-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oho1rkUF6PlTjks7dlw7DcejC8HgfAfL/+eJmjLV4I5PONVlhjeXZAgd/ZDTLoYu xWzST7FCsebgfE09DlyP8A== 0000950124-96-001824.txt : 19960430 0000950124-96-001824.hdr.sgml : 19960430 ACCESSION NUMBER: 0000950124-96-001824 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIPRICO INC CENTRAL INDEX KEY: 0000720145 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 411749708 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02941 FILM NUMBER: 96552169 BUSINESS ADDRESS: STREET 1: 2800 CAMPUS DRIVE CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 6125514000 MAIL ADDRESS: STREET 1: 2800 CAMPUS DRIVE CITY: PLYMOUTH STATE: MN ZIP: 55441 S-2 1 FORM S-2 1 As filed with the Securities and Exchange Commission on April 29, 1996 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ 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)
CIPRICO INC. 2800 CAMPUS DRIVE, SUITE 60 PLYMOUTH, MINNESOTA 55441 (612) 551-4000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ ROBERT H. KILL, PRESIDENT AND CHIEF EXECUTIVE OFFICER CIPRICO INC. 2800 CAMPUS DRIVE, SUITE 60 PLYMOUTH, MINNESOTA 55441 (612) 551-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ Copies to: TIMOTHY M. HEANEY, ESQ. DOUGLAS P. LONG, ESQ. MELODIE R. ROSE, ESQ. P. GRAHAM VAN DER LEEUW, ESQ. Fredrikson & Byron, P.A. Faegre & Benson LLP 900 Second Avenue South, Suite 1100 90 South Seventh Street, Suite 2200 Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402 (612) 347-7000 (612) 336-3000
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: /X/ CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- Common Stock ($0.01 per share par value)..................... 1,725,000 shares $19.125 $32,990,625 $11,376 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) Includes 225,000 shares purchasable by the Underwriters to cover over-allotments. (2) Estimated solely for the purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low sale prices of the Registrant's Common Stock on April 23, 1996 as reported by the Nasdaq National Market. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 29, 1996 PROSPECTUS 1,500,000 Shares [LOGO] Common Stock ------------------------ All of the 1,500,000 shares of Common Stock offered hereby are being sold by Ciprico Inc. ("Ciprico" or the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "CPCI." On April 25, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $21.75 per share. See "Price Range of Common Stock." ------------------------ THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(3).......................... $ $ $ - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company, estimated at $330,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 225,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock offered by this Prospectus are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares will be made in New York, New York on or about , 1996. ------------------------ Needham & Company, Inc. Dain Bosworth Incorporated The date of this Prospectus is , 1996 3 [Photograph of Company's 6700 Series, 6900 Series and 7000 Series disk arrays] The Ciprico family of RAID disk arrays includes three series. The 6700 series provides up to 20 MB/sec. with a Fast/Wide SCSI-2 interface. The 6900 series provides up to 40 MB/sec. with an UltraSCSI interface. The 7000 series provides up to 100 MB/sec. with a Fibre Channel interface. Capacities range from 8 to 72 GB per disk array. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 4 HIGH SPEED DISK ARRAYS FOR VISUAL COMPUTING MARKETS. FILM AND VIDEO [PHOTOGRAPH OF COMPUTER-GENERATED FIGURE] - Real-time uncompressed storage and playback - Format independent - Single array capacity of over 20 minutes - Built-in redundancy features provide continuous operation to keep production schedules on track SATELLITE TELEMETRY [PHOTOGRAPH OF SATELLITE IN ORBIT] - Fast transfer rates for data capture, image extraction and mission planning - Flexible capacities, from gigabytes to terabytes - Fault-tolerant features for continuous system and data availability BROADCAST AND VIDEO SERVICES [PHOTOGRAPH OF VIDEO CAMERA OPERATOR] - Supports many video streams - No performance degradation after drive failure - Scalable capacity - Multiple redundancy features 5 MEDICAL IMAGING [PHOTOGRAPH OF CT SCAN OF BRAIN LOBE] - Real-time image acquisition and display - Scalable capacities - System and data availability - Best price/performance value available DIGITAL PREPRESS [PHOTOGRAPH OF DIGITAL IMAGE OF BUTTERFLY] - High performance to retrieve data/image files - Large storage capacity increases print flexibility - Availability (up-time) features for on-time schedules OIL AND GAS [PHOTOGRAPH OF CROSS-SECTION SCHEMATIC OF OFFSHORE OIL EXPLORATION RIG] - High speed playback of 3D images - Storage capacities from 8 GB to terabytes of seismic data - Hot swap disk drives and power supplies for uninterrupted data availability [ABOVE-DESCRIBED PHOTOGRAPHS SURROUND SKETCH OF IMAGING WORKSTATION WITH A CIPRICO DISK ARRAY CONNECTION] 20, 40 or 100 MB/sec. Interface Ciprico-Designed Controller 5 or 9 Hot Swap Disk Drives CIPRICO LOGO 6 PROSPECTUS SUMMARY This summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) gives effect to a 3-for-2 stock split of the Common Stock distributed on April 12, 1996. THE COMPANY Ciprico designs, manufactures, markets and services high performance RAID disk arrays that provide storage solutions for the domestic and international visual computing markets. Ciprico's RAID (Redundant Array of Independent Disks) products typically consist of five or nine industry standard disk drives linked together by proprietary hardware, firmware and software. The array of disks performs as one large disk drive with superior performance characteristics compared to a single disk drive. Ciprico's RAID disk arrays are designed to provide fast data transfer rates of up to 100 megabytes per second, redundancy to ensure the integrity of the stored data, and large storage capacities of up to 72 gigabytes. All of the Company's disk arrays transfer data using industry standard data transfer protocols which enable them to interface with the primary open architecture computing platforms found in the visual computing market designed by Silicon Graphics, Inc. ("Silicon Graphics"), Sun Microsystems, Inc., Hewlett-Packard Company, IBM Corporation and Apple Computer, Inc. Visual computing refers to the digital representation and complex image processing of film, video, graphics, photographs, animation, special effects, three dimensional images and other images. Like many other computer applications, the trend in visual computing is toward random access, digital data storage and away from traditional analog tape storage or film methods. Digital image processing offers numerous benefits when compared to traditional analog and film methods, including the ability to achieve higher quality images, process and edit data faster, access data remotely over networks, and create images and special effects not previously possible. Based on industry sources, the Company believes that sales of digital image processing equipment into the film/video production market segment of the visual computing market have grown from less than $1 million in 1991 to approximately $900 million in 1995, with sales projected to continue to grow at an average annual rate of 45% over the next several years. The Company's disk arrays, which use a RAID-3 storage methodology, are designed to meet the demanding data transfer rate, storage capacity and data redundancy needs of the visual computing market. The Company's targeted market segments are film/video production, satellite telemetry, oil and gas exploration, medical imaging, digital prepress, and broadcast and video services. RAID-3 is generally considered the optimal RAID methodology for visual computing applications because it achieves the fastest data transfer rates for sequentially stored data such as graphics and video, while providing large storage capacities and data redundancy. A primary benefit of RAID-3 is that no decrease in performance results from the failure of a disk drive, a feature which is critical to real-time visual computing applications. Ciprico has its origins as a manufacturer of tape and disk controller board products in the 1980s. The Company successfully leveraged its controller board expertise by introducing its first RAID-3 disk array in 1990 and now offers four series of RAID-3 disk arrays. Since 1990, Ciprico has focused on designing leading edge, high performance disk arrays specifically for use in the Company's targeted market segments, delivering high quality service through extensive customer training and support programs, and building a sales organization capable of supporting increased demand for the Company's products. Ciprico was the first RAID-3 disk array manufacturer to achieve real-time playback of uncompressed video data, the first to receive ISO 9001 certification, the first and only to receive Silicon Graphics' "Gold Seal Approval," and the first to introduce a RAID-3 Fibre Channel disk array. Ciprico's engineers have extensive knowledge of data transfer interfaces and many years of cumulative engineering experience which is reflected in the proprietary hardware, firmware and software incorporated into the Company's disk arrays. In addition, Ciprico has a close design relationship with Silicon Graphics. This relationship facilitates optimal system compatibility between Ciprico's disk arrays and Silicon Graphics workstations, which have a leading market share in the visual computing market. Ciprico believes its extensive disk array expertise, proprietary technology, and close customer and vendor relationships provide the 3 7 Company with a competitive advantage in developing leading edge high performance disk array products for its markets. The Company was incorporated under the name Computer Products Corporation in Minnesota in February 1978 and changed its name to Ciprico Inc. in May 1983, when it completed its initial public offering, and reincorporated in Delaware in January 1988. The Company's executive offices are located at 2800 Campus Drive, Suite 60, Plymouth, Minnesota 55441 and its telephone number is (612) 551-4000. THE OFFERING Common Stock Offered................. 1,500,000 shares Common Stock Outstanding after this Offering............................. 4,987,525 shares(1) Use of Proceeds...................... Working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol........ CPCI SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, --------------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------ ------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales..................... $10,675 $13,415 $ 9,214 $13,121 $15,966 $6,776 $12,783 Gross profit.................. 6,234 7,219 4,604 6,273 7,468 3,108 6,075 Earnings (loss) from operations................. (749) 24 (2,026) (422) 106 (164) 1,542 Earnings (loss) before income taxes...................... (387) 460 (1,754) (300) 424 (18) 1,775 Net earnings (loss)........... $ (376) $ 427 $(1,778) $ (321) $ 396 $ (27) $ 1,615 Earnings (loss) per common share...................... $ (0.12) $ 0.14 $ (0.58) $ (0.10) $ 0.12 $(0.01) $ 0.43 Weighted average number of common and common equivalent shares outstanding................ 3,010 3,125 3,068 3,094 3,394 3,164 3,776
MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- CONSOLIDATED BALANCE SHEETS DATA: Cash and cash equivalents........................................... $ 6,041 $ 36,460 Working capital..................................................... 8,026 38,445 Total assets........................................................ 13,964 44,383 Long-term installments of obligations under capital leases.......... 22 22 Total stockholders' equity.......................................... 9,468 39,887
- ------------ (1) Based on the number of shares outstanding as of March 31, 1996. Does not include 596,539 shares issuable upon exercise of outstanding stock options. (2) Adjusted to reflect the sale of the 1,500,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $21.75 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds." The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. 4 8 RISK FACTORS In addition to the other information in this Prospectus or incorporated herein by reference, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares offered in this Prospectus. DEPENDENCE ON RAID DISK ARRAY PRODUCTS Sales of the Company's RAID disk array products accounted for 65.0% of the Company's net sales in fiscal 1994, 73.8% in fiscal 1995 and 86.7% in the first six months of fiscal 1996. The Company's RAID disk array products are used principally by the visual computing market and the success of the Company is dependent in part upon the growth of this market and of applications in this market requiring the performance attributes of the Company's disk array products. There can be no assurance that another technology will not replace RAID technology in the disk array marketplace or that there will be widespread acceptance or continuing growth of the use of RAID disk array products in general, or the Company's products in particular, in the visual computing market. UNCERTAINTY OF MARKET ACCEPTANCE BEYOND FILM/VIDEO APPLICATIONS Currently, the Company has targeted six specific segments of the visual computing market. Certain of these segments, most notably the film/video production segment, have been quicker than others to embrace RAID technology and the Company's disk array products. The Company expects in excess of a third of its fiscal 1996 revenues to be derived from the film/video production segment of the visual computing market. Continued success in the film/video production market segment is critical to the Company's success in the foreseeable future. There can be no assurance that the Company will be able to achieve substantial market acceptance in the other identified segments of the visual computing market. See "Business--Visual Computing Market Segments." DEPENDENCE ON SILICON GRAPHICS RELATIONSHIP The Company's relationship with Silicon Graphics, a leading developer of high performance visual computing systems, has been instrumental to the Company's success even though it has no development or marketing agreements with Silicon Graphics. The Company's marketing and engineering departments have worked closely with Silicon Graphics, focusing a portion of their disk array product development efforts on the connectivity and performance with Silicon Graphics computer platforms. While the Company's RAID disk arrays are compatible with other computer platforms, sales of products developed by the Company specifically designed for Silicon Graphics platforms accounted for approximately half of the Company's disk array sales during the past 18 months. There can be no assurance that Silicon Graphics' leadership position in the visual computing market will continue or that the close working relationship between Silicon Graphics and the Company will continue or that the Company can develop comparable working relationships with other visual computing system developers. A decrease in the demand for Silicon Graphics platforms, a deterioration in the Company's relationship with Silicon Graphics, or the development of relationships between Silicon Graphics and other disk array suppliers could have a material adverse effect on the Company's business and operating results. In addition, there can be no assurance that other disk array manufacturers might not create interface technology compatible with Silicon Graphics platforms or that Silicon Graphics might not develop its own interface that would allow compatibility with other vendors of disk arrays. See "Business--Marketing and Sales." CUSTOMER CONCENTRATION For the six-month period ended March 31, 1996, three customers, Sony Trading International Corp. ("Sony"), Avid Technology, Inc. and R-Squared Vanguard, accounted for 16.7%, 13.9% and 8.4% of the Company's net sales, respectively. Two of these customers are new to the Company in the last 12 months. For fiscal 1995, no one customer accounted for more than 10% of the Company's net sales but Eastman Kodak Company, Sony and Autometric Incorporated collectively accounted for 22.8% of net sales. Net sales to 5 9 customers outside the United States accounted for approximately 35.2% of net sales in fiscal 1995 and 37.7% of net sales in the six-month period ended March 31, 1996. Sony accounted for over 40% of the Company's export sales for the six-month period ended March 31, 1996. The Company has no long-term purchase commitments from its customers and customers generally may cancel their orders on 30 days' notice. Accordingly, there can be no assurance that orders from existing customers, including the Company's principal customers, will continue at their historical levels, or that the Company will be able to obtain orders from new customers. In addition, there can be no assurance that existing customers, including the Company's principal customers, will not develop their own storage solutions internally and as a result reduce or eliminate purchases from the Company. Loss of one or more of the Company's current customers, particularly a principal customer, or cancellation or rescheduling of orders already placed, could materially and adversely affect the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The market for all levels of RAID disk arrays is highly competitive. The Company competes with other disk array manufacturers, with manufacturers of proprietary integrated computer systems and with systems integrators that market computer systems which contain general purpose RAID disk arrays. Such competitors often offer systems at lower prices than those offered by the Company and the Company must compete on the basis of product performance in specific applications. Many of these competitors have greater financial, manufacturing and marketing resources than those of the Company. The Company's ability to compete successfully depends upon its ability to continue to develop high performance products that obtain market acceptance and can be sold at increasingly competitive prices. Although the Company believes that its RAID-3 disk array products have certain competitive advantages, there can be no assurance that the Company will be able to compete successfully in the future or that other companies may not develop products with greater performance and thus reduce the demand for the Company's products. Furthermore, as more companies enter the RAID disk array market, the Company may encounter increased price competition for such products which could materially and adversely affect the Company's operating results. Also, the Company's OEM customers and other manufacturers could develop their own disk arrays or could integrate competitive RAID disk arrays into their systems rather than the Company's products, which could materially and adversely affect the Company's operating results. See "Business--Competition." NEW PRODUCTS AND TECHNOLOGICAL CHANGES The markets for the Company's products are characterized by rapidly changing technology, evolving industry standards and relatively short product life cycles. The Company's ability to compete successfully will depend on its ability to enhance its existing products and introduce new products on a timely and cost-effective basis. There can be no assurance that the Company will be successful in introducing such new products or enhancements. Delays in product enhancements and developments or the failure of the Company's new products or enhancements to gain market acceptance would have an adverse effect on the Company's business and operating results. In addition, there can be no assurance that new products or technologies developed by others, or the emergence of new industry standards, will not render the Company's products or technologies noncompetitive or obsolete. Despite testing, new products may be affected by quality, reliability or interoperability problems, which could result in returns, delays in collecting accounts receivable, unexpected service or warranty expenses, reduced orders and a decline in the Company's competitive position. See "Business--Products" and "Business--Research and Development." POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS The Company has experienced and expects to continue to experience significant fluctuations in its quarterly operating results due to a variety of factors, including the cost of disk drives, the timing of receipt and shipment of significant orders, the cost and timing of new product releases and product enhancements by the Company and its competitors, variations in the Company's product mix, market acceptance of new or enhanced versions of the Company's products, changes in pricing and promotion policies by the Company and 6 10 its competitors and general economic conditions. Quarterly sales depend on the volume and timing of orders received during a quarter, which are difficult to forecast. The Company's expenses during a quarter are based, in part, on its expectations as to customer demand for its products. Demand falling below expectations in any quarter could have a material adverse effect on operating results. In addition, the need for continued expenditures for research and development, marketing and customer service and support would make it difficult for the Company to reduce its expenses in a particular quarter if the Company's sales forecasts for such quarter were not met. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUPPLIER AND COMPONENT DEPENDENCE The Company depends heavily on its suppliers to provide high quality materials on a timely basis and at reasonable prices. Although many of the components for the Company's products are available from numerous sources at competitive prices, certain of the disk drives used in its products are presently purchased by the Company from a single source. Furthermore, because of increased industry demand for many of those components, their manufacturers may, from time to time, not be able to make delivery on orders on a timely basis. In addition, manufacturers of components on which the Company relies may choose, for numerous reasons, not to continue to make those components, or the next generation of those components, available to the Company. The Company has no long-term supply contracts. There can be no assurance that the Company will be able to obtain, on a timely basis, all of the components it requires. If the Company cannot obtain essential components as required, the Company could be unable to meet demand for its products, thereby materially adversely affecting its operating results and allowing competitors to gain market share. In addition, scarcity of such components could result in cost increases and adversely affect the Company's operating results. See "Business--Manufacturing." SUSTAINING AND MANAGING GROWTH The Company is currently undergoing a period of rapid growth and there can be no assurance that such growth can be sustained or managed successfully. This growth has resulted in, and is expected to continue to create, the need for additional capacity, new and increased responsibilities for management personnel, and added pressures on the Company's operating and financial systems. The Company's ability to manage future growth effectively and accomplish its overall goals will depend on its ability to hire and retain qualified management, sales and technical personnel. Competition for such personnel in the Company's industry is high. The Company has commenced a number of programs in response to its growth, including the expansion of its manufacturing space and the upgrading of its internal computer systems. If the Company is unable to manage growth effectively or hire and retain qualified personnel, the Company's business and operating results could be materially and adversely affected. See "Use of Proceeds," "Business--Employees" and "Business--Facilities." INTERNATIONAL OPERATIONS Net sales to customers outside the United States accounted for approximately 35.2% of net sales in fiscal 1995 and 37.7% of net sales in the six-month period ended March 31, 1996. The Company expects that international sales will continue to represent a significant portion of the Company's net sales. Sales to customers outside the United States are subject to risks, including the imposition of governmental controls, the need to comply with a wide variety of foreign and United States export laws, political and economic instability, trade restrictions, changes in tariffs and taxes, longer payment cycles typically associated with international sales, and the greater difficulty of administering business overseas. In addition, fluctuations in the value of foreign currencies relative to the U.S. dollar could make the Company's products less price competitive and, if the Company in the future denominates any of its sales in foreign currencies, losses could result from foreign currency transactions. Furthermore, although the Company endeavors to meet technical standards established by foreign regulatory bodies, there can be no assurance that the Company will be able to comply with changes in foreign standards in the future. The inability of the Company to design products to 7 11 comply with foreign standards could have a material adverse effect on the Company. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as do the laws of the United States. PROPRIETARY TECHNOLOGY CLAIMS Ciprico believes its extensive disk array expertise, proprietary technology, and close customer and vendor relationships provide the Company with a competitive advantage in developing leading edge high performance disk array products. However, the Company does not presently hold any patents applicable to its RAID disk array products and relies on a combination of trade secret, copyright and trademark laws and employee and third-party nondisclosure agreements to protect its intellectual property rights. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of the Company's technology or to preclude competitors from developing products with features similar to the Company's products. Furthermore, there can be no assurance that, in the future, third parties will not assert infringement claims against the Company or with respect to its products for which the Company has indemnified certain of its customers. Asserting the Company's rights or defending against third-party claims could involve substantial expense, thus materially and adversely affecting the Company's operating results. In the event a third party were successful in a claim that one of the Company's products infringed its proprietary rights, the Company may have to pay substantial damages or royalties, remove that product from the marketplace or expend substantial amounts in order to modify the product so that it no longer infringes such proprietary rights, any of which could have a material adverse effect on its operating results. See "Business--Proprietary Technology." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of key personnel, many of whom would be difficult to replace and are not subject to employment or noncompetition agreements. If any of these employees were to leave the Company, the Company's operating results could be materially adversely affected. The Company believes its future success will also depend, in large part, upon its ability to hire and retain highly skilled engineering, managerial, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Business--Employees" and "Management." POSSIBLE VOLATILITY OF STOCK PRICE The Company's Common Stock has experienced in the past, and could experience in the future, substantial price volatility as a result of a number of factors, including quarter to quarter variations in the actual or anticipated financial results of the Company, announcements by the Company, its competitors or its customers, government regulations, and developments in the industry. In addition, the stock market has experienced extreme price and volume fluctuations which have affected the market price of many technology companies in particular and which have at times been unrelated to the operating performance of the specific companies whose stock is traded. Broad market fluctuations and general economic conditions may adversely affect the market price of the Company's Common Stock. See "Price Range of Common Stock" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." FUTURE ACQUISITIONS The Company may pursue acquisitions of complementary technologies, product lines or businesses. Future acquisitions by the Company could result in the use of proceeds of this offering, dilutive issuances of equity securities, and the incurrence of additional debt and amortization expenses related to goodwill and intangible assets that could adversely affect the Company's operating results. In addition, gross margins of acquired products, necessary product or technology development expenditures and other factors that may be involved in any such acquired business could result in dilution to the Company's earnings. Acquisitions also may involve numerous other risks, including difficulties in the assimilation of the operations and products of the acquired business, dependence on new products and processes, the diversion of management's attention 8 12 from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, the potential loss of key employees of the acquired business and difficulties in attracting additional key employees necessary to absorb added management responsibilities. Although there are currently no agreements with respect to any acquisition, no assurance can be given as to the effect of any future acquisition on the Company's business or operating results. CONTROL BY PRINCIPAL SHAREHOLDER Upon completion of this offering, Perkins Capital Management, Inc. ("Perkins"), an investment management firm, will beneficially own 28.0% of the Company's outstanding Common Stock. As a result, Perkins may be able to control matters requiring approval by the shareholders of the Company, including the election of Directors and the amendment of the Company's Certificate of Incorporation. As a shareholder, Perkins will not be prohibited from acting in its own interest in respect of, among other things, the voting or disposition of its shares of Common Stock. Perkins is not subject to any agreement restricting the sale of the Company shares it beneficially holds. Sales of substantial amounts of shares of Common Stock in the public market after the offering hereby could adversely affect the market price of the Company's Common Stock. See "Principal Shareholders." ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation authorizes the issuance of 1,000,000 shares of Preferred Stock. The Company's Board of Directors has the power to issue any or all of the shares of Preferred Stock, including the authority to establish one or more classes or series and to fix the powers, preferences, rights and limitations of such class or series, without seeking shareholder approval. Furthermore, as a Delaware corporation, the Company is subject to Section 203 of the Delaware General Corporation Law regarding "business combinations." This section and the power to issue Preferred Stock may, in certain circumstances, deter or discourage takeover attempts and other changes in control of the Company not approved by management and the Board of Directors. As a result, the Company's shareholders may lose opportunities to dispose of their shares at the higher prices generally available in takeover attempts or that may be available under a merger proposal. In addition, the statutory provision and the existence of Preferred Stock may have the effect of permitting the Company's current management to retain its position and place it in a better position to resist changes that shareholders may wish to make if they are dissatisfied with the conduct of the business. See "Description of Securities--State Law Provisions with Potential Anti-Takeover Effect." 9 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,500,000 shares of Common Stock offered to the public hereby are estimated to be $30.4 million, assuming a public offering price of $21.75 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds for general corporate purposes, including additions to working capital and for capital expenditures. The Company expects to use approximately $1.2 million to improve its internal computer systems and software and approximately $300,000 to fund expansion of the manufacturing space at its existing facility. A portion of the net proceeds may also be used to acquire technologies, products or businesses that complement the Company's current business, as such opportunities may arise. Currently, there are no commitments or agreements with respect to any such acquisitions. Pending their use, the proceeds will be invested in short-term, United States Government or investment grade interest-bearing securities. PRICE RANGE OF COMMON STOCK The Company's Common Stock trades on the Nasdaq National Market under the symbol "CPCI." The following table sets forth for the periods indicated the high and low sales prices for the Common Stock as reported on the Nasdaq National Market.
HIGH LOW ------ ------ FISCAL YEAR ENDED SEPTEMBER 30, 1994 First Quarter.......................................................... $ 3.84 $ 2.83 Second Quarter......................................................... 4.34 2.83 Third Quarter.......................................................... 3.34 2.83 Fourth Quarter......................................................... 3.17 2.33 FISCAL YEAR ENDED SEPTEMBER 30, 1995 First Quarter.......................................................... 3.42 2.58 Second Quarter......................................................... 4.00 3.00 Third Quarter.......................................................... 5.42 3.42 Fourth Quarter......................................................... 7.67 4.00 FISCAL YEAR ENDING SEPTEMBER 30, 1996 First Quarter.......................................................... 12.08 5.83 Second Quarter......................................................... 15.83 10.67 Third Quarter (through April 25, 1996)................................. 23.00 13.00
On April 25, 1996, the last reported sale price for the Common Stock on the Nasdaq National Market was $21.75 per share. As of April 25, 1996, there were approximately 1,850 beneficial holders of the Common Stock. DIVIDEND POLICY The Company has not paid cash dividends on its Common Stock since fiscal 1991. The Company currently intends to retain any earnings for use in the operation and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 10 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to reflect the sale by the Company of the 1,500,000 shares offered hereby at an assumed public offering price of $21.75 per share and the anticipated application of the estimated net proceeds therefrom, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds."
MARCH 31, 1996 --------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Long-term installments of obligations under capital leases..... $ 22 $ 22 ------ ------- Stockholders' equity: Preferred Stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding................... -- -- Common Stock, $0.01 par value; 9,000,000 shares authorized; 3,487,525 shares issued and outstanding; 4,987,525 shares issued and outstanding, as adjusted(1).................... 35 50 Additional paid-in capital................................... 6,843 37,247 Retained earnings............................................ 2,612 2,612 Accumulated translation adjustments.......................... (22) (22) ------ ------- Total stockholders' equity................................ 9,468 39,887 ------ ------- Total capitalization.................................... $9,490 $39,909 ====== =======
- ------------ (1) Based on the number of shares outstanding as of March 31, 1996 and as adjusted for the offering. Does not include 596,539 shares issuable upon exercise of outstanding options. 11 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of, each of the years in the five-year period ended September 30, 1995, are derived from the Company's consolidated financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of September 30, 1994 and 1995, and for each of the years in the three-year period ended September 30, 1995, and the auditors' report thereon, are included elsewhere in this Prospectus. Selected consolidated financial information as of March 31, 1996 and for the six-month periods ended March 31, 1995 and 1996 have been derived from unaudited consolidated financial statements of the Company included elsewhere herein and reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results for such periods. The results for the six months ended March 31, 1996 are not necessarily indicative of the results to be expected for the entire fiscal year. The data set forth in the following tables should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
SIX MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, CONSOLIDATED STATEMENTS OF --------------------------------------------------- ------------------ OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................... $10,675 $13,415 $ 9,214 $13,121 $15,966 $ 6,776 $12,783 Cost of sales............... 4,441 6,196 4,610 6,848 8,498 3,668 6,708 ------- ------- ------- ------- ------- ------ ------- Gross profit........... 6,234 7,219 4,604 6,273 7,468 3,108 6,075 Sales and marketing expenses.................. 4,043 4,225 3,593 3,693 4,130 1,807 2,329 General and administrative expenses.................. 1,290 1,377 1,386 1,308 1,432 656 1,088 Research and development expenses.................. 1,650 1,593 1,651 1,694 1,800 809 1,116 ------- ------- ------- ------- ------- ------ ------- Earnings (loss) from operations........... (749) 24 (2,026) (422) 106 (164) 1,542 Other income, net........... 362 436 272 122 318 146 233 ------- ------- ------- ------- ------- ------ ------- Earnings (loss) before income taxes......... (387) 460 (1,754) (300) 424 (18) 1,775 Income tax expense (benefit)................. (11) 33 24 21 28 9 160 ------- ------- ------- ------- ------- ------ ------- Net earnings (loss).... $ (376) $ 427 $(1,778) $ (321) $ 396 $ (27) $ 1,615 ======= ======= ======= ======= ======= ====== ======= Earnings (loss) per common share......... $ (0.12) $ 0.14 $ (0.58) $ (0.10) $ 0.12 $ (0.01) $ 0.43 ======= ======= ======= ======= ======= ====== ======= Weighted average number of common and common equivalent shares outstanding.......... 3,010 3,125 3,068 3,094 3,394 3,164 3,776 Dividends per share.... $ 0.13 -- -- -- -- -- --
SEPTEMBER 30, MARCH 31, CONSOLIDATED BALANCE ----------------------------------------------------------- --------- SHEETS DATA: 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- --------- (IN THOUSANDS) Cash and cash equivalents............. $ 2,816 $ 2,341 $ 1,826 $ 2,176 $ 3,425 $ 6,041 Marketable securities..... 1,323 1,426 1,311 1,300 1,267 -- Working capital........... 6,379 6,534 4,930 5,244 6,573 8,026 Total assets.............. 9,033 9,682 7,963 8,583 10,920 13,964 Long-term installments of obligations under capital leases.......... 16 -- 22 48 40 22 Total stockholders' equity.................. 7,985 8,506 6,759 6,474 7,696 9,468
12 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Ciprico designs, manufactures, markets and services high performance RAID disk arrays that provide storage solutions for the domestic and international visual computing markets. Ciprico's RAID products typically consist of five or nine industry standard disk drives linked together by proprietary hardware, firmware and software. The array of disks performs as one large disk drive with superior performance characteristics compared to a single disk drive. Ciprico has its origins as a manufacturer of tape and disk controller board products in the 1980s. In the early 1990s, as the controller market weakened, the Company transitioned its focus to the RAID-3 disk array markets. While the Company continues to sell controller boards, it expects such sales to represent a decreasing percentage of net sales in the future. The following table shows Ciprico's transition from board-level controller products to disk arrays.
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ---------------------------------------------------- ENDED 1993 1994 1995 MARCH 31, 1996 -------------- -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PERCENTAGES) Disk Arrays..................... $ 1,718 18.7% $ 8,527 65.0% $11,787 73.8% $11,089 86.7% Controllers..................... 7,025 76.2 4,138 31.5 3,186 20.0 1,299 10.2 Miscellaneous Products and Services...................... 471 5.1 456 3.5 993 6.2 395 3.1 ------- ----- ------- ----- ------- ----- ------- ----- $ 9,214 100.0% $13,121 100.0% $15,966 100.0% $12,783 100.0% ======= ===== ======= ===== ======= ===== ======= =====
This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual operating results could differ materially from the operating results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Prospectus. RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data as a percentage of net sales for the periods indicated.
FISCAL YEAR ENDED SEPTEMBER SIX MONTHS ENDED 30, MARCH 31, --------------------------- ---------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Costs of sales................................ 50.0 52.2 53.2 54.1 52.5 ----- ----- ----- ----- ----- Gross profit............................. 50.0 47.8 46.8 45.9 47.5 Sales and marketing expenses.................. 39.0 28.1 25.8 26.7 18.2 General and administrative expenses........... 15.1 10.0 9.0 9.7 8.5 Research and development expenses............. 17.9 12.9 11.3 11.9 8.7 ----- ----- ----- ----- ----- Earnings (loss) from operations.......... (22.0) (3.2) 0.7 (2.4) 12.1 Other income, net............................. 3.0 0.9 2.0 2.1 1.8 ----- ----- ----- ----- ----- Earnings (loss) before income taxes...... (19.0) (2.3) 2.7 (0.3) 13.9 Income tax expense............................ 0.3 0.1 0.2 0.1 1.3 ----- ----- ----- ----- ----- Net earnings (loss)...................... (19.3)% (2.4)% 2.5% (0.4)% 12.6% ===== ===== ===== ===== =====
13 17 SIX MONTHS ENDED MARCH 31, 1995 AND 1996 Net Sales. Net sales for the six-month period ended March 31, 1996 increased 88.7% to $12.8 million when compared to $6.8 million for the same period last year. The increase in net sales was attributed to strong product acceptance for disk arrays in the visual computing market and the film/video production market segment in particular. New customers in other visual computing market segments, such as digital prepress, also contributed to the sales growth. The Company's continued international focus resulted in export sales of $4.8 million or 37.7% of net sales during the six-month period ended March 31, 1996 compared to $2.1 million or 31.0% of net sales for the same period last year. Sales to Sony accounted for over 40% of the export sales for the current six-month period. Gross Profit. Gross profit was $6.1 million or 47.5% of net sales for the six-month period ended March 31, 1996 compared to $3.1 million or 45.9% of net sales for the same period last year. Gross profit margin for the current six-month period was higher than the same period last year due to a reduction in disk drive costs and strong sales of the Company's new 6900 Series disk array product, which carries a higher gross profit margin. Management anticipates gross profit margins for the remainder of fiscal 1996 should approximate the level attained during the first six months of fiscal 1996; however, gross profit margins are highly dependent on a number of factors, including customer and product mix and disk drive costs. Disk drives are a significant cost component of total disk array costs and there is no assurance the Company can sustain the current gross margin levels given the price fluctuations of new generation disk drives. Sales and Marketing Expenses. Sales and marketing expenses were $2.3 million or 18.2% of net sales for the six-month period ended March 31, 1996 compared to $1.8 million or 26.7% of net sales for the same period last year. The percentage decrease was due primarily to the increased sales volume when compared to the same period last year. The actual dollar spending for the current six-month period was higher than the same period last year due primarily to commission expense associated with higher sales levels and an increase in the number of sales and marketing people hired to address the growing market segments. General and Administrative Expenses. General and administrative expenses were $1.1 million or 8.5% of net sales for the six-month period ended March 31, 1996 compared to $657,000 or 9.7% of net sales for the same period last year. The percentage decrease was due to the higher sales volume in the current six-month period compared to the same period last year. Actual dollar spending for the current six-month period was higher than the same period last year due primarily to an increase in management and employee bonuses of $190,000 and bad debt expense of $95,000. Research and Development Expenses. Research and development expenses were $1.1 million or 8.7% of net sales for the six-month period ended March 31, 1996 compared to $809,000 or 11.9% of net sales for the same period last year. The percentage decrease was primarily due to the higher sales volume in the current six-month period compared to the same period last year. Actual dollar spending during the current six-month period was higher than the same period last year due to increases in development expenses for the Fibre Channel disk array recently announced, other product development expenses and engineering staff. Research and development costs are expensed as incurred. Other Income, Net. Other income, net for the six-month period ended March 31, 1996 was $233,000 compared to $146,000 for the same period last year. The increase in the current six-month period was due primarily to an increase in interest and dividend income of $33,000 and a realized gain of $60,000 from the sale of marketable securities. Income Tax Expense. Income tax expense for the six-month period ended March 31, 1996 was $160,000 compared to $9,000 for the same period last year. This increase reflects the change in operating results of $1.8 million of pre-tax earnings for the first six months of fiscal 1996 compared to a pre-tax loss of $18,000 for the same period last year. In the second quarter of fiscal 1996, the Company began to accrue income tax expense based on an estimated tax liability for fiscal 1996 resulting in an effective tax rate for the first six months of fiscal 1996 of 9% due to utilization of $1.7 million net operating loss carryforwards. The effective tax 14 18 rate for fiscal 1996 is estimated to be 10% due to the utilization of the net operating loss carryforwards. The Company expects that its net loss carryforwards will be fully exhausted during fiscal 1996. FISCAL YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 Net Sales. Net sales increased by 21.7% to $16.0 million in 1995 and 42.4% to $13.1 million in 1994. Net sales were $9.2 million in 1993. The increase in net sales was attributed to wider acceptance of the Company's disk arrays in the visual computing markets. For the year ended September 30, 1995, no one customer accounted for 10% or more of net sales. For the year ended September 30, 1994, sales to Eastman Kodak Company represented approximately 13.7% of net sales. For the year ended September 30, 1993, sales to Data General, Eastman Kodak Company and GE Medical represented approximately 12.9%, 11.8% and 10.4%, respectively, of net sales. As a result of increased focus on international markets, export sales grew to $5.6 million or 35.2% of net sales in 1995, compared to $2.8 million or 21.4% of net sales and $1.2 million or 12.9% of net sales in 1994 and 1993, respectively. Gross Profit. Gross profit was $7.5 million or 46.8% of net sales in 1995, compared to $6.3 and $4.6 million, or 47.8% and 50.0% of net sales, in 1994 and 1993, respectively. The decrease in gross profit margin was attributed to the lower margins associated with disk array sales and reduced sales of higher margin controller products. Disk drives are a significant cost component of total disk array costs and there is no assurance the Company can sustain the current gross profit margin levels given the price fluctuations of new generation disk drives. Costs of raw materials other than disk drives held relatively steady over the three years. Sales and Marketing Expenses. Sales and marketing expenses totaled $4.1 million or 25.8% of net sales in 1995, compared to $3.7 million or 28.1% of net sales in 1994, and $3.6 million or 39.0% of net sales in 1993. These expenses, as a percentage of net sales, decreased during each of last three years due to the increased sales volume. Actual dollar spending during these periods increased due to additional costs incurred in connection with increased sales staff and promotion expenses associated with higher sales levels. General and Administrative Expenses. General and administrative expenses totaled $1.4 million or 9.0% of net sales in 1995, compared to $1.3 and $1.4 million, or 10.0% and 15.1% of net sales, for 1994 and 1993, respectively. Spending for 1993 included one-time expenses for preparation of new product manuals for disk arrays and costs associated with achieving ISO 9001 certification. Research and Development Expenses. Research and development expenses totaled $1.8 million or 11.3% of net sales in 1995, compared to $1.7 million or 12.9% of net sales in 1994, and $1.7 million or 17.9% of net sales in 1993. The growth in research and development expenses was primarily due to increased technology development efforts related to new generation disk array products. Other Income, Net. Other income, net increased by $196,000 in 1995. Interest and dividend income increased $47,000 and no additional charges for marketable security valuations occurred in 1995, compared to prior years. Interest and dividend income decreased $50,000 in 1994 due to lower short-term interest rates and lower average cash balances. Royalty income decreased $30,000 in 1995 and $52,000 in 1994 due to decreased usage of the licensed technology. In 1994 and 1993, there were charges of $193,000 and $45,000, respectively, for a cost-to-market adjustment for investments. Income Tax Expense. Income tax expense incurred for 1995, 1994 and 1993 was minimal as a result of the application of net operating loss carryforwards during those periods. NEW ACCOUNTING PRONOUNCEMENTS Beginning in fiscal 1997, the Company will be required to adopt the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). Under SFAS No. 123, companies are permitted to adopt a new method of accounting for stock compensation awards which is based on recognition of a charge equal to the estimated fair value of the award on the date of grant. Alternatively, companies may continue using the methodology specified in Accounting Principles Board 15 19 Opinion No. 25, "Accounting for Stock Issued to Employees" to account for stock based compensation, with expanded disclosure in the notes to the financial statements of the pro forma effects on net earnings and earnings per share, assuming application of the new accounting method outlined in SFAS No. 123. The Company plans to implement the disclosure requirements for SFAS No. 123 in fiscal 1997 and retain its current accounting method for stock-based employee compensation. QUARTERLY INFORMATION The following tables present selected quarterly consolidated financial information for the periods indicated in both dollars and as a percentage of net sales. This information was derived from unaudited consolidated financial statements which have been prepared on a basis consistent with the Company's audited Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and, in the opinion of management, reflects all normal recurring adjustments necessary to fairly present the information. The Company has experienced and expects to continue to experience significant fluctuations in its quarterly operating results due to a variety of factors, including the cost of disk drives, the timing of receipts and shipments of significant orders, the cost and timing of new product releases and product enhancements by the Company and its competitors, variations in the Company's product mix, market acceptance of new or enhanced versions of the Company's products, changes in pricing and promotion policies by the Company and its competitors and general economic conditions. The operating results for any quarter do not necessarily indicate the results to be expected for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------------------------ FISCAL 1994 FISCAL 1995 FISCAL 1996 --------------------------------------- --------------------------------------- ------------------ DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................. $3,229 $2,987 $3,407 $3,498 $3,669 $3,107 $3,877 $5,313 $6,087 $6,696 Cost of sales............. 1,739 1,493 1,844 1,772 2,017 1,650 1,974 2,857 3,304 3,404 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit............ 1,490 1,494 1,563 1,726 1,652 1,457 1,903 2,456 2,783 3,292 Sales and marketing expenses................ 867 873 902 1,051 917 890 1,095 1,227 1,155 1,174 General and administrative expenses................ 304 334 359 311 323 333 396 380 538 550 Research and development expenses................ 408 397 471 418 378 431 449 542 513 603 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) from operations............ (89) (110) (169) (54) 34 (197) (37) 307 577 965 Other income (expense), net..................... 108 (25) (68) 107 66 80 78 94 134 99 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) before income taxes.......... 19 (135) (237) 53 100 (117) 41 401 711 1,064 Income tax expense........ 4 5 5 7 5 4 6 13 5 155 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net earnings (loss)..... $ 15 $ (140) $ (242) $ 46 $ 95 $ (121) $ 35 $ 388 $ 706 $ 909 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Earnings (loss) per common share.......... $ 0.01 $(0.05) $(0.08) $ 0.02 $ 0.03 $(0.04) $ 0.01 $ 0.12 $ 0.19 $ 0.24 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Weighted average number of common and common equivalent shares outstanding........... 3,253 3,092 3,098 3,094 3,222 3,218 3,467 3,394 3,721 3,831
16 20
QUARTER ENDED --------------------------------------------------------------------------------------------------------- FISCAL 1994 FISCAL 1995 FISCAL 1996 ----------------------------------------- ---------------------------------------- ------------------ DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.......... 53.8 50.0 54.1 50.6 55.0 53.1 50.9 53.8 54.3 50.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit......... 46.2 50.0 45.9 49.4 45.0 46.9 49.1 46.2 45.7 49.2 Sales and marketing expenses............. 26.9 29.2 26.5 30.0 25.0 28.6 28.2 23.1 19.0 17.6 General and administrative expenses............. 9.4 11.2 10.6 8.9 8.8 10.7 10.2 7.2 8.8 8.2 Research and development expenses............. 12.6 13.3 13.8 12.0 10.3 13.9 11.6 10.2 8.4 9.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) from operations......... (2.7) (3.7) (5.0) (1.5) 0.9 (6.3) (0.9) 5.7 9.5 14.4 Other income (expense), net.................. 3.3 (0.8) (2.0) 3.0 1.8 2.5 2.0 1.8 2.2 1.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings (loss) before income taxes.............. 0.6 (4.5) (7.0) 1.5 2.7 (3.8) 1.1 7.5 11.7 15.9 Income tax expense..... 0.1 0.2 0.1 0.2 0.1 0.1 0.2 0.2 0.1 2.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net earnings (loss)............. 0.5% (4.7)% (7.1)% 1.3% 2.6% (3.9)% 0.9% 7.3% 11.6% 13.6% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The Company's operating results over the ten quarters ended March 31, 1996 reflect generally increasing net sales, excluding the second quarters of fiscal 1994 and 1995. Net sales in the second quarters of fiscal 1994 and 1995 were affected by reduced shipments to film/video production customers who postponed purchase decisions in order to view new products at a key tradeshow for that industry. Gross profit was higher in some quarters due to cost reductions for disk drives or new product introductions of higher margin products. There can be no assurance that future cost reductions for disk drives will occur or that new product introductions will be at favorable gross profit margins when compared to historical levels. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and marketable securities totaled $6.0 million at March 31, 1996, compared to $4.7 million at September 30, 1995. The Company's working capital was $8.0 million at March 31, 1996 compared to $6.6 million at September 30, 1995. Cash flows provided by operating activities of $1.9 million during the six-month period ended March 31, 1996 were largely attributed to net earnings of $1.6 million and the non-cash expense of depreciation and amortization of $439,000. Increases in accounts receivable of $300,000 and inventories of $1.1 million occurred due to the increase in net sales. These increases were partially offset by increases in accounts payable of $471,000 and income taxes payable of $454,000. Cash flows provided by investing activities of $538,000 for the six-month period ended March 31, 1996 were mainly from the $1.3 million in proceeds from the sale of marketable securities during that period. These proceeds were partially offset by equipment purchases of $728,000 during that same period. Cash flows provided by financing activities of $206,000 during the six-month period ended March 31, 1996 were largely the result of proceeds from the issuance of Common Stock sold pursuant to the exercise of employee stock options. The Company expects that the net proceeds of this offering, cash provided by continuing operations and existing cash balances will be sufficient to fund its operations for the foreseeable future. The Company may acquire technologies, products or businesses that complement the Company's business, as such opportunities may arise, and the Company's working capital needs may change as a result of such acquisitions. Currently, however, there are no commitments or agreements with respect to any acquisitions. 17 21 BUSINESS GENERAL Ciprico designs, manufactures, markets and services high performance RAID disk arrays that provide storage solutions for the domestic and international visual computing markets. Ciprico's RAID (Redundant Array of Independent Disks) products typically consist of five or nine industry standard disk drives linked together by proprietary hardware, firmware and software. The array of disks performs as one large disk drive with superior performance characteristics compared to a single disk drive. Ciprico's RAID disk arrays are designed to provide fast data transfer rates of up to 100 megabytes ("MB") per second, large storage capacity of up to 72 gigabytes ("GB"), and redundancy to ensure the integrity of the stored data. All of the Company's disk arrays transfer data using industry standard data transfer protocols which enable them to interface with the primary open architecture computing platforms found in the visual computing market designed by Silicon Graphics, Sun Microsystems, Inc., Hewlett-Packard Company, IBM Corporation and Apple Computer, Inc. Ciprico's engineers have extensive knowledge of data transfer interfaces and many years of cumulative engineering experience which is reflected in the proprietary hardware, firmware and software incorporated into the Company's disk arrays. In addition, Ciprico has a close design relationship with Silicon Graphics which facilitates optimal system compatibility between Ciprico's disk arrays and Silicon Graphics workstations, which have a leading market share in the visual computing market. Sales of products developed by the Company specifically designed for Silicon Graphics platforms accounted for approximately half of the Company's disk array sales during the past 18 months. Ciprico believes its extensive disk array expertise, proprietary technology, and close customer and vendor relationships provide the Company with a competitive advantage in developing leading edge high performance RAID disk array products. VISUAL COMPUTING INDUSTRY Visual computing refers to the digital representation and complex image processing of film, video, graphics, photographs, animation, special effects, three dimensional ("3D") images and other images. Like many other computer applications, the trend in visual computing is toward random access, digital data storage and away from traditional analog tape storage or film methods which require substantial processing time and limit the creativity of users. Digital image processing offers numerous benefits when compared to traditional analog and film methods, including the ability to achieve higher quality images, process and edit data faster, access data remotely over networks, and create images and special effects not previously possible. Within the visual computing industry, market segments such as film/video production, satellite telemetry, oil and gas exploration, medical imaging, digital prepress, and broadcast and video services require large storage capacity with fast data transfer rates. Disk arrays are designed to meet the high data transfer rate, storage capacity and data redundancy requirements of the visual computing market. Based on the large storage requirements of digital image processing in visual computing, the Company expects growing demand for storage requirements in the visual computing market. Based on industry sources, the Company believes that sales of digital image processing equipment into the film/video production segment of the visual computing market have grown from less than $1 million in 1991 to approximately $900 million in 1995, with sales projected to continue to grow at an average annual rate of 45% over the next several years. In addition to digital technology, another important industry dynamic in the visual computing market is open system architecture. With open architecture, the Silicon Graphics workstations and other computing platforms prevalent in the visual computing market are designed to be compatible with peripheral storage equipment using industry standard data transfer protocols. Ciprico's disk arrays use Fast/Wide SCSI, UltraSCSI or Fibre Channel industry standard data transfer protocols, enabling them to interface with the primary open architecture computing platforms found in the visual computing market including Silicon Graphics, Sun Microsystems, Inc., Hewlett-Packard Company, IBM Corporation and Apple Computer, Inc. Only a few computing systems today provide both the graphical and computational power that are required for visual computing applications. These systems often lack the high-speed data input/output performance, redundancy and storage that is necessary for data retrieval and manipulation of images. Ciprico's 18 22 disk array products complement the graphic and computational power of computer systems supplied by other vendors by providing high performance disk array storage solutions. As additional computer systems evolve, the Company believes it is positioned to address the changing needs of its customers by capitalizing on its current technology and strategic industry relationships. RAID TECHNOLOGY RAID is an emerging storage technology dramatically changing the way on-line data is stored in computers. The RAID concept was defined by a team of researchers from the University of California at Berkeley in 1987. A RAID disk array links together several industry standard disk drives into a single large disk drive using proprietary hardware, firmware and software to achieve extremely fast data transfer rates, high levels of redundancy and large storage capacity. The key characteristics of RAID disk array performance are as follows: Data Transfer Rate. Disk arrays are able to achieve much faster data transfer rates than individual disk drives because of their ability to spread data among all the component disk drives, enabling the data to be retrieved from all drives simultaneously at very fast speeds. Ciprico's RAID-3 disk arrays can achieve transfer rates up to 100 MB per second (a MB represents one million bytes of data, or approximately the amount of data needed to store a single frame of high quality video). A data transfer rate of approximately 36 MB per second is needed to deliver uncompressed full motion video. Redundancy. Redundancy refers to the replication of certain data within the RAID disk array so that if one disk drive or other redundant component such as a power supply fail within the disk array, no data is lost and the application continues uninterrupted. Storage Capacity. By linking together multiple disk drives, disk arrays achieve very large storage capacities. Ciprico's disk arrays achieve storage capacities up to 72 GB (a GB represents one billion bytes of data or roughly the amount of data needed to store one minute of uncompressed real-time video). RAID is available in several levels, the most common of which are 1, 3 and 5. Each RAID level identifies a unique storage methodology, offering different data transfer rates, redundancy and cost. Therefore, each level should be evaluated for the application it is intended. The table below summarizes the different attributes and applications of the three most widely used RAID levels. 19 23 RAID TECHNOLOGY OVERVIEW
RAID LEVEL ATTRIBUTES APPLICATIONS RAID-1: Disk Mirroring High data reliability but Applications that value high cost due to high reliability and data duplication of disk drives transfer rates more than and associated hardware. storage capacity and cost. RAID-3: Parallel Data Access Highest data transfer rate Applications that require for large block sizes (high high data transfer rates, bandwidth) such as images. such as film/video animation or special effects, medical images, seismic analysis, satellite imagery or analysis, video-on-demand, digital prepress. RAID-5: Independent Data Access High data transfer rate for Applications that require small transaction files. frequent access to small blocks of data, such as a reservation system or office automation.
Among the RAID levels, RAID-3 is the best technology for visual computing applications because it achieves the fastest data transfer rates for sequentially stored data such as graphics and video, while providing large storage capacities and data redundancy. In a RAID-3 disk array, data is spread evenly among the "data drives" within the array while one "parity drive" ensures redundancy. For example, a typical Ciprico RAID-3 drive has eight data disk drives and one parity disk drive, so that when data is retrieved, each of the eight data drives provides one byte of data simultaneously, enabling data transfer up to eight times the speed of a single disk drive with eight times the storage capacity. A primary benefit of RAID-3 is that no decrease in performance results from the failure of one disk drive, a feature which is critical to real-time visual computing applications. With Ciprico's disk arrays, a failed disk drive or power supply can be "hot swapped" for a new drive without shutting off the array, allowing the user to keep working at full speed while the failed component is being replaced. All of Ciprico's disk array products are RAID-3 products designed for visual computing applications. Certain suppliers of disk arrays focus on RAID-1 and RAID-5 disk arrays. In contrast to RAID-3 disk arrays, RAID-1 creates exact duplicates of all stored data, and therefore, it uses one-half of available storage capacity to achieve redundancy. This methodology makes RAID-1 extremely costly to store large amounts of data. RAID-5 disk arrays are generally suited for intensive data processing applications requiring the ability to process large volumes of transactions simultaneously and store large quantities of data. Examples of RAID-5 applications include insurance policy holder databases, bank account transaction processing and airline reservation systems where performance is typically measured by the number of transactions which can be processed in a given amount of time (in contrast, performance of RAID-3 disk arrays is measured by MB per second of sustained data transfer capability). As a result of the differing performance characteristics, RAID-1 and RAID-5 disk arrays are not particularly well-suited and are not directly competitive with RAID-3 disk arrays in the visual computing market segments targeted by Ciprico. 20 24 VISUAL COMPUTING MARKET SEGMENTS Within the visual computing market, the Company focuses on the film/video production, satellite telemetry, oil and gas exploration, medical imaging, digital prepress, and broadcast and video services market segments. Each of these market segments requires the high data transfer rate performance, large storage capacity and redundancy provided by the Company's RAID-3 disk arrays. The following table identifies the application and storage requirements of each of these market segments as well as some of the current customers and end users of Ciprico's disk arrays. CIPRICO'S VISUAL COMPUTING MARKET SEGMENTS
REQUIREMENTS (IN ORDER OF SEGMENT APPLICATION SIGNIFICANCE) CUSTOMERS/END USERS Film/Video Creation of special - Real-time storage and - Avid Technology, Inc. Production effects, playback of images - Digital Domain post-production, digital without compression - DreamWorks, Inc. character animation - No performance - Eastman Kodak Company degradation with a - Fox Animation Studios, failed drive Inc. - 100% data availability - Industrial Light + Magic - Pacific Ocean Post - Walt Disney Studios - Warner Bros., Inc. Satellite Capture, process and - Real-time performance - Autometric Inc. Telemetry manipulate information - 100% data availability - E-Systems, Inc. and images transmitted - Large storage - NASDA from satellites capacities - NK-EXA Corp. Oil and Gas 3D processing and - Large storage - Phillips Petroleum Exploration interpretation of capacities Company seismic data to - Fast storage and - Texaco Inc. determine best drilling retrieval of image files - Unocal Corporation location - 100% data availability Medical Digital image - High speed transfers - Camtronics Ltd. Medical Imaging acquisition and display and display of images Systems (i.e., CT, MRI, - 100% data availability - CTI/PET Systems ultrasound); image - InfiMed, Inc. storage and networking (i.e., PACs, teleradiology) Digital Image storage direct-to- - High performance and - Contex Prepress Systems Prepress plate and redundancy - DALiM Imaging Software direct-to-press printing - On-line storage for - Komori America Corp. without using film fast changes - 100% data availability Broadcast and Playback of video in - Deliver video for - Philips Consumer Video Services real- time; commercial real-time viewing Electronics B.V. insertion, video-on- - High bandwidth to - Sony Trading demand, broadcast, in- supply video streams to International Corp. flight entertainment multiple users - 100% data availability
21 25 Film/Video Production. The film/video production market segment includes companies that create, edit and manipulate images for the entertainment industry, such as movie studios and post-production facilities. These companies utilize leading edge graphics workstations and high performance storage systems to generate and manipulate complex computer-generated images. Applications within this market include 3D animation, compositing (the digital layering of two different image sequences), special effects, film restoration and editing. Film/video production companies require extremely high image resolution because the final image will be enlarged many times when it is displayed on a movie screen. The images created in this market segment represent very large digital data files. Even a single image, or frame, can require the equivalent storage of one MB. Since the images are so large, they cannot be stored in the computer's memory and therefore must be stored on disk drives. However, single disk drives do not offer data transfer rates of at least 36 MB per second (30 frames per second), which is the required level of data transfer rate performance to retrieve images from the disk fast enough to provide smooth motion, or real-time video. Ciprico's disk arrays are among the first in the film/video production market to offer a single disk array that achieves real-time transfer rates. In addition, Ciprico's disk arrays are designed to provide data transfer rates ranging up to 100 MB per second which allows the simultaneous transfer of multiple streams of compressed video images. Satellite Telemetry. The satellite telemetry market segment consists of companies and military organizations that capture and extract images from satellites and transfer them to groundstations for processing. In recent years, there have been many changes in the satellite telemetry marketplace due to an improved supply and quality of imagery from new image scanners, the availability of new software tools that deliver more complex visualization capabilities and more sharing of technology between military and commercial organizations domestically and internationally. These changes are all key factors in the growth of applications which require disk arrays in this market segment. The satellite telemetry market segment has three primary applications where Ciprico disk arrays are best suited: data capture, image processing and extraction, and mission planning. Data capture is the process of collecting the images that are transmitted from a satellite passing overhead to a groundstation located on earth. The groundstation must be capable of reading these transmitted images very fast and be ready to receive them during the small window of opportunity when the satellite is in position to transmit. In the image processing and extraction application, the images that are gathered at the groundstation are bundled into data sets for use by various industries. The data sets can be hundreds of GBs, thus requiring massive storage. In the mission planning application, data is used to manage troop deployment, which frequently requires real-time viewing of 3D images. Ciprico's disk arrays deliver high performance transfer rates, typically real-time, that are required by users in the satellite telemetry market segment. Because the data sets are large, high storage capacities are necessary. In addition, redundancy is critical in these applications so data can be captured at the opportune time and made available as needed for processing and mission planning applications. Oil and Gas Exploration. The oil and gas exploration market segment is comprised mainly of the major oil and gas exploration companies. This market segment has undergone dramatic changes in recent years with the introduction of 3D technology. Seismic data is typically generated by detonating an explosive charge, sending shock vibrations beneath the earth's surface, which reflect off underground geological formations. The seismic data, which can be measured in terabytes (1,000 GB), is recorded, processed to about one-tenth of its original data size and stored digitally. By using high performance workstations and disk arrays, the seismic information can be displayed through 3D images representing underground geological formations, enabling the exploration company to locate oil fields and determine optimal drilling sites. The processing and interpretation of the seismic data may take days or even weeks, during which time a Ciprico disk array's redundancy features are critical should a disk drive or power supply fail. Without a disk array, if the data were lost the data would have to be reprocessed or reinterpreted, resulting in productivity losses. Ciprico's disk arrays provide flexible capacities to store the ever increasing amounts of data. In 22 26 addition, the high transfer rates of the Company's disk array products improves geophysicists' productivity by providing fast storage and retrieval of the large data files. Medical Imaging. The medical imaging market segment includes medical equipment manufacturers and end users such as hospitals, clinics and other diagnostic centers that collect and interpret medical images. Powerful computers are routinely used to capture digital images for diagnosis both locally at the site of the examination and at remote locations such as doctors' offices. The two primary medical imaging application environments in which Ciprico disk arrays operate best are image acquisition and image storage and transmission. In image acquisition, a magnetic resonance imaging ("MRI"), computed tomography ("CT") or ultrasound examination is conducted on a patient in a radiology lab. The resulting image is stored digitally. A disk array ensures that the data is stored to avoid repeating the examination, which may be uncomfortable for the patient as well as costly. Image storage and transmission applications, such as picture archive and communications systems ("PACs") and teleradiology, are essentially networks of medical images. The digital image that is acquired in the radiology laboratory is stored in a central archive and must be rapidly retrieved and displayed at viewing stations throughout the hospital or clinic. Ciprico disk arrays provide the high speed data transfer rates required in medical imaging applications. The redundancy features of the Company's disk arrays also ensure that examination images are not lost due to drive failure. Digital Prepress. The digital prepress market segment consists of companies such as computer-to-plate or direct-to-press manufacturers that utilize disk arrays to optimize performance. Digital prepress applications began about ten years ago. However, the move away from traditional printing presses and printing plates is a relatively new trend. As the printing industry endorses digital technology to reduce cost, improve flexibility and shorten production schedules, new opportunities are developing within the prepress market. RAID-based disk storage provides many features and benefits for improving the capabilities of digital prepress applications. Traditional prepress systems use photographic film images as the basis for producing printing plates. This method is quickly being replaced as suppliers are introducing a host of computer-based products which eliminate the material costs of photographic film, increase the quality and accuracy of image reproduction, and provide the printer with tools for quick turnaround. Examples of prepress applications include desktop publishing and page layout, photo-retouch, large workgroup servers and production management software, computer-to-plate devices, and digital presses. All of these applications provide printers with greater control over image quality and the ability to store jobs on-line, allowing them to respond to last minute changes more quickly. Computer-based prepress applications create image sizes up to 200 MB for a single page of printed material. Ciprico's disk array products provide the high data transfer rates and redundancy required for these applications. Broadcast and Video Services. The broadcast and video services market segment includes companies that demand delivery of high bandwidth video for real-time viewing at a reasonable cost. In this market segment, video is digitized and stored on disk subsystems. Video is retrieved from storage, either on a predetermined schedule or on demand, and transmitted for viewing. Automated commercial insertion is a good example of a broadcast application. In this application, the commercials viewed during a television broadcast are actually being retrieved from a disk array. The disk-based approach replaces videotape systems, which are less reliable and more expensive to maintain. Broadcast and video service applications are some of the most demanding for disk storage and require very high data bandwidth to supply different video streams to multiple users. Further, there can be no interruptions in service, which causes dead-air time. Large storage capacity is also required to allow an adequate selection of content for viewing. Without disk arrays these applications would not be possible or, at best, would be relegated to the more expensive and less flexible videotape-based systems. In other video services markets, the applications may be different, but the use for RAID disk arrays is similar. For instance, in the hospitality industry, disk-based systems are used for movies-on-demand in hotels. Another emerging application is in-flight entertainment, in which in-flight video systems allow passengers to view movies, on demand, on screens located in seat backs. Education is also a growth area for disk-based video 23 27 delivery systems. Whether for academic or corporate training, users can watch training videos on the desktop, at any time. In all these applications, Ciprico's disk array systems may be used to store the video content and deliver it for viewing in real-time. CIPRICO STRATEGY Ciprico's goal is to expand its leadership position as a provider of high performance RAID-3 storage solutions to the visual computing market. The Company's strategy to achieve this goal incorporates the following elements. Provide Leading Edge Disk Array Solutions. Ciprico believes its future success is largely dependent upon its ability to offer leading edge disk array solutions. Ciprico was the first RAID-3 disk array manufacturer to achieve real-time playback of uncompressed video, the first to receive ISO 9001 certification, the first and only to receive Silicon Graphics' "Gold Seal Approval" and the first to introduce a RAID-3 Fibre Channel disk array. The Company uses engineering design teams that work cross-functionally with marketing managers, application engineers and customers to develop products and product enhancements that address not only the needs of the visual computing market, but also changing industry standards. Ciprico's engineers have extensive knowledge of data transfer interfaces which is reflected in the proprietary hardware, firmware and software incorporated into the Company's disk arrays. Ciprico believes its extensive disk array expertise, proprietary technology, and close customer and vendor relationships give the Company a competitive advantage in continuing to provide leading edge disk array solutions. Further Penetrate Targeted Market Segments. Ciprico has identified and targeted six market segments within the visual computing market that have significant storage requirements: film/video production, satellite telemetry, oil and gas exploration, medical imaging, digital prepress, and broadcast and video services. The Company has achieved significant penetration in the film/video production segment in which it is a leading supplier of high performance disk arrays. The Company's thorough knowledge of this segment and its relationship with Silicon Graphics, a leading provider of workstations to this market segment, have been instrumental to the Company's success in the film/video production segment of the market. To penetrate further all of the Company's identified market segments, the Company will continue to study and learn the unique user applications within each segment so product development can be appropriately directed. In addition, the Company will attempt to establish relationships with important software and hardware vendors servicing each segment so the Company's disk arrays can be part of a total visual computing solution offered to customers. The Company believes that the application-specific knowledge gained from these relationships will enable it to further penetrate its six targeted market segments. Expand Worldwide Sales Efforts. In anticipation of expected growth in Ciprico's targeted visual computing market segments, the Company expects to continue expanding its worldwide sales efforts. In addition, the Company intends to further expand its geographic presence through association with carefully selected VARs that have in-depth application knowledge and technical expertise in the Company's targeted market segments. Ciprico salespeople and value-added resellers ("VARs") draw upon the expertise of the Company's marketing managers and application engineers to further enhance the Company's sales efforts. The Company believes this approach provides the focus and knowledge that is needed to expand its disk array sales internationally and domestically. Offer Extensive Support Programs. Ciprico believes that in addition to providing high performance storage solutions for the visual computing market, it is also important to provide flexible service and support programs to its customers. The Company offers its customers a number of training programs and service plans to accommodate the varying degrees of support required by customers. In addition, Ciprico uses application engineers who have an in-depth knowledge of customer requirements and work closely with customers to achieve optimal disk array performance. Technical support is also available through the Company's toll-free help line, which has a 99% attainment record of the caller reaching a support technician on the first call. PRODUCTS The Company introduced its first generation RAID-3 disk array product in 1990. Over the next six years, Ciprico introduced several new disk array products to meet the changing needs of its customers. The Company announced its newest product, the 7000 Fibre Channel Series disk array, in April 1996 and expects to 24 28 commence shipments of this product in the fall of 1996. Ciprico now offers customers a choice of four different series of disk arrays depending on their needs. Prices for the Company's disk arrays generally range from $20,000 to $50,000 per disk array depending on the features selected by the customer. Applications may require one or several disk arrays. The Company designs, develops and manufactures all of its disk array products to operate within industry standards and at peak performance levels. The controller board, internal packaging, component integration and cabinet design are all results of Ciprico's engineering expertise. Disk drives and power supplies are mounted on easily removable shuttles which make swap outs simple. The table below summarizes the maximum interface transfer rate, storage capacity, features and benefits of each of Ciprico's RAID-3 disk arrays. CIPRICO'S RAID-3 DISK ARRAYS
MAXIMUM # OF DRIVES/ INTERFACE STORAGE PRODUCT TRANSFER RATE* CAPACITY** FEATURES BENEFITS 6700 Series 20 MB/Sec. - 5 or 9 drives - SCSI-2 - No decrease in - 8 - 72 GB per compatible data transfer disk array - Hot swap drives rate performance and power with a failed supplies drive - Increased performance and capacity with striping 6900 Series 40 MB/Sec. - 9 drives - SCSI-3 or Ultra- - Provides - 16 - 72 GB per SCSI compatible real-time speeds disk array - Hot swap drives using a single and power disk array supplies - Bigger images, higher density 7000 Series 100 MB/Sec. - 9 drives - Fibre Channel - Supports - 16 - 72 GB per interface multiple disk array - Supports both uncompressed point-to-point video streams and Arbitrated - Delivers dozens Loop of compressed - Fast/Wide SCSI-2 video streams drives - Supports 30 - Hot swap drives, frames per power supplies second and fans operations at very high resolutions Spectra Series 20 to 100 MB/Sec. - 5 or 9 drives - Customized 6700, - Spectra 6900, - 8 - 72 GB per 6900 or 7000 attaining disk array series for real-time Silicon Graphics speeds, is environments unique in the including industry, graphical user packaged with interface, adapter board drivers and jointly adapter board developed by - Gold Seal Ciprico and Approved by Silicon Graphics Silicon Graphics - Thorough testing by Silicon Graphics assures compatibility with Silicon Graphics systems
* These are the maximum interface transfer rates theoretically attainable; however, sustained transfer rates are lower due to limitations of the SCSI software code. ** Ciprico intends to use higher capacity 9 GB disk drives as soon as they are available from the drive manufacturers, which will increase storage capacities from the current maximum, 34 GB, to 72 GB. 25 29 6700 Series. The Company's 6700 Series disk arrays offer customers a sustained transfer rate of 19 MB per second. These disk arrays are compatible with SCSI-2 (an industry standard protocol that allows peripheral equipment to connect with the host computer). Storage capacity on the Company's disk arrays is limited only by the capacity of the disk drives themselves. With a continual program of disk drive qualification, the highest performing and highest quality disk drives are offered with the disk array. The 6700 Series disk arrays consist of five or nine drives and currently have storage capacities of 8 GB to 34 GB, which will increase to 72 GB when 9 GB disk drives are available. Ciprico's 6700 Series disk arrays offer several redundancy features, including hot swap drives, which allow replacement of a failed disk drive without any interruption in performance while the failed disk drive is being replaced at the convenience of the user. Hot swap power supplies are available to prevent interruption due to power supply failure. 6900 Series. Ciprico's 6900 Series disk arrays use a new version of the SCSI peripheral interface standard, known as UltraSCSI, double-speed or Fast-20. While maintaining compatibility with SCSI-2, the UltraSCSI interface offers sustained transfer rates of 36 MB per second. Before the introduction of UltraSCSI, multiple disk arrays had to be striped together to increase transfer rates. With one 6900 Series UltraSCSI disk array, a user can retrieve 24-bit color, uncompressed video images at a real-time speed of 30 frames per second. The Company's 6900 Series offers customers eight data drives plus one redundant drive, which together provide a storage capacity of 16 GB to 34 GB, which will increase to 72 GB when 9 GB disk drives are available. The 6900 Series also includes several redundancy features, including hot swap drives and power supplies. 7000 Fibre Channel Series. In April 1996, Ciprico announced its newest RAID disk array, the 7000 Series, the industry's first disk array to offer a host interface compatible with full speed Fibre Channel, the fastest interface currently available. The 7000 Series offers a sustained transfer rate of 76 MB per second. This disk array is capable of transferring uncompressed video images in real-time to preserve quality, or simultaneously transferring several dozen streams of compressed video images. Ciprico qualifies its 7000 Series disk arrays with popular host adapters for standard platforms to preserve compatibility with its customer's systems. As new computer platforms are introduced specifically for Fibre Channel, the Company intends to integrate the 7000 Series with platforms that deliver the highest performance possible to take advantage of full speed Fibre Channel which can offer maximum interface transfer rates of up to 100 MB per second. The 7000 Series is based on SCSI drive technology and consists of nine Fast/Wide SCSI drives, each connected to a dedicated channel. The storage capacities supported by the 7000 Series disk arrays range from 16 GB to 34 GB, which will increase to 72 GB when 9 GB disk drives are available. The total system storage capacity can grow to a terabyte with only fifteen arrays and a single host connection. The 7000 Series has hot swap disk drives, power supplies and fans. Spectra Series. Ciprico has developed, in cooperation with Silicon Graphics, the Spectra Series to work with Silicon Graphics platforms. The 6700, 6900 and 7000 Series of disk arrays may all be ordered as a Spectra package. Included in the Spectra package is a Ciprico disk array, an adapter for certain models, and a set of software utilities. These graphical user interface-based utilities were written by Ciprico to facilitate the installation and use of a Ciprico disk array with a Silicon Graphics platform. Before the Company developed these utilities, system administrators had to use complex system commands to configure peripherals, such as disk arrays. Ciprico's utilities provide an easy-to-use graphical interface using point-and-click commands that reduces the installation time. In addition, point-and-click commands are available to monitor the status of the disk array. Spectra disk arrays have received Silicon Graphics' "Gold Seal Approval," which signifies that the products have successfully undergone extensive testing by Silicon Graphics. Recently, the Company worked with Silicon Graphics to create an adapter card that allows Silicon Graphics' new Indigo(2) IMPACT workstation to connect to Ciprico's Spectra 6900 UltraSCSI disk array. The Company is not aware of any other company that can offer this capability on the Indigo(2) IMPACT. Controllers. Prior to 1994, the Company's sales were largely attributed to controller boards, peripheral input/output connectors for tape and disk drives. In the early 1990s, as the controller market weakened, the 26 30 Company transitioned its focus to the RAID-3 disk array markets. While the Company continues to sell controller boards, it expects such sales to represent a decreasing percentage of net sales. MARKETING AND SALES The Company's strategy is one of application selling into the Company's identified segments of the visual computing market. This strategy requires that the Company's marketing and sales personnel have an in-depth knowledge of the various imaging applications and related data storage requirements of end users in the various segments. Based upon such understanding, the Company's product managers are responsible for developing a comprehensive marketing plan tailored to the needs of each market segment, including brochures, trade shows, advertising and direct mail. In addition, the Company relies on its experienced application engineers to support the Company's marketing and sales efforts. Typically, the Company's disk arrays are sold to OEMs for inclusion in their own computer systems and to systems integrators and VARs who in turn sell the disk arrays to end users. The initial sales process is complex, requiring interaction with several layers of the customer's organization and extensive technical exchanges, product demonstrations and commercial negotiations. As a result, the Company's typical sales cycle is three to nine months. As part of the Company's marketing and sales strategy, the Company has from time to time entered into relationships with companies, primarily hardware and software suppliers to the visual computing market, that Ciprico believes could play an important role in the successful marketing of the Company's products. For example, the Company has developed a strong relationship with Silicon Graphics, a leading manufacturer of computer platforms in the visual computing market. The Company's engineering department has worked closely with Silicon Graphics to understand and provide connectivity and performance solutions compatible with Silicon Graphics computer platforms. The result of these efforts is the Company's Spectra Series of disk arrays. In addition to such product development efforts, the Company's marketing department has engaged in joint promotions, trade shows and seminars with Silicon Graphics. Sales of products developed by the Company specifically designed for Silicon Graphics platforms accounted for approximately half of the Company's disk array sales during the past 18 months. The Company's products are sold through a combination of direct sales people, independent manufacturers' representatives, VARs and other distributors. Ciprico's direct sales organization, comprised of ten salespeople, coordinates the activities of the Company's manufacturers' representatives and distributors and actively participates with them in selling efforts. This enables the Company to establish strong direct ties with its customers and end users. The Company's North American sales locations are in Plymouth, Minnesota; Raleigh, North Carolina; Nashau, New Hampshire; Dallas, Texas; and Santa Clara, California. The Company has an international sales and service office in Newbury, England and a sales office in Singapore. CUSTOMER SUPPORT The Company believes that its ability to provide prompt and reliable support is an important element in the marketing of its products. The Company employs expert application engineers and phone support specialists who provide technical application support to customers. To develop strong customer relationships, the application engineers work with potential customers to understand their applications and ensure that the disk arrays optimally address their requirements. Ciprico believes it has a competitive advantage with the added value it provides through its customer support programs. Ciprico offers several training and service programs including the Advantage Support Program and the Safety Net Spares Program. The Advantage Support Program is designed to offer the customer product support flexibility. Under this program, the customer can choose which spares it will rent for its disk array support. One Advantage Support Program contract can cover all of the different disk array configurations and locations a customer may have now or in the future. This program also offers training for service technicians, priority telephone support and parts repair and updates at no additional charge. 27 31 With the Safety Net Spares Program, customers receive support for up to five disk arrays at one location. Critical spare parts are located at the customer's site on a consignment basis. Other spare parts are available upon request with next-day delivery. Under this program, the customer's technicians are provided with training, a training manual, service guide and a software diagnostic application. Telephone support specialists are also available through the Company's toll-free help line, which has a 99% attainment record of customers reaching a technical support specialist on the first call. International customers have critical and non-critical spare parts on location. The Company also provides a return-to-factory parts and labor warranty against defects in materials and workmanship covering a period from one to three years from the date of shipment to customers. Extended warranty and maintenance services are also offered to customers as the primary warranty expires. All repair work for the Company's products is presently done at the Company's Plymouth, Minnesota, manufacturing facility. MANUFACTURING The Company typically assembles its products from components and prefabricated parts manufactured and supplied by others, such as controllers, cabinets, multiple disk drives, one or more power supplies and other miscellaneous parts. Certain of the items manufactured by others are made to the Company's specifications. The Company has established strategic relationships with certain of its suppliers to manage inventory in such a manner that the Company is better able to fulfill changing customer needs. For example, the Company receives disk drives on a consignment basis, which allows the Company to have access to the drives as needed without having to carry substantial amounts of inventory. The Company's principal suppliers are Anthem Electronics, Inc., Manufacturers' Services Limited and Fabrico, Inc. The Company is also ISO 9001 certified, an international quality standard. Assembly operations for the Company's products are performed in Plymouth, Minnesota. The sophisticated nature of the Company's products requires extensive testing by skilled personnel. The Company utilizes specialized testing equipment and maintains an internal test engineering group to provide this product support. RESEARCH AND DEVELOPMENT The Company operates in an industry which is subject to rapid technological change. Its goals in research and development are to develop leading edge products that adhere to industry standards. The Company's ability to achieve this goal is largely dependent upon its ability to anticipate and respond to change. The Company uses engineering design teams that work cross-functionally with marketing managers, application engineers and customers to develop products and product enhancements. Computer input/output interface standards are maintained and an extensive disk drive qualification program is in place to monitor off-the-shelf disk drives to ensure the quality and performance of the disk drives integrated into the Company's disk arrays. As part of its development strategy, the Company actively seeks available, cooperative and co-development activities with industry leaders in the hardware, software and systems businesses, such as Silicon Graphics. Ciprico's research and development efforts have been successful as demonstrated by such accomplishments as offering the first RAID-3 disk array to achieve real-time playback of uncompressed video, and the first and only RAID-3 provider to receive Silicon Graphics' "Gold Seal Approval." In April 1996, the Company announced its newest product, which utilizes the new Fibre Channel interface. The Company has invested significant resources in the development of its Fibre Channel disk array and is the first manufacturer to introduce a disk array integrating this new interface. The Company expects to begin shipments of this new Fibre Channel product in the fall of 1996. The Company is one of 60 companies that are members of the Fibre Channel Association, which is committed to providing connectivity to standard computing platforms. Research and development expenses during the first six months of fiscal 1996 and during fiscal 1995 and 1994 were $1.1 million, $1.8 million and $1.7 million, respectively. All of the Company's research and development expenditures are expensed as incurred. As of March 31, 1996, the Company had 22 full-time employees engaged in research and development activities, 20 of whom are engineers. 28 32 COMPETITION The market for all levels of RAID disk arrays is highly competitive. The Company competes with disk array manufacturers, with manufacturers of proprietary, integrated computer systems and with systems integrators that market computer systems which contain general purpose RAID disk arrays. Such competitors often offer systems at lower prices than those offered by the Company and the Company must compete on the basis of product performance in specific applications. Many of these competitors have greater financial, manufacturing and marketing resources than those of the Company. The Company's ability to compete successfully depends upon its ability to continue to develop high performance products that obtain market acceptance and can be sold at increasingly competitive prices. PROPRIETARY TECHNOLOGY AND TRADEMARKS The Company has no patents, and does not consider ownership of patents to be material to its business. The Company believes that the rapidly changing technology in the computer industry makes the Company's future success dependent more on the technical competence and creative skills of its personnel than on any patents it may be able to obtain. However, protection of the Company's proprietary hardware, firmware and software is very important to the Company. It relies upon trade secrecy and confidentiality agreements with its employees and customers, rather than on patent or copyright protection, to preserve its intellectual property rights. The Company has obtained federal registrations for the trademark Ciprico(R) and has filed a federal application to register the trademark Spectra 6000(TM). EMPLOYEES At March 31, 1996, the Company had 86 full-time employees, of which 15 were engaged in manufacturing, 22 in engineering and research and development, 38 in sales, sales support and marketing and 11 in general management and administration. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes that its employee relations are good. Management believes that the future success of the Company will depend in part on its ability to attract and retain qualified technical, management and marketing personnel. Such experienced personnel are in great demand, and the Company must compete for their services with other firms which may be able to offer more favorable benefits. FACILITIES The Company's administrative headquarters, manufacturing and research and development operations are located in one building in Plymouth, Minnesota, totaling approximately 32,000 square feet. The Company's rent and maintenance costs for this space are approximately $28,000 per month. The lease for this space expires in October 1997. The Company believes that its existing facilities and equipment are adequate for its current needs. The Company owns most of the equipment used in its operations. Such equipment consists primarily of manufacturing and test equipment, tools and fixtures. LEGAL PROCEEDINGS The Company is not a party to nor is any of its property subject to any material pending legal proceedings. 29 33 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The Directors, executive officers and certain key employees of the Company are as follows:
NAME AGE POSITION - ------------------------------ --- -------------------------------------------------------- Robert H. Kill(1)............. 49 Chairman of the Board, President and Chief Executive Officer Cory J. Miller................ 42 Vice President of Finance, Chief Financial Officer and Secretary Stephen R. Hansen............. 44 Vice President of Operations and Development Susan A. Leenerman............ 42 Director of Marketing Stuart A. Reile............... 55 Director of Sales for North America Christopher Gerrard........... 44 Director of International Operations Ronald B. Thomas(2)........... 52 Director Gary L. Deaner(2)............. 56 Director Peyton Gannaway(1)............ 56 Director Donald H. Soukup(1)........... 56 Director William N. Wray(2)............ 68 Director
- ------------ (1) Member of Audit Committee (2) Member of Compensation Committee All Directors hold office until the next annual meeting of shareholders or until their successors have been duly elected and qualified. Executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. The Board of Directors has a Compensation Committee which provides recommendations concerning salaries and other compensation to be paid to executive officers of the Company and administers the Company's employee stock plans. The Board also has an Audit Committee which is responsible for reviewing the Company's audit process. Robert H. Kill has been President and Chief Executive Officer of the Company since March 1988, a Director since September 1987 and was elected Chairman of the Board in January 1996. Mr. Kill was Executive Vice President of the Company from September 1987 to March 1988, Secretary from September 1987 to July 1988 and from November 1989 to October 1993, and Vice President and General Manager from August 1986 to September 1987. Mr. Kill held several marketing and sales positions at Northern Telecom Inc. from 1979 to 1986, his last position being Vice President, Terminals Distribution. Cory J. Miller was elected Vice President of Finance and Chief Financial Officer in October 1992 and Secretary in October 1993. Mr. Miller served as the Company's Controller and Chief Financial Officer from December 1989 to October 1992 and as Controller from October 1987 to December 1989. Mr. Miller was Director of Finance at VTC Inc., a semiconductor manufacturer, from 1985 to 1987 prior to joining Ciprico. Stephen R. Hansen has been Vice President of Operations and Development since March 1996. Mr. Hansen served as Vice President of Engineering since joining the Company in 1989. From 1983 to 1989, Mr. Hansen was employed by Zycad Corporation in various engineering and product development management roles. Prior to his employment with Zycad, Mr. Hansen was with Control Data Corporation from 1974 to 1983. Susan A. Leenerman has served as Director of Marketing for the Company since 1992. She joined the Company as the Marketing Communications Manager in 1991. Prior to her positions with Ciprico, Ms. Leenerman was Market Development Manager at Tricord Systems, Inc., a personal computer server manufacturer, from 1989 to 1991. She also held several marketing management positions with Lee Data Corporation prior to 1989. 30 34 Stuart A. Reile has been Director of Sales for North America for Ciprico since December 1992. He has been with the Company since April 1981, holding various positions in marketing and sales. Prior to his employment by the Company, Mr. Reile held technical and sales positions for companies including GE Computer Service, Tally Mannesman Corporation, Centronics, Electronic Marketing Specialists and Datum Computer Service, Inc. Christopher Gerrard has served as Director of International Operations of the Company since November 1992. He joined the Company in 1990 primarily to assist in the formation of the Company's European subsidiary. Prior to joining the Company, Mr. Gerrard held various senior positions with computer companies including Hitachi, Fujitsu and Control Data Corporation. Ronald B. Thomas has been a Director of the Company since its incorporation in February 1978 and served as its Chairman of the Board from March 1988 to January 1996. He has been a private investor since March 1988. Mr. Thomas served as President and Treasurer of the Company from February 1978 to March 1988 and was the sole proprietor of the Company's unincorporated predecessor. Gary L. Deaner was elected a Director of the Company in May 1995. Since January 1995, Mr. Deaner has been Vice President and General Manager, Lan Connect, a division of Digi International, Inc., a manufacturer of computer communications products. From August 1991 to January 1995 Mr. Deaner served as President of Arnet Corporation, then a subsidiary of Digi International, and from 1985 to 1991 he was Vice President of Marketing for Digi International. Peyton Gannaway was elected a Director of the Company in January 1996. Mr. Gannaway was President, Chief Operating Officer and a director of Anthem Electronics from 1984 until his retirement in 1994. Prior to that time, Mr. Gannaway was Vice President and Senior Vice President of Anthem from 1975 to 1984. Mr. Gannaway is a director of Aptos Semiconductor Corporation, a semiconductor manufacturer. Donald H. Soukup became a Director of the Company in March 1982. Mr. Soukup has been an independent venture capitalist for more than five years. Mr. Soukup is also a director of MinnTech Corporation, a medical device company, and several privately held companies. William N. Wray has been a Director of the Company since July 1993. Prior to his retirement in 1988, Mr. Wray held various management positions at Honeywell, Inc., the most recent being Executive Vice President of Honeywell Information Systems (from 1985 to 1989) and Executive Vice President of Corporate Marketing (from 1987 to 1988). Mr. Wray is currently employed by Honeywell Consultants, Ltd., an organization comprised of retired Honeywell executives who are now involved in civic and nonprofit organizations. 31 35 PRINCIPAL SHAREHOLDERS The following table sets forth as of March 31, 1996, and as adjusted to reflect the sale of the shares offered hereby, certain information regarding beneficial ownership of the Company's Common Stock by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each Director of the Company, (iii) each executive officer and (iv) all executive officers and Directors of the Company as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO OFFERING(1) OWNED AFTER OFFERING(1) ----------------------- ----------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT PERCENT - ------------------------------------------------ --------- ------- ----------------------- Robert H. Kill(2)............................... 74,076 2.1% 1.5% Ronald B. Thomas(3)............................. 43,270 1.2% * Cory J. Miller(4)............................... 15,600 * * Gary L. Deaner(5)............................... 4,500 * * Peyton Gannaway................................. 0 * * Donald H. Soukup(3)............................. 47,250 1.3% * William N. Wray(5).............................. 15,000 * * Perkins Capital Management, Inc.(6)............. 1,395,975 40.0% 28.0% All executive officers and Directors as a group (7 persons)(7)................................ 199,696 5.5% 3.9%
- ------------ * Less than one percent. (1) Shares not outstanding but deemed beneficially owned by virtue of the individual's right to acquire them as of March 31, 1996, or within 60 days of such date, are treated as outstanding when determining the percent of the class owned by such individual and when determining the percent owned by the group. For purposes of calculating the percent of class owned after this offering, it was assumed that the officers, Directors and principal shareholders will not be purchasing shares in this offering. Unless otherwise indicated, each person named or included in the group has sole voting and investment power with respect to the shares of Common Stock set forth opposite his name. (2) Includes 45,000 shares purchasable upon exercise of currently exercisable options. (3) Includes 30,000 shares purchasable upon exercise of currently exercisable options. (4) Includes 8,400 shares purchasable upon exercise of currently exercisable options. (5) Represents shares purchasable upon exercise of currently exercisable options. (6) Perkins has indicated that as of March 31, 1996 it beneficially owns 1,395,975 shares, that it has no voting power as to 991,350 of such shares, has sole voting power as to the remainder, and has sole dispositive power over all of such shares. The address of Perkins is 708 East Lake Street, Wayzata, MN 55391. (7) Includes 132,900 shares purchasable upon exercise of currently exercisable options. 32 36 DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 10,000,000 shares of capital stock, $0.01 per share par value, of which 9,000,000 shares are Common Stock and 1,000,000 shares are Preferred Stock. COMMON STOCK As of March 31, 1996, the Company had 3,487,525 shares of Common Stock issued and outstanding. The holders of the Common Stock: (i) have equal ratable rights to dividends from funds legally available therefor, when, as and if declared by the Board of Directors of the Company; (ii) are entitled to share ratably in all the assets of the Company available for distribution to holders of the Common Stock upon liquidation, dissolution or winding up of the affairs of the Company; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto; and (iv) are entitled to one vote per share on all matters which shareholders may vote on at all meetings of shareholders. All shares of Common Stock now outstanding are fully paid and nonassessable. The holders of the Common Stock do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares voting for the election of directors can elect all of the directors of the Company to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of the Company's directors. PREFERRED STOCK No shares of Preferred Stock are currently outstanding. The Board of Directors is empowered to establish, and to designate the name of, each class or series of the Preferred Stock and to set the terms of such shares (including terms with respect to redemption, sinking fund, dividend, liquidation, preemptive, conversion and voting rights and preferences). Accordingly, the Board of Directors, without shareholder approval, may issue Preferred Stock with terms (including terms with respect to redemption, sinking fund, dividend, liquidation, preemptive, conversion and voting rights and preferences) that could adversely affect the voting power and other rights of holders of the Common Stock. STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT The Company is subject to Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or, in the case of affiliates or associates of the corporation, within three years prior to the determination of interested stockholder status, did own) 15% or more of a corporation's voting stock. The existence of this provision would be expected to have anti-takeover effects with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in a premium over the market price of the Common Stock. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar with respect to the Company's Common Stock is Norwest Bank Minnesota, N.A. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation, as amended, limits the liability of Directors in their capacity as Directors of the Company or its shareholders to the full extent permitted by Delaware law. The Certificate of Incorporation provides that a Director shall not be liable to the Company or its shareholders for monetary 33 37 damages for breach of fiduciary duty as a Director, except (i) for any breach of the Director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for dividends, stock repurchases and other distributions made in violation of Delaware law or for violations of the Delaware securities laws, (iv) for any transaction from which the Director derived an improper personal benefit or (v) for any act or omission occurring prior to the effective date of the provision in the Company's Certificate of Incorporation, as amended, limiting such liability. These provisions do not affect the availability of equitable remedies, such as an action to enjoin or rescind a transaction involving a breach of fiduciary duty, although, as a practical matter, equitable relief may not be available. The above provisions also do not limit the liability of the Directors for violations of, or relieve them from the necessity of complying with federal securities laws. The Certificate of Incorporation of the Company, as amended, also provides that the Company will exercise, to the extent permitted by law, its power of indemnification, and that the foregoing right of indemnification shall not be exclusive of other rights to which a person shall be entitled as a matter of law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 34 38 UNDERWRITING Under the terms and subject to the conditions of the Underwriting Agreement, the Underwriters named below, for whom Needham & Company, Inc. and Dain Bosworth Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company, and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth opposite their respective names in the table below. The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock are subject to certain conditions precedent, and that the Underwriters are committed to purchase and pay for all shares if any shares are purchased.
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- --------- Needham & Company, Inc........................................................... Dain Bosworth Incorporated....................................................... --------- Total....................................................................... 1,500,000 =========
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers (who may include the Underwriters). After the offering to the public, the offering price and other selling terms may be changed by the Representatives. The Company has granted the Underwriters a 30-day option to purchase up to an additional 225,000 shares solely to cover over-allotments, if any, at the public offering price per share, less the underwriting discounts and commissions set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. To the extent the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares of Common Stock to be purchased by such Underwriters as shown in the above table bears to the total shown. In connection with this offering, certain of the Underwriters and selling group members may engage in passive market making transactions in the Common Stock of the Company on the Nasdaq National Market immediately prior to the commencement of sales in this offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market making consists of displaying bids on the Nasdaq National Market which are limited by the bid prices of independent market makers and making purchases limited by such prices and effected in response to order flow. Net purchases by passive market makers on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in the Company's Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock of the Company at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. 35 39 In the Underwriting Agreement, the Company has agreed to indemnify the Underwriters against certain liabilities that may be incurred in connection with this offering, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company's officers and directors have agreed that, without the prior written consent of Needham & Company, Inc., they will not, directly or indirectly, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for Common Stock for 180 days after the date of this Prospectus. The Company has agreed in the Underwriting Agreement not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock, other than the shares of Common Stock being offered hereby, for a period of 180 days after the date of this Prospectus without the prior written consent of Needham & Company, Inc., provided that the Company may issue securities pursuant to its stock option plans and upon the exercise of outstanding options. The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject any order for the purchase of shares in whole or in part. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Fredrikson & Byron, P.A., 1100 International Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402. Certain legal matters for the Underwriters will be passed upon by Faegre & Benson LLP, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402. EXPERTS The consolidated financial statements of Ciprico as of September 30, 1994 and 1995 and for each of the years in the three-year period ended September 30, 1995, included herein and elsewhere in the Registration Statement, have been included herein and elsewhere in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 36 40 AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-2 under the Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy or information statements and other information with the Commission. Such reports, proxy or information statements and other information, as well as the Registration Statement of which this Prospectus is a part and the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, by mail at prescribed rates. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (1) the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995 and (2) the Company's interim reports on Form 10-QSB for the fiscal quarters ended December 31, 1995 and March 31, 1996. Any statements contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon a written request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be directed to the Chief Financial Officer of the Company, 2800 Campus Drive, Suite 60, Plymouth, Minnesota 55441, Telephone: (612) 551-4000. 37 41 CIPRICO INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX
PAGE ---- Independent Auditors' Report.......................................................... F-2 Financial Statements: Consolidated Balance Sheets as of September 30, 1994 and 1995, and March 31, 1996 (Unaudited)....................................................... F-3 Consolidated Statements of Operations: Years Ended September 30, 1993, 1994, and 1995, and Six Months Ended March 31, 1995 and 1996 (Unaudited)...................................... F-4 Consolidated Statements of Stockholders' Equity: Years Ended September 30, 1993, 1994, and 1995, and Six Months Ended March 31, 1996 (Unaudited)............................................... F-5 Consolidated Statements of Cash Flows: Years Ended September 30, 1993, 1994, and 1995, and Six Months Ended March 31, 1995 and 1996 (Unaudited)...................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7
F-1 42 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS CIPRICO INC.: We have audited the accompanying consolidated balance sheets of Ciprico Inc. and subsidiaries as of September 30, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1995. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ciprico Inc. and subsidiaries as of September 30, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota November 3, 1995, except as to note 6(b) which is as of March 27, 1996 F-2 43 CIPRICO INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 31, ------------------------- ----------- 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................ $ 2,176,125 $ 3,425,471 $ 6,041,025 Marketable securities............................................ 1,300,412 1,267,482 -- Trade accounts receivable, less allowance for doubtful accounts of $249,000 in 1994, $180,000 in 1995 and $285,000 at March 31, 1996........................................................... 2,335,847 3,227,535 3,467,836 Related party receivable......................................... 106,737 -- -- Other receivables................................................ 14,335 87,751 47,256 ----------- ----------- ----------- Total accounts receivable...................................... 2,456,919 3,315,286 3,515,092 Inventories: Finished goods................................................. 459,026 949,044 962,292 Work-in-process................................................ 261,097 231,622 714,563 Raw materials.................................................. 423,521 397,172 775,609 ----------- ----------- ----------- Total inventories.............................................. 1,143,644 1,577,838 2,452,464 Deferred income taxes............................................ -- -- 308,000 Other current assets............................................. 161,990 115,490 140,389 ----------- ----------- ----------- Total current assets........................................... 7,239,090 9,701,567 12,456,970 Furniture and equipment, at cost: Furniture and fixtures......................................... 316,890 332,418 332,811 Equipment...................................................... 4,520,663 4,665,683 5,338,055 ----------- ----------- ----------- 4,837,553 4,998,101 5,670,866 Less accumulated depreciation.................................. (3,495,258) (3,785,667) (4,171,873) ----------- ----------- ----------- Net furniture and equipment.................................... 1,342,295 1,212,434 1,498,993 Other assets..................................................... 1,835 6,066 7,840 ----------- ----------- ----------- Total assets................................................... $ 8,583,220 $10,920,067 $13,963,803 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of obligations under capital leases......... $ 20,880 $ 27,330 $ 28,976 Accounts payable................................................. 1,480,645 2,346,639 2,817,254 Accrued compensation............................................. 228,754 354,611 424,157 Warranty accrual................................................. 53,000 65,000 292,880 Income taxes payable............................................. 72,991 76,454 530,285 Other accrued expenses........................................... 82,822 169,297 169,311 Deferred revenue................................................. 56,202 89,548 167,913 ----------- ----------- ----------- Total current liabilities...................................... 1,995,294 3,128,879 4,430,776 Long-term installments of obligations under capital leases....... 48,140 40,102 22,399 Deferred rent.................................................... 66,264 54,822 42,646 ----------- ----------- ----------- Total liabilities.............................................. 2,109,698 3,223,803 4,495,821 Stockholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding.................................... -- -- -- Common stock, $0.01 par value; 9,000,000 shares authorized; issued and outstanding 3,099,924 shares in 1994, 3,398,919 shares in 1995 and 3,487,525 shares at March 31, 1996.......... 30,999 33,989 34,875 Additional paid-in capital....................................... 5,857,638 6,621,704 6,842,553 Retained earnings................................................ 601,432 997,509 2,612,383 Unrealized gain on marketable securities......................... -- 60,400 -- Accumulated translation adjustments.............................. (16,547) (17,338) (21,829) ----------- ----------- ----------- Total stockholders' equity..................................... 6,473,522 7,696,264 9,467,982 ----------- ----------- ----------- Commitments (note 11)............................................ Total liabilities and stockholders' equity..................... $ 8,583,220 $10,920,067 $13,963,803 =========== =========== ===========
The accompanying Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. F-3 44 CIPRICO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, ----------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Net sales...................... $ 9,213,626 $13,120,610 $15,966,203 $6,775,835 $12,782,879 Cost of sales.................. 4,609,314 6,847,643 8,498,374 3,667,349 6,707,711 ----------- ----------- ----------- ----------- ---------- Gross profit................. 4,604,312 6,272,967 7,467,829 3,108,486 6,075,168 Sales and marketing expenses... 3,592,686 3,693,255 4,129,493 1,806,615 2,328,483 General and administrative expenses...................... 1,386,675 1,307,632 1,432,373 656,531 1,088,403 Research and development expenses...................... 1,651,277 1,693,619 1,799,547 809,094 1,116,102 ----------- ----------- ----------- ----------- ---------- Earnings (loss) from operations................... (2,026,326) (421,539) 106,416 (163,754) 1,542,180 Other income (expense): Interest expense............. (10) (5,736) (7,101) (3,437) (4,249) Interest and dividend income.................... 206,298 156,542 203,309 93,566 126,479 Royalty income............... 173,950 122,200 91,950 62,950 49,000 Gain (loss) on investments... (45,221) (148,920) 4,093 -- 60,424 Gain (loss) on sale of fixed assets...................... (79,970) 1,030 27,476 217 (1,419) Other, net................... 17,188 (3,200) (2,066) (7,173) 2,459 ----------- ----------- ----------- ----------- ---------- 272,235 121,916 317,661 146,123 232,694 Earnings (loss) before income taxes......................... (1,754,091) (299,623) 424,077 (17,631) 1,774,874 Income tax expense............. 24,000 21,000 28,000 9,000 160,000 ----------- ----------- ----------- ----------- ---------- Net earnings (loss)............ $(1,778,091) $ (320,623) $ 396,077 $ (26,631) $ 1,614,874 =========== =========== =========== =========== ========== Earnings (loss) per common share......................... $ (0.58) $ (0.10) $ 0.12 $ (0.01) $ 0.43 =========== =========== =========== =========== ========== Weighted average number of common and common equivalent shares outstanding............ 3,067,884 3,093,872 3,394,079 3,164,270 3,775,938
The accompanying Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. F-4 45 CIPRICO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1993, 1994, 1995 AND SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
UNREALIZED GAIN ON COMMON STOCK ACCUMULATED SECURITIES AND ADDITIONAL RETAINED TRANSLATION AVAILABLE SHARES PAID-IN CAPITAL EARNINGS ADJUSTMENTS FOR SALE TOTAL --------- ---------------- ---------- ----------- ---------- ---------- Balance, September 30, 1992..... 3,058,224 $5,806,219 $2,700,146 $ (435) $ -- $8,505,930 Stock issued in connection with exercise of employee stock options................ 23,403 44,186 -- -- -- 44,186 Net loss...................... -- -- (1,778,091) -- -- (1,778,091) Foreign currency adjustment... -- -- -- (12,538) -- (12,538) --------- ---------- ---------- -------- -------- ---------- Balance, September 30, 1993..... 3,081,627 5,850,405 922,055 (12,973) -- 6,759,487 Stock issued in connection with exercise of employee stock options................ 18,297 38,232 -- -- -- 38,232 Net loss...................... -- -- (320,623) -- -- (320,623) Foreign currency adjustment... -- -- -- (3,574) -- (3,574) --------- ---------- ---------- -------- -------- ---------- Balance, September 30, 1994..... 3,099,924 5,888,637 601,432 (16,547) -- 6,473,522 Stock issued in connection with exercise of employee stock options................ 297,416 702,588 -- -- -- 702,588 Restricted stock issued....... 1,579 5,002 -- -- -- 5,002 Net earnings.................. -- -- 396,077 -- -- 396,077 Foreign currency adjustment... -- -- -- (791) -- (791) Excess of fair value over option price for stock options exercised............ -- 59,466 -- -- -- 59,466 Change in unrealized gain on securities available for sale......................... -- -- -- -- 60,400 60,400 --------- ---------- ---------- -------- -------- ---------- Balance, September 30, 1995..... 3,398,919 6,655,693 997,509 (17,338) 60,400 7,696,264 Stock issued in connection with exercise of employee stock options (unaudited).... 88,664 222,516 -- -- -- 222,516 Net earnings (unaudited)...... -- -- 1,614,874 -- -- 1,614,874 Foreign currency adjustment (unaudited).................. -- -- -- (4,491) -- (4,491) Change in unrealized gain on securities available for sale (unaudited).................. -- -- -- -- (60,400) (60,400) Fractional shares, related to stock split (unaudited)...... (58) (781) -- -- -- (781) --------- ---------- ---------- -------- -------- ---------- Balance, March 31, 1996 (unaudited).................... 3,487,525 $6,877,428 $2,612,383 $ (21,829) $ -- $9,467,982 ========= ========== ========== ======== ======== ==========
The accompanying Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. F-5 46 CIPRICO INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, -------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ---------- ---------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)....................... $(1,778,091) $ (320,623) $ 396,077 $ (26,631) $ 1,614,874 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization........... 724,852 690,969 712,476 361,089 439,268 Provision for inventory obsolescence.... 195,000 142,418 307,380 90,500 223,221 Provision for warranty expense.......... -- -- 12,000 -- 285,000 Provision for bad debt expense.......... 38,000 63,303 36,029 4,000 100,517 Deferred income taxes................... -- -- -- -- (308,000) (Gain) loss on retirement of furniture and equipment.......................... 79,970 (1,030) (27,476) (217) 1,658 Gain on sale of marketable securities... -- (1,103) (4,093) -- (60,424) Security valuation adjustment to market value.................................. 45,221 192,779 -- -- -- Excess of fair value over option price for stock options exercised............ -- -- 59,466 -- -- Changes in operating assets and liabilities: Accounts receivable..................... 662,943 (1,077,421) (894,396) 974,703 (300,323) Inventories............................. 83,440 50,795 (741,574) (318,802) (1,097,847) Other current assets.................... 9,731 (43,493) 46,500 31,432 (24,899) Accounts payable........................ 39,025 812,916 865,994 (566,201) 470,615 Accrued expenses........................ (17,341) 14,709 212,332 (146,325) 12,440 Income taxes payable.................... (31,707) (4,029) 3,463 3,299 453,831 Deferred revenue........................ -- 56,202 33,346 21,902 78,365 Deferred rent........................... 19,541 (10,151) (11,442) (5,721) (12,176) Other, net.............................. (14,628) (1,514) (790) 1,176 (5,272) ----------- ----------- ---------- ----------- ---------- Net cash flows provided by operating activities........................... 55,956 564,727 1,005,292 424,204 1,870,848 ----------- ----------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Furniture and equipment purchases......... (718,738) (611,997) (682,616) (344,779) (728,365) Proceeds from sale of furniture and equipment................................ 28,854 100,569 146,145 41,871 880 Decrease in restricted cash............... -- 450,000 -- -- -- Other assets, net......................... 9,782 1,706 (4,231) (440) (1,774) Investment in marketable securities....... (25,348) (288,412) -- -- -- Proceeds from sale of marketable securities............................... 95,000 107,000 97,422 -- 1,267,506 ----------- ----------- ---------- ----------- ---------- Net cash flows provided by (used in) investing activities................. (610,450) (241,134) (443,280) (303,348) 538,247 ----------- ----------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital lease obligations.............................. (4,585) (11,575) (20,256) (8,786) (16,057) Proceeds from issuance of common stock.... 44,186 38,232 707,590 285,790 222,516 ----------- ----------- ---------- ----------- ---------- Net cash flows provided by financing activities........................... 39,601 26,657 687,334 277,004 206,459 ----------- ----------- ---------- ----------- ---------- Net increase (decrease) in cash and cash equivalents............................... (514,893) 350,250 1,249,346 397,860 2,615,554 Cash and cash equivalents at beginning of period..................................... 2,340,768 1,825,875 2,176,125 2,176,125 3,425,471 ----------- ----------- ---------- ----------- ---------- Cash and cash equivalents at end of period..................................... $ 1,825,875 $ 2,176,125 $3,425,471 $2,573,985 $ 6,041,025 =========== =========== ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................ $ 10 $ 5,736 $ 7,101 $ 3,811 $ 4,249 Income taxes............................ $ 55,707 $ 25,029 $ 24,537 $ 3,777 $ 13,044 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITY: During fiscal 1993, 1994 and 1995, the Company entered into capital leases for equipment and incurred obligations of $37,078, $59,480 and $68,208, respectively.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. F-6 47 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1993, 1994 AND 1995 (Information as of March 31, 1996 and for the Six Months Ended March 31, 1995 and 1996 is Unaudited.) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: 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. Unaudited Interim Information: The accompanying unaudited consolidated financial statements as of March 31, 1996 and for the six months ended March 31, 1995 and 1996 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Results for the interim periods are not necessarily indicative of the results for an entire year. Consolidation: The accompanying consolidated financial statements include the accounts of Ciprico Inc. and its wholly owned subsidiaries, Ciprico International Limited and Ciprico FSC, Inc. (a foreign sales corporation). All significant intercompany balances and transactions have been eliminated. Revenue Recognition: Revenue is recognized upon shipment of products. Revenue from extended warranty and maintenance agreements are recognized on the straight-line basis over the term of the agreement. Product Warranty Costs: Estimated future warranty costs are provided at the time of revenue recognition. Royalty Income: Royalties are recognized when payment is received. Statements of Cash Flows: For purposes of reporting cash flows, all temporary cash investments having initial maturities of three months or less are considered cash equivalents. Marketable Securities: Marketable securities at September 30, 1994 and 1995 consist of mutual funds investing in mortgage backed debt securities. The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115) at September 30, 1994. Under SFAS No. 115, the Company's marketable securities are classified as available-for-sale and recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from operations and are reported as a separate component of stockholders' equity until realized. A decline in the market value of any available-for-sale security that is below cost and deemed other than temporary, results in a charge to operations and the establishment of a new cost basis for the security. Prior to adoption of SFAS No. 115, unrealized losses resulted in a charge to operating results. Adoption of this statement did not impact the Company's financial position or results of operation for the fiscal year F-7 48 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ended September 30, 1994. The previously recorded decline in the fair value of the Company's investments has been deemed other than temporary. Inventories: Inventories are stated at the lower of cost or replacement market. Cost is determined using the first-in, first-out (FIFO) method. Inventory costs include outside assembly charges, allocated manufacturing overhead and direct material costs. The allocated overhead component totaled $30,000 in 1994 and $58,810 in 1995. Furniture and Equipment: Furniture and equipment is carried at cost, less accumulated depreciation. Depreciation is provided using the straight line method over estimated useful lives of three to seven years. Major replacements and improvements are capitalized; repairs and maintenance are expensed as incurred. Income Taxes: Deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes. The Company's method of accounting for income taxes conforms with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes"(SFAS No. 109). Research and Development Costs: Research and development costs are charged to expense as incurred. Foreign Currency: The financial statements of Ciprico International Limited have been translated into U.S. dollars in accordance with the provisions of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" (SFAS No. 52). Under SFAS No. 52, assets and liabilities are translated into U.S. dollars at the year-end exchange rate, while income and expenses are translated at the average exchange rates during the year. The resulting translation adjustments are reflected as a separate component of stockholders' equity. Reclassification: Certain 1994 amounts have been reclassified to conform to the 1995 presentation. 2. MARKETABLE SECURITIES The cost, gross unrealized gain, and fair market value from the sale of available-for-sale securities were as follows:
SEPTEMBER 30, ------------------------ 1994 1995 ---------- ---------- Cost................................................................. $1,300,412 $1,207,082 Gross unrealized gain................................................ -- 60,400 Fair value........................................................... 1,300,412 1,267,482
Proceeds from the sale of marketable securities in 1993, 1994 and 1995 and for the first six months of fiscal 1995 and 1996 were $95,000, $107,000, $97,422, $0 and $1,267,506, respectively. Net realized gains included in income in 1993, 1994, 1995 and for the first six months of fiscal 1995 and 1996 were $0, $1,103, $4,093, $0 and $60,424, respectively. F-8 49 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. OTHER ACCRUED EXPENSES Other accrued expenses consist of the following:
SEPTEMBER 30, MARCH 31, ------------------- -------- 1994 1995 1996 ------- -------- -------- (UNAUDITED) Marketing expenses............................................. $ -- $ 64,220 $ 48,475 Commission expense............................................. 24,832 39,044 36,452 Employee benefits.............................................. 26,952 21,895 70,254 Professional fees.............................................. 12,000 21,194 6,416 Payroll taxes.................................................. 12,653 17,443 3,714 Miscellaneous, other........................................... 6,385 5,501 4,000 ------- -------- -------- Total........................................................ $82,822 $169,297 $169,311 ======= ======== ========
4. INCOME TAXES Effective for the year ended September 30, 1993, the Company adopted SFAS No. 109. The provisions for income tax expense consist of:
YEARS ENDED SEPTEMBER 30, ----------------------------------- 1993 1994 1995 ------- ------- ------- Current: Federal............................................. $ -- $ -- $ 5,000 State............................................... 5,000 -- 5,000 Foreign............................................. 19,000 21,000 18,000 ------- ------- ------- Total current.................................... 24,000 21,000 28,000 ------- ------- ------- Deferred.............................................. -- -- -- ------- ------- ------- Total............................................ $24,000 $21,000 $28,000 ======= ======= =======
The actual tax expense differs from the expected tax expense computed by applying the U.S. federal corporate rate to earnings (loss) before income taxes as follows:
YEARS ENDED SEPTEMBER 30, ----------------------------------------- 1993 1994 1995 --------- --------- --------- Computed expected tax expense (benefit)......... $(596,400) $(101,900) $ 148,100 State taxes, net of federal income tax effect... 3,300 -- 3,700 Limitation of net operating loss carryforwards................................. 616,300 119,800 -- Change in valuation allowance................... -- -- (130,100) Other, net...................................... 800 3,100 6,300 --------- --------- --------- Actual tax expense......................... $ 24,000 $ 21,000 $ 28,000 ========= ========= =========
F-9 50 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets (liabilities) are as follows:
SEPTEMBER 30, --------------------------- 1994 1995 ----------- --------- U.S. and State net operating loss and tax credit carryforward............................................... $ 932,500 $ 657,000 Reserve for inventory obsolescence........................... 55,500 79,600 Depreciation................................................. (64,700) (22,000) Marketable securities........................................ -- 85,100 Allowance for doubtful accounts.............................. 92,100 66,600 Accrued vacation pay......................................... 52,900 64,800 Warranty accrual............................................. 19,600 24,100 Other........................................................ 7,400 10,000 ----------- --------- Total gross deferred tax asset............................. 1,095,300 965,200 Valuation allowance.......................................... (1,095,300) (965,200) ----------- --------- Net deferred tax asset (liability)......................... $ -- $ -- =========== =========
The Company has net operating loss carryforwards at September 30, 1995, for income tax purposes of approximately $1,700,000 and tax credit carryforwards of $30,000. If not used, these carryforwards will begin to expire in 2002. 5. EARNINGS (LOSS) PER COMMON SHARE For the years ended September 30, 1993 and 1994 and for the first six months of fiscal 1995, loss per common share was computed using the weighted average number of common shares outstanding. Stock options were excluded due to their antidilutive effect. For the year ended September 30, 1995 and for the first six months of fiscal 1996, earnings per common share were computed using the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from dilutive stock options. 6. CAPITAL STOCK (a) Stock Options The Company has four stock option plans under which the officers, directors and employees have been or may be granted incentive and nonqualified stock options to purchase the Company's common stock at fair market value on the date of grant. The options become exercisable over varying periods and expire up to 10 years from date of grant. Summarized information at September 30, 1995, regarding stock option plans is as follows:
PLAN YEARS ------------------------------------------------------------------ 1983 1986 1992 1994 TOTAL ---------- ---------- ---------- ---------- ---------- Total reserved for under the plan... 300,000 450,000 225,000 375,000 1,350,000 Exercised........................... 96,195 203,434 60,677 38,297 398,603 Outstanding......................... 117,750 23,438 114,651 323,208 579,047 Exercisable......................... 65,250 23,062 87,735 38,438 214,485 Exercise price...................... $2.09-2.92 $2.00-2.17 $2.39-3.97 $2.72-4.42 $2.00-4.42 Available for grant................. -- -- 49,672 13,496 63,168
F-10 51 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. CAPITAL STOCK (CONTINUED) Summarized information at March 31, 1996, regarding stock option plans is as follows:
PLAN YEARS (UNAUDITED) --------------------------------------------------------------------- 1983 1986 1992 1994 TOTAL ---------- ---------- ----------- ----------- ----------- Total reserved for under the plan........................... 300,000 450,000 375,000 750,000 1,875,000 Exercised........................ 131,333 224,434 72,761 59,084 487,612 Outstanding...................... 82,613 2,438 155,067 356,421 596,539 Exercisable...................... 131,333 224,435 73,136 57,293 486,197 Exercise price................... $2.00-2.92 $2.00-2.25 $2.08-11.75 $2.68-12.68 $2.00-12.68 Available for grant.............. -- -- 147,173 337,835 485,008
(b) Stock Split On March 27, 1996, the Company declared a three-for-two stock split which was distributed on April 12, 1996. Share and per share data for all periods presented have been restated to reflect the stock split. 7. 401(K) PLAN The Company participates in a 401(k) savings plan covering substantially all of its employees. Minimum contributions to the plan by the Company are 50 percent of the first 2 percent of participants' salaries. The Company's contributions to this plan in 1993, 1994 and 1995 were $24,261, $27,881 and $29,854, respectively. 8. RELATED PARTY TRANSACTIONS In 1994, the Company cancelled its distributor and international sales representative agreements with Diamond Point International, Inc. (DPI), a company owned by a former director of the Company. Total sales to DPI under the distributor agreement for the years ended September 30, 1993, 1994 and 1995 were $230,538, $100,940 and $0, respectively. Trade accounts receivable relating to these sales as of September 30, 1993, 1994 and 1995, were $160,867, $106,737 and $0, respectively. Commission expense under the sales representative agreement in 1993 and 1994 totaled $3,407 and $19,680 respectively. There were no outstanding commissions payable as of September 30, 1993, 1994 and 1995. 9. NET SALES The consolidated statements of operations included net sales to significant customers as follows:
FISCAL YEAR ENDED SEPTEMBER SIX MONTHS ENDED 30, MARCH 31, ------------------------------ ----------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- (UNAUDITED) Customer A................................. 11.8% 13.7% 8.6% 8.4% 2.0% Customer B................................. 12.9 3.0 -- -- -- Customer C................................. 10.4 1.6 -- -- -- Customer D................................. -- -- 7.8 -- 16.7 Customer E................................. -- -- 0.9 -- 13.9 Customer F................................. -- -- 3.8 2.5 8.4 Customer G................................. -- -- 6.4 6.3 1.6 ---- ---- ---- ---- ---- Total.................................... 35.1% 18.3% 27.5% 17.2% 42.6% ==== ==== ==== ==== ====
F-11 52 CIPRICO INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. FINANCIAL INFORMATION BY GEOGRAPHIC AREA (UNAUDITED) The Company's net sales, earnings (loss) from operations and total assets summarized by geographic area is as follows:
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, --------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- Net Sales North America................... $ 8,023,853 $10,306,793 $10,341,928 $4,678,650 $ 7,965,846 UK Subsidiary................... 870,021 1,622,584 2,781,651 1,146,823 1,054,281 Other foreign................... 319,752 1,191,233 2,842,624 950,362 3,762,752 ----------- ----------- ----------- ---------- ----------- Total........................ $ 9,213,626 $13,120,610 $15,966,203 $6,775,835 $12,782,879 =========== =========== =========== ========== =========== Earnings (Loss) From Operations North America and other foreign...................... $(1,874,645) $ (498,869) $ (499,231) (384,602) $ 1,396,114 UK Subsidiary................... (151,681) 77,330 605,647 220,848 146,066 ----------- ----------- ----------- ---------- ----------- Total........................ $(2,026,326) $ (421,539) $ 106,416 $ (163,754) $ 1,542,180 =========== =========== =========== ========== ===========
SEPTEMBER 30, MARCH 31, --------------------------------------- ----------- 1993 1994 1995 1996 ----------- ----------- ----------- ----------- Total Assets North America.............................. $ 7,884,353 $ 8,400,215 $10,738,735 $13,778,720 UK Subsidiary.............................. 262,435 354,585 436,764 380,848 Eliminations............................... (183,680) (171,580) (255,432) (195,765) ----------- ----------- ----------- ----------- Total................................... $ 7,963,108 $ 8,583,220 $10,920,067 $13,963,803 =========== =========== =========== ===========
11. COMMITMENTS Leases Commitments The Company has operating and capital leases for office and manufacturing space and equipment which expire through September 1998. Future minimum payments under these leases are $293,220, $258,381 and $33,159 for 1996, 1997 and 1998, respectively. For the years ended September 30, 1993, 1994, and 1995, operating lease expenses were $243,650, $231,379 and $237,579, respectively. For the first six months of fiscal year 1995 and 1996, operating lease expenses were $117,340 and $119,600, respectively. F-12 53 CIPRICO'S WORLDWIDE DISTRIBUTION [IMAGE OF EARTH FROM SPACE] [FLAGS OF LISTED COUNTRIES] VARS Argentina Australia Austria Brazil Canada Chile Colombia Costa Rica Czech Republic Denmark Ecuador Finland France Germany Greece Hong Kong India Ireland Israel Italy Japan Jordan Korea Lebanon Mexico Netherlands New Zealand Norway Pakistan Panama Poland Russia Singapore South Africa Spain Sweden Switzerland Taiwan Thailand Ukraine United Kingdom United States Venezuela CORPORATE HEADQUARTERS Ciprico Inc. 2800 Campus Drive Plymouth, MN 55441 voice: (612)551-4000 (800)727-4669 fax: (612)551-4002 http://www.ciprico.com U.S. SALES REGIONS North-Central Region: Plymouth, MN South-Central Region: Houston, TX North-East Region: Nashua, NH South-East Region: Raleigh, NC South-West Region: Los Angeles, CA North-West Region: Santa Clara, CA CIPRICO INTERNATIONAL LTD. 7 Clerewater Place Lower Way Newbury Berkshire RG19 3RF England voice: (44)1635-873666 fax: (44)1635-871996 INTERNATIONAL SALES REGIONS U.K., Europe, Israel: Berkshire, England Central Asia, Middle East, Africa: Singapore PAC RIM, Central and South America: Plymouth, MN 54 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 10 Price Range of Common Stock........... 10 Dividend Policy....................... 10 Capitalization........................ 11 Selected Consolidated Financial Data................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 13 Business.............................. 18 Management............................ 30 Principal Shareholders................ 32 Description of Securities............. 33 Underwriting.......................... 35 Legal Matters......................... 36 Experts............................... 36 Available Information................. 37 Incorporation of Certain Documents By Reference........................... 37 Index to Consolidated Financial Statements.......................... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,500,000 Shares [LOGO] Common Stock ------------------------ PROSPECTUS ------------------------ Needham & Company, Inc. Dain Bosworth Incorporated ------------------------ , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 55 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following expenses will be paid by the Company in connection with the distribution of the securities registered hereby and do not include the underwriting discount to be paid to the Underwriters. All of such expenses, except for the SEC registration fee, NASD fee and Nasdaq listing fee, are estimated. SEC Registration Fee............................................... $ 11,376 NASD Fee........................................................... 3,799 Nasdaq National Market Listing Fee................................. 17,500 Legal Fees......................................................... 125,000 Accountants' Fees and Expenses..................................... 60,000 Printing Expenses.................................................. 80,000 Blue Sky Fees and Expenses......................................... 5,000 Miscellaneous...................................................... 27,325 -------- Total......................................................... $330,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Delaware General Corporation Law provides that a director of a corporation (i) shall be indemnified by the corporation for expenses in defense of any action or proceeding if the director is sued by reason of his service to the corporation, to the extent that such person has been successful in defense of such action or proceeding, or in defense of any claim, issue or matter raised in such litigation, (ii) may, in actions other than actions by or in the right of the corporation, be indemnified for expenses, judgments, fines and amounts paid in settlement of such litigation, even if he is not successful on the merits, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and in a criminal proceeding, if he did not have reasonable cause to believe his conduct was unlawful) and (iii) may be indemnified by the corporation for expenses (but not judgments or settlements) of any action by the corporation or of a derivative action, even if he is not successful, provided that he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and provided that no indemnification is permitted without court approval if the director was adjudged liable to the corporation. The Company's Certificate of Incorporation and Bylaws provide that the Company (i) may indemnify its officers, employees and agents and (ii) must indemnify its directors to the full extent permitted by law, including those circumstances in which indemnification would otherwise be discretionary, and advance expenses to its directors at their request provided that they undertake to repay amounts advanced if it is ultimately determined that they are not entitled to indemnification. The Company maintains a directors and officers liability insurance policy and, in addition, has entered into indemnity agreements with its directors which constitute binding agreements of the Company to indemnify its directors and prevent the Company from modifying its indemnification policies in a way that is adverse to the directors who are parties to such agreements. Provisions regarding indemnification of officers and directors of the Company are contained in Article 8 of the Company's Certificate of Incorporation, as amended (Exhibit 4.2 to this Registration Statement) and Article 5 of the Company's Bylaws (Exhibit 4.3 to this Registration Statement). Under Section 6 of the Underwriting Agreement, filed as Exhibit 1.1 hereto, the Underwriters agree to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities. II-1 56 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NUMBER DESCRIPTION - ------- ------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement 4.2 Certificate of Incorporation--incorporated by reference to Exhibit 19.1 of the Registrant's Form 10-Q for the quarter ended March 31, 1988* 4.3 Bylaws--incorporated by reference to Exhibit 19.2 of the Registrant's Form 10-Q for the quarter ended March 31, 1988* 5.1 Opinion and Consent of Fredrikson & Byron, P.A. 10.1 Lease Agreement, dated December 3, 1991, relating to manufacturing space located at 2800 Campus Drive, Plymouth, Minnesota and corporate office space located at 2955 Xenium Lane, Plymouth, Minnesota--incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-K for the fiscal year ended September 30, 1991* 10.2 Company's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.7 of the Registrant's Form 10-K for the fiscal year ended September 30, 1983* 10.3 Specimen of Incentive Stock Option Agreement--incorporated by reference to Exhibit 10.8 of the Registrant's Form 10-K for the fiscal year ended September 30, 1983* 10.4 Amendment to Registrant's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1984* 10.5 Registrant's 1986 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.12 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.6 Specimen of Nonqualified Stock Option Agreement under 1986 Nonqualified Stock Option Plan-- incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.7 1986 Amendment to Registrant's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.8 License Agreement between Cottrill, Inc. and TechSource Inc., Registrant's subsidiary, dated December 18, 1987--incorporated by reference to Exhibit 10.18 of the Registrant's Form 10-K for the fiscal year ended September 30, 1988* 10.9 Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1992* 10.10 Specimens of Nonqualified Stock Option Agreements under 1992 Nonqualified Stock Option Plan --incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-K for the fiscal year ended September 30, 1992* 10.11 Amendment No. 1 to Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.11 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.12 Amendment No. 2 to Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.12 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.13 Registrant's 1994 Incentive Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1993* 10.14 Specimen of Incentive Stock Option Agreement under 1994 Incentive Stock Option Plan-- incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1993* 10.15 Registrant's 1996 Restricted Stock Plan--incorporated by reference to Exhibit 10.15 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.16 Specimen of Restricted Stock Agreement under 1996 Restricted Stock Plan--incorporated by reference to Exhibit 10.16 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.17 Restricted Stock Agreement dated December 30, 1994 between Registrant and Robert H. Kill-- incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-QSB for the quarter ended June 30, 1995* 23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
II-2 57
EXHIBIT NUMBER DESCRIPTION - ------- ------------------------------------------------------------------------------------ 23.2 Consent of KPMG Peat Marwick LLP, independent public accountants 24 Power of Attorney (included on signature page of the Registration Statement)
- ------------ * Incorporated by reference--Commission File No. 0-11336 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 58 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on April 26, 1996. CIPRICO INC. By: /s/ ROBERT H. KILL -------------------------------------- Robert H. Kill, President and Chief Executive Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature to this Registration Statement appears below hereby constitutes and appoints Robert H. Kill and Cory J. Miller, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his or her behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Registration Statement, and any and all instruments or documents filed as part of or in connection with this Registration Statement or the amendments thereto, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his or her substitutes, shall do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE - ------------------------------------- ----------------------------- ------------------ /s/ ROBERT H. KILL President, Chief Executive April 26, 1996 - ------------------------------------- Officer and Director Robert H. Kill (principal executive officer) /s/ CORY J. MILLER Vice President of Finance, April 26, 1996 - ------------------------------------- Chief Financial Officer and Cory J. Miller Secretary (principal financial and accounting officer) /s/ GARY L. DEANER Director April 26, 1996 - ------------------------------------- Gary L. Deaner /s/ PEYTON GANNAWAY Director April 26, 1996 - ------------------------------------- Peyton Gannaway /s/ DONALD H. SOUKUP Director April 26, 1996 - ------------------------------------- Donald H. Soukup /s/ RONALD B. THOMAS Director April 26, 1996 - ------------------------------------- Ronald B. Thomas /s/ WILLIAM N. WRAY Director April 26, 1996 - ------------------------------------- William N. Wray
II-4 59 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 CIPRICO INC. EXHIBIT INDEX TO FORM S-2
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 4.2 Certificate of Incorporation--incorporated by reference to Exhibit 19.1 of the Registrant's Form 10-Q for the quarter ended March 31, 1988* 4.3 Bylaws--incorporated by reference to Exhibit 19.2 of the Registrant's Form 10-Q for the quarter ended March 31, 1988* 5.1 Opinion and Consent of Fredrikson & Byron, P.A 10.1 Lease Agreement, dated December 3, 1991, relating to manufacturing space located at 2800 Campus Drive, Plymouth, Minnesota and corporate office space located at 2955 Xenium Lane, Plymouth, Minnesota--incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-K for the fiscal year ended September 30, 1991* 10.2 Company's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.7 of the Registrant's Form 10-K for the fiscal year ended September 30, 1983* 10.3 Specimen of Incentive Stock Option Agreement--incorporated by reference to Exhibit 10.8 of the Registrant's Form 10-K for the fiscal year ended September 30, 1983* 10.4 Amendment to Registrant's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1984* 10.5 Registrant's 1986 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.12 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.6 Specimen of Nonqualified Stock Option Agreement under 1986 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.7 1986 Amendment to Registrant's Incentive Stock Option Plan--incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-K for the fiscal year ended September 30, 1986* 10.8 License Agreement between Cottrill, Inc. and TechSource Inc., Registrant's subsidiary, dated December 18, 1987--incorporated by reference to Exhibit 10.18 of the Registrant's Form 10-K for the fiscal year ended September 30, 1988* 10.9 Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended September 30, 1992* 10.10 Specimens of Nonqualified Stock Option Agreements under 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-K for the fiscal year ended September 30, 1992* 10.11 Amendment No. 1 to Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.11 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.12 Amendment No. 2 to Registrant's 1992 Nonqualified Stock Option Plan--incorporated by reference to Exhibit 10.12 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.13 Registrant's 1994 Incentive Stock Option Plan--incorporated by reference to Exhibit 10.13 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1993*
60
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------- 10.14 Specimen of Incentive Stock Option Agreement under 1994 Incentive Stock Option Plan -- incorporated by reference to Exhibit 10.14 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1993* 10.15 Registrant's 1996 Restricted Stock Plan -- incorporated by reference to Exhibit 10.15 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.16 Specimen of Restricted Stock Agreement under 1996 Restricted Stock Plan -- incorporated by reference to Exhibit 10.16 of the Registrant's Form 10-KSB for the fiscal year ended September 30, 1995* 10.17 Restricted Stock Agreement dated December 30, 1994 between Registrant and Robert H. Kill -- incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-QSB for the quarter ended June 30, 1995* 23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1) 23.2 Consent of KPMG Peat Marwick LLP, independent public accountants 24 Power of Attorney (included on signature page of the Registration Statement)
- ------------ * Incorporated by reference -- Commission File No. 0-11336. EX-1.1 2 UND. AGMT 1 Draft of April 29, 1996 Exhibit 1.1 1,500,000 SHARES* CIPRICO INC. COMMON STOCK UNDERWRITING AGREEMENT , 1996 NEEDHAM & COMPANY, INC. DAIN BOSWORTH INCORPORATED As Representatives of the several Underwriters c/o Needham & Company, Inc. 445 Park Avenue New York, New York 10022 Ladies and Gentlemen: Ciprico Inc., a Delaware corporation (the "Company"), proposes to issue and sell 1,500,000 shares (the "Firm Shares") of the Company's Common Stock, $.01 par value per share (the "Common Stock"), to you and to the several other Underwriters named in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company has also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 225,000 shares of Common Stock, on the terms and for the purposes set forth in Section 1(b)(the "Option Shares"). The Firm Shares and the Option Shares are referred to collectively herein as the "Shares." The Company confirms as follows its agreement with Representatives and the several other Underwriters. 1. Agreement to Sell and Purchase. (a) On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, (i) the Company agrees to issue and sell the Firm Shares to the several Underwriters, (ii) each of the Underwriters, severally and not jointly, agrees to purchase from the Company the respective - ------------------------ * Plus an option to purchase up to an additional 225,000 shares to cover over-allotments. 1 2 number of Firm Shares set forth opposite that Underwriter's name in Schedule I hereto, at the purchase price of $___ for each Firm Share. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, up to the maximum number of Option Shares at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of this Agreement upon written or telegraphic notice (the "Option Shares Notice") by the Representatives to the Company no later than 12:00 noon, New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date"), setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representatives for the accounts of the Underwriters against payment of the purchase price by certified or official bank check or other next day funds payable to the order of the Company at the office of Needham & Company, Inc., 445 Park Avenue, New York, New York 10022, at 10:00 a.m., New York City time, on the third (or, if the purchase price set forth in Section 1(b) hereof is determined after 4:30 p.m., Washington D.C. time, the fourth) business day following the commencement of the offering contemplated by this Agreement, or at such time on such other date, not later than seven business days after the date of this Agreement, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Representatives shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case my be. 2 3 The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The Company will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: (a) The Company meets the requirements for use of Form S-2 and a registration statement (Registration No. 333-____) on Form S-2 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The term "preliminary prospectus" as used herein means a preliminary prospectus, including the documents incorporated by reference therein, as contemplated by Rule 430 or Rule 430A of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to the Representatives. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed promptly by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date), including all documents incorporated by reference therein, financial statements and all exhibits and any information deemed to be included by Rule 430A and includes any registration statement relating to the offering contemplated by this Agreement and filed pursuant to Rule 462(b) of the Rules and Regulations. The term "Prospectus" means the prospectus, including the documents incorporated by reference therein, as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus, including the documents incorporated by reference therein, included in the Registration Statement at the Effective Date. Any reference herein to the terms "amend," "amendment" or "supplement" with respect to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include the filing of any document under the Securities Exchange Act of 1934, as amended (the "Exchange 3 4 Act") after the Effective Date, the date of any preliminary prospectus or the date of the Prospectus, as the case may be, and deemed to be incorporated therein by reference. (b) No order preventing or suspending the use of any preliminary prospectus has been issued by the Commission. On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did and will comply with all applicable provisions of the Act, the Exchange Act, the rules and regulations under the Exchange Act (the "Exchange Act Rules and Regulations"), and the Rules and Regulations and will contain all statements required to be stated therein in accordance with the Act, the Exchange Act, the Exchange Act Rules and Regulations, and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement, the Prospectus or any such amendment or supplement did or will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. The Company acknowledges that the statements set forth under the heading "Underwriting" in the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement. (c) The documents that are incorporated by reference in the preliminary prospectus and the Prospectus or from which information is so incorporated by reference, when they became or become effective or were or are filed with the Commission, as the case may be, complied or will comply in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the Rules and Regulations or the Exchange Act Rules and Regulations, as applicable, and any documents so filed and incorporated by reference subsequent to the Effective Date shall, when they are filed with the Commission, comply in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the Rules and Regulations or the Exchange Act Rules and Regulations, as applicable. 4 5 (d) The Company does not own, and at the Closing Date and, if later, the Option Closing Date, will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any corporation, firm, partnership, joint venture, association or other equity, other than the subsidiaries listed in Exhibit 22 to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1995 (the "Subsidiaries"). The Company and each of its Subsidiaries is, and at the Closing Date and, if later, the Option Closing Date, will be, a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. The Company and each of its Subsidiaries has, and at the Closing Date and, if later, the Option Closing Date, will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. The Company and each of its Subsidiaries is, and at the Closing Date and, if later, the Option Closing Date, will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such license or qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not materially and adversely affect the Company or its business, properties, business prospects, condition (financial or other) or results of operations. All of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable, and owned by the Company free and clear of all claims, liens, charges and encumbrances; there are no securities outstanding that are convertible into or exercisable or exchangeable for capital stock of any Subsidiary. The Company is not, and at the Closing Date and, if later, the Option Closing Date, will not be, engaged in any discussions or a party to any agreement or understanding, written or oral, regarding the acquisition of an interest in any corporation, firm, partnership, joint venture, association or other entity where such discussions, agreements or understandings would require amendment to the Registration Statement pursuant to applicable securities laws. Complete and correct copies of the certificate of incorporation and of the by-laws of the Company and each of its Subsidiaries and all amendments thereto have been delivered to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. (e) All of the outstanding shares of capital stock of the Company have been duly authorized, validly issued and are fully paid and nonassessable and were issued in compliance with all applicable state and federal securities laws; the Firm Shares and the Option Shares issued by the Company (if any) have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and nonassessable; no preemptive or similar rights exist with respect to any of the Shares or the issue and sale thereof. The description of the capital stock of the Company in the Registration Statement and the Prospectus is, and at the Closing Date and, if later, the Option Closing Date, will be complete and accurate in all respects. Except as set forth in the Prospectus, the Company does not have outstanding, and at the Closing Date and, if later, the Option Closing Date, will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any 5 6 securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of capital stock, or any such warrants, convertible securities or obligations. No further approval or authority of stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Firm Shares and the Option Shares as contemplated herein. (f) The financial statements and schedules included or incorporated by reference in the Registration Statement or the Prospectus present fairly the financial condition of the Company and its consolidated Subsidiaries as of the respective dates thereof and the results of operations and cash flows of the Company and its consolidated Subsidiaries for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. No other financial statements or schedules of the Company are required by the Act, the Exchange Act, the Exchange Act Rules and Regulations or the Rules and Regulations to be included in the Registration Statement or the Prospectus. KPMG Peat Marwick LLP (the "Accountants"), who have reported on such financial statements and schedules, are independent accountants with respect to the Company as required by the Act and the Rules and Regulations. The summary consolidated financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. (g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date and, if later, the Option Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) there has not been and will not have been any change in the capitalization of the Company (other than in connection with the exercise of options to purchase the Company's Common Stock granted pursuant to the Company's stock option plans from the shares reserved therefor as described in the Registration Statement), or any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company, arising for any reason whatsoever, (ii) neither the Company nor any of its Subsidiaries has incurred nor will any of them incur, except in the ordinary course of business as described in the Prospectus, any material liabilities or obligations, direct or contingent, nor has the Company or any of its Subsidiaries entered into nor will it enter into, except in the ordinary course of business as described in the Prospectus, any material transactions other than pursuant to this Agreement and the transactions referred to herein and (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. (h) The Company is not, will not become as a result of the transactions contemplated hereby, and does not intend to conduct its business in manner that would cause it to become, an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, and "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 6 7 (i) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, any of its Subsidiaries or any of or their officers in their capacity as such, nor any basis therefor, before or by any federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might materially and adversely affect the Company or the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (j) The Company and each Subsidiary has, and at the Closing Date and, if later, the Option Closing Date, will have, performed all the obligations required to be performed by it, and is not, and at the Closing Date, and, if later, the Option Closing Date, will not be, in default, under any contract or other instrument to which it is a party or by which its property is bound or affected, which default might materially and adversely affect the Company or the consolidated business, properties, business prospects, condition (financial or other) or results of operations of the Company. To the best knowledge of the Company, no other party under any contract or other instrument to which it or any of its Subsidiaries is a party is in default in any respect thereunder, which default might materially and adversely affect the Company or the consolidated business, properties, business prospects, condition (financial or other) or results of operations of the Company. Neither the Company nor any of its Subsidiaries is, and at the Closing Date and, if later, the Option Closing Date, will be, in violation of any provision of its certificate or articles of organization or by-laws or other organizational documents. (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by the Company of the transactions on its part contemplated herein, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with the terms hereof. The performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the certificate or of incorporation or by-laws of the Company or any of its Subsidiaries, any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the 7 8 Company or any of its Subsidiaries is a party or by which the Company, any of its Subsidiaries or any of their properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any of its Subsidiaries. (m) The Company or one of its Subsidiaries has good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company and its Subsidiaries. The Company or its Subsidiaries has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by them. The Company or one of its Subsidiaries owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted, except where the failure to so own or lease would not materially and adversely affect the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (n) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All such contracts to which the Company or any of its Subsidiaries is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary and are enforceable against and by the Company or such Subsidiary in accordance with the terms thereof. (o) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by Section 5 of this Agreement to be delivered to the Representatives was or will be, when made, inaccurate, untrue or incorrect. (p) Neither the Company nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action designed, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (q) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (r) The Company has filed an application to list the Shares on the Nasdaq National Market ("NNM"), and has received notification that the listing has been approved, subject to notice of issuance of such Shares. (s) Except as disclosed in or specifically contemplated by the Prospectus (i) the Company and its Subsidiaries have sufficient trademarks, trade names, patent rights, mask 8 9 works, copyrights, licenses, approvals and governmental authorizations to conduct their businesses as now conducted, (ii) the Company has no knowledge of any infringement by it or any of its Subsidiaries of trademarks, trade name rights, patent rights, mask work rights, copyrights, licenses, trade secrets or other similar rights of others, where such infringement could have a material and adverse effect on the Company or the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company, and (iii) there is no claim being made against the Company or any of its Subsidiaries, or to the best of the Company's knowledge, against any employee of the Company or any of its Subsidiaries or threatened against the Company, its Subsidiaries or their employees, regarding trademark, trade name, patent, mask work, copyright, license, trade secret or other infringement which could have a material and adverse effect on the Company or the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (t) The Company and each of its Subsidiaries has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes and assessments received by it to the extent that such taxes or assessments have become due. Neither the Company nor any of its Subsidiaries has any tax deficiency which has been or, to the best knowledge of the Company, might be asserted, or threatened against it which could have a material and adverse effect on the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (u) The Company and its Subsidiaries own or possess all authorizations, approvals, orders, licenses, registrations, other certificates and permits of and from all governmental regulatory officials and bodies, necessary to conduct their businesses as contemplated in the Prospectus, except where the failure to own or possess all such authorizations, approvals, orders, licenses, registrations, other certificates and permits would not materially and adversely affect the Company or the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. There is no proceeding pending or threatened (or any basis therefor known to the Company) which may cause any such authorization, approval, order, license, registration, certificate or permit to be revoked, withdrawn, canceled, suspended or not renewed; and the Company and each of its Subsidiaries is conducting its business in compliance with all laws, rules and regulations applicable thereto (including, without limitation, all applicable federal, state and local environmental laws and regulations) except where such noncompliance would not materially and adversely affect the Company or the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (v) The Company maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its Subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. 9 10 (w) Neither the Company nor any of its Subsidiaries has nor, to the best of the Company's knowledge, any of their respective employees or agents at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (x) Except as disclosed in the Prospectus, (i) the Company is in compliance in all material respects with all rules, laws and regulation relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) the Company has not received any notice from any governmental authority or third party of an asserted claim under Environmental Laws, (iii) no facts currently exist that will require the Company to make future material capital expenditures to comply with Environmental Laws, and (iv) to the knowledge of the Company, no property which is or has been owned, leased or occupied by the Company or any of its Subsidiaries has been designated as a Superfund site pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (y) The Company has not distributed, and will not distribute prior to the later to occur of (i) completion of the distribution of the Shares, or (ii) the expiration of any time period within which a dealer is required under the Act to deliver a prospectus relating to the Shares, any offering material in connection with the offering and sale of the Shares other than the Prospectus, the Registration Statement and any other materials permitted by the Act and consented to by the Underwriters. (z) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba. 4. Agreements of the Company. The Company covenants and agrees with the several Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify the Representatives promptly, and will confirm such advice in writing, (i) when the Registration Statement has become effective and when any 10 11 post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening of any event during the period mentioned in the second sentence of Section 4(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in the light of the circumstances in which they are made, not misleading and (v) of receipt by the Company or any representative or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A of the Rules and Regulations, the Company will comply with the provisions of and make all requisite filings with the Commission pursuant to said Rule 430A and notify the Representatives promptly of all such filings. (c) The Company will furnish to each Representative, without charge, one signed copy of each of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, a copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. (e) On the Effective Date, and thereafter from time to time, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of the Underwriters, without charge, such number of copies of such supplement or amendment to the Prospectus as the Representatives may request. The Company will not file any document under the Exchange Act or the Exchange Act Rules and 11 12 Regulations before the termination of the offering of the Shares by the Underwriters, if such document would be deemed to be incorporated by reference into the Prospectus, that is not approved by the Representatives after reasonable notice thereof. (f) Prior to any public offering of the Shares, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request, provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) The Company will, so long as required under the Rules and Regulations, furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flow of the Company and its consolidated Subsidiaries, if any, certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year beginning with the fiscal quarter ending after the effective date of the Registration Statement), consolidated summary financial information of the Company and its Subsidiaries, if any, for such quarter in reasonable detail. (h) During the period of five years commencing on the Effective Date, the Company will furnish to the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. (i) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (j) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay or reimburse if paid by the Representatives all costs and expenses incident to the performance of the obligations of the Company under this Agreement and in connection with the transactions contemplated hereby, including but not limited to costs and expenses of or relating to (i) the preparation, printing and filing of the Registration Statement and exhibits to it, each preliminary prospectus, Prospectus and any amendment or supplement to the Registration Statement or Prospectus, (ii) the preparation and delivery of certificates representing the Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters, any Selected Dealer 12 13 Agreements, any Underwriters Questionnaires, any Underwriters' Powers of Attorney, and any invitation letters to prospective Underwriters, (iv) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the listing of the Shares on the NNM, (vi) any filings required to be made by the Underwriters with the NASD, and the fees, disbursements and other charges of counsel for the Underwriters in connection therewith, (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(f), including the fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (viii) fees, disbursements and other charges of counsel to the Company (but not those of counsel for the Underwriters, except as otherwise provided herein) and (ix) the transfer agent for the Shares. (k) If this Agreement shall be terminated by the Company pursuant to any of the provisions hereof (otherwise than pursuant to Section 9 hereof) or if for any reason the Company shall be unable to perform its obligations hereunder, the Company will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) reasonably incurred by them in connection herewith. (l) The Company will not at any time directly or indirectly, take any action designed or which might reasonably be expected to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (m) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds." (n) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus,without the prior written consent of Needham & Company, Inc., the Company will not offer, sell, contract to sell, grant options to purchase or otherwise dispose of any of the Company's equity securities of the Company or any other securities convertible into or exchangeable with its Common Stock or other equity security (other than pursuant to employee stock option plans or the conversion of convertible securities or the exercise of warrants outstanding on the date of this Agreement.) (o) During the period of 180 days after the date of the Prospectus, the Company will not, without prior written consent of Needham & Company Inc., grant options to purchase shares of Common Stock at a price less than the initial public offering price. During the period of 180 days after the date of the Prospectus, the Company will not file with the 13 14 Commission or cause to become effective any registration statement relating to any securities of the Company without the prior written consent of Needham & Company, Inc. (p) The Company will cause each of its officers, directors and certain stockholders designated by the Representatives to enter into lock-up agreements with the Representatives to the effect that they will not, without the prior written consent of Needham & Company, Inc., sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares according to the terms set forth in Schedule II hereto. 5. Conditions of the Obligations of the Underwriters. The obligations of each Underwriter hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Representatives not later than 5:00 p.m. New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representatives and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representatives and the Representatives do not object thereto in good faith, and the Representatives shall have received certificates, dated the Closing Date and, if later, the Option Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii) of this paragraph. (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company or any of its Subsidiaries, whether or not arising from transactions in the ordinary course of business, in each case other than as described in or contemplated by the Registration Statement and the Prospectus, and (ii) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not described in the Registration Statement and the Prospectus, if in the 14 15 judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company, any of its Subsidiaries, or any of or their officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would, in the judgment of the Representatives, materially and adversely affect the consolidated business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (e) Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements contained herein to be performed on the part of the Company and all conditions contained herein to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. (f) The Representatives shall have received an opinion, dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, satisfactory in form and substance to the Representatives and counsel for the Underwriters from Fredrikson & Byron, P.A., counsel to the Company, with respect to the following matters: (i) Each of The Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; has full corporate power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus; and is duly licensed or qualified to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such license or qualification necessary and where the failure to be licensed or qualified would have a material and adverse effect on the business or financial condition of the Company. (ii) All of the outstanding shares of capital stock of the Company have been duly authorized, validly issued and are fully paid and nonassessable, to such counsel's knowledge, were issued pursuant to exemptions from the registration and qualification requirements of federal and applicable state securities laws, and were not issued in violation of or subject to any preemptive or, to such counsel's knowledge, similar rights; 15 16 (iii) The specimen certificate evidencing the Common Stock filed as an exhibit to the Registration Statement is in due and proper form under Delaware law, the Shares have been duly authorized and, when issued and paid for as contemplated by this Agreement, will be validly issued, fully paid and nonassessable; and no preemptive or similar rights exist with respect to any of the Shares or the issue and sale thereof. (iv) All of the outstanding shares of capital stock of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable, and owned by the Company free and clear of all claims, liens, charges and encumbrances; to such counsel's knowledge, there are no securities outstanding that are convertible into or exercisable or exchangeable for capital stock of any Subsidiary. (v) The authorized and outstanding capital stock of the Company is as set forth in the Registration Statement and the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement or pursuant to reservations, agreements, employee benefit plans or the exercise of convertible securities, options or warrants referred to in the Prospectus). To such counsel's knowledge, except as disclosed in or specifically contemplated by the Prospectus, there are no outstanding options, warrants of other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company. The description of the capital stock of the Company in the Registration Statement and the Prospectus conforms in all material respects to the terms thereof. (vi) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its Subsidiaries is a party or to which any of their respective properties is subject that are required to be described in the Registration Statement or the Prospectus but are not so described. (vii) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by the Company of the transactions on its part contemplated under this Agreement, except such as have been obtained or made under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares. (viii) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company. 16 17 (ix) The execution and delivery of this Agreement, the compliance by the Company with all of the terms hereof and the consummation of the transactions contemplated hereby does not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any of its Subsidiaries, and to the best of such counsel's knowledge will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company pursuant to the terms and provisions of, result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument known to such counsel to which the Company or any of its Subsidiaries is a party or by which the Company, any of its Subsidiaries, or any of their respective properties is bound or affected, or violate or conflict with (i) any judgment, ruling, decree or order known to such counsel or (ii) any statute, rule or regulation of any court or other governmental agency or body, applicable to the business or properties of the Company or any of its Subsidiaries. (x) To such counsel's knowledge, there is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed or incorporated by reference as required, and each description of such contracts and documents that is contained in the Registration Statement and Prospectus fairly presents in all material respects the information required under the Act and the Rules and Regulations. (xi) The statements under the captions "Risk Factors --Anti-Takeover Provisions" and "Description of Capital Stock" in the Prospectus, insofar as the statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present, in all material respects, the information called for with respect to such documents and matters (provided, however, that such counsel may rely on representations of the Company with respect to the factual matters contained in such statements, and provided further that such counsel shall state that nothing has come to the attention of such counsel which leads them to believe that such representations are not true and correct in all material respects). (xii) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (xiii) The Shares have been duly authorized for listing on the NNM, subject to notice of issuance. 17 18 (xiv) To such counsel's knowledge, no holder of securities of the Company has rights, which have not been waived, to require the register with the Commission shares of Common Stock or other securities, as part of the offering contemplated hereby. (xv) The Registration Statement has become effective under the Act, and to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending, threatened or contemplated. (xvi) The Registration Statement and the Prospectus comply as to form in all material respects with the requirement of the Act and the Rules and Regulations (other than the financial statements, schedules and other financial data contained or incorporated by reference in the Registration Statement or the Prospectus, as to which such counsel need express no opinion). (xvii) Such counsel has participated in the preparation of the Registration Statement and Prospectus and has no reason to believe that, as of the Effective Date the Registration Statement, or any amendment or supplement thereto, (other than the financial statements, schedules and other financial data contained or incorporated by referenced therein, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, or any amendment or supplement thereto, as of its date and the Closing Date and, if later, the Option Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (other than the financial statements, schedules and other financial data contained or incorporated by reference therein, as to which such counsel need express no opinion). (xviii) The documents incorporated by reference in the Prospectus (other than the financial statements, schedules and other financial data contained therein, as to which such counsel need express no opinion), when they were filed with the Commission, complied as to form in all material respects with the requirements of the Exchange Act and the Exchange Act Rules and Regulations. In rendering such opinion, such counsel may rely upon as to matters of local law on opinions of counsel satisfactory in form and substance to the Representatives and counsel for the Underwriters, provided that the opinion of counsel to the Company and the Selling Stockholders shall state that they are doing so, that they have no reason to believe that they and the Underwriters are not entitled to rely on such opinions and that copies of such opinions are to be attached to the opinion. 18 19 (g) The representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Faegre & Benson LLP, counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to the Representatives. (h) Concurrently with the execution and delivery of this Agreement, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that they are independent accountants with respect to the Company and its Subsidiaries as required by the Act and the Exchange Act and the Rules and Regulations and with respect to certain financial and other statistical and numerical information contained or incorporated by reference in the Registration Statement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter from the Accountants, that nothing has come to their attention during the period from the date of the letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date and the Option Closing Date, as the case may be, which would require any change in their letter dated the date hereof if it were required to be dated and delivered at the Closing Date and the Option Closing Date. (i) Concurrently with the execution and delivery of this Agreement and at the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives a certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of certificate has carefully examined the Registration Statement and the Prospectus (including any documents filed under the Exchange Act and deemed to be incorporated by reference into the Prospectus) and (A) as of the date of such certificate, such documents are true and correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not untrue or misleading and (B) in the case of the certificate delivered at the Closing Date and the Option Closing Date, since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading. (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, as of the time such certificate is delivered, true and correct. (iii) Each of the covenants required to be performed by the Company herein on or prior to the date of such certificate has been duly, timely and fully performed and 19 20 each condition herein required to be satisfied or fulfilled on or prior to the date of such certificate has been duly, timely and fully satisfied or fulfilled. (j) On or prior to the Closing Date, the Representatives shall have received the executed agreements referred to in Section 4(p). (k) The Shares shall be qualified for sale in such jurisdictions as the Representatives may reasonably request and each such qualification shall be in effect and nor subject to any stop order or other proceeding on the Closing Date or the Option Closing Date. (l) Prior to the Closing Date, the Shares shall have been duly authorized for listing on the NNM upon official notice of issuance. (m) The Company shall have furnished to the Representatives such certificates, in addition to those specifically mentioned herein, as the Representatives may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company herein, as to the performance by the Company of its and their respective obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Representatives. 6. Indemnification. (a) The Company will indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading in the light of the circumstances in which they were made, or arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company contained herein or any failure of the Company to perform its obligations hereunder or under law in connection with the transactions contemplated hereby; provided, however, that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue 20 21 statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives, on behalf of any Underwriter, expressly for inclusion in the Registration Statement, the preliminary prospectus or the Prospectus. The Company acknowledges that the statements set forth under the heading "Underwriting" in the preliminary prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of the Underwriters expressly for inclusion in the Registration Statement, the preliminary prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Company might otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each director of the Company, each officer of the Company who signs the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Underwriter, as set forth in Section 6(a), but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives, on behalf of such Underwriter, expressly for use in the Registration Statement, the preliminary prospectus or the Prospectus. The Company acknowledges that the statements set forth under the heading "Underwriting" in the preliminary prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of the Underwriters expressly for inclusion in the Registration Statement, the preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that each Underwriter might otherwise have. (c) Any party that proposes to assert the right to be indemnified under this Section 6 shall, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party in writing of the commencement of such action, enclosing with such notice a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the loss of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently 21 22 incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. Any indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) If the indemnification provided for in this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable to or insufficient to hold harmless an indemnified party under paragraphs (a), (b) and (c) of this Section 6 in respect of any losses, claims, liabilities, expenses and damages referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) by such indemnified party as a result of such losses, claims, liabilities, expenses and damages in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand, and the Underwriters, on the other hand. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of 22 23 the Company, on the one hand, and the Underwriters, on the other hand, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Representatives on behalf of the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purposes of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts received by it and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 6(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 6(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against any such party in respect of which a claim for contribution may be made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (e) The indemnity and contribution agreements contained in this Section 6 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. 7. Reimbursement of Certain Expenses. In addition to its other obligations under Section 6(a) of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with 23 24 investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon, in whole or in part, any statement or omission or alleged statement or omission, or any inaccuracy in the representations and warranties of the Company contained herein or failure of the Company to perform its or obligations hereunder or under law, all as described in Section 6(a), notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 7 and the possibility that such payment might later be held to be improper; provided, however, that to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them. 8. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time on or prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date) by notice to the Company from the Representatives, without liability on the part of any Underwriter to the Company if, prior to delivery and payment for the Firm Shares or Option Shares, as the case may be, in the sole judgment of the Representatives, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission, by an exchange that lists the Shares or by the NNM, (ii) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by either Federal or New York State authorities or (iv) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or other calamity or crisis shall have occurred, the effect of which is such as to make it, in the sole judgment of the Representatives, impracticable to market the Shares. 9. Substitution of Underwriters. If any one or more of the Underwriters shall fail or refuse to purchase any of the Firm Shares which it or they have agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as the Representatives may specify; provided that in no event shall the maximum number of Firm Shares which any Underwriter has become obligated to purchase pursuant to Section 1 be increased pursuant to this Section 9 by more than one-ninth of such number of Firm Shares without the prior written consent of such Underwriter. If any Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and the 24 25 aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the Representatives and the Company for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company for the purchase or sale of any Shares under this Agreement. In any such case either the Representatives or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Miscellaneous. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 2800 Campus Drive, Plymouth Minnesota 55441, Attention: [Chief Executive Officer], with a copy to Timothy M. Heaney, Esq., Fredrikson & Byron, P.A., 1100 International Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402, or (b) if to the Underwriters, to the Representatives at the offices of Needham & Company, Inc., 445 Park Avenue, New York, New York 10022, Attention: Corporate Finance Department, with copies to Charles Westling, Dain Bosworth Incorporated, 60 South Sixth Street, Minneapolis, Minnesota 55402-4422 and Douglas P. Long, Esq., Faegre & Benson LLP, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402-3901. Any such notice shall be effective only upon receipt. Any notice under such Section 8 or 9 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company and the controlling persons, directors and officers referred to in Section 6, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from any of the several Underwriters. Any action required or permitted to be made by the Representatives under this Agreement may be taken by them jointly or by Needham & Company, Inc. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. 25 26 In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Company and the Underwriters each hereby waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, CIPRICO INC. By: ---------------------------- Title: Confirmed as of the date first above mentioned: NEEDHAM & COMPANY, INC. DAIN BOSWORTH INCORPORATED Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule I hereto. By: NEEDHAM & COMPANY, INC. By: ----------------------------- Title: 26 27 SCHEDULE I UNDERWRITERS Number of Firm Shares to Underwriters be Purchased - ------------ ------------ Needham & Company, Inc. ........................... Dain Bosworth Incorporated ......................... ------------------------ Total .......................................... 1,500,000 ======================== 27 28 SCHEDULE II FORM OF LOCK-UP AGREEMENT The undersigned is a holder of securities of Ciprico, Inc., a Delaware corporation (the "Company"), and wishes to facilitate the public offering of shares of the Common Stock (the "Common Stock") of the Company (the "Offering"). The undersigned recognizes that such Offering will be of benefit to the undersigned. In consideration of the foregoing and in order to induce you to act as underwriters in connection with the Offering, the undersigned hereby agrees that he, she or it will not, without the prior written approval of Needham & Company, Inc., acting on its own behalf and/or on behalf of other representatives of the underwriters, directly or indirectly, sell, contract to sell, make any short sale, pledge, or otherwise dispose of, or enter into any hedging transaction that is likely to result in a transfer of, any shares of Common Stock, options to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock of the Company which he, she or it may own, for a period commencing as of the date hereof and ending on the date which is one hundred eighty (180) days after the date of the final Prospectus relating to the Offering. The undersigned confirms that he, she or it understands that the underwriters and the Company will rely upon the representations set forth in this Agreement in proceeding with the Offering. The undersigned further confirms that the agreements of the undersigned are irrevocable and shall be binding upon the undersigned's heirs, legal representatives, successors and assigns. The undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of securities held by the undersigned except in compliance with this Agreement. This Agreement shall be binding on the undersigned and his, her or its respective successors, heirs, personal representatives and assigns. ----------------------------------- 28 EX-5.1 3 FRED & BYRON 1 EXHIBIT 5.1 April 26, 1996 Ciprico Inc. 2800 Campus Drive Plymouth, Minnesota 55441 Re: Registration Statement on Form S-2 Ladies/Gentlemen: We are acting as corporate counsel to Ciprico Inc. (the "Company") in connection with the preparation and filing of a Registration Statement on Form S-2 (the "Registration Statement") relating to the registration under the Securities Act of 1933, as amended (the "Act") of 1,725,000 shares of the Company's Common Stock (the "Shares"), which number includes 225,000 shares which may be sold pursuant to the Underwriters' option to cover overallotments. In acting as such counsel and for the purpose of rendering this opinion, we have reviewed copies of the following, as presented to us by the Company: 1. The Company's Certificate of Incorporation, as amended. 2. The Company's Bylaws, as amended. 3. Certain corporate resolutions of the Company's Board of Directors pertaining to the issuance of the Shares by the Company. 4. The Registration Statement. 5. The proposed form of Underwriting Agreement filed with the Securities and Exchange Commission as Exhibit 1.1 to the Registration Statement (the "Underwriting Agreement"). Based on, and subject to, the foregoing and upon representations and information provided by the Company and its officers or directors, it is our opinion as of this date that: 1. The Shares are validly authorized by the Company's Certificate of Incorporation. 2. Upon issuance, delivery and payment therefor in accordance with the Underwriting Agreement, the Shares will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" included in the Registration Statement and the related Prospectus. Very truly yours, FREDRIKSON & BYRON, P.A. By /s/ Timothy M. Heaney ------------------------------ Timothy M. Heaney, Vice President Fredrikson & Byron, P.A. 900 Second Avenue South, Suite 1100 Minneapolis, Minnesota 55402 Telephone: (612) 347-7019 Fax: (612) 347-7077 531920 EX-23.2 4 AUDITORS CONSENT 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Ciprico Inc.: We consent to the use of our report included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. KPMG Peat Marwick LLP Minneapolis, Minnesota April 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----