<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-21200
MERIDIAN DATA, INC.
(Exact name of registrant as specified in its charter)
California 77-0188708
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5615 Scotts Valley Drive, California 95066
------------------------------------ -------
(Address of principal executive office) (Zip Code)
(408) 438-3100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding in 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X , No .
The number of shares of Common Stock, no par value, outstanding on
November 6, 1996, was 9,584,052.
Exhibit index on page 18. Page 1 of 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MERIDIAN DATA, INC.
BALANCE SHEETS
September 30, December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $32,558 $11,752
Marketable securities 6,678 5,900
Accounts receivable (net of allowance
for returns and doubtful accounts of $436
and $770, respectively) 3,508 2,772
Inventories 1,354 1,118
Other assets 378 126
------ ------
Total current assets 44,476 21,668
Property and equipment,
less accumulated depreciation 712 569
Other assets 7 16
------ ------
$45,195 $22,253
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,739 $ 2,419
Accrued payroll and related expenses 1,041 1,442
Accrued advertising and promotion 530 430
Other accrued liabilities 1,232 1,589
------ ------
Total current liabilities 4,542 5,880
------ ------
Shareholders' equity:
Common stock 69,521 48,994
Unrealized gains on marketable securities 1 6
Accumulated deficit (28,869) (32,627)
------ ------
Total shareholders' equity 40,653 16,373
------ ------
$45,195 $22,253
====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
INCOME STATEMENTS
Three months ended Nine months ended
(In thousands, except September 30, September 30,
per share data, unaudited) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Product sales $ 6,652 $ 6,630 $20,116 $15,600
Other revenue -- -- -- 1,869
------ ------ ------ ------
Total revenues 6,652 6,630 20,116 17,469
------ ------ ------ ------
Costs and expenses:
Cost of product sales 2,431 3,285 7,929 8,397
Amortization of purchased
technology -- -- -- 455
Research and development 821 610 2,342 1,834
Marketing and sales 1,801 1,525 5,400 4,410
General and administrative 534 549 1,581 1,622
------ ------ ------ ------
Total costs and expenses 5,587 5,969 17,252 16,718
------ ------ ------ -------
Income from operations 1,065 661 2,864 751
Interest income 520 203 1,091 572
------ ------ ------ ------
Income before income taxes 1,585 864 3,955 1,323
Provision for income taxes (82) (28) (197) (43)
------ ------ ------ ------
Net income $ 1,503 $ 836 $ 3,758 $ 1,280
====== ====== ====== ======
Net income per share $ 0.15 $ 0.10 $ 0.39 $ 0.16
====== ====== ====== ======
Weighted average common shares
and common stock equivalents 10,041 8,471 9,549 8,173
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF CASH FLOWS
Nine months ended September 30,
(In thousands, unaudited) 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,758 $ 1,280
Adjustments to reconcile net income to net
cash provided by operating activities:
Compensation expense related to stock
options issued below market value 31 22
Depreciation and amortization 286 608
Changes in assets and liabilities:
Accounts receivable (736) (1,004)
Inventories (236) (86)
Other assets (243) (56)
Accounts payable (680) 522
Accrued payroll and related expenses (401) 441
Deferred product and service revenue - (368)
Other current liabilities (257) (964)
------ ------
Net cash provided by operating activities 1,522 395
------ ------
Cash flows from investing activities:
Redemption of marketable securities 2,841 4,160
Additions to marketable securities (3,624) (1,859)
Restricted cash released from escrow account -- 1,757
Purchase of property and equipment (429) (306)
------ ------
Net cash (used in) provided by
investing activities (1,212) 3,752
------ ------
Cash flows from financing activities:
Issuance of common stock, net 36,971 --
Repurchase of common stock (17,271) --
Issuance of common stock related to stock plans 796 396
------ ------
Net cash provided by financing activities 20,496 396
------ ------
Net increase in cash and cash equivalents 20,806 4,543
Cash and cash equivalents at:
beginning of period 11,752 8,692
------ ------
end of period $32,558 $13,235
====== ======
Statement of cash flows supplemental disclosure:
Total cash paid for interest during the period $ 14 $ 12
Total cash paid for taxes during the period 94 10
Restricted cash used to repay notes payable -- 19,444
Noncash investing and financing activities:
Conversion of notes payable to common stock -- 1,757
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
NOTES TO FINANCIAL STATEMENTS
For The Three and Nine Months Ended
September 30, 1996, and September 30, 1995
Note 1. General
The accompanying financial information is unaudited, but, in the opinion of
management, reflects all adjustments (which include only normally recurring
adjustments) necessary to present fairly the Company's financial position as of
the dates indicated and the results of operations for the periods then ended.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. While the Company believes that the
disclosures are adequate to make the information presented not misleading, the
financial information should be read in conjunction with the audited financial
statements, and notes thereto for the year ended December 31, 1995 included in
the Company's Annual Report on Form 10-K and the Company's Registration
Statement on Form S-3 dated April 25, 1996. Results for the interim period are
not necessarily indicative of the results for the entire year.
Certain reclassifications have been made in the 1995 financial statements to
conform to the 1996 presentation.
Note 2. Income taxes
The Company's effective tax rates for the first nine months of 1996 and 1995
were approximately 5% and 3%, respectively. These rates are lower than the
expected statutory rates due to the utilization of net operating loss
carryforwards. The Company's tax liability results from federal and state
alternative minimum taxes.
Note 3. Inventories consist of the following (in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
Raw materials $1,111 $ 905
Work-in-process 243 213
----- -----
$1,354 $1,118
===== =====
Note 4. Shareholders' equity
On April 30, 1996, the Company completed an offering of 2,645,000 shares of its
Common Stock at an offering price of $15.00 per share (the "Offering"). The net
proceeds from the Offering were $37.0 million. In conjunction with the Offering,
the Company acquired an option to repurchase 1.2 million shares of Common stock
from certain shareholders (the "Option"). The Company exercised the Option on
May 1, 1996, for an aggregate of $16.7 million. The balance of the net proceeds
from the Offering were $20.3 million and were invested in marketable securities.
On July 31, 1996, the Company announced that its Board of Directors had
authorized the repurchase of up to approximately 500,000 shares or 5% of the
Company's outstanding Common Stock. Through September 30, 1996, Meridian had
repurchased 62,500 shares of its Common Stock at an average price of $8.875.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
Prior to 1995, the Company (then known as Parallan Computer, Inc.)
developed and supported high performance network superservers. During 1994, the
Company exited this business and product line, which had generated substantial
losses. The Company fundamentally changed its business in December 1994 with the
purchase of Meridian Data, Inc. Meridian now provides CD-ROM networking software
and systems that enable multiple users on a network to simultaneously access
CD-ROM titles from their desktops. The Company's software supports a broad array
of personal computer and network operating systems and provides access to
networked CD-ROMs in heterogeneous environments. To meet customer demands for
integrated solutions, Meridian provides systems containing the Company's
networking software and CD-ROM servers configured by Meridian from third party
components.
Because the Company generally ships its software and systems within a
short period after receipt of an order, the Company typically does not have a
material backlog of unfilled orders, and total revenues in any quarter are
substantially dependent on orders booked in that quarter. The Company's
quarterly operating results may also vary significantly depending on other
factors, including the introduction of new products by the Company's
competitors; market acceptance of new products; seasonality; mix of software and
systems sales; the long and complex sales cycle for site licenses; the timing of
site license revenue; adoption of new technologies and standards; price and
other forms of competition; the cost, quality and availability of third party
components used in the Company's systems; changes in the Company's distribution
arrangements; and the inability of the Company to accurately monitor end-user
demand for its products due to the sale of products through distributors and
value-added resellers ("VARs"). In 1995, identifiable sales to federal
governmental agencies accounted for approximately 17% of the Company's product
sales, and the Company anticipates that such sales will continue to account for
a significant percentage of the Company's revenues for the foreseeable future.
In the event that there is any reduction or deferral in spending by such
governmental agencies, the Company's quarterly results may be adversely
affected. Moreover, the Company's business has experienced and is expected to
continue to experience seasonality in the form of higher sales for its products
during the quarters ending in September and December and weaker sales during the
quarters ending in March and June. The Company's operating results will also be
affected by the economic condition of the personal computer industry, which has
from time to time experienced cyclical, depressed business conditions, often in
connection with or in anticipation of a decline in general economic conditions.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including, without limitation, risks disclosed under the caption
"Risk factors" beginning on page 10 of this report; and other risks detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.
<PAGE>
Results of operations
Revenues
Product sales
Product sales in the third quarter of 1996 were flat over the
corresponding period of 1995. Meridian's sales and marketing emphasis in the
first half of 1996 was on increasing its software business. The heightened
Company and customer focus on software has resulted in a shift in Meridian's
revenue mix towards higher software content and lower sales of hardware. As this
trend accelerated, Meridian's revenue growth slowed, while gross margin
increased. Beginning in late August, the Company refocused its sales and
marketing efforts on its CD ROM networking systems. If successful, this effort
may result in higher revenues, with potentially lower gross margins. However,
there can be no assurance that such higher revenues will occur.
For the first nine months of 1996, Meridian's revenues increased 29%,
or $4.5 million, over the first nine months of 1995, primarily on the basis of
the impact of the full line of new products available for sale for all of 1996
versus the 1995 sales mix of old and new software technology. Included in the
Company's nine month revenues was approximately $330,000 from the sale of two
software site licenses. Meridian is pursuing additional site licenses, but there
can be no assurance that such licenses will be successfully sold. In addition,
due to the long and complex sales cycle for site licenses, the future timing of
such revenue or its actual realization can not be predicted. The failure to sell
additional site licenses in future quarters could adversely affect the Company's
product sales and margin. Due to the Company's focus on software over the past
year, the rate of growth in the Company's hardware sales decreased, while that
of software increased, from the first quarter of 1996 to the third quarter of
1996. If this trend were to continue, and software site license sales not to
occur, the Company's revenues and earnings could fall below analysts
expectations.
Meridian believes that due to hardware increasingly becoming a
commodity item, it is difficult to create a significant competitive advantage
solely through hardware development. As a result, the Company focuses on the
development of its proprietary software and works to ensure that its software is
independent of the Meridian hardware platform.
Other revenue
There was no other revenue recognized during 1996. Other revenue in the
second quarter and first nine months of 1995 was derived from the one-time sale
of certain software related to the Company's former network superserver product
line and project revenue deferred from 1993.
Cost and expenses
Cost of sales
The Company's gross margin increased from 50% in the third quarter of
1995 to 63% for the third quarter of 1996. This increase was generally due to
increased sales of Meridian's stand alone software products, and decreases in
the cost of CD-ROM drives. Beginning in late August, the Company refocused its
sales and marketing efforts on its CD ROM networking systems. If successful,
this effort may result in higher revenues, with potentially lower gross margins.
However, there can be no assurance that such higher revenues will occur..
The Company's gross margin, including other revenue and amortization of
purchased technology, increased from 49% for the first nine months of 1995 to
61% for the same period of 1996. This increase was generally due to increased
sales of Meridian's stand-alone software products, completion of the
amortization of purchased technology in June of 1995, decreases in the cost of
CD-ROM drives, and site licenses sold during the second quarter of 1996. Due to
the long and complex sales cycle for site licenses, the future timing of such
revenue or its actual realization can not be predicted. The failure to close
additional site licenses in future quarters could adversely affect the Company's
gross margin.
Over the past two years, CD ROM drive speed has increased
significantly. Additionally, the pace of new CD ROM drive introductions has
increased. In order to remain competitive, Meridian believes that it must
incorporate the latest CD ROM drives into its systems. As a result of these
factors, the Company may find itself holding an inventory of slower drives,
which may be considered obsolete. Additionally, the Company's contracts with its
distributors allow for product return, or price protection credits, based on
current inventory levels of obsolete products under certain circumstances.
Meridian estimates and accrues an allowance for such occurrences, but there can
be no assurance that actual inventory writedowns, product returns, or price
protection credits will not exceed the Company's accrual. Excessive or
unanticipated returns could materially adversely affect the Company's business,
liquidity, or results of operations.
A major component of Meridian's product cost is the cost of CD drives,
which are primarily of Japanese origin. These, and certain other components, are
only available from a limited number of manufacturers. Given the growth in the
overall market demand for CD drives, the Company has experienced temporary
delays in obtaining the drives required for its products in the past. In order
to minimize manufacturing disruptions, the Company attempts to source drives
both through long-term commitments and spot market purchases. There can be no
assurance that Meridian will be successful in securing such commitments or
obtaining drives on the spot market at reasonable prices, or that drive prices
will continue to decrease. If the Company is successful in obtaining dependable
drive sources, it may have to increase its inventory of CD drives.
Amortization of purchased technology
Amortization of purchased technology was $455,000 for the nine months
ended September 30, 1995. Technology acquired in the purchase of MDI was
amortized over its estimated useful life of seven months. Purchased technology
had been completely amortized by June 30, 1995.
Research and development
Total research and development expense increased to $0.8 million and
$2.3 million for the third quarter and first nine months of 1996, respectively,
from $0.6 million and $1.8 million for the same periods of 1995. This was due
primarily to an increase in expenses related to new product development and
personnel assigned to developing Meridian's recently announced software
products, including CD Net for mixed Novell/NT network environments and CD
IntraNet. Additional efforts continue to be centered on maintaining
compatibility between the Company's software and evolving CD drive and SCSI
adapter technology standards. The Company anticipates that research and
development expense will increase in the future.
Total research and development expense in 1995 consisted primarily of
salaries and related expenses incurred in the development of the Company's CD
Net Plus v6.0 and Windows NT compatible software.
The Company believes that due to CD-ROM server hardware increasingly
becoming a commodity item, it is difficult to create a significant competitive
advantage solely through hardware development. As such, the Company devotes
substantially all of its engineering resources towards software development. The
Company's inability to anticipate and respond to technological and market
changes or the Company's failure to incorporate new technologies in a timely
manner could have a material adverse effect on the Company's business. In
addition, there can be no assurance that Meridian's research and development
efforts will result in the introduction of new products or that any of such
products, if developed, will be commercially successful.
Sales and marketing
Sales and marketing expense increased from $1.5 million and $4.4
million in the third quarter and first nine months, respectively, of 1995, to
$1.8 million and $5.4 million, respectively, for the corresponding periods of
1996. These increases were primarily due to increased advertising, expenses
incurred in opening and running the Company's European sales office, and higher
payroll costs. Meridian did not have a European sales office in 1995. Sales and
marketing expense consists primarily of payroll and related expense (including
commissions), and advertising related expenses. The Company anticipates that
sales and marketing expenses will increase in the future as a result of its
continued expansion into Europe and costs incurred with the introduction of new
products. Due to the lead times required to implement Meridian's new product
strategies and European sales office, these expenses may increase, both in
absolute and percentage terms, faster than any resulting sales.
General and administrative
General and administrative expense decreased from $549,000 in the third
quarter of 1995 to $534,000 for the corresponding period of 1996, primarily due
to slightly lower travel expenses. General and administrative expenses decreased
from $1.62 million for the first nine months of 1995 to $1.58 million for the
corresponding period of 1996. This decrease was primarily due to lower occupancy
costs. General and administrative expenses consist primarily of payroll, payroll
related expenses, and occupancy expenses. The Company expects general and
administrative expenses to increase in the future as a result of anticipated
increases in headcount and facilities costs.
Interest income
Interest income increased from $0.2 million and $0.6 million for the
third quarter and first nine months of 1995, respectively, to $0.5 million and
$1.1 million for the corresponding periods of 1996. This increase was due to a
combination of higher invested balances and interest rates. Future interest
income will vary with interest rates and invested balances.
Income taxes
The Company's effective tax rate for the nine months ending September
30, 1996 and 1995, was approximately 5% and 3%, respectively. These rates are
lower than the expected statutory rate due to the utilization of net operating
loss carryforwards. Meridian does not expect such favorable tax rates in the
future years. The Company's tax liability results from federal and state
alternative minimum taxes, as well as state franchise taxes.
Capital resources and liquidity
Meridian's source of cash from operations for the nine months ended
September 30, 1996 was net income from operations adjusted for noncash
depreciation and amortization. These were partially offset by increased
inventories and accounts receivable, and reduced accounts payable and accrued
payroll. The Company's accounts receivable balance increased due to the timing
of sales during the third quarter of 1996. The lower accrued payroll was due to
payment of commissions and incentives accrued for at December 31, 1995.
On April 30, 1996, the Company completed an offering of 2,645,000
shares of its Common stock at an offering price of $15.00 per share. The net
proceeds from the Offering were $37.0 million. In conjunction with the Offering,
the Company acquired an option to repurchase 1.2 million shares of Common stock
from certain shareholders. The Company exercised the Option on May 1, 1996 for
an aggregate of $16.7 million. The balance of the net proceeds from the Offering
were $20.3 million and were invested in marketable securities.
At September 30, 1996, Meridian's principal source of liquidity
consisted of cash and short-term investments totaling $39.2 million and accounts
receivable of $3.5 million. The Company believes that its current cash and
short-term investments, accounts receivable, and cash flow from operations will
satisfy its working capital and capital expenditure requirements for at least
through the end of 1997.
Meridian believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of opportunities
as they may arise. The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products or
technologies. Such investment or acquisitions may be funded by internally
generated cash, marketable securities, or additional equity. The sale of
additional equity could result in dilution in the equity ownership of the
Company's shareholders.
Risks
The following risk factors should be considered carefully in addition
to the other information presented in this report. This report contains forward
looking statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the forward
looking statements. Factors that might cause such differences include, but are
not limited to, the following risk factors.
Operating Losses; Fluctuations in Quarterly Operating Results. The Company
fundamentally changed its business in December 1994 with the purchase of
Meridian Data, Inc. During 1994, the Company exited its prior business and
product line, which had generated substantial losses. In the first half of 1995,
the Company incurred an operating loss, excluding certain non-recurring revenue.
Although the Company has operated profitably since then, there can be no
assurance that profitable operations will be sustained.
Because the Company generally ships its software and systems within a
short period after receipt of an order, the Company typically does not have a
material backlog of unfilled orders, and total revenues in any quarter are
substantially dependent on orders booked in that quarter. This may result in
quarterly fluctuations in revenue, and the inability to adjust expenses to match
such quarterly revenue, which may lead to substantial fluctuations in net
operating results. The Company's quarterly operating results may also vary
significantly depending on other factors, including the introduction of new
products by the Company's competitors; market acceptance of new products; mix of
software and systems sales; the long and complex sales cycle for site licenses;
the timing of site license revenue; adoption of new technologies and standards;
price and other forms of competition; the cost, quality and availability of
third party components used in the Company's systems; changes in the Company's
distribution arrangements; and the inability of the Company to accurately
monitor end user demand for its products due to the sale of products through
distributors and value-added resellers. In 1995, identifiable sales to federal
governmental agencies accounted for approximately 17% of the Company's product
sales, and the Company anticipates that such sales will continue to account for
a significant percentage of the Company's revenues for the foreseeable future.
In the event that there is any reduction or deferral in spending by such
governmental agencies, the Company's quarterly results may be adversely
affected. Moreover, the Company's business has experienced and is expected to
continue to experience seasonality in the form of higher sales for its products
during the quarters ending in September and December and weaker sales during the
quarters ending in March and June. The Company's operating results will also be
affected by the economic condition of the personal computer industry, which has
from time to time experienced cyclical, depressed business conditions, often in
connection with or in anticipation of a decline in general economic conditions.
Due to all of the foregoing factors, the Company's total revenues or operating
results may in one or more future quarters be below the expectations of stock
market analysts and investors. In such event, the price of the Company's Common
Stock would likely decline, perhaps substantially.
Dependence on Third Party Distributors. The Company derives substantially all of
its product sales through distributors and VARs. Two distributors and one VAR
accounted for 19%, 13% and 9%, respectively, of the Company's 1995 product
sales. The loss of either of these distributors or the VAR, or certain other
distributors or VARs, would have a material adverse effect on the Company's
business and results of operations. The Company's contractual relationships with
its distributors and VARs are generally cancelable upon notice to the Company.
Certain of the Company's distributors and VARs also act as distributors for
competitors of the Company and could devote greater effort and resources to
marketing competitive products. In addition, effective distributors and VARs
must devote significant technical, marketing and sales resources to an often
lengthy sales cycle. There can be no assurance that the Company's current
distributors and VARs will continue to market the Company's products effectively
or that economic or industry conditions will not adversely affect such
distributors and VARs. Because the Company sells a significant portion of its
products through distributors and VARs, it is difficult for the Company to
monitor end user demand for its products on a current basis. Initial stocking
orders may not be indicative of long-term end user demand. The Company's
distributors typically are allowed by contract to return products, subject to
certain limitations, without charge or penalty. While the Company provides for a
reserve for future returns, there can be no assurance that the reserve will
adequately cover actual product returns. Excessive or unanticipated returns
could materially adversely affect the Company's business, liquidity, or results
of operations. The Company's results of operations could also be materially
adversely affected by changes in distributors' inventory strategies, which could
occur rapidly, and in many cases may not be related to end user demand. New
products may require different marketing, sales and distribution strategies than
those for the Company's current products. There can be no assurance that the
Company's distributors and VARs will choose or be able to effectively market
these new products or to continue to market the Company's existing products. A
failure of the Company's distributors and VARs to successfully market the
Company's products would have a material adverse effect on the Company's
business and results of operations.
Dependence on Third Party Suppliers. The Company is dependent on a small number
of suppliers for certain key components used in its products, including CD-ROM
drives, microprocessors, integrated circuits and power modules. The Company
purchases these components pursuant to purchase orders placed from time to time,
does not carry significant inventories of these components, and has no long-term
supply arrangements. In addition, certain subassemblies used in the Company's
products are manufactured by a single third party vendor. The loss of a key
supplier or a disruption to the business of a key supplier could have a material
adverse effect upon the Company's business, financial condition and results of
operations. Although the Company believes that alternative sources of components
or subassemblies could be arranged, the process of qualifying new suppliers
could be lengthy. There can be no assurance that any additional source would be
available to the Company on a timely basis or at a cost acceptable to the
Company. Any disruption or reduction in the future supply of any key components
currently obtained from limited sources could have a material adverse effect on
the Company's business, financial condition and results of operations. Over the
last twelve months, there has been significant growth in the demand for CD-ROM
drives. These components are only available from a limited number of
manufacturers, most of which are Japanese manufacturers. The Company has
experienced in the past, and may experience in the future, an adverse impact on
the cost in dollars of certain components purchased from Japanese manufacturers
due to fluctuations in the exchange rate for the yen. Moreover, the Company has
been required to make spot market purchases for certain components at premium
prices. In the third quarter of 1995, the Company experienced temporary delays
in obtaining the drives required for its products. If such delays reoccur or the
Company is required to purchase components at a higher cost due to fluctuating
currency exchange rates, spot market shortages or other factors, the Company may
be unable to ship products on the schedule anticipated or may sustain higher
product costs with a resulting adverse effect on the Company's business,
financial condition and results of operations.
Rapid Technological Change; Potential for Product Defects. The market for the
Company's products is characterized by rapid technological advances, evolving
industry standards in computer hardware and software technology, changes in
customer requirements and frequent new product introductions and enhancements.
The Company's future success will depend on its ability to continue to enhance
its current product line and to continue to develop and introduce new products
that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis new products or product enhancements that respond to technological
advances by others, or that these products will achieve market acceptance. In
addition, companies in the industry have in the past experienced delays in the
development, introduction and marketing of new and enhanced products, and there
can be no assurance that the Company will not experience delays in the future.
Any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Due to their complexity and sophistication, the Company's products from
time to time may contain defects or "bugs" which can be difficult to correct.
Furthermore, as the Company continues to develop and enhance its products, there
can be no assurance that the Company will be able to identify and correct
defects in such a manner as will permit the timely introduction of such
products. Moreover, despite extensive testing, the Company has from time to time
discovered defects only after its products have been commercially released.
There can be no assurance that software defects will not cause delays in product
introductions and shipments or loss of or delay in market acceptance, result in
increased costs, require design modifications, or impair customer satisfaction.
Any such event could materially adversely affect the Company's business,
financial condition and results of operations.
Over the past two years, CD ROM drive technology has advanced
significantly. Additionally, the pace of new drive introductions has increased.
As a result, the Company may find itself holding an inventory of obsolete
drives. Additionally, the Company's contracts with its distributors allow for
product return, or price protection credits, based on current inventory levels
of current and obsolete products under certain limited circumstances. Meridian
estimates and accrues its required allowance for such occurrences, but there can
be no assurance that actual inventory writedowns, product returns, or price
protection credits will not exceed the Company's estimate. Such an event could
materially adversely affect the Company's business, financial condition and
results of operations.
Competition. The markets for the Company's products are extremely competitive.
The Company expects that competition will increase as more companies enter the
market and as existing competitors continue to change and expand their product
offerings. Pricing is very aggressive in the Company's industry, and the Company
expects pricing pressures to continue to intensify. The Company's current
competitors in the CD-ROM networking market include other suppliers of CD-ROM
networking software and hardware such as MicroTest, Inc. and MicroDesign
International. The Company also competes indirectly with suppliers of personal
computers and network operating systems such as Microsoft and Novell, to the
extent such companies include CD-ROM networking utilities as part of their
operating systems. The Company's potential competitors in the hardware area
include companies in the personal computer market and certain CD-ROM
manufacturers. These companies in particular, and the Company's competitors in
general, include large domestic and international companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sales and
distribution resources than the Company. There can be no assurance that the
Company's current or potential competitors will not develop products comparable
or superior to those developed by the Company or adapt more quickly than the
Company to new or emerging technologies, evolving industry trends or changing
customer requirements. There can be no assurance that the Company will have the
financial resources, technical expertise, or marketing, sales, distribution and
customer service and technical support capabilities to compete successfully.
Expansion of International Operations. An important element of the Company's
strategy is to expand its international operations. There can be no assurance
that the Company will be able to successfully localize, market, sell and deliver
its products internationally. The inability of the Company to successfully
expand its international operations in a timely and cost effective manner could
materially adversely affect the Company's business, financial condition and
results of operations. International product sales were approximately 11% of
total product sales in 1995. The Company's business and results of operations
could be materially adversely affected by risks inherent in conducting business
internationally, such as changes in currency exchange rates, longer payment
cycles, difficulties in staffing and managing international operations, problems
in collecting accounts receivable, seasonal reductions in business activity
during the summer months in Europe and certain other parts of the world, and
tariffs, duties and other trade barriers. For a discussion of the effect of
fluctuations in the exchange rate of the Japanese yen on the cost of certain
components used in the Company's products, see "Risk Factors - Dependence on
Third Party Suppliers."
Emerging Markets; Product Concentration. The Company's future financial
performance will depend in large part on the growth in demand for CD-ROM
networking products. While there is a substantial installed base of CD-ROM
drives in the United States, the market for CD-ROM networking applications is
relatively new and undeveloped. There can be no assurance that the Company's
products will be widely accepted in these emerging markets. If the demand for
CD-ROM networking products fails to continue to develop, or develops more slowly
than the Company currently anticipates, the demand for the Company's products
and the Company's business, financial condition and results of operations would
be materially adversely affected. In addition, as CD-ROM server products become
generally available, the Company anticipates that, as a percentage of product
sales, systems sales will decline and software sales will increase. In the event
that software sales do not increase in an amount sufficient to offset a decline
in systems sales, the Company's business, financial condition and results of
operations could be materially adversely affected.
Dependence on Key Personnel; Management of Growth. Due to the specialized nature
of the Company's business, the Company's future success is highly dependent upon
the continued services of its key engineering personnel and executive officers
and upon its ability to attract and retain qualified engineering, sales and
marketing, management and manufacturing personnel for its operations.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting or retaining such personnel. The loss
of any key personnel or the Company's inability to attract and retain qualified
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. None of the Company's key
employees has an employment agreement with the Company, and the Company does not
maintain key man insurance policies on the lives of its key employees. Although
the Company's senior executives have lengthy experience in the computer
industry, they have had only limited experience with the CD-ROM networking
business that was acquired in December 1994. To manage its growth, the Company
must continue to implement and improve its operational, financial and management
information systems and expand, train and manage its workforce. Meridian
believes that success in its industry requires substantial capital in order to
maintain the flexibility to take advantage of opportunities as they may arise.
The Company may, from time to time, as market and business conditions warrant,
invest in or acquire complementary businesses, products or technologies. Such
investment or acquisitions may be funded by internally generated cash,
marketable securities, or additional equity. The sale of additional equity could
result in dilution in the equity ownership of Meridian's shareholders. The
Company's failure to manage growth effectively could have a material adverse
effect on the Company's business, financial condition and results of operations
Dependence on Proprietary Rights. The Company's success depends in part upon
protecting its proprietary technology. The Company relies on a combination of
intellectual property laws, nondisclosure agreements and other protective
measures to protect its proprietary information. There can be no assurance,
however, that the steps taken by the Company will be adequate to deter
misappropriation or independent third party development of its technology or
that its intellectual property rights can be successfully defended if
challenged. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as the laws of the
United States. Given the rapid development of CD-ROM technology, there can be no
assurance that certain aspects of the Company's products do not or will not
infringe upon the existing or future proprietary rights of others or that, if
licenses or rights are required to avoid infringement, such licenses or rights
could be obtained or obtained on terms that are acceptable to the Company. The
Company is not currently aware of any infringement of its proprietary rights,
nor is it aware of any claims that its products infringe the rights of others.
Possible Volatility of Stock Price. The Company believes that factors such as
announcements of developments related to the Company's business, announcements
by competitors, quarterly fluctuations in the Company's financial results,
conditions in the CD-ROM networking industry, changes in the general economy and
other factors could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in general,
and the market for shares of small capitalization technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could have a material adverse effect on the market price of the Company's Common
Stock.
<PAGE>
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2.0 Agreement and Plan of Reorganization among Parallan Computer, Inc., PAC
Acquisition Subsidiary, Inc. and Meridian Data, Inc. dated December 1,
1994 previously filed as Exhibit 2 to the Current Report on Form 8-K
filed on December 15, 1994, and incorporated herein by reference.
3.1 Restated Articles of Incorporation of Parallan Computer, Inc.
previously filed as Exhibit 3.1A to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
3.1a Certificate of Amendment of the Articles of Incorporation of Parallan
Computer, Inc. previously filed as Exhibit 3.1a to the Quarterly Report
on From 10-Q for the period ended March 31, 1995, and incorporated
herein by reference.
3.1b Restated Certificate of Incorporation of Meridian Data, Inc. previously
filed as Exhibit 3.1b to the Quarterly Report on From 10-Q for the
period ended March 31, 1995, and incorporated herein by reference.
3.2 Bylaws of Parallan Computer, Inc. previously filed as Exhibit 3.2 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
4.1 Specimen Common Stock certificate of Meridian Data, Inc. previously
filed as Exhibit 4.1 to the Quarterly Report on From 10-Q for the
period ended March 31, 1995, and incorporated herein by reference.
10.1 Form of Indemnification Agreement for directors and officers previously
filed as Exhibit 10.1 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
10.2 Restated and Amended 1988 Incentive Stock Plan and forms of agreements
thereunder previously filed under Form S-8 (Registration No. 333-2620)
and incorporated herein by reference.
10.3 1992 Incentive Stock Plan and form of agreement thereunder previously
filed as Exhibit 10.3 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K (continued)
10.4 1992 Key Employee Stock Plan and form of agreement thereunder
previously filed as Exhibit 10.4 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
10.5 Amended and Restated 1992 Employee Stock Purchase Plan and forms of
subscription agreement previously filed as Exhibit 10.5 to the
Quarterly Report on From 10-Q for the period ended March 31, 1995,
and incorporated herein by reference.
10.9 Marketing Agreement dated as of June 1, 1992 between Parallan Computer,
Inc. and IBM Corporation previously filed as Exhibit 10.9 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.10 Master Work Agreement dated as of June 1, 1992 between Parallan
Computer, Inc. and IBM Corporation previously filed as Exhibit 10.10 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.15 Amendment to the Master Work Agreement and Marketing Agreement dated as
of March 31, 1994, between Parallan Computer, Inc. and IBM Corporation
filed as Exhibit 10.15 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994, and incorporated herein by reference.
10.16 Meridian Data, Inc. 1987 Incentive Stock Plan and form of subscription
agreement thereunder previously filed as Exhibit 4.3 to Registration
Statement on Form S-8 (Registration No. 33-89162) and incorporated
herein by reference.
10.17 Meridian Data, Inc. 1995 Director Option Plan previously filed as
Exhibit 4.3 to the Registration Statement on Form S-8 (Registration No.
333-2622) and incorporated herein by herein by reference.
10.18 Stock option assignment and exercise agreement between the registrant,
International Business Machines Corporation and certain shareholders of
the Registrant dated March 6, 1996 previously filed as Exhibit 10.17 to
the Annual Report on From 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
16.1 Letter regarding change in accountants previously filed as Exhibit 16.1
to Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
27 Financial Data Schedules
(b) Reports on Form 8-K.
none
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
MERIDIAN DATA, INC.
Date: November 12, 1996 /s/ GIANLUCA U. RATTAZZI
Gianluca U. Rattazzi,
President and Chief
Executive Officer.
Date: November 12, 1996 /s/ ERIK E. MILLER
Erik E. Miller, Vice President,
Finance and Chief Financial
Officer (Principal Financial and
Accounting Officer.
<PAGE>
MERIDIAN DATA, INC.
INDEX TO EXHIBITS
Exhibit Item Page
- ------- ----------------------- ----
27 Financial Data Schedule 19
<PAGE>
EXHIBIT 27
MERIDIAN DATA, INC.
Financial Data Schedule
Article 5 of Regulation SX
This schedule contains summary financial information extracted from the
Quarterly Report on Form 10-Q for the period ended September 30, 1996 and is
qualified in its entirety by reference to such financial statements
Category Response
- ------------------- --------------------
CIK 0000864568
NAME Meridian Data, Inc.
MULTIPLIER 1
CURRENCY US dollars
PERIOD-TYPE 9-MOS
FISCAL-YEAR-END DEC-31-1996
PERIOD-START JAN-01-1996
PERIOD-END SEP-30-1996
EXCHANGE-RATE 1
CASH 32,558
SECURITIES 6,678
RECEIVABLES 3,944
ALLOWANCES 436
INVENTORY 1,354
CURRENT-ASSETS 378
PP&E 1,274
DEPRECIATION 562
TOTAL-ASSETS 45,195
CURRENT-LIABILITIES 4,542
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 40,653
OTHER-SE 1
TOTAL-LIABILITY-AND-
EQUITY 45,195
SALES 20,116
TOTAL-REVENUES 20,116
CGS 7,929
TOTAL-COSTS 7,929
OTHER-EXPENSES 9,323
LOSS-PROVISION 0
INTEREST-EXPENSE (1,091)
INCOME-PRETAX 3,955
INCOME-TAX 197
INCOME-CONTINUING 3,758
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 3,758
EPS-PRIMARY 0.39
EPS-DILUTED 0.39
