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, 1999
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 23, 1999 was 4,938,406 shares.
1
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Earnings for Three and
Nine Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
Nine Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIPRICO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,382 $ 9,030
Marketable securities 23,373 18,945
Accounts receivable, less allowance 5,916 5,667
Inventories 4,347 3,755
Deferred income taxes 738 738
Other current assets 494 1,586
---------- ----------
Total current assets 38,250 39,721
Property and equipment, net 3,968 4,511
Marketable securities 9,008 5,016
Other assets 202 225
---------- ----------
Total assets $ 51,428 $ 49,473
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,574 $ 2,438
Accrued expenses 1,778 908
Deferred revenue 805 818
---------- ----------
Total current liabilities 5,157 4,164
Shareholders' equity:
Capital stock 49 49
Additional paid-in capital 35,518 35,983
Retained earnings 10,821 9,353
Deferred compensation from restricted stock (117) (76)
---------- ----------
Total shareholders' equity 46,271 45,309
---------- ----------
Total liabilities and shareholders' equity $ 51,428 $ 49,473
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except Three Months Ended Nine Months Ended
per share amounts) June 30, June 30,
-------- --------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 9,108 $ 4,895 $ 25,497 $ 22,719
Cost of sales 4,455 2,480 12,506 11,482
----------- ---------- ---------- ----------
GROSS PROFIT 4,653 2,415 12,991 11,237
OPERATING EXPENSES:
Research and development expense 942 1,205 3,143 3,113
Sales and marketing expenses 2,401 2,198 6,717 6,158
General and administrative expenses 765 715 2,208 2,195
----------- ---------- ---------- ----------
Total operating expenses 4,108 4,118 12,068 11,466
----------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 545 (1,703) 923 (229)
Other income, primarily interest 458 513 1,302 1,523
----------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,003 (1,190) 2,225 1,294
Income tax expense 339 (405) 757 439
----------- ----------- ---------- ----------
NET INCOME (LOSS) $ 664 $ (785) $ 1,468 $ 855
=========== =========== ========== ==========
NET EARNINGS (LOSS) PER SHARE - BASIC $ .14 $ (.16) $ .30 $ .17
=========== =========== ========== ==========
NET EARNINGS (LOSS) PER SHARE - DILUTED $ .13 $ (.16) $ .29 $ .16
=========== =========== ========== ==========
Shares used to calculate net earnings per share:
Basic 4,918 4,901 4,905 5,058
Diluted 5,002 4,901 5,000 5,276
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
June 30,
--------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,468 $ 855
Depreciation and amortization 1,949 1,391
Changes in operating assets and liabilities 1,313 1,451
---------- ---------
NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES 4,730 3,697
---------- ---------
Cash flows from investing activities:
Equipment purchases (1,403) (1,327)
Purchases of marketable securities (47,473) (37,384)
Proceeds from sale or maturity of marketable
securities 39,053 38,844
---------- ---------
NET CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES (9,823) 133
---------- ---------
Cash flows from financing activities:
Repurchase of common stock (1,041) (3,985)
Proceeds from issuance of common stock 486 468
---------- ---------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (555) (3,517)
---------- ---------
Net increase (decrease) in cash and cash equivalents (5,648) 313
Cash and cash equivalents at beginning of period 9,030 4,512
---------- ---------
Cash and cash equivalents at end of period 3,382 4,825
Marketable securities, current 23,373 23,327
Marketable securities, long-term 9,008 7,503
---------- ---------
Total cash and marketable securities $ 35,763 $ 35,655
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 and digital
media markets. The Company markets its products worldwide through a direct sales
force and various distribution channels.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all necessary adjustments, consisting only of a
recurring nature, and disclosures to present fairly the financial position as of
June 30, 1999 and the results of operations and cash flows for the three-month
and nine-month periods ended June 30, 1999 and 1998. The results of operations
for the nine months ended June 30, 1999 are not necessarily indicative of the
results for the full year. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report to Shareholders for fiscal
1998.
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, 1999 and September 30, 1998,
amortized cost approximates fair value of held-to-maturity investments which
consist of the following:
(In thousands) June 30, September 30,
1999 1998
------- ------------
Current marketable securities:
Commercial Paper $ 14,870 $ 8,945
U.S. Government Agencies 8,503 10,000
---------- ----------
23,373 18,945
Non-current marketable securities:
U.S. Government Agencies 9,008 5,016
---------- ----------
$ 32,381 $ 23,961
========== ==========
NOTE C - SHAREHOLDERS' EQUITY
During 1998, the Company initiated a stock buyback program of up to $6.0
million. As of June 30, 1999, 492,900 shares of common stock have been
repurchased for $5,291,882.
NOTE D - NET EARNINGS PER SHARE
The Company's basic net earnings per share amounts have been computed by
dividing net earnings by the weighted average number of outstanding common
6
<PAGE>
shares. The Company's diluted net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares and common
share equivalents relating to stock options, when dilutive. For the three months
ended June 30, 1999, 84,291 shares of common stock equivalents were included in
the computation of diluted net earnings per share. Options to purchase 592,452
and 482,200 shares of common stock with a weighted average exercise price of
$13.32 and $14.33 were outstanding at June 30, 1999 and 1998, 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, 1999, 95,045
shares of common stock equivalents were included in the computation of diluted
net earnings per share. Options to purchase 696,952 and 456,600 shares of common
stock with a weighted average exercise price of $12.56 and $14.42 were
outstanding at June 30, 1999 and 1998, but were excluded from the computation of
common share equivalents for the nine-month period because they were
antidilutive.
NOTE E - SEGMENT INFORMATION
The Company operates in a single reportable segment. The following presents net
sales for the nine months ended June 30, 1999 and 1998 by geographic area. The
Company has no material long-lived assets outside of the United States.
(In thousands)
1999 1998
--------- ---------
Geographic Area
United States $ 19,162 $ 17,825
Europe 3,483 1,788
Japan 1,605 1,723
Other foreign 1,247 1,383
-------- --------
$ 25,497 $ 22,719
======== ========
Sales to one customer accounted for 31% and 38% of total sales for the nine
months ended June 30, 1999 and 1998.
NOTE F - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Comprehensive income
includes certain changes in equity that were excluded from net earnings. The
adoption of this statement did not impact the Company's consolidated financial
statements; historically there have been no differences between net earnings and
comprehensive income.
The Financial Accounting Standards Board has also issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires
entities to recognize all derivatives in their financial statements as either
assets or liabilities measured at fair value. SFAS 133 also specifies new
methods of accounting for derivatives used in risk management strategies
(hedging activities), prescribes the items and transactions that may be hedged,
and specifies detailed criteria required to qualify for hedge accounting. The
adoption of this standard is not expected to have a material effect on the
consolidated financial statements of the Company.
7
<PAGE>
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, 1999 Compared to Three and Nine Months
Ended June 30, 1998
Net sales for the three-month period ended June 30, 1999 increased 86% to $9.1
million compared to $4.9 million for the same period last year. For the
nine-month period ended June 30, 1999, net sales increased 12% to $25.5 million
compared to $22.7 million for the same prior year period. The increase is
primarily attributable to growth in the Geospatial Imaging and Entertainment
markets, offset by decreases in capital expenditures in the Geosciences market.
Sales in the Company's key markets for the nine-month period ending June 30,
1999 are shown in the chart below (in millions).
<TABLE>
<CAPTION>
Market 1999 % of Total 1998 % of Total
- ------ ---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Geospatial Imaging (formerly Remote Sensing $10.4 40.8% $7.6 33.5%
and Defense Imaging)
Entertainment 10.4 40.8 6.3 27.7
Geosciences 1.2 4.7 6.2 27.3
Medical Imaging 1.7 6.7 1.5 6.7
Other 1.8 7.0 1.1 4.8
---- ---- ---- ----
$25.5 100.0% $22.7 100.0%
===== ====== ===== ======
</TABLE>
The Geospatial Imaging market continues to be strong, comprising 40% of the
Company's revenue for the nine months ending June 30, 1999. Revenue in this
market, however, is highly dependent on the timing of large orders. Revenues in
the Entertainment market also comprised 40% of the Company's revenue for the
nine months ending June 30, 1999 and came from broadcast opportunities as well
as postproduction opportunities. In previous years, revenues in this market have
come almost exclusively from postproduction applications. The Company
anticipates continued growth in this market in fiscal 1999 as customers
implement additional broadcast applications. As a result of depressed oil prices
earlier in the year, capital spending was reduced in the Geosciences market; the
Company has not seen an indication that spending in this market will recover
significantly in the next quarter and believes its revenues in the Geosciences
market will be lower than the previous year revenues.
International sales represented 25% and 19% of total sales for the nine months
ended June 30, 1999 and 1998. International sales have increased 29% over the
same period last year, with most of the growth coming from Europe. Sales through
Silicon Graphics Inc. (SGI) totaled $2.9 million or 31% for the three-month
period ended June 30, 1999 compared to $2.3 million or 47% for the same prior
year period. For the nine-month period ended June 30, 1999, sales through SGI
totaled $7.9 million or 31% of total sales compared to $8.6 million or 38% for
the same period last year. No other customer accounted for 10% or more of total
sales for the nine-month period of either year.
The Company's revenue growth in fiscal 1999 is dependent on its ability to
provide new products and expand the applications of its products into targeted
market segments. Revenues from the FibreSTORE product released in December 1998
totaled approximately $1.5 million for the nine months ended June 30, 1999. The
scheduled release of the FibreSTORE RAID product is anticipated to occur in the
first quarter of fiscal 2000 and should contribute to incremental revenues once
released.
Gross profit, as a percentage of net sales, for both the three-month and
nine-month periods ended June 30, 1999 was 51% compared to 49% for the same
periods last year. This increase in the margin percentage is the result of a
strong sales mix of higher margin Fibre Channel products as well as reduced
8
<PAGE>
component costs. Gross profit margins are highly dependent on the Company's
ability to transition to new generation disk drives and to manage the rapid
decline in disk drive prices. The Company anticipates fiscal 1999 gross profit,
as a percentage of net sales, to continue to be higher than prior year levels.
Research and development expenses decreased $263,000, or 22%, for the current
quarter as compared to the same quarter of last year and increased $30,000, or
1%, for the nine months ended June 30, 1999 as compared to the same period last
fiscal year. The three month decrease results from decreased consulting costs,
partially offset by increased compensation and prototype material costs. The
nine month increase is primarily the result of increased prototype material
costs compared to the same period of the prior year. The Company expects that
research and development expenses in fiscal 1999 will approximate the level of
spending in fiscal 1998.
Sales and marketing expenses increased $203,000, or 9%, for the current quarter
as compared to the same quarter of last year and $559,000, or 9%, for the nine
months ended June 30, 1999 as compared to the same period last fiscal year. The
increase can be attributed to costs associated with realigning the Company's
marketing and promotion efforts along its vertical markets. The Company expects
that sales and marketing expenses will continue to grow but at a lesser rate for
the balance of 1999.
General and administrative expenses increased $50,000, or 7%, for the current
quarter as compared to the same quarter of last year and $13,000, or 1%, for the
nine months ended June 30, 1999 as compared to the same period last fiscal year.
The Company anticipates that general and administrative expenses in fiscal 1999
will approximate the level of spending in fiscal 1998.
Other Income of $458,000 and $1,302,000 for the three-month and nine-month
periods ended June 30, 1999 decreased 11% and 15% compared to the same periods
last year due to lower interest rates and interest income on lower average cash
and investment balances.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and marketable
securities totaling $35.8 million compared to $33.0 million at the end of fiscal
1998.
Cash flows from operating activities were $4.7 million for the nine months ended
June 30, 1999 compared to $3.7 million for the same period last year. The
Company made capital expenditures totaling $1.4 and $1.3 million during the nine
months ended June 30, 1999 and 1998 respectively. The Company anticipates that
capital expenditures for fiscal 1999 will approximate $2.5 million. During
fiscal 1998, the Company initiated a stock buyback program of up to $6.0
million. During the nine months ended June 30, 1999, 133,500 shares of common
stock were purchased for $1,041,000. The remaining authorization as of June 30,
1999 is for approximately $700,000.
Management believes that current cash balances and cash generated from
operations will be adequate to fund requirements for working capital and capital
expenditures, as well as any potential acquisition in fiscal 1999.
IMPACT OF YEAR 2000 ISSUE
The Company initiated a Year 2000 readiness program in June 1998. To date the
Company has reviewed all currently manufactured Ciprico products and critical
information systems. As a result of this process, the Company upgraded software
and hardware to achieve Year 2000 readiness, and believes its products and
information systems will continue to function through the transition to the new
millenium. The Company has also sent questionnaires to critical suppliers to
ensure their ability to provide uninterrupted service in the year 2000. If any
problem(s) is/are revealed during the remainder of this process, it is the
Company's objective to correct the situation or develop backup strategies by
September 1999.
9
<PAGE>
The cost associated with the assessment and any modifications necessary is
expected to be less than $200,000. Ultimately, the potential impact of the Year
2000 issue will depend not only on the actions taken by the Company, but also on
the way in which customers, vendors, service providers, utilities, governmental
agencies and other entities with which the Company does business address the
Year 2000 issue. The Year 2000 efforts of third parties are not within the
Company's control. Failure by these third parties, particularly those upon which
the Company may be dependent, to respond to Year 2000 issues successfully could
result in business disruption, operational problems, financial loss, legal
liability and similar risks for the Company. At the present time, it is not
possible to determine whether any such events are likely to occur, or to
quantify any potential negative impact they may have on the Company's future
results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q are forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. Such statements imply
continued financial improvement. Because of numerous risks and uncertainties in
the Company's business activity, actual results could differ materially from
those implied. Investors should consider: the impact on revenues and earnings of
the timing of product enhancements and new product releases; market acceptance
of new products; sales and distribution issues; competition; dependence on
suppliers; dependence on the cost of disk drives; limited backlog; the historic
and recurring pattern of a disproportionate percentage of total quarterly sales
occurring in the last month and weeks of a quarter and the impact of Year 2000
issues internally and from third parties. For a more complete description, see
"Forward-looking Information" under Item 1 of the Company's Form 10-K for the
year ended September 30, 1998.
10
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in commercial paper and highly rated U.S.
government agencies. All investments are held-to-maturity. The market risk on
such investments is minimal. Receivables from sales to foreign customers are
denominated in U.S. Dollars. If the currencies of these countries were to fall
significantly against the U.S. Dollar, there can be no assurance that such
companies would be able to repay the receivables in full. Transactions at the
Company's foreign subsidiaries, Ciprico International Limited and Ciprico
Asia-Pacific Inc. are denoted in pound sterling and yen, respectively. The
Company has historically had minimal exposure to changes in foreign currency
exchange rates, and as such, has not used derivative financial instruments to
manage foreign currency fluctuation risk.
11
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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, 1999.
12
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIPRICO INC.
Dated: August 3, 1999 /s/ Robert H. Kill
Robert H. Kill, President
(Principal Executive Officer)
Dated: August 3, 1999 /s/ Joan K. Berg
Joan K. Berg, Vice President of
Finance/Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<PAGE>
CIPRICO INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
(filed in electronic format only)
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,382
<SECURITIES> 32,381
<RECEIVABLES> 6,643
<ALLOWANCES> 418
<INVENTORY> 4,347
<CURRENT-ASSETS> 38,250
<PP&E> 11,380
<DEPRECIATION> 7,412
<TOTAL-ASSETS> 51,428
<CURRENT-LIABILITIES> 5,157
<BONDS> 0
0
0
<COMMON> 35,567
<OTHER-SE> 10,704
<TOTAL-LIABILITY-AND-EQUITY> 51,428
<SALES> 25,497
<TOTAL-REVENUES> 25,497
<CGS> 12,506
<TOTAL-COSTS> 24,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 278
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 2,225
<INCOME-TAX> 757
<INCOME-CONTINUING> 1,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468
<EPS-BASIC> .30
<EPS-DILUTED> .29
</TABLE>
