UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the Quarter Ended December 31, 2003 |
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OR |
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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)
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DELAWARE |
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41-1749708 |
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(State or other jurisdiction
of |
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(I.R.S. Employer |
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17400 Medina Road |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (763) 551-4000 |
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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 requirement for the past 90 days. Yes ý No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes o No ý
The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of February 2, 2004 was 4,718,778 shares.
FORM 10-Q
INDEX
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(In thousands) |
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December
31, |
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September
30, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,805 |
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$ |
5,159 |
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Marketable securities and short term investments |
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16,900 |
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16,766 |
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Accounts receivable, less allowance |
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3,446 |
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4,016 |
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Inventories, net |
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3,298 |
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3,928 |
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Other current assets |
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602 |
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453 |
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Total current assets |
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28,051 |
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30,322 |
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Property and equipment, net |
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1,677 |
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1,972 |
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Marketable securities |
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1,552 |
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— |
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Other assets |
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42 |
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42 |
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$ |
31,322 |
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$ |
32,336 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,908 |
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$ |
2,151 |
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Accrued expenses |
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1,933 |
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1,887 |
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Deferred revenue |
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358 |
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312 |
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Total current liabilities |
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4,199 |
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4,350 |
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Shareholders’ equity: |
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Capital stock |
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47 |
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47 |
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Additional paid-in capital |
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34,932 |
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34,840 |
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Retained deficit |
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(7,773 |
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(6,881 |
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Deferred compensation from restricted stock |
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(83 |
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(20 |
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Total shareholders’ equity |
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27,123 |
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27,986 |
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$ |
31,322 |
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$ |
32,336 |
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See accompanying notes to condensed consolidated financial statements.
3
CIPRICO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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(In
thousands except |
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Three-Months Ended |
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2003 |
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2002 |
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NET SALES |
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$ |
6,042 |
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$ |
8,112 |
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Cost of sales |
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3,736 |
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5,162 |
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GROSS PROFIT |
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2,306 |
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2,950 |
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OPERATING EXPENSES: |
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Research and development |
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1,387 |
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1,448 |
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Sales and marketing |
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1,410 |
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1,678 |
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General and administrative |
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501 |
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672 |
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Total operating expenses |
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3,298 |
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3,798 |
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LOSS FROM OPERATIONS |
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(992 |
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(848 |
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Other income, primarily interest |
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100 |
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165 |
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LOSS BEFORE INCOME TAXES |
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(892 |
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(683 |
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Income tax benefit |
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— |
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— |
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NET LOSS |
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$ |
(892 |
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$ |
(683 |
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Shares used to calculate net loss per share: |
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Basic and diluted |
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4,689 |
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4,722 |
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NET LOSS PER COMMON SHARE: |
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Basic and diluted |
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$ |
(.19 |
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$ |
(.14 |
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See accompanying notes to condensed consolidated financial statements.
4
CIPRICO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three-Months Ended |
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(In thousands) |
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2003 |
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2002 |
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Cash flows for operating activities: |
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Net loss |
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$ |
(892 |
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$ |
(683 |
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Depreciation and amortization |
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367 |
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493 |
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Changes in operating assets and liabilities |
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837 |
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(265 |
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NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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312 |
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(455 |
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Cash flows from investing activities: |
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Equipment purchases |
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(72 |
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(272 |
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Purchases of marketable securities |
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(6,719 |
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(7,477 |
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Proceeds from sale or maturity of marketable securities |
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5,033 |
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6,036 |
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NET CASH FLOWS USED IN INVESTING ACTIVITIES |
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(1,758 |
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(1,713 |
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Cash flows from financing activities: |
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Repurchase of common stock |
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— |
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(470 |
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Proceeds from the issuance of common stock |
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92 |
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— |
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NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES |
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92 |
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(470 |
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Net decrease in cash and cash equivalents |
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(1,354 |
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(2,638 |
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Cash and cash equivalents at beginning of period |
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5,159 |
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6,413 |
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Cash and cash equivalents at end of period |
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3,805 |
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3,775 |
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Marketable securities, current |
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16,900 |
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21,028 |
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Marketable securities, long-term |
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1,552 |
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1,031 |
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Total cash and marketable securities |
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$ |
22,257 |
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$ |
25,834 |
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See accompanying notes to condensed consolidated financial statements.
5
CIPRICO INC. AND SUBSIDIARIES
December 31, 2003
(Unaudited)
NOTE A – BASIS OF PRESENTATION
The principal business activity of Ciprico Inc. and subsidiary (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 medical imaging 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 December 31, 2003 and the results of operations and cash flows for the three-month periods ended December 31, 2003 and 2002. The results of operations for the three-months ended December 31, 2003 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 12, 2003.
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, government agencies and other asset-backed investments. 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 December 31, 2003 and September 30, 2003, amortized cost approximates the fair value of held-to-maturity investments, which consist of the following (in thousands):
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December 31, |
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September 30, |
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Current marketable securities: |
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Commercial Paper |
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$ |
15,780 |
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$ |
14,290 |
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U.S. Government Agencies |
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— |
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1,502 |
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Asset-backed investments |
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1,120 |
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974 |
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16,900 |
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16,766 |
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Non-current marketable securities: |
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Commercial Paper |
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1,552 |
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— |
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1,552 |
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— |
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$ |
18,452 |
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$ |
16,766 |
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6
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 December 31, 2003 and September 30, 2003 inventory consists of the following (in thousands).
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December 31, |
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September 30, |
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Finished Goods |
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$ |
841 |
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$ |
967 |
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Work-in-Process |
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674 |
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567 |
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Raw Materials |
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1,783 |
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2,394 |
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$ |
3,298 |
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$ |
3,928 |
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NOTE D – WARRANTY COSTS
The Company provides a three-year warranty on its products. The Company estimates future warranty claims based on historical experience and anticipated costs to be incurred. Warranty expense is accrued at the time of sale with an additional accrual for specific items after the sale when their existence is known and amounts are determinable.
The following represents a reconciliation of changes in the Company’s accrued warranty as of December 31, 2003 (in thousands):
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Balance at |
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Charged
to |
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Deductions |
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Balance
at |
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$ |
387 |
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$ |
70 |
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$ |
103 |
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$ |
354 |
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NOTE E – SHAREHOLDERS’ EQUITY
Stock Repurchase
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 allowed to be expended under the plan to $12.0 million. As of December 31, 2003, 1,037,035 shares of common stock have been repurchased for approximately $7.8 million.
NOTE F – NET EARNINGS PER SHARE
The Company’s basic net earnings per share amounts have been computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings 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 December 31, 2003 and 2002, the Company reported a net loss and as such, no common share equivalents were included in the computation of diluted net loss per share.
For the three-month periods ended December 31, 2003 and 2002, common stock equivalents of 78,730 and 9,398, respectively were excluded in the computation of the net loss per share since they were antidilutive. Options to purchase 646,692 and 1,097,620 shares of common stock with a weighted average exercise price of $7.44 and $7.90 were outstanding at December 31, 2003 and 2002, but were excluded from the computation of common share equivalents for the three-month periods because their exercise price exceeds the average share price during the quarter.
7
NOTE G – SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of sales for the period ended December 31
are as follows:
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2003 |
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2002 |
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Customer A |
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52 |
% |
29 |
% |
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Customer B |
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4 |
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14 |
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Customer C |
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4 |
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13 |
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Customer D |
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12 |
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6 |
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72% |
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62 |
% |
CIPRICO INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60 of the Securities and Exchange Commission, requests that all companies include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by Ciprico Inc. (“the Company, we and our”).
General
Management’s discussion and analysis of Ciprico’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The most significant estimates and assumptions relate to the recoverability of receivables and inventories. Actual amounts could differ significantly from these estimates.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Products sold are generally covered by a warranty for periods up to three years. We accrue a warranty reserve within cost of sales for estimated costs to provide warranty services. We estimate the costs to service our warranty obligations based on historical experience and expectation of future conditions. Revenue from the sale of extended warranty and maintenance agreements is deferred and recognized on a straight-line basis over the term of the related agreement.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer
8
collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we can not guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.
Inventories
We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision to reduce excess and obsolete inventory so estimated market value based primarily on our estimated forecast of product demand and production requirements for the next twelve months or expected life of the representative product. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. If our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. We do not adjust our lower of cost or market adjustment to inventory components upward once a reduction was determined to be necessary.
We make every effort to ensure the accuracy of our forecasts of future product demand, however any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Warranty
Our warranty reserve is established based on our best estimate of the amounts necessary to settle future 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 is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, we would increase our warranty accrual resulting in decreased gross profit. Similarly, if the opposite occurs and we experience better than expected results, we would decrease our warranty accrual.
Deferred Taxes
We record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review the deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income or loss, projected future taxable income or loss, and the expected timing of the reversals of existing temporary differences.
The following discussion and analysis of the financial condition and results of operations of Ciprico Inc. and its subsidiaries should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto, included elsewhere in this Report.
OVERVIEW
Ciprico Inc. designs, manufactures and markets storage and system solutions for digital media applications. Our solutions combine storage, networking and computing technologies to simplify and accelerate digital media workflows. Our primary markets are broadcast and entertainment, which include applications in digital broadcast and film and video production and military and government which include applications involving the data capture, processing and dissemination of surveillance images. In addition, we have historically sold in other markets with high-performance storage requirements such as geosciences, digital prepress and medical imaging.
9
Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002
Comparative information on sales by market for the period ended December 31, are shown in the chart below (in millions).
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2003 |
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2002 |
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Market |
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Sales |
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% of Total |
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Sales |
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% of Total |
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Broadcast & Entertainment |
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$ |
3.8 |
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63 |
% |
$ |
4.7 |
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58 |
% |
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Military & Government |
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1.8 |
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31 |
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3.2 |
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40 |
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Other |
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0.4 |
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6 |
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0.2 |
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2 |
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Total |
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$ |
6.0 |
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100 |
% |
$ |
8.1 |
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100 |
% |
Net sales for the three-month period ended December 31, 2003 decreased 26% to $6.0 million compared to $8.1 million for the same period last year.
The 19% decrease in sales in the Broadcast segment between the periods can be largely attributed to lower demand from our larger OEM customers. We believe this decrease reflects reduced capital spending in this sector due primarily to the uncertainty of a sustained economic recovery. We believe that this uncertainty and increased competition may adversely impact our sales in the Broadcast segment for fiscal 2004.
The 44% decrease in sales in the Military segment reflects the cyclical spending patterns of this program-oriented business. Sales in the Military segment are to some extent dependent upon the actual appropriation and funding of government programs that specify our products. We believe our sales in this segment have been adversely impacted by delays in the deployment and funding of certain programs in which our products have been specified. Sales in the Military segment have historically fluctuated between periods due to the timing of spending on defense-related programs.
The increase in the other market can be principally attributed to sales of our DiMedaä product to new customers in the medical imaging and enterprise applications.
Our revenue growth in fiscal 2004 is dependent on market acceptance of new products, expansion of products into new applications within its targeted market segments, and the success of programs which specify Ciprico products.
Gross profit, as a percentage of net sales, was 38.2% for the three months ended December 31, 2003, compared to 36.4% for the same prior year period. This increase is primarily due to higher sales of new products, such as DiMeda and the FibreSTORE® 2210, and to a lesser extent a result of cost reductions.
Research and development expenses decreased $61,000 or 4% to $1.4 million, compared to the same quarter last year. This 4% reduction primarily reflects decreased headcount due to our restructuring efforts in the prior year. We expect that quarterly research and development expense levels for the remainder of the year will increase as a result of new prototype spending related to our new product development activities, particularly our new FibreSTORE® 2212A serial ATA product.
Sales and marketing expenses decreased $268,000 or 16% to $1.4 million, compared to the same quarter last year. This 16% decrease is primarily the result of reduced headcount between years resulting from our restructuring efforts implemented in the prior year. We expect that quarterly sales and marketing expense levels for the remainder of the year will increase as a result of channel development activities and new product introductions.
General and administrative expenses decreased $171,000 or 25% to $501,000 for the three months ended December 31, 2003, as compared to the same quarter of last year which primarily reflects reduced headcount between years, lower provision for bad debts and decreased legal and professional fees. Expenses for fiscal 2002 include approximately $60,000 of legal and professional fees related to the implementation of the shareholder rights plan and stock option exchange.
(more)
10
Other income decreased approximately $65,000 due primarily to overall lower investment yields and lower cash and marketable securities balances between periods.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had cash, cash equivalents and marketable securities totaling $22.3 million compared to $21.9 million at the end of fiscal 2003.
Cash flows provided by operating activities was $312,000 for the three months ended December 31, 2003 compared to a use of $455,000 for the same period last year. Capital expenditures of approximately $72,000 for the three months ended December 31, 2003 is primarily attributed to purchases of prototype hardware related to new products. We anticipate that capital expenditures for fiscal 2004 will approximate $300,000 to $500,000. There was no share repurchase activity during the three months ended December 31, 2003. The remaining authorization as of December 31, 2003 under our stock buyback program is $4.2 million.
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 our Form 10-K filed on December 12, 2003. 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.
CIPRICO INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in money market mutual funds, highly rated corporate debt securities and and cerain asset-backed investments. 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.
CIPRICO INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Ciprico management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period covered by this report. There have been no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect the Company’s control over financial reporting.
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CIPRICO INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification
of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification
of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification
of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification
of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on January 20, 2004 with respect to the press release dated January 20, 2004 announcing the Company’s results of operations for the quarter ended December 31, 2003.
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CIPRICO INC. AND SUBSIDIARIES
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.
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CIPRICO INC. |
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Dated: February 13, 2004 |
/s/ Robert H. Kill |
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Robert H. Kill, President and |
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(Chief Executive Officer) |
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Dated: February 13, 2004 |
/s/ Thomas S. Wargolet |
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Thomas S. Wargolet, Vice
President of |
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(Principal Financial and Accounting Officer) |
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