<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-11336
CIPRICO INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1749708
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2800 CAMPUS DRIVE
PLYMOUTH, MINNESOTA 55441
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 551-4000
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of July 28, 1998 was 4,926,202 shares.
<PAGE> 2
CIPRICO INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
June 30, 1998 and September 30, 1997 3
Consolidated Condensed Statements of Earnings for
Three and Nine Months Ended June 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for
Nine Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-9
PART II Other Information
Item 4. Quantitative and Qualitative Disclosures about Market Risk 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIPRICO INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) June 30, September 30,
1998 1997
------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,825 $ 4,512
Marketable securities 23,327 24,807
Accounts receivable, less allowance 3,547 5,152
Inventories 4,723 4,354
Deferred income taxes 788 788
Other current assets 1,129 809
------- -------
Total current assets 38,339 40,422
Property and equipment, net 3,877 3,948
Marketable securities 7,503 7,483
Other assets 284 252
------- -------
Total assets $50,003 $52,105
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,885 $ 2,285
Accrued expenses 1,060 1,242
Deferred revenue 662 520
------- -------
Total current liabilities 4,607 4,047
Shareholders' equity:
Capital stock 49 51
Additional paid-in capital 35,801 39,316
Retained earnings 9,546 8,691
------- -------
Total shareholders' equity 45,396 48,058
------- -------
Total liabilities and shareholders' equity $50,003 $52,105
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
CIPRICO INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands except Three Months Ended Nine Months Ended
per share amounts) June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 4,895 $ 10,123 $ 22,719 $ 27,722
Cost of sales 2,480 5,247 11,482 14,621
-------- -------- -------- --------
GROSS PROFIT 2,415 4,876 11,237 13,101
Research and development expense 1,205 826 3,113 2,369
Sales and marketing expenses 2,198 1,965 6,158 5,028
General and administrative expenses 715 738 2,195 2,030
-------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS (1,703) 1,347 (229) 3,674
Other income, primarily interest 513 430 1,523 1,456
-------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES (1,190) 1,777 1,294 5,130
Income tax expense (benefit) (405) 605 439 1,756
-------- -------- -------- --------
NET EARNINGS (LOSS) $ (785) $ 1,172 $ 855 $ 3,374
======== ======== ======== ========
NET EARNINGS (LOSS) PER SHARE - BASIC $ (.16) $ .23 $ .17 $ .67
======== ======== ======== ========
NET EARNINGS (LOSS) PER SHARE - DILUTED $ (.16) $ .22 $ .16 $ .63
======== ======== ======== ========
Shares used to calculate net earnings (loss) per share:
Basic 4,901 5,061 5,058 5,040
Diluted 4,901 5,383 5,276 5,378
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
CIPRICO INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
June 30,
-------------------------------
1998 1997
---------- ---------
<S> <C> <C>
NET CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 3,697 $ (3,969)
Cash flows from investing activities:
Equipment purchases (1,327) (1,931)
Purchases of marketable securities (37,384) (32,501)
Proceeds from sale or maturity of marketable
securities 38,844 28,000
--------- ---------
NET CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES 133 (6,432)
--------- ---------
Net cash flows from financing activities:
Repurchase of common stock (3,985) --
Proceeds from issuance of common stock 468 373
--------- ---------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,517) 373
--------- ---------
Net increase (decrease) in cash and cash equivalents 313 (10,028)
Cash and cash equivalents at beginning of period 4,512 13,398
--------- ---------
Cash and cash equivalents at end of period $ 4,825 $ 3,370
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
CIPRICO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The principal business activity of Ciprico Inc. and subsidiaries (the Company)
is the design, manufacture, marketing and service of disk array solutions for
use in high performance computer systems for the visual computing markets. The
Company markets its products worldwide through a direct sales force and various
distribution channels.
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company in accordance with Regulation S-X pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of management, the unaudited consolidated condensed financial
statements contain all necessary adjustments, consisting only of a recurring
nature, and disclosures to present fairly the financial position as of June 30,
1998 and the results of operations and cash flows for the three-month and
nine-month periods ended June 30, 1998 and 1997. The results of operations for
the nine months ended June 30, 1998 are not necessarily indicative of the
results for the full year. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report to Shareholders for fiscal
1997.
In preparation of the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from the estimates used by management.
NOTE B - MARKETABLE SECURITIES
The Company has invested its excess cash in commercial paper and government
agencies. These investments are classified as held-to-maturity given the
Company's intent and ability to hold the securities to maturity and are carried
at amortized cost.
Investments that have maturities of less than one year have been classified as
current marketable securities. At June 30, 1998 and September 30, 1997,
amortized cost approximates fair value of held-to-maturity investments which
consist of the following:
<TABLE>
<CAPTION>
(In thousands) June 30, September 30,
1998 1997
-------- -------------
<S> <C> <C>
Current marketable securities:
Commercial Paper $ 15,832 $ 14,814
U.S. Government Agencies 7,495 9,993
--------- ---------
23,327 24,807
Non-current marketable securities:
U.S. Government Agencies 7,503 7,483
--------- ---------
$ 30,830 $ 32,290
========= =========
</TABLE>
6
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NOTE C - INVENTORIES
Inventories are stated at the lower of cost or replacement market. Cost is
determined using the first-in, first-out method. Inventories consist of the
following:
<TABLE>
<CAPTION>
(In thousands) June 30, September 30,
1998 1997
-------- -------------
<S> <C> <C>
Finished Goods $ 2,966 $ 1,566
Work-in-Process 546 1,162
Raw Materials 1,211 1,626
--------- ---------
$ 4,723 $ 4,354
========= =========
</TABLE>
NOTE D - SHAREHOLDERS' EQUITY
On January 5, 1998, the Company announced a stock buyback program of up to $3.0
million. The program was completed in March, 1998, resulting in 229,200 shares
of common stock repurchased and retired. On April 22, 1998, the Company
announced a second stock buyback program of up to $3.0 million. As of the date
of this filing, 90,000 shares of common stock have been repurchased for
approximately $1.0 million. Under the programs, the Company can repurchase
shares in the open market and in privately negotiated transactions based on
prevailing market conditions.
NOTE E - NET EARNINGS (LOSS) PER SHARE
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share." As required by Statement No. 128, all
current and prior year net earnings per share data have been restated to conform
to the provisions of Statement No. 128.
The Company's basic net earnings (loss) per share amounts have been computed by
dividing net earnings (loss) by the weighted average number of outstanding
common shares. The Company's diluted net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive. For the three months ended June 30, 1998, the Company reported net
losses and as such, no common share equivalents were included in the computation
of diluted net loss per share. Options to purchase 482,200 and 130,000 shares of
common stock with a weighted average exercise price of $14.33 and $15.78 were
outstanding at June 30, 1998 and 1997, but were excluded from the computation of
common share equivalents for the three-month period because they were
antidilutive. For the nine months ended June 30, 1998 and 1997, 233,726 and
338,566 shares of common stock equivalents were included in the computation of
diluted net earnings per share. Options to purchase 456,600 and 97,000 shares of
common stock with a weighted average exercise price of $14.42 and $16.35 were
outstanding at June 30, 1998 and 1997, but were excluded from the computation of
common share equivalents for the nine-month period because they were
antidilutive.
NOTE F - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
- - "Reporting Comprehensive Income," and Statement No. 131 - "Disclosures about
Segments of an Enterprise and Related Information" which are effective for
fiscal year 1999. Statement No. 130 will require the Company to display an
amount representing comprehensive income, as defined by the statement, as part
of the Company's basic financial statements. Comprehensive income will include
items such as unrealized gains or losses on certain investment securities and
foreign currency items. Statement No. 131 will require the Company to disclose
financial and other information about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information.
The adoption of these statements is not expected to have a material effect on
the consolidated financial statements of the Company.
7
<PAGE> 8
CIPRICO INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Three and Nine Months Ended June 30, 1998 Compared to Three and Nine Months
Ended June 30, 1997
Net sales for the three-month and nine-month periods ended June 30, 1998
decreased by 52% and 18% to $4.9 million and $22.7 million, respectively, when
compared to net sales of $10.1 million and $27.7 million for the same periods
last fiscal year. This decrease can be attributed to a continued decline in the
entertainment market, which represented 28% of net sales for the current
nine-month period compared to 43% for the same period last year. Sales were also
affected by complexities involved with the implementation of the Company's
recently expanded distribution network with Silicon Graphics Inc. (SGI) whereby
SGI sells and supports the Company's disk array storage products with SGI
computing platforms. The satellite/telemetry and oil/gas exploration markets
continue to be strong markets representing 33% and 27% of net sales for the
nine-month period ending June 30, 1998. Sales to one customer, SGI, accounted
for 47% and 38% of net sales for the current three-month and nine-month periods.
For the three-month and nine-month periods ended June 30, 1997, a different
customer accounted for 31% and 11% of net sales. International sales were lower
at $4.4 million or 19% of net sales for the current nine-month period compared
to $6.0 million or 22% of net sales for the same period last fiscal year due to
weakness in the European markets. Management has lowered its estimate for fourth
quarter sales to a range of $8.0 to $10.0 million and anticipates that net sales
for the fiscal year will be lower than the previous fiscal year.
Gross profit, as a percentage of net sales, for the three-month and nine-month
periods ended June 30, 1998 was 49% compared to 48% and 47% for the same periods
last fiscal year. Favorable disk drive pricing during the transition from 9
gigabyte to 18 gigabyte drives was a significant factor in maintaining the level
of gross profit. Management anticipates increased sales through distribution
channels that tend to carry a lower gross profit percentage. As a result,
management anticipates gross profit, as a percentage of sales, to decline in the
remainder of fiscal 1998, but remain in the mid-forty percent range.
Research and development expenses increased $379,000, or 46%, for the current
quarter as compared to the same quarter of last fiscal year and $744,000, or
31%, for the nine months ended June 30, 1998 as compared to the same period last
fiscal year. The increase can primarily be attributed to additional engineering
staff and outside consulting costs related to new product development.
Sales and marketing expenses increased $233,000, or 12%, for the current quarter
as compared to the same quarter of last fiscal year and $1.1 million, or 22%,
for the nine months ended June 30, 1998 as compared to the same period last
fiscal year. The increase can be attributed to additional sales and marketing
staff and new product promotions as the Company positions itself for sales
growth.
General and administrative expenses decreased $23,000, or 3%, for the current
quarter as compared to the same quarter of last fiscal year and increased
$165,000, or 8%, for the nine months ended June 30, 1998 as compared to the same
period last fiscal year. The increase can primarily be attributed to consulting
costs incurred in connection with the Company's information technology
transformation project.
On December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 - "Earnings per Share." As required by Statement No. 128, all
current and prior year earnings per share data have been restated to conform to
the provisions of Statement No. 128.
LIQUIDITY AND CAPITAL RESOURCES
The Ciprico Annual Report on Form 10-KSB for the year ended September 30, 1997
contains a detailed discussion of Ciprico's liquidity and capital resources. In
conjunction with this Quarterly Report on Form 10-Q, investors should read the
1997 Form 10-KSB.
8
<PAGE> 9
Liquidity is very strong with cash and cash equivalents and short-term
marketable securities totaling $35.7 million at June 30, 1998. Cash flows from
operating activities during the current nine-month period were $3.7 million.
This result was primarily attributable to sources of cash from net earnings of
$855,000, non-cash expenses for depreciation of $1.4 million and a $1.3 million
net change in operating assets and liabilities. Investing activities provided
$133,000 primarily as a result of net proceeds from the maturity of marketable
securities offset by $1.3 million of capital expenditures for office equipment,
product development and test equipment and facility expansion. Financing
activities used $3.5 million primarily as a result of two stock buyback programs
in which the Company reacquired 319,200 shares of common stock for $4.0 million.
Funding of future working capital needs and equipment purchases, combined with
purchases of the Company's stock, could cause a reduction in the cash balance in
fiscal 1998. Management believes that current funds and the funds from
operations are adequate to support the current on-going operating needs of the
Company.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using a
two-digit field rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities.
The Company is assessing the impact of the Year 2000 Issue on its operations.
The assessment includes communication with all major suppliers and customers.
The Company is reviewing its systems to determine whether they are century
compliant and does not expect the Year 2000 computer issue to significantly
affect its operations.
FORWARD-LOOKING INFORMATION
The statements in this report that are forward-looking involve risks and
uncertainties. The Company's actual results could differ materially from those
expressed in any forward-looking statements. Certain of these risks and
uncertainties are discussed below.
The Company sells its products into five visual computing vertical markets which
include entertainment (film/video and broadcast), oil/gas exploration, digital
prepress, medical imaging, and satellite/telemetry. Continued growth in sales in
these markets is essential to Company growth.
Gross profit on product sales is highly dependent on the cost of disk drives.
There is no assurance the Company can sustain the current gross profit levels
given the potential for price fluctuations and product availability of new
generation disk drives.
Component parts for the Company's products have been on allocation from time to
time from its suppliers which means parts could become difficult to obtain, thus
having an adverse effect on the Company's results of operations.
The Company typically operates on very little backlog, which means its results
from quarter to quarter are very hard to project and may fluctuate. A large
percentage of total quarterly orders may be received in the last month or weeks
of a quarter and quarterly sales may be affected by the Company's ability or
inability to ship such orders by quarter end.
The Company's products are characterized by rapidly changing technology,
evolving industry standards and relatively short product life cycles. Delays in
product enhancements and developments, failure to gain market acceptance of new
or enhanced products, or emergence of new products or technologies by others,
would have an adverse effect on the Company's business and results of
operations.
9
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CIPRICO INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Quantitative and Qualitative Disclosures about Market Risk
(a) The Company will include the required disclosures in
its 1998 annual report on Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (filed in electronic format only)
(b) No report on Form 8-K was filed during the quarter ended
June 30, 1998.
10
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CIPRICO INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIPRICO INC.
Dated: July 28, 1998 /s/ Robert H. Kill
----------------------------------
Robert H. Kill, President
(Principal Executive Officer and
Acting Principal Financial Officer)
11
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CIPRICO INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(filed in electronic format only)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,825
<SECURITIES> 30,830
<RECEIVABLES> 3,839
<ALLOWANCES> 292
<INVENTORY> 4,723
<CURRENT-ASSETS> 38,339
<PP&E> 9,994
<DEPRECIATION> 6,117
<TOTAL-ASSETS> 50,003
<CURRENT-LIABILITIES> 4,607
<BONDS> 0
0
0
<COMMON> 35,850
<OTHER-SE> 9,546
<TOTAL-LIABILITY-AND-EQUITY> 50,003
<SALES> 4,895
<TOTAL-REVENUES> 4,895
<CGS> 2,480
<TOTAL-COSTS> 6,598
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,190)
<INCOME-TAX> (405)
<INCOME-CONTINUING> (785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (785)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
