UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

_______________________________________

 

FORM 10-Q

 

 

 

ý                                 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2002

 

OR

 

o                                 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

Commission File Number 0-11336

 

 

CIPRICO INC.

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (763) 551-4000

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý  Noo

 

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of August 2, 2002 was 4,886,467 shares.

 

 

---

 

CIPRICO INC. AND SUBSIDIARIES

 

FORM 10-Q

 

INDEX

 

 

PART I		Financial Information
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets at
		June 30, 2002 and September 30, 2001
		Condensed Consolidated Statements of Operations for Three and
		Nine Months Ended June 30, 2002 and 2001
		Condensed Consolidated Statements of Cash Flows for
		Nine Months Ended June 30, 2002 and 2001
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
PART II		Other Information
Item 6		Exhibits and Reports on Form 8-K
SIGNATURES

 

 

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PART I  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

 

CIPRICO INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands)

		June 30,			September 30,
		2002			2001
ASSETS
Current assets:
Cash and cash equivalents		$	6,311		$	6,377
Marketable securities		13,505			17,499
Accounts receivable, less allowance		6,789			3,841
Inventories, net		4,839			5,254
Income taxes receivable		—			869
Other current assets		348			701
Total current assets		31,792			34,541
Property and equipment, net		3,301			3,904
Marketable securities		5,124			6,139
Other assets		57			95
		$	40,274		$	44,679
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,362		$	2,570
Accrued expenses		3,185			2,206
Deferred revenue		451			373
Total current liabilities		6,998			5,149
Shareholders’ equity:
Capital stock		49			50
Additional paid-in capital		35,202			36,013
Retained earnings (deficit)		(1,896		)	3,538
Deferred compensation from restricted stock		(79		)	(71		)
Total shareholders’ equity		33,276			39,530
		$	40,274		$	44,679

 

 

See accompanying notes to condensed consolidated financial statements

 

 

3

 

CIPRICO INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited)

 

(In thousands, except

per share amounts)

		Three Months Ended						Nine months Ended
		June 30,						June 30,
		2002			2001			2002			2001
NET SALES		$	9,081		$	9,467		$	24,406		$	27,945
Cost of sales		6,146			5,338			15,998			16,052
GROSS PROFIT		2,935			4,129			8,408			11,893
OPERATING EXPENSES:
Research and development		2,090			2,029			6,859			5,586
Sales and marketing		2,284			2,927			6,886			8,536
General and administrative		667			695			1,978			1,937
Restructuring		—			220			—			220
Total operating expenses		5,041			5,871			15,723			16,279
LOSS FROM OPERATIONS		(2,106		)	(1,742		)	(7,315		)	(4,386		)
Other income, primarily interest		213			419			751			1,497
LOSS BEFORE INCOME TAXES		(1,893		)	(1,323		)	(6,564		)	(2,889		)
Income tax benefit		—			(450		)	(1,130		)	(975		)
NET LOSS		$	(1,893	)	$	(873	)	$	(5,434	)	$	(1,914	)
Shares used to calculate net loss per share:
Basic and diluted		4,886			5,060			4,908			5,053
NET LOSS PER SHARE:
Basic and diluted		$	(0.39	)	$	(0.17	)	$	(1.11	)	$	(0.38	)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4

 

CIPRICO INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 (In thousands)

		Nine Months Ended
		June 30,
		2002			2001
Cash flows for operating activities:
Net loss		$	(5,434	)	$	(1,914	)
Depreciation and amortization		1,770			1,622
Changes in operating assets and liabilities		308			(503		)
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(3,356		)	(795		)
Cash flows from investing activities:
Equipment purchases		(1,153		)	(1,828		)
Purchases of marketable securities		(24,945		)	(37,542		)
Proceeds from sale or maturity of marketable securities		29,954			39,490
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES		3,856			120
Cash flows from financing activities:
Repurchase of common stock		(703		)	(52		)
Proceeds from issuance of common stock		137			231
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES		(566		)	179
Net decrease in cash and cash equivalents		(66		)	(496		)
Cash and cash equivalents at beginning of period		6,377			3,496
Cash and cash equivalents at end of period		6,311			3,000
Marketable securities, current		13,505			21,455
Marketable securities, long-term		5,124			8,534
Total cash and marketable securities		$	24,940		$	32,989

 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

CIPRICO INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002

(Unaudited)

 

 

NOTE A — BASIS OF PRESENTATION

 

The principal business activity of Ciprico Inc. and subsidiaries (the Company) is the design, manufacture, and marketing of storage and system solutions for digital media applications within the broadcast and entertainment, military and government, and enterprise markets.  The Company’s solutions combine storage, networking and computing technologies to simplify and accelerate digital media workflows. The Company markets its products worldwide through a direct sales force and various distribution channels.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all necessary adjustments, consisting only of a recurring nature, and disclosures to present fairly the financial position as of June 30, 2002 and the results of operations for the three month and nine month periods ended June 30, 2002 and 2001, and the cash flows for the nine months ended June 30, 2002 and 2001. The results of operations for the nine months ended June 30, 2002 are not necessarily indicative of the results for the full year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10-K filed on December 3, 2001.

 

In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from the estimates used by management.

 

NOTE B — MARKETABLE SECURITIES

 

The Company has invested its excess cash in commercial paper and government agencies.  These investments are classified as held-to-maturity given the Company’s intent and ability to hold the securities to maturity and are carried at amortized cost.  Investments that have maturities of less than one year have been classified as current marketable securities.

 

At June 30, 2002 and September 30, 2001, amortized cost approximates fair value of held-to-maturity investments, which consist of the following (in thousands):

 

		June 30,			September 30,
		2002			2001
Current marketable securities:
Commercial Paper		$	8,499		$	13,497
U.S. Government Agencies		5,006			4,002
		13,505			17,499
Non-current marketable securities:
Commercial Paper		3,613			3,627
U.S. Government Agencies		1,511			2,512
		5,124			6,139
		$	18,629		$	23,638

 

 

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NOTE C — INVENTORIES

 

Inventory is stated at the lower of cost or replacement market.  Cost is determined using the first-in, first-out method. Inventory costs include outside assembly charges, allocated manufacturing overhead and direct material costs.

As of June 30, 2002 and September 30, 2001 inventory consists of the following (in thousands):

 

		June 30,			September 30,
		2002			2001
Finished Goods		$	1,628		$	2,339
Work-in-Process		964			837
Raw Materials		2,247			2,078
		$	4,839		$	5,254

 

NOTE D — INCOME TAXES

 

For the nine month period ended June 30, 2002 the income tax benefit of $1.1 million reflects recognition of current income tax benefits related to a Federal income tax refund received under the provision of the Job Creation and Worker Assistance Act of 2002, enacted on March 9, 2002.

 

NOTE E — SHAREHOLDERS’ EQUITY

 

During 1998, the Company initiated a stock buyback program of up to $6.0 million, which was increased by $6.0 million in 2001, bringing the total amount to be expended under the plan to $12.0 million.  As of June 30, 2002, 759,980 shares of common stock have been repurchased for approximately $6.9 million.

 

 

NOTE F — NET LOSS PER SHARE

 

The Company’s basic net loss per share amounts have been computed by dividing net loss by the weighted average number of outstanding common shares.  The Company’s diluted net loss per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive.

 

For the three month periods ended June 30, 2002 and 2001, common stock equivalents of 58,780 and 4,755 were excluded from the computation of the net loss per share since they were antidilutive due to net losses incurred by the Company.  Options to purchase 1,085,641 and 1,031,426 shares of common stock with a weighted average exercise price of $9.11 and $12.52 were outstanding at June 30, 2002 and 2001, but were excluded from the computation of common share equivalents for the three month period because they were antidilutive as the exercise prices were greater than the average market price of the Company’s stock during the period.

 

For the nine month periods ended June 30, 2002 and 2001, common stock equivalents of 55,748 and 19,320 were excluded in the computation of the net loss per share since they were antidilutive due to net losses incurred by the Company.   Options to purchase 812,720 and 897,167 shares of common stock with a weighted average exercise price of $12.17 and $13.16 were outstanding at June 30, 2002 and 2001, but were excluded from the computation of common share equivalents for the nine month period because they were antidilutive as the exercise prices were greater than the average market price of the Company’s stock during the period.

 

 

7

 

 

NOTE G — SEGMENT INFORMATION

 

The Company operates in a single reportable segment.  The Company has no material long-lived assets outside of the United States.  The following presents net sales for the nine months ended June 30, by geographic area (in thousands).

 

 

Geographic Area		2002			2001
North America		$	22,053		$	23,718
Europe		1,822			2,076
Other		531			2,151
		$	24,406		$	27,945

 

 

For the nine months ended June 30, 2002 customer A accounted for approximately 17%, customer B accounted for 13%, customer C accounted for 12% and customer D accounted for 10% of sales.  For the nine months ended June 30, 2001 customer D accounted for 13% of sales and the Company had a different customer that accounted for approximately 18% of sales.

 

 

8

 

 

CIPRICO INC. AND SUBSIDIARIES

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Three and Nine Months Ended June 30, 2002 Compared to Three and Nine Months Ended June 30, 2001

 

Comparative information on sales by market for the period ended June 30, are shown in the chart below (in millions).

 

For the Three Months Ended June 30:

 

		2002								2001
Market		Sales						% of Total		Sales						% of Total
Broadcast & Entertainment		$	5.2					57	%	$			4.2			44				%
Military & Government		3.7						41		4.2						44
Other		0.2						2		1.1						12
Total		$	9.1					100	%	$			9.5			100				%
		2002									2001
Geographic Location		Sales						% of Total			Sales						% of Total
Domestic		$	8.6					95	%		$		8.7				92			%
International		0.5						5			0.8						8
Total		$	9.1					100	%		$		9.5				100			%
For the Nine Months Ended June 30:
		2002									2001
Market		Sales						% of Total			Sales							% of Total
Broadcast & Entertainment		$	12.2					50	%		$		13.5					48	%
Military & Government		11.2						46			10.7							39
Other		1.0						4			3.7							13
Total		$	24.4					100	%		$		27.9					100	%
		2002										2001
Geographic Location		Sales					% of Total					Sales						% of Total
Domestic		$	22.1				91		%			$	23.7					85	%
International		2.3					9					4.2						15
Total		$	24.4				100		%			$	27.9					100	%

 

Net sales for the three month period ended June 30, 2002 decreased 4% to $9.1 million compared to $9.5 million for the comparable period in fiscal 2001.    Sales in the Broadcast segment increased $1.0 million or 24% for the three month period ended June 30, 2002.  This increase includes approximately $1.8 million of sales from a new OEM customer offset by decreased sales from other customers due to lower spending levels as a result of the general economic slowdown.    Sales in the Military segment for the three months ended June 30, 2002 decreased $500,000 or 12%, compared to the same period in fiscal 2001.  The decrease reflects the cyclical spending patterns of this program-oriented business.   For the three months ended June 30, 2002 we shipped approximately $560,000 of our new TALONä product to customers in the Military segment.  The decrease of sales in the Other segment primarily reflects a reduction in demand from geoscience and medical imaging customers and reduced demand from Silicon Graphics, Inc. (SGI).

 

Net sales for the nine month period ended June 30, 2002 decreased 13% to $24.4 million compared to $27.9 million for the comparable period in fiscal 2001.  Sales in the Broadcast segment decreased $1.3 million or 10% for the nine month

 

 

9

 

 

period ended June 30, 2002 compared to the same period in fiscal 2001.  The decline primarily reflects reduced spending levels in this segment as a result of the general economic slowdown.  The decline was partially offset by increased sales of approximately $5 million from two Broadcast OEM customers between years.  Sales in the Military segment increased $500,000 or 5% for the nine month period ended June 30, 2002, compared to the same period last year.  This increase reflects the cyclical spending patterns of this program-oriented business.  The decrease in the Other segment for the first nine months of fiscal 2002 primarily reflects a reduction in demand from geoscience and medical imaging customers and reduced demand from SGI.  Sales to SGI worldwide for the nine months ended June 30, 2002 decreased $613,000 to $1.3 million as compared to the same period last year.

 

Sales from customers in the United States decreased 1% and 7% for the three and nine month periods ended June 30, 2002, respectively, compared to the same periods last year.  Sales from international customers decreased 38% and 45% for the three and nine month periods ended June 30, 2002, respectively, compared to the same periods last year. The decline in international sales for the first nine months of fiscal 2002 reflects decreased volumes with post production customers, primarily from Asia-Pacific regions following the closure of our Singapore and Tokyo offices during the fourth quarter of fiscal 2001.

 

Our revenue growth in fiscal 2002 and beyond is dependent on market acceptance of new products, expansion of products into new applications within their targeted market segments, and success of programs which specify our products.

 

Gross profit, as a percentage of net sales, was 32.3% and 34.5% for the three month and nine month periods ended June 30, 2002, respectively, compared to 43.6% and 42.6% for the same prior year periods.  This decline primarily reflects increased sales of the NETarray product and a higher mix of Broadcast sales, both of which carry lower margins.  In addition our gross profit margins for fiscal 2002 have been adversely impacted by flattened disk drive costs versus continued price competition, particularly on higher capacity disk drives sold.

 

Gross profit on product sales is highly dependent on the cost of disk drives and may fluctuate from quarter to quarter. We believe our strong vendor relations will aid in component availability and cost reductions. We expect to experience continued competitive pressures on gross profit margins throughout fiscal 2002. We intend to partially offset these margin pressures through new product introductions and ongoing cost reductions.

 

Research and development expenses for the three and nine month periods ended June 30, 2002 were $2.1 million and $6.9 million, respectively.  Research and development expenses for the three and nine month periods ended June 30, 2001 were $2.0 million and $5.6 million, respectively.  Expenses for the nine month period ended June 30, 2001 included approximately $600,000 of costs relating to the SANStar acquisition.  The increase in research and development expenses, excluding the SANStar acquisition, was $1.9 million, or 38% for the nine month period ended June 30, 2002, compared to the prior year period.  This increase primarily reflects increases in engineering staff and prototype expenses associated with new products, including the FibreSTORE 2210 and TALONä, as well as spending related to software development activities for DiMedaä, our new digital media appliance product family.  We expect that research and development expenses will remain at the current level for the remainder of the year.

 

Sales and marketing expenses were $2.3 million and $6.9 million for the three and nine month periods ended June 30, 2002, respectively compared to $2.9 million and $8.5 million for the same prior year periods, a decrease of $643,000 and $1.6 million, respectively.  These reductions reflect reduced headcount between years resulting from our restructuring efforts implemented during fiscal 2001.

 

General and administrative expenses decreased approximately $28,000 for the three month period ended June 30, 2002 and increased $41,000 for the nine month period ended June 30, 2002, as compared to the same prior year periods.  The decease for the three month period primarily reflects reduced staff levels between years.  The increase for the nine month period primarily reflects increased insurance costs between years.   The restructuring charge of $220,000 for the three and nine month period ended June 30, 2001 is related to cost reductions implemented in fiscal 2001.

 

 

10

 

 

Other income decreased approximately $206,000 and $746,000 for the three and nine month periods ended June 30, 2002, respectively as compared to the same prior year periods. This decrease is due primarily to overall lower investment yields and lower cash and marketable securities balances between periods.

 

 

An income tax benefit of $1.1 million was recorded in the second quarter of fiscal 2002.  This benefit reflects recognition of current income tax benefits related to a Federal income tax refund received under the provision of the Job Creation and Worker Assistance Act of 2002, enacted on March 9, 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2002, we had cash, cash equivalents and marketable securities totaling $24.9 million compared to $30.0 million at the end of fiscal 2001.

 

Cash flows used in operating activities were $3.4 million for the nine months ended June 30, 2002 compared to $795,000 for the same period last year.  The increase primarily reflects a higher operating loss for the period.  Capital expenditures of approximately $1.2 million for the nine months ended June 30, 2002 primarily reflect spending related to our new product development efforts.  We anticipate that capital expenditures for fiscal 2002 will approximate $1.5 to $2.0 million.  During the nine months ended June 30, 2002, we purchased 141,880 shares of common stock for approximately $700,000. The remaining authorization as of June 30, 2002 under our stock buyback program is $5.1 million.

 

We have signed a 7-year operating lease for a new corporate headquarters expected to commence in October 2002.  The lease provides for base rental payments of approximately $335,000 for the first thirty-six (36) months with increases of approximately 3% each subsequent 12-month period.  The lease also includes provisions for early termination after 3 and 5 years.  Additionally, we are responsible for our proportionate share of real estate taxes and operating expenses associated with operating the facility, as defined by the lease agreement.  We expect our operating expenses for fiscal 2003 to be reduced slightly based on the estimated costs of the new facility.  In addition we expect to incur expenses and capital expenditures up to $300,000 during the fourth quarter of fiscal 2002 associated with moving to this new facility.

 

We expect to incur an operating loss in fiscal 2002 due to continued investments expected in software and new product development.  We believe that current cash balances and cash generated from operations will be adequate to fund requirements for operating losses, working capital and capital expenditures, share repurchases, as well as any potential acquisitions in fiscal 2002.

 

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q are forward-looking and are subject to various risks and uncertainties, which may cause actual results to differ from the expectations set forth in these forward-looking statements.  Such forward-looking statements, which reflect our current view of future events and financial performance, involve known and unknown risks, which include, but are not limited to, the risk factors set forth in Exhibit 99 on Form 10-K filed on December 3, 2001.  Some of these reasons include the impact on revenues and earnings of the timing of product enhancements and new product releases; market acceptance of new products; sales and distribution issues; competition; dependence on suppliers; dependence on the cost of disk drives; limited backlog and the historic and recurring pattern of a disproportionate percentage of total quarterly sales occurring the last month and weeks of a quarter.  Investors should take such risks into account when making investment decisions. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Ciprico undertakes no obligation to update publicly or revise any forward-looking statements.

 

 

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CIPRICO INC. AND SUBSIDIARIES

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company invests its excess cash in commercial paper and highly rated U.S. government agencies.  All investments are held-to-maturity.  The market risk on such investments is minimal.  Receivables from sales to foreign customers are denominated in U.S. Dollars.  If the currencies of these countries were to fall significantly against the U.S. Dollar, there can be no assurance that such companies would be able to repay the receivables in full. Transactions at the Company’s foreign subsidiary, Ciprico International Limited, are denoted in pounds sterling.  The Company has historically had minimal exposure to changes in foreign currency exchange rates and, as such, has not used derivative financial instruments to manage foreign currency fluctuation risk.

 

 

12

 

CIPRICO INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

 

 

Item 6.  Exhibits and Reports on Form 8-K
(a)		Exhibits
		None
(b)		Reports on Form 8-K
		None

 

 

13

 

CIPRICO INC. AND SUBSIDIARIES

SIGNATURES

 

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	CIPRICO INC.
Dated:  August 12, 2002	/s/ Robert H. Kill
	Robert H. Kill, President
	(Chief Executive Officer)
Dated:  August 12, 2002	/s/ Thomas S. Wargolet
	Thomas S. Wargolet, Vice President of
	Finance/Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

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