**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 or 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

| **For the  fiscal year ended September 30, 2004** | **Commission File No. 0-11336** |
|---------------------------------------------------|---------------------------------|

 

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**CIPRICOINC.**

(Exact Name of Registrant as Specified in its Charter)

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

 

**17400 Medina RoadPlymouth, Minnesota 55447**

(Address of Principal Executive Offices) (Zip Code)

 

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Registrant’s Telephone Number,

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

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

**None**

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

**Common Stock (par value $0.01 per share)**

 

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Indicateby checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirement 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

 

Indicateby checkmark whether the registrant is an accelerated filer (as defined by Rule12b-2 of the Act).  Yes  o  No  ý

 

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Theaggregate market value of shares held by non-affiliates is $21.3 millioncomputed by reference to the last sale price of the Company’s Common Stock, asreported in the Nasdaq National Market system, of $4.86 per share on March 31,2004, the last business day of the Company’s most recently completed secondfiscal quarter. As of November 30, 2004, the Company had outstanding 4,743,594shares of Common Stock.

 

 

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CIPRICO INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED SEPTEMBER 30, 2004

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

 

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**NOTE REGARDING FORWARD–LOOKING STATEMENTS**

 

Whenused in this Form 10-K, the words “may,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “intend,” “potential” or “continue” andsimilar expressions are generally intended to identify forward-lookingstatements. The forward-looking statements included in this 10-K relate tofinancial performance and involve risks and uncertainties. Actual results coulddiffer materially from those expressed or implied by these forward-lookingstatements as a result of certain risk factors, including but not limited to(i) competitive factors, including pricing pressures;(ii) variability in quarterly sales; (iii) economic trends generallyand in various markets; (iv) general economic conditions;(v) unanticipated risks associated with introducing new products andfeatures, (vi) other events and other important factors disclosedpreviously and from time to time in our filings with the U.S. Securities andExchange Commission.

 

Weassume no obligation to update any forward-looking statements. These statementsare only predictions reflecting our current views with respect to currentevents.  Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee 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.

 

**Glossary of Terms**

 

**CIFS**

Anacronym for *Common Internet File System.*Aprotocol that defines a standard for remote file access using millions ofcomputers at a time.  With CIFS, userswith different platforms and computers can share files without having toinstall new software.

 

**Digital Media Workflow**

Theprocess involved with the movement of digital media data within an applicationworkflow, including, but not limited to, ingesting, capturing, creating,editing, processing, archiving, retrieving, sharing, publishing anddistributing.

 

**Disk array**

Acollection of standard, independent disks and/or disk sub-systems linkedtogether to produce increased performance and high-volume storage capacity,utilizing redundancy techniques to ensure the integrity of the data.

 

**Failover**

Thetransfer of operation from a failed component (i.e. controller, disk drive) toa similar, redundant component to ensure uninterrupted data flow andoperability.

 

**Fault tolerance**

Theability for a system to remain operational, sometimes in a degraded mode, eventhough one or more elements of the system have failed.  Fault tolerance is obtained through the useof redundant components or modules.

 

**Fibre Channel**

Anindustry-standard peripheral and networking interface used to connect serversto shared storage devices.

 

**iSCSI**

InternetSCSI is an internet protocol (IP) based Storage Networking Protocol thatprovides access to shared storage devices utilizing the mapping of SCSItransport protocol over TCP/IP, allowing SCSI storage controllers to beattached to IP networks.

 

**Infiniband**

Infinibandis a high-bandwidth, low latency, low overhead interconnect technology used tointerconnect processors, I/O devices and other systems in the form of a systemarea network. Infiniband is independent of the host-operating system andprocessor platform. It is highly scalable enabling a high extensiblearchitectural design.

 

**Isochronous**

Performancethat supports network-wide timing requirements. A typical application for isochronous transmission is a broadcastenvironment, which needs information to be delivered at a continuous and steadyrate.

 

**JBOD**

Anacronym for *Just a Bunch of Disks*.A disk array technology that does not use hardware RAID controllers. It is alow-cost storage alternative for applications that do not require redundancy.

 

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**NFS**

Anacronym for *Network File System.*A client/server application that lets a computer user view and optionally storeand update files on a remote computer as though they were on the user’s owncomputer.

 

**NAS**

Anacronym for *Network Attached Storage*.NAS devices are storage devices that users connect to via a networkinginterface such as Ethernet instead of through traditional storage interfacessuch as SCSI or Fibre Channel.

 

**RAID**

Anacronym for *Redundant Array of IndependentDisks*. RAIDs use multiple techniques for managing collections ofdisks in such a way to provide desirable cost, availability and performance.

 

**SAN**

Anacronym for *Storage Area Network*.SAN technology allows multiple workstations and/or file servers to directlyaccess common, shared storage devices. This is in contrast to the traditionalclient-server storage paradigm in which a storage device is dedicated to asingle file server.

 

**SAS**

Anacronym for Serial Attached SCSI.  Anindustry-standard peripheral interface used to connect SCSI peripheral devicesto computer platforms.  Serial AttachedSCSI is a next generation interface intended to replace legacy parallel SCSIinterface.

 

**SATA**

An acronym for Serial ATA.  Serial ATA is the next-generation internalstorage interconnect for desktop hard drives and optical drives.

 

**SCSI**

Anacronym for *Small Computer System Interface*.SCSI interface is used to connect microcomputers to SCSI peripheral devices,such as many hard disks and printers, to other computers and LANs.

 

**Stream (streaming)**

Fromthe storage device viewpoint a stream is a series of sequential read or writerequests. Often multiple streams are accessing data simultaneously, referred toas multiple-streaming. Applications for multiple-streaming include multiplechannels of compressed video playback or multiple users accessing differentfiles through a server.

 

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**PART I**

 

**ITEM 1.****                 ****BUSINESS**

 

**General Development of Business**

 

CipricoInc. designs, manufactures and markets storage and system solutions for digitalmedia applications.  Our solutionscombine storage, networking and computing technologies to improve theproductivity of customer workflows for the creation, manipulation, storage andmanagement of digital assets.   Ourstorage solutions are designed primarily for visual computing applicationsranging from high-speed image data capture, through processing and analysis, toreal-time playback at sustained performance levels within the broadcast,content creation, post production, military and government, digital prepressand other rich media application markets.

 

Wewere incorporated under the name Computer Products Corporation in February 1978and changed our name to Ciprico Inc. in May 1983.  Until 1990, we developed and manufacturedcontroller-based products for manufacturers and end users of computersystems.  In late 1990, we introduced forsale our first RAID data storage product. Today, our business is focused onproviding storage products and services that provide superior performance basedvalue to meet the demanding data transfer rate, storage capacity and dataredundancy needs of digital media workflows. Digital media workflows include the digital representation and compleximage processing of film, video, graphics, photographs, animation, specialeffects, three-dimensional images and other images.

 

Weoffer a range of open platform, disk-based storage solutions for highperformance digital media applications. This includes products that implement a variety of RAID techniquesincluding RAID 0 for single stream bandwidth, RAID 4 for multi-stream highbandwidth and RAID 5 for high input/output (I/O) oriented uses.  We also provide SAN and NAS solutions,focused on the networking of demanding digital media workgroup applications.  Like many other computer applications, thetrend in digital media is toward random access, digital data storage and awayfrom traditional analog tape storage or film methods.  Our primary target market segments includebroadcast, content creation, post production, military and government, digitalprepress and other rich media applications. We believe our expertise is in the understanding of these applicationswithin our target markets.

 

**Narrative Description of Business**

 

(1)**          ****Products and Services****.**

 

***Products*****.**

 

Ourproduct line consists mainly of storage systems.  We design, develop and manufacture all of ourstorage products to operate at peak performance levels while maintainingconnectivity consistent within industry standards.  We offer customers a choice of severaldifferent series of storage solutions depending on their needs.  Prices for our storage products generallyrange from a list price of approximately $7,000 to $97,000 per system dependingon the features selected by the customer. Applications may require one or several systems.  Our products are organized into threefamilies, FibreSTORE*®*,NETarray*®* and DiMeda*TM*.

 

Our*FibreSTORE®* family isour product line intended for the integration and resale by original equipmentmanufacturers (OEMs).  The RAIDtechnology utilized is based on Ciprico design and manufacturing, andincorporates our common RAID software platform described below.   The FibreSTORE family of products iscustomizable for OEM specific requirements.

 

*FibreSTORE 2210* was released in January 2003.  This product is a continuation to previousgenerations of Ciprico RAID and offers performance using 2 gigabit (Gb) FibreChannel technology for both the host side and drive side interfaces.  The product scales in capacity to 18TB per system,by utilizing expansion chassis to add more disk drives and increase the overallcapacity of a system.  The base system iscomprised of two RAID controllers with 2Gbit Fibre Channel host interfaces, ten(10) 2 Gbit Fibre Channel disk drives and redundant power supplies.  Each expansion chassis is comprised of twoenclosure services boards, ten 2Gbit Fibre Channel disk drives and redundantpower supplies.  Its unique set ofbenefits to the customer are in the area of enhanced application performance asit pertains to insured, uninterrupted data availability at full performancelevels without disruption.  Thesefeatures make the product unique in the marketplace and the best-in-classproduct for high bandwidth applications. The JBOD version of the 2210 began shipping in December 2001.

 

*FibreSTORE 2212A* is comprised of two RAID controllers with2Gb Fibre Channel host interfaces, twelve (12) SATA disk drives and redundantpower supplies.  The SATA interface ismost often used in desktop drives and are roughly 60% less expensive thanenterprise drives of similar capacity. The use of desktop drives enables the Company to penetrate

 

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new markets and applications,where performance is not the primary buying criteria and system cost is muchmore of a factor.  The product wasdesigned employing Ciprico’s Accelerated Drive TeamingTM software as the keydifferentiated feature.  AcceleratedDrive Teaming, or XDT for short, is a methodology utilizing hardware andsoftware techniques to overcome the inherent drive delays found in desktopdrives.  The single controller version ofthis product is expected to be released for production in January 2005.  A dual controller version is planned forrelease during the first quarter of calendar 2005.

 

*TALONTM 2211* is the current product offering for military applications, and wasreleased for production in September 2003 as the next generation replacement toits predecessor.   The mechanical chassisis designed to enable the operation of a disk array in harsh environments oftemperature, shock, vibration, salt-fog, etc. Additionally, the removable disk pack feature is a key differentiatingfeature enabling the portability benefits of tape, with the random accessbenefits of disk drives.  TALON 2211 usesthe same Ciprico developed RAID technology as our FibreSTORE 2210 family.  This enables the TALON to achieve 2Gb/secondperformance through each of the two active RAID controllers in the product forhigh data rate recording and playback applications.  The TALON 2211 can be configured with up toeleven (11) 300GB drives for a total of unit capacity of 3.3TB.

 

Our*NETarray®* family is our valuebased products targeted for both digital media and general purpose storageapplications.  The NETarray products areprovided in conjunction with third party alliances to provide reliable, cost effectivesolutions.  The NETarray family isdesigned for simplicity of use, enabling our channel partners to successfullysell and support the products in a wide variety of end user applications.

 

The*NETarray 2215AH**and**2215AM*are RAID subsystems consisting of up to two RAID controllers, each with 2GbitFibre Channel host interfaces.  The *NETarray U215AH* is a RAID subsystemconsisting of up to two RAID controllers, each with Ultra 160 SCSI hostinterfaces.  Each of these systemsincludes fifteen (15) SATA disk drives and redundant power supplies.  The RAID controllers support RAID levels 0,1,1+0 and 5 and can be configured in single or dual RAID configurations.   The NETarray 2215AH and U215AH RAIDcontrollers employ hardware assisted parity scheme for improved performance.

 

*NETarray U116AM* is a RAID subsystem consisting of one RAIDcontroller with an Ultra160 SCSI host interface, sixteen (16) SATA disk drivesand redundant power supplies.  The RAIDcontrollers support RAID levels 0,1, 1+0 and 5. This product is scheduled for production release in the first half ofcalendar 2005.

 

Eachof these products can be sold with optional enterprise software packages thatinclude snapshot, remote mirroring and high availability data pathfailover.  These products are sold underthe Ciprico brand name under an OEM agreement with Advanced Technology andSystems Co. Ltd of Tokyo, Japan.

 

*NETarray 2215F* is a RAID subsystem consisting of two RAIDcontrollers, each with 2Gbit Fibre Channel host interfaces, fifteen (15) 2GbitFibre Channel disk drives and redundant power supplies.  The RAID controllers employ hardware assistedparity scheme for improved performance, support RAID levels 0,1,10, 5, 50, 0+1and JBOD and can be configured in single or dual RAID configurations.  Capacity expansion can be accomplished byattaching one or more JBOD expansion chassis. The chassis has been designed by Ciprico to pass certain MIL-STDenvironmental tests.  The system utilizesa RAID controller supplied by Engenio Information Technologies, Inc., asubsidiary of LSI Logic Corp.

 

The*NETarray 1100* is our legacy 1GbitFibre Channel product designed for both high performance and highavailability.  The NETarray 1100 has fulldual loop Fibre Channel connections, redundant power supplies and redundant fans,with no active components on its backplane. It utilizes standard networking industry protocols to manage the storagevia Ethernet or Internet connections, maximizing bandwidth for storage readingand writing operations.  The systemutilizes a controller manufactured by Mylex Corporation, a division of EngenioInformation Technologies, Inc., a subsidiary of LSI Logic Corp.  The NETarray 1100 product was announced asend of life in May 2003.

 

Our*DiMedaTM*family includes ourproducts based on the industry technology known as Network Attached Storage(NAS). The first offering in the DiMeda family was released in March 2002.  This product was designed to provide highperformance, high-availability, shared storage utilizing IP based networkingprotocols.  The DiMeda family utilizes afile based shared storage system delivering near-Fibre Channel SAN performancewith the ease-of-use of an appliance. One of the benefits of the DiMeda software is the ability to provide sharedstorage to a wide variety of host computer platforms and operating systems withgreat simplicity and cost effectiveness. While SANs do similarly provide the benefit of shared storage toapplications, the DiMeda installs in less than one hour and requires lesstraining to the end user.  Moreover,because it utilizes the industry standard protocols of CIFS and NFS, there aresignificantly fewer application conflicts as compared to SAN.  This is important to customers who attempt toutilize legacy systems in addition to introducing new applicationplatforms.  Our ongoing productdevelopment in the DiMeda area is focused on adding additional softwarefeatures to further enhance the scalability and performance, simplify theinstallation and maintenance, as well as provide premium software services.  All product offerings within the family sharethe same network attached software libraries.

 

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The*DiMeda 360*0 provides flexibleconfiguration options so that it may be purchased in single head or dual headconfigurations, 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 NAShead – a requirement for high availability applications.  The DiMeda 3600 began shipping for productionin December 2003.

 

The*DiMeda 1700* is targeted atentry-level applications where capacity expansion, high-availability and NAShead redundancy is not required.  DiMeda1700 is configured as a single, integrated solution which includes the NAS headprocessor board, an internal RAID controller manufactured by 3Ware, Inc. andtwelve (12) serial ATA disk drives.  TheDiMeda 1700 began shipping for production in December 2003.

 

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 head processor board, twointernal RAID controllers manufactured by 3Ware, Inc. and twenty-four (24) SATAdisk drives.  DiMeda 1724 is expected tobe available for production in January 2005.

 

The*DiMeda 10G* a 10Gbit NAS systemand targeted at applications who require sustained data rates exceeding 300MB/second.  The 10G is configured as a single,integrated solution, which includes the NAS head processor board, two internalRAID controllers manufactured by 3Ware, Inc. and twenty-four (24) SATA diskdrives.  DiMeda 10G is expected to beavailable for production in the third quarter of calendar 2005.  DiMeda 1724 customers can be upgraded to 10Gtechnology via an upgrade kit.

 

The*TALON-NAS* combines the NASfunctionality found 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 the second half of calendar 2005.

 

Thefoundation of our product strategy is a Common Software Platform across all ourproducts.  This commonality includesthree primary libraries - array software, network attached software andmanagement software.  The FibreSTORE familyis based on this common RAID array software and includes unique features ofAccelerated Drive Teaming, guaranteed performance in degraded modes, as well aspremium software packages enabling entire disk packs to be removed and replacedfrom the base unit.  Future additions tothe FibreSTORE family will continue to employ the common array software.  Additionally, it is planned for DiMeda toutilize both FibreSTORE and TALON storage products as one of the back-endstorage options.  As these products evolve,we have developed the software to be able to port easily to faster and morepowerful processor or interface technologies as they become available in themarket place, thus improving our time-to-market of 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 properties unique to Ciprico. While our software is most often bundled with hardware and sold as acomplete solution, we are actively marketing our software via licensing oursoftware and/or RAID technology to select strategic customers.

 

TheDiMeda family utilizes the common network attached software.  This software consists of several codesub-libraries, including open source operating and file systems.  Ciprico also developed components forclustering and management of devices, capacity and performance. 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.

 

Weprovide configuration and management software for all of our storage and systemssolutions.  These software products –Storage Manager (STORM) and Web Manager - enable the user to monitor theperformance and health of our storage and systems products in real-time.  Users can gain access to our storage andsystem solutions via the in-band Fibre Channel interface or via an ethernetport, depending upon the customer’s needs. Our software utilities are platform independent to support the widevariety of computer platforms used with our products.

 

*Storage Area Networks*. Crossing all of our vertical markets is the need for Storage AreaNetwork (SAN) capabilities.  SAN is atechnology that allows multiple workstations and/or file servers to directlyaccess common, shared storage devices. This is in contrast to the traditional client-server storage paradigm inwhich a storage device is dedicated to a single file server.  SANs utilize a Fibre Channel-based,networking infrastructure that provides a number of benefits over traditionalsimple, server-attached storage.  Thesebenefits include providing the same high-performance storage pool across anumber of users, centralized

 

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management of the storage,higher productivity and the ability to seamlessly add increased storage.  Our applications include digital broadcastediting, video and audio streaming and film post-production.

 

Toprovide these SAN solutions, we work with other storage industry vendors suchas Brocade Communications, Advanced Digital Information Corporation, SiliconGraphics Incorporated and Qlogic Corporation by implementing and testing theirproducts as part of the overall solution to meet the needs of ourcustomers.  We seek to strengthen ourrelationships with existing strategic partners and develop new partnershipswith leading vendors in the SAN market to offer additional products that arecomplementary to our solutions.  Inaddition we utilize the services of third party organizations to extend ourservice capabilities based on the needs of our customers.

 

***Technical Support.***

 

Weprovide our customers with ongoing technical assistance and a variety of sparepart programs to assure failures are identified and repairs are madequickly.  Our Hot Spares Program providesthe customer with delivery of replacement parts from an authorized Cipricoparts depot.  Depots are currentlylocated in Minneapolis, Louisville, the United Kingdom and Singapore.  In addition we have an agreement with NCEComputer Group Limited to provide telephone and on-site support for ourproducts to our customers in Europe.  Allservice options provide training for the customer’s technicians and access toour telephone support services. Technical support specialists are available 24hours per day, 7 days per week through our toll-free help line for the U.S.,Canada and selected international locations. Technical support is also available through our Web Site,www.ciprico.com.

 

Wealso provide a return-to-factory parts and labor warranty against defects inmaterials and workmanship covering a period of three years from the date ofshipment to customers.  Extended warrantyand maintenance services are also offered to customers in addition to theprimary warranty.  All repair work forour products is presently done at our manufacturing facility in Plymouth, Minnesota.

 

(2)**          ****Marketing and Distribution****.**

 

***Markets.***

 

Ourmarket focus is digital media applications, with our primary focus onbroadcast, content creation, post production entertainment and military andgovernment.    In addition, we havehistorically sold in other rich media markets such as digital prepress,geosciences and medical imaging.  In eachof these markets, we focus on applications where our customers need simplicity,high bandwidth, high I/O or combinations of both to meet their needs.

 

Inherentto all the applications within each of our primary markets is a “digital mediaworkflow” which is that industry’s version of a production line.  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 uniquely positions us in our target markets.  Our technology development is focused onsolutions that improve the productivity of these workflows for the end users.

 

*Broadcast and Entertainment*.  Thismarket segment includes companies that create, edit, manipulate and broadcastimages, in real-time playback using digital technology, which provides reduced costof ownership and increased productivity over linear film and video tape.  The new high definition television (HDTV)standards currently being mandated worldwide will provide opportunity forvendors with solutions that improve the productivity of manipulating, managingand storing HD content.  Our solutionsmeet the requirements of broadcast and video services applications, whichrequire very high bandwidth to supply many simultaneous video streams tomultiple users where interruption of service and dead airtime is notacceptable.  With images stored as data,new applications for storage devices within the television broadcast segmentwill include electronic news gathering, commercial and promotional insertionand TV broadcast.

 

Otherindustry market segments include companies involved in content creation such asmovie studios, post-production houses, video production houses and digitalcinema OEMs.  Applications within thismarket segment have traditionally included 3D animation, special effects, filmrestoration and editing.

 

*Military and Government*.  Ourprimary focus in this market segment includes applications commonly referred toas “Command and Control” or C4I.  Thereare two primary categories of C4I: those involving the collection, processingand dissemination of reconnaissance and surveillance data and small enterprise.

 

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Missionplanning, intelligence gathering and targeting applications involve datacapturing via airborne or space-based satellite sensors in reconnaissance andsurveillance applications.  A singleimage frame ranges from a few megabytes up to 14 GB in size, with the datacapture phase requiring the collection of hundreds to thousands of frames perday.  In the case of satellite-basedimagery sensors, our disk arrays are used at the supporting groundstations.   For airborne applications,our arrays are on board aircraft and imagery data is captured at a very hightransfer rate.  In the image processingand archiving applications, the imagery data created from the capture phasemust be processed before it is usable for end-users.  Once processed, the imagery data is storedinto digital asset management databases for fast query and retrieval.  These databases often reach multiple terabytesin size and require the high bandwidth performance our disk arrays provide.

 

Smallenterprise uses that support military operations involve a variety ofperipheral applications such as inventory management, duty schedules, personnelrecords, etc.  These applicationsgenerally involve large databases that utilize transaction-based storagesolutions.  In some instances, thesesolutions require unique features to meet the demanding environments ofairborne, ground based and shipboard applications.

 

*Other Markets*.  Ourproducts are also used in other rich media applications in digital prepress,medical imaging and small enterprise markets. Within the digital prepress market segment, content creators,computer-to-plate or direct-to-press manufacturers utilize storage solutions tooptimize performance.  Digital technologyimproves the productivity of a work group by providing simple to use sharedstorage to eliminate historical job envelopes being passed from one step toanother in a prepress workflow.  Digitaltechnology eliminates the material costs of photographic film, increases thequality and accuracy of image reproduction and provides the printer with toolsfor quick turnaround.  For medicalimaging, picture archive and communications systems (PACs) involve the archiveand retrieval of medical images such as digital x-rays, mammography, CAT scans,MRIs, etc.  PACs application requirementsfor storage systems include low-cost, easy-to-use, ability to add capacity overtime, on-site support capability and features to protect the medical imagesutilizing disaster recovery methods. Small enterprise includes general IT applications, such as sharedstorage, database and Microsoft Exchange servers.

 

***Distribution.***

 

Ourproducts are sold through a direct sales force calling on a combination ofOEMs, system integrators, distribution partners and resellers.  Our direct sales organization is primarilyresponsible for “demand creation” activities and customer development withinthese distribution channels in the United States and Canada.  We also have representation in Europe andJapan via independent representative organizations.  In addition to our sales force, we haveinside sales and pre-sales system engineering resources that are aligned withthe sales teams.  These resourcescomplement our direct sales forces, as well as our representativeorganizations.

 

Asa part of our marketing and sales strategy, we enter into relationships withcompanies who could play an important role in the successful marketing of ourproducts. Historically, our storage solutions have been sold to OEMs andsystems integrators and for inclusion in their own solutions delivered toend-users. The initial sales process for OEMs, system integrators and end usersis complex, requiring interaction with several layers of the customer’sorganization and extensive technical exchanges as well as productdemonstrations with sales cycles ranging from three to eighteen months.  During fiscal 2004, we focused a portion ofour sales efforts on distribution partners with an existing network of dealers,integrators, and resellers, and to a limited degree, large end-users includinggovernment departments and agencies. Typically, these distribution partners provide a wide range of storageproducts to both general purpose and vertical markets.  Distribution and dealer sales cycles aretypically shorter and range from two weeks to three months.

 

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

 

Seeitem (10) below.

 

(4)**          ****Competition****.**

 

Themarket for all levels of storage solutions is highly competitive.  In some of our markets, we compete withtraditional suppliers of proprietary computer systems including, but notlimited to Sun Microsystems, Hitachi Data Systems, IBM and Hewlett Packardwhich market storage systems as well as other computer products.  We also compete against independent storagesuppliers, including but not limited to EMC Corporation, Dot Hill Corporation,Adaptec Inc., Infortrend Technology, Inc. and Engenio Information Technologies,Inc., a subsidiary of LSI Logic Corp. in addition to several smallerprivately-held companies.

 

Themarkets in which we operate are characterized by rapidly changing technologyand evolving industry standards, resulting in rapid product obsolescence andfrequent product and feature introductions and improvements. We compete withseveral companies that have greater engineering and development resources,marketing resources, financial resources, manufacturing capability, customersupport resources and name recognition. As a result, our competitors may havegreater

 

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credibility with existing andpotential customers. They also may be able to adopt more aggressive pricingpolicies and devote greater resources to the development, promotion and sale oftheir products than we can to ours, which would allow them to respond morequickly than we can to new or emerging technologies and changes in customerrequirements. These competitive pressures may materially harm our business.

 

Ourability to compete successfully depends upon our ability to continue to develophigh performance products in a timely manner that obtain market acceptance andcan be sold at increasingly competitive prices. Although we believe that our storage 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 OEM customers and othermanufacturers could develop their own disk arrays or could integrate competitiveRAID disk arrays into their systems rather than our products, which couldmaterially and adversely affect our operating results.

 

(5)           **Manufacturing and Suppliers****.**

 

Ourproducts are manufactured utilizing a configure-to-order manufacturingprocess.  In-house manufacturingactivities for our storage products primarily involve quality assurance testingof subassemblies, final system assembly and integration. Our assemblyoperations are ISO 9001:2000 certified, located in Plymouth, Minnesota and aretypical of the electronics industry with no unusual methods or equipmentrequired.  The sophisticated nature ofsome of our products does, however, require extensive testing by skilledpersonnel.

 

Wepurchase certain raw materials and components based on forecasted orderlevels.  Forecasting orders is difficultas a higher percentage of shipments can occur near the end of each quarter.Some of our OEM customers provide us with a forecast of expected orders, butgenerally customers place orders for immediate delivery, not in advance ofneed. Customers may generally cancel or reschedule orders without penalties.Accordingly, we believe that backlog is generally not meaningful for purposesof predicting our revenue for any fiscal period.

 

Ourstorage products are comprised mainly of a controller, metal enclosure, diskdrives, power supply and other miscellaneous parts.  Many of the components are industry standardparts and readily available from many suppliers at competitive prices.  Our controller board assemblies are purchasedfrom an ISO 9001 contract manufacturing company, which manufactures 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 from our supplier.  In some instances, these DiMeda products canbe final tested and shipped directly to our customers from our supplier.

 

Wedepend heavily on our suppliers to provide high quality materials on a timelybasis and at reasonable prices.  Wepurchase a substantial amount of disk drives manufactured by Seagate TechnologyInc. (“Seagate”), Hitachi Global Storage Technologies (“Hitachi”) and MaxtorCorporation (“Maxtor”).  We purchasesubstantially all our disk drives and certain other components via aconsignment purchase program through a distributor, Bell Microproducts Inc. (“Bell”).  All other components are procured pursuant topurchase orders, although we do have agreements with certain suppliers for theprocurement of components that include provisions for purchase commitments ofup to ninety (90) days of forecasted demand. Furthermore, because of increased industry demand for many of thosecomponents, our suppliers may, from time to time, not be able to make deliveryon orders on a timely basis.  Inaddition, manufacturers of components on which we rely may choose, for numerousreasons, not to continue to make those components or the next generation ofthose components available to us.

 

Componentsfor our products are generally available from numerous sources at competitiveprices.  However, we tend to purchase certainkey components from a single source. With respect to certain components, such as disk drives or controllerboards, if we had to seek alternative sources of supply, the incorporation ofsuch components from alternative suppliers and the manufacture and shipment ofthe our products could be delayed while modifications to such products and theaccompanying software were made to accommodate the introduction of thealternative suppliers’ components. We estimate that replacing certaincomponents or changing manufacturers, such as our controller board wouldinvolve several months of hardware and software modification.

 

InAugust 2004, we entered into an agreement with Advanced Technology and SystemsCo., Ltd. (“ADTX”) for the distribution of ADTX’s RAID storage products.  ADTX, established in 1993 by former IBM Japanpersonnel, is headquartered in Tokyo, Japan. Under the terms of the agreement, Ciprico has exclusive distribution rightsin the United States for ADTX ArrayMasStor RAID products, which will be sold aspart of Ciprico’s NETarray product family, including both Fibre Channel andSerial ATA (SATA) 2Gb storage arrays.

 

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Wehave no long-term supply contracts. There can be no assurance that we will be able to obtain, on a timelybasis, all of the components we require. If we cannot obtain essential components as required, we could be unableto meet demand for our products, thereby materially adversely affecting ouroperating results and allowing competitors to gain market share.  In addition, scarcity of such componentscould result in cost increases and adversely affect our operating results.  Our principal suppliers are Bell, PlexusInc., Du Fresne Manufacturing Co. and Adaptec Inc.

 

(6)**          ****Customer Dependence****.**

 

Ourproducts are sold to a broad base of customers. As a percentage of sales, Thomson Broadcast Solutions, represented 35%and 40% of net sales in fiscal 2004 and 2003, respectively.

 

(7)           **Patents and Trademarks****.**

 

Inconjunction with the acquisition of the SANStar technology in January 2001, weacquired the rights to four pending patent applications.  These patent applications disclose aspects ofthe interprocessor communication technology suitable for use in highreliability / availability storage server products.  Two patent applications are currently beingprosecuted before the U.S. Patent Office, while we have abandoned furtherapplication processing on the remaining two. We have also submitted two additionalpatent 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.

 

Wehave no other patents, and do not consider ownership of patents to be materialto our business.  We intend to pursueother patent applications to the extent we identify technologies or processesthat may be patentable.  We believe thatthe rapidly changing technology in the computer industry makes our futuresuccess dependent more on the technical competence, creative skills of ourpersonnel and rapid deployment of innovation than on any patents we may be ableto obtain.  However, protection of ourproprietary hardware, firmware and software is very important to us.  We also rely upon copyright, trade secretprotection and confidentiality agreements with our employees, customers,suppliers and partners, to preserve our intellectual property rights in thismaterial.  We have obtained federalregistrations for the trademarks Ciprico®, SPECTRA 6000®, NETarray®, SANITY®and FibreSTORE® and have registration applications pending for our trademarksStorBridgeTM, Digital Media ApplianceTM, Accelerating the Digital MediaWorkflowTM, DiMedaTM, TALONTM and Accelerated Drive TeamingTM.

 

(8)**          ****Backlog****.**

 

Wehistorically have operated on low levels of backlog, and therefore, do notconsider the level of backlog to be indicative of future operatingresults.  As of September 30, 2004, wehad approximately $184,616 in backlog that is scheduled to ship in fiscal 2005.

 

(9)           **Government Approvals andEffect of Government Regulations.**

 

Certainof our products may incorporate encryption or other technology subject to the “dualuse” export regulations as administered by the U.S. Department of Commerce.

 

Weare not required to obtain government approval of our products when they arenot exported.  We do not believe that anyexisting or proposed governmental regulations not pertaining to exportregulation will have a material effect on our business.

 

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

 

Weoperate in an industry subject to rapid technological change.  Our goals in research and development are todevelop leading edge products that adhere to industry standards.  Our ability to achieve this goal is largelydependent upon our ability to anticipate and respond to change.  We use engineering design teams that workcross-functionally with product marketing managers, system engineers andcustomers to develop products and product enhancements.  Computer I/O interface standards aremaintained and an extensive disk drive qualification program is in place tomonitor off-the-shelf disk drives to ensure the quality and performance of thedisk drives integrated into our storage solutions.  As part of our development strategy, weactively seek available, cooperative and co-development activities withindustry leaders in the hardware, software and systems businesses.

 

Historically,substantially all of our research and development efforts were focused on thedevelopment of stand-alone storage devices. We were the first manufacturer to introduce a disk array integrating theFibre Channel interface in 1996 and substantially all of our products nowutilize this interface technology. Through 1999 our products were focused onhigh-bandwidth RAID 3 and 4 applications. With the introduction of our Common RAID Software and our NETarrayfamily of products, we have broadened our product offering to includetransaction-based RAID 5 capabilities, while still satisfying the needs

 

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of bandwidth applications. Ourcurrent product development activities include products supporting 4 Gb FibreChannel host interfaces for our RAID products, 10 Gb Ethernet interfaces forour NAS product family and the utilization of Serial Attached SCSI (SAS) andSerial ATA II (SATA II) disk drives.

 

Beginningin fiscal 2001, we made substantial investments in software development.  With the acquisition of the SANStartechnology in January 2001, we added a software development team focused ondeveloping a Common NAS Software platform for highly available, networkconnected storage systems.  Since thattime we have continued this investment by adding additional softwaredevelopment resources to focus on developing and extending a Common RAIDSoftware platform that is the basis for storage solutions developed now and inthe future. These developments are intended to support the optimization ofhigh-performance digital media applications. For fiscal 2004, approximately 65% of our research and developmentexpense was related to software development.

 

Wewill continue to develop storage devices and expect our software developmentfocus will increase as we emphasize the productivity improvements for customer’sproduction workflows. We are working with several outside parties on theco-development and incorporation of our technologies with a number of currentand emerging storage and networking technologies such as Internet Protocol SCSI(iSCSI), Serial Attached SCSI (SAS) and Serial ATA (SATA). Additional areas ofresearch include network file protocols, high performance interconnects andapplication integration.

 

Ourresearch and development expenses were $5.2 million, $6.2 million and $8.8million in fiscal 2004, 2003 and 2002, respectively.  All of our research and developmentexpenditures are expensed as incurred. As of November 1, 2004, we had 15 full-time employees engaged inresearch and development activities.

 

Wedo not have significant firm orders for our development stage products.  There is no assurance that any of ourdevelopment programs will be completed or that the resulting products, if any,will be marketed successfully.

 

(11)         **Environmental Regulation****.**

 

Compliancewith present federal, state and local provisions regulating the discharge ofmaterial into the environment, or otherwise relating to the protection of theenvironment, has not had and is not expected to have any material effect uponour capital expenditures, earnings or competitive position.

 

(12)         **Employees****.**

 

AtNovember 1, 2004, we had 43 full-time employees, of which 19 were inengineering, research and development and technical support, 10 in sales,marketing and customer service, 8 in manufacturing, operations and qualityassurance, and 6 in general management, accounting, information systems andadministration.  None of our employeesare represented by a labor union.  Wehave experienced no work stoppages and believe that our employee relations aregood.

 

Webelieve that the future success of our business will depend in part on ourability to attract and retain qualified technical, management and marketingpersonnel.  Such experienced personnelare in demand, and we must compete for their services with other firms, whichmay be able to offer more favorable benefits.

 

**CertainRisk Factors Related to Company’s Business**

 

Ourbusiness faces significant risks. The risks described below may not be the onlyrisks we face. Additional risks that we do not yet know of or that we currentlythink are immaterial may also impair our business operations. If any of theevents or circumstances described in the following risks actually occur, ourbusiness, financial condition or results of operations could suffer, and thetrading price of our common stock could decline.

 

WEHAVE INCURRED LOSSES AND MAY NOT BE ABLE TO ACHIEVE AND MAINTAIN PROFITABILITY.

 

Weexperienced losses of $7.4 million, $3.9 million and $6.5 million for the yearsended September 30, 2004, 2003 and 2002, 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.

 

Ourrevenues will have to significantly increase in order for us to support ourcurrent and expected level of operating expenses. We may not be able to achieveprofitability.

 

ANECONOMIC DOWNTURN IN MARKETS IN WHICH WE ARE CONCENTRATED OR THE LOSS OF KEYCUSTOMERS COULD MATERIALLY AND ADVERSELY AFFECT REVENUES AND OPERATING RESULTS.

 

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Ourrevenues have been derived primarily from sales to customers in the broadcastand entertainment and military and government markets.  We are not able to predict with any certaintythe demand for our products in each of our primary markets.

 

Salesin the broadcast segment decreased approximately $11.6 million or 58% in fiscal2004 versus 2003.  We generally sell toOEMs or integrators who are dependent on capital spending levels at televisionstations and movie studios.  Demand fromcustomers in this market can be dependent, in part, on overall levels ofadvertising revenues and general economic conditions.  Furthermore the storage market within thebroadcast industry is highly competitive, which has adversely impacted oursales.   During fiscal 2004, weexperienced a significant reduction in demand from our key customers in thismarket.  Our ability to predict the demandlevels in this segment is limited given the general economic uncertainties andthe ongoing impacts from competition.

 

Salesin the military and government market as a percentage of net sales were 49% and34% in fiscal 2004 and 2003, 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. We believe our sales inthis segment during fiscal 2004 were adversely impacted by delays in thedeployment and funding of certain programs in which our products have beenspecified.  It is difficult to assess thespecific timing of the deployment and funding of these programs, whichadversely impacts our ability to forecast demand for our products in thissegment.  There can be no assurances thatwe will experience growth in this market segment during fiscal 2005.

 

Historically,a material percentage of our net sales in each year have been derived from alimited number of customers. For fiscal 2004 and 2003, our top four customersaccounted for approximately 54% and 64%, respectively, of our net sales.  We expect that a high percentage of our salesfor the foreseeable future will continue to come from a relatively small numberof customers. There can be no assurance that orders from existing customerswill continue at their historical levels, or that we will be able to obtainorders from new customers. An economic downturn in one of our primary markets,or the loss of one or more customers, particularly a significant customer,could result in a material decrease in revenues, thereby adversely affectingour business.  Further, because ouraccounts receivable are concentrated in a relatively few number of customers, asignificant change in the liquidity or financial position of any one of thesecustomers could have a material adverse impact on the collectibility of ouraccounts receivable and our future operating results.

 

WEMAY HAVE DIFFICULTY PREDICTING RESULTS WHICH WOULD LIKELY RESULT IN A DECLINEIN OUR STOCK PRICE.

 

Ourquarterly revenues and operating results have varied significantly in the pastand are likely to vary significantly in the future due to a number of factors,any of which may cause our stock price to fluctuate. The primary factors thatmay affect our quarterly financial performance include the following:

 

•              the timing of customer orders, which areoften concentrated toward the end of a quarter, particularly large orders fromour significant customers and whether any orders are cancelled;

 

•              general economic trends and factors;

 

•              market acceptance of new products and productenhancements;

 

•              mix of product sales within a quarter;

 

•              our ability to develop, introduce, ship andsupport new products and product enhancements;

 

•              our traditionally long sales cycle, which cantake up to 12 months or more;

 

•              our ability to attain and maintain productionvolumes and quality levels for our products; and the level of competition;

 

•              announcements and new product introductionsby our competitors and deferrals of customer orders in anticipation of newproducts, services or product enhancements introduced by us or our competitors;

 

•              decreases over time in the prices at which wecan sell our products; and

 

•              our ability to obtain sufficient supplies ofcomponents, including limited sourced components, at reasonable prices, or atall.

 

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Salesfor any future quarter are not predictable and have a significant degree ofuncertainty. We generally operate with limited order backlog because ourproducts are typically shipped shortly after orders are received. Further, wegenerally do not enter into long-term purchase contracts with customers. As aresult, sales in any quarter are generally dependent on orders booked andshipped in that quarter. Due to the unpredictable timing of customer orders, wemay ship products representing a significant portion of our net sales for aquarter 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.

 

WEHAVE LIMITED PRODUCT OFFERINGS AND DEPEND ON THE WIDESPREAD MARKET ACCEPTANCEOF OUR EXISTING AND NEW PRODUCTS.

 

Wederive a substantial portion of our revenue from a limited number of existingproducts. Specifically, during fiscal 2004 and 2003 we derived approximately30% and 52%, respectively, of our revenue from our NETarray 1100 product,introduced in late 2000.  We derivedapproximately 29% and 16%, respectively, of our revenue from our FibreSTORE2210 product, introduced in 2003 and approximately 18% and 3%, respectively ofour revenue from our DiMeda product family, introduced in 2002.

 

Weexpect the DiMeda and, to a lesser extent, FibreSTORE products will account fora substantial and growing portion of our total revenue for the foreseeablefuture. However, the demand for, and market acceptance of these products isuncertain. Historically, our storage product offerings consist of a limitednumber of product lines.  As such, thewidespread market acceptance of new products in our markets is critical to ourfuture success.

 

Factorsthat may affect the market acceptance of our products, some of which are beyondour control, include the following:

 

•              growth of storage networking product markets;

 

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

 

•              continued development of technologies thatallow our storage products to function over WANs and over IP-based networks;and

 

•              availability, price, quality and performanceof competing products and technologies.

 

OURINDUSTRIES ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITIONAND WE MUST KEEP PACE WITH THE CHANGES TO SUCCESSFULLY COMPETE.

 

Themarkets for our products are characterized by rapidly changing technology,evolving industry 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 in atimely manner and achieve market acceptance. We also cannot be certain that wewill 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.

 

Themarkets for 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,

 

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standardsor customer requirements. For all of the foregoing reasons, we may not be ableto compete successfully against our current and future competitors.

 

WEDEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR CERTAIN COMPONENTS.

 

Wedepend upon a limited number of suppliers for several components used in themanufacture of our products, such as disk drives, certain controllers and othercomponents. In the future, we may experience shortages of or difficulties inacquiring these components. Failure to manufacture our products on a timelybasis would have a negative impact on our business and operating results.  If we had to seek alternative sources ofsupply, the incorporation of such components from alternative suppliers and themanufacture and shipment of the our products could be delayed whilemodifications to such products and the accompanying software were made toaccommodate the introduction of the alternative suppliers’ components.

 

Wepurchase certain raw materials and components based on forecasted orderlevels.  Forecasting orders is difficultas most shipments occur near the end of each quarter. Some of our OEM customersprovide us with a forecast of expected order delivery dates, but generallycustomers place orders for immediate delivery, not in advance of need.  Lead times for materials and components thatwe order vary significantly and depend on factors such as specific supplier requirements,contract terms and current market demand for such components. As a result, ourcomponent requirement forecasts may not be accurate. If we overestimate ourcomponent requirements, then we may have excess inventory, which would increaseour costs. If we underestimate our component requirements, then we may haveinadequate inventory, which could interrupt our manufacturing and delaydelivery of our products to our customers. Either of these occurrences wouldnegatively impact our business and operating results.

 

WEMAY ENGAGE IN FUTURE ACQUISITIONS THAT MAY DILUTE OUR SHAREHOLDERS AND CAUSE USTO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.

 

Aspart of our strategy, we expect to review opportunities to buy other businessesor technologies 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:

 

•              spend significant amounts of cash;

 

•              issue stock that would dilute our currentshareholders’ percentage ownership;

 

•              incur amortization expense related togoodwill and other intangible assets; or

 

•              incur debt or assume liabilities.

 

Thesepurchases also involve numerous risks, including:

 

•              problems integrating the purchasedoperations, technologies, personnel or products;

 

•              unanticipated costs;

 

•              adverse effects on existing businessrelationships with suppliers or customers;

 

•              risks associated with entering markets inwhich we have no or limited prior experience;

 

•              potential loss of key employees of acquiredor merged organizations; and

 

•              the growth rates of any acquired company maybe less than those projected by analysts or anticipated by markets, which couldhave an adverse effect on our stock price.

 

Wecannot assure you that we will be able to successfully integrate anybusinesses, products, technologies or personnel related to organizations thatwe might acquire or merge with in the future.

 

UNDETECTEDSOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND DELAY PRODUCT INTRODUCTION.

 

Storageproducts frequently contain undetected software or hardware errors when firstintroduced or as new versions are released. Our products are complex and errorsmay be found from time to time in our products, including new or enhancedproducts. In addition, our products are combined with products from othervendors. As a result, when problems occur, it may

 

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be difficult to identify thesource of the problem. These problems may cause us to incur significantwarranty and repair costs, divert the attention of our engineering personnelfrom our product development efforts and cause significant customer relationsproblems. Moreover, the occurrence of hardware and software errors, whethercaused by our or another vendor’s products, could delay or prevent thedevelopment of the markets in which we compete.

 

THELOSS OF KEY PERSONNEL OR THE INABILITY TO HIRE AND RETAIN ADDITIONAL PERSONNELWITH STORAGE NETWORKING EXPERTISE COULD ADVERSELY IMPACT OUR BUSINESS ANDRESULTS OF OPERATION.

 

Ourfuture performance depends in part upon the continued service and contributionsof key management, engineering, sales and marketing personnel, many of whomwould be difficult to replace quickly. We also believe that our success depends to a significant extent on theability of our management to operate effectively, both individually and as agroup. The loss of any one of our key employees could adversely affect oursales or delay the development or marketing of existing or future products.

 

Webelieve our future success will depend also in part upon our ability to attractand retain highly skilled and qualified managerial, engineering, sales andmarketing and operations personnel. Competition for these personnel is intense.The inability to attract or retain qualified personnel in the future or delaysin hiring required personnel, particularly engineers and sales personnel, coulddelay the development and introduction of and negatively impact our ability tosell our products which would have a material adverse impact on our businessand results of operation.

 

WEHAVE APPLIED FOR A LIMITED NUMBER OF PATENTS AND WE MAY BE UNABLE TO PROTECTOUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TOCOMPETE.

 

Historically,we have not pursued patents on all of our intellectual property and we continueto rely on a combination of patent, copyright, trademark and trade secret lawsand restrictions on disclosure to protect our intellectual property rights. Wealso enter into confidentiality agreements with substantially all ouremployees, consultants and corporate partners, and control access to anddistribution of our software, documentation and other proprietary information.

 

Inconjunction with the acquisition of the SANStar technology in January 2001, weacquired the rights to four patent applications.  Two patent applications are currently beingprosecuted before the U.S. Patent Office, while we have abandoned furtherapplication processing on the remaining two. We have also submitted twoadditional patent applications on certain key attributes of the TALONproduct.  These patent applicationsdisclose aspects of removable disk pack technology as it relates to a redundantarray of independent drives.  There is noassurance these patent applications will be successfully prosecuted or, ifsuccessful, whether these patents will provide us with competitive advantagesor would not be challenged by third parties.

 

Althoughwe believe 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 you that others will not claim a proprietaryinterest in all or part of our technology or assert claims of infringement. Allsuch claims, regardless of their merits, could expose us to costly litigationand could substantially harm our operating results.

 

**ITEM 2.****                 ****PROPERTIES**

 

Ouradministrative headquarters, manufacturing and research and developmentoperations are located in one building in Plymouth, Minnesota, totalingapproximately 39,000 square feet.  Thisfacility is leased under a 7-year operating lease which commenced in October2002.  The lease provides for base rental payments of approximately$335,000 for the first thirty-six (36) months with increases of approximately3% each subsequent 12-month period.  The lease also includes provisionsfor early termination after 3 and 5 years. Additionally, we are responsible for our proportionate share of realestate taxes and operating expenses associated with operating the facility, asdefined by the lease agreement. We also maintain a research and developmentfacility in Tinton Falls, New Jersey, in approximately 3,000 square feet ofleased space, which expires in February 2005. We do not anticipate extending the term of this lease.   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.

 

Inconnection with a work force reduction and restructuring implemented in April2004, we abandoned approximately 17,000 square feet of our headquartersfacility and are currently marketing this space for possible sublease.  As a result of this abandonment we recordedlease abandonment costs of approximately $1 million.

 

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**ITEM 3.****                 ****LEGAL PROCEEDINGS**

 

Weare not a party to, nor is any of our property subject to any material pendinglegal proceedings, nor are any material legal proceedings known to becontemplated by governmental authorities or others.

 

**ITEM 4.****                 ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

Nomatter was submitted to a vote of security holders through the solicitation ofproxies or otherwise during the fourth quarter of our fiscal year.

 

**EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Thenames, ages and positions of the executive officers are as follows:

 
| James  W. Hansen    | 49 | Chief  Executive Officer                               |
|---------------------|----|--------------------------------------------------------|
| Thomas  S. Wargolet | 41 | Vice  President of Finance and Chief Financial Officer |

 

 

JamesW. Hansen has been Chief Executive Officer of the Company since September 30,2004.  Mr. Hansen had previously servedas Interim Chief Executive Officer of the Company from March 18, 2004 toSeptember 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.  Since1992 Mr. Hansen has served as an investor, director, president or vicepresident of several private companies in medical services and technology.  Mr. Hansen was President, CEO and Treasurerof E.mergent Incorporated (NASDAQ: EMRT) from November 1996 and Chairman of theBoard of Directors from May 1997 until the sale of the company in May2002.  From 1986 to 1992 he was SeniorVice President and General Manager of the pension division of Washington SquareCapital, a Reliastar Company, a NYSE-traded financial services company nowknown as ING Reliastar.  From 1983 to1986 he was Vice President of Apache Corporation, a NYSE-traded oil and gasexploration company.  From 1979 to 1983,Mr. Hansen was a teacher and management consultant.  He has also served as a director of threepublic companies and has taught in the MBA program at the University of St.Thomas since 1984.

 

ThomasS. Wargolet has been Vice President of Finance and Chief Financial Officersince October 2000.  Prior to joiningCiprico he was Vice President – Finance / CFO of TeeMaster.com, an internetprovider of golf reservation services since October 1999.  From January 1999 to October 1999 he servedas Vice President - Finance and Operations of Vicom, Incorporated, a providerof telecommunications services.  From1996 to 1998, Mr. Wargolet was Chief Financial Officer and Secretary of ENStarInc., a publicly traded company with various network technology businesses.  From 1989 to 1996, Mr. Wargolet served as CorporateController of North Star Universal, Inc. a publicly traded holding company andVice President – Finance and Operations of Americable, Inc. (subsidiary ofNorth Star), a distributor of connectivity products.  From 1985 to 1989, he was with Arthur Andersen& Co. in Minneapolis.  Mr. Wargoletis a Certified Public Accountant.

 

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**PART II**

 

**ITEM 5.****                 ****MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

STOCKTRADING

 

Cipricocommon stock is traded on the Nasdaq National Market under the symbol CPCI. Asof November 30, 2004, there were approximately 1,600 shareholder accounts ofrecord. Closing stock sale price ranges for the years ended September 30, 2004and 2003, were:

 
| ** **  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $        | 5.39       |     | $          | 4.72 |   | $ | 4.07 |   | $ | 2.75 |   |
| Second      |       | 6.12     |       | 4.72     |       | 5.25 |   | 3.30 |   |
| Third       |       | 5.59     |       | 4.40     |       | 6.47 |   | 4.15 |   |
| Fourth      |       | 4.54     |       | 3.27     |       | 6.70 |   | 4.75 |   |
|             |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

Wedo not intend to pay cash dividends on any of our securities for theforeseeable future.

 

Wemade no sales of unregistered securities, and made no repurchase of equitysecurities, during the quarter ended September 30, 2004.

 

**ITEM 6.****                 ****SELECTED FINANCIAL DATA**

 

CipricoInc. and Subsidiaries

Amountsin thousands (except per share data)

 

SELECTEDCONSOLIDATED STATEMENTS OF OPERATIONS DATA

 
| **Years ended September 30**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                             |       | $        | 18,081     |     | $          | 31,215   |       | $        | 31,440     |     | $          | 32,983 |   | $ | 33,210 |   |
| Gross profit                                          |       | 6,152    |       | 11,375   |       | 10,917   |       | 13,623   |       | 14,822   |       |
| % of sales                                            |       | 34.0     | %          | 36.4     | %          | 34.8     | %          | 41.3     | %          | 44.6     | %          |
| Operating expenses                                    |       | 13,956   |       | 15,740   |       | 20,327   |       | 22,611   |       | 17,311   |       |
| % of sales                                            |       | 77.2     | %          | 50.4     | %          | 64.7     | %          | 68.6     | %          | 52.1     | %          |
| Income (loss) from operations                         |       | (7,804   | )          | (4,365   | )          | (9,410   | )          | (8,988   | )          | (2,489   | )          |
| % of sales                                            |       | (43.2    | )%         | (14.0    | )%         | (29.9    | )%         | (27.3    | )%         | (7.5     | )%         |
| Other income, net                                     |       | 426      |       | 450      |       | 956      |       | 1,866    |       | 1,992    |       |
| Income tax expense (benefit)                          |       | —   |       | —   |       | (1,950   | )          | 440      |       | (188     | )          |
| Net income (loss)                                     |       | $        | (7,378     | )        | $          | (3,915   | )          | $        | (6,504     | )        | $          | (7,562 | ) | $ | (309 | ) |
| Shares used to calculate net income (loss)  per share |       |     |       |     |       |     |       |     |       |     |       |
| Basic                                                 |       | 4,717    |       | 4,676    |       | 4,895    |       | 5,050    |       | 4,990    |       |
| Diluted                                               |       | 4,717    |       | 4,676    |       | 4,895    |       | 5,050    |       | 4,990    |       |
| Net income (loss) per share—Basic                |       | $        | (1.56      | )        | $          | (.84     | )          | $        | (1.33      | )        | $          | (1.50 | ) | $ | (.06 | ) |
| Diluted                                               |       | $        | (1.56      | )        | $          | (.84     | )          | $        | (1.33      | )        | $          | (1.50 | ) | $ | (.06 | ) |

 

SELECTEDCONSOLIDATED BALANCE SHEET DATA

 
| **September 30**          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Working capital           |       | $        | 20,318     |     | $          | 25,972   |       | $        | 27,029     |     | $          | 29,392 |   | $ | 33,643 |   |
| Total assets              |       | 25,162   |       | 32,336   |       | 28,115   |       | 44,679   |       | 51,781   |       |
| Shareholders’ equity |       | 20,857   |       | 27,986   |       | 32,238   |       | 39,530   |       | 47,287   |       |
|                           |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

18

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**ITEM 7.****                                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

CriticalAccounting Policies and 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. (“the Company,we and our”).

 

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 inthe United 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.

 

RevenueRecognition

 

Werecognize revenue 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. Products sold are generally coveredby a warranty for periods up to three years. We accrue a warranty reservewithin cost of sales for estimated costs to provide warranty services. Weestimate the costs to service our warranty obligations based on historicalexperience and expectation of future conditions.  Revenue from the sale of extended warrantyand maintenance agreements is deferred and recognized on a straight-line basisover the term of the related agreement.

 

AccountsReceivable

 

Weperform ongoing credit evaluations of our customers and adjust credit limitsbased upon payment history and the customer’s current credit worthiness, asdetermined by our review of their current credit information. We continuouslymonitor collections and payments from our customers and maintain a provisionfor estimated credit losses based upon our historical experience and anyspecific customer collection issues that we have identified. While such creditlosses have historically been within our expectations and the provisionsestablished, we cannot guarantee that we will continue to experience the samecredit loss rates that we have in the past. Since our accounts receivable areconcentrated in a relatively few number of customers, a significant change inthe liquidity or financial position of any one of these customers could have amaterial adverse impact on the collectibility of our accounts receivable andour future operating results.

 

Inventories

 

Wevalue our inventory at the lower of the actual cost to purchase and/ormanufacture the inventory or the current estimated market value of the inventory.We regularly review inventory quantities on hand and record a provision toreduce excess and obsolete inventory to estimated market value based primarilyon our estimated forecast of product demand and production requirements for thenext twelve months or expected life of the representative product. Asignificant decrease in demand could result in an increase in the amount ofexcess inventory quantities on hand. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required. Additionally, our estimates of future product demand may proveto be inaccurate, in which case we may have understated or overstated theprovision required for excess and obsolete inventory. If our inventory is determinedto be overvalued, we would be required to recognize such costs in our cost ofgoods sold at the time of such determination. We do not adjust our lower of cost or market adjustment to inventorycomponents upward once a reduction was determined to be necessary.

 

Wemake every effort to ensure the accuracy of our forecasts of future productdemand, however any significant unanticipated changes in demand ortechnological developments could have a significant impact on the value of ourinventory and our reported operating results. In the third quarter of fiscal 2004, we 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 years.

 

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Warranty

 

Ourwarranty reserve is established based on our best estimate of the amountsnecessary to settle future and existing claims on products sold as of eachbalance sheet date. While we believe that our warranty reserve is adequate andthat our estimate is appropriate, such amounts estimated to be due and payablecould differ 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.

 

DeferredTaxes

 

Werecord a valuation allowance to reduce our net deferred tax assets to theamount that is more likely than not to be realized. We recognize deferred taxassets and liabilities based on the differences between the financial statementcarrying amounts and the tax bases of assets and liabilities. We regularlyreview the deferred tax assets for recoverability and establish a valuationallowance based on historical taxable income or loss, projected future taxableincome or loss, and the expected timing of the reversals of existing temporarydifferences.

 

Thefollowing discussion and analysis of the financial condition and results ofoperations of Ciprico Inc. and its subsidiaries should be read in conjunctionwith the Consolidated Financial Statements and the Notes thereto, includedelsewhere in this Report.

 

OVERVIEW

 

Weare a leading provider of digital media workflow solutions.  Our solutions combine storage, networking andcomputing technologies to simplify and accelerate digital media workflows. Ourprimary markets are broadcast and entertainment, which include applications indigital broadcast and film and video production; and military and government,which include applications involving the data capture, processing and disseminationof surveillance images and medical imaging picture archives.  In addition, we have historically sold inother markets with high-performance storage requirements such as geosciencesand digital prepress.

 

Thefollowing table sets forth certain items from Ciprico’s consolidated statementof operations, as a percentage of net sales for the years ending September 30.

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                  |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales              |       | 66.0     |       | 63.6     |       | 65.2     |       |
| Gross profit               |       | 34.0     |       | 36.4     |       | 34.8     |       |
|                       |       |     |       |     |       |     |       |
| Operating expenses:        |       |     |       |     |       |     |       |
| Research and development   |       | 28.5     |       | 19.9     |       | 27.9     |       |
| Sales and marketing        |       | 25.4     |       | 21.3     |       | 27.7     |       |
| General and administrative |       | 9.5      |       | 7.6      |       | 7.9      |       |
| Restructuring charges      |       | 13.8     |       | 1.6      |       | 1.2      |       |
| Total operating expenses   |       | 77.2     |       | 50.4     |       | 64.7     |       |
| Loss from operations       |       | (43.2    | )%         | (14.0    | )%         | (29.9    | )%         |

 

NETSALES:

 

Comparativeinformation on sales by market are shown in the charts below (in millions).

 
| ** **                    | ** ** | **2004**  | ** ** | **2003**        | ** ** | **2002**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------------|------------|-----------|------------|
| **Market**                    | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** | **Sales** | ** ** | **% of  Total** | ** ** |
| Broadcast & Entertainment |       | $         | 8.5        |            | 46.9       | %         | $          | 20.1 |   | 64.4 | % | $ | 15.0 |   | 47.8 | % |
| Military & Government     |       | 8.9       |       | 49.2            |       | 10.6      |       | 34.0 |   | 14.9 |   | 47.4 |   |
| Other                         |       | 0.7       |       | 3.9             |       | 0.5       |       | 1.6 |   | 1.5 |   | 4.8 |   |
| Total                         |       | $         | 18.1       |            | 100.0      | %         | $          | 31.2 |   | 100.0 | % | $ | 31.4 |   | 100.0 | % |

 

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Salesfor 2004 were approximately $18.1 million, a decrease of 42% from 2003 sales,which decreased 1% from 2002 levels.

 

Salesin the Broadcast segment decreased 58% in 2004 versus an increase of 34% in2003 from 2002.  We believe the decreasein 2004 was the result of lost business from competitive effects at each of ourlarger broadcast OEMs and, to a lesser extent, the result of softer demandwithin the broadcast industry.  Theincrease in 2003 came substantially from increased sales to three larger OEMcustomers that collectively accounted for $17.8 million or 57% of our sales infiscal 2003.

 

Salesin the Military and Government market decreased 16% in fiscal 2004 versus adecrease of 29% in 2003 as compared with 2002. The decrease in fiscal 2004 and 2003 reflects reduced spending levelsfrom system integrators associated with defense related programs due in part tothe military action in the Middle East.  In 2004, we shipped approximately $1.2 million of our TALON product comparedto $800,000 in 2003, to new and existing customers in the Militarysegment.  Sales in the Military segmentare to some extent dependent upon the actual appropriation and funding ofgovernment programs that specify our products. We believe our sales in this segment have been adversely impacted bydelays in the deployment and funding of certain programs in which our productshave been specified. Sales in the Military segment have historically fluctuatedbetween years due to the timing of spending on defense-related programs.

 

Thesales in the other market segments during the past three years primarilyreflects demand from customers in some of our legacy markets such asgeoscience, medical imaging and digital prepress.

 

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.  The DiMeda family ofproducts was released in 2002 and accounted for $3.2 million and $851,000 insales for 2004 and 2003, respectively. In 2003, we released the FibreSTORE 2210 which accounted for $5.2million in sales for 2004, $5.0 million in 2003 and $1.6 million in 2002.  The NETarray family of products was releasedin fiscal 2000. Sales from NETarray products were approximately $5.5 million in2004, $16.3 million in 2003 and $11.9 million in 2002.

 

COSTOF SALES AND GROSS PROFIT:

Grossprofit, as a percentage of net sales, was 34.0% in 2004, 36.4% in 2003 and34.8% in 2002.  The decrease in 2004 canprimarily be attributed to unfavorable overhead absorption due to lower unitvolumes and the impact of a third quarter charge of $900,000 to cost of salesand inventory to reduce certain legacy product to market value.  The increase in margins between 2002 and 2003are primarily a result of improved efficiencies and overhead absorption due toincreased unit volumes and the impacts from expense reduction efforts in theprior year.  In the fourth quarter of2002, we recorded a non-recurring adjustment of $700,000 to reduce certainlegacy product inventory to market value.

 

Grossprofit on product sales is highly dependent on the cost of disk drives and mayfluctuate from quarter to quarter. We believe our strong vendor relations willaid in component availability and cost reductions to meet continued competitivepricing pressures. We expect to experience continued competitive pressures ongross profit margins throughout fiscal 2005. We intend to partially offsetthese margin pressures through new product introductions and cost reductions.

 

RESEARCHAND DEVELOPMENT EXPENSES:

Researchand development expenses decreased approximately $1.1 million or 17% in 2004compared to a decrease of $2.6 million or 29% in 2003 versus 2002.  The decreases in 2004 and 2003 are primarilya result of decreased prototype spending on development projects, a continuedshift towards software development activities and reduced staffing levelsbetween years.  We currently do notmaterially sell software separately from our hardware.

 

Weexpect that research and development expenses will decrease slightly inabsolute dollars in fiscal 2005 based on reduced staffing levels implemented inthe second half of fiscal 2004.

 

SALESAND MARKETING EXPENSES:

Salesand marketing expenses decreased approximately $2.0 million or 31% in 2004versus a decrease of $2.1 million or 24% in 2003 compared to 2002.  The reduction in both years reflects reducedheadcount between years resulting from our restructuring efforts implemented ineach of the past three fiscal years, which included the closure of ourinternational sales offices.  Inaddition, the reduction in expenses during fiscal 2004 and 2003 reflectsreduced spending on trade show and promotional activities.  We expect these expenses to decrease slightlyin absolute dollars during fiscal 2005 as a result of cost reductionsimplemented during the third quarter of 2004.

 

GENERALAND ADMINISTRATIVE EXPENSES:

Generaland administrative expenses decreased approximately $683,000 or 29% in2004.  This reduction is a result ofrestructuring efforts implemented during the third quarter of fiscal 2004, areduction in the allowance for bad debt and a

 

21

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reductionin legal expenses.  Expenses decreasedapproximately $103,000 between 2003 and 2002. We expect general and administrative expenses to increase in fiscal 2005due to anticipated higher insurance costs and increased accounting and auditfees related to Sarbanes-Oxley section 404 compliance.

 

RESTRUCTURING:

Duringthe third quarter of 2004, 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 and $1.4 million is related to the abandonment of a portionof Ciprico’s headquarter facility and the write down of certain fixedassets.   In addition the Companyrecorded a non-cash adjustment of $900,000 to cost of sales and inventory toreduce certain legacy product inventory to market value.  These restructuring efforts are expected toresult in annualized cost reductions of approximately $3.8 million.

 

Duringthe fourth quarter of 2003, we implemented a workforce reduction of 17%,including the closure of our European sales offices.  As a result of the restructuring, we recordeda charge of $500,000, of which approximately $320,000 is employee terminationcosts and $180,000 is a non-cash charge for cumulative foreign currencytranslation adjustments recognized in connection with the closure of our Europeanoperations.

 

InSeptember 2002, we implemented a workforce reduction of 13% and furtherconsolidation of our sales operations in Europe.  As a result of the restructuring, we recordeda charge of $370,000 during the fourth quarter of 2002, of which approximately$328,000 is employee termination costs and $42,000 is facility closure andrelated costs.

 

OTHERINCOME:

Otherincome of $426,000, $450,000 and $956,000 in fiscal 2004, 2003 and 2002,respectively, is primarily attributable to interest income on cash andmarketable securities. The decrease between all years reflects overall lowerinterest rates on lower average cash and investment balances.

 

INCOMETAX EXPENSE:

Forfiscal 2004 and 2003, no income tax benefit was recognized, as we do not expectto realize any current income tax benefits. For 2002 the income tax benefit of $1.9 million reflects recognition ofcurrent income tax benefits related to federal income tax refunds received orexpected to be received under the provisions of the Job Creation and WorkerAssistance Act of 2002.  The effectiveincome tax expense (benefit) was 0% in 2004, 0% in 2003 and (23.0%) in 2002.See Note 3 to Consolidated Financial Statements.

 

LIQUIDITYAND CAPITAL RESOURCES:

Asof September 30, 2004, we had a total of cash, cash equivalents, marketablesecurities and asset-backed short term investments of $21.3 million compared to$22.0 million at the end of 2003 and $27.0 million at the end of 2002.

 

Cashflows used in operating activities were $299,000, $3.4 million and $898,000 in2004, 2003 and 2002, respectively. The use of cash in all years reflects thenet loss and the impacts of depreciation and changes working capital.   The change between years primarily reflectsfluctuations in working capital levels between years.  Capital expenditures were $380,000, $1.2million and $1.3 million in 2004, 2003 and 2002, respectively. We anticipatethat capital expenditures for 2005 will approximate between $250,000 and$500,000 due primarily to anticipated spending on product developmentactivities. There were no shares repurchased in fiscal 2004.  During 2003 and 2002, we repurchased 198,000and 221,000 shares, respectively, at a total cost of approximately $692,000 and$972,000, respectively.  The total amountauthorized to be expended under the stock buyback program is $12.0million.  As of September 30, 2004,1,037,035 shares of common stock have been repurchased for $7.8 million.

 

Despitethe cost reduction efforts implemented during 2004, we expect to incur anoperating loss in fiscal 2005 due to continued investments expected in newproduct development.  We believe thatcurrent cash balances and cash generated from operations will be adequate tofund requirements for operating losses, working capital and capital expenditures,and share repurchases, as well as any potential acquisitions in fiscal 2005.

 

Duringfiscal 2002, we signed a 7-year operating lease for a new corporateheadquarters, which commenced in October 2002.  The lease provides forbase rental payments of approximately $335,000 for the first thirty-six (36)months with increases of approximately 3% each subsequent 12-monthperiod.  The lease also includes provisions for early termination after 3and 5 years.  Additionally, we areresponsible for our proportionate share of real estate taxes and operatingexpenses associated with operating the facility, as defined by the leaseagreement.  In connection with therestructuring charges recorded in fiscal 2004 (as discussed in Note 2Restructuring Activity) we expensed approximately $1.0 million of the leaseobligation for the corporate headquarters. As a result, rent expense will be decreased by approximately $273,000,$284,000 and $294,000 for the fiscal years 2005, 2006 and 2007, respectively.

 

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NEWACCOUNTING PRONOUNCEMENTS

Therehave been no accounting pronouncements relevant to the Company since the end offiscal year 2003.

 

CAUTIONARYSTATEMENTS

Anyforward-looking statements included in this section or elsewhere in this Form10-K are subject to various risks and uncertainties, which may cause actualresults to differ from the expectations set forth in these forward-lookingstatements. These risks and uncertainties include, but are not limited to, therisk factors set forth in Item 1 to this Form 10-K.

 

**ITEM 7A.****              ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

TheCompany invests its excess cash in money market mutual funds, highly ratedcorporate debt 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 SUPPLEMENTARYDATA**

 

CONSOLIDATEDBALANCE SHEETS

CipricoInc. and Subsidiary

Amountsin thousands

 
| **September 30**                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                         |       |     |       |     |       |
| CURRENT ASSETS:                                                                                |       |     |       |     |       |
| Cash and cash equivalents                                                                      |       | $        | 4,394      |     | $          | 5,159 |   |
| Marketable securities and short term  investments                                              |       | 16,946   |       | 16,766   |       |
| Accounts receivable, less allowance of $401  in 2004 and $652 in 2003                          |       | 1,665    |       | 4,016    |       |
| Inventories                                                                                    |       | 1,330    |       | 3,928    |       |
| Other current assets                                                                           |       | 288      |       | 453      |       |
| Total current assets                                                                           |       | 24,623   |       | 30,322   |       |
|                                                                                           |       |     |       |     |       |
| PROPERTY AND EQUIPMENT, AT COST:                                                               |       |     |       |     |       |
| Furniture and fixtures                                                                         |       | 501      |       | 698      |       |
| Equipment                                                                                      |       | 4,991    |       | 11,995   |       |
| Leasehold improvements                                                                         |       | 632      |       | 688      |       |
|                                                                                           |       | 6,124    |       | 13,381   |       |
| Accumulated depreciation and amortization                                                      |       | (5,626   | )          | (11,409  | )          |
| Net property and equipment                                                                     |       | 498      |       | 1,972    |       |
|                                                                                           |       |     |       |     |       |
| OTHER ASSETS                                                                                   |       | 41       |       | 42       |       |
|                                                                                           |       | $        | 25,162     |     | $          | 32,336 |   |
|                                                                                           |       |     |       |     |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                      |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                           |       |     |       |     |       |
| Accounts payable                                                                               |       | $        | 1,432      |     | $          | 2,151 |   |
| Accrued compensation                                                                           |       | 537      |       | 621      |       |
| Warranty accrual                                                                               |       | 240      |       | 387      |       |
| Accrued restructuring                                                                          |       | 1,217    |       | 121      |       |
| Other accrued expenses                                                                         |       | 587      |       | 758      |       |
| Deferred revenue                                                                               |       | 292      |       | 312      |       |
| Total current liabilities                                                                      |       | 4,305    |       | 4,350    |       |
|                                                                                           |       |     |       |     |       |
| COMMITMENTS                                                                                    |       | —   |       | —   |       |
|                                                                                           |       |     |       |     |       |
| SHAREHOLDERS` EQUITY:                                                                          |       |     |       |     |       |
| Common stock, 4,738,595 shares and  4,677,835 shares issued and   outstanding in 2004 and 2003 |       | 47       |       | 47       |       |
| Additional paid-in capital                                                                     |       | 35,118   |       | 34,840   |       |
| Retained deficit                                                                               |       | (14,259  | )          | (6,881   | )          |
| Deferred compensation from restricted stock                                                    |       | (49      | )          | (20      | )          |
| Total shareholders’ equity                                                                |       | 20,857   |       | 27,986   |       |
|                                                                                           |       | $        | 25,162     |     | $          | 32,336 |   |

 

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**                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                     |       | $        | 18,081     |     | $          | 31,215   |       | $ | 31,440 |   |
| Cost of sales                                 |       | 11,929   |       | 19,840   |       | 20,523   |       |
| Gross profit                                  |       | 6,152    |       | 11,375   |       | 10,917   |       |
| Operating expenses:                           |       |     |       |     |       |     |       |
| Research and development                      |       | 5,154    |       | 6,214    |       | 8,767    |       |
| Sales and marketing                           |       | 4,597    |       | 6,638    |       | 8,699    |       |
| General and administrative                    |       | 1,705    |       | 2,388    |       | 2,491    |       |
| Restructuring charges                         |       | 2,500    |       | 500      |       | 370      |       |
| Total operating expenses                      |       | 13,956   |       | 15,740   |       | 20,327   |       |
| Loss from  operations                         |       | (7,804   | )          | (4,365   | )          | (9,410   | )          |
|                                          |       |     |       |     |       |     |       |
| Other income, primarily interest              |       | 426      |       | 450      |       | 956      |       |
| Loss before income taxes                      |       | (7,378   | )          | (3,915   | )          | (8,454   | )          |
|                                          |       |     |       |     |       |     |       |
| Income tax benefit                            |       | —   |       | —   |       | (1,950   | )          |
| Net loss                                      |       | $        | (7,378     | )        | $          | (3,915   | )          | $ | (6,504 | ) |
| Shares used to calculate net loss per  share: |       |     |       |     |       |     |       |
| Basic and diluted                             |       | 4,717    |       | 4,676    |       | 4,895    |       |
|                                          |       |     |       |     |       |     |       |
| Net loss per share:                           |       |     |       |     |       |     |       |
| Basic and diluted                             |       | $        | (1.56      | )        | $          | (0.84    | )          | $ | (1.33 | ) |

 

THEACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIALSTATEMENTS.

 

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CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

CipricoInc. and Subsidiary

Amountsin thousands, except share data

 
| **Years ended September 30, 2004,  2003 and 2002** | ** ** | **Shares** | ** ** | **Common  stock and  additional  paid-in-  capital** | ** ** | **Translation  Adjustment** | ** ** | **Retained  earnings  (deficit)** | ** ** | **Deferred  compensation  from  restricted  stock** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
|                                               |       |       |       |                                                 |       |                        |       |                              |       |                                                |       |      |       |
| Balance, September 30, 2001                        |       | 4,979,703  |       | $                                                    | 36,082     |                        | $          | (19                               | )          | $                                                   | 3,538      |      | $          | (71 | ) | 39,530 |   |
| Employee plan stock purchases                      |       | 48,251     |       | 221                                                  |       | —                      |       | —                            |       | —                                              |       | 221       |       |
| Restricted stock issued                            |       | 5,153      |       | 24                                                   |       | —                      |       | —                            |       | (24                                                 | )          | —    |       |
| Cumulative unrealized translation gain             |       | —     |       | —                                               |       | (100                        | )          | —                            |       | —                                              |       | (100      | )          |
| Amortization of restricted stock                   |       | —     |       | —                                               |       | —                      |       | —                            |       | 63                                                  |       | 63        |       |
| Net loss                                           |       | —     |       | —                                               |       | —                      |       | (6,504                            | )          | —                                              |       | (6,504    | )          |
| Repurchase of common stock                         |       | (220,940   | )          | (972                                                 | )          | —                      |       | —                            |       | —                                              |       | (972      | )          |
| 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 loss             |       | —     |       | —                                               |       | (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 |   |
|                                                    |            |            |            |                                                      |            |                             |            |                                   |            |                                                     |            |           |            |  |  |  |  |  |

 

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

 

26

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS

CipricoInc. and Subsidiary

Amountsin thousands

 
| **Years ended September 30**                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from Operating Activities:                                              |       |     |       |     |       |     |       |
| Net loss                                                                           |       | $        | (7,378     | )        | $          | (3,915   | )          | $ | (6,504 | ) |
| Adjustments to reconcile net loss to net  cash flows used in operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                      |       | 1,278    |       | 1,802    |       | 2,631    |       |
| Loss on disposal of equipment                                                      |       | 576      |       | —   |       | —   |       |
| Unrealized translation (gain) loss.                                                |       | —   |       | (61      | )          | (100     | )          |
| Realized translation loss                                                          |       | —   |       | 180      |       | —   |       |
| Compensation related to stock transactions                                         |       | (29      | )          | 39       |       | 63       |       |
| Changes in operating assets and  liabilities:                                      |       |     |       |     |       |     |       |
| Accounts receivable                                                                |       | 2,351    |       | (426     | )          | 251      |       |
| Inventory                                                                          |       | 2,598    |       | (783     | )          | 2,109    |       |
| Other assets                                                                       |       | 352      |       | 457      |       | (156     | )          |
| Accounts payable                                                                   |       | (719     | )          | (573     | )          | 154      |       |
| Accrued expenses                                                                   |       | 692      |       | (868     | )          | 549      |       |
| Income taxes                                                                       |       | —   |       | 789      |       | 80       |       |
| Deferred revenue                                                                   |       | (20      | )          | (86      | )          | 25       |       |
| Net cash flows used in operating activities                                        |       | (299     | )          | (3,445   | )          | (898     | )          |
| Cash Flows from Investing Activities:                                              |       |     |       |     |       |     |       |
| Equipment purchases                                                                |       | (380     | )          | (1,166   | )          | (1,335   | )          |
| Purchase of marketable securities                                                  |       | (23,439  | )          | (26,392  | )          | (34,460  | )          |
| Proceeds from sale or maturity of  marketable securities                           |       | 23,175   |       | 30,244   |       | 37,480   |       |
| Net cash flows provided by (used in)  investing activities                         |       | (644     | )          | 2,686    |       | 1,685    |       |
| Cash Flows from Financing Activities:                                              |       |     |       |     |       |     |       |
| Proceeds from issuance of common stock                                             |       | 178      |       | 197      |       | 221      |       |
| Repurchase of common stock                                                         |       | —   |       | (692     | )          | (972     | )          |
| Net cash flows provided by (used in)  financing activities                         |       | 178      |       | (495     | )          | (751     | )          |
| Net Increase (Decrease) in Cash and Cash  Equivalents                              |       | (765     | )          | (1,254   | )          | 36       |       |
| Cash and Cash Equivalents at Beginning of  Year                                    |       | 5,159    |       | 6,413    |       | 6,377    |       |
| Cash and Cash Equivalents at End of Year                                           |       | 4,394    |       | 5,159    |       | 6,413    |       |
| Marketable Securities—Current                                                 |       | 16,946   |       | 16,766   |       | 18,071   |       |
| Marketable Securities—Long-term                                               |       | —   |       | —   |       | 2,547    |       |
| Total Cash and Investments at End of Year                                          |       | $        | 21,340     |     | $          | 21,925   |       | $ | 27,031 |   |

 

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

 

Non-cashactivity:

 

Common stock awards issued under the Company’sRestricted Stock Plan totaled $100,000, $29,000, and $24,000 in 2004, 2003 and2002.  The issuance resulted in anincrease in additional paid-in capital and deferred compensation fromrestricted stock.

 

27

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NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

CipricoInc. and Subsidiary - September 30, 2004, 2003 and 2002

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BUSINESS:The principal business activity of Ciprico Inc. and subsidiary (the Company) isthe design, manufacture and marketing of high-performance, direct-attached andnetworked storage solutions for digital media applications.

 

CONSOLIDATION:The accompanying consolidated financial statements for fiscal 2003 and 2002include the accounts of Ciprico Inc. and its wholly owned subsidiary, CipricoInternational Limited. All significant intercompany balances and transactionshave been eliminated.  In the fourthquarter of 2003, the company closed its European sales office and as such noconsolidation was necessary for 2004.

 

ACCOUNTINGESTIMATES: In the preparation of the Company’s consolidated financialstatements in accordance with accounting principals generally accepted in theUnited States of America, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities andrelated revenue and expenses. Actual results could differ from those estimatesused by management.

 

REVENUERECOGNITION: Revenue is recognized upon shipment of products. Revenue fromextended warranty and maintenance agreements is recognized on the straight-linebasis over the term of the agreement.  Werecognize revenue 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. Products sold are generally coveredby a warranty for periods up to three years. We accrue a warranty reservewithin cost of sales for estimated costs to provide warranty services. Weestimate the costs to service our warranty obligations based on historicalexperience and expectation of future conditions.

 

PRODUCTWARRANTY COSTS: Estimated future warranty costs are provided for at the time ofrevenue recognition.  Activity into thewarranty account is as follows for the years ended September 30, 2004, 2003 and2002:

 
| ** **         | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|----------------|------------|--------------------------------|------------|
|               |       |                                 |       |                                |       |           |       |                           |       |
| September 30, 2004 |       | $                                    | 387,000    |                                | $          | 92,000         |       | $                              | (239,000   | ) | $ | 240,000 |   |
| September 30, 2003 |       | 502,000                              |       | 140,000                             |       | (255,000       | )          | 387,000                        |       |
| September 30, 2002 |       | 423,000                              |       | 296,000                             |       | (217,000       | )          | 502,000                        |       |
|                    |            |                                      |            |                                     |            |                |            |                                |            |  |  |  |  |

 

Deductionsrepresent warranty work performed during the year.

 

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

 

INVENTORY:Inventory is stated at the lower of cost or replacement market. Cost isdetermined using the first-in, first-out method. Inventory costs includeoutside assembly charges, allocated manufacturing overhead and direct materialcosts.  In the third quarter of 2004 theCompany recorded an adjustment of $900,000 to reduce certain legacy productinventory to market value due to excess estimated inventory levels of certainlegacy products discontinued during prior fiscal years.  Inventory consists of the following (inthousands) at September 30:

 
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Finished Goods  |       | $        | 995        |     | $          | 967 |   |
| Work-In-Process |       | 125      |       | 567      |       |
| Raw Materials   |       | 210      |       | 2,394    |       |
|            |       | $        | 1,330      |     | $          | 3,928 |   |

 

CASHAND CASH EQUIVALENTS: The Company considers all highly liquid temporaryinvestments with original maturities of three months or less to be cashequivalents. At September 30, 2004 and 2003 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.

 

28

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ACCOUNTSRECEIVABLE:The majorityof the Company’s accounts receivables are due from companies in the broadcastindustry in addition to military and government contractors.  Credit is extended based on evaluation of acustomer’s financial condition and, generally, collateral is not required.  Accounts receivable are typically due fromcustomers within 30 days and are stated at amounts due from customers net of anallowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms areconsidered past due.  The Companydetermines its allowances by considering a number of factors, including thelength of time receivables are past due, the Company’s previous loss history,the customer’s current ability to pay its obligation to the Company, and thecondition of the general economy and the industries as a whole.  The Company writes-off accounts receivablewhen they become uncollectible, and payments subsequently received on suchreceivables are credited to the allowance for doubtful accounts.

 

Changesin the Company’s allowance for doubtful accounts are as follows:

 
| ** **         | ** ** | ** **                           | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **         | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End  of Period** | ** ** |
| ** **         | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| September 30, 2004 |       | $                                    | 652,000    |                                | $          | —                          |       | $              | (118,000   | )(A) | $ | (133,000 | )(B) | $ | 401,000 |   |
| September 30, 2003 |       | 560,000                              |       | 92,000                              |       | —                          |       | —         |       | 652,000 |   |
| September 30, 2002 |       | 409,000                              |       | 151,000                             |       | —                          |       | —         |       | 560,000 |   |
|                    |            |                                      |            |                                     |            |                                 |            |                |            |  |  |  |  |  |  |  |

 

----

(A)-Represents the reversal of an over accrual of the accounts receivableallowance.

 

(B)- Deductions represent accounts receivable written-off during the year.

 

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.

 

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

 
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Current                  |       |     |       |     |       |
| Commercial Paper         |       | $        | 14,055     |     | $          | 14,290 |   |
| U.S. Government Agencies |       | —   |       | 1,502    |       |
| Asset-backed investments |       | 2,891    |       | 974      |       |
|                     |       | $        | 16,946     |     | $          | 16,766 |   |

 

PROPERTYAND EQUIPMENT: Property and equipment is 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.

 

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.

 

29

----

 

STOCK OPTION PLANS: The Companyhas a stock option plan under which officers, directors, employees andconsultants have been or may be granted incentive and nonqualified stock optionsto purchase the Company’s common stock at fair market value on the date ofgrant.  The options become exercisableover varying periods and expire up to 10 years from the date of grant.  The Company uses the intrinsic value methodin accounting for its plans.  Nostock-based employee compensation cost is reflected in net loss, as all optionsgranted under this plan had an exercise price equal to the market value of theunderlying common stock on the date of the grant.  The following table illustrates the effect onnet loss and earnings per share if the Company had applied the fair valuemethod to its stock-based employee compensation.

 
| ** **            | ** **                                                                                                                                              | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|----------|------------|----------|------------|----------|------------|
| Net loss, as reported |                                                                                                                                                    | $        | (7,378     | )        | $          | (3,915   | )          | $ | (6,504 | ) |
| Deduct:               | Total  stock-based employee compensation determined under fair value based method  for awards granted, modified, or settled, net of related tax effects |     | (442       | )        | (481       | )        | (600       | ) |
| Pro forma net loss    |                                                                                                                                                    | $        | (7,820     | )        | $          | (4,396   | )          | $ | (7,104 | ) |
|                  |                                                                                                                                                    |     |       |     |       |     |       |
| Net loss per share    |                                                                                                                                                    |     |       |     |       |     |       |
|                  | Basic and Diluted – as reported                                                                                                                    |     | $          | (1.56    | )          | $        | (0.84      | ) | $ | (1.33 | ) |
|                  | Basic and Diluted – pro forma                                                                                                                      |     | $          | (1.66    | )          | $        | (0.94      | ) | $ | (1.45 | ) |
|                       |                                                                                                                                                         |          |            |          |            |          |            |  |  |  |  |  |

 

Theweighted average fair value of options granted in 2004, 2003 and 2002 was$1.41, $1.46 and $1.46 per share, respectively. The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions used for grants in 2004,2003 and 2002: no dividend yield; risk-free rate of return of 2.6%, 1.7% and3.1%, respectively; volatility of 38.5%, 46.0% and 46.1%, respectively; and anaverage term of 3.0 years.  These effectsmay not be representative of the future effects of applying the fair valuemethod.

 

FOREIGNCURRENCY: The financial statements of Ciprico International Limited weretranslated into U.S. dollars at the year-end exchange rate, while income andexpenses are translated at the average exchange rates during the year.  Included in the restructuring charge infiscal 2003 is a non-cash charge of $180,000 of cumulative foreign currencytranslation adjustments recognized in connection with the closure of CipricoInternational Limited.

 

NEWACCOUNTING PRONOUNCEMENTS:  There havebeen no accounting pronouncements relevant to the Company since the end offiscal year 2003.

 

2.RESTRUCTURING ACTIVITY

 

Duringthe third quarter of 2004, 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.

 

Inthe fourth quarter of 2003,the Company implemented a workforce reduction of17%, including the closure of its European sales offices.  As a result of the restructuring we recordeda charge of $500,000 during the fourth quarter of 2003, of which approximately$320,000 is employee termination costs and $180,000 is a non-cash charge forcumulative foreign currency translation adjustments recognized in connectionwith the closure of our European operations.

 

InSeptember 2002, the Company implemented a workforce reduction of 13% as well asconsolidation of its sales operations in Europe.  As a result of the restructuring, the Companyrecorded a charge of $370,000 during the fourth quarter of 2002 of whichapproximately $328,000 represents employee termination costs and $42,000represents facility closure and related costs.

 

Duringfiscal 2001, the Company implemented two restructuring efforts.  The first occurred in the third quarterthrough a 12% reduction of the workforce and the closing of the Singapore salesoffice, resulting in a charge of $220,000. The second occurred at the end of the fourth quarter through theconsolidation of certain sales and marketing management positions and theclosing of the sales office in Japan, resulting in a charge of $400,000.

 

30

----

 

Employeetermination costs consist primarily of severance payments for terminatedemployees. The facility closure and related costs consist of lease terminationcosts related to the closing of the international sales offices, write down ofcertain fixed assets and the abandonment of a portion of our headquarterfacility.

 

Thefollowing is a summary of the accrued restructuring activity (in thousands):

 
| **Years ended September 30, 2004,  2003 and 2002** | ** ** | **Employee  Termination  Costs** | ** ** | **Facility  closure and  related costs** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|-----------|------------|
| Balance, September 30, 2001                        |       | $                                | 284        |                                     | $          | 157       |       | $ | 441 |   |
|                                               |       |                             |       |                                     |       |      |       |
| Restructuring Charges                              |       | 328                              |       | 42                                       |       | 370       |       |
| Amounts Utilized                                   |       | (284                             | )          | (157                                     | )          | (441      | )          |
| 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 |   |

 

3.INCOME TAXES

 

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

 
| **Years ended September 30** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                     |       |     |       |     |       |     |       |
| Federal                      |       | $        | —     |     | $          | —   |       | $ | (1,927 | ) |
| State                        |       | —   |       | 9        |       | 6        |       |
| Foreign                      |       | —   |       | (9       | )          | (29      | )          |
|                         |       | —   |       | —   |       | (1,950   | )          |
|                         |       |     |       |     |       |     |       |
| Deferred                     |       | —   |       | —   |       | —   |       |
|                         |       | $        | —     |     | $          | —   |       | $ | (1,950 | ) |

 

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**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Current deferred tax assets:    |       |     |       |     |       |
| Inventory                       |       | $        | 290        |     | $          | 734 |   |
| Allowance for doubtful accounts |       | 149      |       | 240      |       |
| Warranty accrual                |       | 89       |       | 142      |       |
| Loss and credit carryforwards   |       | 6,861    |       | 4,546    |       |
| Compensation accrual            |       | 188      |       | 208      |       |
| Other                           |       | 512      |       | 52       |       |
| Less – valuation allowance |       | (8,089   | )          | (5,922   | )          |
| Current deferred tax asset      |       | —   |       | —   |       |
|                            |       |     |       |     |       |
| Long-term deferred tax assets:  |       |     |       |     |       |
| Depreciation                    |       | 1,179    |       | 835      |       |
| Less – valuation allowance |       | (1,179   | )          | (835     | )          |
| Long-term deferred tax asset    |       | —   |       | —   |       |
|                            |       | $        | —     |     | $          | — |   |

 

31

----

 

AtSeptember 30, 2004, the Company had net operating loss carry forwards ofapproximately $15.0 million, which expire in 2024, and general business creditcarry forwards of approximately $1.3 million, which expire at various datesfrom 2016 to 2022.

 

For2002 the income tax benefit of $1.9 million reflects recognition of currentincome tax benefits related to Federal income tax refunds received under theprovisions of the Job Creation and Worker Assistance Act of 2002. Of thisamount approximately $1.1 million was received during fiscal 2002 andapproximately $800,000 was received in fiscal 2003.  The following is a reconciliation of thefederal statutory income tax rate to the consolidated effective tax rate:

 
| **Years ended September 30**                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory rate                                                 |       | (34.0    | )%         | (34.0    | )%         | (34.0    | )%         |
| State taxes, net of federal income tax  benefit                        |       | (3.1     | )          | (3.4     | )          | (2.4     | )          |
| Change in valuation allowance                                          |       | 34.0     |       | 35.9     |       | 11.7     |       |
| Permanent difference – foreign subsidiary  liquidation adjustment |       | 3.1      |       | —   |       | —   |       |
| Foreign tax rate differential                                          |       | —   |       | —   |       | .3       |       |
| Meals and entertainment                                                |       | —   |       | —   |       | .1       |       |
| Other, net                                                             |       | —   |       | 1.5      |       | 1.3      |       |
|                                                                   |       | —   | %          | —   | %          | (23.0    | )%         |

 

Cashreceived (paid) for income taxes was approximately $0 in 2004, $789,000 in 2003and ($13,000) in 2002.

 

4.SHAREHOLDERS’ 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*

###  

During1998, the Company initiated a stock buyback program of up to $6.0 million,which was increased by $6.0 million in 2001, bringing the total amount allowedto be expended under the plan to $12.0 million. There were no sharesrepurchased in fiscal 2004.  During 2003and 2002 the Company repurchased 198,000 and 221,000 shares respectively.  As of September 30, 2004, 1,037,035 shares ofcommon stock have been repurchased for $7.8 million.

 

#### *StockOption Exchange*

####  

OnDecember 4, 2002 the Company accepted for exchange stock options to purchase159,500 shares of common stock granted under the Ciprico Inc. 1999 Amendedand Restated Stock Option Plan pursuant to a Tender Offer Statement on ScheduleTO dated November 4, 2002 (“Schedule TO”) offered to certain eligible employees(the “exchange”).    The exchange wasoffered to non-management employees who held stock options effective October25, 2002 with an exercise price of $7.00 per share or more and expiring afterJanuary 1, 2004, who were option holders that had not received optionsafter May 8, 2002.  On June 10, 2003, theCompany granted options to purchase 127,600 shares of common stock at a priceof $5.75. There was no compensation expense recognized as a result of thisexchange.

 

#### *ShareholderRights Plan*

####  

OnJanuary 8, 2003, the Board of Directors adopted a shareholder rights plan underwhich the Board declared a dividend distribution of one right for eachoutstanding share of Ciprico common stock as of January 14, 2003.  Upon becoming exercisable, each right wouldentitle its holder to buy one one-hundredth of a share of a new series ofpreferred stock at an exercise price of $32.00 per right.  Subject to certain allowable actions by theBoard, the rights will become exercisable if a person or group acquires 15% ormore of the Company’s common stock or announces a tender offer for 15% or moreof its common stock.  Unless the Boardexercises certain other rights, if such a person acquires 15% or more of theCompany’s common stock, each right would enable a Ciprico shareholder toacquire Ciprico stock having a market value of twice the right’s exerciseprice.  The rights are redeemable at theoption of the Company in certain instances.

 

32

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### *StockOptions*

###  

Optiontransactions under the Company’s stock option plans during the three yearsended September 30, 2004 are summarized as follows:

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|
| Outstanding at September 30, 2001    |       | 1,206,875             |       | $                                     | 9.55       |   |
| Granted                              |       | 216,250               |       | 4.22                                  |       |
| Canceled                             |       | (272,500              | )          | 11.71                                 |       |
| 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                                  |       |
| Options exercisable at September 30: |       |                  |       |                                  |       |
| 2002                                 |       | 604,851               |       | $                                     | 9.65       |   |
| 2003                                 |       | 494,063               |       | 8.42                                  |       |
| 2004                                 |       | 516,675               |       | 7.19                                  |       |

 

Thefollowing table summarizes information regarding outstanding and exercisable stockoptions:

 
| **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       |   |   | 233,125 |   | 2.5 years |   | $ | 3.52 |   | 109,875 |   | $ | 3.63 |   |
| 4.40                           | –     | 6.60                    |       |   | 392,300 |   | 3.9 years |   | 5.13 |   | 134,300 |   | 5.37 |   |
| 7.17                           | –     | 10.76                   |       |   | 224,750 |   | 1.1 years |   | 8.76 |   | 211,000 |   | 8.86 |   |
| 11.00                          | –     | 12.88                   |       |   | 61,500 |   | 0.3 years |   | 11.72 |   | 61,500 |   | 11.72 |   |
|                           |       | 911,675                 |       |   |   |   |   | 516,675 |   |   |   |
|                                |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

AtSeptember 30, 2004, the Company had 490,819 shares reserved for future issuanceunder the plan.

 

*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 200,489 shares have been issued.At September 30, 2004, the Company had 49,511 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, 2004, the Company had 68,380 shares reserved for futureissuance under the RSP.

 

33

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5.EMPLOYEE BENEFIT PLAN

 

TheCompany participates in a 401(k) savings plan covering substantially all of itsemployees. Minimum contributions to the plan by the Company are 50 percent ofemployee contributions up to the first 6 percent of the participants’ salaries.Contributions in addition to the minimum may also be made by the Company basedon the Company’s financial performance. The Company’s contributions to the planin 2004, 2003 and 2002 were approximately $180,000, $220,000 and $262,000.

 

6.SEGMENT INFORMATION

 

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

 

Salesto significant customers at September 30: as a percentage of net sales,are as follows:

 
|       |   | **2004** |   | **2003** |   | **2002** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Customer A |   | 35       | %      | 40       | %      | 17       | %      |
| Customer B |   | 2        |   | 9        |   | 12       |   |
| Customer C |   | 9        |   | 8        |   | 11       |   |
| Customer D |   | 8        |   | 7        |   | 10       |   |
|       |   | 54       | %      | 64       | %      | 50       | %      |

 

Receivablesfrom significant customers at September 30, are as follows (in thousands):

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Customer A |       | $        | 956        |     | $          | 2,294    |       | $ | 876 |   |
| Customer B |       | 56       |       | 42       |       | 175      |       |
| Customer C |       | 102      |       | 321      |       | 892      |       |
| Customer D |       | 243      |       | 471      |       | 57       |       |
|       |       | $        | 1,357      |     | $          | 3,128    |       | $ | 2,000 |   |

 

TheCompany operates in a single reportable segment.

 

7.COMMITMENTS

 

TheCompany has operating leases for office and manufacturing space that expire atvarying dates through October 2009. Future minimum payments under these leases are as follows (in thousands)for the fiscal years ending September 30:

 
| 2005       |   | $      | 363    |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 344    |   |
| 2007       |   | 354    |   |
| 2008       |   | 361    |   |
| 2009       |   | 361    |   |
| Thereafter |   | — |   |
|       |   | $      | 1,783  |   |

 

Forthe years ended September 30, 2004, 2003, and 2002, operating lease expenseswere $405,000, $414,000 and $510,000.

 

34

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

THE BOARD OF DIRECTORS AND SHAREHOLDERS –CIPRICO INC.

 

We have audited the accompanying balancesheets of Ciprico Inc. and subsidiary as of September 30, 2004 and 2003, andthe related consolidated statements of operations, shareholders’ equity, andcash flows for each of the three years in the period ended September 30,2004.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.  Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Ciprico Inc and subsidiary as of September 30, 2004 and2003, and the consolidated results of their operations and their consolidatedcash flows for each of the three years in the period ended September 30, 2004in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We have also audited Schedule II of CipricoInc. and subsidiary for each of the three years in the period ended September30, 2004.  In our opinion, this schedulewhen considered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information required to be setforth.

 

 
| /s/ GRANT THORNTON LLP  (typed) |   |
|---------------------------------|--------|
| Minneapolis, Minnesota          |
| October 22, 2004                |

 

35

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QUARTERLYFINANCIAL DATA

(unaudited)amounts in thousands, except per share amounts

 
| ** **                      | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| 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 |       | (.19               | )          | (.34                | )          | (.90               | )          | (.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 |       | (.14               | )          | (.14                | )          | (.21               | )          | (.33                | )          | (.84       | )          |
|                            |       |               |       |                |       |               |       |                |       |       |       |
| 2002                            |       |               |       |                |       |               |       |                |       |       |       |
| Net sales                       |       | $                  | 7,215      |                | $          | 8,110              |       | $                   | 9,081      |       | $          | 7,034 |   | $ | 31,440 |   |
| Net loss                        |       | (2,492             | )          | (1,049              | )          | (1,893             | )          | (1,070              | )          | (6,504     | )          |
| Net loss per share—diluted |       | (.50               | )          | (.21                | )          | (.39               | )          | (.22                | )          | (1.33      | )          |

 

**ITEM 9.****                 ****CHANGES IN AND DISAGREEMENTSWITH 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 overfinancial reporting.

 

**ITEM 9B.****              ****OTHER INFORMATION**

 

Thefollowing information was not reported in a form 8-K during the fourth quarterof fiscal 2004.

 

OnSeptember 30, 2004, Robert H. Kill and the Company entered into a SeparationAgreement in connection with his resignation as President and Chief ExecutiveOfficer.

 

36

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**PART III**

 

**ITEM 10.****     ****DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Thenames, ages and positions of our directors and executive officers are asfollows:

 
| **Name**            |   | **Age** | ** ** | **Position(s)**                                                  |
|---------------------|--------|---------|------------|------------------------------------------------------------------|
|                |   |    |       |                                                             |
| Robert  H. Kill     |   | 57      |       | Chairman  of the Board                                           |
|                |   |    |       |                                                             |
| Thomas  F. Burniece |   | 63      |       | Director                                                         |
|                |   |    |       |                                                             |
| Mark  D. Griffiths  |   | 44      |       | Director                                                         |
|                |   |    |       |                                                             |
| Michael  M. Vekich  |   | 57      |       | Director                                                         |
|                |   |    |       |                                                             |
| Gary  L. Hokkanen   |   | 58      |       | Director                                                         |
|                |   |    |       |                                                             |
| James  W. Hansen    |   | 49      |       | Chief  Executive Officer, Director                               |
|                |   |    |       |                                                             |
| Thomas  S. Wargolet |   | 41      |       | Vice  President - Finance, Chief Financial Officer and Secretary |

 

TheCertificate of Incorporation and Bylaws of the Company provide that the Boardof Directors shall consist of not less than three directors and not more thanseven directors, that the number of directors to be elected shall be determinedby the shareholders at each annual meeting, and that the number of directorsmay be increased by the Board between annual meetings.  The Certificate of Incorporation alsoprovides for the election of three classes of directors with terms staggered soas to require the election of only one class of directors each year.  Officers are elected annually by and serve atthe discretion of the Board of Directors. Following is information about the Board of Directors and executiveofficers of the Company:

 

RobertH. Kill, (Class III, term ending at 2006 Annual Meeting), age 57, was electedChairman of the Board in March 2004 and had previously held that position fromJune 1996 to November 2000.  Mr. Kill hasbeen a director since September 1987. Mr. Kill had also served as the Chief Executive Officer of the Companyfrom January 1996 to March 2004 and as President from March 1988 to March 2004.  Mr. Kill held several marketing and salespositions at Northern Telecom, Inc. from 1979 to 1986, his last position beingVice President, Terminals Distribution.

 

Thomas F. Burniece, (ClassII, term ending at 2005 Annual Meeting), age 63, has been a director of theCompany since November 1999, and was Chairman of the Board from November 2000through January 2003.  Mr. Burniece iscurrently a Senior Vice President at COPAN Systems, a privately held companydeveloping a unique disk-based replacement for tape.  Prior to COPAN, Mr. Burniece was a partner inIn-fusion, LLC, a consulting firm specializing in business development forcompanies in the networked storage market, as well as owner and President ofThomas Burniece Consulting. Mr. Burniece was Chief Executive Officer from April1997 until December 2000 of Voelker Technologies, Inc., a private companydeveloping an intelligent physical layer switching product.  In addition, in June 1998 he co-founded andserved as the original Chief Executive Officer, as well as a director until May2001 of Rutilus Software, Inc., a private company developing a unique,centrally-managed approach to the backup of network-attached desktopcomputers.  Mr. Burniece has also servedas a board member or as an advisor to a number of other small private companiesacross several high technology markets. His previous experience includes senior management positions at Maxtor,Digital Equipment Corporation and Control Data Corporation.

 

Michael M. Vekich, (Class I,term ending at 2007 Annual Meeting), age 57, has been director of the Companysince December 2002.  Mr. Vekich hasserved as Chief Executive Officer of Vekich Associates since 1998 and as ChiefExecutive Officer of Vekich Arkema & Company from 1979 to 1998.  Prior to 1979 he held various managementconsulting positions.  A Certified PublicAccountant, he serves as a financial and business advisor to several public andprivate company boards.  He has alsoserved as a director on a number of boards of private companies andnot-for-profit institutions.

 

Mark D. Griffiths, (ClassIII, term ending at 2006 Annual Meeting), age 44, has been a director of theCompany since May 2001.  Mr. Griffithshas been Vice President of Security Services at Verisign, Inc. since August2003.  From May

 

37

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1997 to October 2001 he heldseveral positions at VERITAS Software, his latest position being Vice Presidentof Corporate Marketing.  Prior to joiningVERITAS Software, Mr. Griffiths also held the position of Director of ProductMarketing for the Internet Division of Cisco Systems from September 1996 to May1997.  Prior to Cisco, Mr. Griffithsspent nine years at Novell Inc., culminating his career there as the Directorof Marketing for Novell’s Internet Commerce Division.

 

Gary L. Hokkanen, (Class II,term ending at 2005 Annual Meeting), age 58, was appointed by the Board on June24, 2004, to fill the remainder of the term left vacant by the resignation ofThomas G. Hudson.  Mr. Hokkanen iscurrently Chief Operating Officer of the Carlson Marketing Group.  From 1984 through 2002 Mr. Hokkanen owned TheCynergi Group, Inc., a contract executive consulting company.  Mr. Hokkanen's assignments with The CynergiGroup included:  President of Wam!Net,Inc. from 1999 to 2001 and Chief Executive Officer of The Miner Group, Inc.from 1997 to 1999.  Mr. Hokkanen is agraduate of the Advanced Management Program at Harvard University and earned aB.S. degree in electronic intelligence from the Presidio at Monterey.

 

JamesW. Hansen, (Class I, term ending at 2007 Annual Meeting), age 49, has beenChief Executive Officer since September 2004 and a director of the Companysince April 2001.  Mr. Hansen also servedas Chairman of the Board from January 2003 to March 2004, and Interim ChiefExecutive Officer from March 2004 to September 2004.  Since 1992 Mr. Hansen has served as aninvestor, director, president or vice president of several private companies inmedical services and technology.  Mr.Hansen was President, CEO and Treasurer of E.mergent Incorporated (NASDAQ:EMRT) from November 1996 and Chairman of the Board of Directors from May 1997until the sale of the company in May 2002. From 1986 to 1992 he was Senior Vice President and General Manager ofthe pension division 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.

 

ThomasS. Wargolet has been Vice President of Finance and Chief Financial Officersince October 2000.  Prior to joiningCiprico he was Vice President – Finance / CFO of TeeMaster.com, an internetprovider of golf reservation services since October 1999.  From January 1999 to October 1999 he servedas Vice President - Finance and Operations of Vicom, Incorporated, a providerof telecommunications services.  From1996 to 1998, Mr. Wargolet was Chief Financial Officer and Secretary of ENStarInc., a publicly traded company with various network technology businesses.  From 1989 to 1996, Mr. Wargolet served asCorporate Controller of North Star Universal, Inc. a publicly traded holdingcompany and Vice President – Finance and Operations of Americable, Inc.(subsidiary of North Star), a distributor of connectivity products.  From 1985 to 1989, he was with ArthurAndersen & Co. in Minneapolis.  Mr.Wargolet is a Certified Public Accountant.

 

Thereare no arrangements or understandings between any of the directors or any otherperson (other than arrangements or understandings with directors acting assuch) pursuant to which any person was selected as a director or nominee of theCompany. There are no family relationships among the Company’s directors orexecutive officers.

 

SECTION16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

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 shareholders 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, 2004, 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, with theexception of a late filing of a Form 4 that reported two transactions for Mr.Burniece.

 

CODE OF ETHICS AND BUSINESS CONDUCT

 

Wehave adopted the Ciprico Code of Ethics and Business Conduct (the “Code ofConduct”), a code of conduct that applies to our employees, officers anddirectors.  The Code of Conduct ispublicly available on our website at http://www.ciprico.com.  If we make any substantive amendments to theCode of Conduct or grant any waiver, including any implicit waiver from aprovision of the Code of Conduct to our directors or executive officers, wewill disclose the nature of such amendment or waiver on our website or in areport on Form 8-K.

 

38

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**ITEM 11.****     ****EXECUTIVE COMPENSATION**

 

###### **SUMMARYCOMPENSATION TABLE**

######  

Thefollowing table sets forth information regarding compensation paid during eachof the Company’s last three fiscal years to the Company’s Chief ExecutiveOfficer and to the other executive officers whose total salary and bonus forfiscal 2004 exceeded $100,000.

 
| ** **                       | ** ** | ** ** | ** ** | **ANNUAL  COMPENSATION**                    | ** ** | **LONG-TERM  COMPENSATION** | ** ** | ** **                            | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                  | ** ** | ** **                            | ** ** | **Awards** | ** ** | **Payouts** | ** ** | ** ** | ** ** |
| **Name and Principal  Position** | ** ** | **Year**   | ** ** | **Salary  ($)**                             | ** ** | **Bonus  ($)**              | ** ** | **Other  Annual  Compensation  ($)**  | ** ** | **Restricted  Stock  Award(s)  ($)** | ** ** | **Securities  Underlying  Options/SARs  (#)** | ** ** | **LTIP  Payouts  ($)** | ** ** | **All  Other  Compensation  ($)(1)** | ** ** |
| James W. Hansen  (2)             |       | 2004       |       |        — |       | —                      |       | 60,000                                | (3)        | — |   | 25,000 | (3) | — |   |       — |   |
| President and CEO                |       |       |       |                                        |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |
|                             |       |       |       |                                        |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Robert H. Kill,                  |       | 2004       |       | 227,500                                     | (4)        | —                      |       |       — |       | — |   | 20,000 |   | — |   | 8,641 |   |
| Former –  President         |       | 2003       |       | 202,500                                     | (4)        | —                      |       |       — |       | — |   | 25,000 |   | — |   | 2,681 |   |
| and CEO                          |       | 2002       |       | 195,000                                     |       | —                      |       |       — |       | — |   | 20,000 |   | — |   | 3,671 |   |
|                             |       |       |       |                                        |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Thomas S.  Wargolet              |       | 2004       |       | 146,000                                     |       | —                      |       |       — |       | 5,110 |   | 22,000 |   | — |   | 4,533 |   |
| Vice President -                 |       | 2003       |       | 135,000                                     |       | —                      |       |       — |       | — |   | 15,000 |   | — |   | 4,050 |   |
| Finance and CFO                  |       | 2002       |       | 135,000                                     |       | —                      |       |       — |       | — |   | 15,000 |   | — |   | 4,050 |   |
|                             |       |       |       |                                        |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Robert G. Brown,                 |       | 2004       |       | 98,422                                      |       | —                      |       | 123,422                               | (5)        | 4,970 |   | 10,000 |   | — |   | 3,642 |   |
| Former - Vice                    |       | 2003       |       | 185,333                                     |       | —                      |       |       — |       | — |   | 10,000 |   | — |   | 5,407 |   |
| President of  Sales              |       | 2002       |       | 204,379                                     |       | —                      |       |       — |       | — |   | 15,000 |   | — |   | 6,437 |   |

 

----

(1)  Amounts reflect Company contributions to theCompany’s Savings Plan, a 401(k) plan.

(2)  Mr. Hansen served as the Company’s InterimChief Executive Officer in fiscal 2004 and was appointed as President and CEOon September 30, 2004, and as such there were no amounts for 2003 and 2002.

(3)  Amounts paid to The Hansen Company ascompensation for serving as the Company’s Interim Chief Executive Officer.

(4)  Includes amounts for time earned but nottaken pursuant to the Company’s paid time off policy.

(5)Severance related payments in connection with the termination of Mr. Brown’sEmployment in April of 2004.

 

###### **OPTIONGRANTS DURING 2004 FISCAL YEAR**

######  

Thefollowing table sets forth information regarding stock options granted to thenamed executive officers during the fiscal year ended September 30, 2004. TheCompany has not granted stock appreciation rights.

 
| ** **         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **           | ** ** | ** **     | ** ** | **POTENTIAL**          | ** ** |
|--------------------|------------|------------------|------------|------------------|------------|----------------------|------------|----------------|------------|------------------------|------------|
| ** **         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **           | ** ** | ** **     | ** ** | **REALIZABLE VALUE**   | ** ** |
| ** **         | ** ** | **NUMBER OF**    | ** ** | **% OF TOTAL**   | ** ** | ** **           | ** ** | ** **     | ** ** | **AT ASSUMED ANNUAL**  | ** ** |
| ** **         | ** ** | **SECURITIES**   | ** ** | **OPTIONS/SARS** | ** ** | ** **           | ** ** | ** **     | ** ** | **RATES OF STOCK**     | ** ** |
| ** **         | ** ** | **UNDERLYING**   | ** ** | **GRANTED TO**   | ** ** | ** **           | ** ** | ** **     | ** ** | **PRICE APPRECIATION** | ** ** |
| ** **         | ** ** | **OPTIONS/SARS** | ** ** | **EMPLOYEES IN** | ** ** | **EXERCISE OR BASE** | ** ** | **EXPIRATION** | ** ** | **FOR OPTION TERM**    | ** ** |
| **NAME**           | ** ** | **GRANTED (#)**  | ** ** | **FISCAL YEAR**  | ** ** | **PRICE ($/SH)**     | ** ** | **DATE**       | ** ** | **5% ($)**             | ** ** | **10% ($)** | ** ** |
| ** **         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **           | ** ** | ** **     | ** ** | ** **             | ** ** | ** ** | ** ** |
| James W. Hansen    |       | 25,000           | (1)        | 7.3%             |       | $4.80                |       | 04/28/09       |       | 33,154                 |       | 73,261 |   |
|               |       |             |       |             |       |                 |       |           |       |                   |       |   |   |
| Robert H. Kill     |       | 20,000           | (2)        | 5.8%             |       | $5.10                |       | 12/12/08       |       | 28,181                 |       | 62,272 |   |
|               |       |             |       |             |       |                 |       |           |       |                   |       |   |   |
| Thomas S. Wargolet |       | 12,000           | (3)        | 3.5%             |       | $5.11                |       | 11/11/08       |       | 16,942                 |       | 37,436 |   |
|               |       | 10,000           | (1)        | 2.9%             |       | $4.80                |       | 04/28/09       |       | 13,262                 |       | 29,304 |   |
|               |       |             |       |             |       |                 |       |           |       |                   |       |   |   |
| Robert G. Brown    |       | 10,000           | (3)        | 2.9%             |       | $5.11                |       | 11/11/08       |       | 14,118                 |       | 31,197 |   |

 

----

(1)   Such option is exercisable April 28, 2005.

(2)   Such option is exercisable annually as to 25%of the total number of shares, commencing December 12, 2005.

(3)   Such option is exercisable annually as to 25%of the total number of shares, commencing November 11, 2005.

 

39

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AGGREGATEDOPTION EXERCISES DURING FISCAL YEAR 2004 AND FISCAL YEAR END OPTION VALUES

 

Thefollowing table provides information related to options exercised by the namedexecutive officers during fiscal 2004 and the number and value of options heldat fiscal year end.

 
| **NAME**           | ** ** | **SHARES ACQUIRED  ON EXERCISE (#)** | ** ** | **VALUE  REALIZED ($)** | ** ** | **NUMBER OF  UNEXERCISED  OPTIONS/SARS AT  FY-END(#)  EXERCISABLE/  UNEXERCISABLE** | ** ** | **VALUE OF  UNEXERCISED  IN-THE-MONEY  OPTIONS/SARS AT  FY-END ($)  EXERCISABLE/  UNEXERCISABLE (1)** | ** ** |
|--------------------|------------|--------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| James W. Hansen    |       | 0                                    |       | N/A                     |       | 0 / 25,000                                                                          |       | 0 / 0                                                                                                 |       |
|               |       |                                 |       |                    |       |                                                                                |       |                                                                                                  |       |
| Robert H. Kill     |       | 0                                    |       | N/A                     |       | 75,000 / 50,000                                                                     |       | 3,750 / 11,250                                                                                        |       |
|               |       |                                 |       |                    |       |                                                                                |       |                                                                                                  |       |
| Thomas S. Wargolet |       | 0                                    |       | N/A                     |       | 48,750 / 53,250                                                                     |       | 2,813 / 8,483                                                                                         |       |
|               |       |                                 |       |                    |       |                                                                                |       |                                                                                                  |       |
| Robert G. Brown    |       | 0                                    |       | N/A                     |       | 20,000 / 30,000                                                                     |       | 2,813 / 8,438                                                                                         |       |

 

----

(1)These amounts represent the difference between the exercise price of thein-the-money options and the market price of the Company’s Common Stock onSeptember 30, 2004.  The closing price ofthe Company’s Common Stock on that day on the NASDAQ Stock Market was$3.64.  Options are in-the-money if themarket value of the shares covered thereby is greater than the option exerciseprice.

 

##### **OTHERCOMPENSATION ARRANGEMENTS**

#####  

EffectiveMarch 18, 2004, the Company entered into a Management Agreement (the “Agreement”)with The Hansen Company, a management consulting firm 100% owned by Mr. JamesHansen, for Mr. Hansen to act as Interim Chief Executive Officer of the Companyfor a six (6) month period which may be extended at the discretion of theBoard.  The Hansen Company received a feeof $60,000 for services under the Agreement plus reimbursement of travel andout-of-pocket expenses.

 

EffectiveSeptember 30, 2004, the Company entered into an Employment Agreement and Changeof Control Agreement with James W. Hansen to serve as Chief Executive Officer (“Executive”)of the Company.** **The term of employment shallcontinue for an initial term of two (2) years (“Initial Term”).  As base compensation for all services to berendered by the Executive under this Agreement during the Term of Employment,the Company shall pay to Executive a minimum monthly base salary of $11,500 permonth for the first twelve (12) months and $12,333 per month for the secondtwelve (12) months of the Initial Term, which salary shall be paid inaccordance with the Company’s normal payroll procedures and policies and bereviewed annually by the Board of Directors. In addition, the Company will payThe Hansen Company, an affiliate of Executive, $1,000 per month for the firsttwelve (12) months of the Initial Term and $1,250 per month for the secondtwelve (12) months of the Initial Term for strategic planning services.  Mr. Hansen has also entered into a Change ofControl Agreement (“Agreement”) with the Company.  In the event that Mr. Hansen’s employment isterminated without good cause or he should voluntarily terminate suchemployment with good reason within a twelve (12) month period following achange in control of the Company, the agreement provides for a lump sumseverance payment equal to twelve (12) months of current base salary.

 

RobertH. Kill, the Company’s former President and Chief Executive Officer had anEmployment Agreement and Change of Control Agreement with the Company. TheEmployment Agreement had a two-year term and was renewable at the discretion ofthe Board of Directors within a period one-year prior to the scheduledtermination date of the agreement.  Inconnection with Mr. Kill’s resignation as President and Chief ExecutiveOfficer, Mr. Kill and the Company agreed in September 2004 to terminate his employmentagreement in consideration for the payment to Mr. Kill of $16,250 monthly for atwelve (12) month period.  In addition,the Company agreed to pay, through September 2005, the entire premium for Mr.Kill’s health and dental insurance coverage under the Company’s group healthand dental insurance plans.

 

ThomasS. Wargolet, the Company’s Vice President of Finance and Chief FinancialOfficer, has entered into a Severance Agreement (“Severance Agreement”) withthe Company. In the event Mr. Wargolet’s employment is terminated without goodcause or he should voluntarily terminate such employment with good reason,including termination within a

 

40

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twelve-month period following achange of control of the Company, the Severance Agreement provides for a lumpsum severance payment equal to twelve (12) months of current base salary.

 

##### **DIRECTORCOMPENSATION**

#####  

Directorswho are not employees of the Company receive $250 for each Board meetingattended in addition to a monthly fee and annual restricted share grant basedon their respective committee participation on the Board.  Mr. Kill receives a monthly fee of $2,000 forhis role as Chairman of Board.  Mr.Vekich receives a monthly fee of $1,000 and an annual grant of 1,000 restrictedshares of common stock for his role as Chairman of the Audit and Human Capitalcommittees.  Messrs. Burniece, Griffithsand Hokkanen receive a monthly fee of $500 and an annual grant of 500 restrictedshares of common stock.   The restrictedshares vest over a twelve (12) month period. In addition, each non-employee director receives an annual stock optiongrant for 3,000 seven-year stock options at an exercise price equal to theclosing price of the Company’s Common Stock on the date of grant, exercisableone year from the date of grant.

 

Inaddition, any director who is elected or re-elected to the Board, receives aseven-year stock option for 2,000 shares at an exercise price equal to theclosing price of the Company’s Common Stock on the date of grant, exercisableone year from the date of grant along with a grant of 1,000 shares ofrestricted stock vesting over an 18-month period.

 

**HUMAN CAPITAL COMMITTEE REPORT ON EXECUTIVE COMPENSATION**

 

CommitteeInterlocks and Insider Participation. The Human Capital Committee of the Board of Directors of the Company iscurrently composed of directors Thomas F. Burniece and Michael M. Vekich.  None of the members of the Committee is anemployee or officer of the Company and none is affiliated with any entity otherthan the Company with which an executive officer of the Company is affiliated.

 

Overviewand Philosophy. The Company’s executive compensation program is comprised ofbase salaries, annual and quarterly performance bonuses, long-term incentivecompensation in the form of stock options and restricted stock grants andvarious benefits, including the Company’s savings plan and employee stockpurchase plan in which all qualified employees of the Company participate. Inaddition, the Human Capital Committee from time to time may award special cashbonuses, stock options and restricted stock grants in connection with newhiring, promotions or non-recurring, extraordinary performance.

 

TheHuman Capital Committee has followed a policy of paying annual base salaries,which are on the moderate side of being competitive in its industry and ofawarding cash bonuses based on achievement of operating profit goals andsecondarily on achievement of revenue goals. If minimum operating profit goals are achieved, the officer receives acash bonus in an amount equal to the percentage of goal achieved multiplied bythe established target bonus, which is a minimum of 30% and a maximum of 150%of annual base salary. The goals are established annually by the Human CapitalCommittee and the President of the Company.

 

TheCompany’s executive officers participate in the Company’s stock option andrestricted stock plans as well as the management cash bonus plan describedabove.  There were no cash bonuses earnedby executive officers in fiscal 2004.

 

General.The Company provides medical and insurance benefits to its executive officers,which are generally available to all Company employees.  The Company has a savings plan in which allqualified employees, including the executive officers, may participate.  Each year the Company contributes to thesavings plan an amount equal to fifty percent of the first six percent of grosswages for each employee who participates in the savings plan.  The company may contribute an additional twopercent of gross wages based on the operating profit of the Company for thefiscal year and plan contributions by the individual employee.  The amount of perquisites allowed toexecutive officers, as determined in accordance with rules of the Securitiesand Exchange Commission, did not exceed 10% of salary in fiscal 2004.

 

Chief Executive OfficerCompensation. Robert H. Kill served as the Company’s Chief Executive Officeruntil March 22, 2004.  Mr. Kill was paid$227,500 for fiscal 2004 and there were 20,000 options granted to Mr. Killduring fiscal 2004.

 

Chief Executive OfficerCompensation.  James W. Hansen became theInterim Chief Executive Officer of the Company on March 18, 2004.  Mr. Hansen was paid $60,000 and was granted 25,000options during his term as Interim Chief Executive Officer.  Mr. Hansen entered into an EmploymentAgreement naming him as the President and Chief Executive Officer on September30, 2004.  Mr. Hansen’s base salary forfiscal 2005 is $138,000.  In addition,the Company will pay The Hansen Company, an affiliate of Mr. Hansen, $1,000 permonth in fiscal 2005.

 

41

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Summary. The Human CapitalCommittee annually reviews its compensation policies but anticipates generallycontinuing its policy of paying relatively moderate base salaries, basingbonuses on specific revenue and operating profit goals and granting stockoptions and restricted stock to provide long-term incentives.

 
| MEMBERS OF THE HUMAN CAPITAL COMMITTEE |
|----------------------------------------|
|                                   | Thomas  F. Burniece |
|                                   | Michael  M. Vekich |

 

42

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**STOCK PERFORMANCE CHART**

 

Thefollowing chart compares the cumulative total shareholder return on the Company’sCommon Stock with the S&P SmallCap 600 Index and the S&P ComputerStorage & Peripherals Index.  Thecomparison assumes $100 was invested on September 30, 1999 in the Company’sCommon Stock and in each of the foregoing indices and assumes reinvestment ofdividends.

 

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

 

AMONG CIPRICO INC., THE S & P 500 INDEX

AND THE S & P COMPUTER STORAGE & PERIPHERALS INDEX

 

* $100invested on 9/30/99 in stock or index-including reinvestment of dividends.Fiscal year ending September 30.

 

Copyright ©2002, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. Allrights reserved.

www.researchdatagroup.com/S&P.htm

 

43

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**ITEM 12.****              ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**EQUITY COMPENSATION PLANS**

 

Thefollowing table provides information as of September 30, 2004 about the Company’sequity compensation plans.

 
| **Plan Category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                             | ** ** |
| Equity compensation plans approved by  security holders     |       | 911,675                                                                                            |       | $6.04                                                                              |       | 608,710                                                                                                                                             | (1)        |
|                                                        |       |                                                                                               |       |                                                                               |       |                                                                                                                                                |       |
| Equity compensation plans not approved by  security holders |       | N/A                                                                                                |       | N/A                                                                                |       | N/A                                                                                                                                                 |       |

 

----

(1)Includes 490,819 options reserved for issuance under the 1999 Amended andRestated Stock Option Plan, 68,380 shares reserved for issuance under the 1996Restricted Stock Plan and 49,511 shares reserved for issuance under the 1996Employee Stock Purchase Plan.

 

Theequity compensation plans approved by our shareholders are the 1999 Amended andRestated Stock Option Plan and the 1996 Restricted Stock Plan.

 

TheCompany also maintains an Employee Stock Purchase Plan, participation in whichis available to substantially all of the Company’s employees.  Participating employees may purchase theCompany’s common stock at the end of each participation period at a purchaseprice equal to 85% of the lower of the fair market value of the stock at thebeginning or end of the period.  Thesix-month participation period runs from January 1 to June 30 and from July 1to December 31 each year.  Employees maycontribute up to 10% of their base compensation to the plan subject to certainIRS limits on stock purchases through the plan. The Company’s shareholders have approved this plan.

 

44

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**PRINCIPAL SHAREHOLDERS**

 

Thefollowing table provides information concerning persons known to the Company tobe the beneficial owners of more than 5% of the Company’s outstanding CommonStock as of the dates indicated in the respective footnotes to the table.  Unless otherwise indicated, the shareholderslisted in the table have sole voting and investment powers with respect to theshares indicated.

 
| **NAME AND ADDRESS OF BENEFICIAL  OWNER** | ** ** | **NUMBER OF SHARES  BENEFICIALLY OWNED** | ** ** | **PERCENT OF CLASS** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|----------------------|------------|
|                                      |       |                                     |       |                 |       |
| Perkins Capital Management, Inc           |       | 629,983                                  | (1)        | 14.1%                |       |
| 730 E. Lake Street                        |       |                                     |       |                 |       |
| Wayzata, MN 55391                         |       |                                     |       |                 |       |
|                                      |       |                                     |       |                 |       |
| Laurence W. Lytton                        |       | 347,265                                  | (1)        | 7.4%                 |       |
| 28 Sherwood Place                         |       |                                     |       |                 |       |
| Scarsdale, NY 10583                       |       |                                     |       |                 |       |
|                                      |       |                                     |       |                 |       |
| Dimensional Fund Advisors, Inc.           |       | 291,343                                  | (1)        | 6.2%                 |       |
| 1299 Ocean Avenue                         |       |                                     |       |                 |       |
| Santa Monica, CA 90401                    |       |                                     |       |                 |       |
|                                      |       |                                     |       |                 |       |
| Intrinsic Value Asset Management, Inc     |       | 258,649                                  | (1)        | 5.5%                 |       |
| 522 Wilshire Blvd. Suite D                |       |                                     |       |                 |       |
| Santa Monica, CA 90401                    |       |                                     |       |                 |       |
|                                      |       |                                     |       |                 |       |
| Leviticus Partners, L.P.                  |       | 240,000                                  | (1)        | 5.1%                 |       |
| 30 Park Avenue, Suite 12F                 |       |                                     |       |                 |       |
| New York, NY 10016                        |       |                                     |       |                 |       |

 

----

(1)  Such shares were owned as of the most recent13G filing with the SEC.

 

45

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**MANAGEMENT SHAREHOLDINGS**

 

Thefollowing table sets forth the number of shares of Common Stock beneficiallyowned as of November 30, 2004 by each executive officer of the Company named inthe Summary Compensation Table, by each current director and by all directorsand executive officers (including the named individuals) as a group.  Unless otherwise indicated, the shareholderslisted in the table have sole voting and investment powers with respect to theshares indicated.

 
| **NAME OF DIRECTOR OR  IDENTITY OF GROUP**         | ** ** | **NUMBER OF SHARES  BENEFICIALLY OWNED** | ** ** | **PERCENT  OF CLASS (1)** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|
| Robert H. Kill                                     |       | 175,300                                  | (2)        | 3.7%                      |       |
| Thomas S. Wargolet                                 |       | 77,750                                   | (3)        | 1.6%                      |       |
| Thomas F. Burniece                                 |       | 59,500                                   | (4)        | 1.3%                      |       |
| James W. Hansen                                    |       | 49,656                                   | (5)        | 1.0%                      |       |
| Mark D. Griffiths                                  |       | 21,500                                   | (6)        | *                         |       |
| Michael M. Vekich                                  |       | 10,000                                   | (7)        | *                         |       |
| Gary L. Hokkanen                                   |       | 1,000                                    |       | *                         |       |
| All officers and directors as a Group (7  persons) |       | 394,706                                  | (8)        | 8.3%                      |       |

 

----

*   Less than 1%

 

(1)Shares not outstanding but deemed beneficially owned by virtue of the right ofa person to acquire them as of November 30, 2004, or within sixty days of suchdate, are treated as outstanding only when determining the percent owned bysuch individual and when determining the percent owned by a group.

 

(2)Amount includes 20,000 shares held by Mr. Kill’s wife and 92,500 sharespurchasable upon exercise of options presently exercisable or exercisablewithin sixty days of November 30, 2004.

 

(3)Amount includes 71,750 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

(4)Amount includes 54,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

(5)Amount includes 20,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

(6)Amount includes 19,500 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

(7)Amount includes 9,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

(8)Amount includes 266,750 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 30, 2004.

 

**ITEM 13.****     ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

EffectiveMarch 18, 2004, the Company entered into a Management Agreement (the “Agreement”)with The Hansen Company, a management consulting firm 100% owned by Mr. JamesHansen, for Mr. Hansen to act as Interim Chief Executive Officer of the Companyfor a six (6) month period.  The HansenCompany is received a fee of $60,000 for services under the Agreement plusreimbursement of travel and out-of-pocket expenses.

 

46

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**ITEM 14.****              ****PRINCIPAL ACCOUNTING FEESAND SERVICES**

 

GrantThornton LLP has acted as the Company’s independent registered publicaccountants for the fiscal year ended September 30, 2004.

 

***Audit Fees.***  Theaggregate fees billed by Grant Thornton LLP for professional services renderedin connection with the audit of the Company’s annual financial statements forfiscal 2004 and 2003 and included in the Company’s Forms 10-Q for fiscal 2004and 2003 were $56,000 and $48,200, respectively.

 

***Audit Related Fees.***  Theaggregate fees billed by Grant Thornton LLP for products and services providedby the principal accountant, other than the Company’s annual financialstatements and the Company’s Forms 10-Q for the fiscal year ended September 30,2004 and 2003 were $5,500 and $5,500, respectively.  These fees were primarily for the audit ofthe Company’s benefit plan.

 

***Tax Fees.***  Theaggregate fees billed by Grant Thornton LLP for professional services renderedby the principal accountant for tax compliance, tax advice and tax planning forthe fiscal year ended September 30, 2004 and 2003 were $22,500 and $15,300,respectively.  These fees were primarilyfor the preparation of the Company’s income tax returns.

 

***All Other Fees.***  Theaggregate fees billed by Grant Thornton LLP for products and services providedby the principal accountant other than Audit Fees, Audit Related Fees and TaxFees for the fiscal year ended September 30, 2004 and 2003 were $0 and $2,750,respectively.  The fee in 2003 was forthe review of the Company’s Tender Offer Statement filed on November 5, 2002.

 

##### **Pre-ApprovalPolicy**

#####  

Pursuantto its written charter, the Audit Committee is required to pre-approve allaudit and non-audit services performed by the Company’s independent registeredpublic accountants in order to assure that the provision of such services doesnot impair the independence of the Company’s independent registered publicaccountants.

 

TheAudit Committee’s Pre-Approval Policy was recommended by the Audit Committeeand approved by the Board on June 24, 2004. Unless a particular service has received general pre-approval by theAudit 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, FINANCIALSTATEMENT SCHEDULES**

 

(a)      Exhibits.  See “Exhibit Index” on pagefollowing financial statement schedules.

 

(b)      Financial Statement Schedules.  SeeSchedule II on page following signatures.

 

47

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                     |   |    CIPRICO  INC.                 |
|--------------------------|--------|-------------------------------------------------|
|                     |   |    (the  “Registrant”) |
|                     |   |                                            |
| Date:  December 20, 2004 | By     | /s/                                             | James  W. Hansen |   |
|                     |   |                                            | James  W. Hansen,Chief Executive Officer |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 

 
| **Signature**           | ** ** | **Title**                                                       | ** ** | **Date**           |
|-------------------------|------------|-----------------------------------------------------------------|------------|--------------------|
|                    |       |                                                            |       |               |
| /s/  James W. Hansen    |       | Chief  Executive Officer and Director                           |       | December  20, 2004 |
| James  W. Hansen        |       | (Principal  executive officer)                                  |       |               |
|                    |       |                                                            |       |               |
| /s/  Thomas S. Wargolet |       | Vice  President - Finance and Chief                             |       | December  20, 2004 |
| Thomas  S. Wargolet     |       | Financial  Officer (Principal financial and accounting officer) |       |               |
|                    |       |                                                            |       |               |
| /s/  Michael M. Vekich  |       | Director                                                        |       | December  20, 2004 |
| Michael  M. Vekich      |       |                                                            |       |               |
|                    |       |                                                            |       |               |
| /s/  Robert H. Kill     |       | Chairman  of the Board                                          |       | December  20, 2004 |
| Robert  H. Kill         |       |                                                            |       |               |
|                    |       |                                                            |       |               |
| /s/  Mark D. Griffiths  |       | Director                                                        |       | December  20, 2004 |
| Mark  D. Griffiths      |       |                                                            |       |               |
|                    |       |                                                            |       |               |
| /s/  Gary L. Hokkanen   |       | Director                                                        |       | December  20, 2004 |
| Gary  L. Hokkanen       |       |                                                            |       |               |
|                    |       |                                                            |       |               |
| /s/  Thomas F. Burniece |       | Director                                                        |       | December  20, 2004 |
| Thomas  F. Burniece     |       |                                                            |       |               |

 

48

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** **

**SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS**

 
| ** **                    | ** ** | ** **                           | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|----------------|------------|
| **Column A**                  | ** ** | **Column B**                         | ** ** | **Column C**                        | ** ** | **Column D**                    | ** ** | **Column E**   | ** ** |
| ** **                    | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End  of Period** | ** ** |
| ** **                    | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Accounts receivable allowance |       |                                 |       |                                |       |                            |       |           |       |   |   |
| September 30, 2004            |       | $                                    | 652,000    |                                | $          | —                          |       | $              | (118,000   | )(A) | $ | (133,000 | )(B) | $ | 401,000 |   |
| September 30, 2003            |       | 560,000                              |       | 92,000                              |       | —                          |       | —         |       | 652,000 |   |
| September 30, 2002            |       | 409,000                              |       | 151,000                             |       | —                          |       | —         |       | 560,000 |   |
|                          |       |                                 |       |                                |       |                            |       |           |       |   |   |
| Warranty reserve              |       |                                 |       |                                |       |                            |       |           |       |   |   |
| September 30, 2004            |       | $                                    | 387,000    |                                | $          | 92,000                          |       | $              | —     |   | $ | (239,000 | )(C) | $ | 240,000 |   |
| September 30, 2003            |       | 502,000                              |       | 140,000                             |       | —                          |       | (255,000       | )(C)       | 387,000 |   |
| September 30, 2002            |       | 423,000                              |       | 296,000                             |       | —                          |       | (217,000       | )(C)       | 502,000 |   |

 

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(A)-Represents the reversal of an over accrual of the accounts receivableallowance.

 

(B)- Deductions represent accounts receivable written-off during the year.

 

(C)- Deductions represent warranty work performed during the year.

 

49

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

EXHIBITINDEX TO FORM 10-K

 
| For  the fiscal year ended | Commission File No.: 0-11336 |
|----------------------------|------------------------------|
| September  30, 2004        |                         |

 

CIPRICOINC.

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                       |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                  |
| 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 |

 

50

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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 June 1, 2003 between Robert  H. Kill and Ciprico Inc.—incorporated by reference to Exhibit 10.13 of the  Registrant’s Form 10-K for the fiscal year ended September 30, 2003                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 10.14**    |       | Severance  Agreement dated November 15, 2003 between Thomas S. Wargolet and Ciprico Inc.  —incorporated by reference to Exhibit 10.13 of the Registrant’s Form 10-K for  the fiscal year ended September 30, 2003                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 10.15**    |       | Change  of Control Agreement dated November 15, 2003 between Robert G. Brown and  Ciprico Inc.— incorporated by reference to Exhibit 10.13 of the Registrant’s  Form 10-K for the fiscal year ended September 30, 2003                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 10.16**    |       | Employment  Agreement and Change of Control Agreement dated September 30, 2004 between  James W. Hansen and Ciprico Inc.***                                                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 10.17**    |       | Separation  Agreement and Release dated September 30, 2004 between Robert H. Kill and  Ciprico Inc.***                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 22         |       | Subsidiaries  of the Registrant                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | **Name**                                                                                                                                                                                                                                                                                                                                       | ** ** | **Jurisdiction of Incorporation** | ** ** |
|       |       | Ciprico  International Limited                                                                                                                                                                                                                                                                                                                 | England |
|       |       |                                                                                                                                                                                                                                                                                                                                           |
| 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 a management contract orcompensatory plan or arrangement required to be filed as an exhibit to thisForm 10-K.

***Filed herewith

 

51

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