[ANNUAL REPORT COVER]
[COMPANY LOGO]
MERIDIAN DATA, INC.
1996 ANNUAL REPORT
<PAGE>
Dear Shareholders, [COMPANY LOGO]
This has been an exciting year at Meridian Data. The Company reported
record setting revenue and our highest gross margins and profits since 1993.
These accomplishments did not happen overnight, but are the result of our
employees' outstanding efforts and dedication over the past two years, and we
salute them. However, over the past few months, our stock performance has been
below average and many challenges confront us. All of us at Meridian are eager
to meet and overcome these challenges.
Beginning in early 1995, analysts were forecasting strong growth in the
CD-ROM networking market. We expected this growing market would attract an
increasing number of hardware vendors, some of whom could have greater financial
resources than Meridian. Consequently, we decided to focus our energies on
growing the software side of Meridian's revenue stream to escape the decreasing
margins of standalone hardware products. Our goal was to slowly transition from
being a hardware supplier to becoming the preferred software supplier for these
new hardware competitors. Channeling all their efforts towards this goal, our
engineering teams completely revamped the Company's software products. From May
1995 through September 1996, we released ten new software products, some of
which, we believe, may become industry standards. Among these new products are
software that seamlessly integrates CD-ROMs in mixed Novell and NT networking
environments, and the industry's first product for integrating CD-ROMs into
corporate Intranets. During this same time, our marketing department refocused
their efforts on the features and benefits of Meridian software to VARs, system
integrators, and end users. The success of those efforts can be seen in our
progressively increasing gross margin percentage, increasing from 46% in 1995 to
61% for 1996, as well as growing overall profits in 1996 by 70% over the
previous year.
However, while we were concentrating our efforts on successfully
growing software revenue, price competition for CD-ROM networking systems
intensified and, based on our heavy marketing emphasis on the new software,
customers began to doubt the Company's dedication to its system business.
Additionally, the market that was forecasted to expand at 50% a year reaching
$450 million in size in 1997, slowed down to a 20% a year growth rate and is
estimated in a recent Investors Business Daily article at approximately $180
million. All of the above factors led to our disappointing systems revenue
growth over the last nine months of 1996. While it is our plan to lead the
CD-ROM networking market, we are considering a new product strategy that would
enable us to step beyond CD-ROM networking into a new market that leverages off
our networking software experience, our established distribution channels, and
the current installed base.
In 1997, our goal is to grow Meridian's total revenues from sales of
integrated systems, and deliver the most complete CD-ROM networking system
solutions, with one-stop shopping for customers. In early November 1996, we
brought new leadership to our sales and marketing organizations, with the
appointment of Charles R. (Chuck) Joseph as Sr. Vice President of Sales and
Marketing. Chuck has over 20 years of multi-national sales, marketing and
operations expertise with Trimble Navigation, Xerox, and IBM. Chuck is
realigning our sales and marketing efforts to pursue a more aggressive presence
in the CD-ROM networking market, targeted on expanding our reseller
relationships. We are also in the process of refocusing our marketing programs
away from an emphasis on Meridian's software towards the message that Meridian
is the one-stop shop of all of your CD-ROM networking needs. We hope to expand
our reseller channel by increasing the level of sales, marketing and technical
support Meridian offers its distribution and VAR partners. Meridian intends to
support its resellers with an outside sales, business development, and technical
support organization focused on Meridian's CD networking products and systems.
Meridian will continue to supply leading technology such as high performance
systems, sophisticated software, plug and play solutions, and complete technical
support.
In late January 1997, Meridian announced an aggressive new pricing
structure for its integrated systems and software. We intend for our new system
prices to meet or beat those of our largest competitors while at the same time
offering Meridian's industry-leading software in integrated systems. With a new
line of high performance CD Net systems, Meridian continues to provide the
latest in CD-ROM networking technology.
Looking forward, we believe that the first half of 1997 will be
challenging for the Company and its employees. However, we believe that the
changes implemented over the past few months and that will be implemented
throughout 1997 will move the Company in a positive direction. On behalf of the
Board of Directors and management, we would like to thank our employees,
shareholders and customers for their ongoing support.
Sincerely,
/s/Charlie Bass /s/Gianluca U. Rattazzi
Charlie Bass, Gianluca U. Rattazzi,
Chairman of the Board President and Chief
Executive Officer
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] 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 Dr., Scotts Valley, California 95066
(Address of principal executive office) (Zip Code)
(408) 438-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
(Title of Class)
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 28, 1997, was $42,990,300.00. The number of
shares of Common Stock, no par value, outstanding on February 28, 1997, was
9,619,401.
Documents incorporated by reference: Portions of the Proxy Statement
for Registrant's Annual Meeting of Shareholders to be held April 23, 1997, are
incorporated herein by reference into Part III.
Index begins on page 43. Page 1 of 48.
<PAGE>
PART I
ITEM 1. BUSINESS.
HISTORY
For the purposes of this discussion, the term "PCI" shall refer to the
operations and business of Parallan Computer, Inc. prior to the acquisition of
Meridian Data, Inc. on December 1, 1994. The term "MDI" shall refer to the
operations and business of Meridian Data, Inc. prior to its acquisition by PCI.
Any reference to "Meridian" or the "Company" shall refer to the operations and
business of the Company subsequent to the acquisition of MDI on December 1,
1994.
PCI was founded in 1988 to develop high-performance, fault tolerant
servers for large networks of personal computers. In the first quarter of 1991,
PCI commenced shipment of products to customers. In the fall of 1991, in
response to continuing losses and funding constraints, PCI significantly reduced
expenses, reduced its staff by approximately 50%, and began a search for a major
computer company as a strategic partner. In June 1992, PCI entered into a
strategic alliance with International Business Machines Corporation (IBM). The
strategic alliance with IBM encompassed certain product development,
manufacturing and support arrangements (the Agreements). At the same time, IBM
acquired a substantial minority stock interest in PCI. PCI granted IBM the
exclusive rights to PCI's current and future products and technologies in return
for guaranteed minimum royalties in 1992 and 1993, and revenue-based royalties
for 1994 and beyond. The Agreements do not apply to any technology acquired
from, or developed by, MDI. After the first quarter of 1994, sales by IBM of
products licensed from PCI, net of returns, were zero. PCI expected that this
trend would continue for the foreseeable future.
As a result of management's expectations concerning future royalties
from IBM, PCI downsized and reorganized its operations into two segments: (i)
the development of original equipment manufacturer ("OEM") relationships for its
latest products; and (ii) to focus on potential acquisition opportunities. Over
the course of several months, PCI engaged in discussions with several large OEMs
about the sale or licensing of its latest server technology. These discussions
ultimately resulted in the sale of certain subsets of PCI's server technology
for $1.5 million in the first quarter of 1995. PCI then narrowed its focus to
identifying potential acquisition candidates. PCI focused on potential
acquisition candidates who had a significant market or technological position
and high year-to-year growth in revenues.
On December 1, 1994, PCI acquired all of the outstanding shares of MDI.
MDI was a privately-held developer of compact disc-read only memory (CD ROM) and
compact-disc recordable (CD-R) systems and software for both networks and
personal computers. With the acquisition of MDI, PCI effectively ended its
reliance on IBM as its primary source of revenue. Since December 1, 1994, the
Company's primary source of revenue is from sales of the products of MDI. Thus,
the remainder of the discussion of the Company's business, industry, operations,
or competition under this Item will refer exclusively to the operations of
Meridian.
OVERVIEW
Meridian Data, Inc. provides CD ROM networking software and systems
that enable multiple users on a network to simultaneously share CD ROM titles
from their desktops. Networking CD ROMs makes them easier to install, update and
manage, and eliminates the need to physically share CDs among users. The Company
is committed to an open systems approach, supports a broad array of personal
computer and network operating systems, and provides seamless desktop access to
networked CD ROMs in heterogeneous environments. The Company believes that a
significant opportunity exists to enable organizations to provide access to
networked CD ROMs through corporate networks and standard web browsers and to
archive or internally publish their data on networked CD ROMs. To meet customer
demands for integrated solutions, the Company offers systems containing the
Company's networking software and CD ROM servers configured by the Company with
third-party components. However, since the manufacture of CD ROM servers has low
barriers to entry, Meridian focuses its research and development activities
primarily on software development. The Company's hardware development efforts
revolve around maintaining compatibility with existing and developing hardware
standards. If industry standard CD ROM server hardware were to become more
generally available, the Company will be in a position to more easily transition
its revenue stream from a systems-centric basis to a software-centric basis.
INDUSTRY BACKGROUND
WIDESPREAD ADOPTION OF CD ROM TECHNOLOGY. CD ROM, a read-only optical storage
technology, has gained widespread acceptance in recent years for computer
applications. According to an independent industry research organization, the
worldwide installed base of CD ROM drives has grown from 5 million units in 1992
to over 50 million units in 1995. While much of this growth has been in the home
computer market, increasingly, businesses, government and other organizations
are implementing CD ROM technology. In early 1996, a survey was published that
showed that approximately 95% of the Fortune 1000 companies planned to purchase
CD ROM drives in 1996. CD ROMs have many advantages over alternate storage
technologies, including cost-effectiveness, data integrity, durability and
storage capacity. The Company estimates that it costs less than $1.00 to produce
a copy of CD ROM capable of holding over 600 megabytes of data. For certain
applications, an advantage of CD ROM technology is that it is read-only and
non-magnetic, so that it cannot be altered or accidentally erased, thereby
ensuring data integrity. CD ROM technology is rapidly evolving, and significant
advances have been made in speed and storage capacity. In 1995, a new CD ROM
standard, DVD (digital video disc), was announced which is expected to provide 7
to 28 times the storage capacity of current CD ROMs and will eventually be
recordable and erasable.
USE OF CD ROM TECHNOLOGY FOR THE DISTRIBUTION OF INFORMATION. For many
applications, CD ROMs are more cost-efficient and practical than paper-based
delivery alternatives. CD ROM technology increases user productivity by reducing
time spent manually searching for and updating information. Many information
providers whose businesses require the periodic dissemination of data such as
manuals, catalogs, directories and tax and legal compilations, have adopted CD
ROM technology as an effective distribution method. The Company believes that
the distribution of information on CD ROMs is complementary to commercial
on-line services which are often limited by access speeds and require large
investments by information providers. Examples of information providers that
distribute CD ROMs include the National Association of Insurance Commissioners
(NAIC), Commerce Clearing House (CCH) and Disclosure Incorporated. According to
an independent research organization, commercial CD ROM titles for professional,
corporate, library, educational and in-house publishing applications accounted
for nearly 80% of the total worldwide CD ROM title revenue of $10.7 billion in
1994.
NETWORKED CD ROMS. Corporations and other organizations that purchase
information on CD ROMs generally need to provide multiple users with
simultaneous access to information stored on those CD ROMs. When CD ROMs are not
networked, businesses must generally purchase multiple copies of each CD ROM set
or physically transport discs between desktop computers. Purchasing multiple
copies is usually not as cost effective as relying on site licenses, and
physically transporting discs between desktop computers can be time-consuming
and can result in misplaced or unreturned discs. In addition, many commercial
databases are distributed on multi-volume sets of discs which require physically
shuffling discs if they are used at a desktop computer with a single drive. As a
result of these and other factors, many organizations seek to implement
networked, multi-drive CD ROM systems. Networked CD ROMs can be quickly and
easily accessed by multiple users from their desktop computers. Because
networked CD ROMs are typically installed on a single server, they can be
efficiently managed and periodically updated without access to individual
desktop computers.
NEED FOR CD ROM NETWORKING SOFTWARE. While many organizations increasingly seek
to network CD ROMs, CD ROM technology was not originally designed for multi-user
network access. These organizations require software specifically designed to
enable them to share CD ROMs on a network, manage multiple titles and control
user access. Controlling user access is especially important when information
providers restrict the number of simultaneous users. Furthermore, corporations
are continually upgrading their networks to take advantage of new technologies
such as Windows NT, and, as a result, CD ROM networking software must be able to
operate in heterogeneous environments. In addition to the increasing number of
available commercial CD ROM titles, organizations are increasingly using
recordable CD ROMs that are "write once - read many," to archive or internally
publish their own data. As a result, there is an increased number of CD ROMs to
be managed. Additionally, organizations are implementing web technology to
create "intranets" that provide users access to internal information, as well as
public information on the Internet, with a consistent, easy to use interface,
regardless of where the data resides. The Company believes that organizations
will want to enable popular web browsers, such as Netscape Navigator or
Microsoft Internet Explorer, to access networked CD ROMs as part of their
intranets.
THE MERIDIAN SOLUTION
The Company offers a family of CD ROM networking software products and
systems that enable organizations to provide multi-user access over a network to
centrally managed CD ROMs. Meridian's CD ROM software and systems provide cost
effective solutions for organizations that implement CD ROM technology by
eliminating the need to physically share discs or purchase multiple copies of
often expensive CD ROM titles. The Company provides scalable solutions to
address a variety of customer needs ranging from workgroup to enterprise-wide
applications of CD ROMs. The Company's software supports a broad range of
networking environments, including Novell, Windows NT and Banyan VINES, and
desktop operating systems, including Windows, DOS, Macintosh and OS/2, and is
compatible with most major connectivity methodologies and network protocols. The
Company's client software is designed to provide seamless access to shared CD
ROMs by associating them with icons on the desktop. Users do not need to know
where on the network the data resides or that they are even accessing CD ROMs.
In addition, Meridian's client software allows users to avoid drive letter
limitations through its ability to group multiple networked CD ROMs under a
single client drive letter which enables searches across multiple CD ROM
volumes. Meridian's server software provides a graphical user interface for the
central management of all networked CD ROMs. Load balancing and disk caching
features allow multiple users to access a single CD ROM with optimum
performance, while license metering ensures that only the proper number of
licensed users may access data at any one time.
THE MERIDIAN STRATEGY
Meridian believes that its customers currently want to implement "plug
and play" CD ROM networking systems. In response, the Company offers
competitively priced systems, containing with Meridian's industry-leading
software. The Company's goal is to be the leading provider of one-stop shopping
for CD ROM networking systems and software. The key elements of the Company's
strategy include:
FOCUS ON SOFTWARE. To meet customer demands for integrated solutions, the
Company offers systems containing the Company's networking software and CD ROM
servers configured by the Company with third-party components. The Company
believes that because the market for networked CD ROMs is at an early stage many
customers will continue to prefer integrated systems because of the lack of
commercially available CD ROM servers. As industry standard CD ROM servers
become available, Meridian believes that customers will increasingly purchase
separate CD ROM networking software to run on these servers. As a result, the
Company focuses substantially all of its research and development efforts on
software and has recently introduced a variety of software products for CD ROM
networking to meet anticipated market demand.
SUPPORT INDUSTRY STANDARDS. The Company provides CD ROM networking software
that operates on a broad range of desktop platforms and network operating
systems. The Company believes that Microsoft Windows NT will be increasingly
popular for networks in the future and will be the basis for an increasing
number of enterprise-wide networks. At the same time, there is a large installed
base of Novell NetWare LANs. The Company believes that both operating systems
will reside concurrently in many network environments. Meridian's software
provides interoperability between networks making it transparent to the user as
to where the data exists or under which network operating system. Meridian's
current software also provides a common user interface and set of administrative
tools for popular network operating systems. The Company believes that it is an
advantage to support multiple networking operating systems, client operating
systems, connectivity methodologies and network protocols.
PURSUE INTRANET AND INTERNET OPPORTUNITIES. Today, businesses can access
information via CD ROM databases, via the Internet, or via on-line services such
as America Online. In addition, organizations are implementing web technology to
create corporate intranets that provide users with seamless access to internal
information and public information on the Internet, with a consistent, easy to
use interface, regardless of where the data resides. It is estimated that
intranets will grow at approximately three times the rate of the Internet over
the next four years. The Company believes that CD ROM and Internet/intranet
technologies represent complementary opportunities for the development of new
markets, and that organizations will want to access CD ROMs as part of their
intranets. In 1996, the Company introduced new systems and software to extend
the functionality of web servers to manage and meter CD ROM data, and make
information on CD ROMs accessible in standard HTML format to web browsers such
as Netscape Navigator and Microsoft Internet Explorer.
LEVERAGE THIRD PARTY DISTRIBUTION. The Company sells its products through
two-tier distribution, comprised primarily of large distributors of electronic
hardware and software and key value added resellers ("VARs"). The Company seeks
to minimize any conflict between third party distribution and direct sales by
fulfilling orders through distributors and VARs, except in special circumstances
dictated primarily by customer requests. In 1996, the Company made the decision
to pursue the OEM market for Meridian's software products. Meridian's
multi-platform, operating system and product strategy benefits OEM partners by
providing a single source for all of their CD ROM networking software needs.
However, there can be no assurance that such OEM sales will occur. In addition,
the Company's strategy includes establishing co-marketing and reselling
relationships with leading CD ROM content providers. In furtherance of this
strategy, the Company has agreements with Follett Software Company, a reseller
of educational databases, and SilverPlatter Software, a provider of health care,
biomedical and academic databases.
EXPAND INTERNATIONAL SALES. The Company intends to increase international sales
by expanding its international distribution channel. The Company opened a sales
office in the United Kingdom in 1996 and intends to further increase its
presence in the European market. In addition, the Company has established
several key distribution relationships in various countries in the Pacific Rim.
To address the needs of international customers, the Company intends to continue
to localize products for use in the native language of targeted countries. See
"Risk Factors - Expansion of International Operations."
PRODUCTS
Meridian provides support for a broad range of networking environments
(Novell, Windows NT and Banyan VINES) and desktop operating systems (Windows 95
and Windows 3.x, DOS, Macintosh and OS/2), and is compatible with most major
connectivity methodologies and network protocols. The table below describes
selected principal products, their functions and price ranges:
<TABLE>
<CAPTION>
PRODUCTS INTRODUCTION
SOFTWARE DESCRIPTION DATE PRICE RANGE*
<S> <C> <C> <C>
CD Net for NetWare Client and server software that provides native NetWare
volume access for CD ROMS on Novell servers Jan. '96 $995 - $1,195
CD Intranet for Windows NT CD Intranet brings CD ROM and mixed media storage to Sep. `96 $1,495
business intranets
CD Net for Windows NT Client and Server software for Windows NT for
enterprise-wide CD ROM applications, providing a common Aug. '95 $995
user interface in mixed Novell/NT environments
CD Net Plus Windows-based client and server software for dedicated, May '95 $545-$1,595
high performance CD ROM servers on Novell networks
CD Net for VINES Client and server software providing access to CD ROMs on Aug. '95 $1,995
Banyan VINES servers
CD NetRecord Novell NLM for recording CD ROMs over NetWare networks Jan. '96 $595
</TABLE>
<TABLE>
<CAPTION>
PRODUCTS INTRODUCTION
SYSTEMS DESCRIPTION DATE PRICE RANGE*
<S> <C> <C> <C>
CD Net 914/956 Complete plug and play CD ROM servers with 14 to 56 12x Aug. '95 $12,330-$48,150
CD ROM drives, featuring Pentium 166 processors, fast
Ethernet adapters, for Novell, NT, Intranets, and VINES
CD Net 900R CD Servers designed for rack mount enclosures, featuring April 1996 $14,330-$17,660
Pentium 166 processors, fast Ethernet adapters, and 12x CD
ROM drives
CD Net Systems Complete "plug and play" CD ROM servers including April 1996 $3,815-$13,745
(807/814) Meridian's software ranging in size from departmental to
enterprise-wide systems
CD Net ROMs CD ROM subsystems for connection to servers via SCSI 1990 $1,065-$17,965
CD NetLink A network peripheral including software that allows up to April `96 $895-$1,195
14 CD ROM drives to be connected to a Novell network
without a dedicated server
<FN>
*Price range based on domestic end user list price as of January 27, 1997.
</FN>
</TABLE>
SALES, MARKETING AND CUSTOMER SERVICE
The Meridian sales organization is divided into multiple North American
territories, which aggregate to two sales regions, Europe, the Middle East,
Latin America, and the Pacific Rim. Leading each region is a sales director
responsible for working with the Company's major distributors, direct sales of
large systems into major accounts, and OEM sales. Each territory has an assigned
sales representative, who is responsible for developing marketing programs with
all VARs in his or her territory, developing new VAR relationships, and sales
into smaller accounts through the Company's VARs. Each territory is supported by
a business development team which is responsible for training new VARs on the
installation and support of Meridian software and systems, and supporting
existing VARs. A final level of sales support is provided by sales engineers who
are responsible for several territories each. The Company's entry level software
and systems are marketed through advertising and trade shows. The Company seeks
to minimize any conflict between third party distribution and direct sales by
fulfilling orders through distributors and VARs, except in special circumstances
dictated primarily by customer requests. The Company's sales personnel that are
focused on the distribution channel work closely with the Company's largest
distributors to ensure that the proper level and mix of inventory is maintained,
and works with the distributor and VAR in developing cooperative marketing
programs for the Company's products. In 1996, Meridian opened a sales office in
the United Kingdom and intends to further increase its presence in the European
market.
To support its sales efforts, the Company's marketing organization
focuses on increasing end user demand and creating awareness in the distribution
channel of the Company's products. Based on Meridian's belief that the CD ROM
networking market is still in the emerging stage, the Company's marketing
organization focuses on educating end users on the Company's simple, cost
effective solution to accessing and sharing CD ROMs and educating network
professionals on the administration tools available with CD Net software, ease
of adding new titles to their CD ROM library, and license control and metering.
The Company's marketing program includes direct mail, public relations,
educational seminars, trade shows, selected joint marketing programs, an
extensive home page on the World Wide Web and advertising in broad industry
publications such as the PC Week and LAN Times. The Company's sales and
marketing organization consists of 34 persons as of December 31, 1996.
The Company's customer service department consists of 7 persons as of
December 31, 1996. The Company's customer support department provides
installation and maintenance support via telephone, a Company bulletin board,
ftp file server, and Internet support on the World Wide Web at
http://www.meridian-data.com. Meridian products are sold with a one year
warranty, which can be extended for an additional fee.
DISTRIBUTION
Approximately 82% of the Company's product sales are derived from
two-tier distribution sales to distributors and VARs. Because the Company
derives such a significant portion of its products through distributors and
VARs, it is difficult for the Company to determine the identity of the end user
of the Company's products. The Company's distribution channel consists of five
North American distributors, including Ingram Micro, Inc., Tech Data Corporation
and Merisel, Inc. Meridian's VARs generally concentrate their sales efforts by
region, such as MicroAge Computers, or by industry, such as Government
Technology Services, Inc. The Company intends to expand its international
distribution channel. The Company opened a sales office in the United Kingdom in
1996 and intends to establish additional distribution relationships in Europe,
Latin America, and the Pacific Rim. The Company's systems are installed in
numerous industries, including government, education, law and accounting. The
Company's typical distribution agreement gives the distributor the right, under
limited circumstances, to return products. In addition, the Company allows price
protection to certain distributors, to the extent that they are holding
inventory at the time the Company announces a price decrease.
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, could have a material adverse effect on the
Company's business, financial condition and results of operations. 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 possess
sufficient technical, marketing and sales resources and must often devote these
resources to a relatively lengthy sales cycle. There can be no assurance that
the Company's current distributors and VARs will be able to continue to market
the Company's existing or new products effectively or that economic conditions
or industry demand will not adversely affect such distributors and VARs. New
products may require a 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, financial condition and results of operations. See "Risk Factors -
Dependence on Third Party Distributors."
RESEARCH AND DEVELOPMENT
The Company has invested significant resources in the development of
new products and expects to continue to make these investments in the future.
Meridian also plans to continue to enhance its products with new releases that
provide additional features. The Company's research and development department
consists of 20 software engineers as of December 31, 1996. In 1996, the
Company's research and development expenditures were approximately $3.3 million
or 13% of product sales. During 1996, the Company introduced new software to
extend the functionality of corporate intranets to include CD ROMs, and make
information on CD ROMs accessible in standard HTML format. In November 1996, the
Company entered into an agreement with a development stage company ("DSC") which
is developing 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. In return, the Company received warrants convertible into
the common stock of DSC, the right to license DSC's software technology, and a
security interest in DSC's technology. To the extent that DSC expends the funds
advanced under the Loan, Meridian reduces the carrying value of this investment
and records the expense as research and development expense based on
management's estimate of DSC development activities. The Company expects to
record additional charges to research and development expense on a quarterly
basis, concurrent with DSC's development efforts due to uncertainty over the
future realization of the Loan. Meridian is under no obligation to advance
additional funds to DSC.
The Company believes that the CD ROM server manufacturing industry has low
barriers to entry. Since CD ROM servers are manufactured from off-the shelf
components, it is difficult to create a significant competitive advantage solely
through hardware development. As a result, Meridian focuses its research and
development activities primarily on software development. The Company's hardware
development efforts revolve around maintaining compatibility with existing and
developing hardware standards. If industry standard CD ROM server hardware were
to become more generally available, the Company will be in a position to more
easily transition its revenue stream from a systems-centric basis to a
software-centric basis.
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. There can be no assurance that the Company will
be successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that these products will achieve market
acceptance. See "Risk Factors - Rapid Technological Change; Potential for
Product Defects."
MANUFACTURING
The Company contracts with third parties to manufacture its hardware
and software products, which consist of manufacturing server subassemblies and
diskette duplication, and printing of manuals and boxes. Final assembly and
testing are performed currently by the Company at its Scotts Valley facility.
Finished products are distributed globally from the Scotts Valley facility to
customers. The Company is dependent on a small number of suppliers for certain
key components and parts used in its products, including CD ROM drives,
microprocessors, integrated circuits and power modules. In addition, certain
subassemblies used in the Company's products are manufactured by a single third
party vendor. Financial, market or other developments adversely affecting the
Company's key component suppliers, or the loss of a key subassembly
manufacturer, could have an adverse effect on their ability to supply the
Company with components or assemblies and, consequently, 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 assembly services could be arranged, the process of qualifying new suppliers
could be lengthy, and 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. See "Risk
Factors - Dependence on Third Party Suppliers."
COMPETITION
The markets for the Company's products are extremely competitive, and
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. Many of the Company's
competitors have entrenched market positions, established patents, copyrights,
trade names, trademarks and intellectual property rights and substantial
technological capabilities. The Company's current competitors in the CD ROM
networking market include other suppliers of CD ROM networking software and
hardware such as Procom Technology, Microtest, Inc. and Microdesign
International. The Company also competes indirectly with suppliers of personal
computers, like Dell Computers, 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 computers
market. 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.
The Company believes that its ability to compete successfully in the CD
ROM networking market will depend upon a number of factors both within and
outside of its control, including price, quality, product performance and
features; timing of new product introductions by the Company, its customers and
competitors; customer service and technical support; and the ability of the
Company to respond more quickly than current or potential competitors to new or
emerging technologies, evolving industry trends and changes in customer
requirements and to devote greater resources than current or potential
competitors to the development, promotion and sale of products. The Company
believes that it competes favorably with respect to these factors. There can be
no assurance however that the Company will have the financial resources,
technical expertise, or marketing, sales, distribution and customer service and
technical support capabilities to compete successfully.
RISK FACTORS
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. 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
due to competitive pressures. The Company believes that it will be at least
several months at a minimum before any positive revenue results from these
actions will become evident, if at all. As a result, the Company anticipates
that its earnings for at least the first half of 1997 will be below those of
1996, and there can be no assurance that earnings will improve thereafter.
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 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. Similarly,
if such government agencies reduced their purchases of Meridian products in
favor of those of its competitors, 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. In the second quarter of 1996, the Company sold two site
licenses totaling approximately $330,000. Meridian will attempt to sell
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 gross margin.
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."
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
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, 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. 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 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, 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.
EMPLOYEES
As of December 31, 1996, the Company employed 94 individuals, of whom
22 were employed in manufacturing, 20 in research and development, 31 in sales
and marketing, 7 in customer support, 3 in product management, and 11 in
administration and finance. Competition in the recruiting of personnel in the
computer and networking industry is intense. The Company believes that its
future success will depend, in part, 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. None of the Company's employees are represented by
a labor union or are subject to a collective bargaining agreement. The Company
believes that relations with its employees are good.
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. 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. See "Risk Factors - Dependence on
Key Personnel; Management of Growth."
ITEM 2. PROPERTIES.
The Company leases its headquarters office and manufacturing facility
in Scotts Valley, California, under a noncancleable operating lease which
expires in 1999. Other than several small regional sales offices, primarily all
of the Company's operations are conducted at the Scotts Valley location. This
facility is currently being fully utilized. The Company is investigating
expanding its operations into vacant office space in the surrounding area. Given
the current real estate market, management expects that a suitable location can
be found at terms favorable to the Company.
ITEM 3. LEGAL PROCEEDINGS
A former employee of the Company has claimed that she was wrongfully
terminated and seeks unspecified monetary damages and fees from Meridian. The
Company has conducted a review of the circumstances surrounding this matter and
believes the claim is without merit. Although the Company believes that it
should prevail, the uncertainties inherent in litigation prevent the Company
from giving any assurance about the outcome of such litigation. Nevertheless,
should the former employee prevail in her claim, the Company does not believe
such a result would have a material adverse affect on the Company's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1996.
EXECUTIVE AND OTHER OFFICERS OF THE COMPANY
The executive officers of the Company who are elected by and serve at
the discretion of the Board of Directors, and their ages are as follows:
EXECUTIVE OFFICERS
NAME AGE POSITION
- ---- --- ---------------------------------------
Gianluca U. Rattazzi 44 President, CEO and Director
Charles Joseph 46 Sr. Vice President, Sales and Marketing
Erik E. Miller 36 Sr. Vice President, Finance and CFO
Shmuel Shottan 45 Sr. Vice President, Engineering and CTO
DR. RATTAZZI co-founded the Company in July 1988. He has served as
President and a director of the Company since inception and was appointed Chief
Executive Officer in October 1992. From 1985 to 1988, Dr. Rattazzi held various
executive level positions at Virtual Microsystems, Inc., a computer peripheral
networking company, most recently as President. Dr. Rattazzi holds an M.S.
degree in Electrical Engineering and Computer Science from University of
California, Berkeley and a Ph.D. in Physics from University of Rome, Italy.
MR. JOSEPH joined the Company as Sr. Vice President of Sales and Marketing
in November 1996. Prior to joining the Company, Mr. Joseph served as Executive
Vice President and General Manager for Trimble Navigation from 1992 through
November 1996. Mr. Joseph holds an MA and BA degree in English Literature from
Marquette University.
MR. MILLER joined the Company as Controller in February 1992. Mr.
Miller was appointed Vice President, Finance in October 1992, Chief Financial
Officer in January 1993, and Senior Vice President in October 1996. Mr. Miller
served as Director of Finance and Administration for Granger-Telettra, a
microwave telecommunications company, from September 1988 to February 1992.
Mr. Miller holds a B.S. in Accounting from University of California, Berkeley.
MR. SHOTTAN joined the Company in September 1993 as Vice President,
Engineering and Chief Technical Officer. In October 1996, Mr. Shottan was
promoted to Sr. Vice President. Prior to joining the Company, Mr. Shottan served
in various executive and managerial positions at AST Research, Inc. ("AST"),
most recently as Director of Server Development from 1989 to 1993. Prior to
joining AST, Mr. Shottan was with ICL North American Development Operations, a
manufacturer of UNIX departmental servers, from 1982 to 1989. Mr. Shottan holds
a B.S. in Electrical Engineering from Technion, Israel Institute of Technology,
Haifa, Israel.
OFFICERS
NAME AGE POSITION
- ------------------ --- ------------------------------------
Luciano Dalle Ore 38 Vice President, Advanced Development
Carlo Garbagnati 37 Vice President, Software Development
Trevor Heathorn 38 Vice President, Advanced Software
Kenneth Kuo 46 Vice President, Manufacturing
MR. DALLE ORE joined the Company in June 1996 as Vice President of
Advanced Development. Prior to joining the Company, Mr. Dalle Ore was Vice
President of Research and Development of Sextant Corporation, a process
manufacturing software developer from 1994 through 1996. From 1991 to 1994, Mr.
Dalle Ore was Director of Marketing for MAI Systems." Mr. Dalle Ore holds a BSEE
from Purdue University and a MSEE from Stanford University.
MR. GARBAGNATI joined the Company in November 1988 as Manager of Software
Engineering and was promoted to Director of Software Systems in August 1993. In
January 1995, he became Vice President, Software Development. Mr. Garbagnati
holds a B.S. in Electrical Engineering from Northrop University and an MS in
Electrical Engineering from Stanford University.
MR. HEATHORN joined the Company in August 1988 as Manager of Software
Engineering and was one of the Company's original employees. In August 1993, Mr.
Heathorn was promoted to director of Advanced Software Development and in
January 1995 to Vice President, software Development. Mr. Heathorn holds a B.A.
in Engineering and an M.A. in Engineering from Cambridge University, England.
MR. KUO joined the Company in January 1990 as Vice President,
Manufacturing. From 1986 to 1989, Mr. Kuo was the Senior Manager, Operations
Engineering at Sun Microsystems, Inc. Mr. Kuo holds a B.S. in Electrical
Engineering from National Taiwan University and an M.S. in Electrical
Engineering and Computer Science from the University of Cincinnati, Cincinnati,
Ohio.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The shares of the Company's Common Stock are listed on the NASDAQ
National Market System under the symbol MDCD. The following table sets forth,
for the periods indicated, the high and low closing sales price per share for
the Company's Common Stock as reported by NASDAQ.
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ---- ---
First quarter........................................ $12.69 $8.88
Second quarter....................................... 19.00 7.50
Third quarter........................................ 9.69 6.63
Fourth quarter....................................... 8.00 6.38
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
---------------------------- ---- ---
First quarter........................................ $ 7.88 $3.63
Second quarter....................................... 6.63 3.00
Third quarter........................................ 10.50 5.13
Fourth quarter....................................... 12.75 8.25
As of February 28, 1997, there were 109 shareholders of record of the
Company's Common Stock and approximately 2,000 beneficial owners. The Company
has never declared or paid any cash dividends on its capital stock. The Company
currently intends to retain earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following is a summary of the Company's unaudited quarterly results
for the four quarters ended December 31, 1996 and 1995. In management's opinion,
these results have been prepared on a basis consistent with the audited
financial statements contained elsewhere herein, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The information set
forth below is not necessarily indicative of the results of future operations
and should be read in conjunction with the financial statements and notes
thereto appearing in Item 8 of this report.
QUARTERLY FINANCIAL DATA
1996 QUARTER ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues.............. $7,062 $6,402 $6,652 $6,000
Income from operations...... 848 951 1,065 45
Net income ................. 1,013 1,242 1,503 516
Net income per share........ $ 0.12 $ 0.13 $ 0.15 $ 0.05
1995 QUARTER ENDED
*MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
-------- ------- -------- --------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues................ $5,878 $4,961 $6,630 $7,826
Income (loss) from
operations (1)............. 313 (223) 661 1,057
Net income (loss)............. 482 (38) 836 1,220
Net income (loss) per share... $ 0.06 $(0.00) $ 0.10 $ 0.14
*Total revenue includes $1.5 million for certain Parallan OEM software sales.
1)Income (loss) from operations includes approximately $228,000 in amortization
of purchased technology in each of the first two quarters of 1995.
FIVE YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Product sales............ $26,116 $23,426 $ 1,957 $ 276 $ 2,470
Other revenue............ - 1,500 - - -
Product sales and
services to and
royalties from IBM..... - 369 3,954 21,676 7,303
------ ------ ----- ------ -----
Total revenues............ 26,116 25,295 5,911 21,952 9,773
Cost of product sales
and amortization of
purchased technology.... 10,162 12,605 1,070 13 1,402
Cost of product sales
and services to and
royalties from IBM...... - - 4,365 14,801 4,714
Income (loss) from
operations (2).......... 2,909 1,808 (28,534) 5,956 (5)
Net Income (loss) (2)..... 4,274 2,500 (27,507) 6,782 (48)
Net income (loss)
per share (1 & 2)....... $ 0.44 $ 0.30 $ (3.69) $ 0.97 $ (0.01)
DECEMBER 31,
1996 1995 1994 1993 1992
------ ------ ----- ---- ------
Cash and cash equivalents. $24,809 $11,752 $ 8,692 $ 4,145 $11,223
Marketable securities..... 14,340 5,900 5,077 34,031 -
Restricted cash........... - - 21,201 - -
Working capital........... 39,760 15,788 10,591 36,007 865
Total assets.............. 45,245 22,823 39,793 41,832 15,485
Shareholders' equity...... 41,230 16,373 11,445 37,809 2,096
1) Net loss per share for the year ended December 31, 1992, is based on pro
forma weighted average shares and equivalents.
2) Includes a charge for in-process R&D of $21,245 in 1994.
ITEM 7. 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 its prior 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. (MDI). The total purchase price
was $23.1 million. The acquisition was accounted for using the purchase method
of accounting and included $21.2 million allocated to in-process research and
development which was charged to expense on December 1, 1994. Since the
acquisition, the Company has been engaged in the business of developing CD ROM
software products and selling CD ROM networking software both separately and
integrated with CD ROM network servers. Due to the fundamental operational
change in the Company's high performance network superserver business brought
about by the transition from manufacturing to royalties and service in 1993, to
the subsequent exit from that business and product line in 1994, and the
acquisition of MDI on December 1, 1994, management believes that any comparison
between 1996, 1995, and 1994 would not be germane to the discussion of 1996 or
1995 operating results. Since December 1, 1994, the Company's revenues consist
primarily of the sale of Meridian products. MDI's results of operations are
included in those of the Company from December 1, 1994. The following discussion
focuses primarily on material events which occurred during the year ended
December 31, 1994, and the material events and trends for the four quarters of
1996 and 1995.
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; 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
VARs. In 1996 and 1995, identifiable sales to federal governmental agencies
accounted for approximately 11% and 17%, respectively, 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. Similarly, if such government agencies reduced their purchases of
Meridian products in favor of those of its competitors, 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
The statement of operations data on the following pages for the years
ended December 31, 1996 and 1995 and the balance sheet data at December 31, 1996
and 1995 are derived from the financial statements of the Company which have
been audited by Price Waterhouse LLP, independent accountants. The statement of
operations data for each of the quarters in the years ended December 31, 1996
and 1995 and the balance sheet data for the quarters ended March 31, June 30,
and September 30, 1996 and 1995, are derived from the unaudited financial
statements and include all adjustments, consisting of normal recurring accruals,
which the management of the Company considers necessary for the fair
presentation of the information set forth therein. The operating results of any
quarter are not necessarily indicative of the results that may be expected for
any future period.
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 due to competitive pressures. The Company believes that it
will be at least several months at a minimum before any positive revenue results
from these actions will become evident, if at all. As a result, the Company
anticipates that its earnings for at least the first half of 1997 will be below
those of 1996, and there can be no assurance that earnings will improve
thereafter. See "Results of Operations - Revenues", "- Gross Margin", and
"Operating Expenses - Sales and Marketing".
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
1996 1996 1996 1996 1996
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues -
Product sales..................$7,062 $6,402 $ 6,652 $6,000 $26,116
----- ----- ------ ----- ------
Costs and expenses:
Cost of product sales.......... 3,167 2,331 2,431 2,233 10,162
Research and development....... 751 770 821 973 3,315
Sales and marketing............ 1,764 1,835 1,801 2,120 7,520
General and administrative..... 532 515 534 629 2,210
----- ----- ------ ----- ------
Total costs and expenses...... 6,214 5,451 5,587 5,955 23,207
----- ----- ------ ----- ------
Income from operations........... 848 951 1,065 45 2,909
Interest income.................. 221 350 520 499 1,590
----- ----- ------ ----- ------
Income before income taxes....... 1,069 1,301 1,585 544 4,499
Provision for income taxes....... (56) (59) (82) (28) (225)
----- ----- ------ ----- ------
Net income ......................$1,013 $1,242 $ 1,503 $ 516 $ 4,274
===== ===== ====== ===== ======
Net income per share.............$ 0.12 $ 0.13 $ 0.15 $ 0.05 $ 0.44
===== ===== ====== ===== ======
Weighted average common shares
and equivalents................. 8,706 9,892 10,041 9,936 9,692
===== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------
<S> <C> <C> <C> <C> <C>
Revenues -
Product sales.................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales.......... 44.8 36.4 36.5 37.2 38.9
Research and development....... 10.7 12.1 12.4 16.2 12.7
Sales and marketing............ 25.0 28.7 27.1 35.3 28.8
General and administrative..... 7.5 8.0 8.0 10.5 8.5
----- ----- ----- ----- -----
Total costs and expenses...... 88.0 85.2 84.0 99.2 88.9
----- ----- ----- ----- -----
Income from operations........... 12.0 14.8 16.0 0.8 11.1
Interest income.................. 3.1 5.5 7.8 8.3 6.1
----- ----- ----- ----- -----
Income before income taxes....... 15.1 20.3 23.8 9.1 17.2
Provision for income taxes....... (0.8) (0.9) (1.2) (0.5) (0.9)
----- ----- ----- ----- -----
Net income....................... 14.3% 19.4% 22.6% 8.6% 16.3%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
marketable securities..........$18,185 $39,500 $39,236 $39,149
Working capital.................. 16,824 38,959 39,934 39,760
Total assets..................... 22,454 44,765 45,195 43,775
Shareholders' equity............. 17,499 39,702 40,653 41,230
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
1995 1995 1995 1995 1995
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales..................$4,378 $4,592 $6,630 $7,826 $23,426
Other revenue.................. 1,500 369 - - 1,869
----- ----- ----- ----- ------
Total revenues............... 5,878 4,961 6,630 7,826 25,295
----- ----- ----- ----- ------
Costs and expenses:
Cost of product sales.......... 2,604 2,508 3,285 3,753 12,150
Amortization of purchased
technology................... 229 226 - - 455
Research and development....... 700 524 610 640 2,474
Sales and marketing............ 1,413 1,472 1,525 1,828 6,238
General and administrative..... 619 454 549 548 2,170
----- ----- ----- ----- ------
Total costs and expenses..... 5,565 5,184 5,969 6,769 23,487
----- ----- ----- ----- ------
Income (loss) from operations.... 313 (223) 661 1,057 1,808
Interest income.................. 184 185 203 204 776
----- ----- ----- ----- ------
Income (loss) before income
taxes.......................... 497 (38) 864 1,261 2,584
Provision for income taxes....... (15) - (28) (41) (84)
----- ----- ----- ----- ------
Net income (loss)................$ 482 $ (38) $ 836 $1,220 $ 2,500
===== ===== ===== ===== ======
Net income (loss) per share......$ 0.06 $(0.00) $ 0.10 $ 0.14 $ 0.30
===== ===== ===== ===== ======
Weighted average common shares
and equivalents................ 8,204 7,841 8,471 8,664 8,416
===== ===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.................. 74.5% 92.6% 100.0% 100.0% 92.6%
Other revenue.................. 25.5 7.4 - - 7.4
----- ----- ----- ----- -----
Total revenues............... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product sales.......... 44.3 50.6 49.5 48.0 48.0
Amortization of purchased
technology................... 3.9 4.5 - - 1.8
Research and development....... 11.9 10.6 9.2 8.2 9.8
Sales and marketing............ 24.0 29.7 23.0 23.3 24.7
General and administrative..... 10.6 9.1 8.3 7.0 8.6
----- ----- ----- ----- -----
Total costs and expenses..... 94.7 104.5 90.0 86.5 92.9
----- ----- ----- ----- -----
Income (loss) from operations.... 5.3 (4.5) 10.0 13.5 7.1
Interest income.................. 3.2 3.7 3.0 2.6 3.1
----- ----- ----- ----- -----
Income (loss) before income
taxes.......................... 8.5 (0.8) 13.0 16.1 10.2
Provision for income taxes....... (0.3) - (0.4) (0.5) (0.3)
----- ----- ----- ----- -----
Net income (loss)................ 8.2% (0.8)% 12.6% 15.6% 9.9%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
marketable securities..........$15,852 $14,795 $16,033 $17,652
Working capital.................. 13,302 13,496 14,302 15,788
Total assets..................... 21,029 18,770 21,118 22,253
Shareholders' equity............. 13,981 14,008 14,854 16,373
</TABLE>
REVENUES
PRODUCT SALES. The Company's product sales increased from $23.4 million in 1995
to $26.1 million in 1996, an increase of approximately 12%, due to higher sales
in the first quarter of 1996. This increase was driven by sales of new software
products released throughout 1995 and a resulting increase in the Company's
system sales. Sales for the last nine months of 1996 were flat over the
comparable period of 1995. During this time, the Company's revenue mixed shifted
towards higher software sales and lower system sales. This was due to increasing
price competition on system sales beginning late in the second quarter of 1996
and a heavy promotional emphasis on software products by the Company throughout
1996. In response to the heightened competitive environment, Meridian increased
promotional spending in the fourth quarter of 1996 and, in January 1997, reduced
prices on its systems by approximately 33%. As a result of the January 1997
price decreases, the Company expects that its revenues will be sequentially down
from the fourth quarter of 1996 through at least the first two quarters of 1997,
and there can be no assurance that revenues will improve thereafter.
The Company's sales in the first quarter of 1996 were favorably
impacted by new software products released over the prior twelve months. In the
second quarter of 1996, sales decreased from the prior quarter due to the
heightened Company and customer focus on Meridian's software products. This
resulted in a shift in Meridian's revenue mix towards higher software content,
and lower sales of systems. Included in the Company's second quarter sales was
approximately $330,000 from the sale of two software site licenses. Sales in the
third and fourth quarters of 1996 continued the trend from the second quarter,
exacerbated by increased price competition from the Company's largest
competitors. The Company's revenue mix continued its shift towards higher
software content and lower sales of systems. As this trend accelerated,
Meridian's revenue growth slowed, while gross margin increased.
Approximately 82% of the Company's product sales are derived from
two-tier distribution sales to distributors and VARs. Two distributors, Ingram
Micro, Inc. and TechData Corporation, accounted for 25% and 18%, respectively,
of Meridian's 1996 product sales. The loss of any of these customers would have
a material adverse effect on the Company's results of operations. 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" and "
- - Emerging Markets; Product Concentration."
The Company's product sales in the first quarter of 1995 consisted
primarily of DOS-based products, some of which had become non-competitive. In
the second quarter of 1995, sales increased 5% over the first quarter primarily
due to the commercial release in June 1995 of the Company's Windows-based CD Net
PLUS v6.0 and customer response to increased advertising. Sales in the third
quarter of 1995 increased 44% over the second quarter primarily as a result of a
full quarter of sales of CD Net PLUS v6.0, customer response to increased
advertising, the introduction of companion releases for Windows NT and Banyan
Vines networking environments, and federal government purchases at the end of
its fiscal year. Fourth quarter sales increased 18% over the third quarter due
to the impact of calendar year-end business purchases and the continuing
favorable reception of the products introduced in the second and third quarters.
Product sales to non-IBM customers in 1994 totaled $2.0 million which
consisted of $0.2 million of sales and service revenue related to non-IBM
Parallan customers and $1.8 million of Meridian product sales for the month of
December 1994.
OTHER REVENUE. Other revenue totaling $1.5 million in the first quarter of 1995
consisted of a non-recurring sale of OEM software relating to the Company's
former network superservers product line. In the second quarter of 1995, other
revenue of $0.4 million resulted from the recognition of project revenue that
had been attributed to the Company's former product line and deferred from 1993.
The Company does not expect any additional revenues from its former product
line.
<PAGE>
PRODUCT SALES AND SERVICES TO AND ROYALTIES FROM IBM
There were no product sales and service to, and royalties from IBM in
1996. Product sales and services to and royalties from IBM were $0.4 million and
$4.0 million in 1995 and 1994, respectively. Revenue related to IBM in 1995
consisted of project revenue deferred from 1993. No future product sales and
services to, or royalties from IBM are expected.
GROSS MARGIN
Gross margin on product sales, exclusive of amortization of purchased
technology, increased from 48% in 1995 to 61% in 1996. This increase was due to
the higher proportion of software sales in the Company's revenue mix in relation
to systems sales, site licenses, and increased price/performance ratios for CD
ROM drives. In January 1997, Meridian lowered prices on its CD ROM networking
systems by approximately 33% due to competitive pressures. The Company
anticipates that this will result in a reduction in its gross margin percentage
in 1997.
Gross margin was 55%, 64%, 63%, and 63% in the four sequential quarters
of 1996, respectively. Throughout 1996, gross margin was favorably impacted by
the increase in the proportion of Meridian's revenues derived from the sale of
stand-alone software products, sales of site licenses in the second quarter, and
increased price/performance ratios for CD ROM drives
Gross margin, excluding other revenue and including the amortization of
purchased technology, was 35%, 40%, 50% and 52% in the four sequential quarters
of 1995, respectively. During the first quarter of 1995, the Company's gross
margin was adversely impacted by a general decrease in prices for the Company's
products, particularly due to competition for low-end networked CD ROM systems,
and additional reserves for inventory obsolescence. The Company's gross margin
generally increased after the first quarter of 1995 as a result of increased
sales of the Company's stand alone software products, the increase in the
product mix to higher margin systems with higher software content, and the
completion in the second quarter of 1995 of the cost reduction program
implemented in the first quarter of 1995. The Company's gross margin increased
in the second half of 1995 as compared to the first half of 1995 due to the
completion in the second quarter of 1995 of amortization of purchased
technology. Technology acquired in the purchase of Meridian Data, Inc. was
amortized over its estimated useful life of seven months, beginning at December
1, 1994. Amortization of purchased technology was $0.5 million for 1995, all of
which occurred in the first half of 1995. Another factor affecting Meridian's
gross margin in 1995 was the declining cost of purchasing CD ROM drives
manufactured in Japan, reflecting changes in exchange rates for the yen,
increased price competition, and availability.
Cost of sales in 1994 was entirely due to the inclusion of one month of
Meridian cost of sales in the Company's results of operations.
For a discussion of certain risks affecting cost of sales, see "Risk
Factors - Dependence on Third Party Suppliers" and " - Expansion of
International Operations; Foreign Currency Fluctuations."
AMORTIZATION OF PURCHASED TECHNOLOGY
There was no amortization expense in 1996. Technology acquired in the
purchase of MDI was amortized over its estimated useful life of seven months,
beginning in December 1994. Purchased technology had been completely amortized
by June 30, 1995.
<PAGE>
COST OF PRODUCT SALES AND SERVICES TO, AND ROYALTIES FROM IBM
There was no cost associated with product sales and services to, and
royalties from IBM in 1996 or 1995. The cost of product sales and services to,
and royalties from IBM in 1994 exceeded the level of product sales due to
manufacturing overhead expenses which were geared to a higher level of shipments
than occurred.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expense in 1996 was $3.3
million, an increase of $0.8 million, or 34%, over 1995. This increase was due
to higher payroll, overhead expenses, and the amortization of an advance made to
a development stage company ("DSC"), developing 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"). In November 1996,
the Company entered into an agreement with DSC. As part of this agreement,
Meridian loaned $1 million (the "Loan") to DSC, which was recorded in other
assets. In return, the Company received warrants convertible into the common
stock of DSC, the right to license DSC's software technology, and a security
interest in DSC's technology. To the extent that DSC expends the funds advanced
under the Loan, Meridian reduces the carrying value of this investment and
recognizes the expense as research and development expense. As a result, the
Company recorded $0.2 million in research and development expense which reflects
Meridian's estimate of the development activities of DSC through December 31,
1996. The Company expects to record additional charges to research and
development expense concurrent with DSC's development efforts due to uncertainty
over the future realization of the Loan. Meridian is under no obligation to
advance additional funds to DSC. The Company expects research and development
expense to increase in 1997 both in absolute dollars and as a percent of sales.
Research and development expense consists of salaries and related
expenses incurred in the development of the Company's products, as well as
expenses related to consultants and prototype material purchased in the
development of the Company's CD ROM networking software and extensions of its
system offerings. Research and development expense was $0.8 million in each of
the first three quarters of 1996, and $1.0 million for the fourth quarter. This
represents approximately 11%, 12%, 12%, and 16% of product sales, respectively.
For a discussion of certain risks related to research and development, see "Risk
Factors - Rapid Technological Change; Potential for Product Defects."
Research and development expense was $0.7 million, $0.5 million, $0.6
million and $0.6 million for the four quarters of 1995, representing 16%, 11%,
9% and 8% of product sales, respectively. Research and development expense
declined in absolute dollars in the second quarter of 1995 from the first
quarter due to reductions in the number of research and development consultants
and employees as a result of organizational changes made following the
acquisition of Meridian Data, Inc. Research and development expense increased
moderately in the second half of 1995 as a result of higher spending on new
products which were subsequently released in late 1995 and early 1996.
Meridian believes that, as CD ROM server hardware increasingly becomes
a commodity item, it will be difficult to create a significant competitive
advantage through hardware development. Therefore, the Company devotes
substantially all of its engineering resources towards software development. For
a discussion of certain risks related to research and development, see "Risk
Factors Rapid Technological Change; Potential for Product Defects."
In 1994, research and development expenses were $3.5 million. This
includes approximately $188,000 of research and development expense related to
Meridian products incurred in the month of December 1994. The remaining expense
was related to the Company's development of a new server for IBM, which IBM
eventually declined to accept.
SALES AND MARKETING. Sales and marketing expense consists primarily of payroll
and related expenses, including commissions, and advertising related expenses.
Sales and marketing expense was $7.5 million in 1996, and increase of
approximately $1.3 million, or 21% over 1995. This increase was to higher
payroll and related expenses, and increased advertising and promotional
expenses. Sales and marketing expense was $1.8 million for each of the first
three quarters of 1996, and $2.1 million in the fourth quarter. This represented
approximately 25%, 29%, 27%, and 35% of product sales, respectively. In the
fourth quarter of 1996, Meridian substantially increased is promotional and
advertising expenditures to counteract decreasing revenues and increasing price
competition. In 1997, the Company intends to increase the level of sales,
marketing , and technical support that Meridian offers its distribution and
reseller partners. As such, the Company 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 was $1.4 million, $1.5 million, $1.5
million and $1.8 million in the four quarters of 1995, representing 32%, 32%,
23% and 23% of products sales, respectively. In the last six months of 1995 the
Company expanded its marketing efforts, increased its product introduction
expenses, and shifted its advertising from vertical niche periodicals to broad
industry publications, such as PC Week and LAN Times.
For a discussion of certain risks relating to sales and marketing, see
"Risk Factors - Dependence on Third Party Distributors" and " - Emerging
Markets; Product Concentration."
Sales and marketing expense in 1994 primarily consisted of expenses
incurred in market research in support of the Company's next generation server
and sales efforts to license that server to other companies.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of payroll and related expenses and occupancy expenses. General and
administrative expense was approximately $2.2 million in both 1995 and 1996.
General and administrative expense was $0.5 million in each of the first three
quarters of 1996, and $0.6 million in the fourth quarter. General and
administrative expenses increased in the fourth quarter due to higher overhead
expenses. General and administrative expense is expected to increase in 1997
both in absolute dollars and as a percent of sales.
General and administrative expense was $0.6 million, $0.5 million, $0.5
million and $0.5 million in the four quarters of 1995, representing 14%, 10%, 8%
and 7% of product sales, respectively. The decrease in general and
administrative expense in the second quarter of 1995 was primarily due to lower
compensation expense.
General and administrative expense for 1994 consisted primarily of
payroll and related expenses and occupancy expenses.
IN-PROCESS RESEARCH AND DEVELOPMENT ACQUIRED IN MDI ACQUISITION
After allocating the purchase price to net tangible assets, acquired
technology, which represented MDI's current products, was valued by an
independent appraiser using a risk adjusted cash flow model. Under the model,
future cash flows were discounted taking into account risks related to existing
and future markets and an assessment of the life expectancy of the acquired
technology. This analysis resulted in an allocation of $0.5 million to acquired
technology, which was capitalized in other assets. The acquired technology was
amortized over seven months, beginning December 1, 1994.
With respect to MDI's in-process R&D at December 1, 1994, none had
reached a stage where feasibility, delivery, or product features were certain.
Prior to the acquisition by the Company, MDI had begun developing applications
and system software for Windows. However, MDI's experience developing and
marketing Windows-based applications or systems was minimal. Acquired research
and development in-process was valued by an independent appraiser using the same
methodology as the acquired technology. Expected future cash flows associated
with acquired in-process R&D were discounted considering risks and uncertainties
related to the viability of the products, to the work required to establish
feasibility, and to the completion of products that will be ultimately marketed
by the Company. This analysis resulted in an allocation of $21.2 million to
acquired in-process research and development expense. This amount, which is not
deductible for tax purposes, was charged to operating expense at the acquisition
date.
<PAGE>
1994 RESTRUCTURING COSTS
In 1994, Meridian recorded two restructuring charges totaling $2.2
million. The total charge included $1.5 million in non-cash charges relating to
the write-off of fixed assets and prepaid expenses and $0.7 million for
anticipated cash charges. The first charge of $1.4 million was accrued in the
second quarter of 1994 and was related to the downturn in business with IBM.
This charge consisted primarily of the write down of fixed assets identifiable
with Meridian's relationship with IBM, estimated carrying costs of excess
capacity, and a provision for noncancleable purchase commitments. In December of
1994, with the acquisition of MDI, the Company took an additional charge against
earnings of $0.8 million. This charge was primarily related to occupancy
expenses incurred in connection with terminating the lease on the Mountain View,
California, office, severance pay for certain employees, and the write-off of
certain fixed assets. The total number of employees terminated due to reductions
during 1994 was 61. These employees responsibilities covered all functional
departments. Restructuring actions were completed during 1995.
OTHER INCOME AND EXPENSE
INTEREST INCOME AND EXPENSE.
Interest income increased to $1.6 million in 1996 due to funds provided
by a public offering of the Company's Common Stock in April 1996. Interest
income decreased from $1.6 million in 1994 to $0.8 million in 1995 due to the
use of funds required in acquiring MDI. Interest income could decrease in the
future if the Company were to acquire another company or technology, or if
interest rates were to decline.
INCOME TAXES
The Company's estimated effective tax rate for 1996 and 1995 was
approximately 5% and 3% respectively. This rate is lower than the statutory rate
due to the utilization of net operating loss carryforwards. The Company's tax
liability results primarily from federal and state alternative minimum taxes, as
well as state franchise taxes. At December 31, 1996, the Company has a net
operating loss carryforward for U.S. federal income tax purposes of
approximately $13.8 million that expires between 2005 and 2009. The net
operating loss carryforward includes approximately $8.7 million of tax
deductions resulting from the exercise of employee stock options. The tax
benefit of this deduction, when realized, will be accounted for as a credit to
shareholders' equity rather than as a reduction in the income tax provision. The
Company has federal research and development tax credit carryovers of
approximately $0.9 million at December 31, 1996, that expire primarily in 2003
through 2010. The Company's net operating losses, tax deductions and credit
carryforwards may be limited by changes in ownership as defined under the
Internal Revenue Code. Based on the Company's evaluation of the weight of
available evidence, it cannot conclude that it is more likely than not that
deferred income tax assets will be realized and therefore has provided a full
deferred income tax valuation allowance at December 31, 1996.
Meridian did not have income tax expense in 1994 due to net operating
losses. The Company did not record any benefit of these losses due to
uncertainty as to their realization. The charge for purchased research and
development of $21.2 million in 1994 was not deductible for tax purposes.
CAPITAL RESOURCES AND LIQUIDITY
Meridian's source of cash flow from operations for 1996 was principally
net income from operations adjusted for noncash depreciation and amortization
charges and the amortization of advance for research and development
arrangements. These were offset by an increase in accounts receivable due to the
timing of sales, and a decrease in account payable and accrued payroll related
expenses. The Company's capital expenditures for 1996 were approximately $0.5
million. The Company's source of cash flow from operations for 1995 was
principally net income from operations adjusted for noncash depreciation and
amortization charges. These were offset by an increase in accounts receivable
due to higher sales, payment of restructuring expenses accrued at December 31,
1994, and a decrease in deferred revenues. The Company's capital expenditures
for 1995 were approximately $0.4 million. Also included in cash flows from
investing activities in 1995 was $1.8 million for cash released from the
restricted escrow account set up as part of the acquisition of MDI.
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 $36.8 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 $20.1 million and were
invested in marketable securities.
Meridian believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies, or develop products in-house which leverage off the Company's
extensive experience in networking software and server development. 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.
At December 31, 1996, Meridian's principal source of liquidity
consisted of cash and marketable securities totaling $39.1 million and accounts
receivable of $3.0 million. The Company believes that its current cash and
marketable securities, and accounts receivable will satisfy its working capital
and capital expenditure requirements at least through the end of 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Certain information required by this Item is included in Item 6 of Part
II of this Report under the heading "Quarterly Financial Data" and is
incorporated herein by reference. All other information required by this Item is
included on pages 29 to 41 in Item 14 of Part IV of this report and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Directors of the Company is incorporated by
reference from the information set forth under the caption "Proposal No. 1:
Election of Directors" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the end of the Company's year ended December 31, 1996 (the "1997 Proxy
Statement"). Information regarding the executive officers of the Company is
incorporated by reference from the information set forth under the caption
"Executive Officers of the Company" at the end of Part I of this report.
Information with respect to Directors and Officers of the Company required by
Item 405 of Regulation S-K is incorporated herein by reference from information
set forth under the caption "Filing of Reports by Directors and Officers" in the
1997 Proxy Statement.
DISCLOSURE WITH REGARD TO DELINQUENT FILINGS
Based solely on a review of Forms 3, 4, and 5 furnished to the Company
during 1996, Meridian believes that no officer, director, or 10% shareholder was
delinquent in filing any Form 3, 4, or 5.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by
reference from the information set forth under the caption "Executive Officer
Compensation" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is incorporated by reference from the information set forth under
the caption "Record Date and Share Ownership" in the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference from the information set forth under the caption
"Certain Transactions" in the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K.
(a) The following documents are filed as part of this Report:
1 FINANCIAL STATEMENTS. The following financial statements of the
Company and the Report of Independent Accountants, are included
in Part IV of this report on the pages indicated. PAGE
Report of Independent Accountants......................................... 29
Balance Sheets as of December 31, 1996 and 1995........................... 30
Statements of Operations for the years ended December 31, 1996, 1995,
and 1994................................................................ 31
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995, and 1994.................................................... 32
Statements of Cash Flows for the years ended December 31, 1996, 1995,
and 1994................................................................ 33
Notes to Financial Statements............................................. 34
2.FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule
of the Company as of and for the years ended December 31, 1996, 1995 and
1994, and the Report of Independent Accountants on Financial Statements
Schedule (page 46) are included in Part IV of this Report on the pages
indicated. This financial statement schedule should be read in
conjunction with the Financial Statements, and notes thereto, of the
Company.
SCHEDULES TITLE PAGE
II Valuation and Qualifying Accounts............................ 47
Schedules not listed above have been omitted because they are not applicable,
not required, or the information required to be set forth therein is included in
the Financial Statements or notes thereto.
3.EXHIBITS (in accordance with Item 601 of Regulation S-K).
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.
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
Form 10-Q for the period ended March 31, 1995, and incorporated by
reference.
3.1b Restated Certificate of Incorporation of Meridian Data, Inc. previously
filed as Exhibit 3.1b to the Quarterly Report of Form 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 Form 10-Q for the period ended
March 31, 1995, and incorporated herein by reference.
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 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 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.
10.10Master 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.
10.11Secured 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.
10.12Lease Agreement dated as of October 26, 1992 between Parallan Computer,
Inc. and South Bay/Copley Joint Venture previously filed as Exhibit 10.12
to Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.13Master 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.
10.14Master 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.
10.15Amendment to the Master Work Agreement and Marketing Agreement dated as of
March 31, 1994, between Parallan Computer, Inc. and IBM Corporation.
10.16Meridian 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.
10.17Stock 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.
10.18Meridian 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.
11 Statement re: computation of net income (loss) per share. See page 44.
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.
23 Consent of Independent Accountants. See page 45.
24 Power of attorney (see page 42). See page 42.
27 Financial Data Schedule. See page 48.
(b) Reports on Form 8-K.
None
(c) Exhibits.
See Item 14(a)3 above.
(d) Financial Statement Schedule.
See Item 14(a)2 above.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Meridian Data, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Meridian Data, Inc. at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 28, 1997
<PAGE>
MERIDIAN DATA, INC.
BALANCE SHEETS
December 31,
1996 1995
------ ------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents $24,809 $11,752
Marketable securities 14,340 5,900
Accounts receivable (net of
allowance for returns and
doubtful accounts of $512
and $770, respectively) 2,991 2,772
Inventories 1,311 1,118
Other assets 324 126
------ ------
Total current assets 43,775 21,668
Property and equipment at cost,
less accumulated depreciation 653 569
Other assets 817 16
------ ------
$45,245 $22,253
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,632 $ 2,419
Accrued payroll and related expenses 686 1,442
Accrued advertising and promotion 506 430
Other accrued liabilities 1,191 1,589
------ ------
Total current liabilities 4,015 5,880
------ ------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, no par value, 35,000 shares
authorized, 9,590 and 7,979 shares issued
and outstanding 69,578 48,994
Unrealized gains on marketable securities 5 6
Accumulated deficit (28,353) (32,627)
------ ------
Total shareholders' equity 41,230 16,373
------ ------
$45,245 $22,253
====== ======
The accompanying notes are an integral part of these financial statements.
MERIDIAN DATA, INC.
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues:
Product sales $26,116 $23,426 $ 1,957
Other revenue - 1,500 -
Product sales and services to
and royalties from IBM - 369 3,954
------ ------ ------
Total revenues 26,116 25,295 5,911
------ ------ -------
Costs and expenses:
Cost of product sales 10,162 12,150 995
Amortization of purchased
technology - 455 75
Cost of product sales and
services to and royalties
from IBM - - 4,365
Research and development 3,315 2,474 3,516
Sales and marketing 7,520 6,238 1,107
General and administrative 2,210 2,170 974
Acquired in-process research
and development - - 21,245
Restructuring charges - - 2,168
------ ------ ------
Total costs and expenses 23,207 23,487 34,445
------ ------ ------
Income (loss) from operations 2,909 1,808 (28,534)
Realized losses on marketable
securities - - (544)
Interest income 1,590 776 1,571
------ ------ ------
Income (loss) before income taxes 4,499 2,584 (27,507)
Provision for income taxes (225) (84) -
------ ------ ------
Net income (loss) $ 4,274 $ 2,500 $(27,507)
====== ====== =======
Net income (loss) per share $ 0.44 $ 0.30 $ (3.69)
====== ====== =======
Weighted average common
shares and equivalents 9,692 8,416 7 ,455
====== ====== =======
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN DATA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Unrealized Total
Common Stock losses on Accumulated Shareholders'
Shares Amount investments Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance at December
31, 1993............... 7,364 $ 45,429 $ - $ (7,620) $ 37,809
Common stock issued
under stock plans......... 142 248 - - 248
Compensation expense
related to stock
options issued below
market.................... - 137 - - 137
Net unrealized losses on
investments............... - - (48) - (48)
Options assumed in the
acquisition of MDI........ - 806 - - 806
Net loss..................... - - - (27,507) (27,507)
----------------------------------------------------------
Balance at December
31, 1994.................. 7,506 46,620 (48) (35,127) 11,445
Common stock issued
under stock plans......... 473 587 - - 587
Compensation expense
related to stock
options issued
below market.............. - 30 - - 30
Net unrealized gains on
investments.............. - - 54 - 54
Options exchanged in
connection with the
acquisition of MDI........ - 1,757 - - 1,757
Net income................... - - - 2,500 2,500
-----------------------------------------------------------
Balance at December
31, 1995.................. 7,979 48,994 6 (32,627) 16,373
Common stock issued
under stock plans......... 259 978 - - 978
Compensation expense
related to stock
options issued
below market.............. - 36 - - 36
Unrealized losses on
investments............... - - (1) - (1)
Common Stock issued
in a Public
Offering, net of
issuance expenses......... 2,645 36,841 - - 36,841
Common Stock
repurchased............... (1,293) (17,271) - - (17,271)
Net Income................... - - - 4,274 4,274
-----------------------------------------------------------
Balance at December
31, 1996.................. 9,590 $ 69,578 $ 5 $(28,353) $ 41,230
================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,274 $ 2,500 $(27,507)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Restructuring charges - - 1,714
Acquired in-process research
and development - - 21,245
Compensation expense related
to stock options issued below
market value 36 30 137
Depreciation and amortization 401 685 754
Amortization of advance for research
and development arrangements 200 - -
Changes in assets and liabilities,
net of the effect of an acquisition
in 1994:
Accounts receivable (219) (801) 1,474
Inventories (193) 75 895
Other assets (199) 7 43
Advance for research and
development arrangement (1,000) - -
Accounts payable (787) 508 (392)
Accrued payroll and related expenses (756) 411 (1,505)
Accrued advertising and promotion 76 (79) 509
Other accrued liabilities (398) (1,515) 42
Deferred IBM development revenue - - (365)
------- ------ -------
Net cash provided by (used in)
operating activities 1,435 1,821 (2,956)
------- ------ -------
Cash flows from investing activities:
Purchases of property and equipment (485) (404) (578)
Net cash acquired from an acquisition - - 128
Restricted cash released from restricted
escrow account - 1,825 -
Restricted cash to support notes payable
issued in connection with an acquisition - - (21,201)
Redemption of marketable securities 11,978 5,115 32,994
Additions to marketable securities (20,419) (5,884) (4,088)
------ ------ -------
Net cash (used in) provided
by investing activities (8,926) 652 7,255
------ ------ -------
Cash flows from financing activities:
Repurchase of Common Stock (17,271) - -
Issuance of Common Stock, net 36,841 - -
Issuance of Common Stock related
to stock plans 978 587 248
------ ------ -------
Net cash provided by
financing activities 20,548 587 248
------ ------ -------
Net increase in cash and cash equivalents 13,057 3,060 4,547
Cash and cash equivalents at beginning of year 11,752 8,692 4,145
------ ------ -------
Cash and cash equivalents at end of year $24,809 $11,752 $ 8,692
====== ====== =======
The accompanying notes are an integral part of these financial statements.
MERIDIAN DATA, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1996, 1995, AND 1994
NOTE 1 _ THE COMPANY:
Meridian Data, Inc. (the "Company" or "Meridian"), formerly known as
Parallan Computer, Inc., was incorporated in 1988 and is currently engaged in
the development of CD ROM and CD R networking products for Novell, Windows NT,
and Banyan networking environments, and related client software.
Prior to the Company's acquisition of Meridian Data, Inc. ("MDI") in
December 1994 (Note 9), the Company developed and supported high performance
network superservers and enterprise networking software for local and wide-area
networks under several agreements with International Business Machines ("IBM"),
which provided a framework whereby the Company designed and developed network
servers and software for IBM to manufacture and market in exchange for licensing
fees and royalties. Based on management's expectations with respect to potential
future revenues from IBM, the Company restructured its operations away from
reliance on IBM in the second quarter of 1994.
NOTE 2 _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investment instruments with
original maturities of three months or less. The carrying value of cash and cash
equivalents approximates their estimated fair market value. At December 31, 1996
and 1995, the Company's marketable securities, consisting primarily of
government and corporate bonds, certificates of deposit and commercial paper,
are classified as available for sale and are reported at fair market value based
on quoted market prices, which approximates cost.
Any unrealized gains or losses recorded as a separate component of shareholders'
equity.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of unsecured accounts
receivable and investments in government and high grade corporate bonds,
certificates of deposit, and commercial paper. The Company places its cash
primarily in investment accounts under professional management. The Company's
investment policy limits the amount of credit exposure to any one issuer. The
Company's investment policy also attempts to limit interest rate risk by
restricting any concentration of maturities. Meridian's accounts receivable are
primarily derived from sales to distributors and value added resellers (VARs) in
the United States. The Company performs ongoing credit evaluations of its
customers' financial condition and maintains an allowance for uncollectible
accounts based upon the expected collectibility of all accounts receivable and
has not experienced material losses to date. At December 31, 1996 and 1995, five
customers accounted for 50% and 54%, respectively, of the Company's gross
accounts receivable.
INVENTORIES
Inventories are valued at the lower of cost, using the first-in
first-out method, or market.
RESEARCH AND DEVELOPMENT COSTS
The Company charges research and development costs to operations as
incurred. Statement of Financial Accounting Standards No. 86 "Accounting for
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" requires
capitalization of certain software development costs after technological
feasibility of software is established upon the completion of the working model.
Development costs incurred by the Company after completion of the working model
and prior to commercial release have been insignificant and all software
development costs since 1993 have been expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, generally one to three and a half
years. Amortization of leasehold improvements is computed using the shorter of
the remaining terms of the leases or the estimated useful lives of the
improvements.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under
this method, deferred income tax assets and liabilities are determined based on
the differences between the financial reporting and tax bases of assets and
liabilities and are measured using currently enacted tax rules and laws.
REVENUE RECOGNITION
Product revenues are recognized upon shipment to the customer or
delivery to a third party shipper. Revenue from sales to distributors is
recognized net of an allowance for product returns, price protection, and other
adjustments which may be required under the Company's agreements with
distributors. Contract and service revenue is recognized over the term of the
respective agreements, generally on a percentage of completion basis.
During 1996, two customers, consisting of two large distributors,
accounted for 25% and 18% of the company's 1996 product sales. During 1995,
three customers, consisting of two large distributors and one VAR of electronic
hardware and software in the United States, accounted for 19%, 13%, and 9% of
Meridian's 1995 product sales. During 1994, no customers accounted for greater
than 10% of non-IBM revenue. Export sales in 1996 and 1995 were $3.6 million and
$2.6 million, respectively, primarily to the Pacific Rim, Europe and South
America.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average Common
Stock outstanding and dilutive common equivalent shares (using the treasury
stock method). Common equivalents shares include stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenue and expenses during the period. Actual
results could differ from estimates.
RECLASSIFICATIONS
Certain information in the 1995 financial statements has been reclassified
to confirm with the 1996 financial statement presentation.
NOTE 3 _ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
CASH PAID DURING THE YEAR FOR (IN THOUSANDS)
Interest................ $18 $20 $12
Taxes................... 126 32 35
<PAGE>
NOTE 4 _ BALANCE SHEET DETAIL (IN THOUSANDS):
DECEMBER 31,
1996 1995
Marketable securities: ------- ------
United States government and agencies..... $ 2,696 $ 2,580
Corporate................................. 28,936 11,081
Other..................................... 6,328 561
------- ------
37,960 14,222
Less securities classified as
cash equivalents..................... (23,620) (8,322)
------- ------
$ 14,340 $ 5,900
======= ======
Inventories:
Raw materials and purchased parts.... $ 885 $ 647
Work in process...................... 426 471
------- ------
$ 1,311 $ 1,118
======= ======
Property and equipment:
Computers and purchased software..... $ 953 $ 487
Machinery and equipment.............. 167 227
Furniture and fixtures.............. 181 109
Leasehold improvements............... 26 18
------- ------
1,327 841
Less accumulated depreciation
and amortization................ (674) (272)
------- ------
$ 653 $ 569
======= ======
NOTE 5 _ COMMITMENTS AND CONTINGENCIES:
The Company rents its offices, manufacturing, and research facilities
under noncancelable operating leases which expire in 1997 through 1999. The
Company's lease agreement requires that the Company pay certain other expenses
such as property taxes, insurance, and common area maintenance. Rent expense for
all operating leases was $0.4 million, $0.4 million, and $0.2 million for 1996,
1995, and 1994, respectively. Future minimum lease payments due under
noncancelable operating leases at December 31, 1996 are as follows (in
thousands):
YEAR ENDING: OPERATING LEASES
- ------------ ----------------
1997............................. $ 515
1998............................. 385
1999............................. 337
-----
Total minimum lease payments..... $1,237
=====
A former employee of the Company has claimed that she was wrongfully
terminated and seeks unspecified monetary damages and fees from Meridian. The
Company has conducted a review of the circumstances surrounding this matter and
believes the claim is without merit. Although the Company believes that it
should prevail, the uncertainties inherent in litigation prevent the Company
from giving any assurance about the outcome of such litigation. Nevertheless,
should the former employee prevail in her claim, the Company does not believe
such a result would have a material adverse affect on the Company's business,
financial condition and results of operations.
NOTE 6 _ 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 and
annual rate of 5.96%, due in August of 1997, and which was recorded in other
assets. In return, the Company received warrants convertible into the common
stock of DSC, the right to license DSC's software technology, and a security
interest in DSC's technology. As another condition of the Loan to DSC, Gianluca
U. Rattazzi, President and CEO of Meridian Data, Inc. was elected to the Board
of Directors of DSC. To the extent that DSC expends the funds advanced under the
Loan, Meridian reduces the carrying value of this investment and recognizes the
expense as research and development expense. As a result, the Company recorded
$0.2 million in research and development expense which reflects Meridian's
estimate of the development activities of DSC through December 31, 1996. The
Company does not recognize any interest income from the Loan. The Company
expects to record additional charges to research and development expense
concurrent with DSC's development efforts due to uncertainty over the future
realization of the Loan. Meridian is under no obligation to advance additional
funds to DSC.
NOTE 7 _ STOCKHOLDERS EQUITY:
1988 AND 1992 STOCK OPTION PLANS
The Company has reserved 1,350,394 and 670,320 shares of Common Stock,
respectively, for issuance under the Company's 1988 and 1992 stock option plans
(Plans). The options granted may be either incentive stock options to employees
or nonstatutory stock options to employees or consultants, at the discretion of
the Board of Directors. The Board also has the discretion to grant to employees
and consultants stock purchase rights for shares of stock reserved for issuance
under the Plans. Terms and conditions of stock options and stock purchase rights
are set by the Board of Directors.
Stock options granted to date generally become exercisable at the rate
of 25% of the total shares on the first anniversary of the grant date and
thereafter at the rate of one forty-eighth of the total shares each full month
for 36 months thereafter. Shares purchased under stock purchase rights are
subject to repurchase by the Company. The Company's right of repurchase expires
ratably, subject to continued employment, over a four year period. To date, no
stock purchase rights have been granted.
The 1992 Plan was terminated in May 1992 and accordingly, no further
option grants will be made under the Plan. Any options issued under this Plan
which are subsequently canceled are returned to the Plan and immediately expire.
Termination of the Plan, however, does not affect options previously granted
thereunder.
In February 1996, the Company issued employees options to purchase
30,503 shares of Common Stock with an exercise price of $11.375 per share,
contingent upon shareholder approval of an increase in the number of shares
reserved for issuance under the 1988 Plan. The increase was approved at the
Company's 1996 Annual Meeting of Shareholders when the fair market value of
Meridian's Common Stock was $15.125. These options vest ratably through March
2000 and contained a compensatory element in the amount of $114,000, which is
being recognized during vesting period.
1995 DIRECTOR STOCK OPTION PLAN
The Company has reserved 100,000 of Common Stock for issuance under the
Company's 1995 Director stock option plan (the "1995 Plan"). The 1995 Plan
provides for the automatic grant of a nonstatutory option to purchase 12,500
shares of the Company's common stock to each outside Director upon their initial
election to the Board of Directors (the "First Option"). Upon each subsequent
re-election to the Board, the outside Director receives an additional grant to
purchase 5,000 shares of the Company's common stock (the "Subsequent Option").
All options are granted at fair market value of the Common Stock on the date of
grant.
The 1995 Plan provides that the First Option vests at the rate of 25%
per year on the anniversary of the grant date. Each Subsequent Option vests
ratably over eight months following the month of grant.
1987 MERIDIAN DATA INCENTIVE STOCK PLAN
Under the terms of the Company's acquisition of MDI, the Company
assumed options to acquire approximately 1,176,800 shares of MDI common stock at
prices ranging from $0.10 to $1.25 per share. These options automatically
converted into options to purchase 598,288 shares of the Company's common stock
at prices ranging from $0.197 to $2.460 per share. Stock options granted under
this plan generally become exercisable at the rate of 33% of the total shares on
the first anniversary of the grant date and thereafter at the rate of one
twenty-fourth of the total shares each full month for 24 months thereafter. This
Plan was terminated effective with the acquisition of MDI by the Company and
accordingly, no further option grants will be made under the Plan. Any options
issued under this Plan which are subsequently canceled are returned to the Plan
and immediately expire. Termination of the Plan, however, does not affect
options previously granted thereunder.
KEY EMPLOYEE STOCK PLAN
In June 1992, the Company issued to certain key employees and
consultants options to purchase 206,640 shares of Common Stock with an exercise
price of $1.00 per share, of which 178,000 shares vested. At the date of the
issuance of the options, the Board of Directors determined that the fair market
value of the Common Stock was $5.00 per share. The Company recognized $30,000
and $137,000 of compensation expense in 1995 and 1994, respectively, related to
stock options issued below fair market value under the Key Employee Stock Plan.
The Key Employee Stock Plan was terminated in December 1992 and accordingly, no
further option grants will be made under this Plan.
Stock option activity under the above Plans for years 1996, 1995, and
1994, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------------------
AVAILABLE WEIGHTED
FOR GRANT SHARES AVERAGE PRICE PRICE RANGE
--------- ------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993........... 245,270 581,899 $ 5.90 $0.025-$22.500
Additional shares assumed
under Meridian stock plan........ 598,288 - $ 1.05
Options granted.......................(555,667) 555,667 $ 5.74 $4.000-$12.625
Meridian options assumed..............(598,288) 598,288 $ 1.05 $0.197-$ 2.460
Options canceled...................... 372,084 (372,084) $10.93 $0.025-$22.500
Options exercised..................... - (108,847) $ 0.15 $0.025-$ 7.500
Options expired....................... (20,917) $ 0.62 $0.025-$ 1.000
-------- ---------
Balance at December 31, 1994........... 40,770 1,254,923 $ 2.53 $0.025-$ 7.500
1995 Director Option Plan............. 100,000 -
Increase in 1988 Plan................. 500,000 -
Options granted.......................(658,600) 658,600 $ 5.09 $4.000-$10.000
Options canceled...................... 153,200 (153,200) $ 3.46 $1.180-$ 7.500
Options exercised..................... - (439,764) $ 1.06 $0.025-$ 6.125
Options expired....................... (65,114) - $ 1.18 $1.180-$ 7.500
--------- -------
Balance at December 31, 1995........... 70,256 1,320,559 $ 4.25 $0.025-$10.000
Increase in 1988 Plan................. 300,000 -
Options granted.......................(401,600) 401,600 $ 8.69 $7.250-$15.125
Options canceled...................... 173,389 (173,389) $ 7.20 $1.180-$15.125
Options exercised..................... - (214,819) $ 3.09 $0.025-$ 8.500
Options expired....................... (33,592) - $ 1.18 $1.180-$ 1.180
-------- ---------
Balance at December 31, 1996........... 108,453 1,333,951 $ 5.45 $0.025-$15.130
======== =========
Options exercisable at December 31,
1996................................. 540,675 $ 4.33 $0.025-15.130
=========
</TABLE>
1992 EMPLOYEE STOCK PURCHASE PLAN
In October 1992, the Company adopted the 1992 Employee Stock Purchase
Plan (Purchase Plan). Under the Purchase Plan, an eligible employee may purchase
shares of Common Stock from the Company through payroll deductions of up to 10%
of their base compensation plus commission, at a price per share equal to 85% of
the fair market value as of the first day or the last day, whichever is lower,
of each six-month offering period under the Purchase Plan. The offering periods
commence on May 1 and November 1. The Company has reserved 200,000 shares of
Common Stock for issuance under the Purchase Plan. At December 31, 1996, 114,163
shares of Common Stock had been issued under the Purchase Plan, and 85,837
shares remain available for future issuance under the Purchase Plan.
STOCK COMPENSATION
The Company accounts for its employee stock option plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation " which established a fair value based method of accounting for
employee stock option plans. The Company elected to adopt the disclosure method
of FAS 123. Had compensation cost for the Company's option plans been determined
based on the fair value at the grant dates, as prescribed in FAS 123, the
Company's net income and pro forma net loss per share would have been as
follows: (in thousands)
1996 1995
---- ----
Net income:
As reported $4,274 $2,500
====== ======
Pro forma $3,246 $1,983
====== ======
Net income per share:
As reported $ 0.44 $ 0.30
====== ======
Pro forma $ 0.33 $ 0.24
====== ======
The fair value was determined using the Black-Sholes option pricing
model incorporating the following range of assumptions in the calculations:
Expected life 4.51 years
Interest rate at date of grant 6%
Volatility at date of grant 0.6566 to 1.0853
Dividend yield 0%
The following table summarizes information about all options
outstanding as December 31, 1996:
Options Outstanding Options Exercisable
Range of Weighted Average Weighted Average
Exercise prices Number Remaining Life Exercise Price Number Exercise price
- --------------- --------- ------------------------------ ------- --------------
$ 0.025-$ 1.18 104,342 5.1 years $ 0.22 104,342 $ 0.22
$ 4.000-$ 6.50 871,059 7.8 " $ 4.72 377,563 $ 4.46
$ 7.250-$10.00 310,850 9.4 " $ 8.15 33,445 $ 8.64
$11.380-$15.13 47,700 9.2 " $12.55 25,325 $13.60
--------- -------
$ 0.025-$15.13 1,333,951 8.0 years $ 5.45 540,675 $ 4.33
========= =======
Because additional stock options are expected to be granted each year,
the above pro forma disclosures are not representative of pro forma effects on
reported financial results for future years.
NOTE 8 _ FEDERAL AND STATE INCOME TAXES:
The provision for income taxes in 1996, 1995, and 1994 was as follows (in
thousands):
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Federal:
Current........... $ 167 $ 62 $ -
Deferred.......... - - -
---- ---- -----
167 62 -
State:
Current........... 58 22 -
Deferred.......... - - -
---- ---- -----
58 22 -
---- ---- -----
$ 225 $ 84 $ -
==== ==== =====
Deferred tax assets at December 31, 1996 and 1995, consist of the
following (in thousands):
DECEMBER 31,
1996 1995
---- ----
Deferred tax assets:
Federal and state loss carryforwards.........$ 4,850 $ 6,536
Tax credit carryforwards..................... 1,417 1,417
Inventory reserves and basis differences..... 294 269
Depreciation and amortization................ 154 267
Other........................................ 1,384 1,190
------ ------
8,099 9,679
Deferred tax asset valuation allowance....... (8,099) (9,679)
------ ------
Total net deferred tax assets.................$ - $ -
====== ======
Following is a reconciliation of the effective income tax rates from
operations and the statutory federal income tax rate:
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Statutory federal income tax rate............ 35% 35% (35)%
State income taxes, net of federal benefit... 6 6 (6)
Operating loss carryforwards not recognized.. - - 7
Write off of in-process R&D costs............ - - 31
Other........................................ (1) - 3
Change in valuation allowance................ (35) (38) -
--- --- ---
Effective tax rate........................... 5% 3% - %
=== === ===
At December 31, 1996, the Company has a net operating loss carryforward
for U.S. federal income tax purposes of approximately $13.8 million that expires
between 2005 and 2009. The net operating loss carryforward includes
approximately $8.7 million of tax deductions resulting from the exercise of
employee stock options. The tax benefit of this deduction, when realized, will
be accounted for as a credit to shareholders' equity rather than as a reduction
in the income tax provision. The Company has federal research and development
tax credit carryovers of approximately $0.9 million at December 31, 1996, that
expire in 2003 through 2010. The Company's net operating losses, tax deductions
and credit carryforwards may be limited by changes in ownership as defined under
the Internal Revenue Code. Based on the Company's evaluation of the weight of
available evidence it can not conclude that it is more likely than not that
deferred income tax assets will be realized and therefore has provided a full
deferred income tax valuation allowance at December 31, 1996.
NOTE 9 _ ACQUISITION OF MDI:
On December 1, 1994, the Company acquired all outstanding shares of MDI
for a total purchase price of $23.1 million, including notes payable of $21.1
million, acquisition costs of $1.2 million and $0.8 million related to assumed
stock options. This acquisition was accounted for under the purchase method of
accounting. MDI was a privately held developer and manufacturer of networkable
compact disc-read-only memory (CD ROM) and compact disc-write (CD R) server
products. The purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair market value of the
net tangible assets acquired aggregated approximately $21.7 million, of which
$21.2 million was allocated to in-process research and development and $0.5
million was allocated to acquired technology. The acquired technology was
amortized on a straight-line basis over its estimated useful life of seven
months. The statement of operations for the year ended December 31, 1994
included charges of $21.2 million for in-process research and development
purchased in connection with the acquisition. MDI's operating results have been
included in the statement of operations from the date of acquisition.
Acquired technology, which represented MDI's then current products, was
valued by an independent appraiser using a risk adjusted cash flow model. Under
the model, future cash flows were discounted taking into account risks related
to existing and future markets and assessment of the life expectancy of the
purchased technology. This analysis resulted in the allocation of $0.5 million
to acquired technology, which was capitalized in other assets.
The acquired in-process research and development had not yet reached a
stage where technological feasibility, delivery, or product features were
certain at December 1, 1994. MDI's development focus was to develop CD ROM and
CD R networking products for Microsoft's Windows. At December 1, 1994, MDI's
experience with Window's based applications was limited. Acquired in-process
research and development was valued by an independent appraiser using the same
methodology as acquired technology. Expected future cash flows associated with
in-process research and development were discounted considering risks and
uncertainties related to the viability, work required to establish feasibility,
and to the completion of products that will be ultimately marketed by the
Company. This analysis resulted in the allocation of $21.2 million to purchased
in-process research and development. This amount, which is not deductible for
tax purposes, was charged to operations at the acquisition date.
The following unaudited pro forma information reflects the results of
operations for the year ended December 31, 1994 as if the acquisition of MDI had
occurred as of the beginning of 1993, and after giving effect to certain
adjustments, including amortization of acquired technology, lost interest income
and related income tax effects. The pro forma information excludes the effects
of the nonrecurring charge of $21.2 million for in-process research and
development. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results would have
been had the acquisition actually taken place at the beginning of 1993 or of
operating results which may occur in the future.
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue..................... $24,132
Net loss.................... (7,611)
Loss per share.............. $ (1.02)
Shares outstanding.......... 7,455
NOTE 10 _ RELATED PARTY TRANSACTIONS:
In connection with the Company's stock offering on April 30, 1996,
Meridian entered into an agreement to acquire and exercise an option held by IBM
to purchase 1,229,932 shares of outstanding Common Stock from certain
shareholders of the Company, including Bass Associates, an original investor in
the Company. Pursuant to the closing of the offering, Meridian exercised the
option and acquired 1,229,932 shares of Common Stock, including 66,544 shares
from Bass Associates, for $11.396 per share. Dr. Bass, General Partner of Bass
Associates and Chairman of the Board of Meridian Data, Inc., disclaims
beneficial ownership of the shares held by Bass Associates, except to the extent
of his proportional interest therein. The shares acquired were immediately
retired.
NOTE 11 _ SUBSEQUENT EVENTS (UNAUDITED):
1997 STOCK OPTION PLAN
Subsequent to December, 31, 1996 the Board of Directors adopted the
1997 Stock Option Plan (the "97 Plan") and has reserved 900,000 shares of Common
Stock for issuance under the 97 Plan, pending shareholder approval. The options
granted may be either incentive stock options to employees or nonstatutory stock
options to employees or consultants, at the discretion of the Board of
Directors. The Board also has the discretion to grant to employees and
consultants stock purchase rights for shares of stock reserved for issuance
under the 97 Plan. Terms and conditions of stock options and stock purchase
rights are set by the Board of Directors. Shares purchased under stock purchase
rights are subject to repurchase by the Company. The Company's right of
repurchase expires ratably, subject to continued employment, over a four year
period. To date, no stock options or stock purchase rights have been granted.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERIDIAN DATA, INC.
Date: March 3, 1997 /s/ GIANLUCA U. RATTAZZI
------------------------
Gianluca U. Rattazzi,
President, Chief Executive Officer,
and Director
Date: March 3, 1997 /s/ ERIK E. MILLER
------------------------
Erik E. Miller,
Sr. Vice-President, Finance, and
Chief Financial Officer
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Gianluca U. Rattazzi and Erik
E. Miller and each of them, jointly and severally, his attorneys-in-fact, each
with full power of substitution, for him in any capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- --------------------- -------------
/s/ CHARLIE BASS Chairman of the Board March 3, 1997
- ------------------------
Charlie Bass
/s/ GIANLUCA RATTAZZI President, Chief Executive Officer March 3, 1997
- ------------------------ and Director
Gianluca Rattazzi
/s/ ERIK E. MILLER Vice-President, Finance, Chief March 3, 1997
- ------------------------ Financial Officer (Principal Financial
Erik E. Miller and Accounting Officer)
/s/PETER R JOHNSON Director March 3, 1997
- ------------------------
Peter R. Johnson
/s/ MARIO ROSATI Director March 3, 1997
- ------------------------
Mario Rosati
/s/ PIERLUIGI ZAPPACOSTA Director March 3, 1997
- ------------------------
Pierluigi Zappacosta
<PAGE>
MERIDIAN DATA, INC.
INDEX TO EXHIBITS
EXHIBIT ITEM PAGE
------- ---- ----
11 Statement re: Computation of net income (loss) per share......... 44
23 Consent of Independent Accountants............................... 45
24 Power of attorney................................................ 42
<PAGE>
EXHIBIT 11
MERIDIAN DATA, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
------ ------ -------
Net income (loss)............................... $ 4,274 $ 2,500 $(27,507)
====== ====== =======
Weighted average shares outstanding:
Common Stock................................ 9,067 7,835 7,455
Common Stock issuable upon exercise of
options and warrants................... 625 581 -
------ ------ -------
Weighted average common shares and equivalents.. 9,692 8,416 7,455
====== ====== =======
Net income (loss) per share..................... $ 0.44 $ 0.30 $ (3.69)
====== ====== =======
(1) This Exhibit should be read in conjunction with Note 2 of Notes to Financial
Statements.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-62084, 33-89162, and 333-3934) of Meridian Data,
Inc. of our report dated January 28, 1997 appearing in this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statements Schedule, appearing in this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 3, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Meridian Data, Inc.
Our audits of the financial statements of Meridian Data, Inc. referred to in our
report dated January 28, 1997, appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 14(a) of
this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PRICE WATERHOUSE LLP
San Jose, California
January 28, 1997
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
MERIDIAN DATA, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED
BEGINNING OF COSTS AND AGAINST OTHER BALANCE AT
YEAR EXPENSES RESERVES (1) END OF YEAR
------------ ---------- -------- ----- -----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1994
Inventory Reserves............... $ 529 - (8) 320 $ 841
Allowance for Doubtful Accounts.. - - - 200 200
Sales Returns and Allowances..... - - - 660 660
DECEMBER 31, 1995
Inventory Reserves............... $ 841 - 223 - $ 618
Allowance for Doubtful Accounts.. 200 - - - 200
Sales Returns and Allowances..... 660 2,214 2,304 - 570
DECEMBER 31, 1996
Inventory Reserves............... $ 618 57 - - $ 675
Allowance for Doubtful Accounts.. 200 - (14) - 186
Sales Returns and Allowances..... 570 1,570 (1,814) - 326
- -----------
<FN>
(1) Reserves acquired with the acquisition of MDI.
</FN>
</TABLE>
DIRECTORS AND OFFICERS
DIRECTORS COMMITTEES OFFICERS
CHARLIE BASS AUDIT SHMUEL SHOTTAN
Chairman of the Charlie Bass Sr. vice President,
Board, Meridian Mario M. Rosati Engineering and CTO
GIANLUCA U. RATTAZZI COMPENSATION CARLO GARBAGNATI
President and CEO Peter R. Johnson Vice President,
Meridian Data, Inc. Pierluigi Zappacosta Software Development
PETER R. JOHNSON OFFICERS TREVOR HEATHORN
Chairman of the GIANLUCA U. RATTAZZI Vice President,
Board, QuickResponse President and CEO Advanced Software
Services, Inc. Development
CHARLES JOSEPH
MARIO M. ROSATI Sr. Vice President KENNETH KUO
Member of Wilson, Sales and Marketing Vice President,
Sonsini, Goodrich Manufacturing
and Rosati ERIK E. MILLER
Sr. Vice President, IDELL A. STELLER
PIERLUIGI ZAPPACOSTA Finance and CFO Vice President,
President, Human Resources
Logitech, Inc.
CORPORATE DATA
HEADQUARTERS TRANSFER AGENT AND REGISTRAR
Meridian Data, Inc. Boston EquiServe
5615 Scotts Valley Dr. Canton, MA
Scotts Valley, CA 95066
INDEPENDENT ACCOUNTANTS
GENERAL COUNSEL Price Waterhouse LLP
Wilson, Sonsini, Goodrich
and Rosati ANNUAL MEETING
The Annual Meeting of Shareholders will
be held on Wednesday, April 23, 1997 at
the Inn at Pasatiempo in Santa Cruz, CA.
