[ANNUAL REPORT COVER]
[PICTURE OF COMPANY'S SNAP! SERVER]
MERIDIAN DATA, INC.
1997 ANNUAL REPORT
<PAGE>
[FRONT INSIDE ANNUAL REPORT COVER]
[SAMPLE ADVERTISEMENT FOR MERIDIAN'S SNAP! SERVER]
[THREE FRAMES SHOWING THE SNAP! SERVE]
[CAPTION SUPERIMPOSED]
"PLUG IT IN, TURN IT ON. NOW ADDING NETWORK STORAGE IS A SNAP!"
FRAME 1 - SNAP! SERVER POWER CONNNECTION
FRAME 2 - SNAP! SERVER ETHERNET CONNECTION
FRAME 3 - SNAP! SERVER BEING TURNED ON
FOOTNOTE - Snap! Servers and Network Storage Made Simple are trademarks , and
the Meridian logo is a registered trademark of Meridian Data, Inc.
{copyright symbol] 1998 Meridian Datas, Inc. All rights reserved
[TEXT OF ADVERTISEMENT]
Starting at just $995, the Snap! Server (tm) from Meridian DAta is
everything you want in a storage server. It comes preconfigured to recognize
your network so you really can just plug it in and turn it on -- with no
downtime for your existing servers. And with prices ranging from $995 for the
4GB server to 12GB for $1795, Snap! Server redefines network storage, offering
the perfect combination of quick and easy installation at prices
never-before-seen for a file server. In fact, Snap! server is so hassle-free, it
comes with an unconditional 30-day money-back guarantee. And now, you could win
a Snap! Server just by visiting our web site at www.snapsever.com or simply call
1-888-343-SNAP.
[CORPORATE LOGO] MERIDIAN (registered trademark symbol)
Network Storage Made Simple (trademark symbol)
[ANOTHER PICTURE OF SNAP! SERVER]
<PAGE>
Dear Stockholders, [CORPORATE LOGO]
This has been a challenging year for Meridian Data. In response to a market
shift away from high-end CD-ROM networking systems, we initiated a search for
new business opportunities. Key ingredients in our quest included a market with
anticipated high annual growth, as well as technical and distribution
requirements that were complementary to the Company's core competencies. After
extensive market research and engineering studies, we decided that the potential
of the market for network-attached storage (or "NAS") for PC-LANs provided an
excellent opportunity for Meridian. The PC-LAN network file server market grew
from $2.2 billion in 1995 to an estimated $6.0 billion in 1998. Having
determined the marketing requirements from diverse focus groups and extensive
interviews with prospective customers, we embarked on the development of the
Snap! Server.
In February 1998, Meridian premiered a Beta version of its Snap! Server at
the prestigious DEMO '98 show. The Snap! Server represents an entirely new
product classification, both for the industry and the Company. Snap! Server is a
protocol independent, plug and play NAS device targeted at the PC-LAN
environment. We do not know of any competing product on the market that offers
the same ease of installation and price/performance as Meridian's Snap! Server.
Today, the addition of storage capacity to a PC network requires investing in
often-expensive new hardware and potentially significant network downtime. The
Snap! Server will cost significantly less than these alternatives and be as
simple to install as plugging a telephone into the wall. We believe that Snap!
Server presents Meridian with an exciting opportunity to get in on the ground
floor of a new, high-growth market.
The Company intends to quickly gain a leadership position in the NAS market
for PC-LANs. Our advertising campaign, scheduled to begin in late March, will
run in national business publications such as Forbes, Business Week and the Wall
Street Journal, as well as leading technical publications such as PC Week. Other
marketing programs will include a custom-designed e-commerce web site and
web-based advertising. Product support will be provided 24 hours a day, 7 days a
week by a nationally known computer support firm. To overcome the hesitance that
normally comes with any new product, we will offer a 30-day money-back
guarantee.
Despite the downturn in the CD-ROM networking business, we still believe
that profitable opportunities exist. Where customers and distribution channels
overlap, we will have an opportunity to promote both Snap! Server and CD-Net
Universal, our plug and play CD-ROM networking product. Based on this synergy,
we have optimized our CD-ROM networking business to focus on the plug & play
segment of the market.
Looking forward, we believe that 1998 will be an exciting year for the
Company and its employees. Our greatest challenge will be completing the
development of the Snap! Server and successfully implementing the most ambitious
product rollout in the Company's history. We are excited about our entry into
the NAS market and the growth opportunities it provides. We hope to rapidly
assume a leadership position in this new product category by enabling users to
quickly and cost-effectively perform tasks that were until now laborious and
expensive. At the same time, we are also committed to optimizing the return from
our established position in the CD-ROM networking market.
Surmounting these challenges will not happen overnight, but will result
from our employees' continued efforts and dedication. All of us at Meridian, in
fact, are eager to meet and overcome these challenges.
Sincerely,
/s/CHARLIE BASS /S/GIANLUCA U. RATTAZZI
Charlie Bass Gianluca 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, 1997
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)
Delaware 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, $0.001 par value
Preferred Share Purchase Rights
(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 .
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 3, 1998, was $30,015,517.81. The number of shares
of Common Stock, $0.001 par value, outstanding on March 3, 1998, was 8,802,788.
Documents incorporated by reference: Portions of the Proxy Statement
for Registrant's Annual Meeting of Stockholders to be held April 22, 1998, are
incorporated herein by reference into Part III.
Index begins on page 43. Page 1 of 47
<PAGE>
THIS ANNUAL REPORT OF FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS THAT
ARE ACCOMPANIED BY CAUTIONARY STATEMENTS THAT IDENTIFY FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD LOOKING
STATEMENTS.
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)
developing original equipment manufacturer ("OEM") relationships for its latest
products and (ii) focusing 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. 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 an
opportunity exists to enable organizations to provide access to networked CD
ROMs through corporate networks and standard web browsers. 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 CD ROM research and development
activities primarily on software development. Due to a shift in demand during
1996 from separate hardware and software CD ROM networking solutions to
integrated systems, the Company refocused its CD ROM research towards the
development of systems and away from stand alone software. The Company's CD ROM
hardware development efforts also seek to maintain compatibility with existing
and developing hardware standards. In order to bring its expertise in networking
software and systems, and channel distribution, to a larger market, the Company
began development of its first non-CD ROM networking product in late 1996. The
result of this research was the prototype Snap! Server which premiered at the
DEMO 98 trade show in February 1998. Snap! Server is a protocol-independent,
plug-and-play network storage appliance.
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. 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. In
the third quarter of 1997, Meridian began shipping its DVD line of CD ROM
systems.
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.
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.
EMERGING MARKET FOR NETWORK ATTACHED STORAGE ("NAS"). NAS devices are
specialized file servers optimized for network data storage. Unlike a general
purpose server which handles a variety of tasks, from running an intranet to
managing e-mail to delivering mission-critical database services, NAS products
are optimized for data storage and managing input/output traffic associated with
that task efficiently, freeing up network server resources for mission critical
applications, and enhancing speed on the network backbone by offloading data
storage nearer to users. According to Peripheral Concepts, Inc., a leading
storage research firm, the emerging market for NAS will grow from $800 million
in 1997 to $1.2 billion in 1998. By delivering a NAS device below $2,000,
Meridian hopes to redefine the NAS market to include small and medium-sized
businesses.
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 introduced its CD
Net Universal plug and play server in 1997, and offers other competitively
priced systems, containing Meridian's networking 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 AND SYSTEMS. 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. Since the manufacturing of CD ROM servers has low barriers to entry,
Meridian focuses its CD ROM research and development activities primarily on
software development and integrated systems.
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 NAS OPPORTUNITIES. The NAS market is estimated to grow from approximately
$800 million in 1997 to $1.2 billion in 1998. The Company believes that an
opportunity exists to leverage its skills and expertise in networking systems to
the larger market for NAS. Meridian does not believe that there is any competing
product currently on the market that offers the same ease of use and
installation as the Company's Snap! Server. See "Risk Factors - New Product
Development."
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. 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.
EXPAND INTERNATIONAL SALES. The Company has established several key
distribution relationships in various countries in the Pacific Rim. In 1996,
Meridian opened a sales office in the United Kingdom. This office was closed in
late 1997 due to a change in the Company's European distribution strategy. 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>
INTRODUCTION
PRODUCTS DESCRIPTION DATE PRICE RANGE (1)
Software
<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 $684
CD Intranet for Windows NT CD Intranet brings CD ROM and mixed media storage to Sep. `96 $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 $684 - $1,308
user interface in mixed Novell/NT environments
CD Net Plus Windows-based client and server software for dedicated, May '95 $377-$1,097
high performance CD ROM servers on Novell networks
CD Net for VINES Client and server software providing access to CD ROMs on Aug. '95 $1,372
Banyan VINES servers
CD NetRecord Novell NLM for recording CD ROMs over NetWare networks Jan. '96 $595
Systems
CD/DVD Net 900 Series Servers Complete plug and play CD ROM/DVD servers with 7 to 56 CD Aug. '95 $6,231-$24,738
ROM/DVD drives, featuring Pentium 200 processors, fast
Ethernet adapters, for Novell, NT, Intranets, and VINES,
available in tower or rack mount enclosures
TNT Servers CD ROM/DVD Server with 14 to 28 drives in a flexible Sep. `97 $7,196 - $16,748
configuration of CD ROM, DVD and hard drives, featuring
Pentium 200 processors, fast Ethernet, for Windows NT
CD Net Ultimate Server designed to support large multi-department networks Jan. `97 $2,780-$12,956
with heavy multimedia content, features automatic disk
caching, Pentium 200 processors, 14 to 28 CD ROM/DVD
drives, for Windows NT and Novell NetWare
CD Net Universal Server Plug and play CD ROM server with a built-in Web server Sep. `97 $1,420 - $4,903
enabling easy access to HTML and graphics files on CDs,
and remote Web-based system administration. Available
with 7 to 14 CD ROM drives.
CD Net ROMs CD ROM subsystems for connection to servers via SCSI 1990 $1,056-$9,388
<FN>
(1) Price range based on domestic end user list price as of January 12, 1998.
</FN>
</TABLE>
NEW PRODUCTS
In early February 1998, the Company premiered a prototype of its first
non-CD ROM product, Snap! Server. This represents an entirely new product
classification for the Company and the marketplace. Snap! Server is a
protocol-independent, plug and play network-attached storage (NAS) device
targeted for the PC-LAN environment. According to Peripheral Concepts, Inc., an
independent market research firm, the market for NAS has been estimated to be
approximately $800 million in 1997 and is projected to grow to $1.2 billion in
1998. Meridian does not believe that there is any competing product currently on
the market that offers the same ease of use and installation as Meridian's Snap!
Server. Initially, the Company expects that its main competition in the NAS
market will come from established PC server vendors (such as Compaq and Dell)
and drive manufacturers (such Seagate and Maxtor). Meridian believes that its
new Snap! Server will have significant cost advantages over its initial
competition. The Company estimates that the cost of adding a comparable amount
of additional storage to a PC server or network would run from approximately
$3,000 to $10,000 or higher, depending on the server/network configuration and
downtime. While final pricing has not been set, the Company anticipates that its
Snap! Server will retail for under $2,000. Installation of the Snap! Server will
involve simply connecting the server to an Ethernet network port and power
outlet. Setup and management will be handled by a simple HTML interface,
accessed through the user's Internet browser. In contrast, the installation of
additional drives or servers requires several hours of network downtime and the
services of a network professional, all of which adds to the overall cost of
increasing storage on networks. The Snap! Server must be compatible with all
major PC networks operating systems (Microsoft, Novell, and UNIX) and protocols
(TCP/IP, IPX, NetBEUI, HTTP, etc.) concurrently. In addition, it must be able to
work in mixed network environments with the same ease as in heterogeneous
environments. Such compatibility may be difficult, if not impossible to obtain.
Failure to achieve such compatibility could have an adverse effect on the
market's acceptance of the Snap! Server.
The Company's challenge will be to educate users on the practicality of
implementing NAS compared against the established methods of adding storage to
PC servers. As such, the Company's initial competition for the Snap! Server will
come from suppliers of PC server computers, like Dell Computers, Compaq and IBM,
and disk drive manufacturers, such as Seagate and Maxtor. 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 the Snap! Server
or adapt more quickly than the Company to new or emerging technologies, evolving
industry trends or changing customer requirements. Meridian's Snap! Server
requires customers to change the method in which they address the problem of
adding additional storage to their PC-LAN networks. There can be no assurance
that the Company will be successful in educating the market on the advisability
of switching from adding additional drives to their servers or additional
servers to their PC-LAN and using a Snap! Server in their place. The Snap!
Server will 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
this new product 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, or of Meridian to develop new distribution channels, 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; - New Product Development; - Rapid Technological Change; Potential
for Product Defects; - Competition; emerging Markets; Product Concentration."
SALES, MARKETING AND CUSTOMER SERVICE
The Meridian sales organization is divided into multiple North American
territories, 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.
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. 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, a 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 22 persons as
of December 31, 1997.
The Company anticipates that it will begin shipping its new Snap!
Server in the second quarter of 1998. This will be preceded by an intensive,
national advertising campaign aimed at educating the general business public on
the benefits and ease-of-installation of Meridian's Snap! Server. The failure by
the Company to successfully educate the market on the benefits of its Snap!
Server could have a material adverse effect on Meridian's business, financial
condition and results of operations. The Snap! Server will require different
marketing, sales and distribution strategies than those for the Company's
current products. As such, it entails significant new risks to Meridian. There
can be no assurance that the Company's distributors and VARs will choose or be
able to effectively market this new product or to that the Company will be
successful in establishing other modes of marketing, sales, and distribution. A
failure of the Company's distributors and VARs to successfully market this
product, or the failure to establish other means of marketing, sales, and
distribution, 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; - New Product Development; - Rapid Technological
Change; Potential for Product Defects; - Competition; emerging Markets; Product
Concentration."
The Company's customer service department consists of 9 persons as of
December 31, 1997. 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 93% 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 opened a sales office in the United
Kingdom in 1996. This office was closed in late 1997 due to a change in the
Company's European distribution strategy. 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 21% and 19%, respectively, of the
Company's 1997 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's research and development staff consists of 21 engineers
as of December 31, 1997. The Company's primary focus in 1997 was on the
development of its Snap! Server. The Snap! Server is a protocol-independent,
plug-and-play NAS appliance. There can be no assurance that Meridian's research
and development efforts will result in the successful introduction of the Snap!
Server or any other new products or that any of such products, if developed,
will be commercially successful. For a discussion of certain other risks that
may relate to the Company's research and development, see "Risk Factors-Rapid
Technological Change; Potential for Product Defects; and - New Product
Development."
Meridian's CD ROM research and development focus in 1997 consisted of
developing new, entry-level plug and play CD ROM servers and CD ROM networking
systems, and maintaining compatibility with evolving industry standards related
to drives (CD ROM and DVD) and network protocols.
Meridian Data's software does not utilize calendar dates. As such, the
Company's software should have no difficulty with Year 2000 issues. Meridian's
systems, however, are reliant on various network and personal computer operating
systems, such as MS DOS, Novell NetWare, and Windows 3.11 and NT. To the extent
that those vendors do not adequately solve their Year 2000 issues, the Company's
products, results of operations, cash flow, and liquidity may be adversely
affected.
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."
The Company anticipates that the manufacturing of its new Snap! Server,
including final assembly and testing, will contracted out to third party
vendors, some of whom are located in Asia. Initially, Meridian will be dependent
on a few third party contractors to manufacture its Snap! Server. Like its CD
ROM counterparts, the Snap! Server will be dependent on a small number of
suppliers for certain key components and parts, including microprocessors,
integrated circuits and power modules. In addition, certain subassemblies used
will be 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 would 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.
Initially, the Company's Snap! Server will compete with alternative
methods of adding storage to PC-LAN networks such as adding new PC servers from
companies such as Dell Computers, Compaq and IBM, and adding additional disk
drives from manufacturers such as Seagate and Maxtor to existing servers. 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 the
Snap! Server 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 and NAS markets 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.
From that point the Company operated profitably until the first quarter of 1997,
when it again began incurring net losses. There can be no assurance that
profitable operations will return. In late 1996 and early 1997, the Company made
several decisions to address the disappointing systems revenue growth
experienced in the last three quarters of 1996. Late in the fourth quarter of
1996, Meridian increased its sales and promotional expenditures and, at the end
of January 1997, significantly reduced system prices in response to competitive
pressures. Even if unit shipments were to increase in the future, there can be
no assurance that prices for the Company's products will not decrease further
due to competitive pricing pressures. Accordingly, the Company may not meet its
total revenue goals and the Company's results of operations and liquidity would
be materially adversely affected. As a result of expenses related to completing
the engineering development and developing and implementing the initial
marketing campaign of Meridian's new Snap! Server, the Company anticipates that
it will operate at a substantial net operating loss for 1998.
The Company generally ships its software and systems within a short
period after receipt of an order, therefore the Company typically does not have
a material backlog of unfilled orders. Accordingly, total revenues in any
quarter are substantially dependent on orders booked in that quarter. This may
result in quarterly fluctuations in revenue. The Company's expense levels are
based, in part, on its expectations as to future sales. As a result, if sales
levels are below expectations, net income may be disproportionately affected.
The Company's quarterly operating results may also vary significantly depending
on other factors, including the introduction of new products by the Company's
competitors; market acceptance of the Company's new products; mix of software
and systems sales; the long and complex sales cycle for site licenses; the
timing of site license revenue; adoption of new technologies and standards;
price and other forms of competition; the cost, quality and availability of
third party components used in the Company's systems; changes in the Company's
distribution arrangements; and the inability of the Company to accurately
monitor end user demand for its products due to the sale of products through
distributors and value-added resellers. In 1997, identifiable sales to federal
governmental agencies accounted for approximately 14% of the Company's product
sales, and the Company anticipates that such sales will continue to account for
a significant percentage of the Company's revenues for the foreseeable future.
In the event that there is any reduction or deferral in spending by such
governmental agencies, the Company's quarterly and annual results would be
adversely affected. Similarly, if such government agencies reduced their
purchases of Meridian products in favor of those of its competitors, the
Company's quarterly results would be adversely affected. Moreover, the Company's
business has experienced and is expected to continue to experience seasonality
in the form of higher sales for its products during the quarters ending in
September and December and weaker sales during the quarters ending in March and
June. The Company's operating results will also be affected by the economic
condition of the personal computer industry, which has from time to time
experienced cyclical, depressed business conditions, often in connection with or
in anticipation of a decline in general economic conditions. Due to all of the
foregoing factors, the Company's total revenues or operating results may in one
or more future quarters be below the expectations of stock market analysts and
investors. In such event, the price of the Company's Common Stock would likely
decline, perhaps substantially. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEW PRODUCT DEVELOPMENT. The Company is actively developing products for entry
into non-CD ROM networking markets, such as the new Snap! Server. Such entry
entails substantially higher risks to the Company in the form of new and well
established competition, and competitive dynamics different than those
experienced in the CD ROM networking market. In attempting to successfully enter
the NAS market and other new markets, the Company will have to commit to
significant levels of engineering, sales and marketing expenditures. With
respect to NAS, Meridian must also successfully educate the market concerning
the practicality of changing from conventional means of adding storage capacity
to PC networks to installing its new Snap! Server. There can be no assurance
that the Company will be successful in developing and marketing its new Snap!
Server or other new products, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of the new Snap! Server or other new products, or that its new Snap!
Server or other new products will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce its new Snap! Server or
other new products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will all be materially adversely affected. Due to the
complexity of the Company's Snap! Server and other contemplated new products and
the difficulty in gauging the engineering effort required to produce the new
Snap! Server and other potential new products, such potential new products are
subject to significant technical risks. There can be no assurance that the Snap!
Server and other potential new products will be introduced on a timely basis or
at all. In addition, there can be no assurance that the Company will be able to
offer the functionality and ease-of-use that it believes the Snap! Server
requires for a successful introduction. If the new products are delayed, do not
offer the functionality and ease-of-use envisioned, or do not achieve market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected. As a result of uncertainty with respect
to Snap! Server revenues and anticipated expenses required to successfully
develop and market this product, the Company anticipates that it will operate at
a substantial net loss in 1998.
DEPENDENCE ON THIRD PARTY DISTRIBUTORS. The Company derives substantially all of
its product sales through distributors and VARs. Two distributors accounted for
21% and 19%, respectively, of the Company's 1997 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 from distributors 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. There can be no assurance that
the Company's distributors and VARs will 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
The Company anticipates that it will begin shipping its new Snap!
Server in the second quarter of 1998. The Snap! Server will require different
marketing, sales and distribution strategies than those for the Company's
current products. As such, it entails significant new risks to Meridian. There
can be no assurance that the Company's distributors and VARs will choose or be
able to effectively market this new product or to that the Company will be
successful in establishing other modes of marketing, sales, and distribution. A
failure of the Company's distributors and VARs to successfully market this
product, or the failure to establish other means of marketing, sales, and
distribution, would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON THIRD PARTY SUPPLIERS. The Company is dependent on a small number
of suppliers for certain key components used in its products, including CD ROM
and DVD drives, microprocessors, integrated circuits and power modules. The
Company purchases these components pursuant to periodic purchase orders, does
not carry significant inventories of these components, and has no long-term
supply arrangements. In addition, certain subassemblies used in the Company's
products are manufactured by a single third party vendor. The loss of a key
supplier or a disruption to the business of a key supplier could have a material
adverse effect upon the Company's business, financial condition and results of
operations. Although the Company believes that alternative sources of components
or subassemblies could be arranged, the process of qualifying new suppliers
could be lengthy. There can be no assurance that any additional source would be
available to the Company on a timely basis or at a cost acceptable to the
Company. Any disruption or reduction in the future supply of any key components
currently obtained from limited sources could have a material adverse effect on
the Company's business, financial condition and results of operations. In the
past, there has been unexpected significant growth in the demand for CD ROM
drives, which has caused temporary supply disruptions. These components are only
available from a limited number of manufacturers, most of which are Japanese
manufacturers. The Company has experienced in the past, and may experience in
the future, an adverse impact on the cost in dollars of certain components
purchased from Japanese manufacturers due to fluctuations in the exchange rate
for the yen. Moreover, the Company has been required to make spot market
purchases for certain components at premium prices. In the third quarter of
1995, the Company experienced temporary delays in obtaining the drives required
for its products. If such delays reoccur or the Company is required to purchase
components at a higher cost due to fluctuating currency exchange rates, spot
market shortages or other factors, the Company may be unable to ship products on
the schedule anticipated or may sustain higher product costs with a resulting
adverse effect on the Company's business, financial condition and results of
operations.
The Company anticipates that the manufacturing of its new Snap! Server,
including final assembly and testing, will contracted out to third party
vendors, some of whom may be located in Asia. Initially, Meridian will be
dependent on a few third party contractors. Like its CD ROM counterparts, the
Snap! Server will be dependent on a small number of suppliers for certain key
components and parts, including microprocessors, integrated circuits and power
modules. In addition, certain subassemblies used will be 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. The process of qualifying new suppliers would 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
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 a manner that 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 such defects will not cause delays in product
introductions and shipments or loss of or delay in market acceptance, result in
increased costs, require design modifications, impair customer satisfaction, or
result in customer returns. Any such event could materially adversely affect the
Company's business, financial condition and results of operations.
Over the past two years, CD ROM drive technology has advanced
significantly. Additionally, the pace of new drive introductions has increased.
As a result, the Company may find itself holding an inventory of obsolete
drives. Further, the Company's contracts with its distributors allow for product
return, or price protection credits, based on current inventory levels of
current and obsolete products under certain limited circumstances. Meridian
estimates and accrues its required allowance for such occurrences, but there can
be no assurance that actual inventory writedowns, product returns, or price
protection credits will not exceed the Company's estimate. Such an event could
materially adversely affect the Company's business, financial condition and
results of operations.
COMPETITION. The markets for the Company's CD ROM products are extremely
competitive. The Company expects that competition will increase if 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.
Initially, the Company's Snap! Server will compete with alternative
methods of adding storage to PC-LAN networks such as adding new PC servers from
companies such as Dell Computers, Compaq and IBM, and adding additional disk
drives from manufacturers such as Seagate and Maxtor to existing servers. 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 the
Snap! Server 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.
The Company believes that its ability to compete successfully in the CD
ROM networking and NAS markets 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.
EXPANSION OF 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 12% of
total product sales in 1997. 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 part on the growth in market share for CD ROM
networking products and its success in the new NAS market. While there is a
substantial installed base of CD ROM drives in the United States, growth in the
CD ROM networking market is primarily in entry-level systems with low price
points. There can be no assurance that the Company's products will be widely
accepted in these emerging markets. If demand for the Company's CD ROM
networking products continues to decrease, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, if CD ROM server products were to become generally available, the
Company anticipates that, as a percentage of product sales, systems sales could
decline and software sales may increase. In the event that software sales do not
increase in an amount sufficient to offset a decline in systems sales, the
Company's business, financial condition and results of operations will be
materially adversely affected.
The Company's future financial performance will depend in large part on
the success of its Snap! Server and growth in demand for NAS products. The
market for NAS appliances is new and undeveloped. There can be no assurance that
the Company's products will be widely accepted in this emerging market. If
demand for the Snap! Server fails to develop, or develops more slowly than the
Company currently anticipates, the Company's business, financial condition and
results of operations would 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 no experience with the NAS appliances market that the
Company contemplates entering. To manage its growth, the Company must continue
to implement and improve its operational, financial and management information
systems and expand, train and manage its workforce. Meridian believes that
success in its industry requires substantial capital in order to maintain the
flexibility to take advantage of opportunities as they may arise. The Company
may, from time to time, as market and business conditions warrant, invest in or
acquire complementary businesses, products or technologies. Such investment or
acquisitions may be funded by internally generated cash, marketable securities,
or additional equity. The sale of additional equity could result in dilution in
the equity ownership of Meridian's stockholders. The Company's failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON PROPRIETARY RIGHTS. The Company's success depends in part upon
protecting its proprietary technology. The Company relies on a combination of
intellectual property laws, nondisclosure agreements and other protective
measures to protect its proprietary information. There can be no assurance,
however, that the steps taken by the Company will be adequate to deter
misappropriation or independent third party development of its technology or
that its intellectual property rights can be successfully defended if
challenged. Litigation may be necessary to protect the Company's proprietary
rights. Any such litigation may be time-consuming and costly. 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 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 and NAS appliance industries, 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.
ANTI-TAKEOVER EFFECT OF STOCKHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW
PROVISIONS. In February 1997, the Company's Board of Directors authorized the
Company's reincorporation in the State of Delaware (the "Reincorporation"). The
Company's Reincorporation was approved by its stockholders in April 1997 and
effective in May 1997.
In July 1997, the Company's Board of Directors adopted a Preferred
Shares Rights Plan (the "Rights Plan"). The Rights Plan provides for a dividend
distribution of one Preferred Shares Purchase Right (a "Right") on each
outstanding share of the Company's Common Stock. The Rights will become
exercisable following the tenth day after a person or group announces
acquisition of 15% or more of the Company's Common Stock, or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 15% or more of the Company's Common Stock.
The Company will be entitled to redeem the Rights at $0.01 per Right at any time
on or before the tenth day following acquisition by a person or group of 15% of
more of the Company's Common Stock.
The Rights Plan and certain provisions of the Company's Certificate of
Incorporation and Bylaws may have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. The Company's Certificate of Incorporation
allows the Company to issue Preferred Stock without any vote or further action
by the stockholders, and certain provisions of the Company's Certificate of
Incorporation and Bylaws specify procedures for director nominations by
stockholders and submission of other proposals for consideration at stockholder
meetings, and eliminate cumulative voting in the election of directors. Certain
provisions of Delaware law could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203,
which prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met. The Rights Plan, the possible issuance of Preferred Stock,
the procedures required for director nominations and stockholder proposals and
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of the
Company's Common Stock. These provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.
EMPLOYEES
As of December 31, 1997, the Company employed 98 individuals, of whom
28 were employed in manufacturing, 21 in research and development, 26 in sales
and marketing, 9 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. With respect to the Company's lease
expiring in 1999, management believes that the current lease could be
renegotiated or a suitable new location can be found at terms acceptable to the
Company.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the quarter ended December 31, 1997.
<PAGE>
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 sales price per share for the
Company's Common Stock as reported by NASDAQ.
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---------------------------- ---- ---
First quarter........................................ $ 7.75 $3.88
Second quarter....................................... 4.69 3.38
Third quarter........................................ 5.50 3.88
Fourth quarter....................................... 5.50 3.50
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
As of March 6, 1998, there were 98 stockholders of record of the
Company's Common Stock and approximately 4,000 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, 1997 and 1996. 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
1997 QUARTER ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(In thousands, except per share data)
Total revenues....................... $ 3,009 $5,547 $ 6,151 $ 5,261
Loss from operations................. (3,816) (928) (1,859) (3,169)
Net loss ............................ (3,299) (372) (1,404) (2,703)
Net loss per share (basic/diluted)... $ (0.34) $(0.04) $ (0.16) $ (0.31)
1996 QUARTER ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(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 (basic)......... $ 0.13 $ 0.14 $ 0.16 $ 0.05
Net income per share (diluted)....... $ 0.12 $ 0.13 $ 0.15 $ 0.05
The following is a summary of the Company's results for the five years
ended December 31, 1997. In management's opinion, these 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.
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL SUMMARY
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales................................................... $19,968 $26,116 $23,426 $ 1,957 $ 276
Other revenue................................................... -- -- 1,869 3,954 21,676
------ ------- ------ ------ ------
Total revenues................................................... 19,968 26,116 25,295 5,911 21,952
Cost of product sales and amortization of purchased technology... 9,570 10,162 12,605 1,070 13
Cost of product sales and services to and royalties from IBM..... -- -- -- 4,365 14,801
Income (loss) from operations (1)................................ (9,772) 2,909 1,808 (28,534) 5,956
Net income (loss) (1)............................................ (7,778) 4,274 2,500 (27,507) 6,782
Net income (loss) per share (basic).............................. $ (0.86) $ 0.47 $ 0.32 $ (3.69) $ 1.12
Net income (loss) per share (diluted)............................ $ (0.86) $ 0.44 $ 0.30 $ (3.69) $ 0.97
<FN>
1) Includes a charge for in-process R&D of $21,245 in 1994.
</FN>
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........................................ $15,167 $24,809 $11,752 $ 8,692 $ 4,145
Marketable securities............................................ 16,722 14,340 5,900 5,077 34,031
Restricted cash.................................................. -- -- -- 21,201 --
Working capital.................................................. 29,355 39,760 15,788 10,591 36,007
Total assets..................................................... 37,491 45,245 22,823 39,793 41,832
Stockholders' equity............................................. 30,085 41,230 16,373 11,445 37,809
</TABLE>
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.
In order to bring its skills and expertise in networking systems and
channel distribution to a larger market, Meridian embarked on the development of
its first non-CD ROM networking system in late 1996. In February 1998, the
Company premiered a prototype of its Snap! Server at the DEMO 98 show. This
represents an entirely new product classification for the Company and the
marketplace. The Snap! Server is a protocol-independent, plug and play
network-attached storage ("NAS") device targeted for the PC-LAN environment.
Snap! Server will attempt to provide superior ease-of-use and installation of
any competitive product or competing method for adding storage to PC LAN
networks. According to Peripheral Concepts, Inc., an independent market research
firm, the market for NAS has been estimated to be approximately $800 million in
1997 and is projected to grow to $1.2 billion in 1998. While final pricing has
not been set, the Company anticipates that its Snap! Server will retail for
under $2,000. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to the Snap! Server
or adapt more quickly than the Company to new or emerging technologies, evolving
industry trends or changing customer requirements. The Snap! Server will require
different marketing, sales and distribution strategies than those for the
Company's current CD ROM products. There can be no assurance that the Company's
distributors and VARs will choose or be able to effectively market this new
product, nor that the Company will be successful in developing alternate
channels of distribution. Nor can there be any assurance that the Snap! Server
will be a commercial success. A failure of the Company's distributors and VARs
to successfully market the Company's new products, or the failure to develop new
channels of distribution, or the failure to obtain market acceptance for the
Snap! Server, would have a material adverse effect on the Company's business,
financial condition and results of operations.
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. Meridian currently has
no orders for the Snap! Server. 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 1997, 1996 and 1995, identifiable sales to
federal governmental agencies accounted for approximately 14%, 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 would be adversely affected. Similarly, if such government
agencies reduced their purchases of Meridian products in favor of those of its
competitors, the Company's quarterly results would be adversely affected.
Moreover, the Company's business has experienced and is expected to continue to
experience seasonality in the form of higher sales for its products during the
quarters ending in September and December and weaker sales during the quarters
ending in March and June. The Company's operating results will also be affected
by the economic condition of the personal computer industry, which has from time
to time experienced cyclical, depressed business conditions, often in connection
with or in anticipation of a decline in general economic conditions.
The Company utilizes standard, off-the-shelf software, for all phases
of its operations, including production, distribution and accounting. Since some
of these programs recognize only the last two digits of the year in any date
(e.g. "98" for "1998"), some software may fail to operate in 1999 or 2000 if the
software is not reprogrammed or replaced (the "Year 2000 Problem"). The Company
believes that its suppliers, distributors, and customers also have Year 2000
Problems which could affect the Company. Meridian is in the process of
developing a plan to determine the impact of the Year 2000 Problem on its
operations. It is not possible, at present, to quantify the overall cost of this
work, or the financial effect of the Year 2000 Problem if it is not resolved on
a timely basis However, the company believes at present that the cost of
addressing the Year 2000 Problem will not have a material effect on the
Company's financial position, liquidity, or results of operations.
RESULTS OF OPERATIONS
In late 1996 and early 1997, the Company made several decisions to
address the disappointing CD ROM networking 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. Unit shipments
did not increase as anticipated, and, as a result, the Company's sustained a net
operating loss for 1997. In February 1998, Meridian announced its first, non-CD
ROM networking product, the Snap! Server. This product is scheduled for
commercial release in the second quarter of 1998. The Company believes that it
will be several quarters before it achieves significant revenues from sales of
the Snap! Server. However, Meridian expenses related to the completion of the
final product and marketing expenses related to the introduction of its Snap!
Server will result in the company posting a substantial net operating loss for
1998. See "Risk Factors New Product Development; - Rapid Technological Change; -
Potential for Product Defects; Competition; - Emerging markets; - Product
concentration."
REVENUES
PRODUCT SALES. Meridian's product sales decreased from $26.1 million in 1996 to
$20.0 million in 1997. This decrease was due to lower prices, and lower unit
shipments. The Company lowered prices approximately 30% in January of 1997 due
to increased price competition in the CD ROM networking market and, at the same
time, increased promotional spending. Meridian believes that the market for CD
ROM networking systems has fundamentally changed from one in which customers
purchase integrated, high-end CD ROM servers, to one in which low-cost, plug and
play CD ROM servers, such as Meridian's CD Net Universal line of servers, are in
demand. Due to this shift, Meridian's sales mix in 1997 shifted from its
high-end enterprise systems to its entry-level systems, such as the CD Net
Universal server. However, due to much lower price points, the impact on the
Company's overall revenue was insufficient to offset lower high-end system
sales. The Company does not expect that sales from its low-end systems will grow
to the extent required to completely offset lower prices of high-end systems. As
such, revenues from the sale of Meridian's CD ROM networking products are
anticipated to be less in 1998 than in 1997. 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 mix 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.
The Company's sales in 1996 were favorably impacted by new software
products released in 1995. Included in the Company's 1996 sales were
approximately $330,000 from the sale of two software site licenses. Beginning in
the second quarter of 1996, and continuing throughout the remainder of the year,
Meridian's revenue mix shifted towards higher software content, and lower sales
of systems. The Company experienced increased price competition from its largest
competitors for its high-end system sales. As this trend continued, Meridian's
revenue growth slowed, while gross margin increased.
The Company's product sales in early 1995 consisted primarily of
DOS-based products, some of which had become non-competitive. Sales began
increasing in the second quarter of 1995, primarily due to the commercial
release of the Company's Windows-based CD Net PLUS v6.0 and customer response to
increased advertising.
Approximately 93% 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 21% and 19%, respectively,
of Meridian's 1997 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."
OTHER REVENUE. Other revenue totaling $1.9 million in 1995 consisted primarily
of a non-recurring sale of OEM software relating to the Company's former network
superservers product line.
GROSS MARGIN
Gross margin decreased from 61% in 1996 to 52% in 1997 due to the price
reduction announced in January 1997, lower software sales, and a shift in the
Company's system mix to low-end systems. 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. The Company's gross margin
was 46% in 1995, including amortization of purchased technology of $455,000.
As a result of the continuing shift in the Company's product sales
towards systems with lower price points and continued pricing pressures,
Meridian anticipates that gross margins from its CD ROM networking products will
decrease in 1998. While final pricing has not been established, the Company
anticipates that its new Snap! Server will generate lower margins than its
existing CD ROM products.
For a discussion of certain risks affecting cost of sales and gross
margins, see "Risk Factors - Dependence on Third Party Suppliers" and " -
Expansion of International Operations; Foreign Currency Fluctuations."
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expense in 1997 was $6.3
million, an increase of approximately $3.0 million over 1996. This increase was
due to costs incurred in developing Meridian's new Snap! Server. The Company
anticipates that research and development expenses will continue to increase as
it completes work on the Snap! Server and begins development on its second
generation Snap! Server. Research and development expense in 1996 was $3.3
million, an increase of $0.8 million over 1995. This increase was due to higher
payroll and overhead expenses, and the amortization of an advance made to a
development stage company ("DSC"). In June of 1997, DSC repaid the advance. This
was recorded as a credit against research and development expense. Also included
in the Company's research and development expense for 1997 was a $1.0 million
charge for the acquisition of technology to be used in the Snap! Server. This
charge was offset by the receipt of the proceeds from the advance. 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
new products. For a discussion of certain risks related to research and
development, see "Risk Factors - Rapid Technological Change; Potential for
Product Defects."
In February 1998, the Company premiered a prototype of its first non-CD
ROM product, the Snap! Server. Meridian's Snap Server attempts to provide
superior ease-of-use and installation of any competitive product or competing
method for adding storage to PC LAN networks. As such, it must be compatible
with all major PC networks operating systems (Microsoft, Novell, and UNIX) and
protocols (TCP/IP, IPX, NetBEUI, HTTP, etc.) concurrently. In addition, it must
be able to work in mixed network environments with the same ease as in
heterogeneous environments. Such compatibility may be difficult, if not
impossible to obtain. Failure to achieve such compatibility could have an
adverse effect on the market's acceptance of the Snap! Server. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to the Snap! Server or adapt more quickly than
the Company to new or emerging technologies, evolving industry trends or
changing customer requirements. Meridian's failure to successfully develop and
introduce the Snap! Server 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; - New Product Development; - Rapid
Technological Change; Potential for Product Defects; - Competition; Emerging
Markets; Product Concentration."
SALES AND MARKETING. Sales and marketing expense consists primarily of payroll
and related expenses, including commissions, and advertising related expenses.
Sales and marketing expense in 1997 was $11.0 million, an increase of $3.5
million over 1996. This increase was primarily due to higher advertising and
related expenditures, increased payroll, and expenses related to marketing
studies of the NAS market. As a result of planned expenditures related to the
introduction of the Snap! Server, the Company expects that sales and marketing
expenses will increase substantially in 1998. The Snap! Server will 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 this new
product or to continue to market the Company's existing products. Nor can their
be any assurance that the Company will successfully develop any such new
channels. A failure of the Company's distributors and VARs to successfully
market the Company's products, or the failure to develop alternate channels of
distribution for the Snap! Server, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Sales and marketing expense was $7.5 million in 1996, an increase of
approximately $1.3 million, over 1995. This increase was due to higher payroll
and related expenses, and increased advertising and promotional expenses. The
increase in advertising and promotional expenses was primarily related to the
heightened competitive environment which began in early 1996. Sales and
marketing expense was $6.2 in 1995. In the later part 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"; - "New Product Development."
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of payroll and related expenses and occupancy expenses. General and
administrative expense was approximately $2.8 million in 1997 and $2.2 million
in both 1996 and 1995. The increase between 1997 and 1996 was primarily due to
higher payroll expenses and costs incurred with the Company's reincorporation in
Delaware. General and administrative expense is expected to increase in 1998
both in absolute dollars and as a percent of sales.
OTHER INCOME AND EXPENSE
INTEREST INCOME AND EXPENSE.
Interest income increased to $2.0 million in 1997 due to twelve months
of interest earnings on funds provided by a public offering of the Company's
Common Stock in April 1996. Interest income increased to $1.6 million in 1996
due to a partial year's earnings on the stock proceeds. Interest income was $0.8
million in 1995 due to lower invested balances. Interest income will decrease in
the future as the Company expends funds for the development and marketing of its
Snap! Server and other products.
INCOME TAXES
The Company had no tax liability in 1997 due to the net operating loss.
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, 1997, the Company has a net operating
loss carryforward for U.S. federal and state income tax purposes of
approximately $21.0 and $7.0 million, respectively, which expire between 1998
and 2012. The net operating loss carryforward includes approximately $8.9
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 stockholders' equity rather than as a reduction in the income tax
provision. The Company has federal research and development tax credit
carryovers of approximately $1.5 million at December 31, 1997, that expire
primarily in 2003 through 2012. 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, 1997.
CAPITAL RESOURCES AND LIQUIDITY
Meridian's source of liquidity in 1997 was from cash and investments
available at December 31, 1996. The Company's negative cash flow from operations
in 1997 was principally due to the net operating loss, which included costs
related to the development of the Snap! Server, adjusted for noncash
depreciation and amortization charges, the amortization of advance for research
and development arrangements, and an increase in accrued expenses. These
adjustments were partially offset by an increase in inventories. The Company's
capital expenditures for 1997 were approximately $0.5 million. 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
accounts 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.
The Company's entry into the NAS market will entail the expenditures of
substantial funds for the completion of the Snap! Server, implementing a
nation-wide marketing campaign, and developing distribution channels for the
Snap! Server. These expenditures may be funded by internally generated cash,
marketable securities, debt, or additional equity. The sale of additional equity
could result in dilution in the equity ownership of the Company's stockholders.
Meridian believes that success 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 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 stockholders.
At December 31, 1997, Meridian's principal source of liquidity
consisted of cash and marketable securities totaling $31.9 million and accounts
receivable of $2.9 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 1998.
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 26 to 28 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
<PAGE>
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 1998 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's year ended December 31, 1997 (the "1998 Proxy
Statement"). 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 1998 Proxy Statement.
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, Chief Executive Officer and Director
Charles Joseph 47 Executive Vice President, Sales and Marketing
Erik E. Miller 37 Sr. Vice President, Finance and CFO
Shmuel Shottan 46 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, and was promoted to Executive vice President in
1997. 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 39 Vice President, Advanced Development
Carlo Garbagnati 38 Vice President, Software Development
Trevor Heathorn 39 Vice President, Advanced Software Development
Kenneth Kuo 47 Vice President, Manufacturing
Greg Swope 39 Vice President, Sales
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.
MR. SWOPE joined the Company in November 1995 as Director of OEM Sales. In
1997 he was promoted to Vice President, Sales. From 1988 to 1995 Mr. Swope held
various sales and marketing positions with The Santa Cruz Operation, Inc., a
UNIX networking software company. Mr. Swope holds a B.S. in Computer Sciences
and Business Administration from California State University, Chico.
DISCLOSURE WITH REGARD TO DELINQUENT FILINGS
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file certain reports of
ownership with the SEC and with the National Association of Securities Dealers.
Such officers, directors and stockholders are also required by SEC rules to
provide the Company with copies of all Section 16(a) forms that they file. Based
solely on its review of copies of such forms received by the Company, or on
written representations from certain reporting persons, the Company believes
that, during the period from January 1, 1997 to December 31, 1997, its executive
officers, directors and ten percent stockholders filed all required Section
16(a) reports on a timely basis.
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 1998 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 1998 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 1998 Proxy Statement.
<PAGE>
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.
Report of Independent Accountants.................................... 29
Balance Sheets as of December 31, 1997 and 1996...................... 30
Statements of Operations for the years ended December 31, 1997,
1996, and 1995....................................................... 31
Statements of Stockholders' Equity for the years ended December 31,
1997, 1996, and 1995................................................. 32
Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995....................................................... 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, 1997, 1996 and
1995, and the Report of Independent Accountants on Financial Statement
Schedule (page 45) 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
II Valuation and Qualifying Accounts....................... 46
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).
(a)
2.0 Agreement and Plan of Reorganization among Parallan Computer, Inc.,
PAC Acquisition Subsidiary, Inc. and Meridian Data, Inc. dated
December 1, 1994 previously filed as Exhibit 2 to the Current Report
on Form 8-K and incorporated herein by reference.
2.2 Agreement and Plan of Merger between Meridian Data, Inc., a California
corporation, and Meridian Data, Inc., a Delaware corporation, dated
May 29,1997 previously filed as Exhibit 2.2 to Registration of
Securities of Certain Successor Issues on Form 8-B and incorporated
herein by reference.
3.1 Certificate of Incorporation of Meridian Data, Inc., a Delaware
corporation, previously filed as Exhibit 3.1 to Registration of
Securities of Certain Successor Issues on Form 8-B and incorporated
herein by reference.
3.2 Bylaws of Meridian Data, Inc., a Delaware corporation, previously
filed as Exhibit 3.2 to Registration of Securities of Certain
Successor Issues on Form 8-B and incorporated herein by reference..
4.1 Specimen Common Stock certificate of Meridian Data, Inc., a Delaware
corporation, previously filed as Exhibit 4.1 to the Quarterly Report
on Form 10-Q for the period ended September 30, 1997, and incorporated
herein by reference.
4.2 Fourth Article of Certificate of Incorporation of Meridian Data, Inc.,
a Delaware corporation (see Exhibit 3.1)
9.1 Stockholders Agreement, dated as of June 1, 1992, among IBM
Corporation, Parallan Computer, Inc. and certain stockholders of
Parallan Computer,Inc. previously filed as Exhibit 9.1 to Registration
Statement on Form S-1 (Registration No. 33-57976) and incorporated
herein by reference.
10.1 Form of Indemnification Agreement by and among Meridian Data, Inc., a
Delaware corporation, and its directors and officers previously filed
as Exhibit 10.1B to Registration of Securities of Certain Successor
Issues on Form 8-B and incorporated herein by reference.
10.2 Restated and Amended 1988 Incentive Stock Plan and forms of agreements
thereunder previously filed under Registration Statement on Form S-8
(Registration No. 333-3934) and incorporated herein by reference.
10.3 1992 Incentive Stock Plan and form of agreement thereunder previously
filed as Exhibit 10.3 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
10.4 1992 Key Employee Stock Plan and form of agreement thereunder
previously filed as Exhibit 10.4 to Registration Statement on Form S-1
(Registration No. 33-57976) and incorporated herein by reference.
10.5 Amended and Restated 1992 Employee Stock Purchase Plan and form of
subscription agreement thereunder previously filed as Exhibit 10.5 to
the Quarterly Report on Form 10-Q for the period ended March 31, 1995,
and incorporated herein by reference.
10.6 Registration Rights Agreement between the Registrant and certain of
the Registrant's stockholders previously filed as Exhibit 10.6 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.7 Custodial Agreement dated as of May 12, 1992 between Parallan
Computer, Inc., IBM Corporation and File-PROTEK, Inc. previously filed
as Exhibit 10.7 to Registration Statement on Form S-1 (Registration
No. 33-57976) and incorporated herein by reference.
10.8 Share Purchase Agreement dated as of May 15, 1992 between Parallan
Computer, Inc., and IBM Corporation, as amended, previously filed as
Exhibit 10.8 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.9 Marketing Agreement dated as of June 1, 1992 between Parallan
Computer, Inc. and IBM Corporation previously filed as Exhibit 10.9 to
Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.10 Master Work Agreement dated as of June 1, 1992 between Parallan
Computer, Inc. and IBM Corporation previously filed as Exhibit 10.10
to Registration Statement on Form S-1 (Registration No. 33-57976) and
incorporated herein by reference.
10.11 Secured Loan Agreement dated as of June 1, 1992 between Parallan
Computer, Inc. and IBM Credit Corporation previously filed as Exhibit
10.11 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.13 Master Equipment Lease dated as of June 29, 1990 between Parallan
Computer, Inc. and Western Technology Investment previously filed as
Exhibit 10.13 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.14 Master Equipment Lease dated as of January 15, 1993 between Parallan
Computer, Inc. and Phoenix Leasing Incorporated previously filed as
Exhibit 10.14 to Registration Statement on Form S-1 (Registration No.
33-57976) and incorporated herein by reference.
10.15 Amendment to the Master Work Agreement and Marketing Agreement dated
as of March 31, 1994, between Parallan Computer, Inc. and IBM
Corporation.
10.16 Meridian Data, Inc. 1987 Incentive Stock Plan and form of subscription
agreement thereunder previously filed as Exhibit 4.3 to Registration
Statement on Form S-8 (Registration No. 33-89162) and incorporated
herein by reference.
10.17 Stock Option Assignment and Exercise Agreement between the Registrant,
International Business Machines Corporation and certain stockholders
of the Registrant dated March 6, 1996 previously filed as Exhibit
10.17 to the Annual Report on Form 10-K for the year ended December
31, 1995, and incorporated herein by reference.
10.18 Meridian Data, Inc. 1995 Director Stock Plan and form of subscription
agreement thereunder previously filed as Exhibit 4.3 to the
Registration Statement on Form S-8 (Registration No, 333-2622) and
incorporated herein by reference.
10.19 Meridian Data, Inc. 1997 Incentive Stock Plan and form of agreement
thereunder previously filed as Exhibit 10.19 to Registration of
Securities of Certain Successor Issues on Form 8-B and incorporated
herein by reference.
16.1 Letter regarding change in accountants previously filed as Exhibit
16.1 to Registration Statement on Form S-1 (Registration No. 33-57976)
and incorporated herein by reference.
27 Financial Data Schedule 47
(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 Stockholders of Meridian Data, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Meridian Data, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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 30, 1998
<PAGE>
MERIDIAN DATA, INC.
BALANCE SHEETS
(in thousands, except per share data)
December 31,
1997 1996
ASSETS ------ ------
Current assets:
Cash and cash equivalents $15,167 $24,809
Marketable securities 16,722 14,340
Accounts receivable (net of allowance
for returns and doubtful accounts
of $543 and $512, respectively) 2,949 2,991
Inventories 1,795 1,311
Other assets 128 324
------ ------
Total current assets 36,761 43,775
Property and equipment at cost,
less accumulated depreciation 714 653
Other assets 16 817
------ ------
$37,491 $45,245
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,371 $ 1,632
Accrued payroll and related expenses 1,787 686
Accrued advertising and promotion 1,353 506
Other accrued liabilities 1,895 1,191
------ ------
Total current liabilities 7,406 4,015
------ ------
Commitments (Note 4)
Stockholders' equity:
Preferred stock, $0.001 par value,
5,000 shares authorized, and
no shares outstanding -- --
Common stock, $0.001 par value,
35,000 shares authorized,
8,785 and 9,590 shares issued
and outstanding 9 69,578
Additional paid-in capital 66,207 --
Unrealized gains on marketable
securities -- 5
Accumulated deficit (36,131) (28,353)
------ ------
Total stockholders' equity 30,085 41,230
------ ------
$37,491 $45,245
====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------
Revenues:
Product sales $19,968 $26,116 $23,426
Other revenue -- -- 1,869
------ ------ ------
Total revenues 19,968 26,116 25,295
------ ------ ------
Costs and expenses:
Cost of product sales 9,570 10,162 12,605
Research and development 6,340 3,315 2,474
Sales and marketing 10,980 7,520 6,238
General and administrative 2,850 2,210 2,170
------ ------ ------
Total costs and expenses 29,740 23,207 23,487
------ ------ ------
Income (loss) from operations (9,772) 2,909 1,808
Interest income 1,994 1,590 776
------ ------ ------
Income (loss) before income taxes (7,778) 4,499 2,584
Provision for income taxes -- (225) (84)
------ ------ ------
Net income (loss) $(7,778) $ 4,274 $ 2,500
====== ====== ======
Net income (loss) per share:
Basic $ (0.86) $ 0.47 $ 0.32
====== ====== ======
Diluted $ (0.86) $ 0.44 $ 0.30
====== ====== ======
Weighted average common shares
and equivalents:
Basic 9,061 9,066 7,835
====== ====== ======
Diluted 9,061 9,686 8,296
====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
MERIDIAN DATA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Additional Unrealized Total
Common Stock Paid-in gains (losses) Accumulated Stockholders'
Shares Amount Capital on investments Deficit Equity
<S> <C> <C> <C> <C> <C> <C>
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
Reincorporation in Delaware... -- (69,568) 69,568 -- -- --
Common stock issued under
stock plans................ 223 -- 598 -- -- 598
Compensation expense related
to stock options issued
below market............... -- -- 6 -- -- 6
Unrealized losses on
investments................ -- -- -- (5) -- (5)
Common Stock repurchased...... (1,028) (1) (3,965) -- -- (3,966)
Net loss...................... -- -- -- -- (7,778) (7,778)
--------------------------------------------------------------------------
Balance at December 31, 1997.. 8,785 $ 9 66,207 $ -- $(36,131) $30,085
==========================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (7,778) $ 4,274 $ 2,500
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Compensation expense related to stock
options issued below market value 6 36 30
Depreciation and amortization 474 401 685
Amortization of advance for research and
development arrangements 800 200 --
Changes in assets and liabilities:
Accounts receivable 42 (219) (801)
Inventories (484) (193) 75
Other assets 197 (199) 7
Advance for research and development
arrangement -- (1,000) --
Accounts payable 739 (787) 508
Accrued payroll and related expenses 1,101 (756) 411
Accrued advertising and promotion 847 76 (79)
Other accrued liabilities 704 (398) (1,515)
------- ------- ------
Net cash provided by (used in)
operating activities (3,352) 1,435 1,821
------- ------- ------
Cash flows from investing activities:
Purchases of property and equipment (535) (485) (404)
Restricted cash released from restricted
escrow account -- -- 1,825
Redemption of marketable securities 37,547 11,978 5,115
Additions to marketable securities (39,934 (20,419) (5,884)
------- ------- ------
Net cash provided by (used in)
investing activities (2,922) (8,926) 652
------- ------- ------
Cash flows from financing activities:
Repurchase of Common Stock (3,966) (17,271) --
Issuance of Common Stock, net -- 36,841 --
Issuance of Common Stock related to
stock plans 598 978 587
------- ------- ------
Net cash provided by (used in)
financing activities (3,368) 20,548 587
------- ------- ------
Net (decrease) increase in cash and
cash equivalents (9,642) 13,057 3,060
Cash and cash equivalents at beginning of year 24,809 11,752 8,692
------- ------- ------
Cash and cash equivalents at end of year $ 15,167 $ 24,809 $11,752
======= ======= ======
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 8 $ 18 $ 20
Taxes 32 126 32
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1997, 1996, AND 1995
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.
NOTE 2 _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investment instruments
purchased 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, 1997 and 1996, 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 stockholders'
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, 1997 and 1996, two
customers accounted for 44% and five customers accounted for 50%, 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.
During 1997, two customers, consisting of two large distributors,
accounted for 21% and 19% of Meridian's 1997 product sales. 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. Export
sales in 1997, 1996, and 1995 were $2.6 million, $3.6 million, and $2.5 million
respectively, primarily to the Pacific Rim, Europe and South America.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128") during the year ended December 31, 1997 and
retroactively restated all prior periods under SFAS 128. Basic net income (loss)
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
using the weighted average number of common and potential common shares during
the period. Potential common shares consist of the incremental shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). Potential common shares are excluded from the computation if their
effect is anti-dilutive. Options to purchase 2,007,310 shares of common stock at
prices ranging from $0.03 to $15.13 per share were outstanding during the year
ended December 31, 1997 but were not included in the computation of diluted EPS
because the options would have been antidilutive.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The disclosures prescribed by SFAS 131 will be effective for the year
ending December 31, 1998. Management does not anticipate a material impact on
the financial statements from the adoption of SFAS 131.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements. The disclosures prescribed by SFAS 130
will be effective for the year ending December 31, 1998. Management does not
anticipate a material impact of the financial statements from the adoption of
SFAS 130.
NOTE 3 _ BALANCE SHEET DETAIL (IN THOUSANDS):
DECEMBER 31,
1997 1996
Marketable securities: ------- ------
United States government and agencies... $ 4,862 $ 2,696
Corporate............................... 24,735 28,936
Other................................... 1,962 6,328
------- -------
31,559 37,960
Less securities classified as cash
equivalents.......................... (14,837) (23,620)
------- -------
$ 16,722 $ 14,340
======= =======
Inventories:
Raw materials and purchased parts... $ 1,390 $ 885
Work in process..................... 405 426
------- -------
$ 1,795 $ 1,311
======= =======
Property and equipment:
Computers and purchased software.... $ 1,459 $ 953
Machinery and equipment............. 190 167
Furniture and fixtures.............. 144 181
Leasehold improvements.............. 69 26
------- -------
1,862 1,327
Less accumulated depreciation and
amortization........................ (1,148) (674)
------- -------
$ 714 $ 653
======= =======
NOTE 4 _ COMMITMENTS:
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 $0.5 million, $0.4 million, and $0.4 million for 1997,
1996, and 1995, respectively. Future minimum lease payments due under
noncancelable operating leases at December 31, 1997 are as follows (in
thousands):
YEAR ENDING: OPERATING LEASES
------------ ----------------
1998...................... $ 337
1999...................... 337
----
Total minimum lease
payments.................. $ 674
====
NOTE 5 _ RESEARCH AND DEVELOPMENT ARRANGEMENT:
In November 1996, the Company entered into an agreement with a
development stage company ("DSC") to partially fund the development of a media
independent software search technology. As envisioned, the product would allow
searches of textual, audio, and video data stored on corporate intranets, the
Internet, or such possible future media such as digital video disc's ("DVD's").
As part of this agreement, Meridian loaned $1 million (the "Loan") to DSC at an
annual rate of 5.96%, due in August of 1997, which was recorded in other assets.
In the fourth quarter of 1996, the Company reduced the carrying value of this
Loan by $0.2 million, which represented Meridian's estimate of the realizability
of the Loan at December 31, 1996. At March 31, 1997, the carrying value of the
Loan was reduced by an additional $0.8 million due to uncertainty regarding the
realizability of the Loan. These charges were recorded as research and
development expense. The Loan was repaid in full by DSC in June of 1997. This
was recorded as a credit against research and development expense.
In May 1997 the Company purchased a software technology license for $1
million. The cost of the acquired technology was charged against research and
development expense during the second quarter of 1997.
NOTE 6 _ STOCKHOLDERS EQUITY:
STOCK OPTION PLANS
The Company has reserved 3,725,642 shares of Common Stock for issuance
under the Company's various stock option plans (the "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% per year. 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.
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.
Stock option activity under the above Plans for years 1997, 1996, and
1995, is as follows:
<TABLE>
OPTIONS OUTSTANDING
---------------------------------------
<CAPTION>
SHARES WEIGHTED
AVAILABLE AVERAGE
FOR GRANT SHARES PRICE PRICE RANGE
---------- --------- -------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... 40,770 1,254,923 $2.53 $0.03 - $ 7.50
1995 Director Option Plan............ 100,000 -- n/a
Increase in 1988 Plan................ 500,000 -- n/a
Options granted...................... (658,600) 658,600 $5.09 $4.00 - $10.00
Options canceled..................... 153,200 (153,200) $3.46 $1.18 - $ 7.50
Options exercised.................... -- (439,764) $1.06 $0.03 - $ 6.13
Options expired...................... (65,114) -- $1.18 $1.18 - $ 7.50
-------- ---------
Balance at December 31, 1995.......... 70,256 1,320,559 $4.25 $0.03 - $10.00
Increase in 1988 Plan................ 300,000 -- n/a
Options granted...................... (401,600) 401,600 $8.69 $7.25 - $15.13
Options canceled..................... 173,389 (173,389) $7.20 $1.18 - $15.13
Options exercised.................... -- (214,819) $3.09 $0.03 - $ 8.50
Options expired...................... (33,592) -- $1.18 $1.18 - $ 1.18
-------- ---------
Balance at December 31, 1996.......... 108,453 1,333,951 $5.45 $0.03 - $15.13
1997 Stock Option Plan............... 900,000 -- n/a
Options granted...................... (1,260,584) 1,260,584 $3.51 $3.38 - $ 5.00
Options canceled..................... 471,703 (471,703) $7.19 $1.18 - $11.38
Options exercised.................... -- (115,522) $4.55 $3.69 - $ 7.44
Options expired...................... (2,911) -- $1.18 $1.18 - $ 1.18
-------- ---------
Balance at December 31, 1997.......... 216,661 2,007,310 $4.00 $0.03 - $15.13
======= =========
</TABLE>
WEIGHTED
AVERAGE
SHARES PRICE PRICE RANGE
------- -------- --------------
Options exercisable at December 31, 1997 776,927 $4.37 $0.03 - $15.13
On April 23, 1997, the Compensation Committee of the Board of Directors
approved an offer to all employees permitting an election to amend options with
exercise prices in excess of $3.38 to change the exercise price to the fair
market value of the Company's common stock on that date, which was $3.38 subject
to a new vesting schedule. Options for the purchase of a total of 366,184 shares
were canceled and re-granted.
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 300,000 shares of
Common Stock for issuance under the Purchase Plan. At December 31, 1997, 221,133
shares of Common Stock had been issued under the Purchase Plan, and 78,867
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 pro forma net income (loss) and pro forma diluted net income (loss)
per share would have been as follows: (in thousands):
1997 1996
------ -----
Net income (loss):
As reported $(7,778) $4,274
====== =====
Pro forma $(9,210) $3,246
====== =====
Diluted net income (loss) per share:
As reported $ (0.86) $ 0.44
====== =====
Pro forma $ (1.02) $ 0.34
====== =====
The fair value of stock options and stock purchase plan rights was
determined using the Black-Sholes option pricing model incorporating the
following range of assumptions in the calculations:
STOCK OPTIONS STOCK PURCHASE PLAN
------------- -------------------
Expected life 4.51 years 0.5 years
Interest rate at date of grant 6.0% to 6.7% 5.2% to 5.5%
Volatility at date of grant 95% 64% to 98%
Dividend yield 0% 0%
The following table summarizes information about all options
outstanding as December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------
Weighted Average
Range of ------------------------------- Weighted Average
Exercise prices Number Remaining Life Exercise Price Number Exercise price
- --------------- --------- ------------------------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03 - $ 1.18 121,381 4.8 years $ 0.47 121,381 $ 0.47
$3.38 - $ 4.56 1,367,919 8.9 " $ 3.51 317,883 $ 3.73
$5.00 - $ 6.50 481,660 7.1 " $ 5.75 305,308 $ 5.88
$7.50 - $15.13 36,350 6.9 " $10.85 32,355 $11.12
--------- -------------- ------ ------- ------
$0.03 - $15.13 2,007,310 8.2 years $ 4.00 776,927 $ 4.37
========= ============== ====== ======= ======
</TABLE>
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.
PREFERRED SHARE PURCHASE RIGHTS
At December 31, 1997, there were outstanding 8,784,715 rights to
purchase Series A Participating Preferred Stock ("Preferred Stock"). The rights
were issued as a dividend on August 25, 1997 to stockholders of record as of the
close of business on that date. Each right entitles the holder to purchase from
the Company a unit (one one-thousandth) of Preferred Stock at $30 per unit
subject to adjustment. The rights are not exercisable or transferable apart from
the common stock until 10 days after a person or group (a) acquires beneficial
ownership of 15% or more of the Company's common stock or (b) announces a tender
or exchange offer, the consummation of which would result in ownership by a
person or group of 15% or more of the Company's common stock. Each right will
entitle the holder, under certain circumstances (acquiring person becomes the
beneficial owner of 15% or more of the Company's common shares outstanding,
merger or sale of 50% or more of the Company's consolidated assets), to acquire,
at half the value, common stock of the Company or common stock of the acquiring
person. The rights expire August 11, 2007 and are redeemable prior to the time
an acquiring person acquires 15% or more of the Company's common stock at one
cent per right. At December 31, 1997, 5,000,000 shares of Preferred Stock were
authorized but unissued and were reserved for issuance upon exercise of the
rights.
NOTE 7 _ FEDERAL AND STATE INCOME TAXES:
The provision for income taxes in 1997, 1996, and 1995 was as follows (in
thousands):
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Federal:
Current............ $ -- $167 $ 62
Deferred........... -- -- --
---- ---- ----
-- 167 62
State:
Current............ -- 58 22
Deferred........... -- -- --
---- ---- ----
-- 58 22
---- ---- ----
$ -- $225 $ 84
==== ==== ====
Deferred tax assets at December 31, 1997 and 1996, consist of the
following (in thousands):
DECEMBER 31,
1997 1996
Deferred tax assets:
Federal and state loss carryforwards......... $ 7,200 $ 4,850
Tax credit carryforwards..................... 1,484 1,417
Inventory reserves and basis differences..... 396 294
Depreciation and amortization................ (75) 154
Other........................................ 1,995 1,384
------- ------
11,000 8,099
Deferred tax asset valuation allowance....... (11,000) (8,099)
------- ------
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,
1997 1996 1995
---- ---- ----
Statutory federal income tax rate................. (35)% 35 % 35 %
State income taxes, net of federal benefit........ -- 6 6
Current year loss not benefited................... 35 -- --
Other............................................. -- (1) --
Change in valuation allowance..................... -- (35) (38)
---- ---- ----
Effective tax rate................................ -- % 5 % 3 %
==== ==== ====
At December 31, 1997, the Company has a net operating loss carryforward
for U.S. federal and state income tax purposes of approximately $21.0 and $7.0
million, respectively, which expire between 1998 and 2012. The net operating
loss carryforward includes approximately $8.9 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 stockholders'
equity rather than as a reduction in the income tax provision. The Company has
federal research and development tax credit carryovers of approximately $1.5
million at December 31, 1997, that expire in 2003 through 2012. 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 the Company has provided a full deferred income tax valuation
allowance at December 31, 1997.
NOTE 8 _ 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
stockholders 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.
<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 10, 1998 /s/ GIANLUCA U. RATTAZZI
Gianluca U. Rattazzi,
President, Chief Executive Officer, and Director
Date: March 10, 1998 /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 10, 1998
- ------------------------
(Charlie Bass)
/s/ GIANLUCA RATTAZZI President, Chief Executive Officer March 10, 1998
- ------------------------ and Director
(Gianluca Rattazzi)
/s/ ERIK E. MILLER Sr. Vice-President, Finance, Chief March 10, 1998
- ------------------------ Financial Officer (Principal
(Erik E. Miller) Financial and Accounting Officer)
/s/ PETER R. JOHNSON Director March 10, 1998
- ------------------------
(Peter R. Johnson)
/s/ MARIO ROSATI Director March 10, 1998
- ------------------------
(Mario Rosati)
/s/ PIERLUIGI ZAPPACOSTA Director March 10, 1998
- ------------------------
(Pierluigi Zappacosta)
<PAGE>
MERIDIAN DATA, INC.
INDEX TO EXHIBITS
EXHIBIT ITEM PAGE
- ------- ---------------------------------- ----
23 Consent of Independent Accountants......................... 44
24 Power of attorney.......................................... 42
<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 30, 1998 appearing in this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule, appearing in this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 10, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Meridian Data, Inc.
Our audits of the financial statements of Meridian Data, Inc. referred to in our
report dated January 30, 1998, 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 30, 1998
<PAGE>
SCHEDULE II
MERIDIAN DATA, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING OF COSTS AND AGAINST AT END
YEAR EXPENSES RESERVES OF YEAR
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
DECEMBER 31, 1997
Inventory Reserves.................. $675 $ 643 $ (703) $615
Allowance for Doubtful Accounts..... 186 50 -- 236
Sales Returns and Allowances........ 326 2,598 (2,617) 307
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS COMMITTEES OFFICERS
- ---------------------- --------------------- ---------------------
CHARLIE BASS AUDIT SHMUEL SHOTTAN
Chairman of the Board, Charlie Bass Sr. Vice President,
Meridian Data, Inc. 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 TREVOR HEATHORN
Chairman of the Board, OFFICERS Vice President,
QuickResponse -------------------- Advanced Software
Services, Inc. GIANLUCA U. RATTAZZI Development
President and CEO
MARIO M. ROSATI KENNETH KUO
Member of Wilson CHARLES JOSEPH Vice President,
Sonsini Goodrich & Exec. Vice President, Manufacturing
Rosati, P.C. Sales and Marketing
IDELL STELLER
PIERLUIGI ZAPPACOSTA ERIK E. MILLER Vice President,
Vice Chairman, Sr. Vice President, Human Resources
Logitech, Inc. Finance and CFO
GREG SWOPE
Vice President, Sales
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 San Jose, CA
& Rosati, PC
Palo Alto, CA ANNUAL MEETING
The Annual Meeting of
Stockholders will be held
on Wednesday, April 22, 1998,
at the Inn at Pasatiempo in
Santa Cruz, California.
<PAGE>
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