**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13OF THE SECURITIES EXCHANGE ACT OF 1934**

 
| **For the fiscal year ended  September 30, 2003** |   | **Commission File No. 0-11336** |
|--------------------------------------------------------|--------|---------------------------------|

 

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**CIPRICO INC.**

(Exact Name of Registrant asSpecified in its Charter)

 

| **Delaware**                                                     |   | **41-1749708**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State or  Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |   |                                   |
| **17400 Medina Road**                                            |
| **Plymouth, Minnesota 55447**                                    |
| (Address of  Principal Executive Offices) (Zip Code)             |
|                                                             |   |                                   |
| Registrant’s  Telephone Number,                             |
| Including  Area Code:  **(763) 551-4000**                   |

 

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

**None**

 

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

**CommonStock**

 

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Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirement for the past 90 days. Yes  ý    No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K  ý

 

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

 

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The aggregate market value of the Common Stock held by nonaffiliates ofthe Registrant as of November 14, 2003 was approximately  $24.2 million (based upon the last saleprice of the Registrant’s Common Stock on such date).

 

Shares of Common Stock outstanding at November 14, 2003: 4,681,335shares

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None

 

 

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CIPRICO INC.

INDEX TO ANNUAL REPORT ON FORM10-K

FOR THE YEAR ENDEDSEPTEMBER 30, 2003

 

 
| 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 and  Related Stockholder Matters                     |
| Item 6   | Selected Financial Data                                                                         |
| Item 7   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations     |
| 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                                                                         |
|     |                                                                                            |
| PART III |                                                                                            |
| Item 10  | Directors and Executive Officers of the  Registrant                                             |
| Item 11  | Executive Compensation                                                                          |
| Item 12  | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |
| Item 13  | Certain Relationships and Related  Transactions                                                 |
|     |                                                                                            |
| Item 14  | Principal Accounting Fess and Services                                                          |
|     |                                                                                            |
| Item 15  | Exhibits, Financial Statements, Schedules and Reports on Form 8-K                               |
|     |                                                                                            |
|     | Signatures                                                                                      |
|     | Schedule II - Valuation and Qualifying  Accounts                                           |
|     | Exhibit Index to Form 10-K                                                                      |

 

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**NOTEREGARDING FORWARD–LOOKING STATEMENTS**

 

When used in this Form 10-K, the words“may,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“predict,” “intend,” “potential” or “continue” and similar expressions aregenerally intended to identify forward-looking statements. Theseforward-looking statements involve risks and uncertainties. Actual resultscould differ materially from those expressed or implied by theseforward-looking statements as a result of certain risk factors, including butnot 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) unanticipatedrisks associated with introducing new products and features, (vi) otherevents and other important factors disclosed previously and from time to timein our filings with the U.S. Securities and Exchange Commission.

 

We assume no obligation to update any forward-lookingstatements. These statements are only predictions reflecting our current viewswith respect to current events. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements.  We do not intend to update or revise any forward-lookingstatements whether as a result of new information, future events or otherwise.

 

**Glossary of Terms**

 

**DigitalMedia Workflow**

The process involved with the movement of digital media data within anapplication workflow, including, but not limited to, ingesting, capturing,creating, editing, processing, archiving, retrieving, sharing and publishing.

#  

**Diskarray**

A collection of standard, independent disks and/or disk sub-systemslinked together to produce increased performance and high-volume storagecapacity, utilizing redundancy techniques to ensure the integrity of the data.

 

**Failover**

The transfer of operation from a failed component (i.e. controller, diskdrive) to a similar, redundant component to ensure uninterrupted data flow andoperability.

 

**Faulttolerance**

The ability for a system to remain operational, sometimes in a degradedmode, even though one or more elements of the system have failed.  Fault tolerance is obtained through the useof redundant components or modules.

 

**FibreChannel**

An industry-standard peripheral and networking interface used toconnect servers to shared storage devices.

 

**iSCSI**

Internet SCSI is an internet protocol (IP) based Storage NetworkingProtocol that provides access to shared storage devices utilizing the mappingof SCSI transport protocol over TCP/IP, allowing SCSI storage controllers to beattached to IP networks.

 

**Infiniband**

Infiniband is a high-bandwidth, low latency, low overhead interconnecttechnology used to interconnect processors, I/O devices and other systems inthe form of a system area network. Infiniband is independent of thehost-operating system and processor platform. It is highly scalable enabling ahigh extensible architectural design.

 

**Isochronous**

Performance that supports network-wide timing requirements.  A typical application for isochronoustransmission is a broadcast environment which needs information to be deliveredat a continuous and steady rate.

 

**JBOD**

An acronym for *Just a Bunch of Disks*. A disk arraytechnology that does not use hardware RAID controllers. It is a low-coststorage alternative for applications that do not require redundancy.

 

**NAS**

An acronym for *Network Attached Storage*. NAS devices arestorage devices that users connect to via a networking interface such asEthernet instead of through traditional storage interfaces such as SCSI orFibre Channel.

 

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**RAID**

An acronym for *Redundant Array of Independent Disks*.RAIDs use multiple techniques for managing collections of disks in such a wayto provide desirable cost, availability and performance.

 

**SAN**

An acronym for *Storage Area Network*. SAN technologyallows multiple workstations and/or file servers to directly access common,shared storage devices. This is in contrast to the traditional client-serverstorage paradigm in which a storage device is dedicated to a single fileserver.

 

**SCSI**

An acronym for *Small Computer System Interface*. SCSI interfaceis used to connect microcomputers to SCSI peripheral devices, such as many harddisks and printers, to other computers and LANs.

 

**Stream(streaming)**

From the storage device viewpoint a stream is a series of sequentialread or write requests. Often multiple streams are accessing datasimultaneously, referred to as multiple-streaming. Applications formultiple-streaming include multiple channels of compressed video playback ormultiple users accessing different files through a server.

 

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**PART I**

 

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

 

**GeneralDevelopment of Business**

 

Ciprico Inc. designs, manufactures andmarkets storage and system solutions for digital media applications within thebroadcast and entertainment, military and government and medical imagingmarkets. Our solutions combine storage, networking and computing technologiesto simplify and accelerate digital media workflows. Our storage solutions aredesigned for visual computing applications ranging from high-speed image datacapture, through processing and analysis, to real-time playback at sustainedperformance levels.

 

We were incorporated under the name ComputerProducts Corporation in February 1978 and changed our name to Ciprico Inc.in May 1983.  Until 1990, we developedand manufactured controller-based products for manufacturers and end users ofcomputer systems.  In late 1990, weintroduced for sale our first RAID data storage product. Today our business isfocused on providing storage solutions that meet the demanding data transferrate, storage capacity and data redundancy needs of visual computingmarkets.  Visual computing refers to thedigital representation and complex image processing of film, video, graphics,photographs, animation, special effects, three-dimensional images and otherimages.

 

We offer a complete range of open platform,disk-based storage solutions for high performance visual imagingapplications.  This includes productsthat implement a variety of RAID techniques including RAID 3 for single streambandwidth, RAID 4 for multi-stream high bandwidth, and RAID 5 for highinput/output (I/O) oriented uses.  Wealso provide SAN and NAS solutions, focused on the networking of demandingvisual workgroup applications.  Likemany other computer applications, the trend in visual computing is towardrandom access, digital data storage and away from traditional analog tapestorage or film methods.  Our primarytarget market segments include broadcast and entertainment, military andgovernment and medical imaging.  Webelieve our expertise is our understanding of the applications for digitalmedia workflows within our target markets.

 

**NarrativeDescription of Business**

 

(1)**           Products andServices.**

 

***Products*.**

 

Our product line consists mainly of storagesystems.  We design, develop andmanufacture all of our storage products to operate at peak performance levelswhile maintaining connectivity 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 $16,000 to $94,000 per system depending on thefeatures selected by the customer. Applications may require one or several systems.

 

*7000 Fibre Channel Series*.  In fiscal 1997, we began shipping our 7000Series disk array, the industry’s first storage device to offer a hostinterface compatible with full speed Fibre Channel.  The 7000 Series offers a peak transfer rate of 100 MB per secondand a sustained transfer rate in excess of 90 MB per second.  This storage device is capable oftransferring uncompressed video images in real-time to preserve quality, orsimultaneously transferring several dozen streams of compressed video images.The 7000 Series is based on SCSI drive technology and consists of nineFast/Wide SCSI drives, each connected to a dedicated channel.  The storage capacities supported by the 7000Series storage devices range from 144 gigabytes (GB) to over 1 terabyte(TB).  A total rack system storage capacitycan grow to over 8 TB with only seven arrays. The 7000 Series has hot swap diskdrives, power supplies and fans.

 

*FibreSTORE**Ò Products.* The initial member of this family, the FibreSTORE JBOD began shipping inDecember 1998.  It features fullFibre Channel connectivity between the disk drives as well as to the hostcomputer, full dual loop Fibre Channel connections and redundant power suppliesand fans. Configurations of up to seven FibreSTORE enclosures containing up to63 Fibre Channel disk drives have been fully tested and supported.  FibreSTORE offers the performance featuresof Fibre Channel for applications that do not require RAID protection.

 

The second member of the family, FibreSTORERAID was introduced in October 1999. FibreSTORE RAID adds data redundancy features to FibreSTORE insuringuninterrupted data availability at full performance levels and service withoutdisruption.  The FibreSTORE RAID systemcan be configured with single or dual RAID controllers and up to 8 TB of FibreChannel disk storage in a single rack. Each controller is a fully independent, caching controller designed togive optimum performance in data streaming applications such as digital videoand multiple stream video playback.  Itis designed to deliver

 

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continuous, sustainable data rates at close to 200 MB per second withthe dual controller option.  Thisproduct was discontinued in February of 2003.

 

The next generation of FibreSTORE RAID, the2210, was released in January 2003. This product is an extension to the original FibreSTORE RAID and offersperformance improvements using 2 gigabit (Gb) Fibre Channel technology,increased storage density by utilizing new mechanical packaging, and enhancedapplication performance in the area of insured, uninterrupted data availabilityat full performance levels without disruption. These features make the product unique in the marketplace, and thebest-in-class product for high bandwidth applications.  Additionally, we intend to add support ofmultiple RAID levels to the product during fiscal 2004 with particularly focuson RAID 5 capabilities.  The JBODversion of the 2210 began shipping in December 2001.

 

*NETarray**Ò*. * *The NETarray 1000 began shippingin December 2000.  This productfeatures full Fibre Channel connectivity between the disk drives and the hostcomputer.  Designed for both highperformance and high availability, the NETarray 1000 has full dual loop FibreChannel connections, redundant power supplies and redundant fans, with noactive components on its backplane.  Itutilizes standard networking industry protocols to manage the storage viaEthernet or Internet connections, maximizing bandwidth for storage reading andwriting operations.  The NETarray 1000also delivers storage density, with up to 1.8 TB of storage in a single 3U highenclosure.  The NETarray product wasannounced as end of life in May of 2003, with the FibreSTORE 2210 beingdesigned as the upgrade replacement to the NETarray.

 

The NETarray RAID is a controller system thatprovides RAID 5 data redundancy to NETarray JBODs.  The system utilizes a controller manufactured by MylexCorporation, a division of LSI Logic Corporation, and can be configured witheither single or dual controllers and over 18 TB of Fibre Channel disk storagein a single rack.  Each controller is afully independent, caching controller designed to give optimum performance inapplications requiring high I/O data flow, such as Web streaming, rendering andtransaction processing.

 

*TALON**ä.*  TheTALON product is designed to meet the demanding environments of airborne,ground based and shipboard applications, where added levels of ruggedizationare required.  The product also includesa unique feature of a removable disk pack, where the entire set of disks can beremoved and/or replaced in a single operation. The TALON software allows the removal of the disk pack, with up to 11drives, without disrupting the server or operating system.  The TALON data layout resides within thestorage pack itself, allowing the user to simply plug it into another TALONchassis and start processing data immediately, without reconstructing thelogical volumes and rebooting systems. Additionally, TALON has passed a broad set of military specification(“Mil Spec”) tests allowing it to be fully operational in extremeenvironments.  The first product releaseof the TALON family, the TALON 1000, began shipping in March 2002.

 

TALON 2211 is the most recent introduction inthe TALON family, and was released for production in September 2003 as thenext generation replacement for the TALON 1000.   The mechanical chassis design remains relatively unchanged fromthe 1000 model.  It is designed toenable the operation of a disk array in harsh environments of temperature,shock, vibration, salt-fog, etc. Additionally, the removable disk pack feature has been improved forsimplified interaction with host operating systems and customerapplications.  New to the TALON 2211 isthe utilization of the same, Ciprico developed, RAID technology as ourFibreSTORE 2210 family.  This enablesthe TALON to achieve 2Gb/second performance through each of the two active RAIDcontrollers in the product for high data rate recording and playback applications.  The TALON 2211 can be configured with up to11, 146GB drives for a total of unit capacity of 1.6 terabytes.

 

*DiMeda**ä Product Family* includes our family ofproducts based on the industry technology known as Network Attached Storage(NAS). The first offering in the family,the DiMeda 2400, was released in March 2002.  This product is designed to provide high performance, high-availability, sharedstorage utilizing IP based networking protocols.  DiMeda 2400 utilizes a file based shared storage system delivering near-Fibre Channel SAN performancewith the ease-of-use of an appliance. The level of streaming bandwidth performance is a cost effectivesolution.  One of the benefits of theDiMeda software is the ability to provide shared storage to a wide variety ofhost computer platforms and operating systems with great simplicity and costeffectiveness.  While SANs do similarlyprovide the benefit of shared storage to applications, the DiMeda installs inless than one hour, with less training to the end user.  Moreover, because it utilizes the industrystandard protocols of CIFS (Common Internet File System) and NFS (Network FileSystem), there are significantly fewer application conflicts as compared toSAN.  This is important to customers whoattempt to utilize 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.

 

The DiMeda 3600 extends the performance of the 2400by utilizing faster processors for the NAS heads along with the 2Gb RAIDtechnology of the FibreSTORE 2210.  Inaddition the 3600 model provides added flexible configuration options so thatit may be purchased in single head or dual head configurations, as well as avariety of software enhancements to the basic functionality.  Depending on the application, the customerwill realize approximately 25% to 80% performance

 

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improvementsover the 2400 model.  Also available forselect customers, is a premium software feature known as “bandwidthmanagement”.  Bandwidth managementenables system administrators to designate some users as higher priority in ashared storage environment – thus assuring performance to the most criticalapplications within a workflow.  DiMeda3600 is expected to be available for production in December 2003.

 

The DiMeda 1700 is targeted at entry-level applicationswhere high-availability and NAS head redundancy is not required.  The 1700 is configured as a single,integrated solution which includes the NAS head processor board, an internalRAID controller manufactured by 3Ware, Inc. and twelve serial ATA disk drives,and utilizes the same network attached software libraries of the 2400 and 3600models.  DiMeda 1700 is expected to beavailable for production in December 2003.

 

The foundation of our product strategy is aCommon Software Platform across all our products.  This commonality includes three primary libraries - arraysoftware, network attached software and management software.  The FibreSTORE 2210 is the first generationof product to be based on this common RAID array software and includes uniquefeatures of guaranteed performance in degraded modes, as well as premiumsoftware packages enabling entire disk packs to be removed and replaced fromthe base unit.  Both the FibreSTORE andthe TALON product families currently utilize this common array software platform,and will continue to do so moving forward. Additionally, it is planned for DiMeda to utilize both FibreSTORE andTALON storage products as one of back-end storage options.  As these products evolve, we have developedthe ability of the software to port easily to faster and more powerfulprocessor or interface technologies as they become available in the marketplace, thus improving our time-to-market of introducing new products.  The focus on software will also result ingreater utilization of commodity based hardware components that will maintaincost competitiveness, and focus our engineering resources on the intellectualproperties unique to Ciprico.  While oursoftware is most often bundled with hardware and sold as a complete solution,we anticipate a software licensing strategy may be a greater part of ourbusiness model moving forward.

 

The DiMedafamily utilizes the common network attached software.  This software consists of several code sub-libraries, includingopen 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. Thissoftware is portable across hardware platforms as proven by its release ondifferent 2400, 3600 and 1700 members of the DiMeda family.  Software distribution is controlled by a setof licensing keys on the base functionality as well as for premium options likecapacity and bandwidth management enabling third party manufacturing andmultiple end user configurations.

 

We provideconfiguration and management software for all of our storage andsystems solutions.  These softwareproducts – Storage Manager (STORM) and Web Manager - enable the user to monitorthe performance and health of our storage and systems products inreal-time.  Users can gain access to ourstorage and system solutions via the in-band Fibre Channel interface or via anethernet port, depending upon the customer’s needs.  Our software utilities are platform independent to support thewide variety of computer platforms our products are used with.

 

*Controllers*. Sales of controller boards represented approximately 1% of sales forfiscal 2003.  We expect sales ofcontrollers to represent a decreasing percentage of net sales in the future.

 

*Storage Area Networks*.  Crossing all of our vertical markets is theneed for Storage Area Network (SAN) capabilities.  A SAN is a technology that allows multiple workstations and/orfile servers to directly access 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.  SANs utilize aFibre Channel-based, networking infrastructure that provides a number ofbenefits over traditional simple, server-attached storage.  These benefits include providing the samehigh-performance storage pool across a number of users, centralized managementof the storage, higher productivity and the ability to seamlessly add increasedstorage.  Our applications includedigital broadcast editing, video and audio streaming and film post-production.

 

As an extension of our product offerings, weoffer our customers professional services for SAN solutions.  Our services involve the integration ofdiverse components beyond Ciprico storage devices such as tape storage devices,storage management software, network management products and Fibre Channelproducts.  Through our group of salessystems engineers, we help customers evaluate, analyze, install, manage andexpand data centers and storage networks.

 

To provide these SAN solutions, we work withother storage industry vendors such as Brocade Communications, Advanced DigitalInformation Corporation, Silicon Graphics Incorporated and Qlogic Corporationby implementing their products as part of the overall solution to meet theneeds of our customers.  We seek tostrengthen our relationships with existing strategic partners and develop newpartnerships with leading vendors in the SAN market to offer additionalproducts

 

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that are complimentary to our solutions.  In addition we utilize the services of third party organizationsto extend our service capabilities based on the needs of our customers.

 

***TechnicalSupport.***

 

We provide our customers with ongoingtechnical assistance and a variety of spare parts programs to assure failuresare identified and repairs are made quickly. Our Hot Spares Program provides the customer with delivery ofreplacement parts from an authorized Ciprico parts depot.  Depots are currently located in Minneapolis,Louisville, the United Kingdom and Singapore. All service options provide training for the customer’s technicians andaccess to our telephone support services. Technical support specialists areavailable 24 hours per day, 7 days per week through our toll-free help line forthe U.S., Canada and selected international locations.  Technical support is also available throughour Web Site, www.ciprico.com.

 

We also provide a return-to-factory parts andlabor warranty against defects in materials and workmanship covering a periodof three years from the date of shipment to customers.  Extended warranty and maintenance servicesare also offered to customers in addition to the primary warranty.  All repair work for our products ispresently done at our manufacturing facility in Plymouth, Minnesota.

 

In November 2003, Ciprico entered intoan agreement with Kodak Corporation to provide service and support offerings toour customers for our DiMeda product family. This agreement provides for both telephone and on-site support to allour DiMeda customers in the United States.  In addition we have an agreement with NCE Computer Group Limited toprovide similar support for all of our products to our customers in Europe.

 

(2)**           Marketing andDistribution.**

 

***Markets.***

 

Our market focus is digital mediaapplications, with our primary focus on broadcast and entertainment, militaryand government and medical imaging picture archive applications.  In addition, we have historically sold inother markets such as geosciences, digital prepress and small enterpriseIT.  In each of these markets, we focuson applications where our customers need high bandwidth, high I/O, or combinationsof both to meet their needs.

 

Inherent to all the applications within eachof our primary markets is a “digital media workflow” which is that industry’sversion of a production line.  In thecase of the broadcast market, the workflow is characterized by ingestingincoming video feeds from satellites and remote news crews, editing the rawvideo to prepare the news story, and then a “play-to-air” process where thevideo is broadcast from the network feed. For military applications the workflow begins with surveillancegathering followed by image processing and concludes with the dissemination ofdata to military commanders in the field. We believe our understanding of these application workflows uniquelypositions us in our target markets.  Ourtechnology development is focused on solutions that simplify and acceleratethese digital media workflows for the end users.

 

*Broadcast and Entertainment*.  This market segment includes companies thatcreate, edit, manipulate and broadcast images, in real-time playback usingdigital technology, which provides reduced cost of ownership and increasedproductivity over linear film and video tape. An emerging segment of the entertainment market is the digital broadcastmarket, with the new high definition television (HDTV) standards mandated inthe United States.  Our solutions meetthe requirements of broadcast and video services applications, which requirevery high bandwidth to supply many simultaneous video streams to multiple userswhere interruption of service and dead airtime is not acceptable.  With images stored as data, new applicationsfor storage devices within the television broadcast segment will includeelectronic news gathering, commercial and promotional insertion and TVbroadcast.  Digital broadcast marketswill also include such applications as campus and distance learning, movies ondemand and in-flight entertainment systems.

 

Other industry market segments include moviestudios, post-production houses, video production houses, and digital cinema OEMs.  Applications within this market segment havetraditionally included 3D animation, special effects, film restoration andediting.

 

*Military and Government*.  Our primary focus in this market segmentincludes applications commonly referred to as “Command and Control” orC4I.  There are two primary categoriesof C4I: those involving the collection, processing and dissemination ofreconnaissance and surveillance data, and small enterprise.

 

Mission planning, intelligence gathering andtargeting applications involve data capturing via airborne or space-basedsatellite sensors in reconnaissance and surveillance applications.  A single image frame ranges from a fewmegabytes up to 14 GB in size, with the data capture phase requiring thecollection of hundreds to thousands of frames per day.  In the case of satellite-based imagerysensors, our disk arrays are used at the supporting ground stations.   For airborne applications, our arrays areon

 

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board aircraft and imagery data is captured at a very high transferrate.  In the image processing andarchiving applications, the imagery data created from the capture phase must beprocessed before it is usable for end-users. Once processed, the imagery data is stored into digital asset managementdatabases for fast query and retrieval. These databases often reach multiple terabytes in size and require thehigh bandwidth performance our disk arrays provide.

 

Small enterprise uses that support militaryoperations involve a variety of peripheral applications such as inventorymanagement, duty schedules, personnel records, etc.  These applications generally involve large databases that utilizetransaction-based storage solutions.  Insome instances these solutions require unique features to meet the demandingenvironments of airborne, ground based and shipboard applications.

 

*Medical Imaging  -* picture archiveand communications system (PACs) involve the archive and retrieval of medicalimages such as digital x-rays, mammography, CAT scans, MRI’s, etc. PACsapplication requirements for storage systems include low-cost, easy-to-use,ability to add capacity over time, on-site support capability, and features toprotect the medical images utilizing disaster recovery methods

 

*Other Markets*.  Our products are also used in applications in the geosciences,digital prepress markets and small enterprise markets.  The geosciences market segment is comprisedmainly of major oil and gas exploration companies.   Seismic information can be displayed through 3D imagesrepresenting underground geological formations by using high performanceworkstations and storage solutions. This method enables the exploration companyto locate oil fields and determine optimal drilling sites.  Within the digital prepress market segment,computer-to-plate or direct-to-press manufacturers utilize storage solutions tooptimize performance.  Digitaltechnology eliminates the material costs of photographic film, increases thequality and accuracy of image reproduction, and provides the printer with toolsfor quick turnaround.  Small enterpriseincludes general IT applications, such as shared storage, database andMicrosoft Exchange servers.

 

***Distribution.***

 

Our products are sold principally through adirect sales force, although we do have relationships with a limited number ofsystem integrators and representative organizations.  Our direct sales organization is primarily responsible for“demand creation” activities and customer development. We have direct sales representativesin Boston, Dallas, Washington D.C., Minneapolis, California, and theSoutheastern and Pacific Northwest sections of the United States. We also haverepresentation in Europe and Japan via independent representativeorganizations.  In addition to our salesforce, we have system engineering and business development resources that arealigned by vertical market.  Theseresources complement our direct sales forces, as well as our representativeorganizations.

 

As a part of our marketing and sales strategy,we enter into relationships with companies who could play an important role inthe successful marketing of our products. Our storage solutions are sold toOEMs for inclusion in their own computer systems, systems integrators and largeend-users (including government departments and agencies).  The initial sales process is complex,requiring interaction with several layers of the customer’s organization andextensive technical exchanges as well as product demonstrations.  As a result, our typical sales cycle canspan from three to eighteen months.

 

(3)**           Status of NewProducts.**

 

See item (10) below.

 

(4)**           Competition.**

 

The market for all levels of storagesolutions is highly competitive.  Insome of our markets, we compete with traditional suppliers of proprietarycomputer systems including, but not limited to Sun Microsystems, Hitachi, IBMand Hewlett Packard which market storage systems as well as other computerproducts.  We also compete againstindependent storage suppliers, including but not limited to EMC Corporation,Dot Hill Corporation, MTI Technologies, Adaptec Inc., Infortrend Technology,Inc. and LSI Logic Corp.

 

The markets in which we operate arecharacterized by rapidly changing technology and evolving industry standards,resulting in rapid product obsolescence and frequent product and featureintroductions and improvements. We compete with several companies that havegreater engineering and development resources, marketing resources, financialresources, manufacturing capability, customer support resources and namerecognition. As a result, our competitors may have greater credibility withexisting and potential customers. They also may be able to adopt moreaggressive pricing policies and devote greater resources to the development,promotion and sale of their products than we can to ours, which would allowthem to respond more quickly than we can to new or emerging technologies andchanges in customer requirements. These competitive pressures may materiallyharm our business.

 

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Our ability to compete successfully dependsupon our ability to continue to develop high performance products in a timelymanner that obtain market acceptance and can be sold at increasinglycompetitive prices.  Although we believethat our storage solutions have certain competitive advantages, there can be noassurance that we will be able to compete successfully in the future or thatother companies may not develop products with greater performance and thusreduce the demand for our products, or that we will not encounter increasedprice competition for such products which could materially and adversely affectour operating results.  Also, our OEMcustomers and other manufacturers could develop their own disk arrays or couldintegrate competitive RAID disk arrays into their systems rather than ourproducts, which could materially and adversely affect our operating results.

 

(5)           **Manufacturingand Suppliers.**

 

Our products are manufactured utilizing aconfigure-to-order manufacturing process. In-house manufacturing activities for our storage products primarilyinvolve quality assurance testing of subassemblies, final system assembly andintegration. Our assembly operations are ISO 9001:2000 certified, located inPlymouth, Minnesota, and are typical of the electronics industry with nounusual methods or equipment required. The sophisticated nature of our products does, however, requireextensive testing by skilled personnel.

 

We purchase certain raw materials andcomponents based on forecasted order levels. Forecasting orders is difficult as most shipments occur near the end ofeach quarter. Some of our OEM customers provide us with a forecast of expectedorders, but generally customers place orders for immediate delivery, not inadvance of need. Customers may generally cancel or reschedule orderswithout penalties. Accordingly, we believe that backlog is generally notmeaningful for purposes of predicting our revenue for any fiscal period.

 

Our storage products are comprised mainly ofa controller, metal cabinet, disk drives, power supply and other miscellaneousparts.  Many of the components areindustry standard parts and readily available from many suppliers atcompetitive prices.  Our controllerboard assemblies are purchased from an ISO 9000 contract manufacturing company,which manufactures the assemblies to our specifications.  The completed board assembly is received atour facility where it is subject to test procedures to insure productperformance, reliability and quality. The metal enclosure and power supply are specified to our needs, butalternative sources for the components are available.

 

We depend heavily on our suppliers to providehigh quality materials on a timely basis and at reasonable prices.  Although many of the components for ourproducts are available from numerous sources at competitive prices, certain keycomponents are purchased from a single source. We purchase a substantial amount of disk drives manufactured by SeagateTechnology Inc. (“Seagate”).  Wepurchase substantially all our disk drives and certain other components via aconsignment purchase program through Bell Microproducts, Inc. (“Bell”).  All other components are procured pursuantto purchase orders, rather than long-term purchase agreements.  Furthermore, because of increased industrydemand for many of those components, our suppliers may, from time to time, notbe able to make delivery on orders on a timely basis.  In addition, manufacturers of components on which we rely maychoose, for numerous reasons, not to continue to make those components or thenext generation of those components available to us.

 

With respect to certain components, such asdisk drives, if we had to seek alternative sources of supply, the incorporationof such components from alternative suppliers and the manufacture and shipmentof the our products could be delayed while modifications to such products andthe accompanying software were made to accommodate the introduction of thealternative suppliers’ components. We estimate that replacing certaincomponents, such as disk drives would involve several months of hardware andsoftware modification.

 

We have no long-term supply contracts.  There can be no assurance that we will beable to obtain, on a timely basis, all of the components we require.  If we cannot obtain essential components asrequired, we could be unable to meet demand for our products, therebymaterially adversely affecting our operating results and allowing competitorsto gain market share.  In addition,scarcity of such components could result in cost increases and adversely affectour operating results.  Our principalsuppliers are Bell, Pemstar, Inc. and Du Fresne Manufacturing Co.

 

(6)**           Customer Dependence.**

 

Our products are sold to a broad base ofcustomers.  As a percentage of sales,Thomson Broadcast Solutions, represented 40% and 17% of net sales in 2003 and2002, respectively.  Pinnacle Systemsrepresented 9% and 12% of net sales in 2003 and 2002, respectively.  A department of the U.S. Navy, made up 8%and 11% and of net sales in 2003 and 2002, respectively.  Northrop Grumman represented 7% and 10% ofnet sales in 2003 and 2002, respectively.

 

10

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(7)           **Patentsand Trademarks.**

 

In conjunction with the acquisition of theSANStar technology in January 2001, we acquired the rights to four pendingpatent applications.  These patentapplications disclose aspects of the interprocessor communication technologysuitable for use in high reliability / availability storage serverproducts.  Two patent applications arecurrently being prosecuted before the U.S. Patent Office, while we haveabandoned further application processing on the remaining two. We have also submittedtwo additional 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.

 

We have no other patents, and do not considerownership of patents to be material to our business.  We intend to pursue other patent applications to the extent weidentify technologies or processes that may be patentable.  We believe that the rapidly changingtechnology in the computer industry makes our future success dependent more onthe technical competence, creative skills of our personnel and rapid deploymentof innovation than on any patents we may be able to obtain.  However, protection of our proprietaryhardware, 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 trademarksStorBridgeä and, Digital MediaApplianceä, Accelerating the Digital Media Workflowä,DiMedaä and TALONä.

 

(8)**           Backlog.**

 

We historically have operated on low levelsof backlog, and therefore, do not consider the level of backlog to beindicative of future operating results. As of September 30, 2003, we had approximately $137,000 in backlogthat is scheduled to ship in fiscal 2004.

 

(9)           **Government Approvals and Effect of GovernmentRegulations.**

 

Our TALON 1000 product is subject to certainexport restrictions that require us to obtain approval of the United StatesState Department in order to ship TALON 1000 to certain countries outside theUnited States.  Our TALON 2211 productis not subject to such export restrictions. Additionally, certain of ourproducts may incorporate encryption or other technology subject to the “dualuse” export regulations as administered by the U.S. Department of Commerce.

 

We are not required to obtain governmentapproval of our products when they are not exported.  We do not believe that any existing or proposed governmentalregulations not pertaining to export regulation will have a material effect onour business.

 

(10)**         Research and NewProduct Development.**

 

We operate in an industry subject to rapidtechnological change.  Our goals inresearch and development are to develop leading edge products that adhere toindustry standards.  Our ability toachieve this goal is largely dependent upon our ability to anticipate andrespond to change.  We use engineeringdesign teams that work cross-functionally with marketing managers, systemengineers and customers 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, we actively seek available,cooperative and co-development activities with industry leaders in thehardware, software and systems businesses.

 

Historically, substantially all of ourresearch and development efforts were focused on the development of stand-alonestorage devices.  We were the firstmanufacturer to introduce a disk array integrating the Fibre Channel interfacein 1996 and substantially all of our products now utilize this interfacetechnology. Through 1999 our products were focused on high-bandwidth RAID 3 and4 applications.  With the introductionof our NETarray product in 2000, we broadened our product offering to includetransaction-based RAID 5 capabilities. Our current product developmentactivities include products supporting 2 Gb/second data rates.   All Ciprico products are SAN-ready.

 

Beginning in fiscal 2001, we made substantialinvestments in software development. With the acquisition of the SANStar technology in January 2001, weadded a software development team focused on developing a high-availability,network connected storage system.   Wehave continued this investment in fiscal 2002 and 2003 by adding additionalsoftware development resources to focus on developing and extending a commonarray software platform that will be the basis for storage solutions developednow and in the future. These developments are intended to support theoptimization of high-performance digital media applications.   For fiscal 2003, approximately 60% of ourresearch and development expense was related to software development. Thisamount is expected to increase as a percentage of our total R&D spendingduring fiscal 2004.

 

11

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We will continue to develop storage devicesand expect our software development focus will increase as we emphasize theacceleration of digital media applications. We are working with several outsideparties on the co-development and incorporation of our technologies with anumber of emerging storage and networking protocols and technologies such asInfiniband, SCSI Remote Protocol, Direct Access File System (DAFS), InternetProtocol SCSI (iSCSI) and additional SAN capabilities. Additional areas offocus include advanced file systems and applications combining clusteredserver, high performance storage, and networking capabilities.

 

Our research and development expenses were$6.2 million, $8.8 million and $8.2 million in fiscal 2003, 2002 and 2001,respectively.  All of our research anddevelopment expenditures are expensed as incurred.  As of November 1, 2003, we had 33 full-time employeesengaged in research and development activities.

 

We do not have significant firm orders forour development stage products.  Thereis no assurance that any of our development programs will be completed or thatthe resulting products, if any, will be marketed successfully.

 

(11)         **EnvironmentalRegulation.**

 

Compliance with present federal, state andlocal provisions regulating the discharge of material into the environment, orotherwise relating to the protection of the environment, has not had and is notexpected to have any material effect upon our capital expenditures, earnings orcompetitive position.

 

(12)         **Employees.**

 

At November 1, 2003, we had 85 full-timeemployees, of which 33 were in engineering and research and development, 30 insales, marketing, customer service and technical support, 15 in manufacturing,operations and quality assurance, and 7 in general management, accounting,information systems and administration. None of our employees are represented by a labor union.  We have experienced no work stoppages andbelieve that our employee relations are good.

 

We believe that the future success of ourbusiness will depend in part on our ability to attract and retain qualifiedtechnical, management and marketing personnel. Such experienced personnel are in demand, and we must compete for theirservices with other firms, which may be able to offer more favorable benefits.

 

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

 

Our business faces significant risks. The risksdescribed below may not be the only risks we face. Additional risks that we donot yet know of or that we currently think are immaterial may also impair ourbusiness operations. If any of the events or circumstances described in thefollowing risks actually occur, our business, financial condition or results ofoperations could suffer, and the trading price of our common stock coulddecline.

 

WE HAVE INCURRED LOSSES AND MAY NOT BE ABLE TO ACHIEVE ANDMAINTAIN PROFITABILITY.

 

We experienced losses of $3.9 million, $6.5 million and $7.6 millionfor the years ended September 30, 2003, 2002 and 2001, respectively.  There can be no assurance that we will beprofitable on a quarterly or annual basis. If we are unable to generate netincome from operations, our business will be adversely affected and our stockprice will likely decline.

 

Our revenues will have to significantly increase in order for us tosupport our current and expected level of operating expenses. We may not beable to achieve profitability.

 

AN ECONOMIC DOWNTURN IN MARKETS IN WHICH WE ARE CONCENTRATED COULDMATERIALLY AND ADVERSELY AFFECT REVENUES AND OPERATING RESULTS.

 

Our revenues have been derived primarily from sales to customers in thebroadcast and entertainment and military and government markets.  We are not able to predict with anycertainty the demand for our products in each of our primary markets.  Sales in the broadcast and entertainmentmarket as a percentage of net sales were 64% in fiscal 2003 and 48% in fiscal2002.  We generally sell to OEM’s orintegrators who are dependent on capital spending levels at television stationsand movie studios.  Demand from customersin this market can be dependent, in part, on overall levels of advertisingrevenues and general economic conditions. During the fourth quarters of each of fiscal 2003 and 2002, weexperienced a significant reduction in demand from our key customers in thismarket.  Our ability to predict thedemand levels in this segment is limited given the general economicuncertainties.

 

Sales in the military and government market as a percentage of netsales were 34% and 47% in fiscal 2003 and 2002, respectively.  Demand for our products in this market havebeen historically cyclical and fluctuate based on timing of defense

 

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spending and technology upgrades within programs that currently specifyour products. We believe our sales in this segment during fiscal 2003 wereadversely impacted by delays in the deployment and funding of certain programsin which our products have been specified. It is difficult to assess the specific timing of the deployment andfunding of these programs, which adversely impacts our ability to forecastdemand for our products in this segment. There can be no assurances that we will experience growth in this marketsegment during fiscal 2004.

 

Historically, a material percentage of our net sales in each year havebeen derived from a limited number of customers. For fiscal 2003 and 2002, ourtop five customers accounted for approximately 72% and 55%, respectively, ofour net sales.  We expect that a highpercentage of our sales for the foreseeable future will continue to come from arelatively small number of customers. There can be no assurance that ordersfrom existing customers will continue at their historical levels, or that wewill be able to obtain orders from new customers. An economic downturn in oneof our primary markets, or the loss of one or more customers, particularly asignificant customer, could result in a material decrease in revenues, therebyadversely affecting our business.

 

WE MAY HAVE DIFFICULTY PREDICTING RESULTS WHICH WOULD LIKELYRESULT IN A DECLINE IN OUR STOCK PRICE.

 

Our quarterly revenues and operating results have varied significantlyin the past and are likely to vary significantly in the future due to a numberof factors, any of which may cause our stock price to fluctuate. The primaryfactors that may affect our quarterly financial performance include thefollowing:

 
| • |   | the timing of customer orders, which are  often concentrated toward the end of a quarter, particularly large orders  from our significant customers and whether any orders are cancelled;                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                   |
| • |   | general economic trends and other factors,  such as the impact of the economic downturn experienced during fiscal 2001  and 2002, and the adverse impacts of the September 11, 2001 attack on  the United States; |
|   |   |                                                                                                                                                                                                                   |
| • |   | market acceptance of new products and  product enhancements such as our TALON, DiMeda and FibreSTORE 2210 products;                                                                                                    |
|   |   |                                                                                                                                                                                                                   |
| • |   | mix of product sales within a quarter;                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                   |
| • |   | our ability to develop, introduce, ship and  support new products and product enhancements;                                                                                                                            |
|   |   |                                                                                                                                                                                                                   |
| • |   | our traditionally long sales cycle, which  can take up to 12 months or more;                                                                                                                                           |
|   |   |                                                                                                                                                                                                                   |
| • |   | our ability to attain and maintain  production volumes and quality levels for our products; and the level of  competition;                                                                                             |
|   |   |                                                                                                                                                                                                                   |
| • |   | announcements and new product introductions  by our competitors and deferrals of customer orders in anticipation of new  products, services or product enhancements introduced by us or our  competitors;              |
|   |   |                                                                                                                                                                                                                   |
| • |   | decreases over time in the prices at which  we can sell our products; and                                                                                                                                              |
|   |   |                                                                                                                                                                                                                   |
| • |   | our ability to obtain sufficient supplies  of components, including limited sourced components, at reasonable prices, or  at all;                                                                                      |

 

Sales for any future quarter are not predictable and have a significantdegree of uncertainty. We generally operate with limited order backlog becauseour products are typically shipped shortly after orders are received. Further,we generally do not enter into long-term purchase contracts with customers. Asa result, 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.

 

Any significant deferral of these sales could have a material adverseeffect on the results of operations in any particular quarter. Our expenselevels 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.

 

Fluctuating operating results may have an adverse effect on the priceof our common stock.

 

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WE HAVE LIMITED PRODUCT OFFERINGS AND DEPEND ON THE WIDESPREAD MARKETACCEPTANCE OF OUR EXISTING AND NEW PRODUCTS.

 

We derive a substantial portion of our revenue from a limited number ofexisting products. Specifically, during fiscal 2003 and 2002 we derivedapproximately 52% and 38%, respectively, of our revenue from our NETarrayproduct, introduced in late 2000 and approximately 9% and 23%, respectively, ofour revenue from our 7000 product, introduced in 1997.   The FibreSTORE 2210 was released in fiscal2003 and was approximately 16% of fiscal 2003 revenue.

 

We expect the TALON and FibreSTORE 2210 products will account for asubstantial 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.

 

Factors that may affect the market acceptance of our products, some ofwhich are beyond our control, include the following:

 
| • |   | growth of storage networking product markets;                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                          |
| • |   | performance, quality, price and total cost  of ownership of our existing products;                                            |
|   |   |                                                                                                                          |
| • |   | continued development of technologies that  allow our storage products to function over WANs and over IP-based networks;  and |
|   |   |                                                                                                                          |
| • |   | availability, price, quality and  performance of competing products and technologies;                                         |

 

OUR INDUSTRIES ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND INTENSECOMPETITION AND WE MUST KEEP PACE WITH THE CHANGES TO SUCCESSFULLY COMPETE.

 

The markets for our products are characterized by rapidly changingtechnology, evolving industry standards and the frequent introduction of newproducts and enhancements. Our future success depends in large part on ourability to enhance our existing products and to introduce new products on a timelybasis to meet changes in customer preferences and evolving industry standards.We cannot be certain that we will be successful in developing, manufacturingand marketing new products or product enhancements that respond to such changesin a timely manner and achieve market acceptance. We also cannot be certainthat we will be able to develop the underlying core technologies necessary tocreate new products and enhancements.

 

Additionally, changes in technology and consumer preferences couldpotentially render our current products noncompetitive or obsolete. If we areunable, for technological or other reasons, to develop new products or enhanceexisting products in a timely manner in response to technological and marketchanges, our business, results of operations and financial condition would beharmed.

 

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

 

WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR CERTAIN COMPONENTS.

 

We depend upon a limited number of suppliers for several componentsused in the manufacture of our products, such as disk drives, certaincontrollers and other components. In the future, we may experience shortages ofor difficulties in acquiring these components. If we are unable to buy thesecomponents, then we will not be able to manufacture our products on a timelybasis.

 

We purchase certain raw materials and components based on forecastedorder levels.  Forecasting orders isdifficult as most shipments occur near the end of each quarter. Some of our OEMcustomers provide us with a forecast of expected order delivery dates, butgenerally customers place orders for immediate delivery, not in advance ofneed.  Lead times for materials

 

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and components that we order vary significantly and depend on factorssuch as specific supplier requirements, contract terms and current marketdemand for such components. As a result, our component requirement forecastsmay not be accurate. If we overestimate our component requirements, then we mayhave excess inventory, which would increase our costs. If we underestimate ourcomponent requirements, then we may have inadequate inventory, which couldinterrupt our manufacturing and delay delivery of our products to ourcustomers. Either of these occurrences would negatively impact our business andoperating results.

 

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT MAY DILUTE OURSHAREHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.

 

As part of our strategy, we expect to review opportunities to buy otherbusinesses or technologies that would complement our current products andservices, expand the breadth of our markets, enhance our technicalcapabilities, or otherwise offer growth opportunities.  In the event of any future purchases, wecould:

 
| • |   | spend significant amounts of cash;                                                  |
|--------|--------|-------------------------------------------------------------------------------------|
|   |   |                                                                                |
| • |   | issue stock that would dilute our current  shareholders’ percentage ownership; |
|   |   |                                                                                |
| • |   | incur amortization expense related to  goodwill and other intangible assets; or     |
|   |   |                                                                                |
| • |   | incur debt or assume liabilities.                                                   |

 

Thesepurchases also involve numerous risks, including:

 
| • |   | problems integrating the purchased  operations, technologies, personnel or products;                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
| • |   | unanticipated costs;                                                                                                                                                      |
|   |   |                                                                                                                                                                      |
| • |   | adverse effects on existing business  relationships with suppliers or customers;                                                                                          |
|   |   |                                                                                                                                                                      |
| • |   | risks associated with entering markets in  which we have no or limited prior experience;                                                                                  |
|   |   |                                                                                                                                                                      |
| • |   | potential loss of key employees of acquired  or merged organizations; and                                                                                                 |
|   |   |                                                                                                                                                                      |
| • |   | the growth rates of any acquired company  may be less than those projected by analysts or anticipated by markets, which  could have an adverse effect on our stock price. |

 

We cannot 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.

 

UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS ANDDELAY PRODUCT INTRODUCTION.

 

Storage products frequently contain undetected software or hardwareerrors when first introduced or as new versions are released. Our products arecomplex and errors may be found from time to time in our products, includingnew or enhanced products. In addition, our products are combined with productsfrom other vendors. As a result, when problems occur, it may be difficult toidentify the source of the problem. These problems may cause us to incursignificant warranty and repair costs, divert the attention of our engineeringpersonnel from our product development efforts and cause significant customerrelations problems. Moreover, the occurrence of hardware and software errors,whether caused by our or another vendor’s products, could delay or prevent thedevelopment of the markets in which we compete.

 

THE LOSS OF KEY PERSONNEL OR THE INABILITY TO HIRE AND RETAINADDITIONAL PERSONNEL WITH STORAGE NETWORKING EXPERTISE COULD ADVERSELY IMPACTOUR BUSINESS AND RESULTS OF OPERATION.

 

Our future performance depends in part upon the continued service andcontributions of key management, engineering, sales and marketing personnel,many of whom would be difficult to replace quickly.  We also believe that our success depends to a significant extenton the ability of our management to operate effectively, both individually andas a group. The loss of any

 

15

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one of our key employees could adversely affect our sales or delay thedevelopment or marketing of existing or future products.

 

We believe our future success will depend also in part upon our abilityto attract and retain highly skilled and qualified managerial, engineering,sales and marketing, and operations personnel. Competition for these personnelis intense. The inability to attract or retain qualified personnel in thefuture or delays in hiring required personnel, particularly engineers and salespersonnel, could delay the development and introduction of and negativelyimpact our ability to sell our products which would have a material adverseimpact on our business and results of operation.

 

WE HAVE APPLIED FOR A LIMITED NUMBER OF PATENTS AND WE MAY BEUNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY AFFECT OURABILITY TO COMPETE.

 

Historically, we have not pursued patents on all of our intellectualproperty and we continue to rely on a combination of patent, copyright,trademark and trade secret laws and restrictions on disclosure to protect ourintellectual property rights. We also enter into confidentiality agreementswith substantially all our employees, consultants and corporate partners, andcontrol access to and distribution of our software, documentation and otherproprietary information.

 

In conjunction with the acquisition of the SANStar technology inJanuary 2001, we acquired 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 isno assurance 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.

 

Although we believe that we possess all required proprietary rights tothe technology involved in our products and that our products, trademarks andother intellectual property rights do not infringe upon the proprietary rightsof third 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**

 

Our administrative headquarters,manufacturing and research and development operations are located in onebuilding in Plymouth, Minnesota, totaling approximately 39,000 squarefeet.  This facility is leased under a7-year operating lease which commenced in October 2002.  The leaseprovides for base rental payments of approximately $335,000 for the firstthirty-six (36) months with increases of approximately 3% each subsequent12-month period.  The lease also includes provisions for early terminationafter 3 and 5 years.  Additionally, weare responsible for our proportionate share of real estate taxes and operatingexpenses associated with operating the facility, as defined by the leaseagreement. We also maintain a research and development facility in TintonFalls, New Jersey, in approximately 3,000 square feet of leased space which expiresin February 2004.  We believe thatour existing facilities and equipment are well maintained and in good operatingcondition.  We own most of the equipmentused in our operations.  Such equipmentconsists primarily of manufacturing and test equipment, tools, fixtures andcomputer hardware and software.

 

**ITEM 3.****                LEGALPROCEEDINGS**

 

We are not a party to, nor is any of ourproperty subject to any material pending legal proceedings, nor are anymaterial legal proceedings known to be contemplated by governmental authoritiesor others.

 

**ITEM4.****                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

16

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**PART II**

 

**ITEM5.****                MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

STOCK TRADING

 

Ciprico common stock is traded on the Nasdaq National Market under thesymbol CPCI. As of November 1, 2003, there were approximately 2,200shareholder accounts of record. Closing stock sale price ranges for the yearsended September 30, 2003 and 2002, were:

 
|        |   | **2003** |   | **2002** |   |
|-------------|--------|----------|--------|----------|--------|
| **Quarter** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First       |   | $        | 4.07   |     | $      | 2.75 |   | $ | 5.50 |   | $ | 3.90 |   |
| Second      |   | 5.25     |   | 3.30     |   | 6.39 |   | 5.09 |   |
| Third       |   | 6.47     |   | 4.15     |   | 5.90 |   | 4.21 |   |
| Fourth      |   | 6.70     |   | 4.75     |   | 4.35 |   | 2.95 |   |
|             |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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

 

**ITEM6.****                SELECTEDFINANCIAL DATA**

** **

Ciprico Inc. and Subsidiaries

Amounts in thousands (except per share data)

 

SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA

 
| **Years  ended September 30**                    |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                             |   | $        | 31,215 |     | $      | 31,440   |   | $        | 32,983 |     | $      | 33,210 |   | $ | 34,059 |   |
| Gross profit                                          |   | 11,375   |   | 10,917   |   | 13,623   |   | 14,822   |   | 17,371   |   |
| % of sales                                            |   | 36.4     | %      | 34.8     | %      | 41.3     | %      | 44.6     | %      | 51.0     | %      |
| Operating  expenses                                   |   | 15,740   |   | 20,327   |   | 22,611   |   | 17,311   |   | 16,059   |   |
| % of sales                                            |   | 50.4     | %      | 64.7     | %      | 68.6     | %      | 52.1     | %      | 47.1     | %      |
| Income  (loss) from operations                        |   | (4,365   | )      | (9,410   | )      | (8,988   | )      | (2,489   | )      | 1,312    |   |
| % of sales                                            |   | (14.0    | )%     | (29.9    | )%     | (27.3    | )%     | (7.5     | )%     | 3.8      | %      |
| Other  income, net                                    |   | 450      |   | 956      |   | 1,866    |   | 1,992    |   | 1,803    |   |
| Income tax  expense (benefit)                         |   | —   |   | (1,950   | )      | 440      |   | (188     | )      | 1,059    |   |
| Net income  (loss)                                    |   | $        | (3,915 | )        | $      | (6,504   | )      | $        | (7,562 | )        | $      | (309 | ) | $ | 2,056 |   |
| Shares used to  calculate net income (loss) per share |   |     |   |     |   |     |   |     |   |     |   |
| Basic                                                 |   | 4,676    |   | 4,895    |   | 5,050    |   | 4,990    |   | 4,914    |   |
| Diluted                                               |   | 4,676    |   | 4,895    |   | 5,050    |   | 4,990    |   | 5,015    |   |
| Net income  (loss) per share—Basic               |   | $        | (.84   | )        | $      | (1.33    | )      | $        | (1.50  | )        | $      | (.06 | ) | $ | .42 |   |
| Diluted                                               |   | $        | (.84   | )        | $      | (1.33    | )      | $        | (1.50  | )        | $      | (.06 | ) | $ | .41 |   |

 

SELECTED CONSOLIDATED BALANCE SHEET DATA 

 
| **September 30**      |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Working  capital           |   | $        | 25,972 |     | $      | 27,029   |   | $        | 29,392 |     | $      | 33,643 |   | $ | 34,129 |   |
| Total assets               |   | 32,336   |   | 38,115   |   | 44,679   |   | 51,781   |   | 53,238   |   |
| Shareholders’  equity |   | 27,986   |   | 32,238   |   | 39,530   |   | 47,287   |   | 47,290   |   |
|                            |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |

 

**ITEM 7.****                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

Critical Accounting Policies and Estimates

 

Financial Reporting Release No. 60 of the Securities and ExchangeCommission, requests that all companies include a discussion of criticalaccounting policies or methods used in the preparation of financial statements.Note 1 of the Notes to the Consolidated Financial Statements includes a summaryof the significant accounting policies and methods used in the

 

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preparation of our Consolidated Financial Statements. The following isa brief discussion of the more significant accounting policies and methods usedby Ciprico Inc (“the Company, we and our”).

 

General

 

Management’s discussion and analysis of Ciprico’s financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. The most significant estimates andassumptions relate to the recoverability of receivables and inventories. Actualamounts could differ significantly from these estimates.

 

Revenue Recognition

 

We recognize revenue in accordance with SEC Staff Accounting BulletinNo. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), as amendedby SAB 101A and 101B. SAB 101 requires that four basic criteria must be metbefore revenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured. Products soldare generally covered by a warranty for periods up to three years. We accrue awarranty reserve within cost of sales for estimated costs to provide warrantyservices. We estimate the costs to service our warranty obligations based onhistorical experience and expectation of future conditions.  Revenue from the sale of extended warrantyand maintenance agreements is deferred and recognized on a straight-line basisover the term of the related agreement.

 

Accounts Receivable

 

We perform ongoing credit evaluations of our customers and adjustcredit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. Wecontinuously monitor collections and payments from our customers and maintain aprovision for estimated credit losses based upon our historical experience andany specific customer collection issues that we have identified. While suchcredit losses have historically been within our expectations and the provisionsestablished, we can not 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

 

We value our inventory at the lower of the actual cost to purchaseand/or manufacture the inventory or the current estimated market value of theinventory. We regularly review inventory quantities on hand and record aprovision to reduce excess and obsolete inventory to estimated market valuebased primarily on our estimated forecast of product demand and productionrequirements for the next twelve months or expected life of the representativeproduct. A significant decrease in demand could result in an increase in theamount of excess inventory quantities on hand. If actual market conditions areless favorable than those projected by management, additional inventorywrite-downs may be required. Additionally, our estimates of future productdemand may prove to be inaccurate, in which case we may have understated oroverstated the provision required for excess and obsolete inventory. If ourinventory is determined to be overvalued, we would be required to recognizesuch costs in our cost of goods sold at the time of such determination.  We do not adjust our lower of cost or marketadjustment to inventory components upward once a reduction was determined to benecessary.

 

We make every effort to ensure the accuracy of our forecasts of futureproduct demand, 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 fourth quarter of fiscal 2002, we recorded an adjustment of$700,000 to reduce certain legacy product inventory to market value due toexcess estimated inventory levels of certain legacy products discontinuedduring fiscal 2002 and planned product migration of new product introductionsreleased in fiscal 2002 and  2003.

 

Warranty

 

Our warranty reserve is established based on our best estimate of theamounts necessary to settle future and existing claims on products sold as ofeach balance sheet date. While we believe that our warranty reserve is adequateand that our estimate is appropriate, such amounts estimated to be due andpayable could differ materially from what will actually transpire in thefuture.  To the extent we experienceincreased warranty claim activity or increased costs associated with servicingthose

 

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claims, we would increase our warranty accrual resulting in decreasedgross profit.  Similarly, if theopposite occurs and we experience better than expected results, we woulddecrease our warranty accrual.

 

Deferred Taxes

 

We record a valuation allowance to reduce our net deferred tax assetsto the amount that is more likely than not to be realized. We recognize deferredtax assets and liabilities based on the differences between the financialstatement carrying amounts and the tax bases of assets and liabilities. Weregularly review the deferred tax assets for recoverability and establish avaluation allowance based on historical taxable income or loss, projectedfuture taxable income or loss, and the expected timing of the reversals ofexisting temporary differences.

 

The following discussion and analysis of the financial condition andresults of operations of Ciprico Inc. and its subsidiaries should be read inconjunction with the Consolidated Financial Statements and the Notes thereto,included elsewhere in this Report.

 

OVERVIEW

We design, manufacture and market storage and system solutions fordigital media applications.  Oursolutions combine storage, networking and computing technologies to simplifyand accelerate digital media workflows. Our primary markets are broadcast andentertainment, which include applications in digital broadcast and film andvideo production and military and government which include applicationsinvolving the data capture, processing and dissemination of surveillance imagesand medical imaging picture archives. In addition, we have historically sold in other markets withhigh-performance storage requirements such as geosciences and digital prepress.

 

The following table sets forth certain items from Ciprico’sconsolidated statement of operations, as a percentage of net sales for theyears ending September 30.

 
|                        |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                   |   | 100.0    | %      | 100.0    | %      | 100.0    | %      |
| Cost of  sales              |   | 63.6     |   | 65.2     |   | 58.7     |   |
| Gross profit                |   | 36.4     |   | 34.8     |   | 41.3     |   |
|                        |   |     |   |     |   |     |   |
| Operating  expenses:        |   |     |   |     |   |     |   |
| Research and  development   |   | 19.9     |   | 27.9     |   | 24.8     |   |
| Sales and  marketing        |   | 21.3     |   | 27.7     |   | 34.3     |   |
| General and  administrative |   | 7.6      |   | 7.9      |   | 7.6      |   |
| Restructuring  charges      |   | 1.6      |   | 1.2      |   | 1.9      |   |
| Total  operating expenses   |   | 50.4     |   | 64.7     |   | 68.6     |   |
| Loss from  operations       |   | (14.0    | )%     | (29.9    | )%     | (27.3    | )%     |

 

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NET SALES:

Comparative information on sales by market and geographic location areshown in the charts below (in millions).

 
|                           |   | **2003**  |   | **2002**        |   | **2001**  |   |
|--------------------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
| **Market**                     |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   |
| Broadcast  & Entertainment |   | $         | 20.1   |            | 64.4   | %         | $      | 15.0 |   | 47.8 | % | $ | 15.9 |   | 48.2 | % |
| Military  & Government     |   | 10.6      |   | 34.0            |   | 14.9      |   | 47.4 |   | 13.3 |   | 40.3 |   |
| Other                          |   | 0.5       |   | 1.6             |   | 1.5       |   | 4.8 |   | 3.8 |   | 11.5 |   |
| Total                          |   | $         | 31.2   |            | 100.0  | %         | $      | 31.4 |   | 100.0 | % | $ | 33.0 |   | 100.0 | % |

 
|                     |   | **2003**  |   | **2002**        |   | **2001**  |   |
|--------------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
| **Geographic  Location** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   |
| Domestic                 |   | $         | 29.7   |            | 95.2   | %         | $      | 28.6 |   | 91.1 | % | $ | 28.2 |   | 85.5 |   |
| International            |   | 1.5       |   | 4.8             |   | 2.8       |   | 8.9 |   | 4.8 |   | 14.5 |   |
| Total                    |   | $         | 31.2   |            | 100.0  | %         | $      | 31.4 |   | 100.0 | % | $ | 33.0 |   | 100.0 | % |

 

Sales for 2003 were approximately $31.2 million, a decrease of 1% from2002 sales, which decreased 5% from 2001 levels. Sales from customers withinthe United States increased 4% during 2003 versus an increase of 1% in 2002 ascompared to 2001. Sales from international customers decreased 46% in 2003 and42% in 2002 from the previous year. During the past three years, we believe our sales were adverselyimpacted by the economic downturn and its effect on customer demand.  Our international sales during this periodwere also impacted by decreased volumes with post-production customers,economic factors in Europe and Asia-Pacific regions and reduced sales throughSilicon Graphics, Inc. (“SGI”).  As aresult of these declining international sales in addition to the shift ofbusiness towards larger domestically based OEM’s, we closed our sales office inthe United Kingdom in fiscal 2003 and our sales offices in Singapore and Tokyoin fiscal 2001.

 

Sales in the Broadcast segment increased 34% in 2003 versus a decreaseof 6% in 2002 from 2001.  The increasein 2003 came substantially from increased sales to three larger OEM customersthat collectively accounted for $17.8 million or 57% of our sales in fiscal2003.  We believe this growth reflectsgrowing demand for digital storage applications within the broadcastindustry.  This increase was partiallyoffset by lower demand experienced from both European and Asia-Pacificcustomers, including SGI.  Despite thegrowth experienced for the year, we did experience lower sequential demand inthe Broadcast segment during the fourth quarter of fiscal 2003, which webelieve reflects reduced capital spending in this sector due primarily to anuncertain sustained economic recovery. Going forward, we believe these factors, in addition to ongoingincreased competition, may adversely impact our sales in the Broadcast segment.The decline in 2002 primarily reflects reduced spending levels in this segmentas a result of the general economic slowdown.

 

Sales in the Military and Government market decreased 29% in fiscal2003 versus an increase of 12% in 2002 as compared with 2001.  The decrease in fiscal 2003 reflects reducedspending levels from system integrators associated with defense relatedprograms due in part to the military action in the Middle East.   In 2003, we shipped approximately $800,000of our TALON product compared to $900,000 in 2002, to new and existingcustomers in the Military segment. Sales in the Military segment are to some extent dependent upon theactual appropriation and funding of government programs that specify ourproducts.  We believe our sales in thissegment have been adversely impacted by delays in the deployment and funding ofcertain programs in which our products have been specified. Sales in theMilitary segment have historically fluctuated between years due to the timingof spending on defense-related programs.

 

The decline in sales in the other market segments during the past threeyears primarily reflects reduced demand from customers in some of our legacymarkets such as geoscience, medical imaging and digital prepress.

 

Our revenue growth in the future is dependent on our ability to providenew products and expand the applications of our products into targeted marketsegments.  In 2003, we released theFibreSTORE 2210 which accounted for $5.0 million in sales for the year comparedto $1.6 million in 2002.  The NETarrayfamily of products was released in fiscal 2000. Sales from NETarray productswere approximately $16.3 million in 2003, $11.9 million in 2002 and $10.3million in 2001.  During fiscal 2004, weexpect to see a shift in demand from the NETarray product to the 2210 as wetransition customers to this product.

 

COST OF SALES AND GROSS PROFIT:

Gross profit, as a percentage of net sales, was 36.4% in 2003, 34.8% in2002 and 41.3% in 2001.  The increase in2003 can primarily be attributed to improved efficiencies and overheadabsorption due to increased unit volumes and the impacts from expense reductionefforts in the prior year.  The decreasein margins between 2001 and 2002 are primarily a result of a higher

 

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mix of sales of the NETarray product versus legacy products.  In the fourth quarter of 2002, we recorded anon-recurring adjustment of $700,000 to reduce certain legacy product inventoryto market value.

 

Gross profit on product sales is highly dependent on the cost of diskdrives and may fluctuate from quarter to quarter. We believe our strong vendorrelations will aid in component availability and cost reductions to meetcontinued competitive pricing pressures. We expect to experience continuedcompetitive pressures on gross profit margins throughout fiscal 2004. We intendto partially offset these margin pressures through new product introductionsand cost reductions.

 

RESEARCH AND DEVELOPMENT EXPENSES:

Research and development expenses decreased approximately $2.6 millionor 29% in 2003 compared to an increase of $600,000 or 7% in 2002 versus2001.  The decrease in 2003 is primarilya result of decreased prototype spending on development projects, a continuedshift towards software development activities and reduced staffing levelsbetween years.  The increase in 2002primarily reflects increases in engineering staff and prototype expensesassociated with new products, including the FibreSTORE 2210 and TALON, as wellas spending related to software development activities for DiMeda, our newdigital media appliance product family. We do not sell software separately from our hardware.

 

We expect that research and development expenses will decrease slightlyin absolute dollars in fiscal 2004 as we continue our focus towards moresoftware development, which is expected to further reduce the level of hardwareprototype expenses in our product development activities.

 

SALES AND MARKETING EXPENSES:

Sales and marketing expenses decreased approximately $2.1 million or24% in 2003 versus a decrease of $2.6 million or 23% in 2002 compared to2001.  The reduction in both yearsreflects reduced headcount between years resulting from our restructuringefforts implemented during fiscal 2002 and 2001, which included the closure ofour international sales offices.  Inaddition, the reduction in expenses during fiscal 2003 reflects reducedspending on trade show and promotional activities.  We expect these expenses to decrease slightly in absolute dollarsduring fiscal 2004 as a result of cost reductions implemented during the fourthquarter of fiscal 2003.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses decreased approximately $100,000 or4% in 2003, which primarily reflects a charge of $130,000 recognized in thefourth quarter of 2002 related to the relocation of our corporate headquarters.Expenses were relatively unchanged between 2002 and 2001.  We expect general and administrativeexpenses to increase in fiscal 2004 due to anticipated higher insurance costs.

 

RESTRUCTURING:

During the fourth quarter of 2003, we implemented a workforce reductionof 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 ourEuropean operations.  Theserestructuring efforts are expected to result in annualized cost reductions ofapproximately $2.0 million.

 

In September 2002, we implemented a workforce reduction of 13% andfurther consolidation of our sales operations in Europe.  As a result of the restructuring, werecorded a charge of $370,000 during the fourth quarter of 2002, of whichapproximately $328,000 is employee termination costs and $42,000 is facilityclosure and related costs.

 

During fiscal 2001, we implemented two restructuring efforts.  In May 2001 we implemented a costreduction program including the reduction of our workforce by 12% and theclosing of our Singapore sales office. In September 2001 we made further restructuring changes through theconsolidation of certain sales and marketing management positions and theclosing of our sales office in Japan. As a result of the restructuring, we recorded charges of $620,000 duringfiscal 2001 of which approximately $455,000 is employee termination costs and$165,000 is facility closure and related costs.

 

OTHER INCOME:

Other income of $450,000, $956,000 and $1.9 million in fiscal 2003,2002 and 2001, respectively, is primarily attributable to interest income oncash and marketable securities. The decrease between all years reflects overalllower interest rates on lower average cash and investment balances.

 

INCOME TAX EXPENSE:

For fiscal 2003 no income tax benefit was recognized, as we do notexpect to realize any current income tax benefits.  For 2002 the income tax benefit of $1.9 million reflectsrecognition of current income tax benefits related to federal income taxrefunds received or expected to be received under the provisions of the JobCreation and Worker Assistance Act of 2002. Of the $1.9 million, approximately $820,000 was recorded in the fourthquarter of 2002 when the amount of loss for the year

 

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became known.  The effectiveincome tax expense (benefit) was 0% in 2003, (23.0%) in 2002 and 6.2% in 2001.See Note 4 to Consolidated Financial Statements.

 

LIQUIDITY AND CAPITAL RESOURCES:

As of September 30, 2003, we had a total of cash, cashequivalents, marketable securities and asset-backed short term investments of$22.0 million compared to $27.0 million at the end of 2002 and $30.0 million atthe end of 2001.

 

Cash flows used in operating activities were ($3.4) million,($898,000), and ($2.1) million in 2003, 2002 and 2001, respectively. The use ofcash in all years reflects the net loss offset by the impacts of depreciationand working capital.  The change betweenyears primarily reflects fluctuations in working capital levels betweenyears.  Capital expenditures were $1.2million, $1.3 million and $2.9 million in 2003, 2002 and 2001, respectively. Weanticipate that capital expenditures for 2004 will approximate $500,000 due toprimarily to anticipated spending on product development activities. During2003 and 2002 we repurchased 198,000 and 221,000 shares, respectively, at atotal cost of approximately $692,000 and $972,000, respectively.  The total amount authorized to be expendedunder the stock buyback program is $12.0 million.  As of September 30, 2003, 1,037,035 shares of common stockhave been repurchased for $7.8 million.

 

Despite the cost reduction efforts implemented during 2003 we expect toincur an operating loss in fiscal 2004 due to continued investments expected innew product development.  We believethat current cash balances and cash generated from operations will be adequateto fund requirements for operating losses, working capital and capitalexpenditures, and share repurchases, as well as any potential acquisitions infiscal 2004.

 

During fiscal 2002, we signed a 7-year operating lease for a newcorporate headquarters, which commenced in October 2002.  The leaseprovides for base rental payments of approximately $335,000 for the firstthirty-six (36) months with increases of approximately 3% each subsequent12-month period.  The lease also includes provisions for early terminationafter 3 and 5 years.  Additionally, weare responsible for our proportionate share of real estate taxes and operatingexpenses associated with operating the facility, as defined by the leaseagreement.  We expense our rent on astraight-line basis.

 

NEW ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 146 (SFAS 146), *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS 146provides financial accounting and reporting guidance for costs associated withexit or disposal activities, including one-time termination benefits, contracttermination costs other than for a capital lease, and costs to consolidatefacilities or relocate employees.  This statementis effective for exit or disposal activities that are initiated afterDecember 31, 2002. This pronouncement did not have a material effect onthe Company’s financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45), *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*.  FIN 45 addresses thedisclosure requirements of a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.  FIN 45 also requires a guarantor torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee.  The disclosure requirements of FIN 45 were effective for theCompany beginning with its quarter ended December 31, 2002.  The liability recognition requirements willbe applicable prospectively to all guarantees issued or modified afterDecember 31, 2002.  Thispronouncement is not anticipated to have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN46), *Consolidation of Variable InterestEntities*.  FIN 46 is aninterpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, andaddresses consolidation by business enterprises of variable interestentities.  FIN 46 applies immediately tovariable interest entities created or obtained after January 31, 2003 andit applies in the first fiscal year or interim period beginning afterJune 15, 2003, to variable interest entities in which an enterprise holdsa variable interest that is acquired before February 1, 2003.  This pronouncement is currently not anticipatedto have a material effect on the Company’s consolidated financial position orresults of operations.

 

In December 2002, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No.148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,SFAS No. 148 amends the disclosure requirements of Accounting Principles Board(“APB”) Opinion No. 28, Interim Financial Reporting, to require pro-formadisclosure in interim financial statements by companies that elect to accountfor stock-based compensation using the intrinsic value method prescribed in APBOpinion No. 25. The Company continues to use the intrinsic value method ofaccounting for stock-based compensation. As a result, the transition provisionswill not have an effect on the Company’s consolidated financial statements.

 

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InMay 2003, the FASB issued Statement 150, Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity. Statement 150changes the classification in the statement of financial position of certaincommon financial instruments from either equity or mezzanine presentation toliabilities and requires an issuer of those financial statements to recognizechanges in fair value or redemption amount, as applicable, in earnings. SFAS 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. Adoption of Statement 150 isnot anticipated to have an impact on the Company’s financial position orresults of operations.

 

CAUTIONARY STATEMENTS

Any forward-looking statements included in this section orelsewhere in this Form 10-K are subject to various risks and uncertainties,which may cause actual results to differ from the expectations set forth inthese forward-looking statements. These risks and uncertainties include, butare not limited to, the risk factors set forth in Item 1 to this Form 10-K.

 

**ITEM7A.****             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company invests its excess cash in moneymarket mutual funds, highly rated corporate debt securities and certainasset-backed investments.  Allinvestments are held to maturity.  Themarket risk on such investments is minimal. Receivables from sales to foreign customers are denominated in U.S.Dollars.

 

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**ITEM8.****                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

CONSOLIDATED BALANCE SHEETS

Ciprico Inc. and Subsidiaries

Dollars in thousands

 
| **September 30**                                                                          |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| ASSETS                                                                                         |   |     |   |     |   |
| CURRENT  ASSETS:                                                                               |   |     |   |     |   |
| Cash and  cash equivalents                                                                     |   | $        | 5,159  |     | $      | 6,413 |   |
| Marketable  securities and short term investments                                              |   | 16,766   |   | 18,071   |   |
| Accounts  receivable, less allowance of $652 in 2003 and $560 in 2002                          |   | 4,016    |   | 3,590    |   |
| Inventories,  net                                                                              |   | 3,928    |   | 3,145    |   |
| Income taxes  receivable                                                                       |   | —   |   | 789      |   |
| Other  current assets                                                                          |   | 453      |   | 898      |   |
| Total  current assets                                                                          |   | 30,322   |   | 32,906   |   |
|                                                                                           |   |     |   |     |   |
| Property and  equipment, at cost:                                                              |   |     |   |     |   |
| Furniture  and fixtures                                                                        |   | 698      |   | 722      |   |
| Equipment                                                                                      |   | 11,995   |   | 12,986   |   |
| Leasehold  improvements                                                                        |   | 688      |   | 429      |   |
|                                                                                           |   | 13,381   |   | 14,137   |   |
| Accumulated  depreciation and amortization                                                     |   | (11,409  | )      | (11,529  | )      |
| Net property  and equipment                                                                    |   | 1,972    |   | 2,608    |   |
|                                                                                           |   |     |   |     |   |
| Marketable  securities                                                                         |   | —   |   | 2,547    |   |
| Other assets                                                                                   |   | 42       |   | 54       |   |
|                                                                                           |   | $        | 32,336 |     | $      | 38,115 |   |
|                                                                                           |   |     |   |     |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                     |   |     |   |     |   |
| CURRENT  LIABILITIES:                                                                          |   |     |   |     |   |
| Accounts  payable                                                                              |   | $        | 2,151  |     | $      | 2,724 |   |
| Accrued  compensation                                                                          |   | 621      |   | 698      |   |
| Warranty  accrual                                                                              |   | 387      |   | 502      |   |
| Accrued  restructuring                                                                         |   | 121      |   | 370      |   |
| Other  accrued expenses                                                                        |   | 758      |   | 1,185    |   |
| Deferred  revenue                                                                              |   | 312      |   | 398      |   |
| Total  current liabilities                                                                     |   | 4,350    |   | 5,877    |   |
|                                                                                           |   |     |   |     |   |
| COMMITMENTS                                                                                    |   | —   |   | —   |   |
|                                                                                           |   |     |   |     |   |
| SHAREHOLDERS’  EQUITY:                                                                    |   |     |   |     |   |
| Common  stock, 4,677,835 shares and 4,812,167 shares issued and   outstanding in 2003 and 2002 |   | 47       |   | 48       |   |
| Additional  paid-in capital                                                                    |   | 34,840   |   | 35,307   |   |
| Retained  deficit                                                                              |   | (6,881   | )      | (2,966   | )      |
| Translation  adjustment                                                                        |   | —   |   | 119      |   |
| Deferred  compensation from restricted stock                                                   |   | (20      | )      | (32      | )      |
| Total  shareholders’ equity                                                               |   | 27,986   |   | 32,238   |   |
|                                                                                           |   | $        | 32,336 |     | $      | 38,115 |   |

 

THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

Ciprico Inc. and Subsidiaries

Amounts in thousands, except per share amounts

 
| **Years  ended September 30**        |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                 |   | $        | 31,215 |     | $      | 31,440   |   | $ | 32,983 |   |
| Cost of  sales                            |   | 19,840   |   | 20,523   |   | 19,360   |   |
| Gross profit                              |   | 11,375   |   | 10,917   |   | 13,623   |   |
| Operating  expenses:                      |   |     |   |     |   |     |   |
| Research and  development                 |   | 6,214    |   | 8,767    |   | 8,189    |   |
| Sales and  marketing                      |   | 6,638    |   | 8,699    |   | 11,303   |   |
| General and  administrative               |   | 2,388    |   | 2,491    |   | 2,499    |   |
| Restructuring  charges                    |   | 500      |   | 370      |   | 620      |   |
| Total  operating expenses                 |   | 15,740   |   | 20,327   |   | 22,611   |   |
| Loss from  operations                     |   | (4,365   | )      | (9,410   | )      | (8,988   | )      |
|                                      |   |     |   |     |   |     |   |
| Other  income, primarily interest         |   | 450      |   | 956      |   | 1,866    |   |
| Loss before  income taxes                 |   | (3,915   | )      | (8,454   | )      | (7,122   | )      |
|                                      |   |     |   |     |   |     |   |
| Income tax  expense (benefit)             |   | —   |   | (1,950   | )      | 440      |   |
| Net loss                                  |   | $        | (3,915 | )        | $      | (6,504   | )      | $ | (7,562 | ) |
| Shares used  to calculate loss per share: |   |     |   |     |   |     |   |
| Basic and  diluted                        |   | 4,676    |   | 4,895    |   | 5,050    |   |
|                                      |   |     |   |     |   |     |   |
| Loss per  share:                          |   |     |   |     |   |     |   |
| Basic and  diluted                        |   | $        | (0.84  | )        | $      | (1.33    | )      | $ | (1.50 | ) |

 

THE ACCOMPANYING NOTES ARE ANINTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

25

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CONSOLIDATED STATEMENTSOF SHAREHOLDERS’ EQUITY

Ciprico Inc. and Subsidiaries

Amounts in thousands, except share data

 
| **Years ended September 30, 2003, 2002 and 2001** |   | **Shares** |   | **Common  stock and  additional  paid-in-  capital** |   | **Translation  Adjustment** |   | **Retained  earnings  (deficit)** |   | **Deferred  compensation  from  restricted  stock** |   | **Total** |   |
|--------------------------------------------------------|--------|------------|--------|------------------------------------------------------|--------|-----------------------------|--------|-----------------------------------|--------|-----------------------------------------------------|--------|-----------|--------|
|                                                   |   |       |   |                                                 |   |                        |   |                              |   |                                                |   |      |   |
| Balance,  September 30, 2000                      |   | 5,040,291  |   | $                                                    | 36,313 |                        | $      | (66                               | )      | $                                                   | 11,100 |      | $      | (60 | ) | 47,287 |   |
| Exercise of employee stock options                     |   | 8,707      |   | 166                                                  |   | —                      |   | —                            |   | —                                              |   | 166       |   |
| Tax benefit related to options                         |   | —     |   | 2                                                    |   | —                      |   | —                            |   | —                                              |   | 2         |   |
| Employee plan stock purchases                          |   | 21,905     |   | 117                                                  |   | —                      |   | —                            |   | —                                              |   | 117       |   |
| Restricted stock issued                                |   | 9,000      |   | 83                                                   |   | —                      |   | —                            |   | (83                                                 | )      | —    |   |
| Cumulative unrealized translation gain                 |   | —     |   | —                                               |   | 47                          |   | —                            |   | —                                              |   | 47        |   |
| Amortization of restricted stock                       |   | —     |   | —                                               |   | —                      |   | —                            |   | 72                                                  |   | 72        |   |
| Net loss                                               |   | —     |   | —                                               |   | —                      |   | (7,562                            | )      | —                                              |   | (7,562    | )      |
| Repurchase of common stock                             |   | (100,200   | )      | (599                                                 | )      | —                      |   | —                            |   | —                                              |   | (599      | )      |
| 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 loss.                |   | —     |   | —                                               |   | (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 |   |
|                                                        |        |            |        |                                                      |        |                             |        |                                   |        |                                                     |        |           |        |  |  |  |  |  |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PARTOF THESE FINANCIAL STATEMENTS.

 

26

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Ciprico Inc. and Subsidiaries

Amounts in thousands

 
| **Years ended September 30**                                                               |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash Flows from Operating Activities:                                                           |   |     |   |     |   |     |   |
| Net loss                                                                                        |   | $        | (3,915 | )        | $      | (6,504   | )      | $ | (7,562 | ) |
| Adjustments to reconcile net loss to net  cash flows provided by(used in) operating activities: |   |     |   |     |   |     |   |
| Depreciation and amortization                                                                   |   | 1,802    |   | 2,631    |   | 2,145    |   |
| Deferred income taxes                                                                           |   | —   |   | —   |   | 1,348    |   |
| Unrealized translation (gain) loss                                                              |   | (61      | )      | (100     | )      | 47       |   |
| Realized translation loss                                                                       |   | 180      |   | —   |   | —   |   |
| Compensation related to stock transactions                                                      |   | 39       |   | 63       |   | 72       |   |
| Changes in operating assets and  liabilities:                                                   |   |     |   |     |   |     |   |
| Accounts receivable                                                                             |   | (426     | )      | 251      |   | 1,691    |   |
| Inventory                                                                                       |   | (783     | )      | 2,109    |   | 506      |   |
| Other assets                                                                                    |   | 457      |   | (156     | )      | (99      | )      |
| Accounts payable                                                                                |   | (573     | )      | 154      |   | (215     | )      |
| Accrued expenses                                                                                |   | (868     | )      | 549      |   | 884      |   |
| Income taxes                                                                                    |   | 789      |   | 80       |   | (869     | )      |
| Deferred revenue                                                                                |   | (86      | )      | 25       |   | (14      | )      |
| Net cash flows used in operating activities                                                     |   | (3,445   | )      | (898     | )      | (2,066   | )      |
| Cash Flows from Investing Activities:                                                           |   |     |   |     |   |     |   |
| Equipment purchases                                                                             |   | (1,166   | )      | (1,335   | )      | (2,922   | )      |
| Other, net                                                                                      |   | —   |   | —   |   | (116     | )      |
| Purchase of marketable securities                                                               |   | (26,392  | )      | (34,460  | )      | (45,111  | )      |
| Proceeds from sale or maturity of  marketable securities                                        |   | 30,244   |   | 37,480   |   | 53,410   |   |
| Net cash flows provided by investing  activities                                                |   | 2,686    |   | 1,685    |   | 5,261    |   |
| Cash Flows from Financing Activities:                                                           |   |     |   |     |   |     |   |
| Proceeds from issuance of common stock                                                          |   | 197      |   | 221      |   | 285      |   |
| Repurchase of common stock                                                                      |   | (692     | )      | (972     | )      | (599     | )      |
| Net cash flows used in financing activities                                                     |   | (495     | )      | (751     | )      | (314     | )      |
| Net Increase (Decrease) in Cash and Cash Equivalents                                            |   | (1,254   | )      | 36       |   | 2,881    |   |
| Cash and Cash Equivalents at Beginning of  Year                                                 |   | 6,413    |   | 6,377    |   | 3,496    |   |
| Cash and Cash Equivalents at End of Year                                                        |   | 5,159    |   | 6,413    |   | 6,377    |   |
| Marketable Securities—Current                                                              |   | 16,766   |   | 18,071   |   | 17,499   |   |
| Marketable Securities—Long-term                                                            |   | —   |   | 2,547    |   | 6,139    |   |
| Total Cash and Investments at End of Year                                                       |   | $        | 21,925 |     | $      | 27,031   |   | $ | 30,015 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PARTOF THESE FINANCIAL STATEMENTS.

 

27

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Ciprico Inc. and Subsidiaries - September 30, 2003, 2002 and 2001

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS: The principal business activity of Ciprico Inc. andsubsidiaries (the Company) is the design, manufacture and marketing ofhigh-performance, direct-attached and networked storage solutions for digitalmedia applications.

 

CONSOLIDATION: The accompanying consolidated financial statementsinclude the accounts of Ciprico Inc. and its wholly owned subsidiaries, CipricoInternational Limited, Ciprico Asia-Pacific Inc. and Ciprico FSC, Inc. (aforeign sales corporation). All significant intercompany balances andtransactions have been eliminated.

 

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.

 

REVENUE RECOGNITION: Revenue is recognized upon shipment of products.Revenue from extended warranty and maintenance agreements is recognized on thestraight-line basis over the term of the agreement.  We recognize revenue in accordance with SEC Staff AccountingBulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), asamended by SAB 101A and 101B. SAB 101 requires that four basic criteria must bemet before revenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred or services rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured. Products soldare generally covered by a warranty for periods up to three years. We accrue awarranty reserve within cost of sales for estimated costs to provide warrantyservices. We estimate the costs to service our warranty obligations based onhistorical experience and expectation of future conditions.  Revenue from the sale of extended warrantyand maintenance agreements is deferred and recognized on a straight-line basisover the term of the related agreement

 

PRODUCT WARRANTY COSTS: Estimated future warranty costs are providedfor at the time of revenue recognition. Activity into the warranty account is as follows for the years endedSeptember 30, 2003, 2002 and 2001:

 
|                    |   | **Balance at  Beginning  of Period** |    | **Charged to  Costs and  Expenses** |   | **Deductions** |   | **Balance at  End  of Period** |     |
|-------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|----------------|--------|--------------------------------|----------|
|                    |   |                                 |    |                                |   |           |   |                           |     |
| September 30, 2003 |   | $                                    | 502,000 |                                | $      | 140,000        |   | $                              | (255,000 | ) | $ | 387,000 |   |
| September 30, 2002 |   | 423,000                              |    | 296,000                             |   | (217,000       | )      | 502,000                        |     |
| September 30, 2001 |   | 223,000                              |    | 242,000                             |   | (42,000        | )      | 423,000                        |     |
|                         |        |                                      |         |                                     |        |                |        |                                |          |  |  |  |  |

 

Deductions represent warranty work performed during the year.

 

RESEARCH AND DEVELOPMENT COSTS: Research and development costs arecharged to expense as incurred.

 

INVENTORY: Inventory is stated at the lower of cost or replacementmarket. Cost is determined using the first-in, first-out method. Inventorycosts include outside assembly charges, allocated manufacturing overhead anddirect material costs.  In the fourthquarter of 2002 the Company recorded an adjustment of $700,000 to reducecertain legacy product inventory to market value due to excess estimatedinventory levels of certain legacy products discontinued during fiscal2002.  Inventory consists of thefollowing (in thousands) at September 30:

 

|            |   | **2003** |   | **2002** |   |
|-----------------|--------|----------|--------|----------|--------|
| Finished Goods  |   | $        | 967    |     | $      | 1,158 |   |
| Work-In-Process |   | 567      |   | 292      |   |
| Raw Materials   |   | 2,394    |   | 1,695    |   |
|            |   | $        | 3,928  |     | $      | 3,145 |   |

 

CASH AND CASH EQUIVALENTS: The Company considers all highly liquidtemporary investments with original maturities of three months or less to becash equivalents. At September 30, 2003 and 2002 the Company’s cash andcash equivalents were invested in a money market fund and/or commercial paper.

 

ACCOUNTS RECEIVABLE: The Company continuously monitors collections andpayments from its customers and maintains a provision for estimated creditlosses based upon historical experience and any specific customer collectionissues that were identified. While such credit losses have historically beenwithin the Company’s expectations and the provisions established, the Companycannot guarantee that it will continue to experience the same credit loss ratesthat it has in the past.

 

28

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MARKETABLE SECURITIES AND SHORT TERM INVESTMENTS: The Company hasinvested its excess cash in commercial paper, government agencies and otherasset-backed short term investments. These investments are classified asheld-to-maturity given the Company’s intent and ability to hold the securitiesto maturity and are carried at amortized cost. Investments that have maturitiesof less than one year have been classified as current marketable securities.

 

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

 

|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Current                  |   |     |   |     |   |
| Commercial Paper         |   | $        | 14,290 |     | $      | 15,568 |   |
| U.S. Government Agencies |   | 1,502    |   | 2,503    |   |
| Asset-backed investments |   | 974      |   | —   |   |
|                     |   | 16,766   |   | 18,071   |   |
| Non-current              |   |     |   |     |   |
| Commercial Paper         |   | —   |   | 1,509    |   |
| U.S. Government Agencies |   | —   |   | 1,038    |   |
|                     |   | —   |   | 2,547    |   |
|                     |   | $        | 16,766 |     | $      | 20,618 |   |

 

PROPERTY AND EQUIPMENT: Property and equipment is carried at cost, lessaccumulated depreciation and amortization. Depreciation is provided using thestraight-line method over estimated useful lives of eighteen months to sevenyears or, in the case of leasehold improvements, over the period of the relatedlease, if shorter. Major replacements and improvements are capitalized; repairsand maintenance are expensed as incurred. Accelerated and straight-line methodsof depreciation are used for income tax reporting.

 

EARNINGS PER SHARE: The Company’s basic earnings per share amounts arecomputed by dividing net income by the weighted average number of outstandingcommon shares. Diluted earnings per share is computed by dividing net income bythe weighted average number of outstanding common shares and common share equivalentsattributable to the assumed exercise of dilutive stock options.

### * *

### *STOCKOPTION PLANS*

The Company has a stock option plan under which officers, directors,employees and consultants have been or may be granted incentive andnonqualified stock options to purchase the Company’s common stock at fairmarket value on the date of grant.  Theoptions become exercisable over varying periods and expire up to 10 years fromthe date of grant.  The Company appliesAPB Opinion 25, *Accounting for Stock Issuedto Employees,*and related Interpretations in accounting for itsplans.  No stock-based employeecompensation cost is reflected in net income, as all options granted under thisplan had an exercise price equal to the market value of the underlying commonstock on the date of the grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FASB Statement123, *Accounting for Stock-BasedCompensation,* to stock-based employee compensation.

 
|                                                                                                                                                                       |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net loss, as reported                                                                                                                                                      |   | $        | (3,915 | )        | $      | (6,504   | )      | $ | (7,562 | ) |
| Deduct:  Total stock-based employee compensation determined  under fair value based method for awards granted, modified, or settled, net  of related tax effects |   | (481     | )      | (600     | )      | (1,014   | )      |
| Pro forma net loss                                                                                                                                                         |   | $        | (4,396 | )        | $      | (7,104   | )      | $ | (8,576 | ) |
|                                                                                                                                                                       |   |     |   |     |   |     |   |
| Loss per share                                                                                                                                                             |   |     |   |     |   |     |   |
| Basic and Diluted – as reported                                                                                                                                       |   | $        | (0.84  | )        | $      | (1.33    | )      | $ | (1.50 | ) |
| Basic and Diluted – pro forma                                                                                                                                         |   | $        | (0.94  | )        | $      | (1.45    | )      | $ | (1.70 | ) |

 

Theweighted average fair value of options granted in 2003, 2002 and 2001 was$1.46, $1.46 and $2.56 per share. The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions used for grants in 2003, 2002and 2001: no dividend yield; risk-free rate of return of 1.7%, 3.1% and 4.7%;volatility of 46.0%, 46.1% and 49.7%; and an average term of 3.0 years, 3.0years and 3.0 years.  These effects maynot be representative of the future effects of applying the fair value method.

 

29

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FOREIGNCURRENCY: The financial statements of Ciprico International Limited and CipricoAsia-Pacific Inc have been translated into U.S. dollars in accordance with theprovisions of SFAS No. 52 “Foreign Currency Translation.” Under SFAS No. 52,assets and liabilities are translated into U.S. dollars at the year-endexchange rate, while income and expenses are translated at the average exchangerates during the year.  Included in therestructuring charge in fiscal 2003 is a non-cash charge of $180,000 ofcumulative foreign currency translation adjustments recognized in connectionwith the closure of Ciprico International Limited.

 

RECLASSIFICATIONS

 

Certain 2002 and 2001 amountshave been reclassified to conform with the 2003 presentation.

 

NEW ACCOUNTING PRONOUNCEMENTS:

 

In June 2002, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 146 (SFAS 146), *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS 146provides financial accounting and reporting guidance for costs associated withexit or disposal activities, including one-time termination benefits, contracttermination costs other than for a capital lease, and costs to consolidatefacilities or relocate employees.  Thisstatement is effective for exit or disposal activities that are initiated afterDecember 31, 2002.  Thispronouncement did not have a material effect on the Company’s financialstatements.

 

In November 2002, the FASBissued FASB Interpretation No. 45 (FIN 45), *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*.  FIN 45 addresses the disclosure requirements of a guarantor inits interim and annual financial statements about its obligations under certainguarantees that it has issued.  FIN 45also requires a guarantor to recognize, at the inception of a guarantee, a liabilityfor the fair value of the obligation undertaken in issuing the guarantee.  The disclosure requirements of FIN 45 wereeffective for the Company beginning with its quarter ended December 31,2002.  The liability recognitionrequirements will be applicable prospectively to all guarantees issued ormodified after December 31, 2002. This pronouncement is not anticipated to have a material effect on theCompany’s consolidated financial position or results of operations.

 

In January 2003, the FASB issued FASBInterpretation No. 46 (FIN 46), *Consolidationof Variable Interest Entities*. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, andaddresses consolidation by business enterprises of variable interestentities.  FIN 46 applies immediately tovariable interest entities created or obtained after January 31, 2003 andit applies in the first fiscal year or interim period beginning afterJune 15, 2003, to variable interest entities in which an enterprise holdsa variable interest that is acquired before February 1, 2003.  This pronouncement is currently notanticipated to have a material effect on the Company’s consolidated financialposition or results of operations.

 

In December 2002, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No.148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,SFAS No. 148 amends the disclosure requirements of Accounting Principles Board(“APB”) Opinion No. 28, Interim Financial Reporting, to require pro-formadisclosure in interim financial statements by companies that elect to accountfor stock-based compensation using the intrinsic value method prescribed in APBOpinion No. 25. The Company continues to use the intrinsic value method ofaccounting for stock-based compensation. As a result, the transition provisionswill not have an effect on the Company’s consolidated financial statements.

 

InMay 2003, the FASB issued Statement 150, Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity. Statement 150changes the classification in the statement of financial position of certaincommon financial instruments from either equity or mezzanine presentation toliabilities and requires an issuer of those financial statements to recognizechanges in fair value or redemption amount, as applicable, in earnings. SFAS 150 is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. Adoption of Statement 150 is notanticipated to have an impact on the Company’s financial position or results ofoperations.

 

2. RESTRUCTURING ACTIVITY

 

In the fourthquarter of 2003,the Company implemented a workforce reduction of 17%, includingthe closure of its European sales offices. As a result of the restructuring we recorded a charge of $500,000 duringthe fourth quarter of 2003, 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 ourEuropean operations.

 

30

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InSeptember 2002, the Company implemented a workforce reduction of 13% aswell as consolidation of its sales operations in Europe.  As a result of the restructuring, theCompany recorded a charge of $370,000 during the fourth quarter of 2002 ofwhich approximately $328,000 represents employee termination costs and $42,000represents facility closure and related costs.

 

During fiscal2001, 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.

 

Employee terminationcosts consist primarily of severance payments for terminated employees. Thefacility closure and related costs consist of lease termination costs for theclosing of the international sales offices and write down of certain fixedassets.

 

The followingis a summary of the accrued restructuring activity (in thousands):

 

| **Years ended September 30, 2003, 2002 and 2001** |   | **Employee  Termination  Costs** |   | **Facility  closure and  related costs** |   | **Total** |   |
|--------------------------------------------------------|--------|----------------------------------|--------|------------------------------------------|--------|-----------|--------|
| Balance, September 30, 2000                       |   | $                                | — |                                     | $      | —    |   | $ | — |   |
|                                                   |   |                             |   |                                     |   |      |   |
| Restructuring Charges                                  |   | 455                              |   | 165                                      |   | 620       |   |
| Amounts Utilized                                       |   | (171                             | )      | (8                                       | )      | (179      | )      |
| 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 |   |

 

3. ACQUISITION

 

On February 7, 2001 the Company completed the acquisition of theSANStar technology from ECCS, Inc. Under the terms of the agreement, the Company acquired all of theassets, rights, and intellectual property related to SANStar, a clustered, highreliability, network-connected storage management software system, forapproximately $620,000 cash.   Inaddition to the technology acquisition, the Company also hired the New Jerseybased software development team.   Thepurchase price was expensed at the time of the acquisition, as the technologyacquired was used in current research and development activities.

 

4. INCOME TAXES

 

Income tax expense (benefit) consists of the following (in thousands):

 

| **Years ended September 30** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                          |   |     |   |     |   |     |   |
| Federal                           |   | $        | — |     | $      | (1,927   | )      | $ | (975 | ) |
| State                             |   | 9        |   | 6        |   | 24       |   |
| Foreign                           |   | (9       | )      | (29      | )      | 43       |   |
|                              |   | —   |   | (1,950   | )      | (908     | )      |
|                              |   |     |   |     |   |     |   |
| Deferred                          |   | —   |   | —   |   | 1,348    |   |
|                              |   | $        | — |     | $      | (1,950   | )      | $ | 440 |   |

 

Deferred income taxes arise from temporary differences betweenfinancial and tax reporting. The tax effects of the cumulative temporarydifferences resulting in the net deferred tax assets are as follows (inthousands):

 

31

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| **As of September 30**     |   | **2003** |   | **2002** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| Current deferred tax assets:    |   |     |   |     |   |
| Inventory                       |   | $        | 734    |     | $      | 870 |   |
| Allowance for doubtful accounts |   | 240      |   | 217      |   |
| Warranty accrual                |   | 142      |   | 184      |   |
| Loss and credit carryforwards   |   | 4,546    |   | 2,340    |   |
| Compensation accrual            |   | 208      |   | 221      |   |
| Other                           |   | 52       |   | 145      |   |
| Less – valuation allowance |   | (5,922   | )      | (3,977   | )      |
| Current deferred tax asset      |   | —   |   | —   |   |
|                            |   |     |   |     |   |
| Long-term deferred tax assets:  |   |     |   |     |   |
| Depreciation                    |   | 835      |   | 804      |   |
| Less – valuation allowance |   | (835     | )      | (804     | )      |
| Long-term deferred tax asset    |   | —   |   | —   |   |
|                            |   | $        | — |     | $      | — |   |

 

At September 30, 2003, the Company had net operating loss carryforwards of approximately $8.6 million, which expire in 2023, and generalbusiness credit carry forwards of approximately $1.3 million, which expire atvarious dates from 2016 to 2022.

 

For 2002 the income tax benefit of $1.9 million reflects recognition ofcurrent income tax benefits related to Federal income tax refunds receivedunder the provisions of the Job Creation and Worker Assistance Act of 2002. Ofthis amount approximately $1.1 million was received during fiscal 2002 andapproximately $820,000 was recorded in the fourth quarter of 2002.  The following is a reconciliation of thefederal statutory income tax rate to the consolidated effective tax rate:

 

| **Years ended September 30**               |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal statutory rate                          |   | (34.0    | )%     | (34.0    | )%     | (34.0    | )%     |
| State taxes, net of federal income tax  benefit |   | —   |   | —   |   | (.2      | )      |
| Change in valuation allowance                   |   | 36.8     |   | 9.3      |   | 40.9     |   |
| Foreign tax rate differential                   |   | —   |   | .3       |   | (.1      | )      |
| Meals and entertainment                         |   | —   |   | .1       |   | .3       |   |
| Other, net                                      |   | (2.8     | )      | 1.3      |   | (.7      | )      |
|                                            |   | —   | %      | (23.0    | )%     | 6.2      | %      |

 

Cash received (paid) for income taxes was approximately $789,000 in2003, ($13,000) in 2002 and ($67,000) in 2001.

 

5. SHAREHOLDERS’ EQUITY

 

### *AuthorizedShares*

 

The Company is authorized to issue 1,000,000 shares of Preferred Stockat $.01 par value and 9,000,000 shares of Common Stock at $.01 par value. TheCompany has not issued any shares of Preferred Stock.

 

### *StockRepurchase*

 

During 1998, the Company initiated a stock buyback program of up to$6.0 million, which was increased by $6.0 million in 2001, bringing the totalamount allowed to be expended under the plan to $12.0 million. As ofSeptember 30, 2003, 1,037,035 shares of common stock have been repurchasedfor $7.8 million.

#### * *

#### *Stock OptionExchange*

 

On December 4, 2002 theCompany accepted for exchange stock options to purchase 159,500 shares ofcommon stock granted under the Ciprico Inc. 1999 Amended and RestatedStock Option Plan pursuant to a Tender Offer Statement on Schedule TOdated November 4, 2002 (“Schedule TO”) offered to certain eligibleemployees (the “exchange”).  Theexchange was offered to non-management employees who held stock optionseffective October 25, 2002 with an exercise price of $7.00 per share ormore and expiring after January 1, 2004, who were option holders that hadnot received options after May 8, 2002. On June 10, 2003 the Company granted options to purchase 127,600shares of common stock at a price of $5.75. There was no compensation expenserecognized as a result of this exchange.

 

32

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#### *ShareholderRights Plan*

 

OnJanuary 8, 2003, the Board of Directors adopted a shareholder rights planunder which 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.

 

### *Stock Options*

 

Option transactions under the Company’s stock option plans during thethree years ended September 30, 2003 are summarized as follows:

 

|                                      |   | **Number of  Shares** |   | **Weighted  Average  Exercise Price** |   |
|-------------------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
| Outstanding at September 30, 2000    |   | 1,053,938             |   | $                                     | 11.28  |   |
| Granted                                   |   | 427,000               |   | 6.81                                  |   |
| Exercised                                 |   | (14,250               | )      | 7.08                                  |   |
| Canceled                                  |   | (259,813              | )      | 12.16                                 |   |
| 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                                  |   |
| Options exercisable at September 30: |   |                  |   |                                  |   |
| 2001                                      |   | 548,212               |   | $                                     | 11.56  |   |
| 2002                                      |   | 604,851               |   | 9.65                                  |   |
| 2003                                      |   | 494,063               |   | 8.42                                  |   |

 

The following table summarizes information regarding outstanding andexercisable stock options:

 
| **Options Outstanding**        |   | **Options Exercisable** |   |
|--------------------------------|--------|-------------------------|--------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding** |   | **Weighted  Average   Remaining  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Outstanding** |   | **Weighted  Average  Exercise Price** |   |
| $ 2.82 –  4.23            |   | 322,875                 |   | 3.4 years |   | $ | 3.54 |   | 71,000 |   | $ | 3.85 |   |
| 4.59 – 6.89               |   | 184,200                 |   | 5.0 years |   | 5.60 |   | 64,700 |   | 5.87 |   |
| 7.17 – 10.76              |   | 337,750                 |   | 1.9 years |   | 8.77 |   | 266,988 |   | 8.90 |   |
| 11.00 –  14.10            |   | 91,500                  |   | 1.7 years |   | 12.50 |   | 91,375 |   | 12.50 |   |
|                           |   | 936,325                 |   |   |   |   |   | 494,063 |   |   |   |
|                                |        |                         |        |  |  |  |  |  |  |  |  |  |  |

 

At September 30, 2003, the Company had 479,919 shares reserved forfuture issuance under the plan

 

*Employee Stock Purchase Plan*

 

The 1996 Employee Stock Purchase Plan (“ESPP”) provides for thepurchase by eligible employees of Company common stock at a price equal to 85%of the market 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 175,729 shares have been issued.At September 30, 2003, the Company had 74,271 shares reserved for futureissuance under the ESPP.

 

33

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### *RestrictedStock Plan*

 

The 1996 Restricted Stock Plan (“RSP”) provides for common stock awardsto officers and certain key employees of the Company. Restricted stock vestsgenerally after continued employment for a period of up to five years. Allrestricted stock awards entitle the participant to full dividend and votingrights. Since inception of the RSP, a total of 55,023 shares have been issued.At September 30, 2003, the Company had 88,130 shares reserved for futureissuance under the RSP.

 

6. EMPLOYEE BENEFIT PLAN

The Company participates in a 401(k) savings plan coveringsubstantially all of its employees. Minimum contributions to the plan by theCompany are 50 percent of employee contributions up to the first 6 percent ofthe participants’ salaries. Contributions in addition to the minimum may also bemade by the Company based on the Company’s financial performance. The Company’scontributions to the plan in 2003, 2002 and 2001 were approximately $220,000,$262,000 and $256,000.

 

7. SEGMENT INFORMATION

 

The Company’s net sales summarized by geographic area are as follows(in thousands):

 

|           |   | **2003** |   | **2002** |   | **2001** |   |
|----------------|--------|----------|--------|----------|--------|----------|--------|
| North  America |   | $        | 29,675 |     | $      | 28,667   |   | $ | 28,188 |   |
| Europe         |   | 1,103    |   | 2,176    |   | 2,285    |   |
| Japan          |   | 251      |   | 458      |   | 1,744    |   |
| Other foreign  |   | 186      |   | 139      |   | 766      |   |
|           |   | $        | 31,215 |     | $      | 31,440   |   | $ | 32,983 |   |

 

The Company has no material long-lived assets outside of the UnitedStates.

 

Sales to significant customers, as a percentage of net sales, are asfollows:

 

|       |   | **2003** |   | **2002** |   | **2001** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Customer A |   | 40       | %      | 17       | %      | 1        | %      |
| Customer B |   | 9        |   | 12       |   | 9        |   |
| Customer C |   | 8        |   | 11       |   | 14       |   |
| Customer D |   | 7        |   | 10       |   | 5        |   |
| Customer E |   | 8        |   | 5        |   | 16       |   |
|       |   | 72       | %      | 55       | %      | 45       | %      |

 

Receivables from significant customers at September 30, are asfollows (in thousands):

 

|       |   | **2003** |   | **2002** |   | **2001** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Customer A |   | $        | 2,294  |     | $      | 876      |   | $ | 467 |   |
| Customer B |   | 42       |   | 175      |   | 374      |   |
| Customer C |   | 321      |   | 892      |   | 603      |   |
| Customer D |   | 471      |   | 57       |   | 78       |   |
| Customer E |   | 65       |   | 125      |   | 691      |   |
|       |   | $        | 3,193  |     | $      | 2,125    |   | $ | 2,213 |   |

The Company operates in a single reportable segment.

 

8. COMMITMENTS

The Company has operating leases for office and manufacturing spacethat expire at varying dates through October 2009.  Future minimum payments under these leasesare as follows (in thousands) for the fiscal years ending September 30:

 

| 2004       |   | $   | 367    |   |
|------------|--------|-----|--------|--------|
| 2005       |   | 335 |   |
| 2006       |   | 345 |   |
| 2007       |   | 355 |   |
| 2008       |   | 360 |   |
| Thereafter |   | 391 |   |
|       |   | $   | 2,153  |   |

 

For the years endedSeptember 30, 2003, 2002, and 2001, operating lease expenses were$414,000, $510,000 and $575,000.

 

34

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INDEPENDENT AUDITOR REPORT

 

THE BOARD OF DIRECTORS AND SHAREHOLDERS - CIPRICO INC

 

We have audited the accompanying consolidated balance sheets of CipricoInc. and subsidiaries as of September 30, 2003 and 2002, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended September 30, 2003. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofCiprico Inc. and subsidiaries as of September 30, 2003 and 2002, and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended September 30, 2003, inconformity with accounting principles generally accepted in the United Statesof America.

 

We have also audited Schedule II of Ciprico Inc. and subsidiariesfor each of the three years in the period ended September 30, 2003.  In our opinion, this schedule whenconsidered in relation to the basic financial statements taken as a whole,presents fairly, in all material respects, the information required to be setforth therein.

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Minneapolis, Minnesota |
| October 17, 2003  |

 

35

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QUARTERLY FINANCIAL DATA

(unaudited) in thousands, except per share amounts

 
|                                  |   | **First  Quarter** |       | **Second  Quarter** |       | **Third  Quarter** |       | **Fourth  Quarter** |       | **Total** |       |
|---------------------------------------|--------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|-----------|------------|
| 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     | )          |
|                                  |   |               |       |                |       |               |       |                |       |      |       |
| 2001                                  |   |               |       |                |       |               |       |                |       |      |       |
| Net sales                             |   | $                  | 9,066      |                | $          | 9,412              |       | $                   | 9,467      |      | $          | 5,038 |   | $ | 32,983 |   |
| Net loss                              |   | (86                | )          | (935                | )          | (873               | )          | (5,668              | )          | (7,562    | )          |
| Net loss per share—diluted       |   | (.02               | )          | (.18                | )          | (.17               | )          | (1.12               | )          | (1.50     | )          |

 

**ITEM 9.****        CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

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

 

Ciprico management, including the ChiefExecutive Officer and Chief Financial Officer, have conducted an evaluation ofthe effectiveness of disclosure controls and procedures pursuant to ExchangeAct Rule 13a-14.  Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures are effective in ensuringthat all information required to be disclosed by the Company in reports that itfiles under the Exchange Act is recorded, processed, summarized and reportedwithin the time period covered by this report. There have been no changes in the Company’s internal controls overfinancial reporting that occurred during the period covered by this report thathave materially affected or are reasonably likely to materially affect theCompany’s control over financial reporting.

 

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**PART III**

 

**ITEM10.****      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

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

 
| **Name**            |   | **Age** |   | **Position(s)**                                                  |
|---------------------|--------|---------|--------|------------------------------------------------------------------|
|                |   |    |   |                                                             |
| James W. Hansen     |   | 48      |   | Chairman of the Board                                            |
|                |   |    |   |                                                             |
| Thomas F. Burniece  |   | 62      |   | Director                                                         |
|                |   |    |   |                                                             |
| Mark D. Griffiths   |   | 43      |   | Director                                                         |
|                |   |    |   |                                                             |
| Thomas G. Hudson    |   | 55      |   | Director                                                         |
|                |   |    |   |                                                             |
| Michael M. Vekich   |   | 56      |   | Director                                                         |
|                |   |    |   |                                                             |
| Robert H.  Kill     |   | 56      |   | President  and Chief Executive Officer, Director                 |
|                |   |    |   |                                                             |
| Thomas S.  Wargolet |   | 40      |   | Vice  President - Finance, Chief Financial Officer and Secretary |
|                |   |    |   |                                                             |
| Robert G.  Brown    |   | 50      |   | Vice  President – Sales                                     |

 

TheCertificate of Incorporation and Bylaws of the Company provide that the Boardof Directors shall consist of not less than three directors and not more thansix 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 serveat the discretion of the Board of Directors. Following is information about the Board of Directors and executiveofficers of the Company:

 

James W. Hansen  (Class I, termending at 2004 Annual Meeting), age 48, has been a director of the Companysince April 2001 and Chairman of the Board since January 2003.  Mr. Hansen was President, CEO, and Treasurerof E.mergent Incorporated (NASDAQ: EMRT) from November 1996 and Chairmanof the Board of Directors from May 1997 until the sale of the company inMay 2002.  From 1979 to 1983, Mr.Hansen was a teacher and management consultant.  From 1983 to 1986 he was Vice President of Apache Corporation, aNYSE-traded oil and gas exploration company. From 1986 to 1992 he was Senior Vice President and General Manager ofthe pension division of Washington Square Capital, a Reliastar Company, aNYSE-traded financial services company now known as ING Reliastar.  Since 1992 Mr. Hansen has served as aninvestor, director, president or vice president of several private companies inmedical services and technology.  He hasserved as a director of three public companies and has taught in the MBAprogram at the University of St. Thomas since 1984.

 

Thomas F.Burniece (Class II, term ending at 2005 Annual Meeting), age 62, has been adirector of the Company since November 1999, and was Chairman of the Boardfrom November 2000 through January 2003.  Mr. Burniece has been owner and President of Thomas BurnieceConsulting, a firm offering technical marketing and management consultingservices across a wide range of high technology markets, since 1994.  Mr. Burniece is also a partner in In-fusion,LLC, a consulting firm specializing in business development for companies inthe networked storage market.  He wasChief Executive Officer from April 1997 until December 2000 ofVoelker Technologies, Inc., a private company developing an intelligentphysical layer switching product.  Inaddition, in June 1998 he co-founded and served as the original ChiefExecutive Officer and served as a director until May 2001 of RutilusSoftware, Inc, a private company developing a unique, centrally-managedapproach to the backup of network-attached desktop computers.  Mr. Burniece also serves as a director forIntoto, Inc., a private company developing real-time software, and as an advisorto several other small private companies in the networked storage market.  His previous experience includes seniormanagement positions at Maxtor, Digital Equipment Corporation, and Control DataCorporation.

 

Mark D.Griffiths, (Class III, term ending at 2006 Annual Meeting), age 43, has been adirector of the Company since May 2001. Mr. Griffiths has been Vice President of Authentication Services atVerisign, Inc. since August 2003. From May 1997 to October 2001 he held several positions atVERITAS Software, his latest position being Vice President of

 

37

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Corporate Marketing.  Prior to joining VERITAS Software, Mr.Griffiths also held the position of Director of Product Marketing for theInternet Division of Cisco Systems from September 1996 toMay 1997.  Prior to Cisco, Mr.Griffiths spent nine years at Novell Inc., culminating his career there as theDirector of Marketing for Novell’s Internet Commerce Division.

 

Thomas G.Hudson, (Class II, term ending at 2005 Annual Meeting), age 55, has been adirector of the Company since January 2002.  Mr. Hudson has served as President and Chief Executive Officer ofComputer Network Technology since June 1996 and as Chairman of the Boardsince May 1999.  From 1993 toJune 1996, Mr. Hudson served as Senior Vice President of McGraw HillCompanies, a leading information services provider, serving as General Managerof its F.W. Dodge Division and as Senior Vice President, CorporateDevelopment.  From 1968 to 1993, Mr.Hudson served in a number of management positions at IBM Corporation, mostrecently as Vice President Services Sector Division.  Mr. Hudson’s IBM executive career included varied productdevelopment, sales, international marketing and strategic responsibilities forIBM.  Mr. Hudson also currently serveson the board of directors of Lawson Software, Inc. and PLATO Learning, Inc.

 

Michael M.Vekich, (Class I, term ending at 2004 Annual Meeting), age 56, has beendirector of the Company since December 2002.  Mr. Vekich has served as Chief Executive Officer of VekichAssociates since 1998 and as CEO of Vekich Arkema & Company from 1979 to1998.  Prior to 1979 he held variousmanagement consulting positions.  A CertifiedPublic Accountant, he serves as a financial and business advisor to several publicand private company boards.  He has alsoserved as a director on a number of boards of private companies andnot-for-profit institutions.

 

Robert H.Kill, (Class III, term ending at 2006 Annual Meeting), has been Chief ExecutiveOfficer of the Company since January 1996, Chairman of the Board fromJune 1996 to November 2000, President since March 1988, and adirector since September 1987.  Mr.Kill was Executive Vice President of the Company from September 1987 toMarch 1988, Secretary from September 1987 to July 1998 and fromNovember 1989 to October 1993, and Vice President and General Managerfrom August 1986 to September 1987. Mr. Kill held several marketing and sales positions at Northern Telecom,Inc. from 1979 to 1986, his last position being Vice President, TerminalsDistribution.

 

Thomas S.Wargolet has been Vice President of Finance and Chief Financial Officer sinceOctober 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 1999he served as Vice President - Finance and Operations of Vicom, Incorporated, aprovider of telecommunications services. From 1996 to 1998, Mr. Wargolet was Chief Financial Officer andSecretary of ENStar Inc., a publicly traded company with various networktechnology businesses.  From 1989 to1996, Mr. Wargolet served as Corporate Controller of North Star Universal, Inc.a publicly traded holding company and Vice President – Finance and Operationsof Americable, Inc. (subsidiary of North Star), a distributor of connectivityproducts.  From 1985 to 1989, he waswith Arthur Andersen & Co. in Minneapolis. Mr. Wargolet is a CPA.

 

Robert G.Brown was appointed Vice President - Sales in May of 1997.   From 1984 through 1997, Mr. Brown heldvarious sales and management positions with several groups and subsidiaries ofArrow Electronics, a leading industrial distributor in the United States.  Prior to joining Ciprico, Mr. Brown servedas Vice President Central Region.

 

There are no arrangements or understandings between any of thedirectors or any other person (other than arrangements or understandings withdirectors acting as such) pursuant to which any person was selected as adirector or nominee of the Company. There are no family relationships among theCompany’s directors or executive officers.

 

SECTION 16(A) BENEFICIALOWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requiresexecutive officers and directors of the Company, and persons who beneficiallyown more than 10 percent of the Company’s outstanding shares of Common Stock,to file initial reports of ownership and reports of changes in ownership ofsecurities of the Company with the Securities and Exchange Commission.Officers, directors and greater than 10 percent shareholders are required bySecurities and Exchange Commission regulations to furnish the Company withcopies of all Section 16(a) forms they file.

 

Based upon a review of the copies of such reports furnished to orobtained by the Company and upon other information known to the Company, theCompany believes that during the fiscal year ended September 30, 2003, allfiling requirements applicable to its directors, officers or beneficial ownersof more than 10% of the Company’s outstanding shares of Common Stock werecomplied with.

 

38

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**ITEM 11.****      EXECUTIVECOMPENSATION**

###### ** **

###### **SUMMARY COMPENSATION TABLE**

 

The following table sets forth information regarding compensation paidduring each of the Company’s last three fiscal years to the Company’s ChiefExecutive Officer and to the other executive officers whose total salary andbonus for fiscal 2003 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)** |   |
| Robert  H. Kill,                 |   | 2003     |   | 202,500                 | (2)    | —                     |   | —                              |   | — |   | 20,000 |   | — |   | 2,681 |   |
| President  and CEO               |   | 2002     |   | 195,000                 |   | —                     |   | —                              |   | — |   | 30,000 |   | — |   | 3,671 |   |
|                             |   | 2001     |   | 210,000                 | (2)    | —                     |   | —                              |   | — |   | — |   | — |   | 4,487 |   |
|                             |   |     |   |                    |   |                       |   |                                |   |   |   |   |   |   |   |   |   |
| Thomas  S. Wargolet              |   | 2003     |   | 135,000                 |   | —                     |   | —                              |   | — |   | 15,000 |   | — |   | 4,050 |   |
| Vice  President -                |   | 2002     |   | 135,000                 |   | —                     |   | —                              |   | — |   | 15,000 |   | — |   | 4,050 |   |
| Finance  and CFO                 |   | 2001     |   | 118,802                 |   | —                     |   | —                              |   | — |   | 50,000 |   | — |   | 3,356 |   |
|                             |   |     |   |                    |   |                       |   |                                |   |   |   |   |   |   |   |   |   |
| Robert  G. Brown,                |   | 2003     |   | 185,333                 |   | —                     |   | —                              |   | — |   | 15,000 |   | — |   | 5,407 |   |
| Vice  President – Sales     |   | 2002     |   | 194,548                 |   | —                     |   | —                              |   | — |   | 10,000 |   | — |   | 6,437 |   |
|                             |   | 2001     |   | 204,379                 |   | —                     |   | —                              |   | — |   | 15,000 |   | — |   | 4,801 |   |

 

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

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

 

###### **OPTION GRANTSDURING 2003 FISCAL YEAR**

 

The following table sets forthinformation regarding stock options granted to the named executive officersduring the fiscal year ended September 30, 2003. The Company has notgranted stock appreciation rights.

 
| **NAME**           |   | **NUMBER OF  SECURITIES  UNDERLYING  OPTIONS/SARS  GRANTED (#)** |   | **% OF TOTAL  OPTIONS/SARS  GRANTED TO  EMPLOYEES IN  FISCAL YEAR** |   | **EXERCISE OR BASE  PRICE ($/SH)** |   | **EXPIRATION  DATE** |     | **POTENTIAL  REALIZABLE VALUE  AT ASSUMED ANNUAL  RATES OF STOCK  PRICE APPRECIATION  FOR OPTION TERM** |   |
|--------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|------------------------------------|--------|----------------------|----------|---------------------------------------------------------------------------------------------------------|--------|
| **5% ($)**         |   | **10% ($)**                                                      |   |
|               |
|               |   |                                                             |   |                                                                |   |                               |   |                 |     |                                                                                                    |   |   |   |
| Robert H. Kill     |   | 20,000                                                           | (1)    | 7.1                                                                 | %      | $                                  | 2.89   |                 | 10/11/07 |                                                                                                    | 15,969 |   | 35,287 |   |
|               |   |                                                             |   |                                                                |   |                               |   |                 |     |                                                                                                    |   |   |   |
| Thomas S. Wargolet |   | 15,000                                                           | (1)    | 5.4                                                                 | %      | $                                  | 2.89   |                 | 10/11/07 |                                                                                                    | 11,977 |   | 26,466 |   |
|               |   |                                                             |   |                                                                |   |                               |   |                 |     |                                                                                                    |   |   |   |
| Robert G. Brown    |   | 15,000                                                           | (1)    | 5.4                                                                 | %      | $                                  | 2.89   |                 | 10/11/07 |                                                                                                    | 11,977 |   | 26,466 |   |

 

----

(1)  Such option is exercisable annually as to25% of the total number of shares, commencing October 11, 2003.

 

39

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###### **AGGREGATED OPTIONEXERCISES DURING 2003 FISCAL YEAR AND FISCAL YEAR END OPTION VALUES**

 

Thefollowing table provides information related to options exercised by the namedexecutive officers during fiscal 2003 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)** |   |
|--------------------|--------|--------------------------------------|--------|-------------------------|--------|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
|               |   |                                 |   |                    |   |                                                                                |   |                                                                                                  |   |
| Robert H. Kill     |   | 0                                    |   | N/A                     |   | 67,500 / 37,500                                                                     |   | 27,050 / 48,150                                                                                       |   |
|               |   |                                 |   |                    |   |                                                                                |   |                                                                                                  |   |
| Thomas S. Wargolet |   | 0                                    |   | N/A                     |   | 48,750 / 43,250                                                                     |   | 16,163 / 31,988                                                                                       |   |
|               |   |                                 |   |                    |   |                                                                                |   |                                                                                                  |   |
| Robert G. Brown    |   | 0                                    |   | N/A                     |   | 31,000 / 30,000                                                                     |   | 13,413 / 29,238                                                                                       |   |

 

----

(1)  These amounts represent the differencebetween the exercise price of the in-the-money options and the market price ofthe Company’s Common Stock on September 30, 2003.  The closing price of the Company’s CommonStock on that day on the NASDAQ Stock Market was $5.00.  Options are in-the-money if the market valueof the shares covered thereby is greater than the option exercise price.

 

The following table providesinformation as of September 30, 2003 about the Company’s equity compensationplans.

 
| **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     |   | 936,325                                                                                             |   | $                                                                                   | 6.70   |                                                                                                                                                 | 642,320 | (1) |
|                                                        |   |                                                                                                |   |                                                                                |   |                                                                                                                                                 |    |   |
| Equity  compensation plans not approved by security holders |   | N/A                                                                                                 |   | N/A                                                                                 |   | N/A                                                                                                                                                  |    |

 

----

(1)  Includes 479,919 options reserved for issuance under the 1999Amended and Restated Stock Option Plan, 74,271 shares reserved for issuanceunder the 1996 Restricted Stock Plan and 88,130 shares reserved for issuanceunder the 1996 Employee Stock Purchase Plan.

 

##### **OTHERCOMPENSATION ARRANGEMENTS**

 

Robert H.Kill, the Company’s President and Chief Executive Officer has entered into anEmployment Agreement and Change of Control Agreement with the Company. TheEmployment Agreement has a two-year term and is renewable at the discretion ofthe Board of Directors within a period one-year prior to the scheduledtermination date of the agreement. Among other things, the Employment Agreement provides for salary andbonus payments, as established by the Board of Directors.  Under the terms of the Employment Agreement,if Mr. Kill is terminated without cause the agreement provides for salarypayments for the remaining term of the agreement. Mr. Kill also would beprecluded from employment in any capacity, during the two years aftertermination of employment with the Company, in any business or activitycompetitive with the Company’s principal businesses.  Mr. Kill has also entered into a Change of Control Agreement(“Agreement”) with the Company. In the event Mr. Kill’s employment isterminated without good cause or he should voluntarily terminate such

 

40

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employment with good reasonwithin a twelve-month period following a change of control of the Company, theAgreement provides for a lump sum severance payment equal to 12 months ofcurrent base salary.

 

Thomas S.Wargolet, the Company’s Vice President of Finance and Chief Financial Officer,has entered into a Severance Agreement (“Severance Agreement”) with theCompany. 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 twelve-month period following a change ofcontrol of the Company, the Severance Agreement provides for a lump sumseverance payment equal to 12 months of current base salary.

 

Robert G.Brown, the Company’s Vice President of Sales, has entered into a Change ofControl Agreement (“Agreement”) with the Company. In the event Mr. Brown’semployment is terminated without good cause or he should voluntarily terminatesuch employment with good reason within a twelve-month period following achange of control of the Company, the Agreement provides for a lump sum severancepayment equal to 12 months of current base salary.

##### ** **

##### **DIRECTORCOMPENSATION**

 

Directors who are not employees of the Company receive $250 for eachBoard meeting attended in addition to a monthly fee and annual restricted sharegrant based on their respective committee participation on the Board.  Mr. Hansen receives a monthly fee of $1,500and an annual grant of 1,500 restricted shares of common stock for his role asChairman of Board and the Human Capital Committee.  Mr. Vekich receives a monthly fee of $1,000 and an annual grantof 1,000 restricted shares of common stock for his role as Chairman of theAudit Committee.  Messrs. Burniece,Griffiths and Hudson receive a monthly fee of $500 and an annual grant of 500 restrictedshares of common stock.   The restrictedshares vest over a twelve-month period. In addition, each non-employee director receives an annual grant ofseven-year stock options for 3,000 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.

 

In addition, any director who is elected or re-elected to the Board,receives a seven-year 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.

 

Under the previous compensation arrangements, Messrs. Burniece,Griffiths, Hansen, Hudson and Vekich each received an option to purchase 6,000shares at $6.00 per share on January 30, 2003.

 

**HUMAN CAPITAL COMMITTEE REPORT ON EXECUTIVECOMPENSATION**

 

Committee  Interlocks  and Insider  Participation.  The Human Capital Committee of the Board ofDirectors of the Company is currently composed of directors Thomas F. Burniece,Mark D. Griffiths and James W. Hansen. None of the members of the Committee is an employee or officer of theCompany and none is affiliated with any entity other than the Company withwhich an executive officer of the Company is affiliated.

 

Overview and Philosophy. The Company’s executive compensation programis comprised of base salaries, annual and quarterly performance bonuses,long-term incentive compensation in the form of stock options and restrictedstock grants and various benefits, including the Company’s savings plan andemployee stock purchase plan in which all qualified employees of the Companyparticipate. In addition, the Human Capital Committee from time to time mayaward special cash bonuses, stock options and restricted stock grants inconnection with new hiring, promotions or non-recurring, extraordinaryperformance.

 

The Human Capital Committee has followed a policy of paying annual basesalaries, which are on the moderate side of being competitive in its industryand of awarding 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.

 

The Company’sexecutive officers participate in the Company’s stock option and restrictedstock plans as well as the management cash bonus plan described above.  There were no cash bonuses earned byexecutive officers in fiscal 2003.

 

General. The Company provides medical and insurance benefits to itsexecutive officers, which are generally available to all Companyemployees.  The Company has a savingsplan in which all qualified employees, including the executive officers, mayparticipate.  Each year the Companycontributes to the savings plan an amount equal to fifty percent of the firstsix percent of gross wages for each employee who participates in the savingsplan.  The company may contribute anadditional two percent of gross wages based on the operating profit of theCompany for the fiscal year and plan contributions by the individualemployee.  The amount of perquisitesallowed to executive officers, as determined in accordance with rules of theSecurities and Exchange Commission, did not exceed 10% of salary in fiscal2002.

 

41

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Chief Executive Officer Compensation. Robert H. Kill served as theCompany’s Chief Executive Officer in fiscal 2003.  His annual base salary and eligibility for a cash bonus wasdetermined in accordance with the policies described above as applicable to allexecutive officers. His base salary was $195,000 for fiscal 2003.  There were 20,000 options granted to Mr.Kill during fiscal 2003.  Mr. Kill’sparticipation in the bonus plan for fiscal 2004 will be 55% of his base salary.

 

Summary. The Human Capital Committee annually reviews its compensationpolicies but anticipates generally continuing its policy of paying relativelymoderate base salaries, basing bonuses on specific revenue and operating profitgoals and granting stock options and restricted stock to provide long-termincentives.

 
| MEMBERS OF THE HUMAN CAPITAL COMMITTEE |
|----------------------------------------|
|                                   | Thomas F. Burniece |
|                                   | Mark D. Griffiths |
|                                   | James W. Hansen |

 

42

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**STOCKPERFORMANCE CHART**

 

The following chart comparesthe cumulative total shareholder return on the Company’s Common Stock with theS&P SmallCap 600 Index and the S&P Computer Storage & PeripheralsIndex.  The comparison assumes $100 wasinvested on September 30, 1998 in the Company’s Common Stock and in eachof the foregoing indices and assumes reinvestment of dividends.

 

 

43

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**ITEM 12.****     SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

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  730 E. Lake Street  Wayzata, MN  55391     |   | 675,083                                  | (1)    | 14.4                 | %      |
|                                                                             |   |                                     |   |                 |   |
| Dimensional Fund Advisors, Inc.  1299 Ocean Avenue  Santa Monica, CA  90401 |   | 343,725                                  | (1)    | 7.3                  | %      |
|                                                                             |   |                                     |   |                 |   |
| Laurence W. Lytton  28 Sherwood Place  Scarsdale, NY  10583                 |   | 291,890                                  | (1)    | 6.2                  | %      |
|                                                                             |   |                                     |   |                 |   |
| Leviticus Partners, L.P.  30 Park Avenue, Suite 12F  New York, NY  10016    |   | 240,000                                  | (1)    | 5.1                  | %      |

 

----

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

 

**MANAGEMENT SHAREHOLDINGS**

 

The following table sets forth the number of shares of Common Stockbeneficially owned as of November 14, 2003 by each executive officer ofthe Company named in the Summary Compensation Table, by each current directorand by all directors and executive officers (including the named individuals)as a group.  Unless otherwise indicated,the shareholders listed in the table have sole voting and investment powerswith respect to the shares indicated.

 

| **NAME OF DIRECTOR OR  IDENTITY OF GROUP**         |   | **NUMBER OF  SHARES  BENEFICIALLY OWNED** |   | **PERCENT OF CLASS (1)** |    |
|----------------------------------------------------|--------|-------------------------------------------|--------|--------------------------|---------|
| Robert H. Kill                                     |   | 150,300                                   | (2)    | 3.2                      | %       |
| Thomas S. Wargolet                                 |   | 54,750                                    | (3)    | 1.2                      | %       |
| Thomas F. Burniece                                 |   | 46,000                                    | (4)(5) | 1.0                      | %       |
| Robert G. Brown                                    |   | 40,356                                    | (6)    |                     | *  |
| James W. Hansen                                    |   | 17,500                                    | (4)(7) |                     | *  |
| Mark D. Griffiths                                  |   | 12,000                                    | (4)(8) |                     | *  |
| Thomas G. Hudson                                   |   | 7,500                                     | (4)(9) |                     | *  |
| Michael M. Vekich                                  |   | 1,000                                     | (4)    |                     | *  |
| All officers and directors as a  Group (8 persons) |   | 327,404                                   | (10)   | 7.0                      | %       |

 

----

*   Less than 1%

 

(1)Shares not outstanding but deemed beneficially owned by virtue of the right ofa person to acquire them as of November 14, 2003, or within sixty days ofsuch date, are treated as outstanding only when determining the percent ownedby such individual and when determining the percent owned by a group.

 

(2)Amount includes 20,000 shares held by Mr. Kill’s wife and 67,500 sharespurchasable upon exercise of options presently exercisable or exercisablewithin sixty days of November 14, 2003.

 

(3)Amount includes 48,750 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

44

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(4) Does not include anyoptions which will be granted to such individual as of the date of the 2004Annual Meeting.

 

(5) Amount includes 45,000shares purchasable upon exercise of options presently exercisable orexercisable within sixty days of November 14, 2003.

 

(6)Amount includes 31,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

(7) Amountincludes 11,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

(8)Amount includes 10,500 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

(9)Amount includes 6,000 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

(10)Amount includes 219,750 shares purchasable upon exercise of options presentlyexercisable or exercisable within sixty days of November 14, 2003.

 

**ITEM13.****      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

**ITEM14.****      PRINCIPALACCOUNTING FEES AND SERVICES**

 

Grant ThorntonLLP has acted as the Company’s independent auditors for the fiscal year endedSeptember 30, 2003.

 

***Audit Fees.***  The aggregate fees billed by Grant ThorntonLLP for professional services rendered in connection with the audit of theCompany’s annual financial statements for fiscal 2003 and 2002 and included inthe Company’s Forms 10-Q for fiscal 2003 and 2002 were $48,200 and $46,000,respectively.

 

***Audit Related Fees.***  The aggregate fees billed by Grant ThorntonLLP for products and services provided by the principal accountant, other thanthe Company’s annual financial statements and the Company’s Forms 10-Q for thefiscal year ended September 30, 2003 and 2002 were $5,500 and $5,500,respectively.  These fees were primarilyfor the audit of the Company’s benefit plan.

 

***Tax Fees.***  The aggregate fees billed by Grant ThorntonLLP for professional services rendered by the principal accountant for taxcompliance, tax advice and tax planning for the fiscal year endedSeptember 30, 2003 and 2002 were $15,300 and $15,400, respectively.  These fees were primarily for thepreparation of the Company’s income tax returns.

 

***All Other Fees.***  The aggregate fees billed by Grant ThorntonLLP for products and services provided by the principal accountant other thanAudit Fees, Audit Related Fees and Tax Fees for the fiscal year endedSeptember 30, 2003 and 2002 were $2,750 and $0, respectively.  This fee was for the review of the Company’sTender Offer Statement filed on November 5, 2002.

 
| **ITEM 15.** |   | **EXHIBITS, FINANCIAL STATEMENTS AND REPORTS  ON FORM 8-K**                                    |
|--------------|--------|------------------------------------------------------------------------------------------------|
|         |   |                                                                                           |
| (a)          |   | Exhibits. See “Exhibit Index” on page following  financial statement schedules. |
|         |   |                                                                                           |
| (b)          |   | Financial  Statement Schedules.  See Schedule II on page following signatures.       |
|         |   |                                                                                           |
| (c)          |   | Reports on  Form 8-K.                                                                          |

 

The Companyfiled a Current Report on Form 8-K dated July 22, 2003 with the Commissionwith respect to the press release dated July 22, 2003 to announce andfurnish the Company’s results of operations for the quarter endedJune 30, 2003.

 

No otherreports on Form 8-K were filed during the three months ending September 30,2003.

 

45

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SIGNATURES

 

Pursuant tothe 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 12, 2003 | By     | /s/    | Robert H.  Kill                                          |   |
|                          |   |   | Robert H.  Kill, Chief Executive   Officer and President |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

(Power of Attorney)

 

Each personwhose signature appears below constitutes and appoints ROBERT H. KILL andTHOMAS S. WARGOLET his true and lawful attorneys-in-fact and agents, eachacting alone, with full power of substitution and resubstitution, for him andin his name, place and stead, in any and all capacities, to sign any or allamendments to this Annual Report on Form 10-K and to file the same, with allexhibits thereto, and other documents in connection therewith with theSecurities and Exchange Commission, granting unto said attorneys-in-fact andagents, each acting alone, full power and authority to do and perform each andevery act and thing requisite and necessary to be done in and about thepremises, as fully and to all intent and purposes as he might or could do inperson, hereby ratifying and confirming all said attorneys-in-fact and agents,each acting alone, or his substitute or substitutes, may lawfully do or causeto be done by virtue thereof.

 
| **Signature**           |   | **Title**                               |   | **Date**                |   |
|-------------------------|--------|-----------------------------------------|--------|-------------------------|--------|
|                    |   |                                    |   |                    |   |
| /s/ Robert  H. Kill     |   | President,  Chief Executive Officer and |   |                    |   |
| Robert H.  Kill         |   | Director                                |   | December 12,  2003 |   |
|                    |   | (Principal  executive officer)          |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ Thomas  S. Wargolet |   | Vice  President - Finance and Chief     |   | December 12,  2003 |   |
| Thomas S.  Wargolet     |   | Financial  Officer (Principal           |   |                    |   |
|                    |   | financial  and accounting officer)      |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ Michael  M. Vekich  |   | Director                                |   | December 12,  2003 |   |
| Michael M.  Vekich      |   |                                    |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ James W.  Hansen    |   | Director                                |   | December 12,  2003      |   |
| James W.  Hansen        |   |                                    |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ Mark D.  Griffiths  |   | Director                                |   | December 12,  2003 |   |
| Mark D.  Griffiths      |   |                                    |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ Thomas  G. Hudson   |   | Director                                |   | December 12,  2003 |   |
| Thomas G.  Hudson       |   |                                    |   |                    |   |
|                    |   |                                    |   |                    |   |
| /s/ Thomas  F. Burniece |   | Director                                |   | December 12,  2003 |   |
| Thomas F.  Burniece     |   |                                    |   |                    |   |

 

46

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**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS**

 
|                          |   |                                 |       | **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, 2003       |   | $                                    | 560,000    |                                | $          | 92,000                          |       | —         |       | $ | — |   | $ | 652,000 |   |
| September 30, 2002       |   | 409,000                              |       | 151,000                             |       | —                          |       | —         |       | 560,000 |   |
| September 30, 2001       |   | 408,000                              |       | 274,000                             |       | —                          |       | (273,000       | )A         | 409,000 |   |
|                          |   |                                 |       |                                |       |                            |       |           |       |   |   |
| Warranty reserve              |   |                                 |       |                                |       |                            |       |           |       |   |   |
| September 30, 2003       |   | $                                    | 502,000    |                                | $          | 140,000                         |       | —         |       | $ | (255,000 | )B | $ | 387,000 |   |
| September 30, 2002       |   | 423,000                              |       | 296,000                             |       | —                          |       | (217,000       | )B         | 502,000 |   |
| September 30, 2001       |   | 223,000                              |       | 242,000                             |       | —                          |       | (42,000        | )B         | 423,000 |   |

 

----

A - Deductions representaccounts receivable written-off during the year.

 

B - Deductions representwarranty work performed during the year.

 

47

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

EXHIBIT INDEXTO FORM 10-K

 
| For the  fiscal year ended | Commission File No.:  0-11336 |
|----------------------------|------------------------------------|
| September 30,  2003   |                               |

 

CIPRICO INC.

 

 
| **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, 199*                                                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                           |
| 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                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                           |
| 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.***                                                                                                                                                                                                                                      |

 

48

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| 10.14** |   | Severance  Agreement dated November 15, 2003 between Thomas S. Wargolet and Ciprico  Inc.***      |
|---------|--------|--------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                   |
| 10.15** |   | Change of  Control Agreement dated November 15, 2003 between Robert G. Brown and  Ciprico Inc.*** |

 
| 22     |   | Subsidiaries  of the Registrant                                                                               |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|   |   | **Name**                                                                                                      |   | **Jurisdiction  of Incorporation** |
|   |   |                                                                                                          |   |   |
|   |   | Ciprico  International Limited                                                                                |   | England |
|   |   |                                                                                                          |
| 23.1   |   | Consent of  Grant Thornton LLP                                                                                |
|   |   |                                                                                                          |
| 24     |   | Power of  Attorney from Certain Directors––see Signature Page                                       |
|   |   |                                                                                                          |
| 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 managementcontract or compensatory plan or arrangement required to be filed as an exhibitto this Form 10-K.

***   Filed herewith

 

49

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