** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13OF THE SECURITIES EXCHANGE ACT OF 1934**

 
| **For the fiscal year ended September 30,  2002** |   | **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 pursuant to Section12(b) of the Exchange Act:**None**

 

Securities registered pursuant to Section12(g) of the Exchange Act:**Common Stock**

 

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

 

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

 

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Theaggregate market value of the Common Stock held by nonaffiliates of the Registrantas of October 25, 2002 was approximately $14.1 million (based upon the last sale price of the Registrant’s CommonStock on such date).

 

Shares of Common Stockoutstanding at October 25, 2002: 4,741,167 shares

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the Registrant’sProxy Statement for the 2003 Annual Meeting of Shareholders are incorporatedherein by reference in Part III, as indicated.

 

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CIPRICO INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED SEPTEMBER 30, 2002

 
| PART I            |                                                                                            |
|-------------------|-------------------------------------------------------------------------------------------------|
| Item 1            | Description of Business                                                                         |
| Item 2            | Properties                                                                                      |
| Item 3            | Legal Proceedings                                                                               |
| Item 4            | Submission of Matters to a Vote of Security  Holders                                            |
|              | Executive Officers of the Registrant                                                            |
|              |                                                                                            |
| 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           |
|              |                                                                                            |
| 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           | Controls and Procedures                                                                         |
|              |                                                                                            |
| Item  15          | Exhibits,  Financial Statements and Reports on Form 8-K                                         |
|              |                                                                                            |
|              | Signatures                                                                                      |
|              | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                       |
|              | Schedule II – Valuation and Qualifying  Accounts                                           |
|              | Exhibit Index to form 10-K                                                                      |
|              |                                                                                            |
| Exhibit 23.1      | Consent of  Independent Certified Public Accountants                                            |
|              |                                                                                            |
| Exhibit 99.1 | Cautionary  Statements                                                                          |
| Exhibit 99.2 | Certifications  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |
| Exhibit 99.3 | Certifications  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |

 

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**NOTE REGARDING FORWARD–LOOKING STATEMENTS**

 

When used inthis Form 10-K, the words “may,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “intend,” “potential” or “continue” andsimilar expressions are generally intended to identify forward-lookingstatements. These forward-looking statements involve risks and uncertainties.Actual results could 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) unanticipated risks associated with introducing new products andfeatures, (vi) other events and other important factors disclosedpreviously and from time to time in our filings with the U.S. Securities andExchange Commission and in Exhibit 99.1 to this Form 10-K.

 

We assume noobligation to update any forward-looking statements. These statements are onlypredictions reflecting our current views with respect to current events.  Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements.  We do not intend to update or revise anyforward-looking statements whether as a result of new information, futureevents or otherwise.

 

**Glossaryof Terms**

 

**Digital Media Workflow**

The process involved with themovement of digital media data within an application workflow, including, butnot limited to, ingesting, capturing, creating, editing, processing, archiving,retrieving, sharing and publishing.

#  

**Disk array**

A collection of standard, independentdisks and/or disk sub-systems linked together to produce increased performanceand high-volume storage capacity, utilizing redundancy techniques to ensure theintegrity of the data.

 

**Failover**

The transfer of operation froma failed component (i.e. controller, disk drive) to a similar, redundantcomponent to ensure uninterrupted data flow and operability.

 

**Fault tolerance**

The ability for a system toremain operational, sometimes in a degraded mode, even though one or moreelements of the system have failed. Fault tolerance is obtained through the use of redundant components ormodules.

 

**Fibre Channel**

An industry-standard peripheraland networking interface used to connect servers to shared storage devices.

 

**iSCSI**

Internet SCSI is an IP basedStorage Networking Protocol that provides access to shared storage devicesutilizing the mapping of SCSI transport protocol over TCP/IP, allowing SCSIstorage controllers to be attached to IP networks.

 

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**Infiniband**

Infiniband is a high-bandwidth,low latency, low overhead interconnect technology used to interconnectprocessors, I/O devices and other systems in the form of a system area network.Infiniband is independent of the host-operating system and processor platform.It is highly scalable enabling a high extensible architectural design.

 

**Isochronous**

Performance that supportsnetwork-wide timing requirements.  Atypical application for isochronous transmission is a broadcast environmentwhich needs information to be delivered at a continuous and steady rate.

 

**JBOD**

An acronym for *Just a Bunchof Disks*. A disk array technology that does not use hardware RAIDcontrollers. It is a low-cost storage alternative for applications that do notrequire redundancy.

 

**NAS**

An acronym for *NetworkAttached Storage*. NAS devices are storage devices that users connectto via a networking interface such as Ethernet instead of through traditionalstorage interfaces such as SCSI.

 

**RAID**

An acronym for *RedundantArray of Independent Disks*. RAIDs use multiple techniques formanaging collections of disks in such a way to provide desirable cost,availability and performance.

 

**SAN**

An acronym for *Storage AreaNetwork*. SAN technology allows multiple workstations and/or fileservers to directly access common, shared storage devices. This is in contrastto the traditional client-server storage paradigm in which a storage device isdedicated to a single file server.

 

**SCSI**

An acronym for *SmallComputer System Interface*. SCSI interface is used to connectmicrocomputers to SCSI peripheral devices, such as many hard disks andprinters, 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.                  DESCRIPTION OF BUSINESS**

 

**General Development of Business**

 

Ciprico Inc. designs,manufactures and markets storage and system solutions for digital mediaapplications within the broadcast and entertainment, military and government,and enterprise markets. Our solutions combine storage, networking and computingtechnologies to simplify and accelerate digital media workflows. Our storagesolutions are designed for visual computing applications ranging fromhigh-speed image data capture, through processing and analysis, to real-timeplayback at sustained performance levels.

 

We were incorporated under thename Computer Products Corporation in February 1978 and changed our name toCiprico Inc. in May 1983.  Until 1990,we developed and manufactured controller-based products for manufacturers andend users of computer systems.  In late1990, we introduced for sale our first RAID data storage product. Today ourbusiness is focused on providing storage solutions that meet the demanding datatransfer rate, 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 ofopen platform, disk-based storage solutions for high performance visual imagingapplications.  This includes productsthat implement a variety of RAID techniques including RAID 3 for single stream bandwidth,RAID 4 for multi-stream high bandwidth, and RAID 5 for high input/output (I/O)oriented uses.  We also provide SANsolutions, focused on the networking of demanding visual workgroupapplications.  Like many other computerapplications, the trend in visual computing is toward random access, digitaldata storage and away from traditional analog tape storage or filmmethods.  Our primary target marketsegments include broadcast and entertainment and military and government.  We believe our expertise is ourunderstanding of the applications for digital media workflows within our targetmarkets.

 

**Narrative Description of Business**

 

(1)**           Products and Services.**

 

***Products*.**

 

Our product line consistsmainly of storage systems.  Wedesign, develop and manufacture all of our storage products to operate at peakperformance levels while maintaining connectivity consistent within industrystandards. We offer customers a choice of several different series of storagesolutions depending on their needs. Prices for our storage products generally range from a list price of$17,000 to $130,000 per system depending on the features selected by thecustomer.  Applications may require oneor several systems.

 

*6900 Series*. Introduced in 1996, our 6900 Series disk arrays use the SCSI peripheralinterface standard UltraSCSI.  Whilemaintaining compatibility with SCSI-2, the UltraSCSI interface offers atransfer rate of 40 megabytes (MB) per second, twice the speed of Fast WideSCSI-2.  The 6900 Series also includesseveral redundancy features, including hot swap drives and power supplies.  The 6900 product was discontinued in May2002.

 

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*6500 Series.* The 6500 Series of disk arrays, targeted atentry-level or low-cost application environments, was introduced in 1996.  The 6500 Series utilizes the Ultra SCSIinterface, offers 40 MB per second transfer rate and allows users to swap diskdrives without losing data or performance. The 6500 product uses ATA diskdrives (also known as IDE disk drives) internally.  ATA disk drives are most commonly found in personalcomputers.  Use of these drives enablesus to offer a low-cost solution to customers while meeting their performance,data redundancy and cost requirements. The 6500 product was discontinued in May2002.

 

*7000 Fibre Channel Series*.  Infiscal 1997, we began shipping our 7000 Series disk array, the industry’s firststorage device to offer a host interface compatible with full speed FibreChannel.  The 7000 Series offers a peaktransfer rate of 100 MB per second and a sustained transfer rate in excess of90 MB per second.  This storage deviceis capable of transferring uncompressed video images in real-time to preservequality, or simultaneously transferring several dozen streams of compressedvideo images. The 7000 Series is based on SCSI drive technology and consists ofnine Fast/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 storagecapacity can grow to over 8 TB with only seven arrays. The 7000 Series has hotswap disk drives, power supplies and fans.

 

*FibreSTORE**Ò Products.*  Theinitial member of this family, the FibreSTORE JBOD began shipping in December1998.  It features full Fibre Channelconnectivity between the disk drives as well as to the host computer, full dualloop Fibre Channel connections and redundant power supplies and fans.Configurations of up to seven FibreSTORE enclosures containing up to 63 FibreChannel 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 thefamily, FibreSTORE RAID was introduced in October 1999.  FibreSTORE RAID adds data redundancyfeatures to FibreSTORE insuring uninterrupted data availability at fullperformance levels and service without disruption.  The FibreSTORE RAID system can be configured with single or dualRAID controllers and up to 8 TB of Fibre Channel disk storage in a singlerack.  Each controller is a fullyindependent, caching controller designed to give optimum performance in datastreaming applications such as digital video and multiple stream videoplayback.  It is designed to delivercontinuous, sustainable data rates at close to 200 MB per second with the dualcontroller option.

 

The next generation ofFibreSTORE RAID, the 2210 is expected to be released by the end of calendar2002.  This product is an extension tothe original FibreSTORE RAID and offers improvements in maximum performanceusing 2 gigabit (Gb) Fibre Channel technology, increased storage density byutilizing new mechanical packaging, and enhanced application performance in thearea of insured, uninterrupted data availability at full performance levelswithout disruption.  These features makethe product unique in the marketplace, and the best-in-class product for highbandwidth applications.  The JBODversion of the 2210 began shipping in December 2001.

 

*NETarray**Ò*. * *In late 2000, webegan shipping the NETarray 1000.  Thisproduct features full Fibre Channel connectivity between the disk drives andthe host computer.  Designed for bothhigh performance and high availability, the NETarray 1000 has full dual loopFibre Channel 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.

 

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The NETarray RAID is acontroller system that provides RAID 5 data redundancy to NETarray JBODs.  The system utilizes a controllermanufactured by Mylex Corporation and can be configured with either single ordual controllers and over 18 TB of Fibre Channel disk storage in a singlerack.  Each controller is a fullyindependent, caching controller designed to give optimum performance inapplications requiring high I/O data flow, such as Web streaming, rendering andtransaction processing.

 

*TALON**ä 1000.*  The TALON 1000 is an extensionof the NETarray family and is targeted toward the military marketplace, whereadded levels of ruggedization are required. The TALON 1000 began shipping in March 2002.   The TALON product is designed to meet the demanding environmentsof airborne, ground based and shipboard applications.  Additionally, the product includes a unique feature of aremovable disk pack, where the entire set of disks can be removed and/orreplaced in a single operation.  Thisfeature is key to many surveillance and reconnaissance applications within themilitary.

 

*Management Software. *We provideconfiguration and management software for all of our storage and systems solutions.  These software products – Storage Manager(STORM) and Web Manager - enable the user to monitor the performance and healthof our storage and systems products in real-time.  Users can gain access to our storage and system solutions via thein-band Fibre Channel interface or via an ethernet port, depending upon thecustomer’s needs.  Our software utilitiesare platform independent to support the wide variety of computer platforms ourproducts are used with.

 

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 array software platform and includesunique features 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 will utilize this common array software platformmoving forward.  As these productsevolve, we have developed the ability of the software to port easily to fasterand more powerful processor technologies as they become available in the marketplace, 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.  Softwareis not sold separately from our hardware and is integral to the applicationsand performance of our hardware products.

 

*DiMeda**ä ProductFamily.*  Our DiMeda family of products is ournext-generation of products based on an underlying common library networkedattached (NAS) software.  The DiMeda 2400, released in March 2002, wasthe initial product release of this family.  This product family isdesigned to provide high performance,high-availability, shared storage utilizing IP based networking protocols.  DiMeda utilizes a file based shared storagesystem delivering near-FibreChannel SAN performance with the ease-of-use of an appliance.  The level of streaming bandwidth performanceis a cost effective solution.

 

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.

 

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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 –such as bandwidth management.  Bandwidthmanagement enables system administrators to designate some users as higherpriority in a shared storage environment – thus assuring performance to themost critical applications within a workflow. We intend to release new versions of DiMeda software approximately everysix months.

 

*Controllers*.  Salesof controller boards represented approximately 1% of sales for fiscal2002.  We expect sales of controllers torepresent a decreasing percentage of net sales in the future.

 

*Storage Area Networks*. Crossing all of our vertical markets is the need for Storage AreaNetwork (SAN) capabilities.  A SAN is atechnology that allows multiple workstations and/or file servers to directlyaccess common, shared storage devices. This is in contrast to the traditional client-server storage paradigm inwhich a storage device is dedicated to a single file server.  SANs utilize a Fibre Channel-based,networking infrastructure that provides a number of benefits over traditionalsimple, server-attached storage.  Thesebenefits include providing the same high-performance storage pool across anumber of users, centralized management of the storage, higher productivity andthe ability to seamlessly add increased storage.  Our applications include digital broadcast editing, video andaudio streaming, and film post-production.

 

As an extension of our productofferings, we offer 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. We believe this value-added professional service assists customers ininstalling and managing data centers and storage networks better than theycould on their own.

 

To providethese SAN solutions, we work with other storage industry vendors such asBrocade Communications and Advanced Digital Information Corporation byimplementing their products as part of the overall solution to meet the needsof our customers.  We seek to strengthenour relationships with existing strategic partners and develop new partnershipswith leading vendors in the SAN market to offer additional products that arecomplimentary to our solutions.

 

***Technical Support.***

 

We provide our customers withongoing technical assistance and a variety of spare parts programs to assurefailures are identified and repairs are made quickly.  Our Advantage Support Program allows the customer to choose whichspares they will use for disk array support. Our Hot Spares Program provides the customer with delivery ofreplacement parts from an authorized Ciprico parts depot.  Depots are currently located in Minneapolis,Los Angeles, Amsterdam 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 areturn-to-factory parts and labor warranty against defects in materials andworkmanship covering a period of three years from the date of shipment tocustomers.  Extended warranty andmaintenance services are also offered to customers in addition to the primarywarranty.  All repair work for ourproducts is presently done at our manufacturing facility in Plymouth,Minnesota.

 

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(2)**           Marketing and Distribution.**

 

***Markets.***

 

Our marketfocus is visual computing applications. Within the visual computing market, our primary focus is on applicationsin broadcast and entertainment and military and government.  In addition, we have historically sold inother markets such as geosciences, medical imaging and digital prepress.  In each of these markets, we focus on useswhere our customers need high bandwidth, high I/O, or combinations of both tomeet their application needs.

 

Inherent to all theapplications within each of our markets is a “digital media workflow” which isthat industry’s version of a production line. In the case of the broadcast market, the workflow is characterized byingesting incoming video feeds from satellites and remote news crews, editingthe raw video to prepare the news story, and then a “play-to-air” process wherethe video 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*.  Thismarket segment includes companies that create, edit, manipulate and broadcastimages, in real-time playback, using digital technology, which provides reducedcost of ownership and increased productivity over linear film and videotape.  An emerging segment of theentertainment market is the digital broadcast market, with the new highdefinition television (HDTV) standards mandated in the United States.  Our solutions meet the requirements ofbroadcast and video services applications, which require very high bandwidth tosupply many simultaneous video streams to multiple users where interruption of serviceand dead airtime is not acceptable. With images stored as data, new applications for storage devices withinthe television broadcast segment will include electronic news gathering,commercial and promotional insertion and TV broadcast.  Digital broadcast markets will also includesuch applications as campus and distance learning, movies on demand andin-flight entertainment systems.

 

Other industry market segments include moviestudios, post-production houses, video production houses, and digital cinemaOEMs.  Applications within this marketsegment have traditionally included such things as 3D animation, specialeffects, film restoration and editing, and now include the emerging applicationof digital cinema.  Film and videoproduction require extremely high image resolution because the final image willbe enlarged many times when it is displayed on a movie screen.  Digital cinema involves utilizing digitalcontent distributed electronically to the theaters, and digital projectors toproject the movie on to the screen.

 

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

 

Mission planning, intelligencegathering and targeting applications involve data capturing via airborne orspace-based satellite sensors in reconnaissance and surveillanceapplications.  A single image frameranges from a few megabytes up to 14 GB in size, with the data capture phaserequiring the collection of hundreds 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 board the aircraft and the imagery data is also captured at a very hightransfer rate.  In the image processingand archiving applications, the imagery data created from the capture phase mustbe processed before it is usable for end-users.  Once processed, the imagery data is stored into digital asset

 

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managementdatabases for fast query and retrieval. These databases often reach multiple terabytes in size and require thehigh bandwidth performance our disk arrays provide.

 

Infrastructure upgrades involve a variety of peripheral applicationssuch as inventory management, duty schedules, personnel records, etc. thatsupport military operations.  Theseapplications generally involve large databases that utilize transaction-basedstorage solutions.  In some instancesthese solutions require unique features to meet the demanding environments ofairborne, ground based and shipboard applications.

 

*Other Markets*.  Ourproducts are also used in applications in the geosciences, medical imaging anddigital prepress markets.  Thegeosciences market segment is comprised mainly of major oil and gas explorationcompanies.   Seismic information can bedisplayed through 3D images representing underground geological formations byusing high performance workstations and storage solutions. This method enablesthe exploration company to locate oil fields and determine optimal drillingsites. Within the medical imaging market segment, applications for our storagesolutions include diagnostic imaging, picture archival communication systemsand 3D imaging applications.  Within thedigital prepress market segment, computer-to-plate or direct-to-pressmanufacturers utilize storage solutions to optimize performance.  Digital technology eliminates the materialcosts of photographic film, increases the quality and accuracy of imagereproduction, and provides the printer with tools for quick turnaround.

 

***Distribution.***

 

We have identified segments ofthe visual computing market and allocated marketing resources to support itsprincipal market segments. Market managers with an in-depth understanding ofthe applications develop a comprehensive marketing plan tailored to the needsof each market segment, including market and promotional strategy.  In addition, we rely on our experiencedsystem engineers to support our marketing and sales efforts.

 

Our products are soldprincipally through a direct sales force, although we do have relationshipswith a limited number of system integrators. Our direct sales organization is primarily responsible for “demandcreation” activities and customer development. We have direct salesrepresentatives in Boston, Dallas, Washington D.C., Minneapolis, Northern andSouthern California, and the Southeastern and Pacific Northwest sections of theUnited States. We also have an international sales office in Newbury, England.

 

As part of ourmarketing and sales strategy, we enter into relationships with companies whocould play an important role in the successful marketing of our products. Ourstorage solutions are sold to OEMs for inclusion in their own computer systems,systems integrators and large end-users (including government departments andagencies).  The initial sales process iscomplex, requiring interaction with several layers of the customer’sorganization and extensive technical exchanges as well as productdemonstrations.  As a result, ourtypical sales cycle can span up to nine months.

 

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

 

See item (10) below.

 

(4)**           Competition.**

 

The market forall levels of storage solutions is highly competitive.  In some of our markets, we compete withtraditional suppliers of proprietary computer systems including, but notlimited to Sun Microsystems, Hitachi, IBM and Hewlett Packard which marketstorage systems as well as other computer products.  We also compete against independent storage suppliers, includingbut not limited to EMC Corporation, Dot Hill Corporation, MTI Technologies andEurologic.

 

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The markets inwhich we operate are characterized by rapidly changing technology and evolvingindustry standards, resulting in rapid product obsolescence and frequentproduct and feature introductions and improvements. We compete with severalcompanies that have greater engineering and development resources, marketingresources, financial resources, manufacturing capability, customer supportresources and name recognition. As a result, our competitors may have greater credibilitywith existing 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.

 

Our ability to competesuccessfully depends upon our ability to continue to develop high performanceproducts 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)           **Manufacturing and Suppliers.**

 

Our productsare manufactured utilizing a configure-to-order manufacturing process.  In-house manufacturing activities for ourstorage products primarily involve quality assurance testing of subassembliesand final system assembly, integration and quality assurance testing. Ourassembly operations are ISO 9001 certified, located in Plymouth, Minnesota, andare typical of the electronics industry with no unusual methods or equipmentrequired.  The sophisticated nature of ourproducts does, however, require extensive testing by skilled personnel.

 

We purchasecertain raw materials and components based on forecasted order levels.  Forecasting orders is difficult as mostshipments occur near the end of each quarter. Some of our OEM customers provideus with a forecast of expected orders, but generally customers place orders forimmediate delivery, not in advance of need. Customers may generally cancel orreschedule orders without penalties. Accordingly, we believe that backlog isgenerally not meaningful for purposes of predicting our revenue for any fiscalperiod.

 

Our storageproducts are comprised mainly of a controller, metal cabinet, disk drives,power supply and other miscellaneous parts. Many of the components are industry standard parts and readily availablefrom many suppliers at competitive prices. Our controller board assemblies are purchased from an ISO 9000,independent board assembly firm, which manufactures the assemblies to ourspecifications.  The completed boardassembly is received at our facility where it is subject to test procedures toinsure product performance, reliability and quality.  The metal enclosure and power supply are specified to our needs,but alternative sources for the components are available.

 

We dependheavily on our suppliers to provide high quality materials on a timely basisand at reasonable prices.  Although manyof the components for our products are available from numerous sources atcompetitive prices, certain key components are purchased from a singlesource.  We purchase a substantialamount of disk drives manufactured by Seagate Technology Inc. (“Seagate”).  We purchase substantially all of our componentspursuant to 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,

 

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for numerous reasons, not tocontinue to make those components or the next generation of those componentsavailable to us.

 

With respectto certain components, such as disk drives, if we had to seek alternative sourcesof supply, the incorporation of such components from alternative suppliers andthe manufacture and shipment of the our products could be delayed whilemodifications to such products and the accompanying software were made toaccommodate the introduction of the alternative suppliers’ components. Weestimate that replacing certain components, such as disk drives would involveseveral months of hardware and software modification.

 

We have nolong-term supply contracts.  There canbe no assurance that we will be able to obtain, on a timely basis, all of thecomponents we require.  If we cannotobtain essential components as required, we could be unable to meet demand forour products, thereby materially adversely affecting our operating results andallowing competitors to gain market share. In addition, scarcity of such components could result in cost increasesand adversely affect our operating results. Our principal suppliers are Bell Microproducts, Inc., Pemstar, Inc. andDu Fresne Manufacturing Co.

 

(6)**           Customer Dependence.**

 

Our products are sold to a broad base ofcustomers.  As a percentage of sales,Grass Valley Group, a division of Thomson Multimedia Inc., represented 17% ofnet sales in 2002.  Pinnacle Systemsrepresented 12% of net sales in 2002.  Adivision of Leitch Technology Corporation represented 16% of net sales in2001.  Adepartment of the U.S. Navy, made up 11% and 14% and of net sales in 2002 and2001, respectively.  Northrop Grummanrepresented 10% of net sales in 2002. Silicon Graphics, Inc. (“SGI”) represented 25% of net sales in2000.

 

(7)           **Patents and Trademarks.**

 

In conjunctionwith the acquisition of the SANStar technology in January 2001, we acquired therights to four pending patent applications. These patent applications disclose aspects of the interprocessorcommunication technology suitable for use in high reliability / availabilitystorage server products.  The patentapplications are currently being prosecuted before the U.S. Patent Office. Weare also currently in the process of pursuing patents on certain key attributesof the TALON 1000 product.

 

We have noother patents, and do not consider ownership of patents to be material to ourbusiness.  We intend to pursue otherpatent applications to the extent we identify technologies or processes thatmay be patentable.  We believe that therapidly changing technology in the computer industry makes our future successdependent more on the technical competence and creative skills of our personnelthan on any patents we may be able to obtain. However, protection of our proprietary hardware, firmware and softwareis very important to us.  We also relyupon copyright, trade secret protection, and confidentiality agreements withour employees, customers, suppliers and partners, to preserve our intellectualproperty rights in this material.  Wehave obtained federal registrations for the trademarks Ciprico®, SPECTRA 6000®,NETARRAY® and SANITY® FIBRESTORE® and have registration applications pendingfor our trademarks StorBridgeäand, Digital Media Applianceä, Accelerating theDigital Media Workflowä, DiMedaäand TALONä.

 

(8)**           Backlog.**

 

We historically have operatedon low levels of backlog, and therefore, do not consider the level of backlogto be indicative of future operating results. As of September 30, 2002, we had approximately $450,000 in backlog thatis scheduled to ship in fiscal 2003.

 

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(9)           **Government Approvals and Effectof Government Regulations.**

 

Our TALON product is subject tocertain export restrictions that require us to obtain approval of the UnitedStates State Department in order to ship TALON to certain countries outside theUnited States.  Additionally, certain ofour products may incorporate encryption or other technology subject to the“dual use” export regulations as administered by the U.S. Department ofCommerce.

 

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

 

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

 

We operate in an industrysubject to rapid technological change. Our goals in research and development are to develop leading edgeproducts that adhere to industry standards. Our ability to achieve this goal is largely dependent upon our abilityto anticipate and respond to change.  Weuse engineering design teams that work cross-functionally with marketingmanagers, system engineers and customers to develop products and productenhancements.  Computer I/O interfacestandards are maintained and an extensive disk drive qualification program isin place to monitor off-the-shelf disk drives to ensure the quality and performanceof the disk drives integrated into our storage solutions.  As part of our development strategy, weactively seek available, cooperative and co-development activities withindustry leaders in the hardware, software and systems businesses.

 

Historically, substantially allof our research and development efforts were focused on the development ofstand-alone storage devices.  We werethe first manufacturer to introduce a disk array integrating the Fibre Channel interfacein 1996 and substantially all of our products utilize interfaces. Through 1999our products were focused on high-bandwidth RAID 3 and 4 applications.  With the introduction of our NETarrayproduct in 2000, we broadened our product offering to include transaction-basedRAID 5 capabilities. Our current product development activities includeproducts supporting 2 Gb second data rates.  All Ciprico products are SAN-ready.

 

Beginning in fiscal 2001, wemade substantial investments in software development.  With the acquisition of the SANStar technology in January 2001,we added a software development team focused on developing a high-availability,network connected storage system. During fiscal 2002, we continued this investment by adding additional softwaredevelopment resources to focus on developing and extending a common arraysoftware platform that will be the basis for storage solutions developed nowand in the future. These developments are intended to support the optimizationof high-performance digital media applications.   For fiscal 2002, approximately 40% of our research anddevelopment expenses was related to software development. This amount isexpected to increase, in terms of both absolute dollars and as a percentage ofour total R&D spending during fiscal 2003.

 

We will continue to developstorage devices and expect our software development focus will increase as weemphasize the acceleration of digital media applications. We are working withseveral outside parties on the co-development and incorporation of ourtechnologies with a number of emerging storage and networking protocols andtechnologies such as Infiniband, SCSI Remote Protocol, DirectAccess File System (DAFS), Internet Protocol SCSI (iSCSI) and additional SANcapabilities. Additional areas offocus include advanced file systems and applications combining clusteredserver, high performance storage, and networking capabilities.

 

Our research and developmentexpenses were $8.8 million, $8.2 million and $4.4 million in fiscal 2002, 2001and 2000, respectively.  All of ourresearch and development expenditures are expensed as incurred.  As of October 25, 2002, we had 40 full-timeemployees engaged in research and development activities.

 

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

 

(11)         **Environmental Regulation.**

 

Compliance by us with present federal,state and local provisions regulating the discharge of material into theenvironment, or otherwise relating to the protection of the environment, hasnot had and is not expected to have any material effect upon our capitalexpenditures, earnings or competitive position.

 

(12)         **Employees.**

 

At October 25,2002, we had 100 full-time employees, of which 15 were engaged inmanufacturing, operations and quality assurance, 40 in engineering and researchand development, 35 in sales, customer service and professional services and 10in general management, information systems and administration.  None of our employees are represented by alabor union.  We have experienced nowork stoppages and believe that our employee relations are good.

 

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

 

**ITEM 2.                  PROPERTIES**

 

Our administrativeheadquarters, manufacturing and research and development operations are locatedin one building in Plymouth, Minnesota, totaling approximately 39,000 squarefeet.  This facility is leased under a 7-yearoperating lease which commenced in October 2002.  The lease provides forbase rental payments of approximately $335,000 for the first thirty-six (36)months with increases of approximately 3% each subsequent 12-monthperiod.  The lease also includes provisions for early termination after 3and 5 years.  Additionally, we areresponsible for our proportionate share of real estate taxes and operatingexpenses associated with operating the facility, as defined by the leaseagreement. We also maintain a research anddevelopment facility in Tinton Falls, New Jersey, in approximately 3,000 squarefeet of leased space which expires in February 2004.  We believe that our existing facilities and equipment are wellmaintained and in good operating condition. We own most of the equipment used in our operations.  Such equipment consists primarily ofmanufacturing and test equipment, tools, fixtures and computer hardware andsoftware.

 

**ITEM 3.                  LEGAL PROCEEDINGS**

 

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

 

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

 

No matter was submitted to avote of security holders through the solicitation of proxies or otherwiseduring the fourth quarter of our fiscal year.

 

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**EXECUTIVEOFFICERS OF THE REGISTRANT**

 

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

 
| **Name**           |   | **Age** |   | **Position(s)**                                                |
|--------------------|--------|---------|--------|----------------------------------------------------------------|
|               |   |    |   |                                                           |
| Robert H. Kill     |   | 55      |   | President and Chief Executive Officer                          |
|               |   |    |   |                                                           |
| Thomas S. Wargolet |   | 39      |   | Vice President - Finance,Chief Financial Officer and Secretary |
|               |   |    |   |                                                           |
| Robert G. Brown    |   | 49      |   | Vice President – Sales                                    |

 

Officers are elected annuallyby and serve at the discretion of the Board of Directors.  There is no family relationship between theexecutive officers of the Company.

 

Robert H. Kill has been ChiefExecutive Officer of the Company since January 1996, Chairman of the Board fromJune 1996, to November 2000, President since March 1988, and a director sinceSeptember 1987.  Mr. Kill was ExecutiveVice President of the Company from September 1987 to March 1988, Secretary fromSeptember 1987 to July 1998 and from November 1989 to October 1993, and VicePresident and General Manager from August 1986 to September 1987.  Mr. Kill held sev­eral marketing and salespositions at Northern Telecom, Inc. from 1979 to 1986, his last position beingVice President, Terminals Distribution.

 

Thomas S. Wargolet, prior tojoining Ciprico in October 2000, was Vice President – Finance / CFO ofTeeMaster.com, an internet provider of golf reservation services since October1999.  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 of1997.   From 1984 through 1997, Mr.Brown held various sales and management positions with several groups andsubsidiaries of Arrow Electronics, a leading industrial distributor in theUnited States.  Prior to joiningCiprico, Mr. Brown served as Vice President Central Region.

 

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**PART II**

 

**ITEM 5.****                     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 October 25, 2002, there were approximately 2,200 shareholderaccounts of record. Closing stock sale price ranges for the years endedSeptember 30, 2002 and 2001, were:

 
|        |   | **2001** |   | **2002** |   |
|-------------|--------|----------|--------|----------|--------|
| **Quarter** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First       |   | $        | 10.56  |     | $      | 6.63 |   | $ | 5.50 |   | $ | 3.90 |   |
| Second      |   | 10.44    |   | 7.25     |   | 6.39 |   | 5.09 |   |
| Third       |   | 8.25     |   | 6.95     |   | 5.90 |   | 4.21 |   |
| Fourth      |   | 7.67     |   | 3.80     |   | 4.35 |   | 2.95 |   |
|             |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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

 

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**ITEM 6.                  SELECTED FINANCIAL DATA**

 

Ciprico Inc. and Subsidiaries

Amounts in thousands (except per share data)

 

SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA

 
| **Years ended September 30**                          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                             |   | $        | 31,440 |     | $      | 32,983   |   | $        | 33,210 |     | $      | 34,059 |   | $ | 30,088 |   |
| Gross profit                                          |   | 10,917   |   | 13,623   |   | 14,822   |   | 17,371   |   | 15,083   |   |
| % of sales                                            |   | 34.8     | %      | 41.3     | %      | 44.6     | %      | 51.0     | %      | 50.1     | %      |
| Operating expenses                                    |   | 20,327   |   | 22,611   |   | 17,311   |   | 16,059   |   | 16,029   |   |
| % of sales                                            |   | 64.7     | %      | 68.6     | %      | 52.1     | %      | 47.1     | %      | 53.3     | %      |
| Income (loss) from operations                         |   | (9,410   | )      | (8,988   | )      | (2,489   | )      | 1,312    |   | (946     | )      |
| % of sales                                            |   | (29.9    | )%     | (27.3    | )%     | (7.5     | )%     | 3.8      | %      | (3.1     | )%     |
| Other income, net                                     |   | 956      |   | 1,866    |   | 1,992    |   | 1,803    |   | 1,951    |   |
| Income tax expense (benefit)                          |   | (1,950   | )      | 440      |   | (188     | )      | 1,059    |   | 342      |   |
| Net income (loss)                                     |   | $        | (6,504 | )        | $      | (7,562   | )      | $        | (309   | )        | $      | 2,056 |   | $ | 663 |   |
| Shares used to calculate net income (loss)  per share |   |     |   |     |   |     |   |     |   |     |   |
| Basic                                                 |   | 4,895    |   | 5,050    |   | 4,990    |   | 4,914    |   | 5,023    |   |
| Diluted                                               |   | 4,895    |   | 5,050    |   | 4,990    |   | 5,015    |   | 5,221    |   |
| Net income (loss) per share—Basic                |   | $        | (1.33  | )        | $      | (1.50    | )      | $        | (.06   | )        | $      | .41 |   | $ | .13 |   |
| Diluted                                               |   | $        | (1.33  | )        | $      | (1.50    | )      | $        | (.06   | )        | $      | .41 |   | $ | .13 |   |

 

 

SELECTED CONSOLIDATED BALANCESHEET DATA

 
| **September 30**          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Working capital           |   | $        | 27,029 |     | $      | 29,392   |   | $        | 33,643 |     | $      | 34,129 |   | $ | 35,557 |   |
| Total assets              |   | 38,115   |   | 44,679   |   | 51,781   |   | 53,238   |   | 49,473   |   |
| Shareholders’ equity |   | 32,238   |   | 39,530   |   | 47,287   |   | 47,290   |   | 45,309   |   |
|                           |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |

 

**ITEM 7.****    ****                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Critical Accounting Policiesand Estimates

 

Financial Reporting Release No.60 of the Securities and Exchange Commission, requests that all companiesinclude a discussion of critical accounting policies or methods used in thepreparation of financial statements. Note 1 of the Notes to the ConsolidatedFinancial Statements includes a summary of the significant accounting policiesand methods used in the preparation of our Consolidated Financial Statements.The following is a brief discussion of the more significant accounting policiesand methods used by Ciprico Inc (“the Company, we and our”).

 

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General

 

Management’s discussion andanalysis of Ciprico’s financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. The mostsignificant estimates and assumptions relate to the recoverability ofreceivables and inventories. Actual amounts could differ significantly fromthese estimates.

 

Revenue Recognition

 

We recognize revenue inaccordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition inFinancial Statements” (“SAB 101”), as amended by SAB 101A and 101B. SAB 101requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices rendered; (3) the fee is fixed and determinable; and (4)collectibility is reasonably assured. Products sold are generally covered by awarranty for periods up to three years. We accrue a warranty reserve withincost of sales for estimated costs to provide warranty services. We estimate thecosts to service our warranty obligations based on historical experience andexpectation of future conditions. Revenue from the sale of extended warranty and maintenance agreements isdeferred and recognized on a straight-line basis over the term of the relatedagreement.

 

Accounts Receivable

 

We perform ongoing creditevaluations of our customers and adjust credit limits based upon paymenthistory and the customer’s current credit worthiness, as determined by ourreview of their current credit information. We continuously monitor collectionsand payments from our customers and maintain a provision for estimated creditlosses based upon our historical experience and any specific customercollection issues that we have identified. While such credit losses havehistorically been within our expectations and the provisions established, wecan not guarantee that we will continue to experience the same credit lossrates that we have in the past. Since our accounts receivable are concentratedin a relatively few number of customers, a significant change in the liquidityor financial position of any one of these customers could have a materialadverse impact on the collectibility of our accounts receivable and our futureoperating results.

 

Inventories

 

We value our inventory at thelower of the actual cost to purchase and/or manufacture the inventory or thecurrent estimated market value of the inventory. We regularly review inventoryquantities on hand and record a provision to reduce excess and obsoleteinventory so estimated market value based primarily on our estimated forecastof product demand and production requirements for the next twelve months orexpected life of the representative product. A significant decrease in demandcould result in an increase in the amount of excess inventory quantities onhand. If actual market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required. Additionally, ourestimates of future product demand may prove to be inaccurate, in which case wemay have understated or overstated the provision required for excess andobsolete inventory. If our inventory is determined to be overvalued, we wouldbe required to recognize such costs in our cost of goods sold at the time ofsuch determination.  We do not adjustour lower of cost or market adjustment to inventory components upward once areduction was determined to be necessary.

 

We make every effort to ensurethe accuracy of our forecasts of future product demand, however any significantunanticipated changes in demand or technological developments could have asignificant impact on the value of our inventory and our reported operatingresults.  In the fourth quarter of 2002,we recorded an adjustment of $700,000 to reduce certain legacy productinventory to 

 

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market value due to excessestimated inventory levels of certain legacy products discontinued duringfiscal 2002 and planned product migration of new product introductions releasedin fiscal 2002 or scheduled for release in early fiscal 2003.

 

Warranty

 

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

 

Deferred Taxes

 

We record a valuation allowanceto reduce our net deferred tax assets to the amount that is more likely thannot to be realized. We recognize deferred tax assets and liabilities based onthe differences between the financial statement carrying amounts and the taxbases of assets and liabilities. We regularly review the deferred tax assetsfor recoverability and establish a valuation allowance based on historicaltaxable income or loss, projected future taxable income or loss, and theexpected timing of the reversals of existing temporary differences.

 

The following discussion andanalysis of the financial condition and results of operations of Ciprico Inc.and its subsidiaries should be read in conjunction with the ConsolidatedFinancial Statements and the Notes thereto, included elsewhere in this Report.

 

OVERVIEW

Ciprico Inc. designs, manufactures and markets storage and systemsolutions for digital media applications. Our solutions combine storage, networking and computing technologies tosimplify and accelerate digital media workflows. Our primary markets arebroadcast and entertainment, which include applications in digital broadcastand film and video production and military and government which includeapplications involving the data capture, processing and dissemination ofsurveillance images.  In addition, wehave historically sold in other markets with high-performance storagerequirements such as geosciences, digital prepress and medical imaging.

 

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

 

|                       |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                  |   | 100.0    | %      | 100.0    | %      | 100.0    | %      |
| Cost of sales              |   | 65.2     |   | 58.7     |   | 55.4     |   |
| Gross profit               |   | 34.8     |   | 41.3     |   | 44.6     |   |
|                       |   |     |   |     |   |     |   |
| Operating expenses:        |   |     |   |     |   |     |   |
| Research and development   |   | 27.9     |   | 24.8     |   | 13.4     |   |
| Sales and marketing        |   | 27.7     |   | 34.3     |   | 32.4     |   |
| General and administrative |   | 7.9      |   | 7.6      |   | 6.3      |   |
| Restructuring charges      |   | 1.2      |   | 1.9      |   | —   |   |
| Total operating expenses   |   | 64.7     |   | 68.6     |   | 52.1     |   |
| Loss from operations       |   | (29.9    | )%     | (27.3    | )%     | (7.5     | )%     |

 

NET SALES:

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

 
|                          |   | **2002**  |   | **2001**        |   | **2000**  |   |
|-------------------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
| **Market**                    |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   |
| Broadcast & Entertainment |   | $         | 15.0   |            | 47.8   | %         | $      | 15.9 |   | 48.2 | % | $ | 15.7 |   | 47.3 | % |
| Military & Government     |   | 14.9      |   | 47.4            |   | 13.3      |   | 40.3 |   | 11.7 |   | 35.2 |   |
| Other                         |   | 1.5       |   | 4.8             |   | 3.8       |   | 11.5 |   | 5.8 |   | 17.5 |   |
| Total                         |   | $         | 31.4   |            | 100.0  | %         | $      | 33.0 |   | 100.0 | % | $ | 33.2 |   | 100.0 | % |

 
|                     |   | **2002**  |   | **2001**        |   | **2000**  |   |
|--------------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
| **Geographic  Location** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** |   | **Sales** |   | **% of  Total** | ** ** |
| Domestic                 |   | $         | 28.6   |            | 91.1   | %         | $      | 28.2 |   | 85.5 | % | $ | 24.5 |   | 73.8 |   |
| International            |   | 2.8       |   | 8.9             |   | 4.8       |   | 14.5 |   | 8.7 |   | 26.2 |   |
| Total                    |   | $         | 31.4   |            | 100.0  | %         | $      | 33.0 |   | 100.0 | % | $ | 33.2 |   | 100.0 | % |

 

Sales for 2002 were approximately $31.4 million, a decrease of 5% from2001 sales, which decreased .6% from 2000 levels. Sales from customers withinthe United States increased 1.4% during 2002 versus an increase of 15% in 2001from 2000 sales. Sales from international customers decreased 42% in 2002 and45% in 2001 from the previous year.  Webelieve our sales in fiscal 2002 and 2001 were adversely impacted by theeconomic downturn and its effect on customer demand.  We believe the effect of the economy on 

 

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demand for our products was further impacted by the September 11, 2001attack on the United States.  Thedecline in international sales for 2002 reflects decreased volumes withpost-production customers, primarily from Asia-Pacific regions following theclosure of our Singapore and Tokyo offices during the fourth quarter of fiscal2001.  Our international salesthroughout fiscal 2002 and 2001 were also impacted by economic factors in Europeand Asia-Pacific regions and reduced sales through Silicon Graphics, Inc.(“SGI”).

 

Sales in the Broadcast segment decreased 6% in 2002 versus an increaseof 1% in 2001 versus 2000.  The declinein 2002 primarily reflects reduced spending levels in this segment as a resultof the general economic slowdown.  Thedecline was partially offset by increased sales of approximately $5.7 millionfrom two Broadcast OEM customers between years.  The sales increase in 2001 reflects higher sales in our domesticoperations resulting from our increased focus during the past two years onexpanding opportunities with broadcast OEM customers.  This was offset by lower demand experienced from both Europeanand Asia-Pacific customers, including SGI.

 

Sales in the Military and Government market increased 12% in fiscal2002 and 14% during fiscal 2001, which primarily reflects higher demand in ourdomestic operations from a number of system integrators for certain defenserelated projects.  In 2002, we shippedapproximately $900,000 of our new TALON product to new and existing customersin the Military segment.  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 a medical imaging integrator andSGI.  Sales to SGI were $1.5 million in2002, $2.0 million in 2001 and $8.2 million in 2000.   This reduction with SGI also reflects a shift in our strategyduring the past three years of developing products and opportunities thatsupport more open system platforms.

 

Our revenue growth in the future is dependent on our ability to providenew products and expand the applications of our products into targeted marketsegments. The NETarray family of products was released in fiscal 2000. Salesfrom NETarray products were approximately $11.9 million in 2002, $10.3 millionin 2001 and $1.1 million in 2000.  TheNETarray product provided us expanded market opportunities for RAID 5applications and contributed to the growth in domestic sales in each of theprimary market segments.  We expect torelease our FibreSTORE 2210 at the end of calendar 2002, which we believe willresult in a migration of customer demand from the NETarray and our legacy 7000products.

 

COST OF SALES AND GROSS PROFIT:

Gross profit, as a percentageof net sales, was 34.8% in 2002, 41.3% in 2001 and 44.6% in 2000. In the fourthquarter of 2002, we recorded a non-recurring adjustment of $700,000 to reducecertain legacy product inventory to market value.  The decline in margins in 2002 and 2001 reflects increased salesof the NETarray product, particularly in the Broadcast segment, which carrieslower margins.  In addition our grossprofit margins for fiscal 2002 have been adversely impacted by flattened diskdrive costs versus continued price competition, particularly on higher capacitydisk drives sold.

 

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 2003, whichcould result in a further decline in our margins. We intend to partially offsetthese margin pressures through new product introductions and cost reductions.

 

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RESEARCH AND DEVELOPMENT EXPENSES:

Research and developmentexpenses increased approximately $600,000 or 7% in 2002 and $3.7 million or 84%in 2001 versus 2000.  The increase in2001 includes approximately $620,000 of costs related to the SANStaracquisition, as discussed in Note 3 to the Consolidated FinancialStatements.   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. The increase in 2001 is primarily attributable to significantinvestments made in our software and DiMeda product development activitiesthrough the addition of new personnel including the addition of the softwaredevelopment team in New Jersey following the SANStar acquisition.  We currently do not sell software separatelyfrom our hardware.

 

We expect that research and development expenses will decrease slightlyin absolute dollars in fiscal 2003 as we shift our focus towards softwaredevelopment, which is expected to reduce the level of hardware prototypeexpenses in our product development activities.

 

SALES AND MARKETING EXPENSES:

Sales and marketing expenses decreased approximately $2.6 million or 23%in 2002 versus an increase of $535,000 or 5% in 2001 compared to 2000.  The reduction in 2002 reflects reducedheadcount between years resulting from our restructuring efforts implementedduring fiscal 2001 along with lower sales compensation related to reduced grossprofit dollars between years.  Theincrease in 2001 primarily reflects added personnel in sales, product marketingand sales engineering in addition to higher promotional expenses associatedwith our efforts to expand our presence in certain vertical markets.  We expect these expenses to decreaseslightly in absolute dollars during fiscal 2003 as a result of cost reductionsimplemented during the second half of fiscal 2002.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses were relatively unchanged between2002 and 2001 and increased approximately $400,000 or 19% in 2001 as comparedto 2000.  In the fourth quarter of 2002,we recorded costs of approximately $130,000 related to the relocation of ourcorporate headquarters.  The increase in2001 is due to lower expense in the prior year due to adjustments in bad debtprovisions in addition to the costs associated with the implementation of newinformation systems. We expect general and administrative expenses to increasein fiscal 2003 due to anticipated higher insurance costs.

 

RESTRUCTURING:

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.  Theserestructuring efforts are expected to reduce approximately $900,000 from ourfiscal 2003 operating expenses levels.

 

During fiscal 2001, we implemented two restructuring efforts.  In May 2001 we implemented a cost reductionprogram including the reduction of our workforce by 12% and the closing of ourSingapore sales office.  In September2001 we made further restructuring changes through the consolidation of certainsales and marketing management positions and the closing of our sales office inJapan.  As a result of therestructuring, we recorded charges of $620,000 during fiscal 2001 of which approximately$455,000 is employee termination costs and $165,000 is facility closure andrelated costs.

 

23

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OTHER INCOME:

Other income of $956,000, $1.9 million and $2.0 million in fiscal 2002,2001 and 2000, respectively, is primarily attributable to interest income oncash and marketable securities. The decrease in 2002 and 2001 reflects overalllower interest rates on lower average cash and investment balances.

 

INCOME TAX EXPENSE:

For 2002 the income tax benefit of $1.9million reflects recognition of current income tax benefits related to federalincome tax refunds received or expected to be received under the provisions ofthe Job Creation and Worker Assistance Act of 2002, enacted on March 9, 2002.  Of the $1.9 million, approximately $820,000was recorded in the fourth quarter of 2002 when the amount of loss for the yearbecame known.  The effective income taxexpense (benefit) was (23.0%) in 2002, 6.2% in 2001 and (37.8%) in 2000. SeeNote 4 to Consolidated Financial Statements.

 

LIQUIDITY AND CAPITAL RESOURCES:

As of September 30, 2002, we had a total of cash, cash equivalents andmarketable securities of $27.0 million compared to $30.0 million at the end of2001 and $35.4 million at the end of 2000.

 

Cash flows from (used in) operating activities were ($798,000), ($2.1)million, and $1.0 million in 2002, 2001 and 2000, respectively. The changebetween years primarily reflects the operating losses offset by overall lowerworking capital requirements in fiscal 2002. Capital expenditures were $1.3 million, $2.9 million and $1.8 million in2002, 2001 and 2000, respectively. We anticipate that capital expenditures for2003 will approximate $1.5 million due to anticipated spending on productdevelopment activities. During 2002 and 2001 we repurchased 221,000 and 100,200shares, respectively, at a total cost of approximately $972,000 and $600,000,respectively.  The total amountauthorized to be expended under the stock buyback program is $12.0million.  As of September 30, 2002,839,000 shares of common stock have been repurchased for $7.1 million.

 

Despite the cost reduction efforts implemented during fiscal 2001 and2002, we expect to incur an operating loss in fiscal 2003 due to continuedinvestments expected in new product development.  We believe that current cash balances and cash generated fromoperations will be adequate to fund requirements for operating losses, workingcapital and capital expenditures, and share repurchases, as well as anypotential acquisitions in fiscal 2003.

 

We have signed a 7-yearoperating lease for a new corporate headquarters which commenced in October2002.  The lease provides for base rental payments of approximately$335,000 for the first thirty-six (36) months with increases of approximately3% each subsequent 12-month period.  The lease also includes provisionsfor early termination after 3 and 5 years. Additionally, we are responsible for our proportionate share of realestate taxes and operating expenses associated with operating the facility, asdefined by the lease agreement.  Weexpect our operating expenses for fiscal 2003 to be reduced slightly based onthe estimated costs of the new facility. In the fourth quarter of 2002 we incurred approximately $130,000 ofcosts in connection with the relocation. In addition, we expect to incur capital expenditures up to $150,000associated with the new facility during fiscal 2003.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board issued Statementof 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.  Management does notbelieve this pronouncement will have a material effect on the

 

24

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company’sfinancial statements.

 

CAUTIONARY STATEMENTS

Any forward-looking statements included in this section or elsewhere inthis Form 10-K are subject to various risks and uncertainties, which may causeactual results to differ from the expectations set forth in theseforward-looking statements. These risks and uncertainties include, but are notlimited to, the risk factors set forth in Exhibit 99.1 to this Form 10-K.

 

 

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We do not haveany material, near-term, market rate risk.

 

 

**ITEM 8.                  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

CONSOLIDATED BALANCE SHEETS

CipricoInc. and Subsidiaries

Dollars in thousands

 
| **September 30**                                                                             |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| ASSETS                                                                                       |   |     |   |     |   |
| CURRENT ASSETS:                                                                              |   |     |   |     |   |
| Cash and cash equivalents                                                                    |   | $        | 6,413  |     | $      | 6,377 |   |
| Marketable securities                                                                        |   | 18,071   |   | 17,499   |   |
| Accounts receivable, less allowance of $560  in 2002 and $409 in 2001                        |   | 3,590    |   | 3,841    |   |
| Inventory                                                                                    |   | 3,145    |   | 5,254    |   |
| Income taxes receivable                                                                      |   | 789      |   | 869      |   |
| Other current assets                                                                         |   | 898      |   | 701      |   |
| Total current assets                                                                         |   | 32,906   |   | 34,541   |   |
|                                                                                         |   |     |   |     |   |
| Property and equipment, at cost:                                                             |   |     |   |     |   |
| Furniture and fixtures                                                                       |   | 722      |   | 721      |   |
| Equipment                                                                                    |   | 12,986   |   | 14,082   |   |
| Leasehold improvements                                                                       |   | 429      |   | 429      |   |
|                                                                                         |   | 14,137   |   | 15,232   |   |
| Accumulated depreciation and amortization                                                    |   | (11,529  | )      | (11,328  | )      |
| Net property and equipment                                                                   |   | 2,608    |   | 3,904    |   |
|                                                                                         |   |     |   |     |   |
| Marketable securities                                                                        |   | 2,547    |   | 6,139    |   |
| Other assets                                                                                 |   | 54       |   | 95       |   |
|                                                                                         |   | $        | 38,115 |     | $      | 44,679 |   |
|                                                                                         |   |     |   |     |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                    |   |     |   |     |   |
| CURRENT LIABILITIES:                                                                         |   |     |   |     |   |
| Accounts payable                                                                             |   | $        | 2,724  |     | $      | 2,570 |   |
| Accrued compensation                                                                         |   | 698      |   | 680      |   |
| Warranty accrual                                                                             |   | 502      |   | 423      |   |
| Accrued restructuring                                                                        |   | 370      |   | 441      |   |
| Other accrued expenses                                                                       |   | 1,185    |   | 662      |   |
| Deferred revenue                                                                             |   | 398      |   | 373      |   |
| Total current liabilities                                                                    |   | 5,877    |   | 5,149    |   |
|                                                                                         |   |     |   |     |   |
| COMMITMENTS                                                                                  |   | —   |   | —   |   |
|                                                                                         |   |     |   |     |   |
| SHAREHOLDERS` EQUITY:                                                                        |   |     |   |     |   |
| Common stock, 4,812,167 shares and  4,979,703 shares issued and outstanding in 2002 and 2001 |   | 48       |   | 50       |   |
| Additional paid-in capital                                                                   |   | 35,188   |   | 36,013   |   |
| Retained earnings (deficit)                                                                  |   | (2,966   | )      | 3,538    |   |
| Deferred compensation from restricted stock                                                  |   | (32      | )      | (71      | )      |
| Total shareholders’ equity                                                              |   | 32,238   |   | 39,530   |   |
|                                                                                         |   | $        | 38,115 |     | $      | 44,679 |   |

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PARTOF THESE FINANCIAL STATEMENTS.

 

25

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CONSOLIDATED STATEMENTS OF OPERATIONS

Ciprico Inc. and Subsidiaries

Amounts in thousands, except per share amounts

 
| **Years ended September 30**              |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                 |   | $        | 31,440 |     | $      | 32,983   |   | $ | 33,210 |   |
| Cost of sales                             |   | 20,523   |   | 19,360   |   | 18,388   |   |
| Gross profit                              |   | 10,917   |   | 13,623   |   | 14,822   |   |
| Operating  expenses:                      |   |     |   |     |   |     |   |
| Research and  development                 |   | 8,767    |   | 8,189    |   | 4,445    |   |
| Sales and  marketing                      |   | 8,699    |   | 11,303   |   | 10,768   |   |
| General and  administrative               |   | 2,491    |   | 2,499    |   | 2,098    |   |
| Restructuring  charges                    |   | 370      |   | 620      |   | —   |   |
| Total operating  expenses                 |   | 20,327   |   | 22,611   |   | 17,311   |   |
| Loss from  operations                     |   | (9,410   | )      | (8,988   | )      | (2,489   | )      |
|                                      |   |     |   |     |   |     |   |
| Other income,  primarily interest         |   | 956      |   | 1,866    |   | 1,992    |   |
| Loss before  income taxes                 |   | (8,454   | )      | (7,122   | )      | (497     | )      |
|                                      |   |     |   |     |   |     |   |
| Income tax  expense (benefit)             |   | (1,950   | )      | 440      |   | (188     | )      |
| Net loss                                  |   | $        | (6,504 | )        | $      | (7,562   | )      | $ | (309 | ) |
| Shares used to  calculate loss per share: |   |     |   |     |   |     |   |
| Basic and diluted                         |   | 4,895    |   | 5,050    |   | 4,990    |   |
|                                      |   |     |   |     |   |     |   |
| Loss per share:                           |   |     |   |     |   |     |   |
| Basic and diluted                         |   | $        | (1.33  | )        | $      | (1.50    | )      | $ | (.06 | ) |

 

THE ACCOMPANYING NOTES AREAN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY

Ciprico Inc. and Subsidiaries

Amounts in thousands, except share data

 
| **Years ended September 30, 2002, 2001 and 2000** |   | **Shares** |   | **Common  stock and  additional  paid-in-  capital** |   | **Retained  earnings  (deficit)** |   | **Deferred  compensation  from  restricted  stock** |   | **Total** |   |
|---------------------------------------------------|--------|------------|--------|------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------------------------|--------|-----------|--------|
| Balance, September 30, 1999                       |   | 4,954,779  |   | $                                                    | 35,978 |                              | $      | 11,409                                              |   | $         | (97)   |   | $ | 47,290 |   |
|                                              |   |       |   |                                                 |   |                              |   |                                                |   |      |   |
| Exercise of  employee stock options               |   | 89,711     |   | 256                                                  |   | —                            |   | —                                              |   | 256       |   |
| Tax benefit  related to options                   |   | —     |   | 80                                                   |   | —                            |   | —                                              |   | 80        |   |
| Employee plan  stock purchases                    |   | 17,151     |   | 159                                                  |   | —                            |   | —                                              |   | 159       |   |
| Restricted stock  issued                          |   | 3,650      |   | 37                                                   |   | —                            |   | (37                                                 | )      | —    |   |
| Amortization of  restricted stock                 |   | —     |   | —                                               |   | —                            |   | 74                                                  |   | 74        |   |
| Net loss                                          |   | —     |   | —                                               |   | (309                              | )      | —                                              |   | (309      | )      |
| Repurchase of  common stock                       |   | (25,000    | )      | (263                                                 | )      | —                            |   | —                                              |   | (263      | )      |
| Balance,  September 30, 2000                      |   | 5,040,291  |   | 36,247                                               |   | 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     |   | 164                                                  |   | —                            |   | —                                              |   | 164       |   |
| Restricted stock  issued                          |   | 9,000      |   | 83                                                   |   | —                            |   | (83                                                 | )      | —    |   |
| 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  |   | 36,063                                               |   | 3,538                             |   | (71                                                 | )      | 39,530    |   |
|                                              |   |       |   |                                                 |   |                              |   |                                                |   |      |   |
| Employee plan  stock purchases                    |   | 48,251     |   | 121                                                  |   | —                            |   | —                                              |   | 121       |   |
| Restricted stock  issued                          |   | 5,153      |   | 24                                                   |   | —                            |   | (24                                                 | )      | —    |   |
| 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  |   | $                                                    | 35,236 |                              | $      | (2,966                                              | )      | $         | (32    | ) | $ | 32,238 |   |

 

THE ACCOMPANYING NOTES AREAN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Ciprico Inc. and Subsidiaries

Amounts in thousands

 
| **Years ended September 30**                                                                      |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash Flows from  Operating Activities:                                                            |   |     |   |     |   |     |   |
| Net loss                                                                                          |   | $        | (6,504 | )        | $      | (7,562   | )      | $ | (309 | ) |
| Adjustments to  reconcile net loss to net cash flows provided by (used in) operating  activities: |   |     |   |     |   |     |   |
| Depreciation and  amortization                                                                    |   | 2,631    |   | 2,145    |   | 2,507    |   |
| Deferred income  taxes                                                                            |   | —   |   | 1,348    |   | 97       |   |
| Compensation  related to stock transactions                                                       |   | 63       |   | 72       |   | 74       |   |
| Changes in  operating assets and liabilities:                                                     |   |     |   |     |   |     |   |
| Accounts  receivable                                                                              |   | 251      |   | 1,691    |   | 1,430    |   |
| Inventory                                                                                         |   | 2,109    |   | 506      |   | (1,157   | )      |
| Other assets                                                                                      |   | (156     | )      | (99      | )      | (139     | )      |
| Accounts payable                                                                                  |   | 154      |   | (215     | )      | 144      |   |
| Accrued expenses                                                                                  |   | 549      |   | 884      |   | 202      |   |
| Income taxes                                                                                      |   | 80       |   | (869     | )      | (944     | )      |
| Deferred revenue                                                                                  |   | 25       |   | (14      | )      | (857     | )      |
| Net cash flows  provided by (used in) operating activities                                        |   | (798     | )      | (2,113   | )      | 1,048    |   |
| Cash Flows from  Investing Activities:                                                            |   |     |   |     |   |     |   |
| Equipment  purchases                                                                              |   | (1,335   | )      | (2,922   | )      | (1,800   | )      |
| Other, net                                                                                        |   | —   |   | (116     | )      | (12      | )      |
| Purchase of  marketable securities                                                                |   | (34,460  | )      | (45,111  | )      | (46,386  | )      |
| Proceeds from  sale or maturity of marketable securities                                          |   | 37,480   |   | 53,410   |   | 46,815   |   |
| Net cash flows  provided by (used in) investing activities                                        |   | 1,685    |   | 5,261    |   | (1,383   | )      |
| Cash Flows from  Financing Activities:                                                            |   |     |   |     |   |     |   |
| Proceeds from  issuance of common stock                                                           |   | 121      |   | 332      |   | 555      |   |
| Repurchase of  common stock                                                                       |   | (972     | )      | (599     | )      | (263     | )      |
| Net cash flows  provided by (used in) financing activities                                        |   | (851     | )      | (267     | )      | 292      |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                                             |   | 36       |   | 2,881    |   | (43      | )      |
| Cash and Cash  Equivalents at Beginning of Year                                                   |   | 6,377    |   | 3,496    |   | 3,539    |   |
| Cash and Cash  Equivalents at End of Year                                                         |   | 6,413    |   | 6,377    |   | 3,496    |   |
| Marketable  Securities—Current                                                               |   | 18,071   |   | 17,499   |   | 21,867   |   |
| Marketable  Securities—Long-term                                                             |   | 2,547    |   | 6,139    |   | 10,070   |   |
| Total Cash and  Investments at End of Year                                                        |   | $        | 27,031 |     | $      | 30,015   |   | $ | 35,433 |   |

 

THE ACCOMPANYING NOTES AREAN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Ciprico Inc. and Subsidiaries - September 30,2002, 2001 and 2000

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS: The principal business activity ofCiprico Inc. and subsidiaries (the Company) is the design, manufacture andmarketing of high-performance, direct-attached and networked storage solutionsfor digital media applications.

 

CONSOLIDATION: The accompanying consolidatedfinancial statements include the accounts of Ciprico Inc. and its wholly ownedsubsidiaries, Ciprico International Limited, Ciprico Asia-Pacific Inc. andCiprico FSC, Inc. (a foreign sales corporation). All significant intercompanybalances and transactions have been eliminated.

 

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

 

REVENUE RECOGNITION: Revenue is recognizedupon shipment of products. Revenue from extended warranty and maintenanceagreements is recognized on the straight-line basis over the term of theagreement.

 

PRODUCT WARRANTY COSTS: Estimated futurewarranty costs are provided for at the time of revenue recognition.

 

RESEARCH AND DEVELOPMENT COSTS: Research anddevelopment costs are charged to expense as incurred.

 

INVENTORY: Inventory is stated at the lowerof cost or replacement market. Cost is determined using the first-in, first-outmethod. Inventory costs include outside assembly charges, allocatedmanufacturing overhead and direct material costs. In thefourth quarter of 2002 the Company recorded an adjustment of $700,000 to reduce certain legacy product inventoryto market value due to excess estimated inventory levels ofcertain legacy products discontinued during fiscal 2002.  Inventoryconsists of the following (in thousands) at September 30:

 

|            |   | **2002** |   | **2001** |   |
|-----------------|--------|----------|--------|----------|--------|
| Finished Goods  |   | $        | 1,158  |     | $      | 2,078 |   |
| Work-In-Process |   | 292      |   | 837      |   |
| Raw Materials   |   | 1,695    |   | 2,339    |   |
|            |   | $        | 3,145  |     | $      | 5,254 |   |

 

CASH AND CASH EQUIVALENTS: The Companyconsiders all highly liquid temporary investments with original maturities ofthree months or less to be cash equivalents. At September 30, 2002 and 2001 theCompany’s cash and cash equivalents were invested in a money market fund and/orcommercial 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.

 

29

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MARKETABLE SECURITIES: The Company hasinvested its excess cash in commercial paper and government agencies. Theseinvestments are classified as held-to-maturity given the Company’s intent andability to hold the securities to maturity and are carried at amortized cost.Investments that have maturities of less than one year have been classified ascurrent marketable securities.

 

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

 

|                      |   | **2002** |   | **2001** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Current                   |   |     |   |     |   |
| Commercial Paper          |   | $        | 15,568 |     | $      | 13,497 |   |
| U.S. Government  Agencies |   | 2,503    |   | 4,002    |   |
|                      |   | 18,071   |   | 17,499   |   |
| Non-current               |   |     |   |     |   |
| Commercial Paper          |   | 1,509    |   | 3,627    |   |
| U.S. Government  Agencies |   | 1,038    |   | 2,512    |   |
|                      |   | 2,547    |   | 6,139    |   |
|                      |   | $        | 20,618 |     | $      | 23,638 |   |

 

PROPERTY AND EQUIPMENT: Property andequipment is carried at cost, less accumulated depreciation and amortization.Depreciation is provided using the straight line method over estimated usefullives of eighteen months to seven years or, in the case of leaseholdimprovements, over the period of the related lease, if shorter. Majorreplacements and improvements are capitalized; repairs and maintenance areexpensed as incurred. Accelerated and straight-line methods of depreciation areused for income tax reporting.

 

EARNINGS PER SHARE: The Company’s basicearnings per share amounts are computed by dividing net income by the weightedaverage number of outstanding common shares. Diluted earnings per share iscomputed by dividing net income by the weighted average number of outstandingcommon shares and common share equivalents attributable to the assumed exerciseof dilutive stock options.

 

For the fiscal years ended September 30,2002, 2001, and 2000, 39,671, 11,842, and 89,564 shares of common stockequivalents were excluded from the computation of earnings per share since theywere antidilutive due to the net loss incurred by the Company. Options topurchase 925,967, 831,750, and 569,948 shares of common stock with a weightedaverage exercise price of $8.94, $11.00, and $13.52 were outstanding atSeptember 30, 2002, 2001 and 2000, but were excluded from the computation ofcommon share equivalents for the fiscal year because they were antidilutive astheir exercise price exceeded the average trading price for the period.

 

FOREIGN CURRENCY: The financial statements ofCiprico International Limited have been translated into U.S. dollars inaccordance with the provisions of SFAS No. 52 “Foreign Currency Translation.”Under SFAS No. 52, assets and liabilities are translated into U.S. dollars atthe year-end exchange rate, while income and expenses are translated at theaverage exchange rates during the year. The resulting translation adjustmentsare not material.

 

30

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NEW ACCOUNTING PRONOUNCEMENTS:

 

In June 2002, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 146 (SFAS 146), *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS 146 provides financial accountingand reporting guidance for costs associated with exit or disposal activities,including one-time termination benefits, contract termination costs other thanfor a capital lease, and costs to consolidate facilities or relocateemployees.  This statement is effectivefor exit or disposal activities that are initiated after December 31,2002.  Management does not believe thispronouncement will have a material effect on the Company’s financialstatements.

 

2. RESTRUCTURING ACTIVITY

 

InSeptember 2002, the Company implemented a workforce reduction of 13% as well asfurther 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.

 

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

 

Employeetermination costs consist primarily of severance payments for terminatedemployees. The facility closure and related costs consist of lease terminationcosts for the closing of the international sales offices and writedown ofcertain fixed assets.

 

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

 

| **Years ended September 30, 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 |   |

 

3. ACQUISITION

 

On February 7, 2001 the Company completed theacquisition of the SANStar 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.

 

31

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4. INCOME TAXES

 

Income tax expense (benefit) consists of thefollowing (in thousands):

 

| **Years ended September 30** |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                     |   |     |   |     |   |     |   |
| Federal                      |   | $        | (1,927 | )        | $      | (975     | )      | $ | (323 | ) |
| State                        |   | 6        |   | 24       |   | 6        |   |
| Foreign                      |   | (29      | )      | 43       |   | 32       |   |
|                         |   | (1,950   | )      | (908     | )      | (285     | )      |
|                         |   |     |   |     |   |     |   |
| Deferred                     |   | —   |   | 1,348    |   | 97       |   |
|                         |   | $        | (1,950 | )        | $      | 440      |   | $ | (188 | ) |

 

Deferred income taxes arise from temporarydifferences between financial and tax reporting. The tax effects of the cumulativetemporary differences resulting in the net deferred tax assets are as follows(in thousands):

 

| **As of September 30**           |   | **2002** |   | **2001** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Current deferred  tax assets:    |   |     |   |     |   |
| Inventory                        |   | $        | 870    |     | $      | 542 |   |
| Allowance for  doubtful accounts |   | 217      |   | 150      |   |
| Warranty accrual                 |   | 184      |   | 155      |   |
| Loss and credit  carryforwards   |   | 2,340    |   | 1,664    |   |
| Compensation  accrual            |   | 221      |   | 222      |   |
| Other                            |   | 145      |   | 2        |   |
| Less – valuation  allowance |   | (3,977   | )      | (2,735   | )      |
| Current deferred  tax asset      |   | —   |   | —   |   |
|                             |   |     |   |     |   |
| Long-term  deferred tax assets:  |   |     |   |     |   |
| Depreciation                     |   | 804      |   | 346      |   |
| Less – valuation  allowance |   | (804     | )      | (346     | )      |
| Long-term  deferred tax asset    |   | —   |   | —   |   |
|                             |   | $        | — |     | $      | — |   |

 

At September 30, 2002, the Company had netoperating loss carry forwards of approximately $4.4 million, which expire in2022, and general business credit carry forwards of approximately $658,000,which expire at various dates from 2016 to 2021.

 

32

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For 2002 the income tax benefit of $1.9 million reflects recognition ofcurrent income tax benefits related to Federal income tax refunds received orexpected to be received under the provisions of the Job Creation and WorkerAssistance Act of 2002, enacted on March 9, 2002. Of this amount approximately$1.1 million was received during fiscal 2002 and approximately $820,000 wasrecorded in the fourth quarter of 2002. The following is areconciliation of the federal statutory income tax rate to the consolidatedeffective tax rate:

 

| **Years ended September 30**                    |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal statutory  rate                         |   | (34.0    | )%     | (34.0    | )%     | (34.0    | )%     |
| State taxes, net  of federal income tax benefit |   | —   |   | (.2      | )      | .8       |   |
| Change in  valuation allowance                  |   | 9.3      |   | 40.9     |   | —   |   |
| Foreign tax rate  differential                  |   | .3       |   | (.1      | )      | (8.6     | )      |
| Meals and  entertainment                        |   | .1       |   | .3       |   | 4.6      |   |
| Other, net                                      |   | 1.3      |   | (.7      | )      | (.6      | )      |
|                                            |   | (23.0    | )%     | 6.2      | %      | (37.8    | )%     |

 

Cash paid for income taxes was approximately$13,000 in 2002, $67,000 in 2001 and $551,000 in 2000.

 

5. SHAREHOLDERS’EQUITY

 

Authorized Shares

 

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

 

Stock Repurchase

 

During 1998, the Company initiated a stockbuyback program of up to $6.0 million, which was increased by $6.0 million in2001, bringing the total amount allowed to be expended under the plan to $12.0million. As of September 30, 2002, 839,040 shares of common stock have beenrepurchased for $7.1 million.

 

Stock Option Plans

 

The Company has a stock option plan underwhich officers, directors, employees and consultants have been or may begranted incentive and nonqualified stock options to purchase the Company’scommon stock at fair market value on the date of grant. The options becomeexercisable over varying periods and expire up to ten years from date of grant.At September 30, 2002, the Company had 280,944 shares reserved for futureissuance under the plan.

 

33

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Option transactions under the Company’s stockoption plans during the three years ended September 30, 2002 are summarized asfollows:

 

|                                  |   | **Number of  Shares** |   | **Weighted  Average  Exercise Price** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------------------------|--------|
| Outstanding at  September 30, 1999    |   | 959,811               |   | $                                     | 11.00  |   |
| Granted                               |   | 269,500               |   | 10.06                                 |   |
| Exercised                             |   | (89,711               | )      | 4.60                                  |   |
| Canceled                              |   | (85,662               | )      | 11.37                                 |   |
| 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                                  |   |
| Options  exercisable at September 30: |   |                  |   |                                  |   |
| 2000                                  |   | 567,014               |   | $                                     | 12.37  |   |
| 2001                                  |   | 548,212               |   | 11.56                                 |   |
| 2002                                  |   | 604,851               |   | 9.65                                  |   |

 

The following table summarizes informationregarding outstanding and exercisable 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** |   |
| $                               | 3.71 – 5.57 |                     | 266,875 |   | 4.0 years |   | $ | 3.89 |   | 23,250 |   | $ | 3.80 |   |
| 5.80 – 8.70                |             | 358,750                  |    | 2.7 years |   | 7.50 |   | 179,625 |   | 7.79 |   |
| 8.81 – 13.22               |             | 468,250                  |    | 2.0 years |   | 10.19 |   | 345,976 |   | 10.30 |   |
| 13.63 – 20.45              |             | 56,000                   |    | 0.1 years |   | 14.02 |   | 56,000 |   | 14.02 |   |
|                            |             | 1,150,625                |    |   |   |   |   | 604,851 |   |   |   |
|                                 |                  |                          |         |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average fair value of optionsgranted in 2002, 2001 and 2000 was $1.46, $2.56 and $4.24 per share. The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants in 2002, 2001 and 2000: no dividend yield;risk-free rate of return of 3.1%, 4.7% and 6.3%; volatility of 46.1%, 49.7% and55.5%; and an average term of 3.0 years, 3.0 years and 3.0 years. The Company’s2002, 2001 and 2000 pro forma net income (loss) and net income (loss) per sharewould have been ($7.1 million), ($8.6 million) and ($1.7 million) or ($1.45),($1.70) and ($.34) per share had the fair value method been used for valuingoptions granted during 2002, 2001 and 2000. These effects may not berepresentative of the future effects of applying the fair value method.

 

34

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Employee Stock Purchase Plan

 

The 1996 Employee Stock Purchase Plan(“ESPP”) provides for the purchase by eligible employees of Company commonstock at a price equal to 85% of the market price on either the commencement orthe termination date of each six-month plan phase, whichever is lower.Participants may authorize payroll deductions up to 10% of their base salaryduring the plan phase to purchase the stock. Since inception of the ESPP, atotal of 131,391 shares have been issued. At September 30, 2002, the Companyhad 18,609 shares reserved for future issuance under the ESPP.

 

Restricted Stock Plan

 

The 1996 Restricted Stock Plan (“RSP”)provides for common stock awards to officers and certain key employees of theCompany. Restricted stock vests generally after continued employment for aperiod of up to five years. All restricted stock awards entitle the participantto full dividend and voting rights. Since inception of the RSP, a total of48,523 shares have been issued. At September 30, 2002, the Company had 94,630shares reserved for future issuance under the RSP.

 

6. EMPLOYEE BENEFIT PLAN

The Company participates in a 401(k) savingsplan covering substantially all of its employees. Minimum contributions to theplan by the Company are 50 percent of employee contributions up to the first 6percent of the participants’ salaries. Contributions in addition to the minimummay also be made by the Company based on the Company’s financial performance.The Company’s contributions to the plan in 2002, 2001 and 2000 wereapproximately $262,000, $256,000 and $187,000.

 

7. SEGMENT INFORMATION

The Company operates in a single reportablesegment.

 

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

 

|          |   | **2002** |   | **2001** |   | **2000** |   |
|---------------|--------|----------|--------|----------|--------|----------|--------|
| North America |   | $        | 28,667 |     | $      | 28,188   |   | $ | 24,512 |   |
| Europe        |   | 2,176    |   | 2,285    |   | 4,540    |   |
| Japan         |   | 458      |   | 1,744    |   | 2,132    |   |
| Other foreign |   | 139      |   | 766      |   | 2,026    |   |
|          |   | $        | 31,440 |     | $      | 32,983   |   | $ | 33,210 |   |

 

The Company has no material long-lived assetsoutside of the United States.

 

Sales to significant customers, as apercentage of net sales, are as follows:

 

|       |   | **2002** |   | **2001** |   | **2000** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Customer A |   | 17       | %      | 1        | %      | —   | %      |
| Customer B |   | 12       |   | 9        |   | 5        |   |
| Customer C |   | 11       |   | 14       |   | 8        |   |
| Customer D |   | 10       |   | 5        |   | 2        |   |
| Customer E |   | 5        |   | 16       |   | 3        |   |
| Customer F |   | 5        |   | 6        |   | 25       |   |
|       |   | 60       | %      | 51       | %      | 50       | %      |

 

35

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Receivables from significant customers atSeptember 30, are as follows (in thousands):

 

|       |   | **2002** |   | **2001** |   | **2000** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Customer A |   | $        | 876    |     | $      | 467      |   | $ | — |   |
| Customer B |   | 175      |   | 374      |   | 72       |   |
| Customer C |   | 892      |   | 603      |   | 1,150    |   |
| Customer D |   | 57       |   | 78       |   | 270      |   |
| Customer E |   | 125      |   | 691      |   | —   |   |
| Customer F |   | 164      |   | 196      |   | 524      |   |
|       |   | $        | 2,289  |     | $      | 2,409    |   | $ | 2,016 |   |

 

8. COMMITMENTS

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

 

| 2003       |   | $   | 404    |   |
|------------|--------|-----|--------|--------|
| 2004       |   | 363 |   |
| 2005       |   | 335 |   |
| 2006       |   | 345 |   |
| 2007       |   | 355 |   |
| Thereafter |   | 751 |   |
|       |   | $   | 2,553  |   |

 

For the years ended September30, 2002, 2001, and 2000, operating lease expenses were $510,000, $575,000,and $547,000.

 

36

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INDEPENDENT AUDITOR REPORT

 

THE BOARD OF DIRECTORS AND SHAREHOLDERS -CIPRICO INC

 

We have audited the accompanying consolidatedbalance sheets of Ciprico Inc. and subsidiaries as of September 30, 2002 and2001, and the related consolidated statements of operations, shareholders’equity, and cash flows for each of the three years in the period endedSeptember 30, 2002. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Ciprico Inc. and subsidiaries as of September 30, 2002and 2001, and the consolidated results of their operations and their consolidatedcash flows for each of the three years in the period ended September 30, 2002,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We have also audited Schedule II of CipricoInc. and subsidiaries for each of the three years in the period ended September30, 2002.  In our opinion, this schedulepresents fairly, in all material respects, the information required to be setforth therein.

 
| /s/ Grant Thornton LLP |
|------------------------|
| Minneapolis, Minnesota |
| October 15, 2002       |

 

37

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QUARTERLY FINANCIAL DATA

(unaudited) in thousands, except per shareamounts

 
|                                      |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
| 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     | )      |
|                                      |   |               |   |                |   |               |   |                |   |      |   |
| 2000                                      |   |               |   |                |   |               |   |                |   |      |   |
| Net sales                                 |   | $                  | 6,847  |                | $      | 8,190              |   | $                   | 9,742  |      | $      | 8,431 |   | $ | 33,210 |   |
| Net income (loss)                         |   | (109               | )      | 60                  |   | 262                |   | (522                | )      | (309      | )      |
| Net income (loss)  per share—diluted |   | (.02               | )      | .01                 |   | .05                |   | (.10                | )      | (.06      | )      |

 

**ITEM 9.****                        CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

38

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**PART III**

 

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

 

Otherthan “Executive Officers of the Registrant” which is set forth at the end ofPart I of this Form 10-K, the information required by Item 10 relating todirectors and compliance with Section 16(a) is incorporated herein by referenceto the sections labeled “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance,” respectively, which appear in the definitiveProxy Statement for our 2003 Annual Meeting of Shareholders.

 

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

 

Theinformation required by Item 11 is incorporated herein by reference to thesection labeled “Executive Compensation” which appears in the definitive ProxyStatement for its 2003 Annual Meeting of Shareholders.

 

**ITEM 12.****                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

Theinformation required by Item 12 is incorporated herein by reference to thesections labeled “Principal Shareholders,” “Management Shareholdings” and“Approval of Increase in Shares Reserved for 1996 Employee Stock Purchase Plan”which appear in the definitive Proxy Statement for our 2003 Annual Meeting ofShareholders.

 

**ITEM 13.****                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

**ITEM 14.****                 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 material information required to be filed in this annual report hasbeen made known to them in a timely fashion. There have been no significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate the Chief Executive Officer and Chief Financial Officer completed theirevaluation.

 

**ITEM 15.****                      EXHIBITS****, FINANCIAL STATEMENTS AND REPORTS ONFORM 8-K**

 

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

 

(b)                 Financial StatementSchedules.  See ScheduleII on page following signatures.

 

(c)                  Reports on Form 8-K.

 

A report on Form 8-K wasfiled on August 12, 2002 reporting under Item 9 the submission ofcorrespondence to the Securities and Exchange Commission by Robert H. Kill, ChiefExecutive Officer, and Thomas S. Wargolet, Chief Financial Officer, of CipricoInc. regaurding their certifications pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

No other reports on Form 8-K were filedduring the three months ending September 30, 2002.

 

39

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SIGNATURES

 

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

 
|                   |     |    CIPRICO INC.                                                                   |
|------------------------|----------|--------------------------------------------------------------------------------------------------|
|                   |     |    (the “Registrant”)                                                   |
|                   |     |                                                                                             |
| Date: November 5, 2002 | By  | /s/ Robert H. Kill                                                                               |
|                   |     |    Robert H. Kill,  Chief Executive     Officer and President |
|                   |     |                                                                                             |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 

(Powerof Attorney)

 

Eachperson whose signature appears below constitutes and appoints ROBERT H. KILLand THOMAS 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 cause tobe done by virtue thereof.

 
| **Signature**              |   | **Title**                              |   | **Date**         |
|----------------------------|--------|----------------------------------------|--------|------------------|
|                       |   |                                   |   |             |
| /s/ Robert H. Kill         |   | President, Chief Executive Officer and |   |             |
| Robert H. Kill             |   | Director                               |   | November 5, 2002 |
|                       |   | (Principal executive officer)          |   |             |
|                       |   |                                   |   |             |
| /s/ Thomas S. Wargolet     |   | Vice President - Finance and Chief     |   | November 5, 2002 |
| Thomas S. Wargolet         |   | Financial Officer (Principal           |   |             |
|                       |   | financial and accounting officer)      |   |             |
|                       |   |                                   |   |             |
| /s/ William N. Wray        |   | Director                               |   | November 5, 2002 |
| William N. Wray            |   |                                   |   |             |
|                       |   |                                   |   |             |
| /s/ James   W. Hansen |   | Director                               |   | November 5, 2002 |
| James W. Hansen            |   |                                   |   |             |
|                       |   |                                   |   |             |
| /s/ Mark D. Griffiths      |   | Director                               |   | November 5, 2002 |
| Mark D. Griffiths          |   |                                   |   |             |
|                       |   |                                   |   |             |
| /s/ Thomas G. Hudson       |   | Director                               |   | November 5, 2002 |
| Thomas G. Hudson           |   |                                   |   |             |
|                       |   |                                   |   |             |
| /s/ Thomas F. Burniece     |   | Director and Chairman of the Board     |   | November 5, 2002 |
| Thomas F. Burniece         |   |                                   |   |             |

 

40

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**CERTIFICATIONPURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Robert H. Kill, Chief Executive Officer ofCiprico Inc., certify that:

 

1.             Ihave reviewed this annual report on Form 10-K of Ciprico Inc.;

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated:  November 5, 2002 | Signature:   | /s/  Robert H. Kill |                     |
|-------------------------------|------------------------|--------------------------|--------------------------|
|                          |                   |                     | Robert H.  Kill          |
|                          |                   |                     | Chief  Executive Officer |
|                               |                        |                          |                          |  |

 

41

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**CERTIFICATIONPURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Thomas S. Wargolet, Chief FinancialOfficer of Ciprico Inc., certify that:

 

1.             Ihave reviewed this annual report on Form 10-K of Ciprico Inc.;

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction);

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated:  November 5, 2002 | Signature:   | /s/  Thomas S. Wargolet |                     |
|-------------------------------|------------------------|------------------------------|--------------------------|
|                          |                   |                         | Thomas S.  Wargolet      |
|                          |                   |                         | Chief  Financial Officer |
|                               |                        |                              |                          |  |

 

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**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**

 
|                           |   |                                 |    | **Additions**                       |   |                            |   |           |   |
|--------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|---------------------------------|--------|----------------|--------|
| **Column A**                   |   | **Column B**                         |    | **Column C**                        |   | **Column D**                    |   | **Column E**   |   |
|                           |   | **Balance at  Beginning  of Period** |    | **Charged to  Costs and  Expenses** |   | **Charged to  Other  Accounts** |   | **Deductions** |   | **Balance at  End  of Period** |   |
|                           |   |                                 |    |                                |   |                            |   |           |   |   |   |
| Accounts receivable  allowance |   |                                 |    |                                |   |                            |   |           |   |   |   |
| September 30, 2002             |   | $                                    | 409,000 |                                | $      | 151,000                         |   | —         |   | $ | — |   | $ | 560,000 |   |
| September 30, 2001             |   | 408,000                              |    | 274,000                             |   | —                          |   | (273,000       | )  A   | 409,000 |   |
| September 30, 2000             |   | 545,000                              |    | 60,000                              |   | —                          |   | (197,000       | )  A   | 408,000 |   |
|                           |   |                                 |    |                                |   |                            |   |           |   |   |   |
| Warranty reserve               |   |                                 |    |                                |   |                            |   |           |   |   |   |
| September 30, 2002             |   | $                                    | 423,000 |                                | $      | 296,000                         |   | —         |   | $ | (217,000 | )  B | $ | 502,000 |   |
| September 30, 2001             |   | 223,000                              |    | 242,000                             |   | —                          |   | (42,000        | )  B   | 423,000 |   |
| September 30, 2000             |   | 75,000                               |    | 148,000                             |   | —                          |   | —         |   | 223,000 |   |

 

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

 

B - Deductions representwarranty work performed during the year.

 

43

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SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

EXHIBIT INDEX TOFORM 10-K

 
| For the fiscal year ended | Commission  File No.:  0-11336 |
|---------------------------|-------------------------------------|
| September 30, 2002        |                                |

 

CIPRICOINC.

 

 
| **Exhibit** |   | **Description**                                                                                                                                                                                                                             |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                        |
| 3.1         |   | The Registrant’s Certificate of  Incorporation, as amended to date—incorporated by reference to Exhibit 19.1  of the Registrant’s Form 10-Q for the quarter ended March 31, 1988*                                            |
|        |   |                                                                                                                                                                                                                                        |
| 3.2         |   | The Registrant’s Bylaws, as amended to  date—incorporated by reference to Exhibit 19.2 of the Registrant’s Form 10-Q  for the quarter ended March 31, 1988*                                                                  |
|        |   |                                                                                                                                                                                                                                        |
| 10.1**      |   | Registrant’s 1992 Nonqualified Stock Option  Plan—incorporated by reference to Exhibit 10.13 of the Registrant’s Form 10-K  for the fiscal year ended September 30, 1992*                                                    |
|        |   |                                                                                                                                                                                                                                        |
| 10.2**      |   | Specimens of Nonqualified Stock Option  Agreements under 1992 Nonqualified Stock Option Plan—incorporated by  reference to Exhibit 10.14 of the Registrant’s Form 10-K for the fiscal year  ended September 30, 1992*             |
|        |   |                                                                                                                                                                                                                                        |
| 10.3**      |   | Amendment No. 1 to Registrant’s 1992  Nonqualified Stock Option Plan—incorporated by reference to Exhibit 10.11 of  the Registrant’s Form 10-KSB for the fiscal year ended September 30, 1995*                               |
|        |   |                                                                                                                                                                                                                                        |
| 10.4**      |   | Amendment No. 2 to Registrant’s 1992  Nonqualified Stock Option Plan—incorporated by reference to Exhibit 10.12 of  the Registrant’s Form 10-KSB for the fiscal year ended September 30, 1995*                               |
|        |   |                                                                                                                                                                                                                                        |
| 10.5**      |   | Registrant’s 1994 Incentive Stock Option  Plan—incorporated by reference to Exhibit 10.13 of the Registrant’s Form  10-KSB for the fiscal year ended September 30, 1993*                                                     |
|        |   |                                                                                                                                                                                                                                        |
| 10.6**      |   | Specimen of Incentive Stock Option  Agreement under 1994 Incentive Stock Option Plan—incorporated by reference to  Exhibit 10.14 of the Registrant’s Form 10-KSB for the fiscal year ended  September 30, 1993*                   |
|        |   |                                                                                                                                                                                                                                        |
| 10.7**      |   | Registrant’s 1996 Restricted Stock Plan, as  amended—incorporated by reference to Exhibit 10.4 of the Registrant’s Form  10-Q for the fiscal quarter ended December 31, 1998*                                                |
|        |   |                                                                                                                                                                                                                                        |
| 10.8**      |   | Specimen of Restricted Stock Agreement  under 1996 Restricted Stock Plan—incorporated by reference to Exhibit 10.16  of the Registrant’s Form 10-KSB for the fiscal year ended September 30, 1995*                                |
|        |   |                                                                                                                                                                                                                                        |
| 10.9**      |   | Registrant’s 1999 Amended and Restated  Stock Option Plan—incorporated by reference to Exhibit 10.1 of the Registrant’s  Form 10-Q for the fiscal quarter ended December 31, 1998*                                           |
|        |   |                                                                                                                                                                                                                                        |
| 10.10**     |   | Specimen of  Incentive Stock Option Agreement under 1999 Amended and  Restated Stock Option Plan—incorporated by reference to Exhibit 10.2 of the  Registrant’s Form 10-Q for the fiscal quarter ended December 31, 1998*    |
|        |   |                                                                                                                                                                                                                                        |
| 10.11**     |   | Specimen of  Nonqualified Stock Option Agreement under 1999 Amended and  Restated Stock Option Plan—incorporated by reference to Exhibit 10.3 of the  Registrant’s Form 10-Q for the fiscal quarter ended December 31, 1998* |
|        |   |                                                                                                                                                                                                                                        |
| 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.                              |
|        |   |                                                                                                                                                                                                                                        |
| 22          |   | Subsidiaries  of the Registrant                                                                                                                                                                                                             | Jurisdiction |
|        |   |                                                                                                                                                                                                                                        | of  Incorporation |
|        |   | Name                                                                                                                                                                                                                                        |   |
|        |   |                                                                                                                                                                                                                                        |   |
|        |   | Ciprico FSC, Inc.                                                                                                                                                                                                                           | Virgin Islands |
|        |   | Ciprico International Limited                                                                                                                                                                                                               | England |
|        |   |                                                                                                                                                                                                                                        |
| 23.1        |   | Consent  of Grant Thornton LLP                                                                                                                                                                                                              |
|        |   |                                                                                                                                                                                                                                        |
| 24          |   | Power  of Attorney from Certain Directors—see Signature Page                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                        |
| 99.1        |   | Cautionary  Statements                                                                                                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                        |
| 99.2        |   | Certifications  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              |
|        |   |                                                                                                                                                                                                                                        |
| 99.3        |   | Certifications  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              |

 

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*                 Incorporated by reference - CommissionFile No. 0-11336

**          Indicates a management contract orcompensatory plan or arrangement required to be filed as an exhibit to thisForm 10-K.

 

 

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