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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 1-9605
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MEDIA LOGIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2772354
(STATE OF OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
310 SOUTH STREET, PLAINVILLE, MA 02762
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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(508) 695-2006
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- - -------------------------------------- --------------------------------------
Common Stock, $.01 American Stock Exchange
par value per share
------------------------
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 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 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. / /
On June 25, 1998, there were outstanding 8,203,610 shares of Common Stock
held by nonaffiliates (without admitting that any person whose shares are not
included are affiliates) with an aggregate market value of $8,716,336 (based on
the closing price of $1.0625 per share on the American Stock Exchange).
As of June 25, 1998, there were issued and outstanding 13,333,409 shares of
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed pursuant
to Regulation 14A for the 1998 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Form 10-K.
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MEDIA LOGIC, INC.
FORM 10-K
TABLE CONTENTS
ITEM PAGE
----- -----
PART I
1. Description of Business............................................................................. 3
2. Properties.......................................................................................... 9
3. Legal Proceedings................................................................................... 9
4. Submission of Matters to a Vote of Security Holders................................................. 10
PART II
5. Market for the Registrant's Common Equity Securities and Related Stockholder Matters................ 11
6. Selected Financial Data............................................................................. 11
7. Management's Discussion and Analysis of Financial Condition and Results of Operation................ 12
8. Consolidated Financial Statements and Supplementary Data............................................ 18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 18
PART III
10. Directors and Executive Officers of the Registrant.................................................. 19
11. Executive Compensation.............................................................................. 19
12. Security Ownership of Certain Beneficial Owners and Management...................................... 19
13. Certain Relationships and Related Transactions...................................................... 19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 20
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Media Logic, Inc. (the "Company") was incorporated in 1982 to develop and
manufacture certification equipment to be used by manufacturers of flexible
storage media such as floppy disks. The Company's principal product line is
automated tape library systems for data storage and retrieval, which was
introduced in fiscal year 1996.
The Company's data storage libraries were developed by MediaLogic ADL Inc.
("ADL"), a subsidiary of the Company which was established in 1994 to develop,
market and sell automated data storage libraries. In fiscal year 1996, ADL
introduced automated tape libraries in 4mm and 8mm tape technologies and
introduced during fiscal 1998 automated tape libraries with digital linear tape
("DLT") technology. Tape drives from a number of manufacturers are supported by
the libraries, as are system management and software configurations from a
variety of vendors. In fiscal 1996, the Company sold only pre-production units,
and began delivering initial production units of 4mm and 8mm tape libraries in
fiscal 1997 and of DLT tape libraries in fiscal 1998. The operations of ADL were
consolidated in Plainville, MA during the second quarter of fiscal year 1998.
Potential customers for the Company's line of automated tape libraries are data
dependent companies in all types of businesses.
The certification, test and duplication product line, representing the
Company's historical products, is not expected to be the basis for the majority
of the Company's future business. This product line includes: (i) certifiers
which are used by computer disk manufacturers to test each disk as it is
manufactured and to sort disks into three industry established quality
categories, (ii) tape certification and evaluation equipment used by
manufacturers and suppliers of magnetic tapes, to evaluate and qualify the
quality of the tapes, and (iii) floppy disk duplication equipment utilizing
industrial disk drives which have been developed by the Company for use by
software publishers and duplicators.
The discussion in this report which express "belief", "anticipation",
"plans", "expectation", "future" or "intention", as well as other statements
which are not historical fact, are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on management's current expectations and involve a number of risks and
uncertainties. The Company's actual results could differ significantly from the
results discussed in these forward-looking statements. Factors that could cause
future results to differ materially from such expectations include, but are not
limited to, the uncertainty surrounding the Company's change in product base
from floppy disk/magnetic tape certifiers and evaluators to automated data
libraries; the Company's limited experience in manufacturing, marketing and
selling automated data libraries and the risk that the Company's new products
may not be able to be marketed at acceptable prices or receive commercial
acceptance in the markets that the Company expects to target; the loss of the
services of one or more of the Company's key executives, which could have a
material adverse impact on the Company; the development of competing or superior
technologies and products by competitors, many of whom have substantially
greater financial, technical and other resources than the Company; the cyclical
nature of the computer industry; the availability of additional capital to fund
expansion on acceptable terms, if at all; general economic conditions in both
the United States and overseas markets, and other risks and uncertainties
described in this report and in this Item 1 -- Description of Business and in
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations in particular. As a result, the Company's future
operations involve a high degree of risk.
3
INDUSTRY BACKGROUND
DATA STORAGE
The company believes that the rapidly growing availability of huge amounts
of data, and the need to readily access that data, has accelerated the demand
for reliable and economical data storage capabilities. The expanding role of
networks, access to data from the Internet, and the explosion of graphics and
imaging applications require ever greater data storage capabilities. With the
loss of information being potentially devastating, participants in data
dependent businesses have determined that it has become essential to have an
automated system for data backup, archival storage and retrieval. The Company's
line of automated tape libraries is designed to meet this requirement.
Libraries can differ substantially in features, capacity and price. The
Company's libraries target the low-end to mid-range of the market for libraries.
The Company believes that the unique architecture of its libraries provides a
competitive advantage in reliability and functionality. The Company plans to
leverage these competitive advantages to continue to build its position in the
low-end to mid-range of the rapidly growing data storage market.
Competition in the data storage market, including the automated tape library
market, is intense, with a large number of companies in these markets. Many of
the Company's current and potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and significantly
greater financial, technical and marketing resources than the Company. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than the Company. An increase in
competition could result in price reductions and loss of market share. Such
competition and any resulting reduction in gross margins could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CERTIFICATION, TEST AND DUPLICATION EQUIPMENT
The sale of certification, test and duplication equipment has historically
been the source of the majority of the Company's revenue. During the early
1990's, significant disk production capacity was added throughout the world,
particularly in the lower labor rate markets of Southeast Asia and China. The
capacity added during the early 1990's has been substantially sufficient to meet
requirements. This, along with the fact that price competition among disk
manufacturers has driven prices down, substantially reducing margins, has
minimized purchases of additional equipment by existing manufacturers and
discouraged new manufacturers. Also, some disk manufacturers have discontinued
the certification process, choosing instead to sell their disks as low quality
into the retail market. Demand for disks has been restricted by alternative
forms of computer media which have become available. CD-ROM has gained general
acceptance as more personal computers are equipped with CD-ROM drives. Many
software programs and games which once were delivered on multiple floppy disks
now come on a single CD-ROM. Other computer media currently available include
floptical disk, which combines optical tracking and magnetic storage, the Mini
Disk, a two inch disk offered by Sony Corporation, the flash memory card or
PCMCIA card, and higher density floppy disks with dramatically increased storage
capabilities. All these media require specialized drives for their operation.
Removable hard drives with large storage capacity are also available. As a
result, the Company has experienced a decline in the market for certification
equipment.
The market for test and evaluation equipment for magnetic tape is primarily
manufacturers of tape and their major customers. The Company had been a leading
supplier of such equipment but, as in the case of certification equipment, the
Company has also experienced a decline in the market for test and evaluation
equipment.
4
While there are several major companies leading the market for duplication
of floppy disks, there are hundreds of smaller companies which have more limited
duplication requirements. The Company provided a solution to the major
duplicators with its AccuCopy line of industrial duplicators which incorporated
the Company's AccuCopy industrial drives. The Company also provided a single
spindle duplicator to those customers whose requirements are less. The Company
has experienced a significant decline in the demand for its duplication
equipment.
BUSINESS STRATEGY
The Company's business strategy is to devote substantially all of its
resources to the development, marketing and sale of its line of automated tape
libraries. The Company will continue to support its historical product lines of
certifiers, evaluators and duplicators, on a limited basis, but will no longer
continue to actively pursue all sales opportunities for new equipment, spare
parts and service of its historical product lines that become available.
AUTOMATED TAPE LIBRARIES
All research and development activities are conducted and overseen by the
Company's Engineering Department, which was established and staffed in fiscal
1996, and the operations of which were fully consolidated in Plainville, MA
during fiscal 1998. The establishment of an in-house research and development
capability has enabled the Company to reduce its reliance on outside engineering
consultants, giving the Company more immediate control over the direction, cost,
and schedule of product design activities.
The Company believes that the most effective allocation of its resources
requires that the manufacture of the automated tape libraries be done by a third
party. A strategic alliance has been formed with a third party manufacturer for
the production of the tape libraries. PAGG Corporation, an ISO 9002 certified
manufacturer located in Milford, Massachusetts is currently manufacturing
automated tape libraries for the Company.
The Company continues to develop a sales staff dedicated to the tape library
product line, with the intent of distributing the product via indirect channels.
CERTIFIERS, EVALUATORS AND DUPLICATORS
Opportunities for sales are limited in the Company's traditional markets.
Significant competition, market saturation and decline in demand have led to
substantial revenue decreases in the Company's traditional product lines.
Consequently, the Company will continue to support owners of its equipment with
spare parts and service on a limited basis, but will no longer actively pursue
all sales opportunities for its traditional product lines.
PRODUCTS
AUTOMATED TAPE LIBRARIES
The Company's line of automated tape libraries includes libraries based on
4mm and 8mm tape technology. The Company introduced a prototype library based on
DLT tape technology during fiscal year 1998. The Company is currently focusing
its resources on 8mm ALT tape technology. Each library developed by Media Logic
capitalizes on the design of its predecessor libraries, shortening the
development cycle and increasing reliability. The Company believes that its
Scalable Data Library System ("SDLS") includes unique design innovations for
automated tape libraries compared with competitive products.
Potential customers for the Company's line of automated tape libraries are
data dependent companies in all types of business. In fiscal 1996, the Company
sold only pre-production units, and began delivering initial production units of
4mm and 8mm tape libraries in fiscal 1997 and DLT tape libraries in fiscal 1998.
5
Features of Media Logic's automated tape libraries include:
- Combined drives and loader mechanisms with hot swap functionality,
resulting in maximum up-time with minimum disruptions;
- Dedicated Loader Mechanism ("DLM") for each drive, which means there is no
single point of failure in the robotics and delivers the fastest data
availability in the industry, which translates to a minimum delay in
retrieving old data;
- Media, Merge and Migration ("M3") System for consolidation and
standardization of data, meaning lower cost of ownership to ease migration
of strategic data stored on legacy media formats;
- SDLS for easy enhancement to add capacity and improve performance, which
guarantees a protection of investment and the ability to respond to
changes in requirements; and,
- Innovative design that offers maximum capacity combined with a minimum
footprint, resulting in the highest storage density in the industry at
388MB per cubic inch.
4mm libraries can be configured with from one to six tape drives and with
DataPaks holding up to 65 cartridges, with storage capacity of up to 1.6
terabytes (TB). 8mm libraries can be configured with from one to six tape drives
and with DataPaks holding up to 52 cartridges, with storage capacity of up to
2.6 TB. The DLT library introduced during fiscal 1998 can be configured with up
to five tape drives and with DataPaks holding up to 32 cartridges, with storage
capacity of up to 2.2 TB. In fiscal 1996, the Company sold only pre-production
units, and began delivering initial production units in fiscal 1997 and 1998.
The computer industry in general, and the markets for the Company's
automated tape library products in particular, are characterized by rapidly
changing technology, frequent new product introductions, and significant
competition. In order to keep pace with this rapidly changing market
environment, the Company must continually develop and incorporate into its
products new technological advances and features desired by the marketplace at
acceptable prices. The successful development and commercialization of new
products involves many risks, including the identification of new product
opportunities, timely completion of the development process, the control and
recoupment of development and production costs and acceptance by customers of
the Company's products. There can be no assurance that the Company will be
successful in identifying, developing, manufacturing and marketing new products
in a timely and cost effective manner, that products or technologies developed
by others will not render the Company's products or technologies uncompetitive,
or that the Company's products will be accepted in the marketplace.
The computer industry is highly cyclical and has historically experienced
periodic downturns. The cyclical nature of the computer industry is beyond the
control of the Company. As an example, the Company experienced a substantial
reduction in demand for its historical product lines. A similar decrease in
demand for the Company's automated tape libraries could have a material adverse
effect on its business and products.
DISK CERTIFIERS
Media Logic manufactured semi-automatic and automatic disk certifiers used
by computer disk manufacturers to test each disk as it comes off a production
line. The certifiers were designed to run 24 hours a day, seven days a week.
Certifiers perform a series of tests on each disk, sorting newly manufactured
disks into one of the three categories based on quality standards established by
the American National Standards Institute.
DISK EVALUATORS
The ML5000 is a disk evaluator for blank disks. It is widely used by both
manufacturers and users of disks. This desktop unit is designed for engineers to
provide quality assurance by testing selected samples
6
of computer disks for a variety of performance and manufacturing
characteristics. Typical customers included disk manufacturers, software
publishers, duplication houses and government agencies.
TAPE CERTIFIERS AND EVALUATORS
The ML4500B is a tape test system designed for maximum flexibility through
the use of plug-in modules for the various types of tapes to be tested. The user
can add test capabilities to the ML4500B at any time by purchasing additional
plug-in modules. Customers included tape manufacturers and users of large
amounts of tape.
DUPLICATORS
The Company manufactured and sold a line of AccuCopy duplicators
incorporating the Company's proprietary AccuCopy industrial disk drive.
Principal customers for AccuCopy duplicators included disk manufacturers, who
are increasingly providing disk formatting and duplication services to maximize
the prices they can change for their disks, and major software duplicators.
SALES AND MARKETING
AUTOMATED TAPE LIBRARIES
The Company sells its automated tape libraries through multiple channels
including value added resellers ("VARs"), system integrators, distributors and
original equipment manufacturers ("OEMs"). The Company's sales and marketing
efforts were reorganized at the end of fiscal 1998. A new Vice President of
North American Sales was named, and the positions of Vice President of
International Sales, headquartered in the United Kingdom and Vice President of
Marketing were created.
CERTIFIERS, EVALUATORS AND DUPLICATORS
Currently all the Company's sales of certifiers, evaluators and duplicators
are generated by the Company's internal sales group, located at its home office
in Plainville, MA.
The Company provides technical support services to customers throughout the
world from its headquarters in Plainville, Massachusetts. Field service
personnel staff a technical hotline and coordinate service requirements. In
addition, repair and refurbishment services are provided, on a limited basis,
through the Field Service Department.
Approximately 64% of the Company's fiscal 1998 sales were to customers
located outside the United States and, therefore, the Company is subject to
risks common to foreign activities including government regulations, political
and economic instabilities, trade barriers and transaction risks. All of the
Company's sales are transacted in U.S. dollars eliminating significant currency
risk to the Company. In some cases, international shipments are covered by
letters of credit.
In fiscal 1998, two individual customers each accounted for 10% or more of
the Company's sales. Because of the non-recurring nature of the Company's
largest orders, the identify of its major customers changes from year to year.
Therefore, the Company does not believe that it is dependent on sales to any one
customer. The Company does anticipate that, in the future, as it concentrates
solely on its automated tape library products, there will be a number of large
distributors which could account for more than 10% of Media Logic's revenues on
a recurring basis.
BACKLOG
At June 15, 1998, the Company's backlog was approximately $315,000, compared
to approximately $262,000 at May 30, 1997. All of the orders included in the
Company's backlog were requested to be filled and completed within six months
and are, subject to possible customer cancellation, expected to be filled in
7
that time frame. The Company does not believe its backlog is an accurate
prediction of its annual or quarterly revenues.
PATENTS
Prior to fiscal year 1996, the Company relied upon know-how rather than
patents to develop and maintain its competitive position with respect to its
historical product lines. The Company recognizes the value of patents in designs
and processes and holds the rights under several patent applications covering
the underlying technology of its automated tape libraries. The Company expects
to seek additional patents as technological advances require. The Company also
protects its technology and proprietary information through trade secrets,
copyrights, trademarks and licenses.
The Company's ability to compete effectively with other companies will
depend, in part, on the ability of the Company to maintain the proprietary
nature of its technology. There can be no assurance that competitors in both the
United States and foreign counties, many of which have substantially greater
resources and have made substantial investments in competing technologies, do
not have or will not obtain patents that will prevent, limit or interfere with
the Company's ability to make and sell its products or intentionally infringe
the Company's patents. While the Company possesses or licenses certain patent
rights, it relies in large part on unpatented proprietary technology, and there
can be no assurance that others may not independently develop the same or
similar technology, whether or not patented, or otherwise obtain access to the
Company's proprietary technology.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has focused its research and development efforts exclusively on
its line of automated tape libraries. Expenditures for research and development
of this product line in fiscal 1998 were $1,423,804, compared with $1,571,404 in
fiscal 1997 and $3,374,685 in fiscal 1996. During fiscal 1998, the Company
continued to expand an in-house Engineering Department established during fiscal
1996 which is responsible for all future research and development activities.
During fiscal 1998, all engineering operations were consolidated in the
Company's headquarters in Plainville, MA. A substantial portion of the research
and development expenditures in fiscal 1996 were made pursuant to a contract
with an engineering consulting firm which expired during fiscal 1996 and was not
renewed. All work product generated pursuant to the contract is the property of
the Company.
The Company made no expenditures on research and development activities
related to the certification, evaluation and duplication products in fiscal 1998
compared to $236,741 in fiscal 1997 and $651,768 in fiscal 1996. All current
research and development activities are focused on the Company's tape library
systems.
As of March 31, 1998, the Company employed 11 engineers, designers and
technicians, including software, mechanical and electrical engineers, all of
whom were assigned to automated tape libraries. The Company, under the
supervision of the recently created position of the Vice President of
Operations, expects to add engineers to its staff, supplemented, where
necessary, by outside consultants, during fiscal 1999 as it continues to
undertake research and development activities related to its automated tape
libraries. The Company continues to seek out new products and new applications
for its current products.
MANUFACTURING
The Company's line of automated tape libraries is manufactured by PAGG
Manufacturing Company of Milford, Massachusetts. The Company believes that PAGG
has the technical and manufacturing experience and capacity to meet the
Company's requirements for the foreseeable future. The Company believes that
there are many manufacturers qualified to build the line of automated tape
libraries should the Company seek alternative manufacturing sources.
8
COMPETITION
Each of the markets in which the Company participates is highly competitive.
In each market, the Company's current and prospective competitors have greater
financial, technical, manufacturing and marketing resources than the Company.
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective than any which are
being developed by the Company and which could render certain of the Company's
technology obsolete.
Numerous companies are engaged in the development and commercialization of
automated tape libraries. Several manufacturers of tape storage systems have
introduced libraries incorporating their tape drives. These companies include
IBM, Hewlett-Packard, Exabyte and Quantum Corporation. The Company does not own
proprietary tape drive technology and is therefore dependent on third party
manufacturers of storage devices for incorporation of its libraries. Other
competitors in the automated tape library market include Odetics, Qualstar,
Spectra Logic and ADIC.
EMPLOYEES
The Company had 28 employees on March 31, 1998, of whom 26 were located in
Plainville, Massachusetts and 2 were located in regional sales offices in
California and Illinois. Of the total employees, 11 are engaged in research and
development, 5 in sales and marketing, 2 in finance, 3 in administration and 7
in operations. The Company's employees are not represented under any collective
bargaining agreement. The Company believes that its employee relations are good.
In June 1998, the Company added a Vice President of International Sales,
headquartered in London, England, to its sales and marketing staff.
ITEM 2. PROPERTIES
The Company leases its headquarters in Plainville, Massachusetts from a
realty trust, the beneficiaries of which are David R. Lennox, the former
Chairman of the Company, and Klaus J. Peter, a former director and former Senior
Vice President of the Company. The facility has a total of 18,000 square feet.
See Note 5 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
On or about January 16, 1996, the Company and its subsidiary MediaLogic ADL,
Inc. (collectively, "Media Logic"), commenced an action in the Superior Court of
the Commonwealth of Massachusetts against Christian P. Marlowe and Marlowe
Engineering Company (collectively, "Marlowe") seeking (a) a declaration of the
rights of Media Logic under certain technology transfer and consulting
agreements, and (b) damages for Marlowe's breach of those agreements. On June 5,
1996, Marlowe answered the complaint and counterclaimed, asserting claims for
breach of contract, misrepresentation, promissory estoppel, violation of the
implied covenant of good faith and fair dealing, M.G.L. c.93A, and declaratory
judgment. On June 11, 1996, Marlowe amended the counterclaim to include a
defamation count relating to a press release issued by Media Logic concerning
the litigation. In August 1996, Media Logic moved to dismiss the counterclaims.
The Court denied Media Logic's motion in November 1996. Currently, the parties
are engaged in pre-trial discovery.
In March 1998, Spiesel Kitchen Vosik, the Company's former advertising
agency, filed a complaint in Boston Municipal Court claiming trade debt owed in
the amount of $35,000. The Company disputes the claim and intends to vigorously
oppose the complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the American Stock Exchange under
the symbol "TST". The Company does not fully satisfy all of the American Stock
Exchange guidelines for continued listing and there is no assurance listing will
be continued. The following table sets forth high and low closing sale prices of
the Common Stock on the American Stock Exchange during the periods indicated
below:
HIGH LOW
PRICE PRICE
--------- ---------
FISCAL 1997
First Quarter............................................................. $ 10.13 $ 4.31
Second Quarter............................................................ 7.06 4.44
Third Quarter............................................................. 5.56 2.69
Fourth Quarter............................................................ 3.88 2.00
FISCAL 1998
First Quarter............................................................. $ 3.50 $ 1.94
Second Quarter............................................................ 2.63 1.50
Third Quarter............................................................. 2.00 1.13
Fourth Quarter............................................................ 1.69 1.13
Market prices for securities of technology companies have been volatile. The
market price for the Company's Common Stock has fluctuated significantly since
public trading began in 1987, and it is likely that the market price will
continue to fluctuate in the future. Quarterly fluctuations in operating
results, announcements by the Company or the Company's present or potential
competitors, technological innovations or new commercial products or services,
developments or disputes concerning patent or property rights and other events
or factors may have a significant impact on the Company's business and on the
market price of the Common Stock.
As of June 25, 1998, there were 273 shareholders of record. The Company
believes that there are in excess of 3,000 beneficial owners of the Company's
Common Stock.
DIVIDEND POLICY
The Company has not paid cash dividends since its inception. The Company
currently intends to retain all of its earnings, if any, to finance the
development and growth of its business and does not anticipate paying any cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected data of the Company is qualified by reference to and
should be read in conjunction with the consolidated financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
11
YEAR ENDED MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.................................................. $ 15,489 $ 5,836 $ 3,578 $ 3,644 $ 1,371
Cost of sales.............................................. 6,727 5,521 2,801 2,446 995
--------- ---------- --------- --------- ---------
Gross profit............................................. 8,762 315 777 1,198 376
Operating expenses:
Selling, general and administrative........................ 5,462 5,503 4,651 3,596 2,838
Research and development................................... 1,712 3,951 4,026 1,808 1,424
--------- ---------- --------- --------- ---------
Income (loss) from operations............................ 1,588 (9,139) (7,900) (4,206) (3,886)
Settlement costs........................................... (676) (2,230) (30) -- --
Other income (expense)..................................... 264 220 111 84 30
Interest expense--convertible debentures................... -- -- -- -- 757
--------- ---------- --------- --------- ---------
Income (loss) before provision (benefit) for income
taxes.................................................. 1,176 (11,149) (7,819) (4,122) (4,613)
Provision (benefit) for income taxes....................... 446 (1,168) -- -- --
--------- ---------- --------- --------- ---------
Net income (loss)........................................ $ 730 $ (9,981) $ (7,819) $ (4,122) $ (4,613)
--------- ---------- --------- --------- ---------
--------- ---------- --------- --------- ---------
Net income (loss) per share:
Basic.................................................... $0.17 $(2.01) $(1.40) $(0.66) $(0.57)
Diluted.................................................. $0.15 $(2.01) $(1.40) $(0.66) $(0.57)
--------- ---------- --------- --------- ---------
--------- ---------- --------- --------- ---------
Weight Average number of common and common equivalent
shares outstanding:
Basic.................................................... 4,422 4,968 5,585 6,271 8,149
Diluted.................................................. 4,975 4,968 5,585 6,271 8,149
MARCH 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital.......................................... $ 18,783 $ 8,473 $ 6,163 $ 5,360 $ 3,397
Total assets............................................. 22,705 11,104 7,965 8,973 4,796
Long-term debt, less current portion..................... -- -- -- 3,267 348
Stockholders, equity..................................... 19,720 9,767 7,016 4,305 3,491
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
THE FOLLOWING DISCUSSION AND OTHER PARTS OF THIS REPORT WHICH EXPRESS
"BELIEF", "ANTICIPATION", "PLANS", "EXPECTATION", "FUTURE" OR "INTENTION", AS
WELL AS OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACT, ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER THE "LIQUIDITY AND CAPITAL RESOURCES", AND
UNDER THE CAPTION "NOTE REGARDING FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN
ITEM 1 "DESCRIPTION OF BUSINESS" SECTIONS OF THIS REPORT AND THOSE INCLUDED IN
PUBLICLY AVAILABLE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
Prior to fiscal 1994, the Company was principally engaged in the
development, manufacture and sale of test equipment for computer media,
primarily floppy disks and tape. Beginning in fiscal 1994, the Company developed
and brought to market a heavy duty industrial disk drive and floppy disk
duplication equipment which incorporated the drives. Together, these products
constituted what is now considered to
12
be the Company's traditional business. The market for these traditional products
has been negatively impacted in recent years by a number of factors including
but not limited to:
- competition among disk manufacturers, the principal customer for the
Company's certification equipment, which led to lower disk prices.
Manufacturers had less money to spend on additional capital equipment and
the low margins made the business unattractive to potential new entrants;
- the wide spread acceptance of CD-ROM as an effective medium for the
delivery of software negatively impacted the demand for higher quality
disks; and,
- the closing of the Chinese market, eliminating the Company's largest
market for new equipment and providing a source of used equipment to be
sold in non-Chinese markets in competition with the Company's new
equipment.
The company recognized the declining nature of its traditional markets and
in fiscal 1995 established a subsidiary company, MediaLogic ADL, Inc., to
develop, market and sell automated tape libraries into the data storage market.
The Company believes that the market for automated tape libraries is large and
growing and that the line of libraries which has been developed by the Company
meets the data storage and retrieval requirements of a large range of customers.
The Company's resources are now, and will continue to be, devoted to the
development and marketing of this product line. The Company first commenced
sales of its initial production units of tape library products, other than
evaluation units, of 4mm and 8mm tape libraries in fiscal year 1997 and of DLT
tape libraries in fiscal year 1998, and therefore has limited experience in
selling its tape library products. While in fiscal year 1998 the Company still
derived most of its revenues from sales of its certifiers, evaluators and
duplicators for floppy disks and tape, the Company has shifted its focus to its
automated tape libraries for the data storage market. The Company expects to
derive a substantial majority of its total revenue and net income from sales of
its tape library products in the future.
The Company's success depends to a significant extent on the performance of
its senior management. The Company has recently experienced turnover in certain
of its senior management positions. Competition for highly skilled employees
with technical, management and other specialized training is intense in the
computer industry. The failure to retain the services of key personnel or to
attract additional qualified employees may have a significant impact on the
Company's business.
The Company restated its consolidated condensed financial statements for the
unaudited quarter ended December 31, 1997, in June 1998, because subsequent to
the issuance of the Company's financial statements for the aforementioned
quarter, certain products sold by the Company were returned. The restatement
reflects the reversal of certain product sales recorded in the third quarter,
consisting primarily of initial production tape library units, for which,
despite efforts by the Company to remedy customers' concerns regarding problems
with the units, payment was not received and the product was subsequently
returned. The restatement reduced revenue, increased net loss and net loss per
share for the third quarter and nine months ended December 31, 1997 by $250,000,
$125,000 and $0.02, respectively.
13
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, certain data as
percentages of the Company's net sales:
YEAR ENDED MARCH 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Net sales...................................................... 100.0% 100.0% 100.0%
Cost of goods sold............................................. 78.3 67.1 72.6
--------- --------- ---------
Gross profit................................................. 21.7 32.9 27.4
Selling, general and administrative expenses................... 130.0 98.7 207.0
Research and development expenses.............................. 112.5 49.6 103.9
--------- --------- ---------
Income (loss) from operations................................ (220.8) (115.4) (283.5)
Settlement costs............................................... (0.8) 0.0 0.0
Other Income................................................... 3.1 2.3 2.2
Interest expense--convertible debentures....................... 0.0 0.0 (55.2%)
--------- --------- ---------
Net income (loss)............................................ (218.5%) (113.1%) (336.5%)
--------- --------- ---------
--------- --------- ---------
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Sales for the year ended March 31, 1998 decreased 62.4% compared to fiscal
1997. The reduction in revenue reflects the continuing decline in the demand for
the Company's traditional products, while increasing sales of automated tape
libraries have not been sufficient to offset the decline. The Company expects
sales of its automated tape libraries to constitute the major portion of
revenues in fiscal 1999.
International revenues decreased by $1,798,273 to $876,251 in fiscal 1998
from $2,674,524 in fiscal 1997. The decrease is primarily due to the continuing
decline in the demand for the Company's traditional product line, which
historically have always been sold internationally. The following table
summarizes sales by geographic region:
SALES BY GEOGRAPHIC REGION
FISCAL 1998 FISCAL 1997 FISCAL 1996
------------ ------------ ------------
Domestic............................................ $ 494,418 $ 969,954 $ 941,972
Europe.............................................. 182,918 489,822 272,617
Far East............................................ 636,050 1,234,700 1,595,396
Other............................................... 57,283 950,002 768,251
------------ ------------ ------------
$ 1,370,669 $ 3,644,478 $ 3,578,236
------------ ------------ ------------
------------ ------------ ------------
Total costs and expenses were $5,256,544 (383.5% of revenue) in fiscal 1998
as compared to $7,850,653 (215.4% of revenue) in fiscal 1997. The principal
reason for this increase in percentage is the substantial decrease in revenues
during fiscal 1998. Actual expenses decreased during fiscal 1998. During fiscal
1998, all operations of Media Logic ADL, formerly maintained in Boulder, CO,
were relocated to the Company's headquarters in Plainville, MA. There were 28
employees as of March 31, 1998, 26 stationed in Plainville and 2 staffing
regional sales offices in California and Illinois, compared to 36 employees on
March 31, 1997, of whom 29 were located in Plainville and 7 at Media Logic ADL
in Boulder, CO.
Gross margin declined to 27.4% in fiscal 1998 compared to 32.9% in fiscal
1997, primarily due to the continuing decrease in demand for the Company's
traditional products resulting in significant downward pricing pressures and
reduced margins. Future gross margins will be impacted by the ability of the
14
Company to implement additional cost controls and the mix of product sales
anticipating an increase in revenue from tape libraries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (S,G&A)
Selling, general and administrative expenses decreased by $758,394 or 21.1%
from fiscal 1997. The Company's total S,G&A expenses have been significantly
reduced by the Company's consolidation of all ADL operations in Plainville, MA.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $1,423,804 in fiscal 1998
from $1,808,145 in fiscal 1997, primarily due to the consolidation of all ADL
operations in Plainville during fiscal 1998 and decreased reliance on outside
consultants. All research and development expenditures during fiscal 1998
related to the Company's tape library systems. It is anticipated that
modifications and enhancements to the Company's tape libraries will necessitate
an increase in the employee complement in engineering (currently 11 employees)
and/or reliance on outside consultants on a temporary basis during fiscal 1999.
OTHER EXPENSES
Interest expense-convertible debenture, a non-cash item, represents the
amortization of assigned deferred costs in accordance with generally accepted
accounting principles in conjunction with the issuance of the Company's 7%
Convertible Subordinated Debentures and 7% Convertible Debentures. See Note 2 of
Notes to Consolidated Financial Statements.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Sales for the year ended March 31, 1997 increased by 1.9% compared to fiscal
1996 which had decreased by 38.7% compared to fiscal 1995. This stabilization of
revenue was primarily the result of steady demand for the Company's traditional
product line, albeit at a level significantly below historical levels.
Previously, severe pricing pressures in the sale of floppy disks, discouraging
current manufacturers from adding capacity and creating barriers to new entrants
into the market, led to dramatic decreases in revenue. A significant number of
manufacturers of floppy disks went out of business, particularly in China,
flooding the market with used equipment. This led to increased competition for
the limited opportunities available and lower prices for equipment. Sales of the
ADL line of automated libraries were not significant in fiscal 1997.
International revenues increased to $2,674,524 in fiscal 1997 from
$2,636,264 in fiscal 1996.
SALES BY GEOGRAPHIC REGION
FISCAL 1997 FISCAL 1996 FISCAL 1995
------------ ------------ ------------
Domestic............................................ $ 969,954 $ 941,972 $ 1,470,552
Europe.............................................. 489,822 272,617 793,793
Far East............................................ 1,234,700 1,595,396 2,368,837
Other............................................... 950,002 768,251 1,202,512
------------ ------------ ------------
$ 3,644,478 $ 3,578,236 $ 5,835,694
------------ ------------ ------------
------------ ------------ ------------
Total costs and expenses as a percentage of revenue were 215.4% in fiscal
1997 as compared to 320.8% in fiscal 1996 and 294.8% in fiscal 1995. The
principal reasons for the decrease in fiscal 1997 were the expansion of the
development of an in-house engineering capability to replace outside consultants
and the institution of strict controls on all aspects of the Company's business
during 1997. All manufacturing of the Company's traditional product lines was
consolidated at the Company's Plainville, Massachusetts
15
facility. There were 36 employees at March 31, 1997 as compared to 45 at March
31, 1996. Headcount by location is as follows:
HEADCOUNT BY LOCATION
MARCH 31, MARCH 31, MARCH 31,
1997 1996 1995
------------- --------------- ---------------
Media Logic, Plainville.................................... 29 26 53
Media Logic ADL............................................ 7 13 8
Media Logic, West.......................................... 0 3 10
Media Logic Far East....................................... N/A 3 3
-- --
---
36 45 74
-- --
-- --
---
---
Gross margins increased to 32.9% in fiscal 1997 from 21.7% in fiscal 1996.
The increase reflected the strict controls which were instituted by the Company.
RESEARCH AND DEVELOPMENT
Research and development expense decreased 55.1% to $1,808,145 in fiscal
1997 from $4,026,453 in fiscal 1996, 86.9% of the total research and development
expenditures in fiscal 1997 were associated with the ADL line of automated tape
libraries now which is the Company's primary area of focus. ADL research and
development expenses decreased by 53.4% in fiscal 1997 from the prior year,
primarily due to the continued development of an in-house engineering staff and
reduced dependence on outside consultants. Research and development expenses
related to the Company's traditional product lines of certification, evaluation
and duplication equipment decreased by 63.7% to $236,741 in fiscal 1997 from
$651,168 in fiscal 1996. The following table represents the research and
development costs for the periods indicated:
FISCAL 1997 FISCAL 1996 FISCAL 1995
------------ ------------ ------------
ADL................................................. $ 1,571,404 $ 3,374,685 $ 2,375,698
Other............................................... 236,741 651,768 1,575,235
------------ ------------ ------------
$ 1,808,145 $ 4,026,453 $ 3,950,933
------------ ------------ ------------
------------ ------------ ------------
SELLING GENERAL & ADMINISTRATIVE EXPENSES
SG&A expenses decreased by $1,054,752 or 22.7% from fiscal 1996, primarily
as the result of a combination of strict cost controls and a reduction in the
number of employees. SG&A expenses associated with the ADL line of automated
tape libraries decreased by $286,968 or 17.9% in fiscal 1996 compared to the
prior fiscal year. SG&A expenditures related to the Company's traditional
product lines were reduced by $767,784 or 25.2% in fiscal 1997 as compared to
fiscal 1996.
FISCAL 1997 FISCAL 1996 FISCAL 1995
------------ ------------ ------------
ADL................................................. $ 1,312,435 $ 1,599,403 $ 1,292,273
Other............................................... 2,283,890 3,051,674 4,211,043
------------ ------------ ------------
$ 3,596,325 $ 4,651,077 $ 5,503,316
------------ ------------ ------------
------------ ------------ ------------
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $3.4 million compared
to $5.4 million at March 31, 1997. The current ratio was 4.5 to 1 as of March
31, 1998 and 4.8 to 1 as of March 31, 1997. The decrease in working capital is
principally due to significant operating losses and funding of the development
of the Company's line of automated tape libraries.
16
In February 1997, the Company issued 5,000 shares of Common Stock to the
former President of MediaLogic ADL pursuant to the terms of a separation
agreement entered in October 1996. These shares were issued in a private
placement exempt from registration under Regulation D under the Securities Act
of 1933, as amended (the "Securities Act"). No underwriter was involved in this
issuance.
On March 24, 1997, the Company issued $3,530,000 aggregate principal amount
of 7% Convertible Subordinated Debentures (the "Debentures") in a private
placement exempt from registration under Regulation D under the Securities Act
of 1993, as amended, (the "Securities Act"). The Debentures mature on March 24,
2000 and were convertible into the Company's common stock prior to that date at
the option of the holder. In connection with the Company's private placement of
common stock in December 1997, all of the remaining holders of the Debentures
and the Company agreed to set a fixed conversion price for the Debentures of
$.90 per share of common stock until January 28, 1998 and thereafter at the
lower of (i) $2.805, which amount is 120% of the average closing bid price of
the common stock as calculated over the five trading-day period ending on March
21, 1997 and (ii) 80% of the average closing bid price of the common stock as
calculated over the five trading-day period immediately preceding the date of
conversion, subject to a $.90 per share minimum conversion price. Costs
associated with the financing were approximately $432,000. In connection with
the issuance of the Debentures, the Company issued warrants to purchase
1,550,870 shares of Common Stock at an exercise price of $3.00 per share and
warrants to purchase 200,000 shares of common stock at $2.00 per share. During
the quarter ended September 30, 1997, Debentures aggregating $1,770,000, plus
accrued interest, were converted into 1,341,788 shares of the Company's Common
Stock. During the quarter ended December 31, 1997, Debentures aggregating
$1,060,000, plus accrued interest, were converted into 890,363 shares of the
Company's Common Stock. During the quarter ended March 31, 1998, Debentures
aggregating $700,000, plus accrued interest, were converted into 807,416 shares
of the Company's Common Stock. All of these Debentures have now been converted
into shares of the Company's Common Stock.
On October 29, 1997, the Company issued $750,000 aggregate principal amount
of 7% Convertible Debentures (the "October Debentures") in a private placement
exempt from registration under Regulation D under the Securities Act, with gross
proceeds of $750,000. The October Debentures mature on October 29, 2000 and are
convertible into the Company's Common Stock prior to that date at the option of
the Holder at a conversion price equal to $.90 per share until January 28, 1998
and thereafter equal to the lower of (i) 80% of the average closing bid price
for the common stock for the five days prior to the conversion date, and (ii)
$1.95 per share, subject to a $.90 minimum conversion price. Costs associated
with the financing were approximately $93,000. During the quarter ended March
31, 1998, Debentures aggregating $180,000, plus accrued interest, were converted
into 203,438 shares of the Company's Common Stock. In connection with the
issuance of the October Debentures, the Company issued warrants to purchase
500,000 shares of Common Stock at an exercise price of $2.00 per share.
On December 29, 1997, the Company sold 1,700,000 shares of Common Stock in a
private placement (the "December Private Placement") exempt from registration
under Regulation D under the Securities Act, with gross proceeds of $1,530,000.
Cost associated with this financing of approximately $469,000 were charged to
additional paid-in capital. In connection with the December Private Placement,
the Company issued warrants to purchase 1,000,000 shares of Common Stock at an
exercise price of $3.00 per share and warrants to purchase 1,000,000 shares of
Common Stock at an exercise price of $1.50 per share. The Company issued
warrants to purchase an aggregate of 500,000 shares of Common Stock at an
exercise price of $2.00 per share to the placement agents for the December
Private Placement.
During May 1998, the Company sold 2,048,895 shares of Common Stock in a
private placement (the "1998 Private Placement") exempt from registration under
Regulation D under the Securities Act, with gross proceeds of $1,850,000. In
connection with the 1998 Private Placement, the Company issued warrants to
purchase 26,666 shares of Common Stock at $1.125 per share, 1,011,114 shares of
Common Stock at $1.50 per share and 1,011,115 shares of Common Stock at $3.00
per share. The 1998 Private Placement had no placement agent fees, and costs
associated with this financing consisted solely of legal fees.
17
The Company, because of its continuing losses from operations, anticipates
that, unless revenues increase significantly, it will not have sufficient cash
resources for the next twelve months and it will require additional capital in
order to continue it operations. The Company has no assurance that it will be
able to raise such additional capital, if needed, in a timely manner or on
favorable terms, if at all. If the Company is unable to increase revenues
significantly and/or secure additional financing, the Company could be forced to
curtail or discontinue its operations. The Company does not fully satisfy all of
the American Stock Exchange guidelines for continued listing and there is no
assurance listing will be continued.
The Company continually monitors the changing business conditions and takes
whatever actions it deems necessary to protect and promote the Company's
interests.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or data recording mechanism incorporating the date sensitive software
which uses only two digits to represent the year may recognize a date using 00
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar business activities.
The Company has conducted a review of its internal information systems to
determine the extent of any Year 2000 problem. Based on such review, the Company
does not currently believe that it has material exposure to the Year 2000 Issue
with respect to its own information systems, since its core existing business
information systems correctly define the year 2000.
The Company is in the process of contacting its major supplies and customers
in an effort to determine the extent to which the Company may be vulnerable to
those parties failure to timely correct their own Year 2000 problems. To date,
the Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of compliance which could have a material
adverse effect on the Company's operations or financial condition will not be
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
SEASONALITY
The Company's business is not seasonal in nature.
INFLATION
The Company does not believe that its operations have been materially
affected by inflation.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Page F-1 for the index to the consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item is incorporated by reference to the
discussion response thereto under the captions "Proposal 1--Election of
Directors" and 16(a) "Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 1998 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is incorporated by reference to the
discussion response thereto under the caption "Executive Compensation" in the
Company's Proxy Statement for the 1998 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is incorporated by reference to the
discussion response thereto under the caption "Share Ownership" in the Company's
Proxy Statement for the 1998 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this is incorporated by reference to the
discussion response thereto under the caption "Certain Transactions" in the
Company's Proxy Statement for the 1998 Annual Meeting.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS:
See Item 8, Consolidated Financial Statements and Supplementary Data
2. SCHEDULE:
Report of Independent Public Accountants on Supplementary Schedule
II--Valuation and Qualifying Accounts for the years ended March 31, 1996, 1997, and 1998
3. EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K AND BY ITEM 14(C):
3.1 Restated Articles of Organization*
3.2 By-Laws of Registrant**
4. Specimen of Registrant's Common Stock Certificate**
10.1 Amended and Restated Profit Sharing and 401(k) Plan effective April 1, 1992*** (****)
10.2 1991 Stock Option Plan**** (*****)
10.3 Lease between the Company and D&K Realty Trust, dated April 1, 1993**
10.4 Combination Agreement between the Company and John Miller and Peter Moore, dated as
of March 1, 1993***
10.5 Separation Agreement between William E. Davis, Jr. And the Company dated, March 12,
1998.
10.6 Separation Agreement among Lee H. Elizer, Media Logic ADL, Inc. and Media Logic, Inc.
dated October 23, 1996+
10.7 Form of Media Logic, Inc. 7% Convertible Subordinated Debenture Due 2000, dated March
24, 1997++ (Ex. 99.1)
10.8 Form of Subscription Agreement among Media Logic, Inc. and the purchasers named on
the signature pages thereto, dated March 1997++ (Ex. 99.2)
10.9 Form of Registration Rights Agreement among Media Logic, Inc. and the purchasers
named on the signature pages thereto, dated March 24, 1997++ (Ex. 99.3)
10.10 Stock Purchase Agreement between Raymond W. Leclerc and the Company, dated September
25, 1995+++ (Ex. 99.1)
10.11 Warrant Agreement between MediaLogic, Inc. and Digital Media & Communications L.P.
dated March 24, 1997+++ (Ex. 99.2) ("Digital Media Warrant")
10.12 Amendment to Digital Media Warrant, dated September 30, 1997+++ (Ex. 99.3)
10.13 Warrant Agreement between MediaLogic, Inc. and ACFS Limited Partnership, dated March
24, 1997+++ (Ex. 99.4) ("ACFS Warrant")
10.14 Amendment to ACFS Warrant, dated September 30, 1997+++ (Ex. 99.5)
10.15 Warrant Agreement between MediaLogic, Inc. and Rochon Capital Group, Ltd., dated
March 25, 1997++++ (Ex 99.6)
10.16 Warrant Agreement between MediaLogic, Inc. and Adar Equities LLC, dated March 25,
1997+++ (Ex. 99.7)
10.17 Securities Purchase Agreement between MediaLogic, Inc. and F.T.S. Worldwide Corp.,
dated October 29, 1997+++ (Ex. 99.8)
20
10.18 MediaLogic, Inc. 7% Convertible Debenture due October 29, 2000, dated October 29,
1997+++ (Ex. 99.9)
10.19 Registration Rights Agreement between MediaLogic, Inc. and F.T.S. Worldwide Corp.,
dated October 29, 1997 +++ (Ex. 99.10)
10.20 Form of Amendment No. 1 to 7% Convertible Debentures Due October 29, 2000, dated as
of December 29, 1997 between F.T.S. Worldwide Corp. and the Company +++++ (Ex.
99.3)
10.21 Securities Purchase Agreement between MediaLogic, Inc. and Imprimis SB L.P., dated
December 22, 1997 ++++++ (Ex. 99.1)
10.22 Securities Purchase Agreement between MediaLogic, Inc. and Wexford Spectrum Investors
LLC, dated December 22, 1997 ++++++ (Ex. 99.2)
10.23 Warrant to Purchase Shares of Common Stock, par value $.01 per share of MediaLogic,
Inc. (Warrant No. WX-1), dated December 29, 1997 ++++++ (Ex. 99.3)
10.24 Warrant to Purchase Shares of Common Stock, par value $.01 per share of MediaLogic,
Inc. (Warrant No. WX-2), dated December 29, 1997 ++++++ (Ex. 99.4)
10.25 Warrant to Purchase Shares of Common Stock, par value $.01 per share of MediaLogic,
Inc. (Warrant No. WX-3), dated December 29, 1997 ++++++ (Ex. 99.5)
10.26 Warrant to Purchase Shares of Common Stock, par value $.01 per share of MediaLogic,
Inc. (Warrant No. WX-4), dated December 29, 1997 ++++++ (Ex. 99.6)
10.27 Warrant Agreement between MediaLogic, Inc. and Adar Equities LLC, dated as of October
29, 1997 ++++++ (Ex. 99.7)
10.28 Warrant Agreement between MediaLogic, Inc. and Adar Equities LLC, dated as of January
9, 1998 +++++++ (Ex. 99.8)
10.29 Warrant Agreement between MediaLogic, Inc. and Boston Group, L.P. dated as of January
9, 1998 +++++++ (Ex. 99.9)
10.30 Form of Securities Purchase Agreement between MediaLogic, Inc. and each of the
Selling Stockholders ++++++++ (Ex. 99.1)
10.31 Form of Warrant to Purchase Shares of Common Stock, par value $.01 per share of
MediaLogic, Inc. issued to each of the Selling Stockholders ++++++++ (Ex. 99.2)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K--The Company filed a report on Form 8-K on March 2,
1998 announcing the appointment of Gregory Scorziello as President and
Chief Executive Officer.
- - ------------------------
* Incorporated by reference to Annual Report Form 10-K for fiscal year
ended March 31, 1993
** Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-18 (No. 33-14722-B) effective July 23, 1987
*** Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-2 (No. 33-63014) filed May 19, 1993
**** Management contract or compensatory plan required to be filed as an
exhibit to this Form 10-K pursuant to Item 14(c) of this report.
***** Incorporated by reference to the Proxy Statement of the Registrant
filed pursuant to Rule 14a-6, dated June 25, 1992.
21
+ Incorporated by reference to Exhibit 99 to the Registrant's
Registration Statement on Form S-3 (No. 333-22657) filed March 4, 1997
++ Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-3 (No. 333-27503) filed May 20, 1997
+++ Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-41041) filed November 26, 1997.
++++ Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form S-3 (No. 333-41041) filed January 14,
1998.
+++++ Incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Commission on December 31, 1997.
++++++ Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-45073) filed January 28, 1998.
+++++++ Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form S-3 (No. 333-45073) filed March 9, 1998.
++++++++ Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-55811) filed June 2, 1998.
22
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.
MEDIA LOGIC, INC.
By: /s/ GREGORY SCORZIELLO
-----------------------------------------
Gregory Scorziello
CHIEF EXECUTIVE OFFICER AND PRESIDENT
By: /s/ JOHN T. LOUGHRAN
-----------------------------------------
John T. Loughran
PRINCIPAL ACCOUNTING OFFICER
DATE: JUNE 29, 1998
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/ GREGORY SCORZIELLO Director and
- - ------------------------------ Chief Executive Officer June 29, 1998
Gregory Scorziello and President
/s/ MICHAEL G. SALTER
- - ------------------------------ Director and Chairman June 29, 1998
Michael G. Salter
/s/ MICHAEL R. BRUCE
- - ------------------------------ Director June 29, 1998
Michael R. Bruce
/s/ RAYMOND W. LECLERC
- - ------------------------------ Director June 29, 1998
Raymond W. Leclerc
/s/ JOSEPH L. MITCHELL
- - ------------------------------ Director June 29, 1998
Joseph L. Mitchell
/s/ FRANCIS S. WYMAN
- - ------------------------------ Director June 29, 1998
Francis S. Wyman
INDEX FOR EXHIBITS
EXHIBIT PAGE
------------------------------------------------------------------------------------------- -----------
Exhibit 10.5 Separation Agreement with William E. Davis, Jr. and Company, dated March 12, 1998
Exhibit 23 Consent of Arthur Andersen LLP
Exhibit 27 Financial Data Schedule
MEDIA LOGIC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................................................. F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997................................................ F-3
Consolidated Statements of Operations for the Years Ended March 31, 1998, 1997 and 1996.................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1998, 1997 and 1996........ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996.................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Public Accountants on Supplementary Schedule....................................... S-1
Schedule II--Valuation and Qualifying Accounts for the Years Ended March 31, 1998, 1997 and 1996......... S-2
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Media Logic, Inc.:
We have audited the accompanying consolidated balance sheets of Media Logic,
Inc. (a Massachusetts corporation) and subsidiaries as of March 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Media Logic, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring losses from
operations. The financial viability of the Company, including its ability to
obtain additional capital for operations, is dependent on the Company's ability
to achieve its sales and profit projections. The Company's business plan is
predicated on achieving sales forecasts for new products for which market
acceptance is uncertain. These factors raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 22, 1998
F-2
MEDIA LOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND 1997
1998 1997
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash............................................................................ $ 155,348 $ 2,382,875
Accounts receivable, net of allowance for doubtful accounts of approximately
$6,000 and $62,000 at March 31, 1998 and 1997, respectively................... 375,215 813,993
Inventories..................................................................... 3,822,238 3,563,482
Prepaid expenses and other current assets....................................... 1,500 1,000
-------------- --------------
Total current assets........................................................ 4,354,301 6,761,350
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment......................................................... 1,088,587 1,210,345
Office equipment and fixtures................................................... 361,043 393,773
Leasehold improvements.......................................................... 247,992 256,766
Vehicles........................................................................ 13,316 13,315
-------------- --------------
1,710,938 1,874,199
Less--Accumulated depreciation and amortization................................. 1,432,499 1,405,119
-------------- --------------
278,439 469,080
-------------- --------------
DEFERRED FINANCING COSTS (Note 2)................................................. 157,720 1,711,829
OTHER ASSETS...................................................................... 6,037 30,696
-------------- --------------
$ 4,796,497 $ 8,972,955
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 673,660 $ 1,107,732
Accrued expenses................................................................ 283,553 293,238
-------------- --------------
Total current liabilities................................................... 957,213 1,400,970
-------------- --------------
CONVERTIBLE SUBORDINATED DEBENTURES (Note 2)...................................... 348,199 3,266,663
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized--20,000,000 shares
Issued and outstanding--11,284,514 shares and 6,320,909 shares at March 31,
1998 and 1997, respectively................................................. 112,845 63,209
Additional paid-in capital.................................................... 24,327,502 20,577,945
Accumulated deficit........................................................... (20,949,262) (16,335,832)
-------------- --------------
Total stockholders' equity.................................................. 3,491,085 4,305,322
-------------- --------------
$ 4,796,497 $ 8,972,955
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MEDIA LOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------- -------------
NET SALES............................................................ $ 1,370,669 $ 3,644,478 $ 3,578,236
COST OF SALES........................................................ 994,809 2,446,183 2,801,009
------------- ------------- -------------
Gross profit................................................... 375,860 1,198,295 777,227
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 2,837,931 3,596,325 4,651,077
RESEARCH AND DEVELOPMENT EXPENSES.................................... 1,423,804 1,808,145 4,026,453
------------- ------------- -------------
Loss from operations........................................... (3,885,875) (4,206,175) (7,900,303)
OTHER INCOME (EXPENSE):
Interest income.................................................... 19,212 83,887 144,583
Interest expense (Note 2).......................................... (756,698) -- --
Settlement costs (Note 5).......................................... -- -- (30,000)
Other.............................................................. 9,931 -- (33,099)
------------- ------------- -------------
Net loss....................................................... $ (4,613,430) $ (4,122,288) $ (7,818,819)
------------- ------------- -------------
------------- ------------- -------------
BASIC AND DILUTED LOSS PER COMMON SHARE (NOTE 1)..................... $ (.57) $ (.66) $ (1.40)
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................. 8,149,352 6,271,463 5,585,025
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MEDIA LOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 1995.................. 4,979,000 $ 49,790 $ 14,112,075 $ (4,394,725) $ 9,767,140
Net loss............................... -- -- -- (7,818,819) (7,818,819)
Exercise of stock options.............. 103,900 1,039 83,138 -- 84,177
Proceeds from private placement of
common stock, net of issuance costs
of $16,832........................... 1,130,909 11,309 4,971,859 -- 4,983,168
------------ ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 1996.................. 6,213,809 62,138 19,167,072 (12,213,544) 7,015,666
Net loss............................... -- -- -- (4,122,288) (4,122,288)
Issuance of common stock............... 5,000 50 14,950 -- 15,000
Issuance of warrants................... -- -- 862,916 -- 862,916
Issuance of rights for guaranteed
return on convertible subordinate
debentures (Note 2).................. -- -- 416,750 -- 416,750
Exercise of stock options.............. 102,100 1,021 116,257 -- 117,278
------------ ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 1997.................. 6,320,909 63,209 20,577,945 (16,335,832) 4,305,322
Net loss............................... -- -- -- (4,613,430) (4,613,430)
Issuance of common stock, net of
issuance costs of $469,039........... 1,700,000 17,000 1,043,961 -- 1,060,961
Issuance of warrants................... -- -- 208,582 -- 208,582
Conversion of debentures and accrued
interest to common stock............. 3,243,005 32,430 2,382,028 -- 2,414,458
Issuance of rights for guaranteed
return on convertible subordinated
debentures (Note 2).................. -- -- 83,992 -- 83,992
Exercise of stock options.............. 20,600 206 30,994 -- 31,200
------------ ---------- ------------- -------------- -------------
BALANCE, MARCH 31, 1998.................. 11,284,514 $ 112,845 $ 24,327,502 $ (20,949,262) $ 3,491,085
------------ ---------- ------------- -------------- -------------
------------ ---------- ------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MEDIA LOGIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $(4,613,430) $(4,122,288) $(7,818,819)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization......................................... 204,691 430,602 549,631
Noncash interest on convertible debentures and deferred financing
costs............................................................... 756,698 -- --
Loss on sale and retirements of property and equipment................ -- 10,389 44,235
Changes in assets and liabilities--
Refundable income taxes............................................. -- 27,658 1,701,972
Accounts receivable................................................. 438,778 184,410 249,652
Inventories......................................................... (258,756) (1,096,333) 1,227,248
Prepaid expenses and other current assets........................... (500) 72,397 121,075
Accounts payable.................................................... (434,072) 763,859 (495,160)
Accrued expenses.................................................... (31,706) (312,215) 126,895
Customer deposits................................................... -- -- (19,709)
----------- ----------- -----------
Net cash used in operating activities............................. (3,938,297) (4,041,521) (4,312,980)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (14,050) (117,033) (129,622)
Proceeds from sale of marketable securities............................. -- -- 2,031,289
Decrease (increase) in other assets..................................... 24,659 29,174 (22,284)
----------- ----------- -----------
Net cash provided by (used in) investing activities............... 10,609 (87,859) 1,879,383
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible subordinated debentures....... 701,233 3,266,663 --
Proceeds from issuance of common stock.................................. 1,060,961 15,000 4,983,168
Increase in deferred financing costs.................................... (93,233) (432,163) --
Exercise of stock options............................................... 31,200 117,278 84,177
----------- ----------- -----------
Net cash provided by financing activities......................... 1,700,161 2,966,778 5,067,345
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH........................................... (2,227,527) (1,162,602) 2,633,748
CASH, BEGINNING OF YEAR................................................... 2,382,875 3,545,477 911,729
----------- ----------- -----------
CASH, END OF YEAR......................................................... $ 155,348 $ 2,382,875 $ 3,545,477
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Charge for guaranteed return on convertible subordinated debentures..... $ (83,992) $ (416,750) $ --
----------- ----------- -----------
----------- ----------- -----------
Issuance of warrants.................................................... $ (208,582) $ (862,916) $ --
----------- ----------- -----------
----------- ----------- -----------
Conversion of debentures and accrued interest to common stock........... $ 2,414,458 $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest.............................................................. $ -- $ -- $ 5,963
----------- ----------- -----------
----------- ----------- -----------
Income taxes.......................................................... $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Media Logic, Inc. (the Company) was incorporated in 1982 to develop and
manufacture certification equipment to be used by manufacturers of flexible
storage media such as floppy disks. The Company's principal product line is
automated tape library systems for data storage and retrieval, which was
introduced in fiscal year 1996.
Since 1995, the Company has dedicated significant financial resources to the
development of its automated tape library product line. The future success of
the Company is dependent on the viability of its new tape library products. The
Company has introduced its 8mm and 4mm tape libraries and has increased
inventory levels for anticipated demand but has not yet achieved significant
sales. The Company has incurred significant operating losses. The financial
viability of the Company, including its ability to obtain additional capital for
operations, is dependent on the Company's ability to achieve its sales and
profit projections for its tape library product line.
In May 1998, the Company received approximately $1,850,000 in gross proceeds
from the issuance of 2,048,695 shares of common stock as discussed in Note 8. If
the Company is unable to substantially achieve its sales forecasts for tape
library products or is unable to secure additional financing, for which it does
not currently have any commitment, there is substantial doubt whether the
Company will have the ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies described below and elsewhere in the
accompanying notes to these consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(B) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires
the capitalization of certain computer software development costs incurred after
technological feasibility is established. The Company believes that once
technological feasibility of a software product has been established, the
additional development costs incurred to bring the software to a commercially
acceptable level are not significant. There were no capitalized software
development costs at March 31, 1998 and 1997.
(C) REVENUE RECOGNITION
Revenue is recognized at the time of product shipment, at which point title
has been transferred and payment is assured. Costs of service and warranty,
which are not significant, are accrued upon shipment.
F-7
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing overhead. At March 31, 1998 and
1997, inventories consisted of the following:
1998 1997
------------ ------------
Raw materials..................................................... $ 1,087,245 $ 1,808,917
Work-in-process................................................... 289,996 168,762
Finished goods.................................................... 2,444,997 1,585,803
------------ ------------
$ 3,822,238 $ 3,563,482
------------ ------------
------------ ------------
(E) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of property and equipment over
their estimated useful lives, using the straight-line method, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- - --------------------------------------------------------------------------------- -----------
Machinery and equipment.......................................................... 5-7 years
Office equipment and fixtures.................................................... 3-7 years
Leasehold improvements........................................................... 8-20 years
Vehicles......................................................................... 3-7 years
(F) LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, EARNINGS PER SHARE. This statement established standards for
computing and presenting earnings per share and applies to entities with
publicly traded common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997. Prior years' earnings
per share have been restated to reflect the adoption of SFAS No. 128.
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share is computed by dividing net loss by the weighted average number of
dilutive common shares outstanding during the period. Diluted weighted average
shares reflect the dilutive effect, if any, of common stock options based on the
treasury stock method. Basic and diluted earnings per share are the same for the
three years in the period ended March 31, 1998, because potentially dilutive
common shares are antidilutive. The number of potentially dilutive shares that
otherwise would have been included are 735,800, 223,158 and 242,829 for the
years ended March 31, 1998, 1997 and 1996, respectively.
(G) FOREIGN CURRENCY
The Company translates the assets and liabilities of its foreign subsidiary
at the rate of exchange in effect at year-end. Revenues and expenses are
translated using a weighted average of exchange rates in
F-8
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effect during the period. Gains and losses from both foreign currency
translation and transactions, which are not material, are classified within
selling, general and administrative expenses in the accompanying consolidated
statements of operations.
(H) OTHER EMPLOYMENT BENEFITS
The Company has no obligations for postretirement benefits under SFAS No.
106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, or
postemployment benefits under SFAS No. 112, EMPLOYERS' ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS, as it does not currently offer such benefits.
(I) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(J) CONCENTRATION OF CREDIT RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of trade accounts receivable, which are managed by the Company
with payment terms. As of March 31, 1998, one customer, who is also a greater
than 10% shareholder, accounted for approximately 29% of accounts receivable. As
of March 31, 1997, two customers accounted for approximately 67% of accounts
receivable. See Note 9(a) for discussion of significant customer sales. The
Company has no significant off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or other foreign hedging
arrangements.
(K) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Company disclose estimated fair values for certain of its
financial instruments. The Company's financial instruments include cash,
accounts receivable, accounts payable and convertible subordinated debentures.
The carrying amounts of these financial instruments approximate their fair
value.
(L) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In October 1995, the
FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
establishes a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative for grants to
employees (see Note 4(b)).
F-9
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(2) CONVERTIBLE SUBORDINATED DEBENTURES
(A) MARCH DEBENTURES
On March 24, 1997, the Company issued 7% convertible subordinated debentures
(the March Debentures) for gross proceeds of $3,530,000. Each March Debenture
had a face amount of $10,000 and bore interest at 7% per annum. Interest was
payable upon conversion or redemption of the March Debentures and was payable in
either cash or shares of common stock at the average market price of common
stock over the five days preceding the conversion dates, at the option of the
Company.
The March Debentures were convertible at the option of the holder into
common stock of the Company beginning on the earlier of (i) the effective date
of the S-3 Registration Statement to register such conversion shares or (ii)
June 23, 1997. The conversion price was equal to the lower of (i) 120% of the
average closing bid price of the common stock for the five trading day period
ending on the trading day prior to the subscription date (March 28, 1997) or
(ii) 80% of the average closing bid price for five days immediately preceding
the conversion date. As of the subscription date, the conversion price was
$2.805. During fiscal 1998, all of the March Debentures plus accrued interest
were converted into common stock.
In connection with the issuance of the March Debentures, the Company issued
warrants to purchase 1,550,870 shares of common stock at $3.00 per share and
200,000 shares of common stock at $2.00 per share. Warrants to purchase 650,870
shares of common stock at an exercise price of $3.00 per share are exercisable
at any time prior to September 22, 2001 and warrants to purchase 900,000 of such
shares are exercisable at any time on or prior to March 24, 2002. As of March
31, 1998, none of these warrants have been exercised.
The Company has recognized the estimated fair value of the warrants based on
the Black-Scholes valuation model and the guaranteed return conversion feature
attributable to the March Debentures as deferred financing costs with an
increase to additional paid-in capital. These amounted to approximately
$1,280,000 along with actual cash financing costs of approximately $432,000.
Deferred financing costs were being amortized over three years--the stated term
of the March Debentures. However, upon conversion of the March Debentures, all
unamortized deferred financing costs were charged against additional paid-in
capital.
(B) OCTOBER DEBENTURES
On October 29, 1997, the Company issued 7% convertible subordinated
debentures (the October Debentures) for gross proceeds of $750,000. Each October
Debenture has a face amount of $10,000 and bears interest at 7% per annum.
Interest is payable upon conversion or redemption of the October Debentures and
is payable in either cash or shares of common stock at the average market price
of common stock over the five days preceding the conversion dates, at the option
of the Company.
The October Debentures are convertible at the option of the holder into
common stock of the Company beginning on the earlier of (i) the effective date
of the S-3 Registration Statement to register such conversion shares or (ii)
January 12, 1998. The conversion price is equal to the lower of (i) 120% of the
average closing bid price of the common stock for the five trading day period
ending on the trading day prior to the subscription date (October 29, 1997) or
(ii) 80% of the average closing bid price for five days immediately preceding
the conversion date. As of the subscription date, the conversion price was $.90
per share. The October Debentures mature on October 29, 2000 and automatically
convert on that date at the
F-10
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(2) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
then current conversion price. As of March 31, 1998, October Debentures with a
face value totaling $180,000 plus accrued interest were converted into common
stock.
In connection with the issuance of the October Debentures, the Company
issued warrants to purchase 500,000 shares of common stock at $2.00 per share.
The warrants are exercisable at the option of the warrantholder at any time on
or after January 23, 1998. All warrants expire on January 23, 2003. As of March
31, 1998, none of these warrants have been exercised.
The Company has recognized the estimated fair value of the warrants based on
the Black-Scholes valuation model and the guaranteed return conversion feature
attributable to the October Debentures as deferred financing costs with an
increase to additional paid-in capital. These amounted to approximately $84,000
along with actual cash financing costs of approximately $93,000. Deferred
financing costs are being amortized over three years--the stated term of the
October Debentures. However, to the extent the October Debentures are converted,
any unamortized deferred financing costs will be charged against additional
paid-in capital.
(3) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by currently enacted tax rates.
As of March 31, 1998, the Company has available net operating loss
carryforwards of approximately $18,640,000 and research and development credit
carryforwards of approximately $129,000 to reduce federal and state income
taxes, if any. These carryforwards expire through fiscal 2013 and are subject to
review and possible adjustment by the Internal Revenue Service. The Tax Reform
Act of 1986 contains provisions that may limit the amount of net operating loss
and credit carryforwards that the Company may utilize in any one year in the
event of certain cumulative changes in ownership over a three-year period in
excess of 50%, as defined.
The approximate income tax effect of each type of temporary difference
composing the net deferred tax asset at March 31, 1998 and 1997 is as follows:
1998 1997
------------- -------------
Net operating loss carryforwards................................ $ 7,456,000 $ 5,440,000
Nondeductible reserves.......................................... 426,000 422,000
Research and development credit carryforwards................... 129,000 129,000
Alternative minimum tax credit carryforwards.................... 100,000 100,000
Nondeductible accruals.......................................... 74,000 104,000
------------- -------------
8,185,000 6,195,000
Less--Valuation allowance....................................... (8,185,000) (6,195,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
F-11
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(3) INCOME TAXES (CONTINUED)
The Company cannot recognize a deferred tax asset for the future benefit of
its net operating loss and tax credit carryforwards unless it concludes that it
is more likely than not that the deferred tax asset will be realized. Due to the
significant decline in sales and recent history of operating losses, the Company
has recorded a full valuation allowance against its otherwise recognizable net
deferred tax asset.
(4) COMMON STOCK
(A) PRIVATE PLACEMENTS
In September 1995, the Company sold 1,000,000 shares of its common stock,
$.01 par value per share, to a private investor at a price of $5.00 per share.
In addition, the Company issued an additional 130,909 shares to its financial
advisory firm in connection with this private placement. The Company's net
proceeds from this transaction totaled $4,983,168 and were restricted to
utilization in connection with the Company's automated data library business.
All of the proceeds of the private placement had been expended by March 31,
1997.
On December 29, 1997, the Company sold 1,700,000 shares of its common stock,
$.01 par value per share, to private investors at a price of $.90 per share. The
Company's net proceeds from this transaction totaled $1,060,961 and were
restricted to utilization in connection with the Company's automated data
library business. In connection with this private placement, the Company issued
warrants to private investors to purchase 1,000,000 shares of common stock at an
exercise price of $3.00 per share and warrants to purchase 1,000,000 shares of
common stock at $1.50 per share. The warrants are exercisable at the option of
the warrantholder at any time from December 31, 1997 to December 29, 2002. The
Company also issued warrants to purchase 500,000 shares of common stock at $2.00
per share. The warrants are exercisable at the option of the warrantholder at
any time from December 30, 1997 to December 29, 2002.
(B) STOCK OPTION PLANS
The Company has a stock option plan (the Plan), established in 1991, which
replaced a previous stock option plan. The Plan enables options to be granted to
purchase shares of common stock at the fair market value on the date of grant,
and at not less than 110% of fair market value on the date of grant for
optionees who are 10% stockholders. Options vest ratably over three years and
expire 10 years from the date of grant. The Board of Directors and stockholders
of the Company have reserved a total of 1,500,000 shares of common stock for
issuance under the Plan.
F-12
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(4) COMMON STOCK (CONTINUED)
The following is a summary of the stock option activity:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE PER PRICE PER
SHARES SHARE SHARE
---------- ------------------ ------------
Outstanding, March 31, 1995.................... 655,421 $ .3750-$11.0630 $ 3.3872
Granted...................................... 206,043 3.5000 3.5000
Exercised.................................... (103,900) .3750-3.5000 1.0936
Terminated................................... (68,200) .3750-8.8750 3.5693
---------- ------------------ ------------
Outstanding, March 31, 1996.................... 689,364 .3750-11.0630 3.7486
Granted...................................... 127,924 2.5000-7.0000 5.1494
Exercised.................................... (102,100) .4125-8.8750 1.1487
Terminated................................... (139,434) 2.0000-8.8750 4.0005
---------- ------------------ ------------
Outstanding, March 31, 1997.................... 575,754 .3750-11.0630 4.4598
Granted...................................... 148,075 1.2500-3.0000 2.0318
Exercised.................................... (20,600) 1.2500-2.0000 1.5146
Terminated................................... (163,770) 1.5000-8.8750 4.1949
---------- ------------------ ------------
Outstanding, March 31, 1998.................... 539,459 $ .3750-$11.0630 $ 2.7446
---------- ------------------ ------------
---------- ------------------ ------------
Exercisable, March 31, 1998.................... 435,687 $ .3750-$11.0630 $ 2.7121
---------- ------------------ ------------
---------- ------------------ ------------
The weighted average contractual life of outstanding options at March 31,
1998 is 6.7 years.
On July 24, 1994, the Company established the 1994 stock option plan of
Media Logic ADL, Inc. (the ADL Plan) and reserved 2,000,000 shares of common
stock for issuance under the plan. Under the ADL Plan, both incentive and
nonqualified options may be granted to purchase shares of common stock. The
exercise of these options can be accelerated upon the achievement of performance
goals and expire 10 years from the date of grant. As of March 31, 1998, the
Company has granted no options pursuant to the ADL Plan.
In connection with the employment agreement discussed in Note 5, the Company
granted options to purchase 1,000,000 shares of common stock at $1.00 per share.
The Company has computed the pro forma disclosures required under SFAS No.
123 for stock options granted to employees in the three years ended March 31,
1998 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used and resultant pro forma net loss are as follows:
1998 1997 1996
------------- ---------- ----------
Risk-free interest rates.............................. 5.77-6.76% 7.50 6.5
Expected dividend yield............................... 0% 0% 0%
Expected lives........................................ 6.5 years 6.5 years 6.5 years
Expected volatility................................... 89% 88% 88%
Weighted average fair value of grant.................. $2.22 $1.95 $4.63
F-13
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(4) COMMON STOCK (CONTINUED)
The effect of applying SFAS No. 123 would be as follows:
1998 1997 1996
------------- ------------- -------------
Net loss as reported............................. $ (4,613,430) $ (4,122,288) $ (7,818,819)
------------- ------------- -------------
------------- ------------- -------------
Pro forma net loss............................... $ (4,942,752) $ (4,372,288) $ (7,945,819)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share as reported................... $ (.57) $ (.66) $ (1.40)
------------- ------------- -------------
------------- ------------- -------------
Pro forma net loss per share..................... $ (.61) $ (.70) $ (1.42)
------------- ------------- -------------
------------- ------------- -------------
(5) COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases its headquarters in Plainville, Massachusetts from a
realty trust, the beneficiaries of which are the former chairman of the Company
and a former director and former Senior Vice President of the Company. This
lease carries a 15-year term expiring in April 2008, with minimum monthly
payments established in an amount covering the underlying mortgage, excluding
all taxes and other operating charges that are the responsibility of the
Company.
Future minimum lease payments under existing noncancelable operating leases
at March 31, 1998 are as follows:
FISCAL YEAR AMOUNT
- - ---------------------------------------------------------------------------------- ----------
1999.............................................................................. $ 147,000
2000.............................................................................. 118,000
2001.............................................................................. 95,000
2002.............................................................................. 87,000
2003.............................................................................. 83,000
Thereafter........................................................................ 424,000
----------
$ 954,000
----------
----------
Rent expense was approximately $135,000, $262,000 and $250,000 for the years
ended March 31, 1998, 1997 and 1996, respectively, which included $83,400 in
each of fiscal 1998, 1997 and 1996 for its Plainville headquarters.
(B) EMPLOYMENT AND SEPARATION AGREEMENTS
In fiscal 1998, the Company elected not to renew its employment contracts
with the chief executive officer and the chief financial officer. The severance
arrangement for the chief executive officer and the chief financial officer
calls for salary payments equal to six and two months' salary payable over nine-
and four-month periods, respectively.
In 1998, the Company entered into an employment contract with a new chief
executive officer. Under this agreement, this officer will receive an annual
salary of $175,000 per year, which will be subject to review by the Company's
Board of Directors or the compensation committee after each anniversary of his
F-14
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
commencement date. In addition, this officer will be eligible to receive a bonus
up to a maximum of $147,500 if certain sales targets are met for fiscal 1999.
In June 1998, this officer was granted a stock option for the purchase of
one million shares of the Company's common stock at an exercise price of $1.00
per share.
(C) LEGAL PROCEEDINGS
On January 17, 1996, the Company filed suit against Christian Marlowe
(Marlowe) and the Marlowe Engineering Company (Marlowe Engineering) for a
declaration that Media Logic ADL, Inc. (ML-ADL) properly terminated agreements
with Marlowe and Marlowe Engineering and that ML-ADL owned technology developed
in conjunction with Marlowe and Marlowe Engineering. On June 5, 1996, Marlowe
and Marlowe Engineering filed an answer and counterclaims against the Company
alleging breach of contract and other charges, asserting that the Company
improperly terminated agreements with them, refused to recognize certain stock
options and improperly assigned certain patents.
The Company believes that the counterclaims are without merit and that the
Company has complied in all material respects with the terms of the contracts
with Marlowe and Marlowe Engineering. The Company further believes that
ultimately any negative decision by the court, if rendered, would not have a
material adverse effect on the Company.
On September 16, 1993, several stockholders, as purported representatives
for all other persons or entities who purchased the Company's common stock
during the period beginning on May 19, 1993 through September 9, 1993, brought
claims against the Company and three of the Company's officers in the United
States District Court for the District of Massachusetts as a class action. On
January 19, 1994, the plaintiffs filed a consolidated and amended complaint in
federal district court in Massachusetts under the caption, IN RE: MEDIA LOGIC,
INC. SECURITIES LITIGATION, Civil Action No. 93-12037-H. The lawsuit alleged,
among other things, that the Company and the named officers and directors
violated Section 10(b) of the Securities Exchange Act of 1934 by making material
misrepresentations or omitting material information in statements issued by or
on behalf of the Company. On November 29, 1994, the United States District Court
for the District of Massachusetts approved a settlement of the securities claim
action pending against the Company and the named officers and entered final
judgment dismissing all claims. The settlement provided for a payment of $2.05
million plus legal charges associated with the settlement. A portion of these
costs is included in settlement costs in the accompanying consolidated
statements of operations for fiscal 1996.
From time to time, the Company is involved in other litigation in its
ordinary course of business. At the current time, the Company does not believe
that any existing or pending litigation would have a material effect on the
consolidated financial statements.
F-15
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(6) ACCRUED EXPENSES
Accrued expenses at March 31, 1998 and 1997 consisted of the following:
1998 1997
---------- ----------
Accrued payroll-related............................................... $ 222,056 $ 173,238
Accrued warranty...................................................... 40,000 120,000
Accrued other......................................................... 21,497 --
---------- ----------
$ 283,553 $ 293,238
---------- ----------
---------- ----------
(7) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement savings plan (the 401(k) Plan),
covering all eligible employees, as defined. Participants in the 401(k) Plan may
elect to defer up to 15% of their compensation for deposit, subject to certain
Internal Revenue Service (IRS) limitations. The Company may elect to make
contributions to the 401(k) Plan at the discretion and in an amount determined
by the Board of Directors. The contributions are allocated to each eligible
participant's account in proportion to each participant's compensation in
relation to the total of all eligible participants' compensation, subject to IRS
limitations; deferrals in excess of 6% of compensation are not matched. During
fiscal 1998, 1997 and 1996, the Company charged to operations approximately
$34,000, $19,000 and $62,000, respectively, of employer matching contributions
to the 401(k) Plan.
(8) SUBSEQUENT EVENT
During May 1998, the Company sold 2,048,895 shares of common stock to
private investors with gross proceeds of $1,850,000. In connection with this
private placement, the Company issued warrants to purchase 26,666 shares at
$1.25 per share, 1,011,114 shares at $1.50 per share and 1,011,115 shares at
$3.00 per share. Costs associated with this financing consisted solely of legal
fees.
(9) SIGNIFICANT CUSTOMERS AND DOMESTIC AND EXPORT SALES
(a) SIGNIFICANT CUSTOMERS
During fiscal 1998, three customers accounted for 40% of net sales. During
fiscal 1997, four customers accounted for 52% of net sales. During fiscal 1996,
no single customer accounted for greater than 10% of net sales.
(b) DOMESTIC AND EXPORT SALES
Sales to customers as a percentage of net sales for the years ended March
31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
----- ----- -----
Far East.............................................................. 47% 34% 34%
Domestic.............................................................. 36 27 26
Brazil................................................................ 4 26 15
Europe................................................................ 13 13 8
All others............................................................ -- -- 17
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
F-16
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(10) GEOGRAPHIC INFORMATION
Revenues, net loss and identifiable assets for the Company's domestic and
Hong Kong operations for the years ended March 31, 1998, 1997 and 1996 are
summarized as follows:
ADJUSTMENTS/
DOMESTIC HONG KONG ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------ ------------
Fiscal 1998--
Sales to unaffiliated
customers................. $ 1,370,669(1) $ -- $ -- $ 1,370,669
Transfers between geographic
areas..................... -- -- -- --
-------------- ------------- ------------ ------------
Total sales............... $ 1,370,669 $ -- $ -- $ 1,370,669
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Net loss.................. $(4,583,334) $ (30,096) $ -- $ (4,613,430)
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Identifiable assets......... $20,255,620 $ 16,526 $(15,634,686) $ 4,796,497
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Fiscal 1997--
Sales to unaffiliated
customers................. $ 3,406,819(1) $ 237,659 $ -- $ 3,644,478
Transfers between geographic
areas..................... 163,287 108,935 (272,222) --
-------------- ------------- ------------ ------------
Total sales............... $ 3,570,106 $ 346,594 $ (272,222) $ 3,644,478
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Net loss.................. $(3,951,995) $ (173,652) $ 3,359 $ (4,122,288)
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Identifiable assets......... $24,220,836 $ 2,082,406 $(17,330,287) $ 8,972,955
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Fiscal 1996--
Sales to unaffiliated
customers................. $ 3,205,931(1) $ 372,305 $ -- $ 3,578,236
Transfers between geographic
areas..................... 331,256 148,252 (479,508) --
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Total sales............... $ 3,537,187 $ 520,557 $ (479,508) $ 3,578,236
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Net loss.................. $(7,457,389) $ (8,075) $ (353,355) $ (7,818,819)
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
Identifiable assets......... $21,410,548 $ 2,306,438 $(15,751,994) $ 7,964,992
-------------- ------------- ------------ ------------
-------------- ------------- ------------ ------------
- - ------------------------
(1) Domestic operations included approximately $876,251, $2,674,524 and
$2,636,264 of export sales in 1998, 1997 and 1996, respectively.
F-17
MEDIA LOGIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(11) QUARTERLY DATA (UNAUDITED)
QUARTER ENDED
----------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 TOTAL
------------- ------------- ------------- ------------- -------------
(AS RESTATED)(1)
FISCAL 1998--
Net sales........................... $ 332,569 $ 435,057 $ 200,749 $ 402,294 $ 1,370,669
Gross profit........................ 87,128 189,206 63,931 35,595 375,860
Loss from operations................ (1,089,481) (595,361) (860,103) (1,340,930) (3,885,875)
Net loss............................ $ (1,302,000) $ (796,630) $ (1,075,117) $ (1,439,683) $ (4,613,430)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Loss per share...................... $ (.21) $ (.11) $ (.13) $ (.13)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
FISCAL 1997--
Net sales........................... $ 848,549 $ 1,226,884 $ 897,376 $ 671,669 $ 3,644,478
Gross profit........................ 401,457 396,451 157,841 242,546 1,198,295
Loss from operations................ (1,150,986) (841,283) (1,189,060) (1,024,846) (4,206,175)
Net loss............................ $ (1,122,727) $ (848,710) $ (1,187,787) $ (963,064) $ (4,122,288)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Loss per share...................... $ (.18) $ (.14) $ (.19) $ (.15)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
FISCAL 1996--
Net sales........................... $ 666,984 $ 701,363 $ 1,070,407 $ 1,139,482 $ 3,578,236
Gross profit........................ 99,853 157,952 318,243 201,179 777,227
Loss from operations................ (1,922,599) (1,680,749) (1,830,527) (2,466,428) (7,900,303)
Net loss............................ $ (1,898,469) $ (1,664,664) $ (1,781,884) $ (2,473,802) $ (7,818,819)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Loss per share...................... $ (.38) $ (.33) $ (.29) $ (.40)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
- - ------------------------
(1) In June 1998, the Company restated its December 31, 1997 quarterly financial
statements. The restatement reflects the reversal of certain product sales
recorded in the third quarter where the product was subsequently returned
and payment was not received. The restatement reduced revenue, increased net
loss and net loss per share for the third quarter and nine months ended
December 31, 1997 by $250,000, $125,000 and $.02, respectively.
F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY SCHEDULE
To Media Logic, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Media Logic, Inc. and subsidiaries and
have issued our qualified report thereon dated May 22, 1998. Our audits were
made for the purpose of forming an opinion on those consolidated financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
May 22, 1998
S-1
SCHEDULE II
MEDIA LOGIC, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
BALANCE, CHARGED BALANCE,
BEGINNING TO COSTS AND END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
---------- ------------ ----------- ----------
YEAR ENDED MARCH 31, 1998:
Deducted from asset accounts--
Allowance for doubtful accounts............................ $ 62,000 $ -- $ 56,000 $ 6,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
Warranty reserve........................................... $ 120,000 $ -- $ 80,000 $ 40,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
YEAR ENDED MARCH 31, 1997:
Deducted from asset accounts-
Allowance for doubtful accounts............................ $ 471,000 $ 220,000 $ 629,000 $ 62,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
Warranty reserve........................................... $ 120,000 $ -- $ -- $ 120,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
YEAR ENDED MARCH 31, 1996:
Deducted from asset accounts--
Allowance for doubtful accounts............................ $ 557,000 $ 173,000 $ 259,000 $ 471,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
Warranty reserve........................................... $ 120,000 $ -- $ -- $ 120,000
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
S-2
EXHIBIT 10.5
MEDIA LOGIC, INC.
310 South Street
Plainville, MA 02762
508-695-2006
March 12, 1998
Mr. William E. Davis, Jr.
11 Dartmouth Avenue
Needham, MA 02194
Dear Bill,
This letter sets forth the terms and conditions for your separation from
Media Logic, Inc. (the "Company") and your cooperation in the transition to a
new Chief Executive Officer next month.
Notwithstanding any provisions of your employment agreement dated September
30, 1994, as amended by the First Amendment thereto dated April 1, 1995, or your
stock option agreements to the contrary:
1. Your last day as an employee of the Company will be Tuesday, March 31, 1998,
unless your successor as Chief Executive Officer requests an earlier date
after the commencement of his employment. You will be paid through the end
of March in any event.
2. By accepting this letter, you are submitting your resignation as President
and Chief Executive Officer, as well as Director, effective upon the date of
commencement of employment of your successor as Chief Executive Officer.
3. On the assumption that the Company successfully completes a further round of
financing (unless the Board determines that no such additional financing in
the near term is required), you will be paid as severance an aggregate
amount equal to six months of your current salary, payable in nine equal
monthly installments on the first payroll date in each month, commencing
with April 1998 and ending with December 1998. Such payments will be subject
to required withholdings.
4. During such nine-month period, the Company will provide you with continued
health insurance coverage at Company expense. You will receive no other
non-salary benefits during that period. Should you enter into other
employment prior to the expiration of the nine-month period, health benefits
shall terminate on the date of such employment.
5. With respect to your stock options, you will have until March 31, 1999 to
exercise those of your options which are currently vested, namely, options
to purchase an aggregate of 178,000 shares of the Company's common stock.
The remainder of your options, which are not vested on the date hereof, will
not vest but will be canceled upon the effective date of your resignation
under Paragraph 2 above.
6. Until the end of the period in Paragraph 3 that you are receiving severance
payments, you will cooperate with and lend assistance to the Company in
connection with transition and financing matters, as requested by the
then-serving Chief Executive Officer and without additional compensation,
subject to your reasonable requirements in connection with your other
business and employment activities during that period.
If you find the foregoing provisions to be acceptable, please so indicate by
signing and returning a copy of this letter, whereupon your Employment
Agreement, as previously amended, and your stock option agreement will be
modified so as to give effect to such provisions.
Very truly yours,
MEDIA LOGIC, INC.
By: /s/ JOSEPH L. MITCHELL
----------------------------------
Joseph L. Mitchell
DIRECTOR DULY AUTHORIZED
AGREED:
/s/ WILLIAM E. DAVIS
- - ----------------------------------------
William E. Davis