UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
x
ANNUAL REPORT PURSUANT TO SECTION 13
or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,
2007
o
TRANSITION REPORT PURSUANT TO SECTION 13
or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from to
Commission File No. 0-11336
CIPRICO INC.
(Name of small
business issuer in its Charter)
Delaware
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41-1749708
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(State or
Other Jurisdiction of
Incorporation or Organization)
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(I.R.S.
Employer
Identification No.)
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7003
West Lake Street, Suite 400, St. Louis Park, Minnesota 55426
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(Address of
Principal Executive Offices, Including Zip Code)
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Issuers
Telephone Number:
(952) 540-2400
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Securities registered under Section 12(b) of
the Exchange Act:
Common Stock (par value
$0.01 per share)
Securities registered pursuant to Section 12(g) of
the Exchange Act:
None
Indicate by checkmark whether the issuer is
not required to file pursuant to Section 13 or 15(d) of the Securities
Exchange Act
o
Indicate by checkmark whether the issuer (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
x
No
o
Indicate by checkmark if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
x
Indicate by checkmark whether the registrant is shell company (as
defined by Rule 12b-2 of the Exchange Act).
Yes
o
No
x
State issuers revenues for its most recent fiscal Year $8,605,000
The aggregate market value of shares held by non-affiliates
was approximately $27.1 million computed by reference to the last sale price of
the Companys Common Stock, as reported in the NASDAQ National Market system,
on November 30, 2007.
As of November 30, 2007, the Company had outstanding
5,112,994 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of
Stockholders to be held on February 7, 2008 are incorporated by reference
into Part III of this report.
Transitional Small Business
Disclosure Format:
Yes
o
No
x
CIPRICO INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED SEPTEMBER 30,
2007
2
NOTE
REGARDING FORWARDLOOKING STATEMENTS
Certain statements contained in this Annual
Report on Form 10-KSB, including, but not limited to, statements regarding
the development and growth of our business, our intent, belief or current
expectations, primarily with respect to our future operating performance and
the products and services we expect to offer and other statements contained
herein regarding matters that are not historical facts are forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor created by those sections. Generally,
words such as may, should, expect, plan, anticipate, believe, estimate,
will, predict, intend, or potential and similar expressions identify
forward-looking statements. Because such statements include risks and
uncertainties, many of which are beyond our control, actual results may differ
materially from those expressed or implied by these forward-looking statements.
These risks and uncertainties include, but are not limited to: (i) competitive
factors, including pricing pressures; (ii) variability in quarterly sales;
(iii) economic trends generally and in various markets; (iv) general
economic conditions; (v) risks associated with introducing new products,
features and services; and (vi) other events and important factors
disclosed previously and from time to time in our filings with the U.S.
Securities and Exchange Commission (SEC). Future SEC filings, future press
releases and oral or written statements made by us or with our approval, which
are not statements of historical fact, may also contain forward-looking
statements.
Readers are cautioned not to place undue
reliance on these forward-looking statements. Forward-looking statements speak
only as of the date on which they were made, and except as required by law, we
assume no obligation to update any forward-looking statements. Although we
believe that the expectations reflected in these statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We do not intend to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
PART I
ITEM 1.
DESCRIPTION
OF BUSINESS
Overview
Ciprico Inc. (the
Company or we or our or us)
is a leading
provider of intelligent storage software solutions for servers, professional
workstations and digital media workflows. Ciprico has been a leader in many
aspects of data storage protection and introduced one of the first data
protection RAID systems in 1988. In June 2006 we acquired the RAIDCore
line of business from Broadcom via asset purchase and technology license. With
the RAIDCore software as a base, the Company is once again focused on being a
leader in data protection technology with its software based virtual RAID
technology. RAIDCore is written to be silicon and operating system agnostic, a
key feature as to its flexibility. Within the emerging software based
virtualized RAID market, the Companys RAIDCore product line is one of the
leading products due to its reliability, performance and scalability. We
believe these rich features combined with low power requirements and
substantial cost savings make the RAIDCore product line compelling.
Currently Ciprico is in transition from being
hardware product centric to software product centric. The Company has
traditionally sold hardware products incorporating proprietary software. Our
legacy hardware products are seeing significant competition from low cost
producers that in some environments offer a solution that is good enough,
negating some of the advantages our products have relied on for market
penetration. The Company is also changing and expanding the markets it
addresses. In the years prior to fiscal
2007, our largest market was the Broadcast market. As we did not keep up with
required technological changes our sales in this market have declined
substantially over the past several years. Our new engineering talent and focus
on RAIDCore software allows us to address a much larger market including the
large enterprise market and particularly the growing SMB (small to medium
business) marketplace. Our transition to emphasizing software has been driven
by several catalysts: the purchase of the RAIDCore software product line from
Broadcom in June 2006, the expanding market for data protection,
technology improvements by chip makers (principally the deployment of
multi-core processors), and the transition of our engineering talent.
According to Gartner, the amount of digital storage
generated by businesses and consumers is growing at a rate of greater than 50%
per year. Key drivers of this growth are the changing regulatory requirements,
general business needs, as well as increased digital based personal
communication. The need to protect, scale and retrieve data efficiently over
extended periods of time is a significant issue. The amount of data that can be stored on any
one disk drive is accelerating this
growth in the amount of digital storage and also highlighting the need for
highly automated data protection products that minimize IT management overhead.
The majority of data protection products require an integrated disk failure
protection technology called RAID (Redundant Array of Independent Disks) in
order to protect data loss due to hard disk drives that may fail over
time.
For the past 20 years, disk data protection via RAID
has been accomplished largely via a dedicated hardware based design which
included its own processor, memory as well as other components. The key factor
for the hardware design was the
3
amount
of processing power needed to perform the RAID algorithms, which required
dedicated processors apart from the CPU. Recently advances in RAID
technology have resulted in increasingly more complex and expensive dedicated
RAID processors in order to keep pace. In addition, these hardware designs
could only work with a specified chip set. Any change in the chip set would
require entire rework of the hardware.
Cipricos RAIDCore technology eliminates the need
for a dedicated RAID processor by instead utilizing the same multi-core CPU
used in the workstation, server or PC, which is much more powerful than the
dedicated RAID processor. We believe our host CPU based software solution will
accelerate the use of advanced Raid products, moving away from expensive
hardware RAID products, by taking advantage of the increased processing power
performance of the CPUs and chipsets that are available. We can deliver with only software what
previously needed to be done with a combination of software and hardware. We
believe our software approach is disruptive to the industry and enables RAID to
become a more standard feature versus the option it is today. In the IT
industry software replacing what has been done by hardware is not new: computer
modems and sound cards are but two examples.
Currently our software runs on the majority of
mainstream chip sets and operating system environments, following our silicon
agnostic path. This provides for optimum flexibility. Our software
and products leverage the significant
investments by Intel and AMD in multi-core CPU technology. Using RAIDCore and
multi-core CPUs as a foundation, the Company is creating new products in the
Intel architecture server and workstation markets, as well as transforming our
appliance product lines to provide feature rich solutions that leverage
industry standard hardware components.
We believe our business model is expandable. We sell
our software three ways:
1) Software only - sold to OEMs, ODMs and
motherboard vendors. We believe our software only model allows for penetration
of base level RAID data protection into new markets and also allows for
web-based activation and upgrades. We anticipate that the lower cost of base
level RAID protection combined with the increased awareness of the need for
data protection will result in an expansion of the market to low-end servers,
desk top PCs and dual disk drive laptops. We believe our silicon agnostic
approach allows us to make swift changes to adapt to market and customer
demand, plus help our customers offer a more consistent look and feel across
multiple platforms.
2) RAID controller card (also referred to as an HBA
-host bus adapter) - sold to system builders via distribution. We utilize
nationally known distribution channel partners like Bell Microproducts and
Avnet to help facilitate our model. All of our RAID controller cards
incorporate our RAIDCore software. Today system builders (also referred to as
white box builders) would use our RAID controller cards when there is a need
for more ports (or SAS drive support) for additional drives than offered on the
host processor board. As motherboard manufacturers add additional ports more
system builders can move to our software only approach. There will continue to be a market for these
cards for the foreseeable future. As more system builders are introduced to our
product we believe they will find it very attractive given our
price/performance advantage over our competitors, as well as our energy efficiency,
and technology flexibility.
3) Appliances sold through a dealer and
distribution network. Our software is incorporated as part of a storage or
data protection appliance that may contain numerous drives and may be
customized for particular applications. We continue to serve certain markets with
our legacy based appliances; however it is our intention to transition all of
our appliances to RAIDCore software. We believe that the revitalization of our
appliance line of products with our RAIDCore software will allow us to better
compete in the video and media marketplace, accelerate our time to market and
allow us to enter into new market segments with a more advanced enterprise class solution.
The first of the RAIDCore software based
products were launched in September 2007 and consisted of both RAIDCore
HBA and a new and improved MediaVault product. This product, MediaVault 5108,
received a Vanguard award in December 2007, an award given to the years
most groundbreaking new products for the video production professionals. By mid-year 2008, we expect substantially all
of our appliance products will be based on the RAIDCore technology.
The vast majority of our employees are new to
Ciprico in the last year. As noted above we have transitioned virtually our
entire engineering team to one which has particular
skills in the
multi-core processor environment.
Our
management team is well experienced in the storage industry. In addition to our
industry experienced executive team, we have recently hired sales and
marketing personnel with extensive industry experience and specific experience
with our key competitors. Their
familiarity with the industry and understanding of our value proposition, lends
credence to our belief that our software can be a game changing disruptive
force in the data protection marketplace.
Corporate Information
We were incorporated under the name Computer
Products Corporation in February 1978 and changed our name to Ciprico Inc.
in May 1983. Ciprico was established to focus on next generation
storage solutions for storage area networks and
developed and
manufactured controller-based products for manufacturers and end users of
computer systems.
The company
successfully established itself as a leader in many aspects of digital data
protection technology, including introducing one of the first RAID data
4
storage system
products. Throughout the 1990s, we provided the
industry standard for reliability in disk arrays with the 6700, 6900, 7000 and
FibreSTORE
®
series. In January 2005, we purchased substantially
all of the assets of Huge Systems, Inc. including their MediaVault
product line, which is focused on the digital content creation marketplace for
video, graphics and movie production including digital cinema. In June 2006
we entered into a Technology License and Asset Purchase Agreement with Broadcom
Corporation that included the purchase of the assets of Broadcoms RAIDCore
business and the cross license of software technology between Ciprico and
Broadcom. We have made key improvements on the
RAIDCore software and believe with this new class of software
based data protection technology the Company will again become a data
protection leader.
(1)
Products and Services
Software Products
We believe the sale of our software only RAID
addresses the needs of the market of the future.
We offer customers a
choice of several different solutions depending on their value and performance
needs. . RAIDCore software is available today in basic RAID (RAID 0, 1, 10) as
well as advanced RAID 5 (for high input/output (I/O) oriented uses) and
controller spanning. RAID 0, 1, 10
stripes data across multiple disk drives to increase sustained data throughput
performance and duplicates data via mirroring to provide redundancy RAID 5 stripes data and parity across all
the disk drives in the array, making it good for transaction processing and is
thus best for traditional data processing or enterprise applications. Additional
enhanced features include RAID 1n, 10n advanced mirroring, full controller
spanning support and mixed capacity drive support, along with several advanced
features to provide recovery from potential system crashes. RAID 6 will be
available in the near future in the RAIDCore software only mode. RAID 6 is
important in very large arrays that contain business-critical data, such as
large customer databases, digital archives, large digital feature films and
movies archives where data loss could be catastrophic. RAID 6 provides
enhanced data protection where any two drives can fail and the array will still
maintain all the data, and sustain the throughput so the customer can continue
to work.
Our key enabling technology is the RAIDCore software
stack which allows transition from hardware device-centric to software
systems-centric. This feature rich software is hardware independent and silicon
agnostic and can run on virtually any multi-core CPU a chipset, as a RoC (Raid
on
Chip), RoMB (RAID on MotherBoard), or HBA (Host Bus Adapter). In
addition to being offered in multiple levels of RAID protection, our software
includes the unique ability to virtualize or group multiple I/O ports together
via its controller spanning feature to form extremely large single RAID
arrays of 32 disk drives. Our software is compatible with SATA I, SATA II, or
SAS
(Serial Attached Storage) drives.
Although previously limited to just the Broadcom
chip set, the RAIDCore software has already been deployed in tens of thousands
of Windows and Linux based servers and embedded video workflow environments at
numerous OEMs and system builders. The available market to the Company has
expanded greatly with our September 2007 announcement that our software
will also run on Intel and Intel compatible chip sets. Ciprico also anticipates continually expanding
the number of platforms and operating systems supported, including MAC (Apple)
OS X, in the next fiscal year.
Our RAIDCore software is a highly integrated
storage platform that includes enterprise-class RAID software that
runs on multiple storage silicon offerings and provides our customers with a
competitive advantage. We accomplish this by lowering total cost of ownership
and providing a more consistent look and feel across multiple platforms. By
eliminating much of the dedicated RAID hardware, the RAIDCore solution has also
demonstrated significant energy savings over competing hardware RAID
controllers.
RAID Controller Cards (HBAs)
This is the primary and largest part of
the RAID controller market today, almost exclusively a hardware based approach
today with a dedicated processor on the Card or HBA. With our host based
approach the primary need for these cards is when the motherboard does not
contain enough SATA I/O ports for the configuration desired or SAS disk drive
support is required. Our RAIDCore product family offers storage ODMs, OEMs and
system builders (including white box server builders) complete and feature-rich
storage platform software delivered as a HBA (also referred to as a RAID
controller card or board).
The RAIDCore RAID controller card series delivers multiple RAID
levels for servers and workstations.
We
believe the close interoperability between the RAIDCore software and the
silicon provides significant cost savings as the Ciprico product eliminates the
need for separate processor, memory and AISC engine on the RAID controller card.
Thus we believe Ciprico has significant cost advantage over its
competitors in supplying this marketplace. In addition, there is decreased
energy consumption and improved performance as the Ciprico product uses the
power of the multi-core host processor (which is almost always faster than the
dedicated processor on a controller card). With controller spanning, online capacity expansion, online RAID level
migration and distributed sparing, our HBA products offer enterprise-level data
integrity and high data access performance at an economical total cost of
ownership. These HBA products cover both SAS and SATA interfaces and come in a
variety of models related to the number of I/O ports needed by a customer.
Our RAIDCore software stack is built into our own
line of PCI Express and PCI-X based RAID controller SAS/SATA II HBAs. We
believe the RAIDCore host CPU based software leads the industry with feature
sets that go well beyond traditional
5
hardware
based RAID and forms a solid foundation for implementing robust and reliable
24/7 data protection platform for any enterprise class server, be it
web, email, data center or small business multi-function servers. By providing
a common software stack and management suite that covers a broader range
of platforms, we believe RAIDCore allows system builders and OEMs to streamline
support costs and IT managers to simply software update management. For smaller
business users, we believe the RAIDCore management utility provides a greatly
simplified and easy to use management tool when compared to other competing
hardware or single solution based products.
Appliance Products
Our appliance products are organized into
three product line families:
MediaVault
ä
, DiMeda
®
and TALON
®
.
We
create, design, and develop all of our product appliances to operate at peak
performance levels while maintaining high reliability. Very high performance
applications may require one or several systems and different levels of
RAID protection.
MediaVault
The MediaVault line of fixed and portable DAS
(Direct Attached Storage) and SAN storage appliances provide a high level of
performance and reliability in demanding digital video editing, capture and
transport systems. Having one of the Content Creation markets most reliable-performance
profiles, the MediaVault products are capable of surviving fatal drive crashes
during intensive video streaming or creation projects, protecting end users
precious time and creative content without holding up the project in the event
of drive failure.
Our MediaVault product line is
designed as a cost effective solution for
high-bandwidth content creation applications such as uncompressed SD / HD / 2K
editing, film digital intermediate work, and digital cinema. The legacy
MediaVault RAID software family is a third generation code set that is focused
on providing high performance throughput for video applications using RAID 0, 3
and 6 in low cost hardware architecture. We
believe this provides a
superior price/performance proposition for the content creation/digital cinema
market. Our current product offerings include a high performance 4Gb Fibre Channel and U320 SCSI interface, and
switchable RAID 0 and RAID 3 operation, offering both performance and
protection. RAID 6 operations are now included on select models offering users
added level of data protection.
The recently introduced new MediaVault
product line based on RAIDCore software and new 20Gbps PCI Express cabling
standard offers significant performance improvement at a very competitive price
for direct attached storage applications. The new 5100 series MediaVault
appliances offer enterprise quality features and thus have application beyond
just the video and media marketplace. We are expanding our market for these
products as we believe
they have broad appeal including the
system builder channels as well as the military and government sector.
TALON®
TALON is a highly ruggedized product for
military applications with the mechanical chassis designed to enable the
operation of a disk array in harsh environments of temperature, shock,
vibration, salt-fog, etc. This product
has now transitioned to use the RAIDCore software and includes unique features
such as guaranteed performance in degraded modes, redundant power supplies, and
storage scalability. Additionally, we believe
the patent pending
removable disk pack feature is a key differentiation, enabling the portability
benefits of tape, with the random access benefits of disk drives. A key benefit
to the customer is enhanced application performance as it pertains to
uninterrupted data availability at full performance levels.
We believe these features make the
product uniquely suited for high bandwidth applications.
For years, Cipricos leadership in high performance real time digital
data capture and streaming media has allowed the company to provide storage in
environmentally demanding applications. High altitude avionics class digital
video capture, rugged terrain and harsh environments all present unique
challenges for sensitive storage equipment. Cipricos TALON® line of rugged
storage is sold to several military and government departments around the world
for demanding applications.
The Company continues to develop products in
this area, leveraging RAIDCore technology in its next generation product
developments.
DiMeda®
Our
DiMeda
product line
family utilizes our RAIDCore
software as well as our NAS software. This software consists of several code
sub-libraries, including open source operating and file systems. The DiMeda
family product line was designed to provide high performance,
high-availability, shared storage utilizing IP based networking protocols of
CIFS (Common Internet File System) and NFS (Network File System) in a file
based shared storage system delivering near-Fibre Channel SAN (Serial Attached
Network) performance with the ease-of-use of an appliance. It is built on
industry standard PC motherboard and chassis hardware with Linux based software
components and incorporates the RAIDCore controller card. The DiMeda line of
NAS appliances offers a flexible form of multiple stream video delivery
across local area networks. Scaling from 1Gbps up to 10Gbps on the network
side, the DiMeda platform provides a comprehensive multi-platform shared
media server that supports most of the popular file operating systems in the
industry. We believe the DiMeda appliances offer an easy to use, high
performance, resilient networked storage solution capable of storing large quantities of
digital media content. This allows for usage in supporting broadcast media and
next generation digital cinemas environments as well as other related areas.
6
Specialized
Software Licensing
In the past fiscal year the company has
utilized its core software intellectual property to design customized software
for military applications with unique features. This service generates
non-recurring engineering fees for software development and ongoing software
licensing fees for the life of the related program. The Company continues to
provide such specialized software licensing utilizing RAIDCore technology
wherever appropriate.
Warranty and Product Services Programs
Standard
Warranty
We generally include our standard warranty
(from one to three years) with our
controller card and appliance sales, which comprises standard business hours
telephone support to record, diagnose, advise on and solve issues of
operational nature relating to all products. Standard warranty technical
support can also be accessed through e-mail or on our website. In addition to the
standard warranty offered on appliance sales, in select cases we offer a range
of contract-based service programs
.
Sales and Marketing
Our software, HBAs and appliance solutions
are sold through a direct sales force calling on a combination of OEMs,
motherboard vendors, system integrators, distribution partners and dealers. Our
direct sales organization is primarily responsible for demand creation
activities and customer development within these distribution channels. In addition to the United States we have
distribution channels and arrangements in Canada, Asia Pacific and Europe. We
also have inside sales, business development and pre-sales system engineering
resources that work closely with and complement our direct sales force.
The sales cycle related to an OEM sale varies
based on the specific OEMs design-in cycle, test process and where they are in
the technology cycle of a particular platform. Therefore the entire sales cycle
ranges form two to six months. Distribution and dealer sales cycles are
typically shorter than with an OEM type sale, and range from two weeks to three
months.
We our offer our software, HBAs, and
appliance solutions to multiple storage markets. In the past we have tracked
our sales to particular markets. As we sell more of our software only and
software on HBA
we will have less insight as to
which marketplace our product ultimately reaches the end user. Sales cycles for
the
military and government market may range
from three to eighteen months and contracts from one to seven years.
Our primary focus is on
small-to-medium
business
and the
enterprise marketplace.
We
will continue to deliver our software via storage appliances to the
digital media content
creation and delivery
and
military and government
markets.
We intend to limit specific efforts in the Broadcast market, utilizing products
for our other markets as appropriate.
Small-to-Medium Business and
Enterprise
This market focus includes the
high-end consumer, game developers, media specialists and the SMB server
markets. We reach these markets through OEMs, motherboard vendors, systems
builders and VARs with either a software license or a HBA.
By providing a common software stack and
management suite that covers a broader range of platforms, we believe
RAIDCore provides system builders and OEMs the ability to streamline support
costs and IT managers to simply software update management. This is especially
important for smaller business users, as we believe the RAIDCore management
utility provides a greatly simplified and easy to use management tool when
compared to other competing hardware or single solution based products. For example, a current customer, a major
China based OEM H3C (originally a joint venture of Huawei and 3Com), is using
our software platform in its line of iSCSI appliances, combined with
FalconStor software, to address the growing SMB market in China. We believe that less than 20% of the low-end
servers, principally addressing the SMB marketplace are currently penetrated
with RAID capability. With our software approach we believe we can address this
marketplace with a cost effective solution for base level RAID. Customers in
this low-end server market, as well as all SMB and enterprise markets, can
avail themselves of a higher level of RAID protection via a web-based upgrade. The
initial sales process for OEMs, ODMs and system integrators is complex,
requiring interaction with several layers of the customers organization and
extensive technical exchanges as well as product demonstrations. We believe the RAIDCore host CPU based software leads the industry with
feature sets that go well beyond traditional hardware based RAID and forms a
solid foundation for implementing robust and reliable 24/7 data protection platform for
any enterprise class server, be it web, email, data center or small
business multi-function servers. Our
goal for this market is to make our software ubiquitous throughout the server,
PC, and workstation industry and drive storage management costs lower for end
users and decrease the cost of management for the OEM.
Digital Media Content Creation
and Delivery
The film industry is beginning
to capture original content with digital cameras, rather than with traditional
film reels. Many movies created with film are then converted to digital for
intermediate work (i.e. editing, special effects, lighting changes, color
changes, etc.) and ultimately put back on film for distribution.
We believe there is potential for increased storage and the protection of such
storage, as the movie industry uses more digital technology, including archives
for the digital intermediate work, digital storage at the movie theater and
ultimately the permanent archiving of these digital assets. In addition to
digital cinema, companies involved in video content creation such as
advertising agencies, post-production houses and video production companies are
increasing their digital storage. As these workflows move from SD (Standard
Definition) to HD (High Definition) and eventually 2K/4K resolution, the need
for storage increases dramatically. Applications include 3D animation, special
effects, film restoration, editing
7
and archive. These markets are beginning to
use enterprise class storage equipment and data management techniques and
we believe this provides significant potential for our RAIDCore technology.
Military and Government
Our primary focus in this market is to
provide software customization services and ruggedized appliance products with
removable disks for applications commonly referred to as Command and Control
or C4I. The primary applications involve the collection, processing and
dissemination of visual reconnaissance and surveillance data for mission
planning, intelligence gathering and targeting. A single image frame ranges
from a few megabytes up to 14 GB in size, with the data capture phase requiring
the collection of hundreds to thousands of frames per day. In the case of
satellite-based imagery sensors, our products are used at the supporting ground
stations. For airborne applications, our
products are onboard aircraft and imagery data is captured at a very high
transfer rate. In the image processing and archiving applications, the imagery
data created from the capture phase must be processed before it is usable for
end-users. Once processed, the imagery data is stored in digital asset
management databases for fast query and retrieval. These databases often reach
multiple terabytes in size and require the high bandwidth performance we
believe
our products provide. We rely on a direct sales method to
address this market through resellers and government contractors.
Broadcast
The broadcast video market includes companies
that create, edit, manipulate and broadcast images, in real-time using digital
technology. The expansion of HDTV worldwide provides opportunity for vendors
with solutions that improve the productivity of creating, managing and storing
HD content. We believe o
ur appliance solutions developed for
other markets meet many of the requirements of broadcast and video services
applications. This market has become increasingly competitive and the Company
anticipates engaging in this market going forward only where it can provide
value and maintain reasonable margins.
(2)
Distribution
Software Products
The Ciprico storage software platform is offered
to
ODMs, OEMs and motherboard vendors on a direct basis. We offer
customers a choice of several different solutions depending on their value and
performance needs.
We believe a key component our
distribution model is that our software products can be accessed and sold via
the internet. This allows users the
opportunity to purchase our software at any time, and also access upgrades.
Due to the fact our software now runs on all
Intel and Intel compatible platforms, a key to our distribution model is sales
of base level RAID protection on a vast amount of motherboards being
manufactured. We intend to sell base level RAID data protection directly and
encourage upgrades. At any subsequent step in the distribution, including the
end-user, a customer can seamlessly purchase an upgrade to a higher level of
protection via a simple web activation or download. We anticipate our
distribution model will allow for channel partners and manufacturers to be
compensated on a rebate or commission basis when customers, including end-users
take advantage of the available upgrade.
We believe t
his distribution model combined
with our silicon agnostic approach (software can run on multiple chip sets),
cost savings, reduced energy consumption, faster time to market for new
technologies, improved features and usability make our software offering a
compelling proposition.
RAID Controller Cards (HBAs)
Our RAIDCore product family offers storage
ODMs, OEMs and system builders (including white box server builders) complete
and feature-rich storage platform software delivered as a HBA (also
referred to as a RAID controller card or board).
These products are marketed and
distributed primarily through large multi-national distributors.
This is the primary and largest part of
the RAID controller market today, almost exclusively a hardware based approach
today with a dedicated processor on the Card or HBA
. We
believe our host-based approach provides significant cost savings as the
Ciprico product eliminates the need for separate processor, memory and AISC
engine on the RAID controller card. Thus
we believe Ciprico has
significant cost savings over its competitors in supplying this marketplace. In
addition, there is decreased energy consumption and improved performance as the
Ciprico product uses the power of the multi-core host processor, which is
almost always faster than the dedicated processor on a controller card. Thus we
believe our value proposition can create demand through the distribution
channel.
Appliance Products
Our appliance products are organized into
three product line families:
MediaVault
ä
, DiMeda
®
and TALON
®
.
We
create, design, and develop all of our product appliances to operate at peak
performance levels while maintaining high reliability. Very high performance
applications may require one or several systems and different levels of
RAID protection.
8
MediaVault
These products are
marketed primarily through distributors to
dealers and integrators in the pre-media and video content creation industry
who combine the high bandwidth attributes of MediaVault with high definition
and film resolution software/hardware components for a complete solution for
their end user customers. The new 5100 series MediaVault appliances offer
enterprise quality features and thus have application beyond just the video and
media marketplace. We are expanding our distribution network for these products
as
we believe they have
broad appeal including the system builder channels as well as the military and
government sector.
TALON®
The TALON appliance product is marketed and
sold directly to government and military contractors as well as through
government VARs and distributors.
DiMeda®
Our
DiMeda
product line family
utilizes our RAIDCore software as well as our NAS software. These products are marketed and sold
directly to OEMs, and through distributors to dealers and integrators in the
media and broadcast industry.
(3)
Status of New Products
In late September, 2007 Ciprico enhanced the
addressable market for its enterprise-class RAIDCore software suite for
server and workstation motherboards by announcing it now runs on market-leading
Intel
®
core logic chipsets as well as Intel compatible chip sets. Intel is estimated to ship more than 75% of
all server chipsets. Prior to this, outside of the RAIDCore HBA family, the
software could only support the Broadcom HT1000 Serverworks core logic chipset.
In the next fiscal year it is expected
that the RAIDCore software will support additional chipsets and operating
systems such as Marvell and AMD core logic along with Vista, Windows Server
2008 and Apple OS X operating systems. In addition, host software based RAID 6
and SAS Expansion features will be added to the RAIDCore core technology, enabling
a new generation of products to be launched. We believe the Ciprico RAIDCore
software solution significantly increases the RAID performance and features of
motherboards, eliminating more expensive and less powerful add-on RAID
controller cards. In addition, by virtualizing underlying hardware disk I/O
ports, the RAIDCore software is able to offer seamless spanning of RAID arrays
from the core logic to Cipricos line of RAIDCore HBAs, a feature unique to
RAIDCore and Ciprico.
(4)
Competition
Our RAIDCore software only and HBA products
compete directly with 3Ware (a part of AMCC Applied Micro Circuits
Corporation), LSI Logic, Promise and Adaptec, Inc. We believe a
software only RAID approach is still in the
early adoption phase in the data protection industry, putting Ciprico in a
leadership position. . In addition, until motherboard manufacturer provide an
increased number of I/O ports there will continue to be a need for our RAIDCore
controller cards (HBAs).
Our controller cards do not need their own
dedicated processor as we rely on the much more robust host multi-core
processor. Our cards also do not need the memory or ASIC contained on our
competitors cards. Because of this we are able to offer our customers a lower
priced RAID data protection solution. In
addition to a lower price for our product, our controller cards provide
significant energy savings. These energy savings are greatly increased if a
customer is able to use our software only solution. We also believe our
RAIDCore products provide better performance compared to the competitors. Rather than any competitor, we believe the
time and resources necessary to achieve significant design-in wins and get
though customer approval cycles will be a key determinant of our sales growth.
The markets in which we operate are
characterized by rapidly changing technology and evolving industry standards,
resulting in rapid product obsolescence and frequent product and feature
introductions and improvements. We compete with several companies that have
greater engineering and development resources, marketing resources, financial
resources, manufacturing capability, customer support resources and name
recognition. As a result, our competitors may have greater credibility
with existing and potential customers. Our ability to compete successfully also
depends upon our ability to recruit and retain key human capital capable of
continuing to expand our intellectual property. Although we believe that our
software platform has certain competitive advantages that are patent
pending, there can be no assurances that we will be able to compete
successfully in the future or that other companies may not develop
products with greater utility and thus reduce demand for our software products,
or that we will not encounter increased price competition for our product
offerings which could materially and adversely affect our operating results. We
believe that our software approach, however, will allow us to adapt more
quickly to industry changes and evolution than our competitors.
We also offer appliance product solutions
that compete against well established companies with substantial sales channel
organizations. They may adopt more aggressive pricing policies and devote
greater resources to the development, promotion and sale of their products than
we can to ours, which would allow them to respond more quickly to changes in
customer requirements. These competitive pressures may materially harm our
business. The market for storage appliance solutions is highly competitive.
9
We compete against independent storage suppliers, including but not
limited to Apple Computer Inc., Avid Technology Inc., Dot Hill Systems
Corporation, Infortrend Technology, Inc., Xyratex, Ltd., Isilon Systems
Inc., DataDirect Networks, BlueArc Corporation as well as numerous
privately-held companies including G Tech, Cal Digit and Facilis Technology
Inc.
(5)
Manufacturing and Suppliers
Our appliance product solutions are
manufactured utilizing both configure-to-order and inventory fulfillment
operations models. Manufacturing activities for our products primarily involve
quality assurance testing of subassemblies, final system assembly, integration
and final test. Our assembly operations are ISO 9001:2000 certified, located in
St Louis Park, Minnesota and are typical of the electronics industry with no
unusual methods or equipment required. The sophisticated nature of some of our
products does, however, require extensive testing by skilled personnel.
Our storage appliance products are comprised
mainly of a controller, an enclosure, disk drives, power supply and other
miscellaneous parts. Although the subsystems are unique and not readily
available, they do contain many components that are industry standard parts
that are readily available from many suppliers at competitive prices. Our
controller board assemblies are purchased from ISO 9001 contract manufacturing
companies, which manufacture the assemblies to our specifications. The
completed board assembly is subject to test procedures to insure product
performance, reliability and quality. The metal enclosure and power supply are
specified to our needs, but alternative sources for the components are
available. Some of our DiMeda products are sourced as a fully integrated
hardware solution from our supplier, with our software loaded at their
location.
Our RAIDCore controller boards are also
purchased from third-party manufacturing services to take advantage of the
inherent quality and cost benefits. We believe that using outsourced
manufacturing services allows us to focus on product development and increases
operational flexibility, thus allowing us to more rapidly introduce new
products.
We depend heavily on our suppliers to provide
high quality materials on a timely basis and at reasonable prices. We have no
long-term supply contracts. There can be no assurance that we will be able to
obtain, on a timely basis, all of the components we require. If we cannot
obtain essential components as required, we could be unable to meet demand for
our products, thereby materially adversely affecting our operating results and
allowing competitors to gain market share. In addition, scarcity of such
components could result in cost increases and adversely affect our operating
results. Our principal suppliers are Seagate Technology, Inc., Hitachi
Global Storage Technologies, Bell Microproducts Inc., AIC (Advanced Industrial
Computer), and Gigabyte.
For certain components, such as disk drives
or controller boards, if we had to seek alternative sources of supply, the
incorporation of such components from alternative suppliers and the manufacture
and shipment of the our products could be delayed while modifications to such
products and the accompanying software were made to accommodate the
introduction of the alternative suppliers components. We estimate that
replacing certain components, such as our controller board, or changing
manufacturers would involve several months of hardware and software
modifications and would disrupt sales.
(6)
Customer Dependence
Our products are sold to a broad base of
customers, in most cases through distribution. As a percentage of sales, one
distributor of our appliance products represented 11% and 13% of net sales in
fiscal 2007 and 2006, respectively. Thomson Broadcast Solutions, a direct sale
customer, represented 1% and 12% of net sales in fiscal 2007 and 2006,
respectively.
(7)
Patents and Trademarks
While our success is not dependent on patents
and trademarks, it is important to us to protect our core technology and
intellectual property. We rely primarily on a combination of copyright, trade
secret, patent and trademark laws as well as contractual provisions with
employees and third parties to establish and protect our intellectual property
rights. Our products are provided to customers pursuant to agreements that
impose restrictions on use and disclosure. Our agreements with our employees
and contractors who participate in the development of our core technology and
intellectual property include provisions that assign any intellectual property
rights to us. In addition, we generally control access to our proprietary and
confidential information through the use of internal and external controls.
The intellectual property exclusively licensed to
Ciprico from Broadcom as part of the Technology License and Asset Purchase
Agreement dated June 6, 2006 consists of a number of patents and patent
applications. In November 2005, a
patent was awarded to Ciprico for Media Server with single chip storage
controller.
In March 2004, we were granted a patent related
to the interprocessor communication technology suitable for use in high
reliability / availability storage server products. We have also submitted two
additional patent applications on certain key attributes of the TALON product. We
intend to pursue other patent applications to the extent we identify
technologies or processes that may be patentable.
10
We have obtained federal registrations for
the trademarks Ciprico®, TALON®,
NETarray®, DiMeda®, and FibreSTORE® and have registration applications
pending for our trademarks MediaVault, and vPOD. As part of our
Agreement with Broadcom we have the rights to use the trademarks RAIDCore,
Xelcore, Fulcrum and Hyperraid.
(8)
Government Approvals
Certain of our products may incorporate
encryption or other technology subject to the dual use export regulations as
administered by the U.S. Department of Commerce. We are not required to obtain
government approval of our products when they are not exported. Because our
controller cards and appliances contain electronics we do obtain proper
approvals from certified testing agencies.
(9)
Effect of Government
Regulations
We do not believe that any existing or
proposed governmental regulations not pertaining to export regulation will have
a material effect on our business. Environmental regulation is addressed below.
(10)
Research and New Product
Development
We
operate in an industry subject to rapid technological change. Our goals in
research and development are to develop industry leading features and functions
that take advantage of the significant investments made in the development of
multi-core processors. Our ability to achieve these goals is largely dependent
upon our ability to anticipate and respond to change. We use engineering design
teams that work cross-functionally with sales and marketing, system
engineering, suppliers, silicon chip manufacturers, and customers to develop
products and product enhancements. As part of our development strategy, we
actively seek cooperative and co-development activities with industry leaders
in the software, hardware, and systems businesses.
Our research and development expenses were
$4.7 million and $3.7 million in fiscal 2007 and 2006, respectively. All of our
research and development expenditures are expensed as incurred. During fiscal
2007 we have hired substantially all of the current research and development
team. The new skills are predominantly software development skills with focus
on abilities in the multi-core processing area.
In fiscal 2007 and 2006 we provided software
and hardware design services for certain customers. We were paid a total of
approximately $300,000 and $900,000 in fiscal 2007 and fiscal 2006,
respectively for this work. We also outsourced some development although this
work was at our direction and supervised by our engineers.
The majority of our research and development
expenses in the past year were focused on the further development of the
RAIDCore software. As a result of these
investments we were able to produce one of the industrys first PCI Express and
PCI-X SAS/SATA RAID controller cards, complete integration of the RAIDCore
software into a major OEMs new iSCSI storage appliance, introduce a new
MediaVault product based on the RAIDCore technology, and complete the software
porting and announce the compatibility of RAIDCore software with the Intel chip
set. We expect to continue to transition all of our appliance products over to
RAIDCore based technology as well as to continue with enhancements and
additional features in our RAIDCore product line.
(11)
Environmental Regulation
Compliance with present federal, state and
local provisions regulating the discharge of material into the environment, or
otherwise relating to the protection of the environment, has not had and is not
expected to have any material effect upon our capital expenditures, earnings or
competitive position. All of our products for the European market are compliant
with the European Union doctrine - ROHS (Restriction of Hazardous Substances)
and the WEEE (Waste Electrical and Electronic Equipment) protocol.
(12)
Employees
As of November 30, 2007, we had 76 full
time equivalents of which 64 were employees (63 full-time). Full time
equivalents include contracted personnel used to meet shorter-term goals. Of
the 76: 33 were in engineering, research and development and technical support,
25 in sales, marketing and customer service, 8 in manufacturing, operations and
quality assurance, and 10 in general management, accounting, information
systems and administration. None of our employees are represented by a labor
union. We have experienced no work stoppages and believe that our employee
relations are satisfactory.
We believe that the future success of our
business will depend in part on our ability to attract and retain
qualified technical, management and sales and marketing personnel. Such
experienced personnel are in demand, and we must compete for their services
with other firms, which may be able to offer more favorable benefits.
11
ITEM 2.
DESCRIPTION
OF PROPERTY
In October, 2007 we moved our administrative
headquarters, research and development, and manufacturing to a single site in
St. Louis Park, Minnesota, totaling approximately 20,600 square feet. This
facility is leased under an operating lease through November 2014. The
lease provides for monthly base rental payments of approximately $22,000 through
November 2008 with increases of approximately 2% each subsequent 12-month
period. Additionally, we are responsible
for our proportionate share of real estate taxes and operating expenses
associated with operating the facility which approximate $5,000 per month, as
defined by the lease agreement.
In July of 2006 we entered into a lease
for approximately 4,800 square feet in Agoura Hills, California for sales and
service. The lease expires in October 2011 and provides for gross rental
payments of approximately $9,900 per month with increases of approximately 3%
in each subsequent 12-month period.
We believe that our existing facilities and
equipment are well maintained and in good operating condition. We own all of
the equipment used in our operations. Such equipment consists primarily of
manufacturing and test equipment, tools, fixtures and computer hardware and
software.
The Company invests its excess cash in
commercial paper, government agencies and other asset-backed short term
investments which include participation loans in real estate mortgages for
first and/or second mortgages for residential, commercial and development
properties.
ITEM 3.
LEGAL
PROCEEDINGS
We are not a party to, nor is any of our
property subject to any material pending legal proceedings, nor are any
material legal proceedings known to be contemplated by governmental authorities
or others.
ITEM 4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise during the fourth
quarter of our fiscal year.
12
PART II
ITEM 5.
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES.
STOCK TRADING:
Ciprico common stock is traded on the NASDAQ
National Market under the symbol CPCI. As of November 30, 2007, there were
approximately 1,100 stockholder accounts of record. Closing stock sale price
ranges for the years ended September 30, 2007 and 2006, were:
|
|
2007
|
|
2006
|
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
|
|
$
|
6.05
|
|
$
|
4.50
|
|
$
|
5.66
|
|
$
|
4.12
|
|
Second
|
|
8.09
|
|
5.91
|
|
6.12
|
|
5.47
|
|
Third
|
|
8.30
|
|
7.33
|
|
6.37
|
|
5.77
|
|
Fourth
|
|
8.35
|
|
7.09
|
|
6.04
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not, and do not intend to pay cash
dividends on any of our securities for the foreseeable future. We made no sales
of unregistered securities, and made no repurchase of equity securities, during
the year ended September 30, 2007.
The following chart compares the cumulative
total stockholder return on the Companys Common Stock with the S&P
Smallcap 600 Index and the S&P Computer Storage & Peripherals
Index. The comparison assumes $100 was invested on September 30, 2002 in
the Companys Common Stock and in each of the foregoing indices and assumes
reinvestment of dividends.
|
|
9/02
|
|
9/03
|
|
9/04
|
|
9/05
|
|
9/06
|
|
9/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ciprico
Inc.
|
|
100.00
|
|
169.49
|
|
123.39
|
|
152.08
|
|
152.54
|
|
254.24
|
|
S&P
Smallcap 600
|
|
100.00
|
|
126.86
|
|
158.03
|
|
191.56
|
|
205.28
|
|
235.93
|
|
S&P
Computer Storage & Peripherals
|
|
100.00
|
|
230.96
|
|
236.76
|
|
241.96
|
|
247.74
|
|
303.15
|
|
Copyright © 2007 Standard & Poors,
a division of The McGraw-Hill Companies, Inc. All rights reserved.
|
www.researchdatagroup.com/S&P.htm
|
13
EQUITY
COMPENSATION PLAN INFORMATION: -See Item 11.
ITEM 6.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the
financial condition and results of operations of Ciprico Inc. should be read in
conjunction with the Financial Statements and the Notes thereto, included
elsewhere in this Annual Report on Form 10-KSB.
Company Transition
:
Currently Ciprico is in transition from being
hardware product centric to software product centric. The Company has
traditionally sold hardware products incorporating proprietary software. Our
legacy products are seeing significant competition from low cost producers that
in some environments offer a solution that is good enough, negating some of
the advantages our products have relied on for market penetration. The Company
is also changing and expanding the markets it addresses. In the years prior to fiscal 2007, our largest
market was the Broadcast market. As we did not keep up with required
technological changes our sales in this market have declined substantially over
the past several years. Our new engineering talent and focus on RAIDCore
software allows us to address a much larger market including the large
enterprise market and particularly the growing SMB (small to medium business)
marketplace. Our transition to emphasizing software has been driven by several
catalysts: the purchase of the RAIDCore software product line from Broadcom in June 2006,
the expanding market for data protection, technology improvements by chip
makers (principally the deployment of multi-core processors), and the
transition of our engineering talent.
As a leader in the RAID technology field,
Ciprico is now introducing virtualized RAID. The Company is focused on a
technology solution that does with host-based software what has been
traditionally been done with expensive, dedicated hardware. Our software
development leverages massive investments by processor and chipset
manufacturers in multi-core processor environments. Our RAIDCore software uses
the power and speed of the host multi-core processor to perform the RAID
data protection function. Our software is designed to be silicon agnostic,
meaning it is portable to any processor or platform. We believe this allows for great expansion of
the applicability of RAID data protection. We believe the need and awareness
for data protection is growing rapidly as both the amount of data being stored
and the amount that can be stored on a single disc drive is increasing.
Not only is the emphasis of the Company
changing, the way the product is going to market is also changing. By the end
of the next fiscal year we anticipate all revenue will be based on the RAIDCore
software. This software is delivered to customers in 3 ways:
1)
Software only
- via electronic distribution to OEMs and
motherboard vendors. This allows for distribution via the Web of new copies,
upgrades from one level of protection to another, upgrades from one version to
another or additional features or data management tools.
2)
Controller Cards (HBAs)
when a customer has need of a
physical controller card (required when additional I/O ports are needed)
customers can purchase our RAIDCore software based controller card that has key
competitive advantages: the Ciprico HBA is 40-60% less in cost versus
hardware-based solutions as it does not require a dedicated processor, memory
or custom ASIC. In addition, we believe our card performs better than the
competition because it uses the speed and capacity of the host processor. It
also a green alternative in that it requires far less energy to power and
cool versus traditional hardware based products. This product is distributed
through national distributors such as Bell Microproducts and Avnet.
3)
Appliance Products
our current appliance products,
MediaVault, DiMeda, and TALON will be transitioned to include RAIDCore software
as a key differentiator. The first RAIDCore based MediaVault product was
introduced in September, 2007. We believe a key to our short term success is the revitalization of these
products. By utilizing industry standard components integrated with our
RAIDCore software, we can offer price competitive products with improved
features, functions and performance. We anticipate that this will allow
applicability beyond our traditional reach into Video and Media markets and
gives us significant opportunity in the general IT marketplace.
During fiscal 2007 we made significant
investments in human capital with the addition of experienced talent in key
management roles, engineering, sales and marketing. The Companys President and
CEO, Senior VP of Development and Marketing, as well as the Chief Engineer all
came on board late in the first quarter of this year. All but two members of
the current engineering team were added in fiscal 2007. The entire RAIDCore
sales force was added in the last half of the fiscal year after we were assured
engineering could execute on the technology roadmap. The VP of RAIDCore sales,
as well as his entire team are seasoned, industry experienced sales and
marketing personnel. Their industry experience includes time at our direct
competitors. We believe we have assembled a team with the right skills and
experience to facilitate a change in how RAID data protection is delivered in
the marketplace. Because of their experience in the industry, a major factor in
the decision of these sales people in joining the Company related to the
opportunity to have an impact on the data protection marketplace by doing in
software what has previously been done with hardware.
14
We believe the timing is right for our transition to focus on a
software based approach from a number of standpoints:
Customer opportunity
the RAID controller marketplace is shifting to SAS/SATA and we are delivering
this technology. We believe that with our software approach we provide a lower
total cost of ownership with both upfront cost savings and lower energy usage.
Technology opportunity
the investments made by the processor and chipset manufactures in multi-core
processors environment has facilitated our move to providing host based
software RAID protection. With continued processor performance improvements and
more features being integrated into the chipsets our host based software uses a
very small incremental percent of the server or workstation processor cycles. We
virtualize the I/O ports within a RAID system and are agnostic as to which
silicon we run on.
Marketplace opportunity
the need and awareness of data protection is growing rapidly, particularly in
the SMB (small to medium business) marketplace, creating an opportunity for our
software model to become ubiquitous by providing a base level of protection
that is upgradeable.
Distribution opportunity
using a secure software key, we are in the process of being able to offer
distribution of our software via the web. When our base software is put down on
motherboards, customers can upgrade their level of RAID protection via the web.
In addition, this is a vehicle to provide updates and more advanced data
management software to our customers.
Liquidity and capital resources
:
As of September 30, 2007, we had a total of
cash, cash equivalents, marketable securities and asset-backed short-term investments
of $4.6 million compared to $11.0 million at the end of 2006. Cash flows used in operating activities were
$5.9 million and $4.2 million in 2007 and 2006, respectively. The use of cash
for operations for both years reflects the net loss and the impacts of
depreciation and changes in working capital. In addition to the use of cash in operations,
the change in total cash and investments between 2007 and 2006 relates to cash
from option exercises and capital expenditures.
We have made significant investments in new
management, research and development talent, developing a significant testing
lab, and more recently in sales and marketing. As part of the transition
of the Company many of these expenditures are by necessity in advance of the
revenues that will be generated by the associated activities.
Because of these investments and the time to
revenue given the required design-in cycles of customers, we believe our cash
position at September 30, 2007 was not sufficient to execute our strategic
plan. Therefore on December 26, 2007 we entered into a financing
arrangement whereby the Company would have access to funds to allow the Company
to execute on its strategic plan. This financing arrangement is in the form of
a convertible note with a total principal amount of $5.1 million and a maturity
date of March 26, 2009. The financing does provide for additional closings
if additional funds are sought and secured. Our intention is that we would
enter into further closings only if they occurred in the very near term. The
loan provides for an interest rate of LIBOR plus 6%. The loan has a conversion
feature for both principal and interest at the lenders option. The conversion
price of $3.86 per share was set at the market rate prior to the closing date. In
addition, lenders receive warrants for the purchase of additional shares at a
rate of $0.25 for each $1.00 of principal converted to shares at the same
market conversion rate noted above. The Company is also planning an additional
capital raising event in 2008. The specifics of the convertible note financing
have been disclosed via a Form 8-K filing.
With access to the capital referred
to
above, 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 in fiscal 2008. We believe that we are making the
appropriate investments now that will allow us to double our revenues in fiscal
2008 (over fiscal 2007) and attain profitability in 2009. The timing of when
profitability is achieved in fiscal 2009 is dependent on the mix of business. We
are dependent on a substantial increase in sales to be able to achieve
profitability.
Capital expenditures were
$791,000 in 2007 versus $94,000 in 2006, and relate to equipment purchases or
small leasehold improvements.
We
anticipate that capital expenditures and related expenses for product
development activities in 2008 will approximate $500,000. Some of our development work may become
reimbursable via non-recurring engineering fees we anticipate receiving from
certain customers.
In October 2007 we exercised our option
to vacate our 39,000 sq. ft Plymouth, MN facility in order to right size our
lease commitment. Our new corporate headquarters in St. Louis Park, MN consists
of 20,500 sq ft and we have lease commitments, including base rents and
operating costs, of approximately $250,000 annually. The lease expires in November of 2014. In addition, we have lease commitments on our
California office of approximately $125,000 annually through October 2011.
Net sales
:
In the past we have tracked our sales to
particular markets to the best of our ability given that majority of our sales
are through distribution and therefore in many cases we do not know the
specific market our products are being used in. As we sell more of our
software-only products to motherboard manufacturers and HBA products to system
builders we will have less insight as to which marketplace our product
ultimately reaches the end user. Therefore for fiscal 2008 we intend to focus
on segregating sales of just our software and related upgrades (including where
this software is delivered as an HBA) from those sales where the software is
integrated as part of an appliance sale.
15
For purposes of this analysis of our net
sales for the past two fiscal years we have separated sales into the following
market categories:
(in millions):
|
|
2007
|
|
2006
|
|
Market
|
|
Sales
|
|
% of
Total
|
|
Sales
|
|
% of
Total
|
|
Digital Media
Content Creation
|
|
$
|
4.7
|
|
54.2
|
%
|
$
|
6.2
|
|
52.1
|
%
|
Broadcast
|
|
1.0
|
|
11.2
|
|
2.8
|
|
23.5
|
|
Enterprise
|
|
0.8
|
|
9.0
|
|
0.2
|
|
1.7
|
|
Military &
Government
|
|
2.2
|
|
25.6
|
|
2.5
|
|
21.0
|
|
Other
|
|
0.0
|
|
0.0
|
|
0.2
|
|
1.7
|
|
Total
|
|
$
|
8.6
|
|
100
|
%
|
$
|
11.9
|
|
100
|
%
|
Sales for 2007 decreased 28% from 2006 sales,
which is due to:
Decreases
in sales of our older legacy products as the technology ages these sales were
concentrated in the Broadcast and Military & Government markets;
Decreases
in the sales of our older MediaVault products primarily due to low cost
competition, along with aging technology these sales were primarily in the
Digital Media Content Creation markets;
Increase
in competition in the Content Creation market from solutions not specifically
designed for this market but with enough features to be usable;
Only
slightly offsetting the above points is the increase in the Enterprise market
related to the first meaningful sales of RAIDCore software and Controller cards
(HBAs) primarily in the enterprise market; and
In
addition, the first RAIDCore based
MediaVault, the 5100 series had it first sales in September 2007
Many of our current appliance products are
scheduled for revitalization by use of the RAIDCore software platform. We
believe this will allow for industry competitive features and functions at
attractive price points, allowing us to be a significant player in the Digital
Media Content Creation marketplace. Our solutions are designed to meet the
specific needs of these customers. We also believe that we have and are
developing applications that are critical to the stages in the digital workflow
process, including capture, management, archival and distribution of digital
assets. Some of these solutions may also find applicability in the Broadcast
market, however this is not a market in which we are currently investing new
product development efforts.
We believe sales in the Military and
Government market will also increase in fiscal 2008 over 2007 due to the
appliance product revitalization which will include our customized and
ruggedized TALON product. Sales in this market are dependent upon the actual
appropriation and funding of government programs that specify our products. Sales
in the Military market have historically fluctuated due to the timing of
spending on defense-related programs. We believe that we can leverage our
technology to satisfy certain customers in this market that could involve
multiple year contracts.
We believe that because our RAIDCore software
is enterprise class it has many applications in the Enterprise market.
Part of our strategy is to provide a number of motherboard manufacturers
with a software only base level RAID offering, with the ability of systems
builders or others in the channel, as well as end-users to purchase upgrades to
higher levels of protection via the internet.
The fourth quarter of fiscal
2007 marked the first time this fiscal year that MediaVault product line sales
increased quarter over quarter. This was due in small part to the
introduction of the first MediaVault RAIDCore based product. In addition, the fourth quarter saw the first
meaningful sales from RAIDCore software license and related RAIDCore
controller cards (HBAs). While we are pleased with some short term revenue
growth and the initial traction of the RAIDCore software and controller card
sales, we understand the investment of time and resources needed to drive the
design-in wins needed to grow our revenues. RAIDCore evaluation samples are in
the hands of a large number of potential customers and partners. We are working
with these customers to help them accelerate their qualification and design-in
process.
As we gain momentum in the marketplace our revenues may be erratic
in the near term. As a result of investments in development and sales and
marketing we expect strong growth in 2008. We anticipate our revenues doubling
from fiscal 2007 levels as we realize sales from our RAIDCore software and
revitalized appliance products. We also believe our growth will be supported by
significant growth in our international sales as we have invested in resources
to assist us in these marketplaces, including our agreement with PIE (Partners
In Europe) announced in September 2007.
16
Cost of sales and gross profit
:
Gross profit, as a percentage of net sales,
was 33% in 2007 and 36% in 2006. The 2007 percentage was adversely affected by
lower volumes of sales and inventory charges related to our legacy products,
offset by the slightly higher gross margin percentages related to the RAIDCore
software and controller card sales. Gross profit on appliance product sales is
highly dependent on the cost of various components including disk drives and may fluctuate
from quarter to quarter. We expect to experience continued competitive
pressures on gross profit margins throughout fiscal 2008 in our appliance
product sales. We intend to partially offset these margin pressures through the
revitalization of the appliance products, transforming them to make use of the
RAIDCore software. In addition we should realize some cost reductions related
to the use of industry standard component. Software-only product sales and the
RAIDCore solutions product line carry higher gross margin percentages and
should have a favorable impact on gross margin in fiscal 2008
Research and development expenses
:
Research and
development expenses increased approximately $1.0 million or 27% compared to
the previous year. Only two members of the current research and development
staff were present at the beginning of the current fiscal year. The Company has
been able to hire top notch engineering talent without paying above market
prices. Although the actual number of employees in this area of the Company has
not changed much from the previous year the skill set has changed dramatically
and this has increased our average engineering employee expenses. In addition
there were a number of consultants that assisted development efforts through
out the year.
The
quality of the staff is reflected in the fact they have been able to meet
virtually all of their development deadlines and
allowed for a number of key technology
announcements including:
RAIDCore software suite running on
Intel chipsets (ICH 7,8,9 & ESB2)
New MediaVault models 5100 series based on RAIDCore software
Improvements to existing MediaVault products
New version of the RAIDCore code
Integration into H3C Technologies iSCSI servers for SMB market
2.2 Gig/sec Raid Performance critical for
high data rate transfer
Vista support
Our team has expertise in working in
multi-core processing environments as well as working with storage
virtualization. We believe these are key advantages as chipset manufacturers
continue massive investments in multi-core technology and storage virtualization
becomes widely used.
Sales and marketing expenses
:
Sales and marketing expenses increased
approximately $900,000 or 31% compared to the previous year. The sales and
marketing team is substantially larger than it was in the previous year with most
of the resources being added in the last four months of fiscal 2007. Substantially
all of the increase in costs and personnel relate to the RAIDCore sales team. We
expect to incur substantially more expense in this area in fiscal 2008 as all
personnel will be in place for a full year. With lead time for design-in wins
and customer qualifications ranging from 60 days to nine months, we believe it
is critical to begin the investment in this area now in order to fulfill our
sales goals later in fiscal 2008 and beyond. The vast majority of sales and
marketing personnel hired this year come with extensive industry experience and
specific experience with our key competitors, 3 Ware (AMCC), LSI Logic, and
Adaptec. In addition, we expect marketing expenses to increase in absolute
dollars during fiscal 2008 as a result of business development costs associated
with the RAIDCore product line.
General and administrative expenses
:
General and administrative expenses increased
$687,000 from 2006. This net increase is a result of many factors including:
costs related to hiring of new President and CEO, costs for former CEO who was
under contract until September 30, 2007, stock option expense as
fiscal 2007 was the first year that the Company was required to expense stock
options, and some cost related to IT infrastructure upgrades (apart from
those capitalized). In addition, and as
noted in last years report, we expected and did see expenses increase in
fiscal 2007 due to higher insurance costs, increased costs to ensure
regulatory compliance, increased accounting and audit fees, and costs to
implement a new accounting, manufacturing and sales system. We do not expect to
see substantial increase in general and administrative costs in fiscal 2008
except for costs related to the completion of our new system implementation and
costs related to compliance with section 404 of Sarbanes Oxley.
Loss from operations
Total operating expenses for the fiscal year were $11.3 million,
compared to operating expenses of $8.7 million for the prior fiscal year, due
to the investment in new management, sales, marketing and engineering
talent. For the fiscal year the operating
loss was $8.5 million compared to a loss of $4.3 million in the previous fiscal
year. We believe comparisons to the prior year are not entirely meaningful,
because the Company is in transition
from hardware-centric to software-centric products, over 80% of the Company
personnel are new in the last 12 months, and the product lines are in various
stages of transition. Our profitability will continue to be impacted by
the investments we are making in order to aggressively bring our RAIDCore
technology to market and increase our revenue. This revenue growth and change
in mix of revenue source is anticipated to position Ciprico to return to
profitability in fiscal year 2009.
17
Other income
:
Other income of $473,000 and $660,000 in
fiscal 2007 and 2006, respectively, is primarily attributable to interest
income on cash and marketable securities. The decrease for 2007 is directly
tied to lower principal balances, despite the increase in overall rate of
return on investments.
Income tax expense
:
For fiscal
2007 we recognized income tax expense related to the difference in how goodwill
is treated for tax purposes from how it is treated for financial statement
purposes. See Note 4 to the Financial Statements
.
New accounting pronouncements
:
In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48),
Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement 10
9. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return, including the decision whether to file or not to file in
a particular jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006, in the Companys case for the fiscal year ending September 30,
2008. If there are changes in net assets as a result of application of FIN 48
these will be accounted for as an adjustment to retained earnings. The
Company
does not believe this will result in any material impact to its financial
statements.
In September 2006, the
FASB issued SFAS No. 157,
Fair
Value Measurements.
This statement does not require any new fair
value measurement, but it provides guidance on how to measure fair value under
other accounting pronouncements. SFAS No. 157 also establishes a fair
value hierarchy to classify the source of information used in fair value
measurements. The hierarchy prioritizes the inputs to valuation techniques used
to measure fair value into three broad categories. This standard is effective
for the Company on October 1, 2008. The Company is currently evaluating
the impact of this pronouncement on its consolidated financial statements.
In February 2007, the
FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The election to measure the
financial instrument at fair value is made on an instrument-by-instrument basis
for the entire instrument, with few exceptions, and is irreversible. SFAS No. 159
is effective for the Company on October 1, 2008. The Company is currently
evaluating the impact of this pronouncement on its consolidated financial
statements.
18
ITEM 7.
FINANCIAL
STATEMENTS
BALANCE SHEET
Ciprico Inc.
Amounts in thousands, except share data
September 30
|
|
2007
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash and
cash equivalents
|
|
$
|
1,271
|
|
Marketable
securities and short term investments
|
|
3,279
|
|
Accounts
receivable, less allowance of $127
|
|
838
|
|
Inventories
|
|
1,815
|
|
Other
current assets
|
|
24
|
|
Total
current assets
|
|
7,227
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT, AT COST:
|
|
|
|
Furniture
and fixtures
|
|
515
|
|
Equipment
|
|
3,694
|
|
Construction
in process
|
|
248
|
|
Leasehold
improvements
|
|
637
|
|
|
|
5,094
|
|
Accumulated
depreciation and amortization
|
|
(4,334
|
)
|
Net property
and equipment
|
|
760
|
|
|
|
|
|
GOODWILL
|
|
2,784
|
|
OTHER
INTANGIBLES, NET
|
|
34
|
|
OTHER ASSETS
|
|
47
|
|
|
|
$
|
10,852
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
|
$
|
1,286
|
|
Accrued
compensation
|
|
525
|
|
Warranty
accrual
|
|
154
|
|
Other
accrued expenses
|
|
369
|
|
Deferred
revenue
|
|
60
|
|
Total
current liabilities
|
|
2,394
|
|
|
|
|
|
LONG TERM
LIABILITIES:
|
|
|
|
Deferred tax
liability
|
|
132
|
|
|
|
|
|
STOCKHOLDERS
EQUITY:
|
|
|
|
Common
stock, 5,112,644 shares issued and outstanding
|
|
51
|
|
Additional
paid-in capital
|
|
37,208
|
|
Retained
deficit
|
|
(28,433
|
)
|
Deferred
compensation from restricted stock
|
|
(500
|
)
|
Total stockholders
equity
|
|
8,326
|
|
|
|
$
|
10,852
|
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THIS FINANCIAL STATEMENT.
19
STATEMENTS OF OPERATIONS
Ciprico Inc.
Amounts in thousands, except per share amounts
Years ended September 30
|
|
2007
|
|
2006
|
|
Net sales
|
|
$
|
8,605
|
|
$
|
11,932
|
|
Cost of
sales
|
|
5,762
|
|
7,590
|
|
Gross profit
|
|
2,843
|
|
4,342
|
|
Operating
expenses:
|
|
|
|
|
|
Research and
development
|
|
4,715
|
|
3,714
|
|
Sales and
marketing
|
|
3,972
|
|
3,013
|
|
General and
administrative
|
|
2,634
|
|
1,936
|
|
Total
operating expenses
|
|
11,321
|
|
8,663
|
|
Loss from
operations
|
|
(8,478
|
)
|
(4,321
|
)
|
|
|
|
|
|
|
Other income
net, primarily interest
|
|
469
|
|
660
|
|
Loss before
income taxes
|
|
(8,009
|
)
|
(3,661
|
)
|
|
|
|
|
|
|
Income tax
expense (benefit)
|
|
65
|
|
|
|
Net loss
|
|
$
|
(8,074
|
)
|
$
|
(3,661
|
)
|
Shares used
to calculate net loss per share:
|
|
|
|
|
|
Basic and
diluted
|
|
5,071
|
|
4,916
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(1.59
|
)
|
$
|
(0.74
|
)
|
STATEMENTS OF STOCKHOLDERS EQUITY
Ciprico Inc.
Amounts in thousands, except share data
Years ended September 30, 2007 and 2006
|
|
Shares
|
|
Common
stock and
additional
paid-in-
capital
|
|
Retained
deficit
|
|
Deferred
compensation
from
restricted
stock
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2005
|
|
4,783,457
|
|
35,335
|
|
(16,698
|
)
|
(5
|
)
|
18,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
plan stock purchases
|
|
16,749
|
|
82
|
|
|
|
|
|
82
|
|
Exercise of
employee stock options
|
|
146,525
|
|
627
|
|
|
|
|
|
627
|
|
Restricted
stock issued
|
|
68,500
|
|
396
|
|
|
|
(396
|
)
|
|
|
Amortization
of restricted stock
|
|
|
|
|
|
|
|
29
|
|
29
|
|
Net loss
|
|
|
|
|
|
(3,661
|
)
|
|
|
(3,661
|
)
|
Balance, September 30,
2006
|
|
5,015,231
|
|
36,440
|
|
(20,359
|
)
|
(372
|
)
|
15,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
plan stock purchases
|
|
2,913
|
|
18
|
|
|
|
|
|
18
|
|
Exercise of
employee stock options
|
|
44,800
|
|
149
|
|
|
|
|
|
149
|
|
Restricted
stock issued
|
|
49,700
|
|
372
|
|
|
|
(372
|
)
|
|
|
Stock option
expense
|
|
|
|
280
|
|
|
|
|
|
280
|
|
Amortization
of restricted stock
|
|
|
|
|
|
|
|
244
|
|
244
|
|
Net loss
|
|
|
|
|
|
(8,074
|
)
|
|
|
(8,074
|
)
|
Balance, September 30,
2007
|
|
5,112,644
|
|
37,259
|
|
(28,433
|
)
|
(500
|
)
|
8,326
|
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
20
STATEMENTS OF CASH FLOWS
Ciprico Inc.
Amounts in thousands
Years ended September 30
|
|
2007
|
|
2006
|
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(8,074
|
)
|
$
|
(3,661
|
)
|
Adjustments
to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
401
|
|
321
|
|
Compensation
related to stock transactions
|
|
525
|
|
28
|
|
Loss on sale
of furniture and equipment
|
|
4
|
|
|
|
Changes in
operating assets and liabilities, net of assets acquired:
|
|
|
|
|
|
Accounts
receivable, net
|
|
608
|
|
(320
|
|
Inventories
|
|
110
|
|
(201
|
)
|
Other assets
|
|
158
|
|
87
|
|
Accounts
payable
|
|
76
|
|
79
|
)
|
Accrued
expenses
|
|
349
|
|
(428
|
)
|
Deferred
revenue
|
|
(18
|
)
|
(80
|
)
|
Net cash
flows used in operating activities
|
|
(5,861
|
)
|
(4,175
|
)
|
Cash Flows
from Investing Activities:
|
|
|
|
|
|
Equipment
purchases
|
|
(791
|
)
|
(94
|
)
|
Business
acquisition
|
|
|
|
(1,495
|
)
|
Purchase of
marketable securities
|
|
(4,454
|
)
|
(6,486
|
)
|
Proceeds
from sale or maturity of marketable securities
|
|
8,654
|
|
11,804
|
|
Net cash
flows provided by investing activities
|
|
3,409
|
|
3,729
|
|
Cash Flows
from Financing Activities:
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
166
|
|
709
|
|
Net cash
flows provided by financing activities
|
|
166
|
|
709
|
|
Net Increase
(Decrease) in Cash and Cash Equivalents
|
|
(2,286
|
)
|
263
|
|
Cash and
Cash Equivalents at Beginning of Year
|
|
4,357
|
|
4,094
|
|
Cash and
Cash Equivalents at End of Year
|
|
1,271
|
|
4,357
|
|
Marketable
SecuritiesCurrent
|
|
3,279
|
|
6,679
|
|
Marketable
SecuritiesLong-term
|
|
|
|
|
|
Total Cash
and Investments at End of Year
|
|
$
|
4,550
|
|
$
|
11,036
|
|
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THIS FINANCIAL STATEMENT.
21
NOTES TO FINANCIAL STATEMENTS
Ciprico Inc. For the Fiscal Years ending on September 30, 2007
and 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: The principal business activity of
Ciprico Inc. (the Company) is the creation and design, manufacture and
marketing of storage solutions for digital media assets throughout the United
States and internationally.
ACCOUNTING ESTIMATES: In the preparation of
the Companys consolidated financial statements in accordance with accounting
principals generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and related revenue and expenses. Actual results could
differ from those estimates used by management.
REVENUE RECOGNITION: The Company recognizes
revenue in accordance with:
Staff
Accounting Bulletin No. 101,
Revenue Recognition in Financial
Statements
, issued by the United States Securities and Exchange
Commission as amended by Staff Accounting Bulletin No. 104;
Statement
of Position (SOP) No. 97-2,
Software Revenue
Recognition
, issued by the American Institute of Certified Public
Accountants and interpretations;
AICPA
SOP No. 98-9,
Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions
;
SOP No. 81-1,
Accounting
for Performance of Construction-Type and Certain Production-Type Contracts
,
issued by the AICPA;
Financial Accounting Standards Board (FASB)
Emerging Issues Task Force (EITF) EITF 00-21,
Revenue
Arrangements with Multiple Deliverables
.
Materially
all of revenue to date has been from the sale of product solutions as a result
of a customer purchase order. As it is clear that an arrangement exists, the
fee is fixed and determinable, and collection is reasonably assured, the
Company recognizes revenue upon shipment of product. The Companys software
sales to date do not involve any undelivered elements. When the Company enters
into services contracts based on time and materials,
revenue is
recognized when these services are provided. I
f the Company enters into arrangements in which the customer payments
are tied to specific milestones, the Company applies the provisions of SOP
81-1. The Company is offering its software platform under licensing
arrangements and recognizes revenue upon shipment of the software or upon use
by the customer in a per unit arrangement, provided there are no other material
undelivered elements.
Though the Company has not
sold a licensing agreement with multiple elements to date, if a licensing
arrangement does include other elements such as maintenance or other consulting
services, it is considered a multiple-element arrangement and the Company
accounts for the software license component using the residual method. The
residual method generally requires recognition of software license revenue in a
multiple-element arrangement once all software products have been delivered and
accepted by the customer and the only undelivered element is maintenance
services or consulting services. The fair value of the maintenance services is
determined based on VSOE of fair value and is deferred and recorded to revenue
ratably over the maintenance term. The residual revenue is allocated to the
license fee associated with the software products in the transaction. The
Companys maintenance services VSOE of fair value is determined by reference
to the price the Companys customers are required to pay for the services when
sold separately (i.e. the maintenance services fees paid by the Companys
customers upon renewal).
The Company accrues a warranty reserve within
cost of sales for estimated costs to provide warranty services. The Company
estimates the costs to service its warranty obligations based on historical
experience and expectation of future conditions.
PRODUCT WARRANTY COSTS: Estimated future
warranty costs are provided for at the time of revenue recognition. Activity of
the warranty account is as follows for the years ended (in thousands):
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance at
End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
$
|
166
|
|
$
|
139
|
|
$
|
(151
|
)
|
$
|
154
|
|
September 30,
2006
|
|
$
|
220
|
|
$
|
71
|
|
$
|
(125
|
)
|
$
|
166
|
|
Deductions represent warranty work performed during the year.
22
INVENTORIES: Inventories are stated at the
lower of cost or replacement market. Inventory costs include outside assembly
charges, allocated manufacturing overhead and direct material costs. Cost is
determined using an average cost method, which approximates a first in first
out cost.
Inventory consists of the following (in
thousands) at September 30:
|
|
2007
|
|
Finished
Goods
|
|
$
|
1,264
|
|
Work-In-Process
|
|
329
|
|
Raw
Materials
|
|
222
|
|
|
|
$
|
1,815
|
|
SHIPPING AND HANDLING COSTS: The Company
includes shipping and handling fees billed to customers in net sales. Shipping
and handling costs associated with outbound freight are included in cost of
sales.
RESEARCH AND DEVELOPMENT COSTS: Research and
development costs are charged to expense as incurred.
ADVERTISING COSTS: Advertising costs are
charged to expense as incurred. For the years ended September 30, 2007 and
2006, advertising expenses were approximately $52,000 and $68,000 respectively.
SALES TAXES: The Company collects sales taxes
from its customers on sales of its various products for sales in which the
customer is not a reseller or distributor . Sales taxes collected are included
in Other accrued expenses. Sales taxes are remitted, in a timely manner, to the
appropriate government tax authority on behalf of the customer.
CASH AND CASH EQUIVALENTS: The Company
considers all highly liquid temporary investments with original maturities of
three months or less to be cash equivalents. At September 30, 2007 and
2006 the Companys cash and cash equivalents were invested in a money market
fund and/or commercial paper. The Company maintains cash balances at several
financial institutions, and at times, such balances exceed insured limits. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash.
ACCOUNTS RECEIVABLE: Credit is
extended based on an evaluation of a customers financial condition and,
generally, collateral is not required. Accounts receivable are typically due
from customers within 30 days and are stated at amounts due from customers net
of an allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. The Company determines its
allowances by considering a number of factors, including the length of time
receivables are past due, the Companys previous loss history, the customers
current ability to pay its obligation to the Company, and the condition of the
general economy and the industries as a whole. The Company writes-off accounts
receivable when they become uncollectible, and payments subsequently received
on such receivables are credited to the allowance for doubtful accounts.
Changes in the Companys allowance for doubtful
accounts has decreased as a result of a 33% decrease in accounts receivable,
and is as follows for the years ended (in thousands):
|
|
|
|
Additions
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Deductions &
Other (A)
|
|
Balance at
End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
$
|
186
|
|
$
|
(38
|
)
|
$
|
(21
|
)
|
$
|
127
|
|
September 30,
2006
|
|
$
|
467
|
|
$
|
59
|
|
$
|
(340
|
)
|
$
|
186
|
|
(A)- Represents accounts receivable
written-off during the year.
MARKETABLE SECURITIES AND SHORT TERM
INVESTMENTS: The Company invests its excess cash in commercial paper,
government agencies and other asset-backed short term investments. Commercial
paper consists of auction rate securities that are held for seven to ten days
and then sold. These investments are classified as available-for-sale
securities, and their amortized cost approximates fair value, and thus there
are no unrealized gains or losses. Other investments are classified as
held-to-maturity given the Companys intent and ability to hold the securities
to maturity and are carried at amortized cost, which approximates fair value.
Asset-backed short term investments are participation loans in real estate
mortgages. The mortgage loans are for first and/or second mortgages for
residential, commercial and development properties. Investments that have
maturities of less than one year have been classified as current marketable
securities.
Marketable securities and short term
investments consist the following (in thousands) at September 30:
23
|
|
2007
|
|
Current
|
|
|
|
Commercial
paper
|
|
$
|
800
|
|
Asset-backed
investments
|
|
2,479
|
|
|
|
$
|
3,279
|
|
PROPERTY AND EQUIPMENT: Property and
equipment are carried at cost, less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over estimated useful
lives of eighteen months to seven years or, in the case of leasehold
improvements, over the period of the related lease, if shorter. Major
replacements and improvements are capitalized; repairs and maintenance are
expensed as incurred. Accelerated and straight-line methods of depreciation are
used for income tax reporting.
VALUATION OF GOODWILL: In accordance with
Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), goodwill
and other intangible assets with indefinite lives are not amortized, they are
instead tested for impairment annually or whenever events or changes in
circumstances indicate that the asset may be impaired. There have been no
impairment charges.
EARNINGS PER SHARE: The Companys basic
earnings per share amounts are computed by dividing net income by the weighted
average number of outstanding common shares. Diluted earnings per share is
computed by dividing net income by the weighted average number of outstanding
common shares and common share equivalents attributable to the assumed exercise
of dilutive stock options.
STOCK OPTION PLAN:
The Company has a stock option plan under
which officers, directors, employees and consultants have been or may be
granted incentive and nonqualified stock options to purchase the Companys
common stock at fair market value on the date of grant. The options become
exercisable over varying periods and in most cases expire five years from the
date of grant; however, the plan provides a maximum term of 10 years.
On October 1, 2006, the Company adopted
SFAS No. 123(R),
Share-Based Payment
,
(SFAS 123(R)) which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees, directors and
consultants, including stock option grants. SFAS 123(R) supersedes our
previous accounting under Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees
(APB 25). In March 2005, the
SEC issued SAB No. 107,
Share-Based
Payments
, and the Company has applied SAB No. 107s provisions
in the adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the
modified prospective transition method, which requires the application of the
accounting standard as of October 1, 2006, as further described below. In
accordance with the modified prospective transition method, the Companys
financial statements for the year ended September 30, 2006 have not been
restated to reflect, and do not include, the impact of the adoption of SFAS
123(R).
SFAS 123(R) requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the awards portion that is ultimately
expected to vest is recognized as expense over the requisite service periods in
the accompanying condensed financial statements for the year ended September 30,
2007. Prior to the adoption of SFAS 123(R), the Company accounted for
share-based awards using the intrinsic value method in accordance with APB 25.
Under the intrinsic value method, share-based compensation expense was only
recognized if the exercise price of the grant was less than the fair market
value of the underlying stock at the date of grant. No stock-based compensation
expense was recorded by the Company as options have been granted at fair market
value on the date of grant.
Prior to October 1, 2006, the Company disclosed
compensation cost related to stock options in accordance with APB 25. The
following table illustrates the effect on net income and earnings per share for
the year ended September 30, 2006 if the Company had applied the fair
value recognition provisions of FASB Statement 123,
Accounting for Stock-Based Compensation,
to stock-based
employee compensation (amounts in thousands, except per share amounts):
|
|
2006
|
|
Net loss, as
reported
|
|
$
|
(3,661
|
)
|
Deduct:
|
Total stock-based employee compensation
determined under fair value based method for awards granted, modified, or
settled, net of related tax effects
|
|
(218
|
)
|
Pro forma
net loss
|
|
$
|
(3,879
|
)
|
|
|
|
|
Net loss per
share
|
|
|
|
Basic and
Diluted as reported
|
|
$
|
(0.74
|
)
|
Basic and
Diluted pro forma
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
24
The weighted average fair value of options
granted in 2007 and 2006 was $2.12 and $1.37, per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2007 and 2006: no dividend yield; risk-free rate
of return of 4.67% and 4.5%, respectively; volatility of 35.4% and 35.2%, respectively;
and an average term of 3.0 years. The Company uses historical information to
estimate expected term and forfeiture rates of options. The forfeiture rate
applied to 2007 grants is 4.75%. These effects may not be representative
of the future effects of applying the fair value method.
NEW ACCOUNTING PRONOUNCEMENTS: In July 2006,
the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return, including the decision whether to file or not to file in
a particular jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006, in the Companys case for the fiscal year ending September 30,
2008. If there are changes in net assets as a result of application of FIN 48
these will be accounted for as an adjustment to retained earnings. The
Company
does not believe this will result in any material impact to its financial
statements.
In September 2006, the
FASB issued SFAS No. 157,
Fair
Value Measurement.
This statement does not require any new fair
value measurement, but it provides guidance on how to measure fair value under
other accounting pronouncements. SFAS No. 157 also establishes a fair
value hierarchy to classify the source of information used in fair value
measurements. The hierarchy prioritizes the inputs to valuation techniques used
to measure fair value into three broad categories. This standard is effective
for the Company beginning year ending September 30, 2009. The Company is
currently evaluating the impact of this pronouncement on its financial
statements.
In February 2007, the
FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The election to measure the
financial instrument at fair value is made on an instrument-by-instrument basis
for the entire instrument, with few exceptions, and is irreversible. SFAS No. 159
is effective for the Company beginning year ending September 30, 2009. The
Company is currently evaluating the impact of this pronouncement on its
financial statements.
2. GOODWILL AND INTANGIBLES
In June 2006, The
Company entered into a Technology License and Asset Purchase Agreement (Agreement)
with Broadcom Corporation, a California corporation. This Agreement involves
the purchase of Broadcoms RAIDCore line of business and the cross license of
software technology between the Company and Broadcom. The initial amount paid
at closing of $330,000 was allocated in its entirety to fixed assets, primarily
computer equipment. No goodwill or intangibles were recorded as part of
this transaction. The Agreement with Broadcom also provides for payment of
royalties and commissions based on actual revenue from product sales and
licensing fees until life-to-date payments total $25 million. The Agreement
further provides for contingent consideration in the form of warrants to
purchase Ciprico common stock at certain prices, these warrants vest only when
certain revenue targets are achieved.
In January 2005, the
Company purchased substantially all of the assets (primarily the MediaVault
ä
product line) of Huge Systems, Inc. (Huge).
Huge was a privately held company and a leading supplier of data storage
solutions for the graphic and video content creation marketplace. The total
transaction cost of approximately $3.4 million included an allocation of
approximately $2.8 million to goodwill. As part of the analysis of the
acquisition, it was determined there was no material in-process research and
development at the date of acquisition.
In conjunction with the acquisition, the Company
also issued certain warrants to purchase an aggregate of 30,000 shares of
Ciprico common stock at a price of $5.00 per share to certain stockholders of
Huge. The warrants become exercisable ratably through January 2009 and
terminate five years from the date of issuance.
In accordance with SFAS 142,
goodwill and other intangible assets with indefinite lives are not amortized,
but are instead tested for impairment annually or whenever events or changes in
circumstances indicate that the asset may be impaired. No impairments were
identified in 2007 and 2006.
Intangible assets with
finite lives that are subject to amortization are listed in the table below as
of September 30, 2007 (in thousands):
25
|
|
Estimated Life
(in years)
|
|
Estimated
Value
|
|
Accumulated
Amortization
|
|
Net
|
|
RAID
technology
|
|
3
|
|
$
|
170
|
|
$
|
(151
|
)
|
$
|
19
|
|
Noncompete
agreements
|
|
3
|
|
135
|
|
(120
|
)
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305
|
|
$
|
(271
|
)
|
$
|
34
|
|
Amortization
expense for the year ended September 30, 2007 was $102,000. These
intangibles will be fully amortized in the fiscal year 2008.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
Other accrued expenses includes the following
(in thousands) as of September 30:,
|
|
2007
|
|
Commissions
and royalties payable
|
|
$
|
96
|
|
Accrued
restructuring
|
|
47
|
|
Deferred
rent
|
|
39
|
|
Other
miscellaneous accruals
|
|
187
|
|
|
|
$
|
369
|
|
Accrued restructuring is related to lease
termination costs for the abandonment of our headquarters facility in Plymouth,
Minnesota.
4. INCOME TAXES
Income tax expense (benefit) consists of the
following (in thousands):
Years ended September 30
|
|
2007
|
|
2006
|
|
Current:
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
Deferred
|
|
66
|
|
66
|
|
|
|
$
|
66
|
|
$
|
|
|
Deferred income taxes arise from temporary
differences between financial and tax reporting. In accordance with SFAS 142,
goodwill and other intangible assets with indefinite lives are not amortized
for financial reporting purposes. As goodwill is amortized for tax purposes,
the company has recorded deferred tax expense of approximately $66,000 for both
2007 and 2006. The deferred tax expense and deferred tax liability are related
to an asset with an indefinite life and are thus created as it is more likely
than not that any deferred tax asset will not be realized. Also during the
fiscal year 2006 it became apparent that $66,000 accrued for state taxes was no
longer necessary.
26
The tax effects of the cumulative temporary differences result in net
deferred taxes as follows (in thousands):
As of September 30
|
|
2007
|
|
Current
deferred tax assets:
|
|
|
|
Inventory
|
|
$
|
195
|
|
Allowance
for doubtful accounts
|
|
47
|
|
Warranty
accrual
|
|
57
|
|
Loss and
credit carryforwards
|
|
12,411
|
|
Compensation
accrual
|
|
73
|
|
Other
|
|
19
|
|
Less
valuation allowance
|
|
(12,802
|
)
|
Current
deferred tax asset
|
|
|
|
|
|
|
|
Long-term
deferred tax assets:
|
|
|
|
Depreciation
|
|
171
|
|
Less
valuation allowance
|
|
(171
|
)
|
Long-term
deferred tax asset
|
|
|
|
|
|
$
|
|
|
Long-term
deferred tax liabilities:
|
|
|
|
Goodwill
|
|
67
|
|
Long-term
deferred tax liability
|
|
$
|
67
|
|
As of September 30, 2007, the Company
had net operating loss carry forwards of approximately $32.8 million, which
expire at various dates from 2022 to 2027, and general business credit carry
forwards of approximately $1.3 million, which expire at various dates from 2011
to 2018.
The following is a reconciliation of the
federal statutory income tax rate to the consolidated effective tax rate:
Years ended September 30
|
|
2007
|
|
2006
|
|
Federal
statutory rate
|
|
(34
|
)%
|
(34
|
)%
|
State taxes,
net of federal income tax benefit
|
|
(3.0
|
)
|
(3.0
|
)
|
Change in
valuation allowance
|
|
37.0
|
|
37.0
|
|
|
|
|
%
|
|
%
|
In July 2006, the FASB issued FIN 48,
Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement 109. FIN 48 prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions
taken or expected to be taken on a tax return, including the decision whether
to file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006, in the Companys case for
the fiscal year ending September 30, 2008. If there are changes in net
assets as a result of application of FIN 48 these will be accounted for as an
adjustment to retained earnings. The
Company does not believe this will
result in any material impact to its financial statements.
5. STOCKHOLDERS EQUITY
Authorized Shares
The Company is authorized to issue 1,000,000
shares of Preferred Stock at $.01 par value and 9,000,000 shares of Common
Stock at $.01 par value. The Company has not issued any shares of Preferred
Stock.
Stock Repurchase
The Companys stock buyback program is
currently suspended. Under the plan $12.0 million was authorized to be used for
the repurchase program. There were no shares repurchased in the fiscal years
2007 and 2006.
Stockholders
Rights Plan
On January 8,
2003, the Board of Directors adopted a stockholder rights plan under which the
Board declared a dividend distribution of one right for each outstanding share
of Ciprico common stock as of January 14, 2003. Upon becoming exercisable,
each right would entitle its holder to buy one one-hundredth of a share of a
new series of preferred stock at an exercise price of
27
$32.00 per right. Subject to certain
allowable actions by the Board, the rights will become exercisable if a person
or group acquires 15% or more of the Companys common stock or announces a
tender offer for 15% or more of its common stock. Unless the Board exercises
certain other rights, if such a person acquires 15% or more of the Companys
common stock, each right would enable a Ciprico stockholder to acquire Ciprico
stock having a market value of twice the rights exercise price. The rights are
redeemable at the option of the Company in certain instances.
Stock Options
Option transactions under the Companys stock
option plans during the years ended September 30, are summarized as
follows:
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at September 30, 2005
|
|
850,850
|
|
5.13
|
|
Granted
|
|
123,500
|
|
5.16
|
|
Exercised
|
|
(146,225
|
)
|
5.06
|
|
Canceled
|
|
(256,425
|
)
|
5.45
|
|
Outstanding
at September 30, 2006
|
|
571,700
|
|
5.65
|
|
Granted
|
|
570,375
|
|
6.26
|
|
Exercised
|
|
(46,800
|
)
|
4.01
|
|
Canceled
|
|
(208,375
|
)
|
5.45
|
|
Outstanding
at September 30, 2007
|
|
886,900
|
|
5.89
|
|
Options
exercisable at September 30:
|
|
|
|
|
|
2007
|
|
256,775
|
|
5.89
|
|
2006
|
|
287,575
|
|
5.62
|
|
The following table summarizes information
regarding 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
|
|
$
|
2.82 4.23
|
|
118,000
|
|
2.9 years
|
|
$
|
4.03
|
|
58,750
|
|
$
|
4.02
|
|
4.24 7.16
|
|
524,400
|
|
3.7 years
|
|
5.35
|
|
160,025
|
|
5.18
|
|
7.17 10.76
|
|
244,500
|
|
4.0 years
|
|
7.97
|
|
38,000
|
|
8.23
|
|
|
|
886,900
|
|
|
|
|
|
256,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, total unrecognized
share-based compensation cost related to unvested stock options was $988,000,
which is expected to be recognized over a weighted average period of
approximately four years. The Company has included the following amounts
for share-based compensation cost, for the year ended September 30, 2007
(amounts in thousands, except per share amount):
|
|
2007
|
|
Cost of
goods sold
|
|
$
|
8
|
|
Research and
development
|
|
45
|
|
Sales and
marketing
|
|
94
|
|
General and
administrative
|
|
133
|
|
Share-based
compensation expense before taxes
|
|
280
|
|
Related
deferred income tax benefits
|
|
|
|
Share-based
compensation expense, net of income taxes
|
|
$
|
280
|
|
Net
share-based compensation expense per basic and diluted common share
|
|
$
|
0.06
|
|
The Company did not realize any actual tax benefit
from the tax deductions for stock option exercises during year ended September 30,
2007, due to the full valuation allowance on the Companys U.S. deferred tax
assets
Share-based compensation expense recognized during
the year ended September 30, 2007 included (1) compensation expense
for awards granted prior to, but not yet fully vested as of October 1,
2006, and (2) compensation expense for the share-based payment awards
granted subsequent to September 30, 2006 based on the grant date fair
values estimated in accordance with
28
the
provisions of SFAS 123(R). SFAS 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company has historically and will
continue to estimate the fair value of share-based awards using the
Black-Scholes option-pricing model. Total unrecognized share-based compensation
cost related to unvested stock options as of September 30, 2007 has been
adjusted for estimated forfeitures.
As of September 30, 2007, the Company
had 279,481 shares reserved for future issuance under the plan.
Restricted Stock Plan
The 1996 Restricted Stock Plan (RSP)
provides for common stock awards to officers, directors and certain key
employees of the Company. All restricted stock awards entitle the participant
to full dividend and voting rights.
The following table summarizes the status of the
Companys non-vested restricted stock as of September 30, 2007.
|
|
Non-Vested Restricted Stock
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Weighted-Average
Remaining
Recognition
Period
|
|
Aggregate
Intrinsic
Value
|
|
Non-Vested
at September 30, 2006
|
|
68,500
|
|
$
|
5.78
|
|
|
|
|
|
Granted
|
|
79,700
|
|
6.48
|
|
|
|
|
|
Vested
|
|
(2,000
|
)
|
5.77
|
|
|
|
|
|
Forfeited
|
|
(30,000
|
)
|
$
|
5.79
|
|
|
|
|
|
Non-Vested
at September 30, 2007
|
|
116,200
|
|
$
|
6.37
|
|
1.4
|
|
740,670
|
|
During the year ended September 30, 2007,
$244,000 of expense was recognized related to outstanding restricted stock
awards. The vesting period for these awards currently ranges from one to two
years. Those that vest over a one-year period vest without other conditions. Those
that vest over a two-year period vest only if certain service, market and, in
some cases, performance conditions are met.
Warrants
Pursuant to the Technology License and Asset
Purchase Agreement (Agreement) with Broadcom Corporation there is contingent
consideration in the form of warrants to purchase Ciprico stock at certain
prices, if certain revenue targets are achieved.
There are three warrants each for 300,000 shares. The exercise price of
the first warrant is $6.00 and vests if sales of software licenses exceed
$2,000,000 and sales of RAID controller cards exceed $5,000,000 in the first
year ending June 6, 2007. The exercise price of the second warrant is
$8.00 and vests if sales of software licenses exceed $4,000,000 and sales of
RAID controller cards exceed $15,000,000 in the second year ending June 6,
2008. The exercise price of the third warrant is $10.00 and vests if sales of
software licenses exceed $4,000,000 and sales of RAID controller cards exceed
$20,000,000 in the third year ending June 6, 2009. The first tranche of
warrants related to the period ending June 6, 2007 did not vest as revenue
targets were not achieved. There is provision for a cumulative provision if
sales meet the stated target over the 3 year period ending June 6, 2009.
6.
NET LOSS PER SHARE
Basic and diluted loss per share amounts were
computed using weighted average shares outstanding for each respective period. As
the Company incurred losses for the years ended September 30, 2007 and
2006, the effect of potentially dilutive securities has been excluded from the
calculation of loss per share as inclusion would have had an anti-dilutive
effect.
Actual weighted average shares outstanding used in
calculating basic and diluted loss per share were as follows for the years
ended September 30:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
5,071,187
|
|
4,915,790
|
|
Effect of
dilutive securities
|
|
|
|
|
|
Diluted
Shares outstanding
|
|
5,071,187
|
|
4,915,790
|
|
Securities excluded from the computation of diluted
loss per share because inclusion would have had an anti-dilutive effect were as
follows for the years ended September 30:
29
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Anti-dilutive
securities
|
|
116,104
|
|
60,124
|
|
7. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) savings
plan covering substantially all of its employees. Minimum contributions to the
plan by the Company are 50 percent of employee contributions up to the first 6
percent of the participants salaries. Contributions in addition to the minimum
may also be made by the Company based on the Companys financial
performance. The Companys contributions to the plan in 2007 and 2006 were
$146,000 and $116,000 respectively.
8. SEGMENT INFORMATION
The Company operates in a single reportable
segment.
The Company has no material long-lived assets
outside of the United States. Our products are sold mostly to distributors, who
in turn sell them to the final customer. As such, because we are not selling to
the final customer, we may not know the geographic location in which our
products are used. The table below represents sales by major geographic area
for the fiscal year :
|
|
2007
|
|
United
States
|
|
$
|
5,679
|
|
Foreign
|
|
2,926
|
|
|
|
$
|
8,605
|
|
Sales as a percentage of net sales, to two
significant customers for the fiscal year 2007 were 11% and 1%, and for the
fiscal year 2006 those same customers accounted for 13% and 12%, respectively. Receivables
from those two significant customers at September 30, 2007 were $68,000
and $0, respectively.
9. COMMITMENTS AND CONTINGENCIES
In October, 2007, the Company moved its
headquarters, offices and manufacturing space to St. Louis Park, MN. The
operating leases for office and manufacturing space expire at varying dates
through November 2014. Future minimum payments under these leases are as
follows (in thousands) for the fiscal years ending September 30:
2008
|
|
$
|
345
|
|
2009
|
|
362
|
|
2010
|
|
370
|
|
2011
|
|
379
|
|
2012
|
|
261
|
|
Thereafter
|
|
558
|
|
|
|
$
|
2,275
|
|
For the years ended September 30, 2007
and 2006, operating lease expenses were $496,000 and $446,000.
10. SUBSEQUENT EVENT
On December 26, 2007, Ciprico Inc. (the Company)
entered into a Convertible Note Purchase Agreement (Purchase Agreement) with
multiple accredited investors for the private placement of a minimum of
$3,000,000 and a maximum of $7,800,000 of convertible notes and common stock
warrants for $0.25 worth of warrant shares for each $1.00 of principal
invested.
The conversion price for the notes and the exercise
price for the warrants is fixed at an amount equal to the average closing bid
price of the Companys common stock for the five (5) consecutive trading
days ending on the trading day prior to the issue date. That price was $3.86
for the initial closing on December 21, 2007 for a principal amount of
$5.1 million.
The notes are due and payable in full on the
15-month anniversary of the date of issuance and the warrants are exercisable
from the date of issuance until the five year anniversary. The number of shares
issuable upon exercise of the warrant is subject to adjustment in the event of
stock splits or dividends, business combinations, sale of assets or other
similar transitions.
The notes, warrants and common stock issuable upon
conversion of the notes or exercise of the warrants have not been registered
under the Securities Act of 1933, as amended, (the Securities Act), or any
state securities laws and were sold in a
30
private
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act, and Rule 506 of Regulation D promulgated thereunder, as a
transaction by an issuer not involving any public offering.
The Company is obligated to register the shares of
common stock issuable upon the conversion of the notes and the exercise of the
warrants pursuant to certain customary terms and conditions contained in the
note and the warrant.
Four related parties purchased notes and
received warrants. Board member James W.
Hansen purchased a Note from the Company in the amount of $100,000 and was
issued 6,577warrants. Board member James
D. Gerson purchased a Note from the Company in the amount of $500,000, and was
issued 32,383 warrants. Steven D. Merrifield, President, Chief Executive
Officer, purchased a Note from the Company in the amount of $100,000 and was
issued 6,477 warrants. Monte S. Johnson,
Senior Vice President and Chief Financial Officer, purchased a Note from the
Company in the amount of $100,000 and was issued 6,477 warrants.
31
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
Ciprico
Inc.
Plymouth,
Minnesota
We have audited the accompanying balance sheet of
Ciprico Inc. as of September 30, 2007, and the related statements of
operations, stockholders equity, and cash flows for each of the two years in
the period ended September 30, 2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, 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 statements referred to above present fairly, in all material respects,
the financial position of Ciprico Inc. as of September 30, 2007, and the
results of their operations and their cash flows for each of the two years in
the period ended September 30, 2007, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Minneapolis,
Minnesota
December 26,
2007
32
ITEM 8.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A.
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 are
recorded, processed, summarized and reported within the time period covered by
this report. There have been no changes in the Companys internal control over
financial reporting that occurred during the period covered by this report that
have materially affected or are reasonably likely to materially affect the
Companys internal control over financial reporting.
ITEM
8B.
OTHER
INFORMATION
None.
PART III
ITEM 9.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
Reference
is made to the information included under the caption Executive Officers and Election
of Directors in the Companys Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held February 7, 2008, which information is
incorporated by reference herein.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of
the Securities Exchange Act of 1934 requires executive officers and directors
of the Company, and persons who beneficially own more than 10 percent of the
Companys outstanding shares of Common Stock, to file initial reports of
ownership and reports of changes in ownership of securities of the Company with
the Securities and Exchange Commission. Officers, directors and greater than 10
percent stockholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based upon a
review of the copies of such reports furnished to or obtained by the Company and
upon other information known to the Company, the Company believes that during
the fiscal year ended September 30, 2007, all filing requirements
applicable to its directors, officers or beneficial owners of more than 10% of
the Companys outstanding shares of Common Stock were complied with.
CODE OF ETHICS AND BUSINESS CONDUCT
We have adopted the Ciprico Code of Ethics and Business Conduct (the Code
of Conduct), a code of conduct that applies to our employees, officers and
directors. The Code of Conduct is publicly available on our website at
http://www.ciprico.com
.
If we make any substantive amendments to the Code of Conduct or grant any
waiver, including any implicit waiver from a provision of the Code of Conduct
to our directors or executive officers, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K.
ITEM 10.
EXECUTIVE
COMPENSATION.
The information
required by Item 10 is incorporated herein by reference to the section labeled
Executive Compensation which appears in the definitive Proxy Statement for
its 2007 Annual Meeting of Stockholders to be held February 7, 2008.
33
ITEM 11.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by Item 11 is incorporated herein by reference to the
sections labeled Principal Stockholders and Management Stockholdings which
appear in the definitive Proxy Statement for our 2007 Annual Meeting of Stockholders
to be held February 7, 2008.
EQUITY COMPENSATION PLAN
INFORMATION
The following table sets
forth certain information as of September 30, 2007 regarding compensation
plans under which equity securities of our company are authorized for issuance:
Plan Category
|
|
Number of Securities
to
be Issued Upon
Exercise
of Outstanding
Options,
Warrants and Rights
(a)
|
|
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
(b)
|
|
Number of Securities
Remaining Available
for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
886,900
|
|
$5.89
|
|
279,481
|
|
Equity
compensation plans not approved by stockholders
|
|
|
|
|
|
|
|
Total
|
|
886,900
|
|
$5.89
|
|
279,481
|
|
The equity compensation plans
approved by our stockholders are the 1999 Amended and Restated Sock Option Plan
and the 1996 Restricted Stock Plan.
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The
information required by Item 12 is incorporated herein by reference to the
sections labeled Certain Transactions and Other Compensation Arrangements
which appear in the definitive Proxy Statement for our 2007 Annual Meeting of
Stockholders to be held February 7, 2008.
ITEM 13.EXHIBITS
(a)
Exhibits.
See Exhibit Index on page following financial statement schedules
ITEM 14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference
to the section labeled Independent Auditors which appears in the
definitive Proxy Statement for our 2007 Annual Meeting of Stockholders to be
held February 7, 2008.
34
SIGNATURES
In accordance with Section 13 or 15(d) of
the Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
CIPRICO INC.
|
|
|
(the Registrant)
|
|
|
|
Date: December 26, 2007
|
By
|
/s/ Steven D. Merrifield
|
|
|
Steven D. Merrifield,
|
|
|
Chief Executive Officer
|
In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Steven D. Merrifield
|
|
President, Chief Executive Officer
|
|
December 26, 2007
|
Steven D. Merrifield
|
|
(Principal executive officer)
|
|
|
|
|
|
|
|
/s/ Monte S. Johnson
|
|
Senior Vice President and Chief Financial
Officer
|
|
December 26, 2007
|
Monte S. Johnson
|
|
(Principal financial and accounting
officer)
|
|
|
|
|
|
|
|
/s/ James W. Hansen
|
|
Chairman of the Board
|
|
December 26, 2007
|
James W. Hansen
|
|
|
|
|
|
|
|
|
|
/s/ James D. Gerson
|
|
Director
|
|
December 26, 2007
|
James D. Gerson
|
|
|
|
|
|
|
|
|
|
/s/ Mark D. Griffiths
|
|
Director
|
|
December 26, 2007
|
Mark D. Griffiths
|
|
|
|
|
|
|
|
|
|
/s/ Gary L. Hokkanen
|
|
Director
|
|
December 26, 2007
|
Gary L. Hokkanen
|
|
|
|
|
|
|
|
|
|
/s/ Thomas F. Burniece
|
|
Director
|
|
December 26, 2007
|
Thomas F. Burniece
|
|
|
|
|
|
|
|
|
|
/s/ Thomas H. Marmen
|
|
Director
|
|
December 26, 2007
|
Thomas H. Marmen
|
|
|
|
|
35
SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
EXHIBIT INDEX TO FORM 10-KSB
For the fiscal year ended September 30,
2007
|
|
Commission
File No.: 0-11336
|
CIPRICO INC.
Exhibit
|
|
Description
|
|
|
|
2.1
|
|
Asset Purchase Agreement dated January 31, 2005 by and among
Ciprico Inc., Huge Systems, Inc. and the Principals named
thereinincorporated by reference to Exhibit 2.1 of the Registrants Form 8-K
filed February 3, 2005
|
|
|
|
3.1
|
|
The Registrants Certificate of Incorporation,
as amended to dateincorporated by reference to Exhibit 19.1 of the
Registrants Form 10-Q for the quarter ended March 31, 1988
|
|
|
|
3.2
|
|
The Registrants Bylaws, as amended to
dateincorporated by reference to Exhibit 19.2 of the Registrants Form 10-Q
for the quarter ended March 31, 1988
|
|
|
|
10.1**
|
|
Registrants 1999 Amended and Restated
Stock Option Planincorporated by reference to Exhibit 10.1 of the
Registrants Form 10-Q for the fiscal quarter ended December 31,
1998
|
|
|
|
10.2**
|
|
Specimen of Incentive Stock Option
Agreement under 1999 Amended and Restated Stock Option Planincorporated by
reference to Exhibit 10.2 of the Registrants Form 10-Q for the
fiscal quarter ended December 31, 1998
|
|
|
|
10.3**
|
|
Specimen of Nonqualified Stock Option Agreement
under 1999 Amended and Restated Stock Option Planincorporated by reference
to Exhibit 10.3 of the Registrants Form 10-Q for the fiscal
quarter ended December 31, 1998
|
|
|
|
10.4
|
|
Indenture of Lease, dated June 12,
2002 by and between Highway 7 Business Center LLC Properties, Inc and Ciprico
Inc. relating to corporate office and manufacturing space located at 7003
West Lake Street, Suite 400, St. Louis Park, Minnesota
|
|
|
|
10.5**
|
|
Employment Agreement and Change of Control
Agreement dated September 30, 2004 between Steven D. Merrifield and
Ciprico Inc. incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K filed December 11,2006
|
|
|
|
10.6**
|
|
Employment Agreement and Change of Control Agreement dated June 1,
2005 between Monte S. Johnson and Ciprico Inc.incorporated by reference to Exhibit 10.15
of the Registrants Form 10-K for the fiscal year ended September 30,
2005
|
|
|
|
10.7
|
|
Asset Purchase Agreement dated June 6,
2006 by and among Ciprico Inc and Broadcom Corporationincorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K filed June 8,
2006
|
|
|
|
10.8**
|
|
Employment Agreement and Change of Control
Agreement dated September 30, 2004 between Andrew Mills and Ciprico Inc.
incorporated by reference to the Registrants Form 8-K filed December 11,2006
|
|
|
|
23.1
|
|
Consent of Grant Thornton LLP***
|
|
|
|
31.1
|
|
Certification of the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
|
|
|
|
31.2
|
|
Certification of the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002***
|
|
|
|
32.1
|
|
Certification of the Chief Executive
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
|
|
|
|
32.2
|
|
Certification of the Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
|
|
|
|
**
Indicates
a management contract or compensatory plan or arrangement.
***
Filed
herewith
36
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