |

 

CIPRICO INC.

 

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                          |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                     |
| 2.1         |       | Asset Purchase Agreement  dated January 31, 2005 by and among Ciprico Inc., Huge Systems, Inc. and the  Principals named therein—incorporated by reference to Exhibit 2.1 of the  Registrant’s Form 8-K filed February 3, 2005 |
|        |       |                                                                                                                                                                                                                                     |
| 3.1         |       | The  Registrant’s Certificate of Incorporation, as amended to date—incorporated by  reference to Exhibit 19.1 of the Registrant’s Form 10-Q for the quarter ended  March 31, 1988                                         |
|        |       |                                                                                                                                                                                                                                     |
| 3.2         |       | The  Registrant’s Bylaws, as amended to date—incorporated by reference to Exhibit  19.2 of the Registrant’s Form 10-Q for the quarter ended March 31, 1988                                                                |
|        |       |                                                                                                                                                                                                                                     |
| 10.1**      |       | Registrant’s  1992 Nonqualified Stock Option Plan—incorporated by reference to Exhibit  10.13 of the Registrant’s Form 10-K for the fiscal year ended September 30,  1992                                                 |
|        |       |                                                                                                                                                                                                                                     |
| 10.2**      |       | Specimens  of Nonqualified Stock Option Agreements under 1992 Nonqualified Stock Option  Plan—incorporated by reference to Exhibit 10.14 of the Registrant’s Form 10-K  for the fiscal year ended September 30, 1992           |
|        |       |                                                                                                                                                                                                                                     |
| 10.3**      |       | Amendment  No. 1 to Registrant’s 1992 Nonqualified Stock Option Plan—incorporated by  reference to Exhibit 10.11 of the Registrant’s Form 10-KSB for the fiscal  year ended September 30, 1995                            |
|        |       |                                                                                                                                                                                                                                     |
| 10.4**      |       | Amendment  No. 2 to Registrant’s 1992 Nonqualified Stock Option Plan—incorporated by  reference to Exhibit 10.12 of the Registrant’s Form 10-KSB for the fiscal  year ended September 30, 1995                            |
|        |       |                                                                                                                                                                                                                                     |
| 10.5**      |       | Registrant’s  1994 Incentive Stock Option Plan—incorporated by reference to Exhibit 10.13  of the Registrant’s Form 10-KSB for the fiscal year ended September 30, 1993                                                   |
|        |       |                                                                                                                                                                                                                                     |
| 10.6**      |       | Specimen  of Incentive Stock Option Agreement under 1994 Incentive Stock Option  Plan—incorporated by reference to Exhibit 10.14 of the Registrant’s Form  10-KSB for the fiscal year ended September 30, 1993                 |
|        |       |                                                                                                                                                                                                                                     |
| 10.7**      |       | Registrant’s  1996 Restricted Stock Plan, as amended—incorporated by reference to Exhibit  10.4 of the Registrant’s Form 10-Q for the fiscal quarter ended December 31,  1998                                             |
|        |       |                                                                                                                                                                                                                                     |
| 10.8**      |       | Specimen  of Restricted Stock Agreement under 1996 Restricted Stock Plan—incorporated  by reference to Exhibit 10.16 of the Registrant’s Form 10-KSB for the fiscal  year ended September 30, 1995                             |
|        |       |                                                                                                                                                                                                                                     |
| 10.9**      |       | Registrant’s  1999 Amended and Restated Stock Option Plan—incorporated by reference to  Exhibit 10.1 of the Registrant’s Form 10-Q for the fiscal quarter ended  December 31, 1998                                        |
|        |       |                                                                                                                                                                                                                                     |
| 10.10**     |       | Specimen  of Incentive Stock Option Agreement under 1999 Amended and Restated Stock  Option Plan—incorporated by reference to Exhibit 10.2 of the Registrant’s  Form 10-Q for the fiscal quarter ended December 31, 1998       |
|        |       |                                                                                                                                                                                                                                     |
| 10.11**     |       | Specimen  of Nonqualified Stock Option Agreement under 1999 Amended and Restated Stock  Option Plan—incorporated by reference to Exhibit 10.3 of the Registrant’s  Form 10-Q for the fiscal quarter ended December 31, 1998    |

 

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| 10.12   |   | Indenture of Lease, dated  June 12, 2002 by and between Moen Leuer Properties, Inc and Ciprico Inc. relating to corporate office and manufacturing  space located at 17400 Medina Road, Plymouth, Minnesota—incorporated by  reference to Exhibit 10.12 of the Registrant’s Form 10-K for the fiscal year  ended September 30, 1992 |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.13** |   | Employment Agreement and  Change of Control Agreement dated September 30, 2004 between James W. Hansen  and Ciprico Inc. — incorporated by reference to Exhibit 10.16 of the  Registrants Form 10-K filed December 20, 2004                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.14** |   | Separation Agreement and Release dated September 30,  2004 between Robert H. Kill and Ciprico Inc. — incorporated by  reference to Exhibit 10.17 of the Registrants Form 10-K filed December 20,  2004                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.15** |   | Employment Agreement and  Change of Control Agreement dated June 1, 2005 between Monte S. Johnson and  Ciprico Inc.***                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.16   |   | Short Term Promissory Note of Ciprico Inc. dated as  of January 31, 2005 in the original amount of $300,000—incorporated by  reference to Exhibit 10.1 of the Registrant’s Form 8-K filed February 3, 2005                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.17   |   | Promissory Note of Ciprico Inc. dated as of January  31, 2005 in the original principal amount of $1,412,545.10—incorporated by  reference to Exhibit 10.2 of the Registrant’s Form 8-K filed February 3, 2005                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 10.18** |   | Change of Control Agreement dated April 15, 2005  with Ciprico Inc. and Mark Gilmore—incorporated by reference to Exhibit 10.1  of the Registrant’s Form 8-K filed May 19, 2005                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 23.1    |   | Consent of Grant Thornton  LLP***                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 31.1    |   | Certification of the Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002***                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 31.2    |   | Certification of the Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002***                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 32.1    |   | Certification of the Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002***                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                          |
| 32.2    |   | Certification of the Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002***                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                          |

 

 

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**          Indicates amanagement contract or compensatory plan or arrangement.

***   Filed herewith

 

41

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