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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 June 30, 1997
[ ] 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 July
31, 1997, was 8,723,609.
Exhibit index on page 19 Page 1 of 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MERIDIAN DATA, INC.
BALANCE SHEETS
June 30, December 31,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 16,782 $ 24,809
Marketable securities 17,413 14,340
Accounts receivable (net of allowance
for returns and doubtful accounts of $489
and $512, respectively) 2,611 2,991
Inventories 1,752 1,311
Other assets 340 324
------- -------
Total current assets 38,898 43,775
Property and equipment at cost,
less accumulated depreciation 581 653
Other assets 17 817
------- -------
$ 39,496 $ 45,245
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,486 $ 1,632
Accrued payroll and related expenses 1,176 686
Accrued advertising and promotion 384 506
Other accrued liabilities 1,373 1,191
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Total current liabilities 5,419 4,015
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Stockholders' equity:
Common stock 66,104 69,578
Unrealized (losses) gains on
marketable securities (2) 5
Accumulated deficit (32,025) (28,353)
------- -------
Total stockholders' equity 34,077 41,230
------- -------
$ 39,496 $ 45,245
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The accompanying notes are an integral part of these financial statements.
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MERIDIAN DATA, INC.
STATEMENTS OF OPERATIONS
Three months ended Six months ended
(In thousands, except per share, June 30, June 30, June 30, June 30,
unaudited) 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Product sales $ 5,547 $ 6,402 $ 8,556 $13,464
Costs and expenses:
Cost of product sales 2,402 2,331 4,130 5,498
Research and development 859 770 2,712 1,521
Sales and marketing 2,604 1,835 4,896 3,599
General and administrative 610 515 1,562 1,047
------ ------ ------ ------
Total costs and expenses 6,475 5,451 13,300 11,665
------ ------ ------ ------
Income (loss) from operations (928) 951 (4,744) 1,799
Interest income 555 350 1,072 571
------ ------ ------ ------
Pretax income (loss) (373) 1,301 (3,672) 2,370
Provision for income taxes -- (59) -- (115)
------ ------ ------ ------
Net income (loss) $ (373) $ 1,242 $(3,672) $ 2,255
====== ====== ====== ======
Net income (loss) per share $ (0.04) $ 0.13 $ (0.39) $ 0.24
====== ====== ====== ======
Weighted average common shares and
common stock equivalents 9,171 9,892 9,389 9,299
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
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MERIDIAN DATA, INC.
STATEMENTS OF CASH FLOWS
Six months ended June 30,
(In thousands, unaudited) 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (3,672) $ 2,255
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Compensation expense related to stock
options issued below market value 7 24
Depreciation and amortization 149 181
Amortization of advance for research
and development arrangements 800 --
Changes in assets and liabilities:
Accounts receivable 380 (177)
Inventories (441) (68)
Other current assets (16) (284)
Accounts payable 854 (102)
Accrued payroll and related expenses 490 (487)
Other accrued liabilities 60 (228)
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Net cash provided by (used in)
operating activities (1,389) 1,114
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Cash flows from investing activities:
Purchase of property and equipment (78) (316)
Redemption of marketable securities 34,285 8,531
Additions to marketable securities (37,365) (9,548)
------- -------
Net cash used in investing activities (3,158) (1,333)
------- -------
Cash flows from financing activities:
Issuance of common stock, net -- 36,976
Repurchase of common stock (3,702) (16,716)
Issuance of common stock related to stock plans 222 701
------- -------
Net cash (used in) provided by
financing activities (3,480) 20,961
------- -------
Net (decrease) increase in cash and cash equivalents (8,027) 20,742
Cash and cash equivalents at:
beginning of period 24,809 11,752
------- -------
end of period $ 16,782 $ 32,494
======= =======
Statement of cash flows supplemental disclosure:
Total cash paid for interest during the period $ 6 $ 8
Total cash paid for taxes during the period 29 76
The accompanying notes are an integral part of these financial statements.
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MERIDIAN DATA, INC.
NOTES TO FINANCIAL STATEMENTS For
The Three and Six Months Ended June 30, 1997, and
June 30, 1996
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, 1996 included in
the Company's Annual Report on Form 10-K. Results for the interim period are not
necessarily indicative of the results for the entire year.
NOTE 2. INCOME TAXES
The Company made no provision for income taxes in the second quarter and first
six months of 1997 due to the net operating loss. The Company's effective tax
rate for the second quarter and first six months of 1996 was approximately 5%.
This rate was lower than the expected statutory rate due to the utilization of
net operating loss carryforwards. The Company's tax liability in 1996 resulted
from federal and state alternative minimum taxes.
NOTE 3. INVENTORIES CONSIST OF THE FOLLOWING (IN THOUSANDS):
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
Raw materials $ 1,054 $ 885
Work-in-progress 698 426
------ ------
$ 1,752 $ 1,311
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NOTE 4. RESEARCH AND DEVELOPMENT ARRANGEMENT:
In November 1996, the Company entered into an agreement with a
development stage company ("DSC") to partially fund the development of a media
independent software search technology. As envisioned, the product would allow
searches of textual, audio, and video data stored on corporate intranets, the
Internet, or such possible future media such as digital video disc's ("DVD's").
As part of this agreement, Meridian loaned $1 million (the "Loan") to DSC at an
annual rate of 5.96%, due in August of 1997, which was recorded in other assets.
In the fourth quarter of 1996, the Company reduced the carrying value of this
Loan by $0.2 million, which represented Meridian's estimate of the realizability
of the Loan at December 31,1996. At March 31, 1997, the carrying value of the
Loan was reduced by an additional $0.8 million due to uncertainty regarding the
realizability of the Loan. These charges were recorded as research and
development expense. The Loan was repaid in full by DSC in the second quarter of
1997. This was recorded as a credit against research and development expense.
In May 1997 the Company purchased a software technology license for $1
million. The cost of the acquired technology was charged against research and
development expense during the second quarter of 1997.
NOTE 5. PRO FORMA EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (the "Statement").
This statement is effective for the Company's fiscal year ending December 31,
1997. The Statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share. There
is no material difference between reported earnings (loss) per share in the
statement of operations and what would have been reported had the Company
adopted the Statement for the three and six month periods ended June 30, 1997
and 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 11 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.
GENERAL
Meridian 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. In addition, 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, such as: price and other forms of competition; seasonality; 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; 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 1996, identifiable sales to federal
governmental agencies accounted for approximately 11% 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.
RESULTS OF OPERATIONS
REVENUES
PRODUCT SALES
Product sales in the second quarter and first six months of 1997
decreased by $0.9 million and $4.9 million or 13% and 36% respectively, over the
corresponding period of 1996. This decrease was the result of lower pricing
instituted in January of 1997 and the transition from 6X CD ROM drives to 12X
drives. In the past, when the Company was faced with a drive speed transition,
Meridian's strategy was to promote those products, typically by way of
discounts, through its distribution channel. In order to regain the Company's
competitive position, management decided to quickly stock rotate the existing 6X
inventory, thus allowing Meridian to concentrate on the new line of high
performance systems introduced in the first quarter. Meridian's gross sales
increased 39% between the first and second quarters of 1997. The Company
attributes this increase to the lower prices, a significant increase in
marketing activities, and new products introduced in the second quarter of 1997.
The markets for the Company's products are extremely competitive, and Meridian
expects that the Company's revenue could be adversely impacted as competition
continues to consolidate, change and expand product offerings and react to prior
market moves made by Meridian.
Over the last six months, Meridian has introduced new products in order
to regain its competitive edge and to solidify the Company's position as a
one-stop shop for CD-ROM networking solutions. In January 1997, Meridian
introduced a line of ultra-performance CD-ROM networking solutions, providing
the performance of 12X drives at 6X prices. In March and April, the Company
announced two products, CD Net Remote and CD Net Universal, to solidify its
entry level products offerings. CD Net Remote is a network appliance that
automatically recognizes, configures and provides network access to CD-ROM
drives located on Novell networks. CD Net Universal addresses the fastest
growing segment of the CD-ROM networking market, protocol independent, entry
level, plug-and-play network servers. At the top end of the market, the Company
now offers its CD Net Ultimate line of servers, providing access to CD ROM data
at speeds comparable to hard disks. This product is targeted at the high-end
users who require extremely rapid access speeds, and are ideal for running
multimedia applications in a networking environment.
For a discussion of certain other risks that may affect the Company's
future product sales, see "Risk Factors-Operating losses; Fluctuations in
Quarterly Operating Results," "-Rapid Technological Change;-Potential for
Product Defects," "-Emerging Markets; Product Concentration," and "-New Product
Development."
COST AND EXPENSES
COST OF SALES
The Company's gross margin decreased from 64% and 59% in the second
quarter and first six months of 1996, respectively, to 57% and 52% in the
comparable periods of 1997. This decrease was due to lower prices on Meridian's
CD-ROM networking systems and the transition from 6X CD ROM drives to 12X
drives. As a result of January's price decrease, the Company's gross margins in
1997 will fall below the gross margins reported for the comparable periods of
1996.
For a discussion of certain other risks that may affect the Company's
future cost of product sales, see "Risk Factors-Dependence on Third party
Suppliers" and "-Expansion of International Operations; Foreign Currency
Fluctuations."
RESEARCH AND DEVELOPMENT
In November 1996, the Company entered into an agreement with a
development stage company ("DSC") to partially fund the development of a media
independent software search technology. The product allows searches of textual,
audio, and video data stored on corporate intranets, the Internet, or such
possible future media such as digital video disc's ("DVD's"). As part of this
agreement, Meridian loaned $1 million (the "Loan") to DSC at an annual rate of
5.96%, due in August of 1997, which was recorded in other assets. In the fourth
quarter of 1996, the Company reduced the carrying value of this Loan by $0.2
million, which represented Meridian's estimate of the realizability of the Loan
at December 31,1996. At March 31, 1997, the carrying value of the Loan was
reduced by an additional $0.8 million. These charges were recorded as research
and development expense. The Loan was repaid in full by DSC in the second
quarter of 1997. This was recorded as a credit against research and development
expense.
Total research and development expense increased to $859,000 and $2.7
million in the second quarter and first six months of 1997, respectively, from
$770,000 and $1.5 million for the comparable periods of 1996. For the second
quarter of 1997 research and development expense increased by $89,000 over the
comparable period of 1996 primarily due to higher payroll and related expenses.
Included in the Company's second quarter research and development expense was a
$1.0 million charge for the acquisition of a technology license to be used in
Meridian's new products (see Note 4 of Notes to Financial Statements). This
charge was offset by the repayment of the DSC Loan. Research and development for
the first six months of 1997 increased by $1.2 million over the comparable
period of 1996 primarily due to the acquisition of technology required for the
Company's investment in new product development and higher payroll and related
expenses.
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 the
second quarter of 1997, Meridian embarked on the development of its first non-CD
ROM networking system. The Company anticipates that it will incur significant
amounts of non-recurring engineering expenses in developing the new product. As
such, Meridian anticipates that R&D expense to increase substantially through at
least the second quarter of 1998. In addition, there can be no assurance that
Meridian's research and development efforts, both CD ROM and non-CD ROM related,
will result in the introduction of new products or that any of such products, if
developed, will be commercially successful. For a discussion of certain other
risks that may relate to the Company's research and development, see "Risk
Factors-Rapid Technological Change; Potential for Product Defects" and "-New
Product Development."
SALES AND MARKETING
Sales and marketing expense increased from $1.8 million and $3.6
million in the second quarter and first six months of 1996 to $2.6 million and
$4.9 million in the second quarter and first six months of 1997, respectively.
This increase was due primarily to higher marketing and advertising costs and
higher payroll and related expenses. The increased advertising expense was
related to expenses incurred to increase advertisement placement, developing a
new advertising campaign, and new product launch costs. Meridian anticipates
that sales and marketing expenses will increase in the future both in absolute
dollars and as a percent of sales. Sales and marketing expense consists
primarily of payroll and related expense (including commissions), and
advertising related expenses. The Company anticipates that it will incur
significant amounts of product research, introduction, and roll out expenses in
relation to the new product. As such, Meridian anticipates that sales and
marketing expense will increase. In addition, there can be no assurance that
Meridian's sales and marketing efforts will result in the successful
introduction of new products or that any of such products, if developed, will be
commercially successful. For a discussion of certain other risks that may relate
to the Company's sales and marketing, see "Risk Factors-Dependence on Third
Party Distributors," "-Emerging Markets; Product Concentrations," and "-New
Product Development."
GENERAL AND ADMINISTRATIVE
General and administrative expense increased from $515,000 and $1.0
million in the second quarter and first six months of 1996, respectively, to
$611,000 and $1.6 million for the corresponding periods of 1997. This increase
was primarily due to legal expenses incurred in connection with the Company's
proposed reincorporation in Delaware, higher compensation expense, and
miscellaneous other corporate expenses. General and administrative expenses
consist primarily of payroll, payroll related expenses, and occupancy expenses.
INTEREST INCOME
Interest income increased from $350,000 and $571,000 in the second
quarter and first six months of 1996 to $556,000 and $1.1 million for the
corresponding periods of 1997. This increase was due to higher invested
balances. Future interest income will vary depending on the average invested
balance and interest rates.
INCOME TAXES
The Company made no provision for income taxes in the first six months
of 1997 due to a net operating loss. The Company's effective tax rate for the
first six months of 1996 was approximately 5%. This rate was lower than the
expected statutory rate due to the utilization of net operating loss carry
forwards. The Company's tax liability in the first six months of 1996 resulted
from federal and state alternative minimum taxes.
CAPITAL RESOURCES AND LIQUIDITY
Meridian's cash flow from operations for the first six months of 1997
was adversely impacted by the net loss of $3.7 million which includes the
acquisition of technology to be used in Meridian's new products. This was
partially offset by a reduction in accounts receivable, an increase in accrued
liabilities and expenses, and noncash depreciation and amortization charges. In
addition the Company repurchased $3.7 million of its Common Stock during the
second quarter of 1997. At June 30, 1997, the Company's principal source of
liquidity consisted of cash and marketable securities totaling $34.2 million.
Meridian believes that its current cash and marketable securities will satisfy
its working capital and capital expenditures at least through the first half of
1998.
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. The costs of such investments could be charged to expense. Such
investment or acquisitions may be funded by internally generated cash,
marketable securities, or additional equity. The sale of additional equity would
result in dilution in the equity ownership of the Company's stockholders
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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.
From that point the Company operated profitably until the first quarter of 1997,
when it incurred a net loss. The Company again incurred a net loss in the second
quarter of 1997, and there can be no assurance that profitable operations will
return. In late 1996 and early 1997, the Company made several decisions to
address the disappointing systems revenue growth experienced in the last three
quarters of 1996. Late in the fourth quarter of 1996, Meridian increased its
sales and promotional expenditures and, at the end of January 1997,
significantly reduced system prices in response to competitive pressures. While
the Company's unit shipments in the second quarter of 1997 increased over the
comparable period of 1996 and the first quarter of 1997, further increases may
not be sustainable in the current competitive environment. In addition, even if
unit shipments were to increase in the future, there can be no assurance that
prices for the Company's products will not decrease due to competitive pricing
pressures. Accordingly, the Company may not meet its total revenue goals and the
Company's results of operations and liquidity would be materially adversely
affected.
The Company generally ships its software and systems within a short
period after receipt of an order, therefore the Company typically does not have
a material backlog of unfilled orders. Accordingly, 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 fluctuations, 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
the Company's 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 1996, identifiable sales to federal governmental agencies
accounted for approximately 11% 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 and annual results would be adversely
affected. Similarly, if such government agencies reduced their purchases of
Meridian products in favor of those of its competitors, the Company's quarterly
results would 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEW PRODUCT DEVELOPMENT. The Company is actively developing products for entry
into new markets. Such entry entails substantially higher risks to the Company
in the form of new and well established competition, and competitive dynamics
different than those experienced in the CD ROM networking market. In attempting
to successfully enter these new markets, the Company will have to commit to
significant levels of engineering, sales, and marketing expenditures. There can
be no assurance that the Company will be successful in developing and marketing
new products, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these new
products, or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will all be materially adversely affected. Due to the complexity of the
Company's contemplated new products and the difficulty in gauging the
engineering effort required to produce these potential new products, such
potential new products are subject to significant technical risks. There can be
no assurance that such potential new products will be introduced on a timely
basis or at all. If potential new products are delayed or do not achieve market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected. As a result of the preceding, the Company
anticipates that it may operate at a net loss through the first half of 1998.
DEPENDENCE ON THIRD PARTY DISTRIBUTORS. The Company derives substantially all of
its product sales through distributors and VARs. Two distributors accounted for
25% and 18%, respectively, of the Company's 1996 product sales. The loss of
either of these distributors, 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 can
generally be canceled 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
and DVD 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.
In the past, there has been unexpected significant growth in the demand for CD
ROM drives, which has caused temporary supply disruptions. 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, impair customer satisfaction, or
result in customer returns. 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. Further, 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 Procom Technologies, Microtest, Inc.
and Microdesign International. The Company also competes indirectly with
suppliers of personal computers, such as Dell Computer, Compaq, and IBM, 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 14% of
total product sales in 1996. 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, slower acceptance of technology advances
compared with the United States, lack of published CD ROM content, 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, if CD ROM server products become
generally available, the Company anticipates that, as a percentage of product
sales, systems sales could decline and software sales may 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 stockholders. 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.
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 and incorporated herein by reference.
2.2 Agreement and Plan of Merger between Meridian Data, Inc., a
California corporation, and Meridian Data, Inc., a Delaware
corporation, dated May 29,1997 previously filed as Exhibit 2.2 to
Registration of Securities of Certain Successor Issues on Form 8-B
and incorporated herein by reference.
3.1 Certificate of Incorporation of Meridian Data, Inc., a Delaware
corporation, previously filed as Exhibit 3.1 to Registration of
Securities of Certain Successor Issues on Form 8-B and incorporated
herein by reference.
3.2 Bylaws of Meridian Data, Inc., a Delaware corporation, previously
filed as Exhibit 3.2 to Registration of Securities of Certain
Successor Issues on Form 8-B 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 Form 10-Q for the
period ended March 31, 1995, and incorporated herein by reference.
4.2 Fourth Article of Certificate of Incorporation of Meridian Data, Inc.
a Delaware corporation (see Exhibit 3.1
9.1 Shareholders Agreement, dated as of June 1, 1992, among IBM
Corporation, Parallan Computer, Inc. and certain shareholders of
Parallan Computer, Inc. previously filed as Exhibit 9.1 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.1 Form of Indemnification Agreement by and among Meridian Data, Inc., a
Delaware corporation, and its directors and officers previously filed
as Exhibit 10.1B to Registration of Securities of Certain Successor
Issues on Form 8-B and incorporated herein by reference.
10.2 Restated and Amended 1988 Incentive Stock Plan and forms of
agreements thereunder previously filed under Registration Statement
on Form S-8 (Registration No. 333-3934) 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.
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 form of
subscription agreement thereunder previously filed as Exhibit 10.5 to
the Quarterly Report on Form 10-Q for the period ended March 31,
1995, and incorporated herein by reference.
10.6 Registration Rights Agreement between the Registrant and certain of
the Registrant's shareholders previously filed as Exhibit 10.6 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.7 Custodial Agreement dated as of May 12, 1992 between Parallan
Computer, Inc., IBM Corporation and File-PROTEK, Inc. previously
filed as Exhibit 10.7 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
10.8 Share Purchase Agreement dated as of May 15, 1992 between Parallan
Computer, Inc., and IBM Corporation, as amended, previously filed as
Exhibit 10.8 to Registration Statement on Form S-1 (Registration No.
33-57976) 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.
10.11 Secured Loan Agreement dated as of June 1, 1992 between Parallan
Computer, Inc. and IBM Credit Corporation previously filed as Exhibit
10.11 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.13 Master Equipment Lease dated as of June 29, 1990 between Parallan
Computer, Inc. and Western Technology Investment previously filed as
Exhibit 10.13 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.14 Master Equipment Lease dated as of January 15, 1993 between Parallan
Computer, Inc. and Phoenix Leasing Incorporated previously filed as
Exhibit 10.14 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.
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 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 Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
10.18 Meridian Data, Inc. 1995 Director Stock Plan and form of subscription
agreement thereunder previously filed as Exhibit 4.3 to the
Registration Statement on Form S-8 (Registration No, 333-2622) and
incorporated herein by reference.
10.19 Meridian Data, Inc. 1997 Incentive Stock Plan and form of agreement
thereunder previously filed as Exhibit 10.19 to Registration of
Securities of Certain Successor Issues on Form 8-B 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.
27.0 Financial Data Schedule
(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: July 31, 1997 /s/ GIANLUCA U. RATTAZZI
========================
Gianluca U. Rattazzi, President and
Chief Executive Officer
Date: July 31, 1997 /s/ ERIK E. MILLER
========================
Erik E. Miller, Sr. 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 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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 six month period ended June 30, 1997 and
is qualified in its entirety by reference to such financial statements
CATEGORY RESPONSE
</LEGEND>
<CIK> 0000864568
<NAME> Meridian Data, Inc.
<MULTIPLIER> 1000
<CURRENCY> US dollars
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 16,782
<SECURITIES> 17,413
<RECEIVABLES> 3,100
<ALLOWANCES> 489
<INVENTORY> 1,752
<CURRENT-ASSETS> 38,898
<PP&E> 1,507
<DEPRECIATION> 926
<TOTAL-ASSETS> 39,496
<CURRENT-LIABILITIES> 5,419
<BONDS> 0
0
0
<COMMON> 66,104
<OTHER-SE> (2)
<TOTAL-LIABILITY-AND-EQUITY> 39,496
<SALES> 8,556
<TOTAL-REVENUES> 8,556
<CGS> 4,130
<TOTAL-COSTS> 13,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,072)
<INCOME-PRETAX> (3,672)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,672)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,672)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
