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, 1998
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)
(831) 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding in 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 1, 1999, was $17,124,650.37. The number of shares of
Common Stock, $0.001 par value, outstanding on March 1, 1999, was 8,134,660.
Documents incorporated by reference: Portions of the Proxy Statement for
Registrant's Annual Meeting of Stockholders to be held April 21, 1999, are
incorporated herein by reference into Part III. Certain information required by
Items 6, 7 and 8 of Form 10-K is incorporated by reference from the Registrant's
annual report to security holders furnished pursuant to Rule 14a-3 (the "Annual
Report").
Index begins on page 23. Page 1 of 65
<PAGE>
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
and similar expressions, as they relate to the Company or the Company's
management, including such items discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth on pages
42-47 of the Company's 1998 Annual Report on Form 10-K, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary significantly from those described.. In accordance with
provisions of Section 27A of the Securities Act of 1933, as amended, and Section
21G of the Securities Exchange Act of 1934, as amended, we are making investors
aware that such forward-looking statements, because they relate to future
events, are by their very nature subject to many important factors which could
cause actual results to differ materially from those contained in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the risk factors beginning on page 9.
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 enterprise-level networks of personal computers. 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"). 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 has derived 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 is a developer and manufacturer of network storage solutions
utilizing optical disk (CD-ROM) and conventional hard drive storage
technologies. The Company provides network attached storage servers ("NAS") for
workgroups based on optical disk and hard disk storage, and CD-ROM enterprise
networking servers and subsystems.
During 1997, the Company also undertook the development of its first NAS
device based on hard drive technology. In March 1998, Meridian announced its
first NAS product based on hard drive technology, the Snap! Server(TM). The
Snap! Server allows small and medium-sized businesses and corporate workgroups
to increase storage capacity on their network with minimal hardware expertise or
time expenditure. The Company's Snap! Server is a time-efficient and
cost-effective alternative to the current methods of increasing network storage
such as installing an additional hard disk to an existing file server or
purchasing a new server primarily to increase storage on the network. Both of
these methods require more time and expense than the simple installation of a
Snap! Server. Another potential benefit of the Snap! Server is an increase in
overall network performance by offloading file serving duties from more
expensive application and general purpose servers and increasing network
throughput by placing data physically closer to the users who generate and/or
need the data. As an independent file server, the Snap! Server continues to
provide file services to network users even when the other servers are down.
The Company's optical disk NAS servers allow workgroups within
organizations to simultaneously share up to 14 CD-ROM titles. The Company's
CD-ROM enterprise servers provide the same simultaneous access several hundred
CD-ROM titles in addition to providing a higher level of performance than
Meridian's optical disk NAS servers. Beginning in 1996, demand for the Company's
enterprise products began to decline due to a shift in large organizations
towards web-based data distribution. Meridian believes that this trend will
continue for the foreseeable future. Due to the decreasing demand for enterprise
CD-ROM servers, the Company refocused its research towards the development of
NAS servers. The Company released its CD-ROM NAS server in 1997. Since that
time, the Company's CD-ROM development efforts have been to maintain
compatibility with existing and developing hardware standards. For all its
products, the Company is committed to an open systems approach, supporting a
broad array of personal computer and network operating systems, and providing
desktop access to networked data, both CD-ROM and hard disk based, in
heterogeneous environments.
Industry Background
CD-ROM Enterprise Servers and NAS Servers. 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. These
organizations require software specifically designed to enable them to share
CD-ROMs on a network, manage multiple titles and control user access.
Furthermore, corporations are following the trend of migrating to Microsoft
Windows NT from other network operating systems, and, as a result, CD-ROM
networking systems must be able to operate in heterogeneous environments during
this transition. 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 that 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 centrally managed servers, they can be efficiently managed and periodically
updated without access to individual desktop computers.
Emerging Market for Hard Drive based Network Attached Storage for PC LANs. The
Company believes that with the increasing use of business software suites,
e-mail and internet applications, and rich data type software applications, such
as CAD and multimedia, corporations are experiencing a dramatically increased
need for network storage capacity. At the same time, many small and medium-sized
business are implementing PC LANs and lack the internal technical expertise
required to manage or upgrade their new networks. Within larger organizations
with in-house expertise, network managers find it difficult to forecast future
storage requirements and require the ability to quickly and affordably increase
network storage capacity. Hard drive-based NAS servers 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 efficiently manage input/output traffic associated with that
task, freeing up primary network server resources for mission-critical
applications, and enhancing speed on the network by offloading data storage
services. According to Dataquest, a leading research firm focused on IT
technology, the emerging market for NAS will grow to $ 2.0 billion in 1999. In
the past, hard drive-based NAS devices were targeted primarily towards large
Unix-based enterprise networks. By delivering a PC LAN NAS device below $1,000,
Meridian hopes to include many small and medium-sized businesses, and corporate
workgroups within the NAS market.
The Meridian Data Solution
The Company offers a family of CD-ROM enterprise servers and NAS servers
that enable organizations to provide multi-user access over networks to
centrally managed data stored on either optical disks or hard drives. Meridian's
enterprise servers provide cost effective solutions for organizations with
applications or data on CD-ROM by eliminating the need to physically share discs
or purchase multiple copies of often expensive CD-ROM titles. The Company's NAS
products allow small and medium-sized businesses and workgroups within a larger
organization to implement networked CD-ROM or add additional file storage
capacity easily without network downtime and assistance from third-party
technical resources. The Company's products support a broad range of networking
environments, including Novell NetWare and Microsoft Windows NT, and most
popular PC desktop operating systems, including Windows 95/98, DOS, OS/2. In
addition, the Company's products are compatible with most major network
protocols.
The Meridian Data Strategy
Meridian believes that customers want to implement "plug-and-play" storage
solutions for both CD-ROMs and network file servers. In response, the Company
introduced its CD Net Universal plug-and-play server in 1997 and its Snap!
Server in May 1998. In addition, the Company offers competitively priced CD-ROM
enterprise servers. The Company's goal is to be a leading provider of one-stop
shopping for plug and play network storage solutions utilizing CD-ROM and hard
drives. The key elements of the Company's strategy include:
Focus on PC LAN NAS Devices. To meet the emerging demand for easily installed,
plug-and-play storage products for small and medium-sized businesses and
workgroups, Meridian offers NAS products based on both CD-ROM and hard drive
technology. In May 1998, the Company premiered its first hard drive NAS product,
the Snap! Server. This represented an entirely new product classification in the
NAS market. Snap! Server is a protocol-independent, plug-and-play NAS server
targeted for the PC LAN environment. 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 Snap! Server. Initially, the Company expects that the main
competition for the Snap! Server will be from traditional methods of increasing
network storage. Such methods include purchasing new PC servers from vendors
such as Compaq Computer Corporation ("Compaq"), and Dell Computer Corporation
("Dell"), and installing additional drives from manufacturers such as Seagate
Technology, Inc. ("Seagate") and Maxtor Corporation ("Maxtor") in existing
servers. The installation of additional drives or servers requires several hours
of network downtime, often the services of a network professional, and the
potential need for additional network operating software licenses, all of which
adds to the overall cost of increasing storage on networks. The Company
estimates that the cost of adding a comparable amount of additional storage to a
PC server or network runs from approximately $3,000 to $10,000 or higher,
depending on the server/network configuration, the need to purchase additional
network software licenses, and network downtime. Meridian believes that its new
Snap! Server has significant cost advantages over those competing methodologies
for increasing network storage. The Company's Snap! Server retails for $1,795
for 16 gigabytes and $995 for 8 gigabytes of storage capacity. Installation of
the Snap! Server involves simply connecting the server to an Ethernet network
port and power outlet. Setup and administration are managed via a simple HTML
interface, accessed through an Internet browser, such as Netscape Navigator or
Microsoft Internet Explorer.
Support Industry Standards. Meridian believes that success in the NAS
market requires products that are able to function in heterogeneous network
environments. The Company's products operate over a broad range of desktop
platforms, network operating systems, and connectivity protocols, and believes
that this interoperability is core to a successful product strategy. The
Company's products provide allows users to access data via standard tools and
interfaces native to their network operating system environment. The Snap!
Server is compatible with all major PC networks operating systems (Microsoft,
Novell, and UNIX) and protocols (including TCP/IP, IPX, NetBEUI and HTTP)
concurrently. In addition, it is able to work in heterogeneous network
environments with the same ease as networks with a single network operating
system. Failure to maintain such compatibility would have an adverse effect on
the market's acceptance of the Snap! Server.
Leverage Third-Party Distribution. The Company sells its products through
two-tier distribution, comprised primarily of large distributors of electronic
hardware 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.
Products
Meridian provides support for a broad range of networking environments
(Novell NetWare and Microsoft Windows NT) and desktop operating systems (Windows
95/98 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:
DESCRIPTION Price Range*
PRODUCTS NAS DEVICES
Snap! Server Plug and play network file server
utilizing hard drive $995 - $1,795
technology with up to 16 gigabytes
of storage.
CD Net Universal Server Plug and play CD-ROM server with a
built-in Web server $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-ROM ENTERPRISE SERVERS,
SUBSYSTEMS AND SOFTWARE
CD/DVD Net CD-ROM/DVD servers designed to support
900/TNT/Ultimate large multi-department networks $2,780-$24,738
Series Servers with 7 to 56 CD-ROM/DVD drives,
featuring Pentium 200 processors,
fast Ethernet adapters,for Novell,
NT, Intranets, and VINES, available
in tower or rack mount enclosures.
NetROM CD-ROM subsystems for connection to
servers via SCSI either directly of $1,056-$9,388
over Ethernet networks
CD Net for NetWare Client and server software that
CD Net for Windows NT provides access for CD-ROMs on
CD Net Plus Novell NetWare and Microsoft
Windows NT $684 - $1,372
*Price range based on domestic end user list price as of October 1998.
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 managing the Company's
major distributors, direct sales of enterprise 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. A final level of sales support is provided by sales
engineers who provide technical assistance to sales staff in several
territories. The Company's workgroup products are marketed primarily through
advertising and the Company's established distribution channel. 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 and network professionals on the Company's simple, cost
effective solutions to increasing network storage via Snap! Servers and
accessing and sharing CD-ROMs. The Company's marketing program includes direct
mail, public relations, educational seminars, specialty trade shows, selected
joint marketing programs, advertising in leading industry publications such as
the PC Week, InfoWorld, PC Magazine, and Windows Magazine, and a home page on
the World Wide Web. The Company's sales and marketing organization consisted of
24 persons as of December 31, 1998.
The Company began shipping its new Snap! Server in the second quarter of
1998. A key element in the success of the Snap! Server will be educating users
about the advantages of utilizing NAS technology for PC LANs. The failure by the
Company to successfully educate the market on the benefits of NAS, especially
its Snap! Server, would have a material adverse effect on Meridian's business,
financial condition and results of operations. The Snap! Server requires
different marketing, sales and distribution strategies than those for the
Company's enterprise products. As such, it entails significant new risks to
Meridian. There can be no assurance that the Company's distributors and VARs
will be able to effectively market this new product or 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 consisted of 7 persons as of
December 31, 1998. 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 and http://www.snapserver.com. Meridian CD-ROM
products are sold with a one or three year warranty, which can be extended for
an additional fee. The Company's Snap! Server is sold with a 30-day money back
guarantee and a three year warranty.
Distribution
Approximately 90% of the Company's product sales are derived from two-tier
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 two North American distributors,
Ingram Micro, Inc. ("Ingram Micro") and Tech Data Corporation ("Tech Data").
Meridian's VARs generally concentrate their sales efforts by region, or by
industry, such as Government Technology Services, Inc. European sales are
currently the responsibility of a third-party manufacturer's representative. 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 and VARs, to the extent that they are holding inventory at the time
the Company announces a price decrease.
Tech Data and Ingram Micro accounted for 41% and 23%, respectively, of the
Company's 1998 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 consisted of 27 engineers as
of December 31, 1998. The Company's primary focus in 1998 was on the development
and enhancement of the current Snap! Server, additional products for inclusion
in the Snap! Server family of products, and maintaining compatibility with
evolving hardware standards for its CD-ROM products. There can be no assurance
that Meridian's research and development efforts will result in the successful
introduction any additional 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 Data's systems sold after December 31, 1997 do 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
Microsoft Windows 3.11, Windows 95/98 and Windows 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Issue."
Manufacturing
The Company contracts with third parties to manufacture some of its
products, and also maintains a manufacturing facility onsite for
enterprise-level products. Finished products are distributed from the Scotts
Valley facility to customers. The Company is dependent on a small number of
suppliers, some of whom are located in Asia, 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, the loss of a key subassembly manufacturer, or the loss of the
contract manufacture would have an adverse effect on their ability to supply the
Company with components or assemblies and, consequently, would 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, could require re-engineering of the Company's products, 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 would 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 Company's Snap! Server competes with alternative methods of adding
storage to PC LAN networks, such as adding new PC servers from companies such as
Dell, 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. 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 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
storage market include other suppliers of CD-ROM networking software and
hardware such as Procom Technology. The Company also competes indirectly with
suppliers of personal computers and servers, like Hewlett Packard, Dell, 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. These companies in particular, and the Company's competitors
in general, include large domestic and international companies, many of which
have significantly greater financial, technical, manufacturing, marketing, sales
and distribution resources than the Company. There can be no assurance that the
Company's current or potential competitors will not develop products comparable
or superior to those developed by the Company or adapt more quickly than the
Company to new or emerging technologies, evolving industry trends or changing
customer requirements.
The Company believes that its ability to compete successfully in the CD-ROM
networking 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 within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21G of the Securities Exchange Act of 1934,
as amended, 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 (then
known as Parallan Computer, Inc.) 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. The
Company has failed to meet its expectations of future revenues in the past and
may not meet future expectations. As a result of these and other factors, the
Company believes that its revenues and operating results are difficult to
predict and are subject to fluctuations from period to period. There can be no
assurance that the Company will return to profitability, or that if
profitability is achieved, will be able to sustain profitability. In order to
address its disappointing systems revenue growth, Meridian increased its sales
and promotional expenditures in 1996 and, at the end of January 1997,
significantly reduced system prices in response to competitive pressures. Unit
shipments did not increase and 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 business, financial condition and results of operations would be
materially adversely affected. As a result of expenses related to the
engineering and marketing campaign of Meridian's Snap! Server, the Company
anticipates that it will operate at a substantial net operating loss through the
end of 1999.
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; adoption of new technologies and standards; price and other
forms of competition; the long and complex sales cycle for site licenses; the
timing of site license revenue; 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 1998, identifiable sales to federal governmental agencies accounted for
approximately 8% 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 and annual results would be
adversely affected. In the past, the Company's business has experienced
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. Due to the shift in the Company's revenues mix from enterprise
systems to NAS products, this trend is no longer evident. 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."
Product Concentration. The Company's future financial performance continues to
be contingent primarily on the success of, 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, or other NAS devices, 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. In addition, while there is a substantial installed base of
CD-ROM/DVD drives in the United States, growth in the CD-ROM/DVD 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 this market.
If demand for the Company's CD-ROM/DVD networking products continues to
decrease, and demand for NAS products not develop, the Company's business,
financial condition and results of operations would be materially adversely
affected.
Snap Server. The Company is actively developing additional products for its
Snap! Server family of products. This entails further expansion into
non-CD-ROM/DVD networking markets, in which the company has minimal experience.
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/DVD 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 Snap! Server, or related products. There can be
no assurance that the Company will be successful in marketing its 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
future Snap! Server products or other new products, or that its 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 current and future Snap! Server products or
other new products in a timely manner in response to changing market conditions
or customer requirements, the Company's business, financial condition and
results of operations will all be materially adversely affected. The Company's
potential new products likely will be subject to significant technical risk due
to their complexity and the difficulty in gauging the engineering effort
required to produce such products. There can be no assurance that future Snap!
Server products 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 continue to offer the functionality and ease-of-use that it believes
future Snap! Server products require 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, financial condition
and operating results 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 may operate at a substantial net operating loss through the
end of 1999.
Dependence on New Distribution Channels. The Company anticipates that VARs,
catalogs, and business-to-business retailers will play a significant role in its
Snap! Server sales strategy. In addition, as the market for the Company's
CD-ROM/DVD products transition from enterprise-servers to workgroup-servers, the
Company anticipates that catalogs and business-to-business retailers will
account for an increasingly greater proportion of the Company's revenues. Early
in 1998, some of the Company's existing CD-ROM/DVD workgroup-server products
began utilizing the same new distribution channels as the Company's Snap!
Server, in addition to the Company's traditional channels, distributors, VARs
and direct sales/telemarketing. The Company must implement marketing strategies
designed to indirectly generate end-user demand thru such new distribution
channels. There can be no assurance that the Company will be able to effectively
design and implement such strategies or that such strategies will be successful
in generating such end-user demand. The Company's agreements or purchase orders
with its catalog and business-to-business retailers typically allow for extended
payment terms and substantial rights of return. While the Company will provide
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, financial condition
and results of operations. The Company's business, financial condition and
results of operations could also be materially adversely affected by changes in
catalog or business-to-business retailers' inventory strategies, which could
occur rapidly, and may be unrelated to end user demand. A failure of the
Company's new distribution channels to successfully market the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations. As a result of the extended
payment terms required by these customers, the Company's liquidity may be
adversely impacted by the timing of payments required by its vendors preceding
the receipt of payments from retail customers.
Competition. 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, Compaq, Hewlett Packard and International Business
Machines Corporation ("IBM"), adding additional disk drives from manufacturers
such as Seagate and Maxtor to existing servers, and potential new competition
from semiconductor manufacturers, such as Intel Corporation. These companies in
particular and others similar to them, 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 markets for the Company's CD-ROM/DVD 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/DVD networking market include other suppliers of
CD-ROM/DVD networking software and hardware such as Procom Technology, Inc., and
Hewlett Packard, Inc.. The Company also competes indirectly with suppliers of
personal computers, such as Dell, Compaq, and IBM, and network operating systems
such as Microsoft Corporation and Novell, Inc., to the extent such companies
include CD-ROM/DVD 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/DVD 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.
The Company believes that its ability to compete successfully in the
CD-ROM/DVD 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.
Dependence on Third Party Distributors. The Company derives substantially all of
its product sales through distributors, VARs, and retailers. Two distributors
accounted for 41% and 23%, respectively, of the Company's 1998 product sales.
The loss of either of these distributors, or certain other distributors, VARs,
or retailers would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's contractual
relationships with its distributors, VARs, and retailers can generally be
canceled upon notice to the Company. Certain of the Company's distributors,
VARs, and retailers also act as distributors for competitors of the Company and
could devote greater effort and resources to marketing competitive products. In
addition, effective distributors, VARs, and retailers 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, VARs, and retailers
will continue to market the Company's products effectively or that economic or
industry conditions will not adversely affect such distributors, VARs, and
retailers. Because the Company sells a significant portion of its products
through distributors, VARs, and retailers it is difficult for the Company to
monitor end user demand for its products on a current basis. Initial stocking
orders from distributors or retailers may not be indicative of long-term end
user demand. The Company's distributors and retailers 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, financial condition and results of operations. The Company's
business, financial condition and results of operations could also be materially
adversely affected by changes in distributors' or retailers inventory
strategies, which could occur rapidly, and may be unrelated to end user demand.
There can be no assurance that the Company's distributors, VARs, and retailers
will continue to market the Company's existing products. A failure of the
Company's distributors, VARs, and retailers to successfully market the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company began shipping its new Snap! Server in the second quarter of
1998. The Snap! Server requires different marketing, sales and distribution
strategies than those for the Company's current CD-ROM/DVD products. As such, it
entails significant new risks to Meridian. There can be no assurance that the
Company's distributors, VARs, and retailers will choose or be able to
effectively market this new product or that the Company will be successful in
developing alternate channels of distribution. Initial stocking orders from
distributors or retailers may not be indicative of long-term end user demand.
The Company's contracts with distributors and purchase orders from retailers
typically allow distributors and retailers of the Snap! Server and other new
products to return products, subject to certain limitations, without charge or
penalty. The Company provides for a reserve for returns based on its contractual
obligations. A failure of the Company's distributors, VARs, and retailers 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 and could require substantial modification of the Company's
products to ensure compatibility. There can be no assurance that any additional
source would be available to the Company at all or on a timely basis or at a
cost acceptable to the Company. Any disruption or reduction or termination 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/DVD 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 be 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/DVD 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 or subassembly
manufacturers 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; and Obsolesce. 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 hardware or software 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/DVD 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 and retailers
allow for product return, or price protection credits, based on their inventory
levels of current products and, under certain circumstances, obsolete products.
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.
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 11% of
total product sales in 1998. The Company's business, financial condition 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/DVD 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."
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 market that the Company has
entered. 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,
debt, or the sale of additional equity. The sale of additional equity would
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.
Employees. As of December 31, 1998, the Company employed 83 individuals, of whom
13 were employed in manufacturing, 27 in research and development, 23 in sales
and marketing, 7 in customer support, 1 in product management, and 12 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."
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/DVD networking and NAS 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 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.
Potential Seismic Disturbances. The Company's research and development
activities, its corporate headquarters, other critical business operations and
certain of its suppliers are located near major earthquake faults. The ultimate
impact on the Company, its significant suppliers and the general infrastructure
is unknown, but operating results could be materially affected in the event of a
major earthquake. The Company is predominantly uninsured for losses and
interruptions caused by earthquakes.
Item 2. Properties.
The Company leases its headquarters office and manufacturing facility in
Scotts Valley, California, under a noncancelable operating lease which expires
in December 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 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, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of February 26, 1999, there were 120 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. The remainder of the
information required by this item is incorporated by reference from the section
of the Registrant's 1998 Annual Report to Stockholders captioned "Quarterly
Financial Data." Such information is also set forth in Exhibit 13.1 attached
hereto.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference from the
section of the Registrant's 1998 Annual Report to Stockholders captioned "Five
Year Financial Summary" Such information is also set forth in Exhibit 13.1
attached hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is incorporated by reference from the
section of the Registrant's 1998 Annual Report to Stockholders captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such information is also set forth in Exhibit 13.1 attached hereto.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated by reference from the
sections of the Registrant's 1998 Annual Report to Stockholders captioned
"Balance Sheets", "Statements of Operations", "Statements of Stockholders'
Equity", "Statements of Cash Flows", "Notes to Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996" and "Report of Independent
Accountants." Such information is also set forth in Exhibit 13.1 attached
hereto.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the Directors of the Company is incorporated by
reference from the information set forth under the caption "Proposal No. 1:
Election of Directors" in the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's year ended December 31, 1998 (the "1999 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 "Section 16(a) Beneficial Ownership
Reporting Compliance" in the 1999 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 46 President, Chief Executive Officer
and Director
Erik E. Miller 38 Sr. Vice President, Finance and
Chief Financial Officer
Shmuel Shottan 47 Sr. Vice President, Engineering and
Chief Technical Officer
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. Dr. Rattazzi is also a director of Socket
Communications, Inc., a company that develops data communication solutions for
the mobile computer market. 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. 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 40 Vice President, Advanced Development
Carlo Garbagnati 39 Vice President, Software Development
Trevor Heathorn 40 Vice President, Advanced Software
Jeff Hill 52 Vice President, Product Marketing
Kenneth Kuo 49 Vice President, Manufacturing
Greg Swope 40 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. Hill joined the Company in 1994 as Product Manager, and was promoted to
Director of Product Marketing in 1998 and to Vice President of Product Marketing
in 1999. Prior to joining the company Mr. Hill held various marketing and
product marketing positions at Metaphor Inc., The Santa Cruz Operation, and the
H.J. Heinz Company. Mr. Hill holds an MBA in Marketing from the University of
Colorado, and a BA in Advertising from Michigan State University.
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.
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 1999 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 "Share Ownership" in the 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
None.
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 have been
incorporated by reference to the Registrant's 1998 Annual Report to
Stockholders. The financial statements required by this Item are also
set forth in Exhibit 13.1 attached hereto.
Report of Independent Accountants
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998, 1997,
and 1996
Statements of Stockholders'Equity for the years ended December 31, 1998,
1997, and 1996
Statements of Cash Flows for the years ended December 31, 1998, 1997,
and 1996
Notes to Financial Statements
2. Financial Statement Schedule. The following financial statement schedule
of the Company as of and for the years ended December 31, 1998, 1997 and
1996, and the Report of Independent Accountants on Financial Statement
Schedule (page 62) 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, which have
been incorporated by reference to the Registrant's 1998 Annual Report to
Stockholders..
Schedules Title Page
II Valuation and Qualifying Accounts...................... 63
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, which
have been incorporated by reference to the Registrant's 1998 Annual
Report to Stockholders.
3. Exhibits (in accordance with Item 601 of Regulation S-K).
2.0 Agreement and Plan of Reorganization among Parallan Computer, Inc.,
PAC Acquisition Subsidiary, Inc. and Meridian Data, Inc. dated
December 1, 1994 previously filed as Exhibit 2 to the Current Report
on Form 8-K and incorporated herein by reference.
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, as amended.
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.
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 Reporton 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 Agreementbetween 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.
10.20 Loan and Security Agreement dated July 31, 1998 between Silicon
Valley Bank and Meridian Data, Inc., previously filed as Exhibit
10.20 to the Quarterly Report on Form 10-Q for the quarter ended
September, 30, 1998, and incorporated herein by reference.
13.1 Portions of the 1998 Annual Report to Stockholders
23.1 Consent of Independent Accountants
27 Financial Data Schedule
(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>
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 23, 1999 /s/ Gianluca U. Rattazzi
----------------------------
GIANLUCA U. RATTAZZI
President, Chief Executive Officer,
and Director
Date: March 23, 1999 /s/ 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 23, 1999
- ------------------
(CHARLIE BASS)
/s/ Gianluca Rattazzi President, Chief Executive
- --------------------- Officer and Director March 23, 1999
(GIANlUCA RATTAZZI)
/s/ Erik E. Miller Vice-President, Finance,
- -------------------- Chief Financial Officer March 23, 1999
(ERIK E. MILLER) (Principal Financial and
Accounting Officer)
/s/ Peter R. Johnson Director March 23, 1999
- --------------------
(PETER R. JOHNSON)
/s/ Mario M. Rosati Director March 23, 1999
- -------------------
(MARIO M. ROSATI)
/s/ Pierluigi M. Zappacosta Director March 23, 1999
- ---------------------------
(PIERLUIGI M. ZAPPACOSTA)
<PAGE>
MERIDIAN DATA, INC.
INDEX TO EXHIBITS
Exhibit Item Page
3.2 Bylaws of Meridian Data, Inc., a Delaware Corporation,
as amended....................................................24
13.1 Portions of the 1998 Annual Report to Stockholders............40
23.1 Consent of Independent Accountants............................62
24 Power of attorney.............................................22
27 Financial Data Schedule.......................................65
<PAGE>
EXHIBIT 3.2
BYLAWS OF MERIDIAN DATA,INC., A DELAWARE CORPORATION, AS AMENDED
TABLE OF CONTENTS
Page
ARTICLE I CORPORATE OFFICES.................................................1
1.1 REGISTERED OFFICE.........................................1
1.2 OTHER OFFICES.............................................1
ARTICLE II MEETINGS OF STOCKHOLDERS.........................................1
2.1 PLACE OF MEETINGS.........................................1
2.2 ANNUAL MEETING............................................1
2.3 SPECIAL MEETING...........................................1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS..........................1
2.5 NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS........2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..............2
2.7 QUORUM....................................................3
2.8 ADJOURNED MEETING; NOTICE.................................3
2.9 VOTING....................................................3
2.10 WAIVER OF NOTICE..........................................3
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING................4
2.13 PROXIES...................................................4
2.14 ORGANIZATION..............................................4
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE.....................4
ARTICLE III DIRECTORS.......................................................5
3.1 POWERS....................................................5
3.2 NUMBER OF DIRECTORS.......................................5
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS..................5
3.4 RESIGNATION AND VACANCIES.................................5
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................6
3.6 REGULAR MEETINGS..........................................6
3.7 SPECIAL MEETINGS; NOTICE..................................6
3.8 QUORUM....................................................6
3.9 WAIVER OF NOTICE..........................................6
3.10 ADJOURNMENT...............................................6
3.11 NOTICE OF ADJOURNMENT.....................................7
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........7
3.13 FEES AND COMPENSATION OF DIRECTORS........................7
3.14 APPROVAL OF LOANS TO OFFICERS.............................7
ARTICLE IV COMMITTEES.......................................................7
4.1 COMMITTEES OF DIRECTORS...................................7
4.2 MEETINGS AND ACTION OF COMMITTEES.........................8
4.3 COMMITTEE MINUTES.........................................8
ARTICLE V OFFICERS..........................................................8
5.1 OFFICERS..................................................8
5.2 ELECTION OF OFFICERS......................................8
5.3 SUBORDINATE OFFICERS......................................8
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................8
5.5 VACANCIES IN OFFICES......................................9
5.6 CHAIRMAN OF THE BOARD.....................................9
5.7 PRESIDENT.................................................9
5.8 VICE PRESIDENTS...........................................9
5.9 SECRETARY.................................................9
5.10 CHIEF FINANCIAL OFFICER...................................9
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS......................................................10
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................10
6.2 INDEMNIFICATION OF OTHERS................................10
6.3 INSURANCE................................................10
ARTICLE VII RECORDS AND REPORTS............................................11
7.1 MAINTENANCE AND INSPECTION OF RECORDS....................11
7.2 INSPECTION BY DIRECTORS..................................11
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.........................11
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...........11
7.5 CERTIFICATION AND INSPECTION OF BYLAWS...................11
ARTICLE VIII GENERAL MATTERS...............................................11
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING....11
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................12
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED........12
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES.........12
8.5 SPECIAL DESIGNATION ON CERTIFICATES......................12
8.6 LOST CERTIFICATES........................................13
8.7 TRANSFER AGENTS AND REGISTRARS...........................13
8.8 CONSTRUCTION; DEFINITIONS................................13
ARTICLE IX AMENDMENTS......................................................13
<PAGE>
BYLAWS
OF
MERIDIAN DATA, INC.
(a Delaware corporation)
CORPORATE OFFICES
- -----------------
REGISTERED OFFICE
- -----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
OTHER OFFICES
- --------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
MEETINGS OF STOCKHOLDERS
- ------------------------
PLACE OF MEETINGS
- -----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
ANNUAL MEETING
- --------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such designation,
the annual meeting of stockholders shall be held on the second Tuesday of May in
each year at 10:00 a.m. However, if such day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected, and any other proper
business may be transacted.
SPECIAL MEETING
- ---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent (10%)of the votes at that meeting. If a special meeting is
called by any person or persons other than the board of directors or the
president or the chairman of the board, then the request shall be in writing,
specifying the time of such meeting and the general nature of the business
proposed to be transacted, and shall be delivered personally or sent by
registered mail or by telegraphic or other facsimile transmission to the
chairman of the board, the president, any vice president or the secretary of the
corporation. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time
requested by the person or persons calling the meeting, so long as that time is
not less than thirty-five (35) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty (20) days after receipt
of the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
NOTICE OF STOCKHOLDERS' MEETINGS
- ----------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.6 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the stockholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS.
- -------------------------------------------------------------
Subject to the rights of holders of any class or series of share having a
preference over the Common Stock as to dividends or upon liquidation, (a)
nominations for the election of directors, and (b) business proposed to be
brought before any stockholder meeting may be made by the board of directors or
proxy committee appointed by the board of directors or by any stockholder
entitled to vote in the election of directors generally if such nomination or
business proposed is otherwise proper business before such meeting. However, any
such stockholder may nominate one or more persons for election as directors at a
meeting or propose business to be brought before a meeting, or both, only if
such stockholder has given timely notice in proper written form of their intent
to make such nomination or nominations or to propose such business. To be
timely, such stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than seventy-five
(75) calendar days in advance of the first anniversary date of mailing of the
corporation's proxy statement released to stockholders in connection with the
previous year's annual meeting of stockholders; provided, however, that in the
event that no annual meeting was held in the previous year or the date of the
annual meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received a reasonable time before the
solicitation is made. To be in proper form, a stockholder's notice to the
secretary shall set forth: (i) the name and address of the stockholder who
intends to make the nominations or propose the business and, as the case may be,
of the person or persons to be nominated or of the business to be proposed;
(ii)a representation that the stockholder is a holder of record of share of the
corporation entitled to vote at such meeting and, if applicable, intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii)if applicable, a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons(naming such person or persons)pursuant to which the nomination or
nominations are to be made by the stockholder; (iv)such other information
regarding each nominee or each matter of business to be proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission had the
nominee been nominated, or intended to be nominated, or the matter been
proposed, or intended to be proposed by the board of directors; and (v)if
applicable, the consent of each nominee to serve as director of the corporation
if so elected. The chairman of the meeting shall refuse to acknowledge the
nomination of any person or the proposal of any business not made in compliance
with the foregoing procedure."
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
- -------------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been given
at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication. An affidavit of the mailing or
other means of giving any notice of any stockholders' meeting, executed by the
secretary, assistant secretary or any transfer agent of the corporation giving
the notice, shall be prima facie evidence of the giving of such notice.
QUORUM
- ------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of the laws
of the State of Delaware or of the certificate of incorporation or these bylaws,
a different vote is required, in which case such express provision shall govern
and control the decision of the question. If a quorum be initially present, the
stockholders may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum, if any action taken is approved by a majority of the stockholders
initially constituting the quorum.
ADJOURNED MEETING; NOTICE
- --------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
VOTING
- ------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements). Except as may be
otherwise provided in the articles of incorporation or these bylaws, each
stockholder shall be entitled to one vote for each share of capital stock held
by such stockholder and stockholders shall not be entitled to cumulate their
votes in the election of directors of with respect to any matter submitted to a
vote of the stockholders. Notwithstanding the foregoing, if the stockholders of
the corporation are entitled, pursuant to Sections 2115 and 301.5 of the
California Corporations Code, to cumulate their votes in the election of
directors, each such stockholder shall be entitled to cumulate votes (i.e., cast
for any candidate a number of votes greater than the number of votes that such
stockholder normally is entitled to cast) only if the candidates' names have
been properly placed in nomination (in accordance with these bylaws) prior to
commencement of the voting, and the stockholder requesting cumulative voting has
given notice prior to commencement of the voting of the stockholder's intention
to cumulate votes. If cumulative voting is properly requested, each holder of
stock, or of any class or classes or of a series or series thereof, who elects
to cumulate votes shall be entitled to as many votes as equals the number of
votes that (absent this provision as to cumulative voting) he or she would be
entitled to cast for the election of directors with respect to his or her shares
of stock multiplied by the number of directors to be elected by him, and he or
she may cast all of such votes for a single director or may distribute them
among the number to be voted for, or for any two or more of them, as he or she
may see fit.
WAIVER OF NOTICE
- ----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
- -------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the General Corporation Law of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
- ------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date. If the board of directors
does not so fix a record date, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the business day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the board of
directors fixes a new record date for the adjourned meeting, but the board of
directors shall fix a new record date if the meeting is adjourned for more than
thirty (30) days from the date set for the original meeting. The record date for
any other purpose shall be as provided in Section 8.1 of these bylaws.
PROXIES
- -------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy shall
be deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
ORGANIZATION
- ------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
LIST OF STOCKHOLDERS ENTITLED TO VOTE
- ---------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
DIRECTORS
- ---------
POWERS
- ------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation and these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
NUMBER OF DIRECTORS
- -------------------
The board of directors shall be not less than five (5) nor more than seven
(7) members. The exact number of directors shall be five (5) until changed,
within the limits specified above by a bylaw amending this Section 3.2 duly
adopted by the board of directors or by the stockholders. The indefinite number
of directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by an amendment to this bylaw, duly adopted by the
board of directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation. No reduction of the authorized number of directors
shall have the effect of removing any director before that director's term of
office expires.
ELECTION AND TERM OF OFFICE OF DIRECTORS
- ----------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
RESIGNATION AND VACANCIES
- --------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the remaining
directors, even if less than a quorum, or by a sole remaining director; however,
a vacancy created by the removal of a director by the vote of the stockholders
or by court order may be filled only by the affirmative vote of a majority of
the shares represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute a majority of the
required quorum). Each director so elected shall hold office until the next
annual meeting of the stockholders and until a successor has been elected and
qualified. Unless otherwise provided in the certificate of incorporation or
these bylaws: Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by theprovisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected. If at any time, by reason of death or resignation
or other cause, the corporation should have no directors in office, then any
officer or any stockholder or an executor, administrator, trustee or guardian of
a stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders in
accordance with the provisions of the certificate of incorporation or these
bylaws, or may apply to the Court of Chancery for a decree summarily ordering an
election as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship, the
directors then in office constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), then the Court of Chancery
may, upon application of any stockholder or stockholders holding at least ten
(10) percent of the total number of the shares at the time outstanding having
the right to vote for such directors, summarily order an election to be held to
fill any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office as aforesaid, which election
shall be governed by the provisions of Section 211 of the General Corporation
Law of Delaware as far as applicable.
PLACE OF MEETINGS; MEETINGS BY TELEPHONE
- -----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
REGULAR MEETINGS
- ----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors. If any regular
meeting day shall fall on a legal holiday, then the meeting shall be held next
succeeding full business day.
SPECIAL MEETINGS; NOTICE
- --------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors. Notice of the time and place of
special meetings shall be delivered personally or by telephone to each director
or sent by first-class mail or telegram, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
corporation. If the notice is mailed, it shall be deposited in the United States
mail at least four (4) days before the time of the holding of the meeting. If
the notice is delivered personally or by telephone or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
QUORUM
- ------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and other applicable law. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, if any action taken is approved by at least a
majority of the required quorum for that meeting.
WAIVER OF NOTICE
- ----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
ADJOURNMENT
- -----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
NOTICE OF ADJOURNMENT
- ---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four(24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
- ---------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
FEES AND COMPENSATION OF DIRECTORS
- ------------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
APPROVAL OF LOANS TO OFFICERS
- -----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
COMMITTEES
- ----------
COMMITTEES OF DIRECTORS
- -----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have and may exercise all
the powers and authority of the board, but no such committee shall have the
power of authority to: amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the corporation); adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware; recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets; recommend to the
stockholders a dissolution of the corporation or a revocation of a dissolution;
or amend the bylaws of the corporation; and, unless the board resolution
establishing the committee, the bylaws or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend, to authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
MEETINGS AND ACTION OF COMMITTEES
- ---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
COMMITTEE MINUTES.
- ------------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
OFFICERS
- --------
OFFICERS
- --------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
ELECTION OF OFFICERS
- ---------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
SUBORDINATE OFFICERS
- --------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
REMOVAL AND RESIGNATION OF OFFICERS
- --------------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors. Any officer
may resign at any time by giving written notice to the corporation. Any
resignation shall take effect at the date of the receipt of that notice or at
any later time specified in that notice; and, unless otherwise specified in that
notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party.
VACANCIES IN OFFICES
- ---------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
CHAIRMAN OF THE BOARD
- ---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
VICE PRESIDENTS
- ---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
SECRETARY
- ---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at stockholders' meetings,
and the proceedings thereof. The secretary shall keep, or cause to be kept, at
the principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the
board of directors, a share register, or a duplicate share register, showing the
names of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation. The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the board of directors required to be given
by law or by these bylaws. He shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
CHIEF FINANCIAL OFFICER
- -----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director. The chief financial officer shall
deposit all money and other valuables in the name and to the credit of the
corporation with such depositaries as may be designated by the board of
directors. He shall disburse the funds of the corporation as may be ordered by
the board of directors, shall render to the president and directors, whenever
they request it, an account of all of his transactions as chief financial
officer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
- -------------------------------------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
- -----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation. The corporation shall
be required to indemnify a director or officer in connection with an action,
suit, or proceeding (or part thereof) initiated by such director or officer only
if the initiation of such action, suit, or proceeding (or part thereof) by the
director or officer was authorized by the Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred by a
director or officer of the corporation entitled to indemnification hereunder in
defending any action, suit or proceeding referred to in this Section 6.1 in
advance of its final disposition; provided, however, that payment of expenses
incurred by a director or officer of the corporation in advance of the final
disposition of such action, suit or proceeding shall be made only upon receipt
of an undertaking by the director or officer to repay all amounts advanced if it
should ultimately be determined that the director of officer is not entitled to
be indemnified under this Section 6.1 or otherwise. The rights conferred on any
person by this Article shall not be exclusive of any other rights which such
person may have or hereafter acquire under any statute, provision of the
corporation's Certificate of Incorporation, these bylaws, agreement, vote of the
stockholders or disinterested directors or otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
INDEMNIFICATION OF OTHERS
- -------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
INSURANCE
- ---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
RECORDS AND REPORTS
- -------------------
MAINTENANCE AND INSPECTION OF RECORDS
- -------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties. Any
stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the corporation's
stock ledger, a list of its stockholders, and its other books and records and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every instance
where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
INSPECTION BY DIRECTORS
- -----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
ANNUAL STATEMENT TO STOCKHOLDERS
- ----------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
- ------------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
CERTIFICATION AND INSPECTION OF BYLAWS
- ----------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
GENERAL MATTERS
- ---------------
RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
- -----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action (other than action by stockholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law of Delaware. If the board of
directors does not so fix a record date, then the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the board adopts the applicable resolution.
CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
- -------------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
- ---------------------------------------------------
The board of directors, except as otherwise provided in these
bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
- --------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue. Certificates for shares shall
be of such form and device as the board of directors may designate and shall
state the name of the record holder of the shares represented thereby; its
number; date of issuance; the number of shares for which it is issued; a summary
statement or reference to the powers, designations, preferences or other special
rights of such stock and the qualifications, limitations or restrictions of such
preferences and/or rights, if any; a statement or summary of liens, if any; a
conspicuous notice of restrictions upon transfer or registration of transfer, if
any; a statement as to any applicable voting trust agreement; if the shares be
assessable, or, if assessments are collectible by personal action, a plain
statement of such facts. Upon surrender to the secretary or transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly paid and
subject to call for the remainder of the consideration to be paid therefor. Upon
the face or back of each stock certificate issued to represent any such partly
paid shares, or upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
SPECIAL DESIGNATION ON CERTIFICATES
- ------------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
LOST CERTIFICATES
- -----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
TRANSFER AGENTS AND REGISTRARS
- ------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
CONSTRUCTION; DEFINITIONS
- --------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
AMENDMENTS
- ----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
<PAGE>
EXHIBIT 13.1
PORTIONS OF THE 1998 ANNUAL REPORT TO STOCKHOLDERS
QUARTERLY FINANCIAL DATA
The following is a summary of the Company's unaudited quarterly results for
the four quarters ended December 31, 1998 and 1997. 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 beginning on page 27 of this report. The shares of the Company's Common
Stock are listed on the NASDAQ National Market System under the symbol MDCD.
1998 Quarter Ended
March 31, June 30, Sept. 30, Dec. 31,
( thousands, except per share data)
Total revenues..........$3,323 $4,237 $4,816 $5,165
Loss from operations ...(2,628) (5,238) (3,376) (3,277)
Net loss................(2,226) (4,864) (3,054) (3,017)
Net loss
per share (basic)...... $(0.25) $(0.55) $(0.35) $(0.36)
Net loss
per share (diluted).... $(0.25) $(0.55) $(0.35) $(0.36)
Closing stock price
High....... $4.44 $6.31 $5.00 $2.50
Low........ $3.31 $3.88 $1.50 $1.00
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)
Closing stock price
High....... $7.75 $4.69 $5.50 $5.50
Low........ $3.88 $3.38 $3.88 $3.50
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
The following is a summary of the Company's results for the five years
ended December 31, 1998. 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 beginning on page 27 of this report.
Years ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
Revenues:
Product sales.............$17,541 $19,968 $26,116 $23,426 $ 1,957
Other revenue............. - - - 1,869 3,954
-------- -------- -------- ------ ------
Total revenues............. 17,541 19,968 26,116 25,295 5,911
Cost of product sales and
amortization of purchased
technology................. 10,090 9,570 10,162 12,605 1,070
Cost of product sales and
services to and royalties
from IBM................... - - - - 4,365
Income (loss)
from operations (1)........(14,519) (9,772) 2,909 1,808 (28,534)
Net income (loss) (1)......(13,161) (7,778) 4,274 2,500 (27,507)
Net income (loss)
per share (basic).......... $(1.51) $(0.86) $0.47 $0.32 $(3.69)
Net income (loss)
per share (diluted)........ $(1.51) $(0.86) $0.44 $0.30 $(3.69)
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Cash and cash equivalents..$11,049 $15,167 $24,809 $11,752 $8,692
Marketable securities...... 7,794 16,722 14,340 5,900 5,077
Restricted cash............ - - - - 21,201
Working capital............ 15,647 29,355 39,760 15,788 10,591
Total assets............... 24,888 37,491 45,245 22,823 39,793
Stockholders' equity....... 16,241 30,085 41,230 16,373 11,445
1)Includes a charge for in-process R&D of $21,245 in 1994.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The words "anticipate," "believe," "estimate," "expect," "intend," "will,"
and similar expressions, as they relate to the Company or the Company's
management, including such items discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth below, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary significantly from those described.. In accordance with
provisions of Section 27A of the Securities Act of 1933, as amended, and Section
21G of the Securities Exchange Act of 1934, as amended, we are making investors
aware that such forward-looking statements, because they relate to future
events, are by their very nature subject to many important factors which could
cause actual results to differ materially from those contained in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the risk factors beginning on page 17.
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. 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 developing and marketing network-attached
storage (`NAS") devices utilizing both optical disk technology for the PC LAN
environment, as well as CD-ROM enterprise servers. In response to a decrease in
the market for its CD-ROM enterprise servers, Meridian embarked on the
development of its first non-CD-ROM NAS device, the Snap! Server, in late 1996
and shipped in May of 1998. The Company believes that it will be several
quarters before it achieves significant revenues from sales of the Snap! Server.
Meridian's expenses related to product development and marketing related to the
Snap! Server resulted in the Company posting a substantial net operating loss
for 1998 and anticipating a loss for 1999. See "Risk Factors - New Product
Development; - Rapid Technological Change; - Potential for Product Defects;
Competition; - Emerging markets; - Product concentration." The Snap! Server is a
protocol-independent, NAS device targeted for the PC LAN environment. The
Company believes that the Snap! Server provides superior ease-of-use and
installation of any competitive product or competing method for adding storage
to PC LAN networks. The Company's Snap! Server retails for under $1,000. 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 requires 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 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 products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and total revenues in any quarter are substantially
dependent on orders booked in that quarter. The Company's quarterly operating
results may also vary significantly depending on other factors, including the
introduction of new products by the Company's competitors; market acceptance of
new products; seasonality; mix of software and systems sales; adoption of new
technologies and standards; price and other forms of competition; the cost,
quality and availability of third party components used in the Company's
systems; changes in the Company's distribution arrangements; and the inability
of the Company to accurately monitor end user demand for its products due to the
sale of products through distributors and VARs. In 1998, 1997 and 1996,
identifiable sales to federal governmental agencies accounted for approximately
8%, 14% and 11%, 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. The Company's operating results will also be
affected by the economic condition of the personal computer industry, which has
from time to time experienced cyclical, depressed business conditions, often in
connection with or in anticipation of a decline in general economic conditions.
Results of Operations
Revenues
Product sales. Meridian's product sales decreased to $17.5 million in 1998
from $20.0 million in 1997. This decrease was due to a continuing market driven
shift from enterprise-wide CD-ROM/DVD servers towards workgroup attached storage
products, such as CD Net Universal, which have increased in volume but have
lower average price points. This decrease was partially offset by sales of the
Snap! Server. Included in product sales for 1998 was approximately $2.7 million
in sales related to the Company's new Snap! Server. The markets for Meridian's
products are extremely competitive, and the Company expects that Meridian's
revenue could be adversely impacted as new competitors enter the market,
existing competition continues to consolidate, change and expand product
offerings and react to prior market moves made by the Company, or Snap! Server
sales fail to continue their growth. Based on expected increases in sales of the
Company's workgroup products, Snap! Server and CD Net Universal, Meridian
believes that reported revenues in 1999 will be greater than those for 1998. The
increase in Snap! Server sales assumes increasing market acceptance of the Snap!
Server. If that acceptance were not to develop, or to develop more slowly than
the Company anticipates, Meridian's results of operations and liquidity would be
adversely affected.
Meridian's product sales decreased to $20.0 million in 1997 from $26.1
million in 1996. Meridian believes that the market for CD-ROM networking systems
fundamentally changed from one in which customers purchase integrated, high-end
CD-ROM enterprise servers, to one in which low-cost, plug and play CD-ROM
servers, such as Meridian's CD Net Universal, were 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. Sales from its low-end
systems did not grow to the extent required to completely offset lower sales of
high-end systems. As such, revenues from the sale of Meridian's CD-ROM
networking products were less in 1998 than in 1997.
Previously released software products favorably impacted the Company's
sales in 1996. 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.
Approximately 90% 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 41% and 23%, respectively, of
Meridian's 1998 product sales. The loss of either of these distributors 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."
Gross margin
Gross margin on product sales decreased to 42% in 1998 from 52% in 1997.
This was a result of the Company's transition to workgroup products like Snap!
Server and CD Net Universal from enterprise products. Meridian anticipates that
gross margins will decrease in 1999 due to the continued shift to workgroup
attached storage products, from the Company's enterprise storage products. Gross
margin decreased to 52% in 1997 from 61% in 1996 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.
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 decreased in 1998 to $5.9 million from
$6.3 million in 1997, a decrease of approximately $400,000. This decrease was
due to the completion of the development of the Snap! Server. 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 the
Snap! Server. The Company does not anticipate that research and development
expenses will continue to increase in 1999. 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 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."
Sales and marketing.
Sales and marketing expense increased in 1998 by $2.5 million to $13.5
million due to product introduction and marketing costs related to the Snap!
Server. 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. The Company does not expect that sales and marketing expenses
will increase in 1999. The new products, such as Snap! Server, require different
marketing, sales and distribution strategies than those for the Company's
current enterprise products. There can be no assurance that the Company's
distributors and VARs will be able to effectively market the new network
attached storage products or continue to market the Company's existing products.
Nor can there be any assurance that the Company will successfully develop any
such new channels for such products. 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.
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
$2.6 million in 1998, $2.8 million in 1997 and $2.2 million in 1996. The
decrease in 1998 was due to reduced legal costs. The Company does not anticipate
that general and administrative expenses will decrease in 1999. The increase
between 1997 and 1996 was primarily due to higher payroll expenses and costs
incurred with the Company's reincorporation in Delaware.
Other income and expense
Interest income and expense.
Interest income decreased in 1998 to $1.4 million from $2.0 million in 1997
due primarily to lower invested cash balances. The increase of interest income
in 1997 from 1996 was due to twelve months of interest earnings on funds
provided by a public offering of the Company's Common Stock in April of 1996.
Interest income increased to $1.6 million in 1996 due to a partial year's
earnings on the stock proceeds. Interest income will decrease in the future as
the Company expends funds for the marketing of its network attached server
product, Snap! Server.
Income taxes
At December 31, 1998, the Company has a net operating loss carryforward for
U.S. federal and state income tax purposes of approximately $32.3 and $11.7
million, respectively, which expire between 1999 and 2018. The net operating
loss carryforwards include 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 $2.4
million at December 31, 1998 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 of 1986, as
amended. 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, 1998.
Capital resources and liquidity
Meridian's source of liquidity in 1998 was from cash and investments
available at December 31, 1997. The Company's negative cash flows from
operations in 1998 and 1997 were principally due to the net operating losses,
which included expenses related to the development and introduction of the Snap!
Server and an increase in inventory. Meridian's capital expenditures for 1998
were approximately $0.4 million. 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 an 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.
Meridian believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
may arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The costs of such investments could be charged to expense.
Internally generated cash, marketable securities, debt, or the sale of
additional equity may fund such investment or acquisitions. The sale of
additional equity would result in dilution in the equity ownership of the
Company's stockholders, while the assumption of debt would increase the
Company's leverage, and consequently, its financial risk.
Year 2000 Issue
The Year 2000 (Y2K) Issue refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. The critical areas being
addressed by Meridian are its internal computer systems, products made by the
Company and relationships with external organizations. Meridian is addressing
both information technology ("IT") and non-IT systems, which typically include
embedded technology, such as microcontrollers. There are no known non-IT issues
that will adversely impact the Company's information systems or manufacturing
capabilities.
Meridian considers a product to be "Y2K ready" if the product's performance
and functionality are unaffected by processing of dates prior to, during and
after the Year 2000, but only if the product and all of its component products
(for example hardware, software and firmware) properly exchange accurate date
data. The Company believes that its Snap! Servers, CD-ROM/DVD systems, and
CD-ROM/DVD networking software manufactured or released after December 31, 1997
are transparent to Year 2000 requirements, and rely primarily on software found
in operating systems and applications to function properly.
The assessment of whether Meridian's software products will operate
correctly depends on the computer system and/or network on which the software is
installed. For many end-users this will include BIOS, software and components
provided by companies other than Meridian Data. After testing, the Company
believes its products manufactured or released after December 31, 1997 are Y2K
ready, although products manufactured or released prior to that date may not be
Y2K ready.
In early 1999, the Company initiated formal communications with its
significant suppliers, contract manufacturers and financial institutions to
evaluate their Y2K compliance plans and state of readiness and to determine
whether any Y2K issues will impede the ability of such suppliers, contract
manufacturers, or financial institutions to continue to provide goods and
services to the Company. However, our suppliers, contract manufacturers, and
financial institutions are under no contractual obligation to provide such
information to the Company. Accordingly, the Company may not be able to
accurately evaluate the Y2K impact on its operations of products and services
delivered by these third parties. Meridian has established procedures to ensure
that products and internal systems from new suppliers are Y2K compliant. As a
general matter, Meridian is vulnerable to any failure by its key suppliers and
contract manufacturers to remedy their own Y2K issues, which could delay
shipments of essential components and systems, thereby disrupting or halting the
Company's manufacturing operations. Further, Meridian also relies upon
governmental agencies, utility companies, telecommunication service companies
and other service providers outside of the Company's control. There is no
assurance that such suppliers, governmental agencies, financial institutions, or
other third parties will not suffer business disruptions caused by a Y2K issue,
and there is little practical opportunity for Meridian to test or require Y2K
compliance from many of those large agencies, companies or providers. Such
failures could have a material adverse effect on the Company's business,
financial condition and results of operations. Commencing in 1999, Meridian
plans to develop a contingency plan designed to address problems which might
arise from the failure of its suppliers or contract manufacturers to timely and
adequately address their Y2K issues.
To date, the Company has not incurred any costs related to assessment and
remediation of Y2K readiness. A formal budget has not been established, and the
cost to Meridian of achieving Y2K readiness is evolving; however, it is not
currently expected to have a material effect on the Company's business,
financial condition, or results of operations. During 1998, Meridian completed
the installation of upgraded computer software for the Company's financial,
accounting, inventory control, order processing and other management information
systems which the vendors maintain are Y2K ready.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Meridian Data, Inc.
In our opinion, the financial statements listed in the index appearing
under item 14(a)(1) and (2), present fairly, in all material respects, the
financial position of Meridian Data, Inc. (the "Company") at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 27, 1999
<PAGE>
MERIDIAN DATA, INC.
BALANCE SHEETS
December 31,
1998 1997
(in thousands, except per share data)
Current assets:
Cash and cash equivalents $11,049 $15,167
Marketable securities 7,794 16,722
Accounts receivable
(net of allowancefor returns
and doubtful accounts of $351
and $543, respectively) 2,632 2,949
Inventories 2,687 1,795
Other assets 132 128
---------- --------
Total current assets 24,294 36,761
Property and equipment at cost,
less accumulated depreciation 579 714
Other assets 15 16
---------- -------
$24,888 $37,491
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,895 $ 2,371
Accrued payroll and related expenses 1,675 1,787
Accrued advertising and promotion 2,283 1,353
Other accrued liabilities 1,794 1,895
-------- --------
Total current liabilities 8,647 7,406
--------- -------
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, 8,134 and
8,785 shares issued and outstanding 8 9
Additional paid-in capital 65,525 66,207
Accumulated deficit (49,292) (36,131)
------- -------
Total stockholders' equity 16,241 30,085
-------- -------
$24,888 $37,491
The accompanying notes are an integral part of these financial statements
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF OPERATIONS Year ended December 31,
- --------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues:
Product sales $ 17,541 $19,968 $ 26,116
Costs and expenses:
Cost of product sales 10,090 9,570 10,162
Research and development 5,931 6,340 3,315
Sales and marketing 13,466 10,980 7,520
General and administrative 2,573 2,850 2,210
---------- ------- --------
Total costs and expenses 32,060 29,740 23,207
---------- ------- --------
Income (loss) from operations (14,519) (9,772) 2,909
Interest income 1,358 1,994 1,590
---------- ------- --------
Income (loss) before income taxes (13,161) (7,778) 4,499
Provision for income taxes - - (225)
---------- --------- --------
Net income (loss) $(13,161) $ (7,778) $ 4,274
========== ========== =========
Net income (loss) per share
Basic $ (1.51) $ (0.86) $ 0.47
====== ====== =======
Diluted $ (1.51) $ (0.86) $ 0.44
====== ====== =======
Weighted average common shares and equivalents
Basic 8,696 9,061 9,066
====== ====== =====
Diluted 8,696 9,061 9,686
====== ====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERIDIAN DATA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
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 31,1995 ............. 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
Common Stock issued under stock plans.... 153 -- 330 -- -- 330
Common Stock repurchased................. (804) (1) (1,012) -- -- (1,013)
Net loss ................................ -- -- -- -- (13,161) (13,161)
Balance December 31, 1998 ............... 8,134 $ 8 $65,525 $ -- $ (49,292) $16,241
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MERIDIAN DATA, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net income (loss) $ (13,161) $ (7,778) $4,274
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
Depreciation and amortization 579 474 401
Amortization of advance for
research and development
arrangements - 800 200
Changes in assets and liabilities:
Accounts receivable 317 42 (219)
Inventories (892) (484) (193)
Other assets (3) 197 (199)
Advance for research and
development arrangement - - (1,000)
Accounts payable 524 739 (787)
Accrued payroll and related expenses (112) 1,101 (756)
Accrued advertising and promotion 930 847 76
Other accrued liabilities (101) 704 (398)
--------- -------- ------
Net cash provided by (used in)
operating activities (11,919) (3,352) 1,435
--------- -------- ------
Cash flows from investing activities:
Purchases of property and equipment (444) (535) (485)
Redemption of marketable securities 31,559 37,547 11,978
Additions to marketable securities (22,631) (39,934) (20,419)
--------- -------- --------
Net cash provided by (used in)
investing activities 8,484 (2,922) (8,926)
Repurchase of Common Stock (1,013) (3,966) (17,271)
Issuance of Common Stock, net - - 36,841
Issuance of Common Stock
related to stock plans 330 598 978
----------- -------- --------
Net cash provided by (used in)
financing activities (683) (3,368) 20,548
----------- -------- --------
Net increase (decrease) in cash and
cash equivalents (4,118) (9,642) 13,057
Cash and cash equivalents at
beginning of year 15,167 24,809 11,752
---------- -------- --------
Cash and cash equivalents
at end of year $ 11,049 $15,167 $24,809
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $38 $ 8 $ 18
Taxes $46 $32 $126
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,
1998, 1997, AND 1996
NOTE 1 _ THE COMPANY:
Meridian Data, Inc. (the "Company" or "Meridian"), was incorporated in 1988
and is currently engaged in the development of network storage solutions 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,
1998 and 1997, 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, 1998, two customers
accounted for 66% of the Company's gross accounts receivables. At December 31,
1997 two customers accounted for 44% 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 1998, two customers, consisting of large distributors, accounted
for 41% and 23% of Meridian's 1998 product sales. During 1997, two customers,
consisting of large distributors, accounted for 21% and 19% of the company's
1997 product sales. During 1996, two customers, consisting of large distributors
accounted for 25% and 18% of Meridian's 1996 product sales. There are no
reporting segments to disclose under FAS 131.
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 (using the treasury stock method). Potential
common shares are excluded from the computation if their effect is
anti-dilutive. Options to purchase 2,145,309 shares of common stock at prices
ranging from $0.03 to $15.13 per share were outstanding during the year ended
December 31, 1998 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.
Bank Credit Facilities.
On October 14, 1998 the Company signed a credit agreement (the "Facility")
with a bank (the "Bank") for a $7.5 million revolving credit line which expires
on July 30, 1999. Borrowing under the Facility is at the Bank's prime rate plus
1/4 %, and is subject to the Company maintaining certain leverage ratios and net
worth requirements. All advances under the Facility must be repaid by the
expiration date of July 30, 1999. As of December 31, 1998, Meridian has no
amounts due under the Facility.
Recent Accounting Pronouncements
Comprehensive Income
There are no components of comprehensive income which are not included in
the Company's net income (loss).
NOTE 3 _ BALANCE SHEET DETAIL (in thousands):
December 31,
1998 1997
Marketable securities:
United States government and agencies..................... $- $ 4,862
Corporate................................................. 18,551 24,735
Other..................................................... - 1,962
------- ---------
18,551 31,559
Less securities classified as cash equivalents............ (10,757) (14,837)
-------- ---------
$7,794 $16,722
Inventories:
Raw materials and purchased parts................... $ 891 $ 1,390
Work in process..................................... 797 405
Finished Goods..................................... 999 -
--- ---
$2,687 $1,795
Property and equipment:
Computers and purchased software.................... $1,731 $1,459
Machinery and equipment............................. 244 190
Furniture and fixtures.............................. 259 144
Leasehold improvements.............................. 72 69
------- ------
2,306 1,862
Less accumulated depreciation and amortization...... (1,727) (1,148)
------- -------
$ 579 $ 714
===== =====
NOTE 4 _ COMMITMENTS:
The Company rents its office, manufacturing, and research facilities under
noncancelable operating lease which expires in December 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, $0.5 million, and $0.4 million for 1998,
1997, and 1996, respectively. Future minimum lease payments due under
noncancelable operating leases at December 31, 1998 are $337,000.
NOTE 5 _ STOCKHOLDERS' EQUITY:
Stock Option Plans
The Company has reserved 4,348,789 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 1998, 1997, and 1996,
is as follows:
Options Outstanding
Shares Weighted
Available Average
for Grant Shares Price Price range
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
-------- ---------
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
----------- ----------
Balance at December 31, 1997..... 216,661 2,007,310 $4.00 $0.03-$15.13
Increase in 1997 Plan........... 400,000 - n/a
Options granted................. (289,000) 289,000 $5.32 $1.16 - $6.31
Options canceled................ 122,989 (122,989) $3.68 $1.18 - $10.00
Options exercised............... - (28,012) $1.31 $1.18 - $3.38
Options expired................. (45,685) - $2.83 $1.18 - $8.50
------- -----------
Balance at December 31, 1998..... 404,965 2,145,309 $1.90 $0.03 - $15.13
======= =========
Options exercisable at December 31, 1998 799,574 $2.52 $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 amended. On October 27, 1998, the Board of Directors
approved an offer to all employees, except certain executives, permitting an
election to amend their options to change the exercise price to the fair market
value of the Company's common stock on November 9, 1998, which was $1.56,
subject to a new vesting schedule. Options for the purchase of a total of
723,309 shares were amended. At the same time, the Board of Directors approved
an offer to certain executives permitting an election to amend their options to
change the exercise price to the fair market value of the Company's common stock
on October 28, 1998, which was $1.44. Options for the purchase of a total of
1,069,413 shares were amended.
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 400,000 shares of
Common Stock for issuance under the Purchase Plan. At December 31, 1998, 346,562
shares of Common Stock had been issued under the Purchase Plan, and 53,438
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):
1998 1997 1996
---------- --------- ------
Net income (loss):
As reported $(13,161) $(7,778) $4,274
======== ======= ======
Pro forma $(15,532) $(9,210) $3,246
========= ======== ======
Diluted net income (loss) per share:
As reported $ (1.51) $ (0.86) $ 0.44
======= ========= =======
Pro forma $ (1.79) $ (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 for 1998, 1997 and 1996 in the calculations:
Stock Options Stock Purchase Plan
Expected life 4.51 years 0.5 years
Interest rate at date of grant 4.2% to 6.7% 4.6% to 5.5%
Volatility at date of grant 95% 117%
Dividend yield 0% 0%
The following table summarizes information about all options outstanding as
December 31, 1998:
Options Outstanding Options Exercisable
----------------------- ------------------------
Range of Weighted Average Weighted Average
Exercise Remaining Exercise Exercise
Prices Number life Price Number Price
- -------- ------ --------- --------- ------- ---------
$0.03-$1.18 131,420 5.2 $ 0.52 95,420 $ 0.28
$1.44-$1.56 1,773,389 7.7 $ 1.49 498,611 $ 1.48
$3.38-$3.75 63,500 8.3 $ 3.47 34,793 $ 3.54
$4.00-$5.13 72,500 5.8 $ 4.73 69,375 $ 4.71
$6.31-$7.50 89,500 6.0 $ 6.58 86,375 $ 6.59
$15.13 15,000 7.3 $15.13 15,000 $15.13
---------- ------- ------- ------- -------
2,145,309 7.5 $ 1.90 799,574 $ 2.52
---------- ------- ------- ------- ------
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, 1998, there were outstanding 8,134,156 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, 1998, 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 was as follows (in thousands):
Years ended December 31,
1996
Federal:
Current............................................. $167
Deferred............................................ -
------
167
State:
Current............................................. 58
Deferred............................................ -
------
58
------
$225
Deferred tax assets at December 31, 1997 and 1996, consist of the following
(in thousands):
December 31, December 31,
1998 1997
------------ ------------
Deferred tax assets:
Federal and state loss carryforwards...... $11,725 $7,200
Tax credit carryforwards.................. 2,410 1,484
Inventory reserves and basis differences.. 396 396
Depreciation and amortization............. (32) (75)
Other..................................... 2,201 1,995
----- -----
16,700 11,000
Deferred tax asset valuation allowance.... (16,700) (11,000)
-------- --------
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,
1998 1997 1996
---- ---- ----
Statutory federal income tax rate............... (35%) (35%) 35%
State income taxes, net of federal benefit...... - - 6%
Current year loss not benefited................. 35% 35% -
Other........................................... - - (1%)
Change in valuation allowance................... - - (35%)
------- ------- -----
Effective tax rate.............................. - - 5%
======= ======= =====
At December 31, 1998, the Company has a net operating loss carryforward for
U.S. federal and state income tax purposes of approximately $32.3 and $11.7
million, respectively, which expire between 1999 and 2018. 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 $2.4
million at December 31, 1998, 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, 1998.
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.
NOTE 9 _ EMPLOYEE BENEFIT PLANS:
The Company has available to all full-time employees a retirement plan.
Under the plan, employee and employer contributions and accumulated plan
earnings qualify for favorable tax treatment under Section 401(k) of the
Internal Revenue Code, as amended. Meridian matches employee contributions
dollar-for-dollar, up to six percent of gross pay, with an annual cap of $1,200
per employee.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
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 27, 1999, appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedules listed in Item 14(a) of
this Form 10-K. In our opinion, the Financial Statement Schedules presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PricewaterhouseCoopers LLP
San Jose, California
January 27, 1999
<PAGE>
SCHEDULE II
MERIDIAN DATA, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at End
Beginning of Costs and Against of Year
Year Expenses Reserves
------------ ---------- -------- ---------------
<S> <C> <C> <C> <C>
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
December 31, 1998
Inventory Reserves................................ $615 $ 188 $ (5) $798
Allowance for Doubtful Accounts................... 236 - - 236
Sales Returns and Allowances...................... 307 1,269 (1,461) 115
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (33-89162, 333-30107, 33-62084, 333-2620, 333-3934,
333-53945, 333-27533, 333-2622, and 333-27531) of Meridian Data, Inc. of our
report dated January 27, 1999 appearing in Meridian Data, Inc.'s Form 10-K for
the year ended December 31, 1998.
PricewaterhouseCoopers LLP
San Jose, California
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
MERIDIAN DATA, INC.
Financial Data Schedule
Article 5 of Regulation SX
This schedule contains summary financial information extracted from the
Annual Report on Form 10-K for the year ended December 31, 1998 and is qualified
in its entirety by reference to such financial statements
Category Response Category Response
</LEGEND>
<CIK> 0000864568
<NAME> Meridian Data, Inc.
<MULTIPLIER> 1000
<CURRENCY> US dollars
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,049
<SECURITIES> 7,794
<RECEIVABLES> 2,983
<ALLOWANCES> 351
<INVENTORY> 2,687
<CURRENT-ASSETS> 24,294
<PP&E> 2,305
<DEPRECIATION> 1,726
<TOTAL-ASSETS> 24,888
<CURRENT-LIABILITIES> 8,647
<BONDS> 0
0
0
<COMMON> 65,533
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,888
<SALES> 17,541
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<INCOME-PRETAX> (13,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,161)
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<CHANGES> 0
<NET-INCOME> (13,161)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
</TABLE>
