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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 0-9220
METATEC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1647405
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
7001 Metatec Boulevard
Dublin, Ohio 43017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (614) 761-2000
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports 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 of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the Registrant's most recently completed second fiscal
quarter was as follows: $1,156,510 (voting common equity); $ -0- (non-voting
common equity).
On March 7, 2003, the Registrant had 6,536,113 Common Shares outstanding,
which is the Registrant's only class of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 15, 2003, which proxy statement will be filed
with the Securities and Exchange Commission within 120 days of December 31,
2002, are incorporated by reference into Part III, Items 10, 11, 12, and 13 of
this Annual Report on Form 10-K.
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METATEC INTERNATIONAL, INC.
FORM 10-K
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this
Form 10-K of Metatec International, Inc. (the "Company") or incorporated herein
by reference, including, without limitation, statements regarding the Company's
future financial position, business strategy, budgets, projected costs, goals
and plans and objectives of management for future operations, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "project," "believe" or "continue"
or the negative thereof or variations thereon or similar terminology.
Forward-looking statements speak only as the date the statements were made.
Although the Company believes that the expectations reflected in forward-looking
statements have a reasonable basis, it can give no assurance that these
expectations will prove to be correct. Forward-looking statements are subject to
risks and uncertainties that could cause actual events or results to differ
materially from those expressed in or implied by the statements. For a
discussion of the most significant risks and uncertainties that could cause the
Company's actual results to differ materially from those projected, see Item
7--Forward-Looking Statements; Risk Factors Affecting Future Results. Except to
the limited extent required by applicable law, the Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Metatec International, Inc. ("Metatec" or the "Company") provides
technology driven supply chain solutions that enable companies to streamline the
process of delivering products and information to market, increase efficiencies
and reduce costs. Metatec assists its customers with a wide range of services,
from preparing their products for market to delivering their finished products
into the distribution channel or directly to the end-users. The Company's
solutions are built on a solid technology foundation that includes both
customized system integration and a web-based reporting and tracking tool that
makes real-time information easily accessible. Technologies include CD-ROM
(compact disc-read only memory) and DVD (digital versatile disc) manufacturing
services. Metatec maintains operations in Dublin, Ohio.
Since its inception, Metatec has been recognized as a high quality provider
of CD-ROM and DVD manufacturing and packaging services. The Company is
considered a pioneer in optical disc technology, being one of the earliest
companies to help U.S. businesses utilize the vast data storage capacity of
optical media. The Company's core business has been its optical disc
manufacturing business. In recent years, the Company has expanded its core
business offering by providing an expanded set of packaging and fulfillment
services to its customers. More recently, and in response to both market
conditions and customer need, the Company is transitioning into a provider of
supply chain solutions while continuing to provide its core CD-ROM and DVD
manufacturing capabilities as a component of the supply chain. For supply chain
customers, the Company can provide support for the procurement of raw materials
and packaging, warehousing, fulfillment, inventory management and returns
management. These services are managed and integrated by extensive information
technology that gives customers visibility into the supply chain to track the
flow of information and product from raw material through delivery.
The Company's information technology infrastructure integrates the systems
and applications of industry standard technology providers. These partnerships
allow for a reliable, end-to-end system for information integration and
exchange. The Company offers customized solution design services for customers
to electronically link information exchange and process flow. Additionally, the
Company's web-based tool, Metatec Exchange, is linked directly to the Company's
order entry, production, and warehouse management systems providing real-time
information about orders, inventory, and shipping status in a secure, online
environment.
1
In September 2002, the Company sold its European disc manufacturing
business to Nimbus, a Netherlands-based private investment group. In January
2003, the Company sold its electronic software delivery business, known as
Metatec Express, to Digital River, Inc., a U.S. company that provides e-commerce
services to businesses. These sales allow Metatec to concentrate on growing its
business from the Company's facility in Dublin, Ohio. The Dublin facility has
served as Metatec's primary business location since the Company's inception and
is centrally located to major population centers.
Prior to May 1999, the registrant was Metatec Corporation, a Florida
corporation that was incorporated on September 9, 1976. At the annual meeting of
shareholders in April 1999, the shareholders of Metatec Corporation approved a
proposal to change the registrant's state of incorporation from Florida to Ohio
through a merger of Metatec Corporation with and into its wholly owned
subsidiary Metatec International, Inc., an Ohio corporation which was
incorporated on March 8, 1999. The merger of Metatec Corporation into Metatec
International, Inc. became effective in April 1999. At that time, the registrant
became an Ohio corporation and its name changed to Metatec International, Inc.
The term "Company" includes Metatec Corporation as the predecessor to Metatec
International, Inc.
FINANCIAL INFORMATION ON INDUSTRY SEGMENTS
Financial information on industry segments as required by Item 101(b) of
Regulation S-K is set forth in Note 10 of the "Notes to the Consolidated
Financial Statements," which Note is part of the financial statements contained
in Item 8 of this Form 10-K, which Note is incorporated herein by reference.
INDUSTRY OVERVIEW
With increased competition, companies are seeking better methods to manage
costs and speed products to market. These events have given rise to a focus on
outsourcing critical non-core functions, such as supply chain management.
Companies are looking for help in compressing the supply chain with
single-source providers of services. The Company's history of providing CD-ROM
manufacturing, packaging and fulfillment services to software and other
companies presents an opportunity for growing the Company's business with a
focus on providing supply chain solutions. The Company is leveraging its
existing customer base using Metatec's CD-ROM manufacturing services by
expanding the breadth of services provided. In some cases, the Company does not
manufacture optical discs as part of the offering because the customer does not
require optical discs or makes its product available through a different medium,
such as interactive game cartridges.
While use of optical discs is still a popular method for the distribution
of business information, the commoditization of the market along with the
continued development of Internet technology has significantly impacted the
potential for revenue growth in optical disc technology. The Company will
continue to offer optical disc manufacturing services as a component of the
supply chain solution but will devote resources to developing and marketing
supply chain solutions to markets with and without a need for optical disc
technology.
PRINCIPAL PRODUCTS AND SERVICES
The Company provides technology driven supply chain solutions to help
customers speed products to market. The Company's primary revenue producing
component of the supply chain is CD-ROM and DVD manufacturing. Customers utilize
disc technology to distribute a wide array of time-sensitive information. Disc
technology is economical when compared to more traditional forms of
distribution, such as printing, and offers substantial capacity for large
quantities of information. Common uses of disc technology include software
distribution, catalogs, digital imagery and information containing
code-intensive audio, video and graphic presentations.
The supply chain solution supports both the business-to-business and retail
marketplaces. The Company markets its services through a direct sales force
which targets customers who generally have time-sensitive and recurring product
and information distribution requirements.
The Company provides supply chain solutions that include raw material
procurement through distribution into the channel and direct-to-user product
shipping. The Company has a 151,000 square foot distribution center
2
at its Dublin, Ohio location to support its supply chain offering. The continued
development and support of supply chain solutions will be the foundation for the
future growth of the Company.
The Company offers its customers direct visibility into their supply chain
through Metatec Exchange. Customers can access a secure online area via the
Internet to check packaging, monitor job progress through Metatec's
manufacturing plant and manage inventory levels, among other capabilities.
Metatec Exchange decreases communication time and enhances the exchange of
information between Metatec and its customers. Additionally, customers can
benefit from seamless information exchange with customized system integration
into their back office systems.
The Company's Dublin, Ohio facility is ISO-9000 certified. The ISO-9000
quality system certification means that the Company's manufacturing facilities
meet worldwide standards for quality practices. The Company utilizes certain
patents and technology in its manufacturing activities which it licenses from
third parties and which the Company believes to be generally available to other
manufacturers.
The Company does not believe that compliance with federal, state, and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has had or will have a material effect upon the capital
expenditures, earnings, or competitive position of the Company. The Company does
not anticipate any material capital expenditures for environmental control
facilities for 2003.
MARKETING
The Company markets it products and services through a direct sales force.
These associates are responsible for maintaining relationships with existing
customers, revenue growth within existing customers and developing new business
relationships. The associates are supported by customer service representatives
who are responsible for managing day-to-day relationships with customers and
developing in-depth knowledge of customers' businesses and industries. The
Company also makes use of a variety of marketing communications initiatives such
as awareness programs through e-marketing, case studies, positioning papers and
sales collateral materials; sales lead generation programs; news media
relations; a corporate web site and webinars; and occasional involvement in
targeted trades shows and participation in industry panels and appearances.
COMPETITION
The Company has a number of competitors, many of which are larger and have
greater financial resources than the Company. The Company believes that the
principal competitive factors in the supply chain solutions marketplace consist
of service, quality, price, technology, and industry expertise and increasingly
is measured by the ability to create overall value for the customer. The Company
believes that it competes favorably with respect to these factors in the supply
chain solutions arena and continues to develop its offering to differentiate
itself from the competition.
The Company differentiates itself from its competitors by providing an
integrated supply chain solution that includes scalability and flexibility,
personalized customer service, customized solution design, supply chain
visibility and proficiency within certain markets where the Company has
demonstrated past success.
EMPLOYEES
The Company employed approximately 247 persons as of February 28, 2003.
Approximately 170 employees are directly involved in the manufacturing and
distribution process, and the remainder are involved in sales, administration,
and support. The Company believes that its relations with its employees is good.
ITEM 2. PROPERTIES
The Company owns a 346,000 square foot office, manufacturing, and
distribution and fulfillment facility situated on approximately 25 acres located
at 7001 Metatec Boulevard, Dublin, Ohio. The Company's principal executive
offices are located at this facility. This facility also includes sales,
administration, and customer support
3
operations. A first mortgage on the real estate and improvements at this
location secures the Company's long-term real estate debt.
ITEM 3. LEGAL PROCEEDINGS
The Company and numerous other parties have been named as defendants in a
court proceeding filed in the United States District Court for the District of
Arizona by the plaintiff, Lemelson Medical, Education & Research Foundation,
Limited Partnership. In that court proceeding, the plaintiff is alleging that
the defendants have infringed upon certain patents that allegedly are
enforceable by the plaintiff. This court proceeding has been stayed pending the
outcome of parallel litigation in Nevada that is challenging the validity of
plaintiff's patents. At this time, the Company is unable to determine the
likelihood of the outcome of either the Arizona or Nevada proceedings or whether
an unfavorable outcome will be material to the Company.
The Company is involved in various legal claims arising from the normal
course of business. While the ultimate liability, if any, from these proceedings
is presently indeterminable, in the opinion of management, these matters should
not have a material adverse effect on the consolidated financial statements of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective ages and present
positions with the Company are as follows:
OFFICERS AGE PRESENT POSITION(S) WITH THE COMPANY
-------- --- ------------------------------------
Christopher A. Munro 42 President and Chief Executive Officer
Gary W. Qualmann 51 Chief Financial Officer and Treasurer
Julia A. Fratianne 40 Vice President, Finance and Secretary
Melodie A. Gee 46 Vice President and General Manager, Manufacturing
Services
Kathryn A. Keane 40 Vice President, Supply Chain and Technology Solutions
Deanna D. Stewart 44 Vice President, Strategic Customer Development
Mr. Munro has been President and Chief Executive Officer of the Company
since December 2001, and prior to that was Chief Operating Officer since joining
the Company in January 2001. Prior to joining the Company, Mr. Munro held the
position of senior vice president of strategy and development for Exel
Logistics, a worldwide supply chain company with global headquarters in London
UK. Mr. Munro was employed by Exel Logistics for over twenty years.
Mr. Qualmann has been Chief Financial Officer of the Company since joining
the Company in February 2002 and has been Treasurer since May 2002. Mr. Qualmann
also provided financial consulting services to the Company from October, 2001
until joining the Company. From March 1996 until June 2001, Mr. Qualmann was
chief financial officer, treasurer, secretary and director of MindLeaders.com,
Inc., an e-learning company based in Columbus, Ohio. From May 1988 until July
1995, Mr. Qualmann served as executive vice president and chief financial
officer of Red Roof Inns, Inc., a lodging company based in Hilliard, Ohio.
Ms. Fratianne has been Vice President, Finance and Secretary of the Company
since May 1998, and has held various accounting and finance positions with the
Company since 1987.
Ms. Gee has been Vice President and General Manager, Manufacturing Services
of the Company since December 2002. She was elected as an executive officer in
February 2003. Ms. Gee has held various management positions with the Company
since 1993.
4
Ms. Keane has been Vice President, Supply Chain and Technology Solutions
since joining the Company in October 2002. She was elected as an executive
officer in February 2003. From August 2001 until joining the Company, Ms. Keane
was director, distribution planning for Limited Logistics Services. From 1993
until April 2001, Ms. Keane was with Borden Foods, formerly a brand-name food
distributor based in Columbus, Ohio, most recently serving as a vice president
of that company.
Ms. Stewart has been Vice President, Strategic Customer Development since
joining the Company in April 2002. She was elected as an executive officer in
February 2003. Prior to joining the Company, Ms. Stewart spent 22 years with
AT&T Corporation in a variety of senior sales, marketing and business management
roles, most recently serving as a vice president of sales of that company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares are currently traded on the Over the Counter
(OTC) Bulletin Board under the symbol META. Prior to April 26, 2002, the Common
Shares were traded on the Nasdaq National Market system. The following table
reflects the range of reported high and low last sales prices for the Common
Shares for the periods indicated.
HIGH LOW
----- -----
For the quarter ended 2002
March 31.................................................. $0.48 $0.23
June 30................................................... $0.38 $0.10
September 30.............................................. $0.30 $0.15
December 31............................................... $0.27 $0.10
For the quarter ended 2001
March 31.................................................. $1.56 $0.81
June 30................................................... $1.32 $0.56
September 30.............................................. $1.20 $0.66
December 31............................................... $0.79 $0.20
As of March 7, 2003 there were 3,785 holders of record of the Common
Shares, and the last sales price per share on that date, as reported by the Over
the Counter (OTC) Bulletin Board, was $0.08.
The Company has never paid cash dividends on its Common Shares, and it does
not expect to pay cash dividends in the foreseeable future. The terms of the
Company's credit facilities prohibit it from paying cash dividends or making any
other distributions to shareholders without the prior consent of the
administrative agent of these credit facilities.
5
ITEM 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Net Sales............... $ 49,694,924 $ 67,513,954 $ 92,856,253 $107,644,368 $ 76,630,600
Earnings (loss) from
continuing
operations............ $ (720,928) $(26,477,364) $(17,990,163) $ (3,025,952) $ 920,395
Net earnings (loss)..... $ (2,271,829) $(29,973,839) $(17,532,618) $ (2,846,290) $ 1,422,769
Earnings (loss) from
continuing operations
per common share:
Basic and diluted..... $ (0.11) $ (4.32) $ (2.96) $ (0.50) $ 0.15
Earnings (loss) per
common share:
Basic and diluted..... $ (0.35) $ (4.88) $ (2.88) $ (0.47) $ 0.23
Weighted average number
of common shares
outstanding:
Basic................. 6,515,557 6,136,002 6,085,426 6,074,879 6,058,414
Diluted............... 6,515,557 6,136,002 6,085,426 6,074,879 6,115,084
Total assets............ $ 33,992,586 $ 45,455,840 $ 75,429,123 $109,395,967 $103,615,514
Long-term liabilities... $ 36,524,140 $ 39,395,641 $ 35,920,386 $ 47,382,793 $ 40,917,569
Shareholders'
equity(deficiency).... $(10,502,554) $ (9,145,080) $ 20,171,877 $ 37,862,192 $ 41,949,897
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OF THE COMPANY
The Company provides technology driven supply chain solutions that enable
its customers to streamline the process of delivering their products and
information to market, increase efficiencies and reduce costs. The Company
assists its customers with a wide range of services, from preparing their
products for market to delivering their finished products into the distribution
channel or directly to the end-users. The Company's solutions are built on a
solid technology foundation that includes both customized system integration and
a web-based reporting and tracking tool that makes real-time information easily
accessible. Technologies include CD-ROM and DVD manufacturing services and
secure Internet-based software distribution services. The Company's core CD-ROM
manufacturing, packaging and distribution capabilities serve as a component of
the supply chain. The Company's manufacturing and distribution facilities are
located in Dublin, Ohio.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
appropriate application of accounting policies, many of which require the
Company's management to make estimates and assumptions about future events and
their impact on amounts reported in the Company's financial statements and
related notes. Since future events and their impact cannot be determined with
certainty, actual results will inevitably differ from management's estimates.
Such differences could be material to the Company's financial statements.
Management believes that its application of accounting policies, and the
estimates inherently required therein, are reasonable. These accounting policies
and estimates are constantly reevaluated, and adjustments are made when facts
and circumstances dictate a change.
6
The Company's accounting policies are more fully described in Note 1 to the
consolidated financial statements included elsewhere in this Form 10-K (see Item
8 herein). Described below are certain critical accounting policies which
management believes are important to emphasize. These critical accounting
policies are not intended to be a comprehensive list of all the Company's
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States of America, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
other available alternatives would not produce a materially different result.
Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, management completes an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, as a result of such calculation.
Management believes that the long-lived assets' carrying values and useful lives
are appropriate.
Allowance for doubtful accounts. Management has attempted to reserve for
expected credit losses based on the Company's past experience with similar
accounts receivable, and it believes that the Company's reserves are adequate.
It is possible, however, that the accuracy of management's estimation process
could be materially impacted as the composition of this pool of accounts
receivable changes over time. Management periodically reviews and modifies the
estimation process as changes to the composition of this pool require.
Litigation. The Company and its legal counsel evaluate litigation and
review the likelihood of an outcome and the resulting materiality to the
Company. The Company is involved in various legal claims arising from the normal
course of its business. While the ultimate liability, if any, from these
proceedings is presently indeterminable, in the opinion of management, these
matters should not have a material adverse effect on the consolidated financial
statements of the Company.
Income taxes. The Company has a history of unprofitable operations. These
losses generated a sizeable federal tax net operating loss, or NOL, carryforward
of as of December 31, 2002.
Accounting principles generally accepted in the United States of America
require the Company to record a valuation allowance against the deferred tax
asset associated with this NOL if it is "more likely than not" that the Company
will not be able to utilize the NOL to offset future taxes. Due to the size of
the NOL carryforward in relation to the Company's history of unprofitable
operations, management has not recognized any net deferred tax asset in the
Company's financial statements.
In the future the Company could achieve levels of profitability which could
cause management to conclude that it is more likely than not that the Company
will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, the Company would record the estimated net realizable value of the
deferred tax asset at that time and would then provide for income taxes at a
rate equal to the Company's combined federal and state effective rates.
RECENT EVENTS
On February 18, 2003, the Company entered into an agreement with a licensor
of a DVD patent, which agreement provides for a deferred payment schedule and,
as a result, $137,000 of accrued royalties has been reclassified to other
long-term liabilities as of December 31, 2002.
On January 14, 2003, the Company sold its Internet-based electronic
software distribution ("ESD") business to Digital River, Inc. ("Digital River"),
a global e-commerce outsource solutions provider based in Minneapolis,
Minnesota. Under the terms of the agreement, Digital River acquired certain
assets and assumed certain liabilities associated with the Company's ESD
business, and the Company received approximately $1,100,000 in cash and notes,
subject to adjustment based on an earn out computation. The Company will
recognize a gain on sale of approximately $450,000 (unaudited) during the first
quarter of 2003.
Pursuant to an agreement dated as of September 30, 2002, the Company sold
its European CD-ROM manufacturing operations in Breda, The Netherlands, to
Nimbus, a Netherlands-based private investment group. The transaction was
structured as a sale of all of the shares of Metatec's European subsidiary to
Nimbus. The
7
shares were sold in exchange for the assumption of the European subsidiary's
liabilities as of August 31, 2002. The Company accounted for these operations as
discontinued operations and recognized a non-cash loss of $2,249,000 associated
with this sale in the third quarter of 2002.
RESULTS OF OPERATIONS -- 2002 COMPARED TO 2001
Net sales in 2002 were $49,695,000, a decrease of $17,819,000, or 26% from
2001. This decrease was due to several factors. First, the closing of the
Company's Milpitas, California ("Silicon Valley") plant and a restructuring of
the Dublin, Ohio operations reduced manufacturing capacity and eliminated
certain customers. Second, pricing of the Company's CD-ROM products and services
declined consistent with industry-wide excess manufacturing capacity, a trend
the Company anticipates will continue. Finally, demand for the Company's CD-ROM
products and services declined due to several factors, including a decline in
general economic conditions, the continued increase in customers using on-line
or electronic methods to distribute information, and the continued maturation of
the CD-ROM market.
Gross margin was 34% of net sales for 2002 and 26% of net sales for 2001.
The 2001 gross margins were significantly impacted by the severe reduction in
sales from the Company's Silicon Valley plant (the plant was closed during the
fourth quarter of 2001) without a corresponding reduction in costs associated
with that plant, and the restructuring of the Dublin operations in 2001.
However, the Company believes that the significant improvement in gross margins
in the period-to-period comparison also reflects management's focus on higher-
margin customers in certain industries and the elimination of certain
lower-margin customers.
Selling, general and administrative expenses ("SG&A") decreased to
$15,157,000, or 30% of net sales, for 2002 as compared to $22,642,000, or 34% of
net sales, for 2001. The improvement in the SG&A expense percentage, as well as
the reduction in SG&A expenses, for the period-to-period comparison was
primarily attributable to the restructuring and workforce reductions and the
closure of the Silicon Valley location in the fourth quarter of 2001.
At each balance sheet date, a determination is made by management to
ascertain whether any long-lived assets have been impaired based upon several
criteria, including, but not limited to, revenue trends, undiscounted operating
cash flows, and other operating factors. At the end of 2002, management
evaluated these criteria and determined that no impairment was noted. At the end
of 2001, management evaluated these criteria and determined that certain
goodwill and long-lived assets associated with the Company's Dublin, Ohio and
Breda, The Netherlands operations were impaired. Accordingly, in the fourth
quarter of 2001, the Company recorded a $13,011,000 write-down of the carrying
value of these impaired assets based on the discounted cash flows of the
operations. In addition the Company made the decision to discontinue its
implementation of an ERP system, which resulted in a charge of $2,455,000 during
2001. At December 31, 2001, there is no remaining goodwill on the balance sheet.
Restructuring expenses of $402,000 were incurred during 2002, compared to
restructuring expenses of $2,041,000 in 2001. The 2002 restructuring expenses
consisted of severance and termination benefits related to a fourth quarter
workforce reduction. The 2001 restructuring expenses consisted primarily of
severance and termination benefits related to a U.S. workforce reduction of
approximately 42% and separation benefits for an executive as well as
restructuring costs related to the closing of two remote sales offices. In
addition, restructuring charges of $3,068,000 were incurred during 2001 related
to the closure of the Company's Silicon Valley manufacturing facility. In
connection with this restructuring, the Company completed the sale of its
manufacturing assets associated with the Silicon Valley facility and terminated
the lease for this facility.
Investment income was $10,000 for 2002 as compared to $37,000 for 2001. The
decrease in investment income was a result of lower cash and cash equivalent
balances. Interest expense was $2,919,000 for 2002 as compared to $3,471,000 for
2001. The decrease in interest expense was the result of decreased borrowings
under the Company's credit facilities, as well as decreases in the interest
rate.
An income tax benefit of $875,000 was realized in 2002 for an effective tax
benefit of 55% due to the Job Creation and Worker Assistance Act of 2002. This
law extended the carry back period from two years to five years for net
operating losses arising in the 2001 and 2002 taxable years. The income tax
expense was $42,000 in
8
2001, or an effective tax benefit of .16% due to the Company recording a full
valuation allowance on all net tax assets.
The net loss from continuing operations for 2002 was $721,000, or $(.11)
from continuing operations per basic and diluted common share, as compared to a
net loss from continuing operations for 2001 of $26,477,000, or $(4.32) from
continuing operations per basic and diluted common share. Including discontinued
operations, discussed below, the Company had a net loss of $2,272,000 for 2002,
or $(.35) per basic and diluted common share, as compared to a net loss for 2001
of $29,974,000, or $(4.88) per basic and diluted common share.
Discontinued Operations
Pursuant to an agreement dated as of September 30, 2002, the Company sold
its European CD-ROM manufacturing operations in Breda, The Netherlands, to
Nimbus, a Netherlands-based private investment group. The transaction was
structured as a sale of all of the shares of Metatec's European subsidiary to
Nimbus. The shares were sold in exchange for the assumption of the European
subsidiary's liabilities as of August 31, 2002. The Company accounted for these
operations as discontinued operations and recognized a non-cash charge of
$2,249,000 associated with this sale during the third quarter of 2002.
European operations had revenues for the year ended December 31, 2002,
which consisted of the nine months prior to the sale, of $6,286,000, as compared
to $9,768,000 for the full year in 2001.
Pre-tax income for the Company's European operations for the year ended
December 31, 2002, which consisted of the nine months prior to the sale, was
$700,000, as compared to a $3,496,000 pre-tax loss for the full year in 2001.
RESULTS OF OPERATIONS -- 2001 COMPARED TO 2000
Net sales in 2001 were $67,514,000, a decrease of $25,342,000, or 27% from
2000. This decrease was due to several factors. First, the pricing for CD-ROM
products and services continued to decline or remained at low levels
industry-wide due to excess manufacturing capacity. Second, the demand for the
Company's CD-ROM products and services declined due to several factors,
including a decline in general economic conditions compounded by the events of
September 11 2001, the continued increase in customers using on-line or
electronic methods to distribute information, and the continued maturation of
the CD-ROM market. Finally, management made a decision in 2001 to reduce the
number of the Company's low-margin disc manufacturing customers.
Gross margin was 26% of net sales for 2001 and 29% of net sales for 2000.
This reduction was primarily caused by the reduced utilization of the Company's
manufacturing capacity and the continued decline of pricing for CD-ROM products
and services, as well as the severe reduction in sales from the Company's
Silicon Valley plant (the plant was closed during the fourth quarter of 2001)
without a corresponding reduction in costs associated with that plant.
Selling, general and administrative expenses ("SG&A") decreased to
$22,642,000, or 34% of net sales, for 2001, as compared to $24,998,000, or 27%
of net sales, for 2000. The SG&A expense reduction in dollars was primarily
attributed to the restructuring and workforce reductions, which occurred in the
first, third, and fourth quarters of 2001, although the Company's decreased
sales caused SG&A expenses to increase as a percentage of net sales.
At each balance sheet date, a determination is made by management to
ascertain whether goodwill or any long-lived assets have been impaired based
upon several criteria, including, but not limited to, revenue trends,
undiscounted operating cash flows, and other operating factors. At the end of
2001, management evaluated these criteria and determined that certain goodwill
and long-lived assets associated with the Company's Dublin, Ohio and Breda, The
Netherlands operations, were impaired. Accordingly, in the fourth quarter of
2001, the Company recorded a $13,011,000 write-down of the carrying value of
these impaired assets based on the discounted cash flows of the operations. In
addition the Company made the decision to discontinue its implementation of an
ERP system, which resulted in a charge of $2,455,000 during 2001. In 2000, the
Company recorded a $15,638,000 writedown of the carrying value of impaired
assets based on the discounted cash flows of the operations.
9
Restructuring expenses of $2,041,000 were incurred during 2001, as compared
to restructuring expenses of $475,000 in 2000. The 2001 restructuring expenses
consisted primarily of severance and termination benefits related to a U.S. and
European workforce reduction of approximately 42% and separation benefits for an
executive as well as restructuring costs related to the closing of two sales
offices. The workforce reduction was accomplished through attrition, unfilled
vacancies, and layoffs of temporary and some full time employees.
Additional restructuring charges of $3,068,000 were incurred during the
fourth quarter of 2001, related to the closure of the Company's Silicon Valley
manufacturing facility. In connection with this restructuring, the Company
completed the sale of its manufacturing assets associated with the Silicon
Valley facility and terminated the lease for this facility.
Investment income was $37,000 for 2001 as compared to $26,000 for 2000. The
increase in investment income was a result of higher cash and cash equivalent
balances. Interest expense was $3,471,000 for 2001 as compared to $4,235,000 for
2000. The decrease in interest expense was the result of decreased borrowings
under the Company's credit facilities, as well as decreases in the interest
rate.
Income tax of $42,000 was incurred in 2001, or an effective tax rate of
..16% due to the Company recording a full valuation allowance on all net tax
assets. The income tax benefit was $787,000 in 2000, or an effective tax benefit
of 4.5%.
The net loss from continuing operations for 2001 was $26,477,000, or
$(4.32) from continuing operations per basic and diluted common share, as
compared to a net loss from continuing operations for 2000 of $17,990,000, or
$(2.96) from continuing operations per basic and diluted common share. Including
discontinued operations, as discussed above, the Company had a net loss of
$29,974,000 for 2001, or $(4.88) per basic and diluted common share, as compared
to a net loss for 2000 of $17,533,000, or $(2.88) per basic and diluted common
share.
IMPACT OF INFLATION
Although inflation has an effect on salaries, employee benefits and other
operating expenses, after considering general inflationary trends, the Company's
operations were not significantly affected by inflation in 2002.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," will be effective for
fiscal years beginning after May 15, 2002 (December 31, 2003 for the Company).
This Statement rescinds FASB Statements No. 4 and 64 that dealt with issues
relating to the extinguishment of debt. This Statement also rescinds FASB
Statement No. 44 that dealt with intangible assets of motor carriers. This
Statement modifies SFAS No. 13, "Accounting for Leases," so that certain capital
lease modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, this Statement identifies amendments that should
have been made to previously existing pronouncements and formally amends the
appropriate pronouncements. The adoption of SFAS No. 145 will not have a
significant effect on the Company's results of operations or its financial
position.
SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal
Activities" will be effective for exit or disposal activities that are initiated
after December 31, 2002. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between this Statement and Issue 94-3 is that this Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
adoption of SFAS No. 146 will not have a material impact on the Company's
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-
10
Based Compensation" ("SFAS 123") to provide alternative methods for an entity
that voluntarily changes to the fair value based method of accounting for
stock-based compensation, amends the disclosure provisions of SFAS 123 and
amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure
about those effects in interim financial information. The transition guidance
and annual disclosure provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002. In addition, this Statement amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002 and
are included in the notes to these consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ('FIN 45'),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for the current fiscal year and were not material in relation to the Company's
2002 consolidated financial statements. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The Company has not assessed what impact, if any, the
adoption of the initial recognition and measurement provisions of FIN 45 will
have upon its financial condition or results of operations.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest entity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The initial adoption of this accounting
pronouncement will not have a material impact on the Company's consolidated
financial statements.
FINANCIAL CONDITION -- LIQUIDITY AND CAPITAL RESOURCES
Source of Liquidity
The Company's principal source of liquidity in 2002 was cash flows
generated from operations. Cash flow from operating activities was $5,277,000,
$4,735,000, and $14,946,000 for 2002, 2001 and 2000, respectively. The Company
anticipates that cash flows generated from operations will continue to be its
principal source of liquidity during 2003.
Bank Financing Matters
The Company has a term loan facility and a revolving loan facility
(collectively, the "Credit Facility") with its banks. The borrowing base of the
revolving loan facility is limited to the lesser of (i) $10,000,000, or (ii) the
sum of (A) 80% of eligible domestic accounts receivable, plus (B) 30% of
eligible domestic inventory, plus (C) 90% of domestic machinery and equipment.
The borrowing base is further reduced by the aggregate amount of the Company's
outstanding letters of credit. As of December 31, 2002, $8,610,000 and
$3,610,000 were outstanding under the term loan facility and revolving loan
facility, respectively, and the Company had approximately $3,695,000 available
to draw on its revolving loan facility.
The Credit Facilities mature on April 1, 2004. Quarterly principal payments
are required for the term loan facility beginning in June 2002 if cashflows
exceed certain specified targets over designated periods of time. The Credit
Facilities are secured by a first lien on all non-real estate business assets of
the Company and a pledge of
11
the stock of the Company's subsidiaries. The Company is required to comply with
the financial and other covenants contained in the loan agreement for the Credit
Facilities. As of December 31, 2002, the Company was in compliance with these
covenants. The Credit Facilities accrue interest at a rate equal to 3.5% in
excess of the prime rate of the banks. Certain fees are required to be paid to
the banks in connection with the Credit Facilities. The Company expects that it
will be able to negotiate a new borrowing facility prior to April 1, 2004;
however, there can be no assurance that the Company will be able to do so.
The Company has a $19,000,000 term loan facility which was used to
permanently finance the Company's Dublin, Ohio distribution center completed in
1999 and to pay down other bank debt. The loan facility has an outstanding
principal balance of $18,527,886 as of December 31, 2002. This term loan
facility is payable in monthly principal and interest payments based upon a
thirty year amortization schedule, bears interest at a fixed rate of 8.2%, and
matures on September 1, 2009. This loan facility is secured by a first lien on
all real property of the Company and letters of credit in favor of the lender,
in an aggregate amount of $1,650,000.
Other Liquidity Matters
In August 2002, the Company entered into new licensing and other agreements
with one of its CD and DVD patent licensors which, among other things, provides
for a deferred payment schedule for accrued royalties owed by the Company under
prior licensing agreements, and, as a result, $3,470,000 of accrued royalties
were reclassified to other long-term liabilities.
In October 2002, the Company entered into a settlement agreement with
another of its CD patent licensors which provides for a deferred payment
schedule for accrued royalties owed under its licensing agreement and, as a
result, $1,618,000 of accrued royalties were reclassified to other long-term
liabilities. Of this amount, $809,000 may be forgiven in 2006 if the Company
meets certain conditions in the agreement.
The Company and a former landlord of its Silicon Valley facility agreed to
terminate a lease for this facility on January 15, 2002. The lease termination
agreement was effective as of December 31, 2001. The lease termination relieved
the Company of paying approximately $12,200,000 in lease payments due over the
next seven years. In exchange for its agreement to terminate the lease, the
landlord received a $1,500,000 unsecured, non-interest bearing promissory note
(discounted to $1,228,349 at 8.5%) due in four equal installments beginning in
January 2003, approximately $1,100,000 in cash, and 300,000 shares of the
Company's common stock with a fair value of $.30 per share.
Recurring capital needs resulted in the purchase of $487,000 in property,
plant and equipment during 2002, as compared to $1,318,000 in 2001 and
$5,088,000 in 2000.
The Company did not carry any off-balance sheet derivative financial
instruments or have any off-balance sheet financial arrangements at December 31,
2002.
Plan to Improve Liquidity and Financial Condition
The Company had shareholders' deficiency of $10,503,000 as of December 31,
2002, as compared to a shareholders' deficiency of $9,145,000 as of December 31,
2001. The Company's financial condition presents both short-term and long-term
liquidity issues for the Company.
Management is addressing, and has addressed, the short-term liquidity
situation. In response to declining pricing and reduced demand for CD-ROM
products, management is implementing a plan to increase revenues from its supply
chain solution services. In February 2002, management successfully negotiated an
extension of the maturity date of the Company's Credit Facilities to April 2004.
The Company has generated positive cash flows from operations in each of
the last three fiscal years. Management believes that the Company's current
focus on its core business customers and continued cost saving measures will
allow it to generate sufficient cash flows to meet operational needs in 2003.
However, there can be no assurance that such measures will allow the Company to
generate sufficient cash flows in 2003. Furthermore, additional actions will
need to be taken to address the Company's long-term liquidity issues as a result
of the Company's shareholders' deficiency.
12
The loan agreement for the Credit Facilities include financial covenants
which require the Company to meet specified cash flow thresholds over designated
periods of time. There can be no assurance that the Company will be able to meet
these cash flow thresholds over such periods of time. See also "Forward Looking
Statements; Risk Factors Affecting Future Results" which is part of this Item 7
for a further discussion of these and other risk factors which have affected and
in the future could affect the Company's financial performance.
STATEMENT OF MANAGEMENT RESPONSIBILITY
The consolidated financial statements of the Company are the responsibility
of management, and those statements have been prepared in accordance with
accounting principles generally accepted in the United Sates of America. All
available information and management's judgment of current conditions and
circumstances have been reflected. Management accepts full responsibility for
the accuracy, integrity and objectivity of the financial information included in
this report.
To provide reasonable assurance that assets are safeguarded against loss
from unauthorized use or disposition and that accounting records are reliable
for preparing financial statements, management maintains systems of accounting
and internal controls, including written policies and procedures, which are
communicated to all appropriate levels of the Company. Management believes that
the Company's accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
Maintenance of sound internal control by division of responsibilities is
augmented by internal review programs and an Audit Committee of the Board of
Directors. The Audit Committee reviews the scope of the audits performed by the
independent public accountants, Deloitte & Touche LLP, together with their audit
report and any recommendations made by them. The independent accountants have
free access to meet with the Audit Committee and Board of Directors with or
without management representatives present.
Christopher A. Munro
President and
Chief Executive Officer
Gary W. Qualmann
Chief Financial Officer and Treasurer
FORWARD LOOKING STATEMENTS; RISK FACTORS AFFECTING FUTURE RESULTS
Statements contained in this Form 10-K or any other reports or documents
prepared by the Company or made by management of the Company may be
"forward-looking" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are subject to certain risks and
uncertainties that could cause the Company's operating results to differ
materially from those projected. Forward-looking statements include, by way of
example and without limitation, statements concerning plans, objectives, goals,
strategies, future events of performance and underlying assumptions and other
statements, which are other than statements of historical facts, and information
concerning future results of the operations of the Company. Forward-looking
statements may be identified, preceded by, followed by or otherwise include,
without limitation, words such as "believes," "expects," "anticipates,"
"intends," "estimates" or similar expressions. There can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished. The following risk factors, among others, in some cases have
affected and in the future could affect the Company's actual financial
performance.
RISKS ASSOCIATED WITH COMPANY'S FINANCIAL CONDITION
For the years ended December 31, 2002, 2001, and 2000, the Company's net
losses were $2,272,000, $29,974,000, and $17,533,000, respectively. The Company
cannot assure shareholders when, or whether, the Company will become, or remain
profitable. The continued incurrence of losses will have a material adverse
effect on the Company's financial position and ability to continue operations.
13
As of December 31, 2002, the Company had a shareholders' deficiency of
$10,503,000. In the event of any sale or liquidation of the Company or its
assets, there can be no assurance that any value will be realized by the
Company's shareholders.
The Company's loan agreement for the Credit Facilities with its banks
include financial covenants which require the Company to meet specified cash
flow thresholds over designated periods of time. There can be no assurance that
the Company will be able to meet these cash flow thresholds over such periods of
time. The Company's failure to meet these cash flow thresholds is an event of
default under the loan agreement which would allow the banks to accelerate the
payment of the Credit Facilities and to exercise their other rights and remedies
under the loan agreement, including the potential forced sale or liquidation of
the Company or its assets.
The Company's liquidity and its ability to meet its current and long-term
financial obligations as they become due will be dependent upon the Company's
financial performance and its ability to meet the cash flow thresholds required
by the loan agreement. The Company's failure to meet these cash flow thresholds
would have a material adverse effect on the Company's financial position and
ability to continue operations.
PRODUCT CONCENTRATION; DEMAND FOR PRODUCTS
The Company manufactures CD-ROMs for substantially all of its current
customers. Although the Company is implementing a plan to increase revenues from
its supply chain solution services, CD-ROM manufacturing sales are expected to
continue to account for a substantial portion of the Company's revenues for the
foreseeable future.
The Company experienced a material decrease in the number of CD-ROM
manufactured units in 2002 and 2001. This decrease was caused, in part, by a
decline in the demand for the Company's CD-ROM products and services, which
decline was caused primarily by the continued increase in customers using online
and electronic methods to distribute information rather than CD-ROM and the
continued maturation of the market for CD-ROM products. The Company anticipates
that these factors will continue to impact the demand for the Company's CD-ROM
products in 2003, which may cause a further decline in CD-ROM units manufactured
in 2003. The continued decrease in demand for the Company's CD-ROM products
would have a material adverse effect on the Company's revenue and operating
results.
Included in the Company's CD-ROM products and services are audio CDs for
the radio syndication programming services market. Radio syndication sales
declined in 2002 and 2001 due to customers choosing to use CD-Recordable as a
distribution method for smaller size orders, a trend that the Company believes
will continue for the foreseeable future. Due to this change in the distribution
method, along with the maturity of the radio syndication programming services
market and the Company's existing share of sales in that market, the Company
believes that revenues from radio syndication sales will continue to decline for
the foreseeable future.
PRICING
In 2002, the pricing of CD-ROM products and services continued to decline
or remained at low-levels industry-wide due to excess manufacturing capacity, a
trend the Company anticipates will continue into 2003.
In prior years, market growth offset increased manufacturing capacity in
the CD-ROM industry. However, this growth has ceased due to the maturation of
this market. In addition, the Company's pricing of its new products and services
may not in all cases be competitive with the other providers in the marketplace,
and some new products and services may not be profitable.
CHANGES IN GENERAL ECONOMIC OR BUSINESS CONDITIONS
The Company assists its customers with a wide range of services, from
preparing their products for market to delivering their finished products into
the distribution channel or directly to the end-users. Many of these customers
are in industries and businesses that are cyclical in nature and subject to
changes in general economic or business conditions, which can cause the
Company's operating results to reflect this general cyclical pattern.
Accordingly, changes in general economic or business conditions, including any
prolonged or substantial
14
economic downturn, could have a material adverse affect on the Company's
business, results of operations and financial condition.
COMPETITION
The Company faces competition in the information distribution industry from
a number of sources, such as traditional print publishers, distributors of
information, CD-ROM manufacturers, and others. The Company's competitors vary by
market segment and include many companies which are larger, more established,
and have substantially more resources than the Company. The Company does not
benefit from its own patents or proprietary technology, and competition may
increase in the future.
TECHNOLOGICAL CHANGE
The market for information distribution services incorporating optical disc
technology is based upon a sophisticated technology and is subject to rapid
technological change. Current or new competitors may introduce new products,
features or services that could adversely affect the Company's competitive
position. Additionally, there can be no assurance that over time optical disc
technology will not be replaced by another form of information storage and
retrieval technology, such as electronic information services. The Company must
continue to improve its products and related services and develop and
successfully market new products and services in order to remain competitive.
There can be no assurance that it will be able to do so.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company no longer uses derivative financial instruments in its
investment portfolio. During 2001, the Company held forward contracts used to
hedge the net receivable/payable position arising from an intercompany note
between the Company and its European subsidiary. During the fourth quarter of
2001, the Company terminated this forward contract, with the proceeds reducing
the Company's debt to one of its lenders. The Company places its investments in
instruments that meet high credit quality standards. The Company does not expect
any material loss with respect to its investment portfolio.
The Company utilizes term and revolving debt with variable interest rates
of 3.5% above prime, and therefore, the Company is effected by changes in market
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 2003, although there can be no
assurances that interest rates will not significantly change.
The effect of foreign exchange rate fluctuations on the Company's
statements of operations for its fiscal years ended December 31, 2002 and 2001,
were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Metatec International, Inc.:
We have audited the accompanying consolidated balance sheets of Metatec
International, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for each of the three years in the period ended
December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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.
15
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Metatec International, Inc. and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
March 7, 2003
Columbus, Ohio
16
METATEC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
---------------------------
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 336,597 $ 1,291,778
Restricted cash........................................... 146,000 0
Accounts receivable
Trade, net of allowance for doubtful accounts of
$200,000 and $300,000 respectively.................... 7,251,086 10,508,965
Due from sale of assets................................ 0 1,000,000
Inventory................................................. 1,096,912 1,841,292
Prepaid expenses.......................................... 920,514 666,047
Net assets of discontinued operations..................... 0 1,207,924
------------ ------------
Total current assets................................... 9,751,109 16,516,006
Property, plant and equipment -- net........................ 24,094,376 28,770,668
Other assets................................................ 147,101 169,166
------------ ------------
TOTAL ASSETS................................................ $ 33,992,586 $ 45,455,840
============ ============
LIABILITIES & SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 2,556,727 $ 3,825,466
Accrued expenses:
Royalties.............................................. 452,152 5,098,535
Personal property taxes and real estate taxes.......... 1,362,188 1,416,645
Payroll and benefits................................... 1,059,480 1,434,139
Restructuring.......................................... 901,721 2,658,275
Other.................................................. 615,120 536,548
Unearned income........................................... 58,767 52,796
Current maturities of long-term real estate debt.......... 170,995 157,399
Current maturities of other long-term debt and capital
lease obligations...................................... 793,850 25,476
------------ ------------
Total current liabilities.............................. 7,971,000 15,205,279
Long-term real estate debt.................................. 18,356,891 18,527,886
Other long-term debt and capital lease obligations, less
current maturities........................................ 17,018,611 20,194,352
Other long-term liabilities................................. 1,148,638 673,403
------------ ------------
Total liabilities...................................... 44,495,140 54,600,920
------------ ------------
Commitments and contingencies (Notes 4, 5, and 6)
Shareholders' deficiency:
Common stock, no par value; authorized 10,000,000 shares;
issued 7,217,855 shares................................ 33,008,138 35,031,138
Accumulated deficit....................................... (39,819,030) (37,547,201)
Accumulated other comprehensive loss...................... 0 (786,480)
Treasury stock, at cost; 681,742 and 1,081,742 shares..... (3,670,537) (5,822,537)
Unamortized restricted stock.............................. (21,125) (20,000)
------------ ------------
Total shareholders' deficiency......................... (10,502,554) (9,145,080)
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIENCY................ $ 33,992,586 $ 45,455,840
============ ============
See notes to consolidated financial statements.
17
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ------------ ------------
NET SALES........................................... $49,694,924 $ 67,513,954 $ 92,856,253
Cost of sales....................................... 32,823,337 50,213,388 66,314,596
----------- ------------ ------------
Gross margin........................................ 16,871,587 17,300,566 26,541,657
Selling, general and administrative expenses........ 15,156,785 22,641,688 24,997,951
Impairment of goodwill and assets and other
restructuring costs............................... 401,608 17,660,182 16,112,287
----------- ------------ ------------
OPERATING EARNINGS (LOSS) FROM CONTINUING
OPERATIONS........................................ 1,313,194 (23,001,304) (14,568,581)
Other income (expense):
Investment income.............................. 9,769 37,346 26,184
Interest expense............................... (2,918,891) (3,471,406) (4,234,766)
----------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................. (1,595,928) (26,435,364) (18,777,163)
Income taxes (benefit).............................. (875,000) 42,000 (787,000)
----------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS..................... $ (720,928) $(26,477,364) $(17,990,163)
Profit (Loss) from discontinued operations
(including loss on disposal of $2,249,488 in
2002), adjusted for tax effect of $43,000 in
2000.............................................. (1,550,901) (3,496,475) 457,545
----------- ------------ ------------
NET LOSS............................................ $(2,271,829) $(29,973,839) $(17,532,618)
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and diluted................................. 6,515,557 6,136,002 6,085,426
=========== ============ ============
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic and diluted................................. $ (0.11) $ (4.32) $ (2.96)
=========== ============ ============
NET LOSS PER COMMON SHARE
Basic and diluted................................. $ (0.35) $ (4.88) $ (2.88)
=========== ============ ============
See notes to consolidated financial statements.
18
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS/ OTHER UNAMORTIZED
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY RESTRICTED
STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK STOCK
----------- ---------- ------------ ----------------- ----------- -----------
BALANCE AT DECEMBER 31, 1999..... $34,949,138 $0 $ 9,959,256 $(1,223,665) $(5,822,537) $ 0
Comprehensive Loss:
Net loss....................... (17,532,618)
Foreign currency translation
adjustments.................. (199,697)
Comprehensive loss...........
Stock options exercised.......... 32,000
Tax benefit relating to stock
options........................ 10,000
----------- -- ------------ ----------- ----------- --------
BALANCE AT DECEMBER 31, 2000..... 34,991,138 0 (7,573,362) (1,423,362) (5,822,537) 0
Comprehensive Loss:
Net loss....................... (29,973,839)
Foreign currency translation
adjustments.................. (311,579)
Gain on termination of forward
contracts.................... 948,461
Comprehensive loss...........
Issuance of restricted shares.... 40,000 (40,000)
Amortization of restricted
stock.......................... 20,000
----------- -- ------------ ----------- ----------- --------
BALANCE AT DECEMBER 31, 2001..... 35,031,138 0 (37,547,201) (786,480) (5,822,537) (20,000)
Comprehensive Loss:
Net loss....................... (2,271,829)
Accretion of gain on
termination of forward
contracts.................... (937,248)
Realization of loss on foreign
currency translation......... 1,723,728
Comprehensive loss...........
Issuance of treasury stock....... (2,062,000) 2,152,000
Issuance of restricted shares.... 39,000 (39,000)
Amortization of restricted
stock.......................... 37,875
----------- -- ------------ ----------- ----------- --------
BALANCE AT DECEMBER 31, 2002..... $33,008,138 $0 $(39,819,030) $ (0) $(3,670,537) $(21,125)
=========== == ============ =========== =========== ========
TOTAL
------------
BALANCE AT DECEMBER 31, 1999..... $ 37,862,192
Comprehensive Loss:
Net loss....................... (17,532,618)
Foreign currency translation
adjustments.................. (199,697)
------------
Comprehensive loss........... (17,732,315)
Stock options exercised.......... 32,000
Tax benefit relating to stock
options........................ 10,000
------------
BALANCE AT DECEMBER 31, 2000..... 20,171,877
Comprehensive Loss:
Net loss....................... (29,973,839)
Foreign currency translation
adjustments.................. (311,579)
Gain on termination of forward
contracts.................... 948,461
------------
Comprehensive loss........... (29,336,957)
Issuance of restricted shares.... 0
Amortization of restricted
stock.......................... 20,000
------------
BALANCE AT DECEMBER 31, 2001..... (9,145,080)
Comprehensive Loss:
Net loss....................... (2,271,829)
Accretion of gain on
termination of forward
contracts.................... (937,248)
Realization of loss on foreign
currency translation......... 1,723,728
------------
Comprehensive loss........... (1,485,349)
Issuance of treasury stock....... 90,000
Issuance of restricted shares.... 0
Amortization of restricted
stock.......................... 37,875
------------
BALANCE AT DECEMBER 31, 2002..... $(10,502,554)
============
See notes to consolidated financial statements.
19
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,271,829) $(29,973,839) $(17,532,618)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 5,058,219 9,536,428 13,184,117
Write-down of fixed assets and goodwill................. 0 13,412,688 15,637,642
Deferred income tax expense (benefit)................... 0 692,107 (338,107)
Tax benefit from stock options exercised................ 0 0 10,000
Net (gain) loss on sales of property, plant and
equipment............................................. 1,463,008 64,494 (141,624)
Recognition of amount previously included in other
comprehensive income.................................. 786,480 0 0
Changes in assets and liabilities (net of discontinued
operations):
Accounts receivable................................... 3,257,878 2,378,380 5,371,699
Inventory............................................. 489,227 726,154 796,649
Prepaid expenses and other assets..................... (254,467) 325,426 369,840
Accounts payable and accrued expenses................. (3,002,612) 2,951,221 (3,472,837)
Unearned income....................................... 5,971 (30,894) 48,933
Net assets of discontinued operations................. (255,084) 4,653,189 1,011,991
----------- ------------ ------------
Net cash provided by operating activities.......... 5,276,791 4,735,354 14,945,685
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (487,280) (1,317,888) (5,088,249)
Proceeds from the sales of property, plant and
equipment............................................... 1,438,056 53,990 314,893
----------- ------------ ------------
Net cash provided (used) by investing activities........ 950,776 (1,263,898) (4,773,356)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash............................... (146,000) 0 0
Increase in long-term debt and capital lease
obligations............................................. 0 2,091,138 4,139,597
Payment of long-term debt and capital lease obligations... (1,550,705) 0 (14,099,986)
Net reduction in revolving line of credit................. (5,486,043) (5,794,961) 0
Stock options exercised................................... 0 0 32,000
----------- ------------ ------------
Net cash used by financing activities................... (7,182,748) (3,703,823) (9,928,389)
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents............ (955,181) (232,367) 243,940
Cash and cash equivalents at beginning of year.............. 1,291,778 1,524,145 1,280,201
----------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 336,597 $ 1,291,778 $ 1,524,141
=========== ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................. $ 2,777,127 $ 3,352,231 $ 4,250,213
=========== ============ ============
Income taxes refunded..................................... $ (897,182) $ (667,375) $ (837,228)
=========== ============ ============
Assets purchased for the assumption of liabilities........ $ 39,657 $ 12,549 $ 194,818
=========== ============ ============
Gain on termination of forward contracts.................. $ 0 $ 948,461 $ 0
=========== ============ ============
Assets sold for the assumption of receivable.............. $ 0 $ 1,000,000 $ 0
=========== ============ ============
Termination of capital lease.............................. $ 0 $ 1,160,742 $ 0
=========== ============ ============
Note payable issued for capital lease termination......... $ 0 $ (1,228,347) $ 0
=========== ============ ============
Payment of accrued restructuring expense by the issuance
of treasury stock....................................... $ 90,000 $ 0 $ 0
=========== ============ ============
Exchange of short-term accrued royalties obligation for a
long-term notes payable................................. $ 4,278,832 $ 0 $ 0
=========== ============ ============
Credit of a payable in exchange for a sale of an asset.... $ 62,000 $ 0 $ 0
=========== ============ ============
See notes to consolidated financial statements.
20
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of Metatec International, Inc., an Ohio corporation, and its wholly owned
subsidiaries (the "Company" or "Metatec"). All significant intercompany accounts
and transactions have been eliminated. Metatec's subsidiaries maintain separate
financial statements.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements. Management believes those
estimates and assumptions utilized in preparing the financial statements are
reasonable. Actual results could differ from these estimates.
Nature of Operations -- The operations of the Company are in the
information industry primarily providing optical disc manufacturing, packaging
and distribution for specific customers, primarily in North America. The Company
maintains one manufacturing, sales, distribution and development facility in the
United States and prior to September 2002, one in Europe. The revenues from
product sales are recognized at the time the products are shipped. The Company
has shifted its focus to supply chain solution services with its core CD-ROM
manufacturing capabilities serving as a component of the supply chain.
The Company incurred net losses from continuing operations of approximately
$721,000, $26,477,000 and $17,990,000 in 2002, 2001 and 2000, respectively. The
Company incurred net losses of approximately $2,272,000, $29,973,000, and
$17,533,000 in 2002, 2001 and 2000, respectively. Included in the losses are
non-recurring losses of $2,249,000 in 2002 from disposal of its European
operations and non-recurring charges resulting from the impairment of goodwill
and long-lived assets and restructuring charges totaling approximately
$20,576,000 including $2,916,000 in discontinued operations and $16,112,000 in
2001 and 2000, respectively. Also, as of December 31, 2002, the Company had a
shareholders' deficiency of $10,503,000. However, the Company generated positive
cash flows from operations in each of these years. Additionally, the Company
successfully amended certain terms and financial covenants of its bank credit
facilities, including extending the maturity date to 2004. Management believes
that the Company's current focus on its core business customers and continued
cost saving measures will allow it to generate sufficient cash flows to meet
operational needs in 2003.
Discontinued operations -- Pursuant to an agreement dated as of September
30, 2002, the Company sold its European CD-ROM manufacturing operations in
Breda, The Netherlands, to Nimbus, a Netherlands-based private investment group.
The transaction was structured as a sale of all of the shares of Metatec's
European subsidiary to Nimbus. The shares were sold in exchange for the
assumption of the European subsidiary's liabilities as of August 31, 2002 of
approximately $1,911,000. The Company accounted for these operations as
discontinued operations and recognized a non-cash loss of $2,249,000 associated
with this sale in the third quarter of 2002.
European operations had revenues for the year ended December 31, 2002,
which consisted of the nine months prior to the sale, of $6,286,000, as compared
to $9,768,000 for 2001 and $11,375,000 for 2000.
Pre-tax income for the Company's European operations for the year ended
December 31, 2002, which consisted of the nine months prior to the sale, was
$700,000, as compared to $3,496,000 pre-tax loss for 2001 and $406,000 pre-tax
income for 2000.
Cash and Cash Equivalents -- Cash and cash equivalents consist of highly
liquid instruments such as certificates of deposit, time deposits, treasury
notes and other money market instruments which generally have maturities of less
than three months. The carrying amounts reported in the balance sheets
approximate fair value. The Company holds cash primarily in one financial
institution.
Inventory -- Inventory consists primarily of raw materials and spare parts
and is valued at the lower of cost or market with cost determined by the
first-in, first-out method.
21
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost. The cost of maintenance and repairs is charged against results of
operations as incurred. Property, plant and equipment are depreciated using the
straight-line method over the estimated useful lives of the related assets which
range from three to thirty years. For income tax purposes, accelerated methods
are used for all eligible assets.
Goodwill -- Goodwill represented the excess of cost over net assets
acquired and was amortized using the straight-line method over estimated useful
lives ranging from 10 to 15 years. In accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets," at each balance sheet date, a determination is made by
management to ascertain whether goodwill and other long-lived assets have been
impaired based on several criteria, including, but not limited to, revenue
trends, undiscounted operating cash flows and other operating factors. At the
end of 2001, management determined that certain assets were impaired (See Note
2) and goodwill was written off at that time.
Income Taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which uses the liability method to
calculate deferred income taxes. This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between the financial statement basis and
income tax basis of assets and liabilities and net operating loss carry forwards
to the extent realization is more likely than not.
Advertising -- The Company expenses advertising costs as incurred.
Advertising expense was $5,358, $122,341 and $10,153 for 2002, 2001 and 2000,
respectively.
Net Loss Per Common Share -- Basic net loss per common share is computed
based on the weighted average number of common shares outstanding during the
period. Diluted net loss per common share is computed similarly but includes the
dilutive effect of stock options. During 2002, 2001 and 2000, the effect of
stock options was anti-dilutive.
Comprehensive Income (Loss) -- SFAS No. 130, "Reporting Comprehensive
Income," requires the reporting and display of comprehensive income (loss) and
its components for all years presented. The Company had other comprehensive loss
related to foreign currency translation adjustments of $161,981 in 2001. During
November 2001, the Company terminated its forward contracts. The related gain of
$948,461 is shown as an offset to other comprehensive income and was accreted to
net income and included in discontinued operations in 2002. The Company sold its
Breda operations in 2002 and the other comprehensive loss related to foreign
currency translation was realized at the time of sale (included in loss from
discontinued operations).
Financial Instruments -- The Company entered into a series of forward
contracts (against the Euro and U.S. Dollar) to hedge an intercompany note
between the Company and its European subsidiary. The Company is not a party to
leveraged derivatives and does not hold or issue financial instruments for
speculative purposes. The purpose of the Company's hedging was to protect it
from the risk that the eventual functional currency inflows resulting from the
intercompany payments will be adversely affected by changes in exchange rates.
The forward contracts were designed to correspond with the repayment schedule
contained within the intercompany note. While these hedging instruments were
subject to fluctuations in value, such fluctuations were generally offset by the
value of the underlying exposures being hedged. During the fourth quarter of
2001, the above noted forward contracts were terminated. The Company realized a
gain on the termination of these contracts of $948,461 which was used to pay
down an operating lease with one of its lenders. This gain was recorded in other
comprehensive income and was accreted to net income in 2002 when the Company
sold its European subsidiary.
The Company does not carry any off balance sheet derivative financial
instruments at December 31, 2002.
Foreign Currency Translation -- The assets and liabilities of the Company's
subsidiaries outside the United States were translated into U.S. dollars at the
rates of exchange in effect at the balance sheet dates. Income and expense items
were translated at the average exchange rates prevailing during the period.
Gains and losses resulting from foreign currency transactions were recognized
currently in net income and those resulting from
22
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
translation of financial statements were recognized currently in comprehensive
income. There are no foreign subsidiaries as of December 31, 2002.
Self-Insurance -- The Company is self-insured with respect to medical and
dental claims for its employees. The Company has obtained stop-loss insurance
for claims in excess of $100,000 per individual per year and $1,000,000 lifetime
maximum per individual. The Company has recorded an estimated liability for
self-insured claims incurred but not reported at December 31, 2002 and 2001 of
$300,000 and $270,000, respectively. The Company is also self- insured with
respect to short term disability claims.
Stock-based compensation -- The Company has adopted the disclosure
provision of SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment to FASB Statement No.
123." The Statement requires prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
accounts for stock compensation awards under the intrinsic method of Account
Principles Board ("APB") Opinion No. 25 (see Note 9). Opinion No. 25 requires
compensation cost to be recognized based on the excess, if any, between the
quoted market price of the stock at the date of grant and the amount an employee
must pay to acquire the stock. All options awarded under all of the Company's
plans are granted with an exercise price equal to the fair market value on the
date of the grant. The following table presents the effect on the Company's net
earnings and earnings per share had the Company adopted the fair value method of
accounting for stock-based compensation under SFAS No. 123, "Accounting for
Stock-Based Compensation".
2002 2001 2000
----------- ------------ ------------
Net loss --
As reported................................ $(2,271,829) $(29,973,839) $(17,532,618)
Pro forma.................................. $(2,361,554) $(29,989,447) $(17,665,757)
Loss per share --
As reported
Basic and diluted.......................... $ (0.35) $ (4.88) $ (2.88)
Pro forma --
Basic and diluted.......................... $ (0.36) $ (4.89) $ (2.90)
The pro forma amounts are not representative of the effects on reported net
earnings or earnings per common share for future years.
Impact of New Accounting Standards -- SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," will be effective for fiscal years beginning after May 15, 2002
(December 31, 2003 for the Company). This Statement rescinds FASB Statements No.
4 and 64 that dealt with issues relating to the extinguishment of debt. This
Statement also rescinds FASB Statement No. 44 that dealt with intangible assets
of motor carriers. This Statement modifies SFAS No. 13, "Accounting for Leases,"
so that certain capital lease modifications must be accounted for by lessees as
sale-leaseback transactions. Additionally, this Statement identifies amendments
that should have been made to previously existing pronouncements and formally
amends the appropriate pronouncements. The adoption of SFAS No. 145 will not
have a significant effect on the Company's results of operations or its
financial position.
SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal
Activities," will be effective for exit or disposal activities that are
initiated after December 31, 2002. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 is that this Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost was
23
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized at the date of an entity's commitment to an exit plan. The adoption
of SFAS No. 146 will not have a material impact on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods for an entity that voluntarily changes to the fair
value based method of accounting for stock-based compensation, amends the
disclosure provisions of SFAS 123 and amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. The transition guidance and annual disclosure provisions
of SFAS 148 are effective for fiscal years ending after December 15, 2002. In
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and are included in the notes to these
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for the current fiscal year and were not material in relation to the Company's
2002 consolidated financial statements. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The Company has not assessed what impact, if any, the
adoption of the initial recognition and measurement provisions of FIN 45 will
have upon its financial condition or results of operations.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest entity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The initial adoption of this accounting
pronouncement will not have a material impact on the Company's consolidated
financial statements.
24
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
LOSS ON
TERMINATION EXIT/OTHER WRITE-DOWN
DESCRIPTION BENEFITS COSTS OF ASSETS TOTAL
----------- ----------- ---------- ---------- --------
IN '000'S
Accrued balance December 31, 1999........ $ 289 $ 562 $ 851
Provision 2000........................... $ 475 $ 15,637 $ 16,112
Payments 2000............................ $ (764) $ (412) $ (1,176)
Asset Write-offs 2000.................... $(15,637) $(15,637)
------ ------- -------- --------
Accrued balance December 31, 2000........ $ -- $ 150 $ -- $ 150
Provision 2001........................... $1,895 $ 3,135 $ 12,630 $ 17,660
Payments 2001............................ $ (527) $ (184) $ (711)
Asset Write-offs 2001.................... $(12,630) $(12,630)
------ ------- -------- --------
Accrued balance December 31, 2001........ $1,368 $ 3,101 $ -- $ 4,469
Provision 2002........................... $ 402 $ -- $ -- $ 402
Payments 2002............................ $ (897) $(1,740) $ -- $ (2,637)
------ ------- -------- --------
Accrued balance December 31, 2002........ $ 873 $ 1,361 $ -- $ 2,234
====== ======= ======== ========
Accrued Restructuring -- Current......... $ 873 $ 404 $ -- $ 1,277
====== ======= ======== ========
During 2002, the Company made decisions to reduce expenses by restructuring
its workforce in Dublin.
During 2001, the Company made decisions to reduce expenses by restructuring
its manufacturing and support services through workforce reductions related to
the facilities in Dublin, Ohio ("Dublin"), Milpitas, California ("Silicon
Valley"), and Breda, The Netherlands ("Breda").
Additional restructuring charges were incurred during the fourth quarter of
2001 related to the closure of the Company's Silicon Valley facility. In
relation to this restructuring, the Company completed the sale of its
manufacturing assets associated with Silicon Valley and terminated the lease on
this facility, all of which was effective December 31, 2001. In exchange for its
agreement to terminate the lease, the landlord received a $1,500,000 unsecured,
non-interest bearing promissory note (discounted to $1,228,349 at 8.5%) due in
four equal installments beginning in January 2003, and approximately $1,100,000
in cash, and 300,000 shares of the Company's common stock with a fair value of
$.30 per share (See Note 4). In addition, the Company took a write-off related
to the closing of two sales offices during 2001.
In December 2001, a determination was made by management that goodwill and
specific fixed assets associated with the Company's operations were impaired.
This decision was based upon an analysis of expected future cash flows and
required a writedown of these assets. Accordingly, a writedown of goodwill
($1,472,000) and fixed assets ($8,703,000) totaling $10,175,000 was recorded
using discounted future cash flows to estimate fair value. In addition,
management made the decision that certain modules of the Company's ERP system
which were under development would not be completed and implemented, resulting
in a write-off of $2,455,144.
During the first quarter of 2000, the Company made a decision to reduce
selling, general and administrative expenses by restructuring its support
services through a workforce reduction in the Dublin and Silicon Valley
facilities. At that time the Company incurred a restructuring charge of $430,561
primarily for severance and termination benefits. During the fourth quarter of
2000, the Company made another workforce reduction at the
25
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Silicon Valley facility resulting in a restructuring charge of $44,084 primarily
for severance and termination benefits.
At the end of 2000, a determination was made by management that goodwill
and specific fixed assets associated with the Company's Silicon Valley
operations, which were acquired from Imation Corporation in September 1998, were
impaired. This decision was based upon an analysis of expected future cash flows
and required a writedown of these assets. Accordingly, a writedown of goodwill
($11,695,618) and fixed assets ($3,942,024) totaling $15,637,642 was recognized
using discounted future cash flows to estimate fair value.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
2002 2001
------------ ------------
Land..................................................... $ 2,579,787 $ 2,579,787
Buildings and improvements............................... 22,473,357 22,480,944
Machinery and equipment.................................. 34,612,252 37,595,120
Furniture and fixtures................................... 4,380,933 4,381,989
Computer equipment and related software.................. 8,213,427 9,178,835
------------ ------------
Total.......................................... 72,259,756 76,216,675
Less accumulated depreciation and impairment............. (48,165,380) (47,446,007)
------------ ------------
Net property, plant and equipment........................ $ 24,094,376 $ 28,770,668
============ ============
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
December 31:
2002 2001
----------- -----------
Term debt.................................................. $ 8,609,791 $ 9,835,488
Revolving line of credit................................... 3,609,910 9,095,953
Real estate financing...................................... 18,527,886 18,685,285
Former Silicon Valley facility lessor...................... 1,332,758 1,228,349
US Philips................................................. 3,461,899 0
Discovision Associates..................................... 764,130 0
Capital lease obligations.................................. 33,973 60,038
----------- -----------
Total............................................ 36,340,347 38,905,113
Less current maturities.................................... (964,845) (182,875)
----------- -----------
Long-term debt and capital lease obligations............... $35,375,502 $38,722,238
=========== ===========
On February 8, 2002, the Company entered into an amended and restated loan
agreement (the "Amended Loan Agreement") with its banks which replaced the
Company's prior agreement with its banks. Under the Amended Loan Agreement, the
credit facilities consist of three separate loans: (1) an asset based revolving
loan facility with a borrowing base as described below; (2) a term loan facility
in the principal amount of $9,326,250; and (3) a second term loan facility in
the original principal amount of $509,238. The borrowing base of the revolving
loan facility is limited to the lesser of (i) $10,000,000, or (ii) the sum of
(A) 80% of eligible domestic accounts receivable, plus (B) 30% of eligible
domestic inventory, plus (C) 90% of domestic machinery and equipment. The
borrowing base is further reduced by the aggregate amount of the Company's
outstanding letters
26
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of credit and is permanently reduced by the amount of any additional advances
made to the Company under the second term loan facility.
The revolving loan and the term loans mature on April 1, 2004. Quarterly
principal payments are required, beginning in June 2002 if cash flow, as
defined, exceeds certain predetermined targets. The credit facilities are
secured by a first lien on all non-real estate business assets of the Company
and a pledge of the stock of the Company's subsidiaries. The Company is required
to comply with the financial and other covenants contained in the Amended Loan
Agreement. The revolving loan and the term loans accrue interest at a rate equal
to 3.5% in excess of the prime rate of the banks (total of 7.25% at December 31,
2002). Certain fees are required to be paid to the banks in connection with the
credit facilities.
As of December 31, 2002, $8,609,791 and $3,609,910 was outstanding under
the bank term loan facility and the bank revolving loan facility, respectively,
and the Company had approximately $3,695,000 available to draw on its revolving
loan facility. The Company was in compliance with its financial and other
covenants as of December 31, 2002.
The Company has a $19,000,000 term loan facility which was used to
permanently finance the Company's Dublin, Ohio distribution center completed in
1999 and to pay down other bank debt. The loan facility has an outstanding
principal balance of $18,527,886 as of December 31, 2002. This term loan
facility is payable in monthly principal and interest payments based upon a
thirty year amortization schedule, bears interest at a fixed rate of 8.2%, and
matures on September 1, 2009. This loan facility is secured by a first lien on
all real property of the Company and bank letters of credit in favor of the
lender, in an aggregate amount of $1,650,000 which are renewed annually.
The Company entered into a $1,500,000 long-term note with its former
Silicon Valley facility landlord, Fleming Business Park, effective December 31,
2001 (See Note 2). This is an unsecured, non-interest bearing note which was
discounted at 8.5% and is due in four equal annual installments beginning in
January 2003.
In August 2002, the Company entered into new licensing and other agreements
with one of its CD and DVD patent licensors which, among other things, provides
for a deferred payment schedule for accrued royalties owed by the Company under
prior licensing agreements. As a result, $3,470,000 million of accrued royalties
were exchanged for a 6% note, payable in quarterly payments with a termination
date of December 31, 2008.
In October 2002, the Company entered into a settlement agreement with
another of its CD patent licensors which provides for a deferred payment
schedule for accrued royalties owed under its licensing agreement and, as a
result, $1,618,000 of accrued royalties were reclassified to long-term
liabilities. The Company issued an $809,000 non-interest bearing note with the
final payment due December 31, 2005. The remaining $809,000 may be forgiven in
2006 if the Company meets certain conditions in the agreement and is currently
classified in other long-term liabilities.
The estimated fair value of the Company's long-term obligations
approximated their carrying amount at December 31, 2002 and 2001, based on
current market prices for the same or similar issues.
The terms of the Company's credit facilities prohibit it from paying cash
dividends or making any other distributions to shareholders without the prior
consent of the administrative agent of these credit facilities.
Total long-term debt maturities from 2003 to 2007, assuming no additional
principal payments based on excess cashflow, are as follows: $964,845,
$13,246,059, $1,424,103, $1,364,451, $1,037,731 respectively, and $18,303,158
thereafter.
5. LEASES
At December 31, 2002, the Company leased office equipment with related
accumulated depreciation of $39,060 under non-cancelable capital lease
agreements expiring at various dates through 2004. Maintenance, insurance, and
tax expenses are the responsibility of the Company under the agreements.
Operating lease expense was $346,888, $1,921,966 and $2,229,479 for 2002,
2001 and 2000, respectively.
27
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future annual minimum lease payments under all capital leases, together
with the present value of the minimum lease payments and the future minimum
rental payments required under all operating leases that have initial or
remaining lease terms in excess of one year, are as follows:
CAPITAL LEASES OPERATING LEASES
YEAR ENDING DECEMBER 31: -------------- ----------------
2003.................................................... $24,199 $192,557
2004.................................................... 11,837 93,220
------- --------
Total minimum lease payments.................. 36,036 $285,777
========
Less amount representing interest....................... (2,063)
-------
Present value of net minimum payments................... $33,973
=======
6. COMMITMENTS AND CONTINGENCIES
Litigation -- The Company and numerous other parties have been named as
defendants in a court proceeding filed in the United States District Court for
the District of Arizona by the plaintiff, Lemelson Medical, Education & Research
Foundation, Limited Partnership. In that court proceeding, the plaintiff is
alleging that the defendants have infringed upon certain patents that allegedly
are enforceable by the plaintiff. This court proceeding has been stayed pending
the outcome of parallel litigation in Nevada that is challenging the validity of
plaintiff's patents. At this time, the Company is unable to determine the
likelihood of the outcome of either the Arizona or Nevada proceedings or whether
an unfavorable outcome will be material to the Company.
The Company is involved in various legal claims arising from the normal
course of business. While the ultimate liability, if any, from these proceedings
is presently indeterminable, in the opinion of management, these matters should
not have a material adverse effect on the consolidated financial statements of
the Company.
7. INCOME TAXES
The components of income tax expense (benefit) were as follows:
2002 2001 2000
--------- --------- ---------
Federal:
Current.......................................... $(875,000) $(472,000) $(638,000)
Deferred......................................... 0 89,000 9,000
--------- --------- ---------
Total Federal................................. (875,000) (383,000) (629,000)
--------- --------- ---------
State and Local:
Current.......................................... 0 (93,000) 72,000
Deferred......................................... 0 741,000 (230,000)
--------- --------- ---------
Total State and Local......................... 0 648,000 (158,000)
Foreign:
Current.......................................... 0 9,000 (21,000)
Deferred......................................... 0 (232,000) (22,000)
--------- --------- ---------
Total Foreign................................. 0 (223,000) (43,000)
--------- --------- ---------
Total.............................................. $(875,000) $ 42,000 $(830,000)
========= ========= =========
Total loss from continuing operations before income tax expense in 2002 was
comprised of $1,596,000 in domestic losses. Total loss before income tax benefit
in 2001 was comprised of $ 4,026,000 in foreign losses and $25,906,000 in
domestic losses. Total loss before income tax benefit in 2000 was comprised of
$167,000 in foreign losses and $18,195,000 in domestic losses.
28
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant differences between income tax expense (benefit) recorded for
financial reporting purposes and income taxes (benefit) calculated using the
Federal statutory rate of 34% on the loss from continuing operations are as
follows:
2002 2001 2000
--------- ------------ -----------
Tax benefit at statutory rate.................. $(542,000) $(10,177,000) $(6,244,000)
State and local tax expense (benefit), net of
federal benefit.............................. 7,000 428,000 (104,000)
Non deductible goodwill........................ 0 153,000 161,000
Change in valuation reserve.................... (399,000) 9,605,000 5,317,000
Other.......................................... 59,000 33,000 40,000
--------- ------------ -----------
Total.......................................... $(875,000) $ 42,000 $ (830,000)
========= ============ ===========
Deferred income taxes recorded in the consolidated balance sheets at
December 31, 2002 and 2001 consisted of the following:
2002 2001
------------ ------------
Deferred tax assets:
State tax credit (expires 2005).......................... $ 595,000 $ 595,000
Allowance for doubtful accounts.......................... 89,000 139,000
Net operating loss carryforwards......................... 11,053,000 8,419,000
Restructuring charges.................................... 402,000 1,684,000
Impaired assets.......................................... 4,395,000 6,974,000
Depreciation............................................. 2,474,000 1,692,000
Accrued medical insurance................................ 134,000 120,000
Other.................................................... 375,000 459,000
Valuation allowance...................................... (19,330,000) (19,729,000)
------------ ------------
Total deferred tax assets...................... $ 187,000 $ 353,000
------------ ------------
Deferred tax liabilities:
Depreciation............................................. 0 0
Prepaid expenses......................................... 150,000 174,000
Foreign currency......................................... 0 162,000
Other.................................................... 37,000 17,000
------------ ------------
Total deferred tax liabilities................. 187,000 353,000
------------ ------------
Net deferred tax asset................................... $ 0 $ 0
============ ============
The Company has available net operating loss carry forwards for tax
purposes of approximately $25,897,000 expiring through 2022. The Company also
has available certain net operating loss carry forwards for tax purposes of
approximately $216,000 which expire in 2005 which may only be used to offset
certain operations of the Company. On March 9, 2002, the President signed into
law the Job Creation and Worker Assistance Act of 2002. This law extended the
carry back period from two years to five years for net operating losses arising
in the 2001 and 2002 taxable years. The Company recorded a benefit of $875,000
in the first quarter of 2002 related to this law.
A valuation allowance has been provided to offset the net deferred tax
assets due to the uncertainty surrounding the realizability of such assets.
8. BENEFIT PLANS
Substantially all associates are enrolled in a Company-sponsored defined
contribution plan established under Section 401(k) of the Internal Revenue Code.
The Company's contribution under the plan was approximately
29
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$192,000, $342,000 and $642,000 for 2002, 2001 and 2000, respectively. During
2002, the Company's contribution was reduced to 40% (75% in 2001, and 2000) of
the associate's contribution up to a maximum of 5% of the associate's annual
compensation. The benefit plan assets are invested in mutual funds.
9. STOCK OPTION PLANS
The Company has a 1999 Directors' Stock Option Plan (the "1999 Directors
Plan") under which a maximum of 300,000 common shares may be issued. The 1999
Directors Plan replaced the Company's 1992 Directors' Stock Option Plan, and no
additional options will be issued under the 1992 plan. The 1999 Directors Plan
automatically grants 5,000 options to each non-employee director immediately
following the Company's annual meeting of shareholders. These options are fully
vested on the grant date. In addition, for each non-employee director, when they
first become a director, the 1999 Directors Plan automatically grants 10,000
one-time options. These one-time options vest in equal installments over a
four-year period. As of December 31, 2002, there have been 130,000 options
granted under the 1999 Directors Plan, none of which were forfeited, none of
which were exercised, and all but 12,500 were exercisable. As of December 31,
2002, there have been 164,925 options granted under the 1992 Director's Stock
Option Plan, 130,080 of which were forfeited, 22,345 of which were exercised and
12,500 of which are exercisable.
The option price of shares subject to an option for the directors' stock
option plans is the fair market value of the shares at the time the option is
granted. No options issued are exercisable after five years from the date of
grant.
The Company has a 1990 Stock Option Plan under which a maximum of 1,610,000
Common Shares may be issued. This Plan is available to all full time employees
of the Company or its subsidiary corporations and, in the case of non-qualified
options, directors of subsidiaries of the Company (other than directors of such
subsidiaries who are also directors of the Company). As of December 31, 2002,
there have been 2,823,725 options granted under this plan, 1,502,525 of which
were forfeited, 290,075 of which were exercised and 761,863 of which are
exercisable.
The Company's Compensation Committee has the authority to grant incentive
options and non-qualified options. Only officers and other key employees of the
Company or its subsidiary corporations are eligible for grants of incentive
options.
At December 31, 2002, no incentive options had been granted. Both incentive
and non-qualified options vest over a period of from one to four years from the
date of grant, and are not exercisable after 10 years from the date of grant.
The option price of both incentive options and non-qualified options is equal to
the fair market value of the shares at the time the options are granted.
The following summarizes all stock option transactions from January 1, 2000
through December 31, 2002:
PER SHARE WEIGHTED AVERAGE
SHARES OPTION PRICE EXERCISE PRICE
--------- --------------- ----------------
Outstanding at December 31, 1999......... 1,272,825 $1.50 to $12.88 $5.24
Granted.................................. 305,300 $1.03 to $ 3.19 $2.58
Exercised................................ (20,500) $1.50 to $ 1.75 $1.56
Terminated............................... (380,400) $3.00 to $ 6.00 $4.99
---------
Outstanding at December 31, 2000......... 1,177,225 $1.03 to $12.88 $4.67
Granted.................................. 181,375 $0.77 to $ 1.31 $0.98
Terminated............................... (119,625) $2.50 to $12.88 $4.87
---------
Outstanding at December 31, 2001......... 1,238,975 $0.77 to $11.50 $4.13
Granted.................................. 180,000 $0.35 to $ 0.39 $0.38
Terminated............................... (247,225) $0.77 to $11.50 $3.02
---------
Outstanding at December 31, 2002......... 1,171,750 $0.35 to $12.88 $3.89
=========
30
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following presents information for common shares exercisable as of
December 31:
2002 2001 2000
-------- -------- --------
Weighted Average Exercise Price...................... $ 4.50 $ 5.00 $ 5.52
======== ======== ========
Common Shares Exercisable............................ 891,863 817,550 694,719
======== ======== ========
The following table summarizes information about options outstanding at
December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- --------- ---------------- ---------------- ------- ----------------
$0.35 - $0.39 180,000 7.7 $ 0.38 30,000 $ 0.35
$0.88 - $1.31 166,375 6.9 $ 1.00 105,688 $ 0.99
$1.75 - $2.59 138,400 7.1 $ 2.51 69,200 $ 2.51
$2.67 - $4.00 60,000 2.0 $ 3.42 60,000 $ 3.42
$4.19 - $6.13 526,475 0.9 $ 5.42 526,475 $ 5.42
$6.63 - $7.75 100,000 2.1 $ 6.63 100,000 $ 6.63
$11.50 500 1.3 $11.50 500 $11.50
--------- -------
1,171,750 $ 3.68 891,863 $ 4.50
========= =======
The weighted average fair value per share of options granted during 2002,
2001 and 2000 were $0.38, $0.98 and $2.58, respectively.
At December 31, 2002, options for 170,000 and 288,800 common shares (total
of 458,800) were reserved for future grant under the 1999 Directors Plan and the
1990 Stock Option Plan, respectively.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for its stock option plans. Had compensation costs for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, the Company's net loss) and net loss per common share, net of
related income tax benefits, would have resulted in the amounts as reported
below. In determining the estimated fair value of each option granted on the
date of grant, the Company uses the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in the years ended
December 31, 2002, 2001 and 2000, respectively: dividend yield of 0%; expected
volatility of 82.31%, 85.19% and 83.16%; risk-free interest rates based on the
constant maturity rates for Treasuries that mature in accordance with the
vesting period of the options granted.
10. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
SFAS 131,"Disclosures About Segments of an Enterprise and Related
Information") established revised standards for public companies relating to the
reporting of financial information about operating segments. In accordance with
SFAS No. 131, the Company has determined that it has one reportable segment.
However, the Company operated in two primary geographic areas prior to 2002 and
has two classes of products.
31
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are attributed to specific geographical areas based on origin of
order generation. Geographic information for the years ended December 31 are as
follows:
U.S. EUROPE
----------- -------------------------
(DISCONTINUED OPERATIONS)
2002
Net Sales....................................... $49,695,000 $ 0
Long-lived assets............................... $24,241,000 $ 0
2001
Net Sales....................................... $67,514,000 $ 9,768,000
Long-lived assets............................... $28,940,000 $ 611,000
2000
Net Sales....................................... $92,856,000 $11,375,000
Long-lived assets............................... $50,836,000 $ 4,547,000
Revenues attributed to product types are distinguished as CD-ROM sales and
other sales. Information for the years ended December 31 are as follow:
CD-ROM OTHER PRODUCTS
----------- --------------
2002
Net Sales............................................... $44,168,000 $5,527,000
2001
Net Sales............................................... $71,667,000 $5,615,000
2000
Net Sales............................................... $97,790,000 $6,441,000
The Company had one customer that accounted for approximately 15% of net
sales in 2002; no other customer accounted for greater than 10% of net sales for
any of the three years in the period ended December 31, 2002.
32
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ----------- ----------- ------------ -----------
2002
Net Sales...................... $13,125,697 $11,956,331 $12,246,115 $12,366,781
Gross Margin................... 4,099,464 4,058,348 3,971,462 4,742,313
Net Earnings(loss) from
continuing operations....... 103,468 (723,559) (526,264) 425,427
Net Earnings(loss)............. 206,563 (42,994) (2,860,993) 425,595
Net Earnings(loss) from
continuing operations per
common share:
Basic and diluted........... $ 0.02 $ (0.11) $ (0.08) $ 0.06
Net Earnings(loss) per common
share:
Basic and diluted........... $ 0.03 $ (0.01) $ (0.44) $ 0.07
2001
Net Sales...................... $17,941,622 $16,362,960 $15,456,899 $17,752,473
Gross Margin................... 4,904,615 4,619,133 3,260,360 4,516,458
Net Loss from continuing
operations.................. (2,087,750) (1,938,383) (3,174,338) (19,276,894)
Net Loss....................... (1,926,598) (2,095,544) (3,482,773) (22,468,924)
Net Loss from continuing
operations per common share:
Basic and diluted........... $ (0.34) $ (0.32) $ (0.52) $ (3.14)
Net Loss per common share:
Basic and diluted........... $ (0.31) $ (0.34) $ (0.57) $ (3.66)
The quarter ended December 31, 2002 included restructuring charges of
$402,000. The quarter ended September 30, 2002 included a loss on disposal of
the European operations of $2,249,000.
The quarter ended March 31, 2001 and September 30, 2001, included
restructuring charges of $110,000 and $416,000 respectively. The quarter ended
December 31, 2001 included a $20,051,000 charge of which $13,011,000 represents
the write down of goodwill and long-lived assets associated with the Dublin and
Breda facilities. The remainder consisted of costs associated with the closure
of the Company's Silicon Valley facility and severance and termination costs
related to the Dublin facility.
12. SUBSEQUENT EVENTS
On January 14, 2003, the Company sold its Internet-based electronic
software distribution ("ESD") business to Digital River, Inc. ("Digital River"),
a global e-commerce outsource solutions provider based in Minneapolis,
Minnesota. Under the terms of the agreement, Digital River acquired certain
assets and assumed certain liabilities associated with the Company's ESD
business, and the Company received approximately $1,100,000 in cash and notes,
subject to adjustment based on an earn out computation. The Company will
recognize a gain on sale of approximately $450,000 (unaudited) during the first
quarter of 2003.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required under this Item with respect to directors will be
contained in the Company's proxy statement to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2002, and is hereby
incorporated herein by reference. Information regarding the executive officers
of the Company may be found under the caption "Executive Officers of the
Company" in Part I and is also incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
proxy statement to be filed with the Securities and Exchange Commission within
120 days of December 31, 2002, and is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information required under this Item will be contained in the Company's
proxy statement to be filed with the Securities and Exchange Commission within
120 days of December 31, 2002, and is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
proxy statement to be filed with the Securities and Exchange Commission within
120 days of December 31, 2002, and is hereby incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of filing this Annual Report on
Form 10-K, the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures have been effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings
with the Securities and Exchange Commission.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date the evaluation described in (a),
above, was carried out.
34
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements of the Company are
included in Item 8:
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Financial Statement Schedules
The financial statement schedule for the years ended
December 31, 2002, 2001 and 2000 is included in this report
following the signatures and should be read in conjunction
with the Consolidated Financial Statements included in Item
8:
Schedule II -- Consolidated Valuation and Qualifying
Accounts and Reserves
All other financial statement schedules have been omitted
because they are not applicable or the required information
is included in the Company's consolidated financial
statements or notes thereto.
(a)(3) Listing of Exhibits
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
------- ---------------------- -------------------------------
3(a) Amended and Restated Articles of Registration Statement on Form S-8, File No.
Incorporation of Metatec 333-03125 (see Exhibit 4(a) therein).
International, Inc.
3(b) Code of Regulations of Metatec Registration Statement on Form S-8, File No.
International, Inc. 333-03125 (see Exhibit 4(b) therein).
4 Form of Share Certificate Registration Statement on Form S-8, File No.
333-03125 (see Exhibit 4(c) therein).
10(a)* Metatec International, Inc. 1990 Stock Annual Report on Form 10-K for the fiscal
Option Plan year ended December 31, 1991 (see Exhibit
10(k) therein).
10(b)* Amendment No. 1 to Metatec Registration Statement on Form S-8, File No.
International, Inc. 1990 Stock Option 33-48022 (see Exhibit 4(d) therein).
Plan
10(c)* Amendment No. 2 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1992 (see Exhibit
Plan 10(k) therein).
10(d)* Amendment No. 3 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1993 (see Exhibit
Plan 10(g) therein).
10(e)* Amendment No. 4 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1995 (See Exhibit
Plan 10(h) therein).
10(f)* Amendment No. 5 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1997 (See Exhibit
Plan 10(I) therein).
10(g)* Amendment No. 6 to Metatec Registration Statement on Form S-8, File No.
International, Inc. 1990 Stock Option 333-03125 (see Exhibit 4(i) therein).
Plan
10(h)* Metatec International, Inc. 1992 Registration Statement on Form S-8, File No.
Directors' Stock Option Plan 33-52700 (see Exhibit 4(c) therein).
35
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
------- ---------------------- -------------------------------
10(i)* Amendment No. 1 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1993 (see Exhibit
Stock Option Plan 10(i) therein).
10(j)* Amendment No. 2 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1995 (see Exhibit
Stock Option Plan 10(k) therein).
10(k)* Amendment No. 3 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1995 (see Exhibit
Stock Option Plan 10(i) therein).
10(l)* Amendment No. 4 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1996 (see Exhibit
Stock Option Plan 10(m) therein).
10(m)* Amendment No. 5 to Metatec Registration Statement on Form S-8, File No.
International, Inc. 1992 Directors' 333-31027 (see Exhibit 4 therein).
Stock Option Plan
10(n)* Metatec International, Inc. 1999 Registration Statement on Form S-8, File No.
Directors Stock Option Plan 333-10442 (see Exhibit 4(d) therein).
10(o)* Metatec International, Inc. Directors Annual Report on Form 10-K for the fiscal
Deferred Compensation Plan year ended December 31, 1997 (see Exhibit
10(p) therein).
10(p) Form of Indemnification Agreement Annual Report on Form 10-K for the fiscal
between Metatec International, Inc. year ended December 31, 1999 (see Exhibit
and each of its officers and directors 10(t) therein).
10(q) DVD Video and DVD ROM Disc Patent Quarterly Report on Form 10-Q for the
License Agreement dated August 9, quarterly period ended July 31, 2002 (see
2002, between Koninklijke Philips Exhibit 10.1 therein).
Electronics N.V. and Metatec
International, Inc.
10(r) Patent License Agreement for the Use Quarterly Report on Form 10-Q for the
of AC-3 Technology in the Manufacture quarterly period ended July 31, 2002 (see
of DVD-Video Discs dated August 9, Exhibit 10.2 therein).
2002, between Koninklijke Philips
Electronics N.V. and Metatec
International, Inc.
10(s) MPEG Audio Patent License Agreement Quarterly Report on Form 10-Q for the
dated August 9, 2002, between quarterly period ended July 31, 2002 (see
Koninklijke Philips Electronics N.V. Exhibit 10.3 therein).
and Metatec International, Inc.
10(t) CD Disc Patent License Agreement dated Quarterly Report on Form 10-Q for the
August 9, 2002, between Koninklijke quarterly period ended July 31, 2002 (see
Philips Electronics N.V. and Metatec Exhibit 10.4 therein).
International, Inc.
10(u) Letter agreement dated August 9, 2002, Quarterly Report on Form 10-Q for the
among U.S. Philips Corporation, quarterly period ended July 31, 2002 (see
Koninklijke Philips Electronics N.V. Exhibit 10.5 therein).
and Metatec International, Inc.
10(v) Patent License Agreement for Disc Amendment No. 1 to Registration Statement on
Products dated July 1, 1986, between Form S-1, File No. 33-60878 (see Exhibit
Metatec/ Discovery Systems, Inc. and 10(t) therein).
Discovision Associates
10(w) Letter agreement dated October 9, Quarterly Report on Form 10-Q for the
2002, among Discovision Associates and quarterly period ended September 30, 2002
Metatec International, Inc. (see Exhibit 10.1 therein).
36
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
------- ---------------------- -------------------------------
10(x) DVD Patent License Agreement dated Contained herein.
December 31, 2002, between Toshiba
Corporation and Metatec International,
Inc.
10(y) Letter agreement dated January 29, Contained herein.
2003, between Toshiba Corporation and
Metatec International, Inc.
10(z) Optical Disc Corporation NPR Amendment No. 1 to Registration Statement on
Technology License Agreement between Form S-1, File No. 33-60878 (see Exhibit
Optical Disc Corp-oration and 10(v) therein).
Metatec/Discovery Systems effective
March 2, 1992
10(aa) Second Amended and Restated Loan Current Report on Form 8-K dated February 14,
Agreement dated as of February 8, 2002 (See Exhibit 10.1 therein).
2002, among Metatec International,
Inc., Bank One, NA, The Huntington
national Bank, other financial
Institutions from time to time party
thereto, as banks, and The Huntington
national Bank, as administrative agent
for the banks.
10(bb) $19.0 million Promissory Note and Annual Report on Form 10-K for the fiscal
Mortgage, Assignment of Rents and year ended December 31, 1999 (see Exhibit
Security Agreement, each dated July 10(y) therein).
28, 1999, between META Holdings, LLC
and Huntington Capital Corp.
10(cc)* Employment Agreement dated November Annual Report on Form 10-K for the fiscal
22, 2000, between Metatec year ended December 31, 2000 (see Exhibit
International, Inc. and Christopher A. 10(z) therein).
Munro
10(dd)* First Amendment to Employment Annual Report on Form 10-K for the fiscal
Agreement dated as of March 26, 2002, year ended December 31, 2001 (see Exhibit
between Metatec International, Inc. 10(z) therein).
and Christopher A. Munro.
10(ee)* Restricted Share Agreement Effective Annual Report on Form 10-K for the fiscal
January 2, 2001, between Metatec year ended December 31, 2000 (see Exhibit
International, Inc. and Christopher A. 10(aa) therein).
Munro.
10(ff)* First Amendment to Restricted Share Annual Report on Form 10-K for the fiscal
Agreement dated as of March 26, 2002, year ended December 31, 2001 (see Exhibit
between Metatec International, Inc. 10(bb) therein).
and Christopher A. Munro.
10(gg)* Separation Agreement and Release Annual Report on Form 10-K for the fiscal
effective December 7, 2001, between year ended December 31, 2001 (see Exhibit
Metatec International, Inc. and 10(cc) therein).
Jeffrey M. Wilkins.
10(hh)* Restricted Share Agreement dated as of Annual Report on Form 10-K for the fiscal
February 13 ,2002, between Metatec year ended December 31, 2001 (see Exhibit
International, Inc. and Gary W. 10(dd) therein).
Qualmann.
21 Subsidiaries of Metatec International, Contained herein.
Inc.
23 Consent of Deloitte & Touche LLP and Contained herein.
Report on Schedule.
24(a) Powers of Attorney for Joseph F. Annual Report on Form 10-K for the fiscal
Keeler, Jr., Peter J. Kight, David P. year ended December 31, 2001 (see Exhibit
Lauer, Jerry D. Miller, James V. 24(a) therein).
Pickett, Daniel D. Viren, and Jeffrey
M. Wilkins.
37
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH SEC
------- ---------------------- -------------------------------
99.1 Certification Pursuant to 18 U.S.C. Contained herein.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification Pursuant to 18 U.S.C. Contained herein.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
---------------
* Executive compensation plans and arrangements required to be filed pursuant to
Item 601(b)(10) of Regulation S-K.
(b) Reports on Form 8-K
(i) The Company filed a Form 8-K dated October 10, 2002,
under Item 5 to report that the Company had sold its
European CD-ROM manufacturing operations in Breda, The
Netherlands, to Nimbus, a Netherlands-based private
investment group.
(c) Exhibits
The exhibits in response to this portion of Item 14 are
submitted following the signatures.
(d) Financial Statement Schedules
The financial statement schedule is submitted following the signatures.
38
SIGNATURES
Pursuant to the requirements of Sections 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.
METATEC INTERNATIONAL, INC.
By /s/ CHRISTOPHER A. MUNRO
------------------------------------
Christopher A. Munro
President and Chief Executive
Officer
Date: March 26, 2003
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/ CHRISTOPHER A. MUNRO President and Chief Executive March 26, 2003
------------------------------------------------ Officer (principal executive
Christopher A. Munro officer)
/s/ GARY W. QUALMANN Chief Financial Officer and March 26, 2003
------------------------------------------------ Treasurer (principal financial
Gary W. Qualmann officer)
/s/ JULIA A. FRATIANNE Vice President, Finance and March 26, 2003
------------------------------------------------ Secretary (principal accounting
Julia A. Fratianne officer)
PETER J. KIGHT* Director March 26, 2003
------------------------------------------------
Peter J. Kight
JERRY D. MILLER* Director March 26, 2003
------------------------------------------------
Jerry D. Miller
DAVID P. LAUER* Director March 26, 2003
------------------------------------------------
David P. Lauer
JAMES V. PICKETT* Director March 26, 2003
------------------------------------------------
James V. Pickett
JOSEPH F. KEELER, JR.* Director March 26, 2003
------------------------------------------------
Joseph F. Keeler, Jr.
DANIEL D. VIREN* Director March 26, 2003
------------------------------------------------
Daniel D. Viren
JEFFREY M. WILKINS* Director March 26, 2003
------------------------------------------------
Jeffrey M. Wilkins
* Christopher A. Munro, by signing his name hereto, does sign this document
on behalf of the person indicated above pursuant to a Power of Attorney duly
executed by such person.
By /s/ CHRISTOPHER A. MUNRO March 26, 2003
-----------------------------------
Christopher A. Munro, Attorney In
Fact
39
CERTIFICATIONS
I, Christopher A. Munro, certify that:
1. I have reviewed this annual report on Form 10-K of Metatec
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ CHRISTOPHER A. MUNRO
--------------------------------------
Christopher A. Munro,
Chief Executive Officer
(Principal executive officer)
Date: March 26, 2003
40
METATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Column A Column B Column C Column D Column E
-----------------------------
Balance at Charged to Charged to Balance At
Beginning of Costs and Other Accounts End Of Year
Description Year Expenses Deductions(A)
2002
ALLOWANCE FOR $300,000 $ 0 $100,000 $200,000
DOUBTFUL ACCOUNTS ======== ======== ======== ========
RECEIVABLE
2001
ALLOWANCE FOR $261,000 $ 39,000 $ 0 $300,000
DOUBTFUL ACCOUNTS ======== ======== ======== ========
RECEIVABLE
2000
ALLOWANCE FOR $407,000 $348,000 $494,000 $261,000
DOUBTFUL ACCOUNTS ======== ======== ======== ========
RECEIVABLE
(A) Amount represents uncollectible accounts written off.
41
METATEC INTERNATIONAL, INC.
Form 10-K
For Fiscal Year Ended December 31, 2002
EXHIBIT INDEX
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with SEC
------- ---------------------- -------------------------------
3(a) Amended and Restated Registration Statement on Form S-8, File
Articles of Incorporation No. 333-03125 (see Exhibit 4(a) therein).
of Metatec International, Inc.
3(b) Code of Regulations Registration Statement on Form S-8, File
of Metatec International, Inc. No. 333-03125 (see Exhibit 4(b) therein).
4 Form of Share Certificate Registration Statement on Form S-8, File
No. 333-03125 (see Exhibit 4(c) therein).
10(a) Metatec International, Inc. 1990 Stock Annual Report on Form 10-K for the fiscal
Option Plan year ended December 31, 1991 (see Exhibit
10(k) therein).
10(b) Amendment No. 1 to Metatec Registration Statement on Form S-8, File
International, Inc. 1990 Stock Option No. 33-48022 (see Exhibit 4(d) therein).
Plan
10(c) Amendment No. 2 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1992 (see Exhibit
Plan 10(k) therein).
10(d) Amendment No. 3 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1993 (see Exhibit
Plan 10(g) therein).
10(e) Amendment No. 4 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1990 Stock Option year ended December 31, 1995 (See Exhibit
Plan 10(h) therein).
42
10(f) Amendment No. 5 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc.1990 Stock Option year ended December 31, 1997 (See Exhibit
Plan 10(I) therein).
10(g) Amendment No. 6 to Metatec Registration Statement on Form S-8, File
International, Inc. 1990 Stock Option No. 333-03125 (see Exhibit 4(i) therein).
Plan
10(h) Metatec International, Inc. 1992 Registration Statement on Form S-8, File
Directors' Stock Option Plan No. 33-52700 (see Exhibit 4(c) therein).
10(i) Amendment No. 1 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1993 (see Exhibit
Stock Option Plan 10(i) therein).
10(j) Amendment No. 2 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1995 (see Exhibit
Stock Option Plan 10(k) therein).
10(k) Amendment No. 3 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1995 (see Exhibit
Stock Option Plan 10(i) therein).
10(l) Amendment No. 4 to Metatec Annual Report on Form 10-K for the fiscal
International, Inc. 1992 Directors' year ended December 31, 1996 (see Exhibit
Stock Option Plan 10(m) therein).
10(m) Amendment No. 5 to Metatec Registration Statement on Form S-8, File
International, Inc. 1992 Directors' No. 333-31027 (see Exhibit 4 therein).
Stock Option Plan
10(n) Metatec International, Inc. 1999 Registration Statement on Form S-8, File
Directors Stock Option Plan No. 333-10442 (see Exhibit 4(d) therein).
10(o) Metatec International, Inc. Directors Annual Report on Form 10-K for the fiscal
Deferred Compensation Plan year ended December 31, 1997 (see Exhibit
10(p) therein).
10(p) Form of Indemnification Agreement Annual Report on Form 10-K for the fiscal
between Metatec International, Inc. year ended December 31, 1999 (see Exhibit
and each of its officers and directors 10(t) therein).
43
10(q) DVD Video and DVD ROM Disc Patent Quarterly Report on Form 10-Q for the
License Agreement dated August 9, quarterly period ended July 31, 2002 (see
2002, between Koninklijke Philips Exhibit 10.1 therein).
Electronics N.V. and Metatec
International, Inc.
10(r) Patent License Agreement for the Use Quarterly Report on Form 10-Q for the
of AC-3 Technology in the Manufacture quarterly period ended July 31, 2002 (see
of DVD-Video Discs dated August 9, Exhibit 10.2 therein).
2002, between Koninklijke Philips
Electronics N.V. and Metatec
International, Inc.
10(s) MPEG Audio Patent License Agreement Quarterly Report on Form 10-Q for the
dated August 9, 2002, between quarterly period ended July 31, 2002 (see
Koninklijke Philips Electronics N.V. Exhibit 10.3 therein).
and Metatec International, Inc.
10(t) CD Disc Patent License Agreement dated Quarterly Report on Form 10-Q for the
August 9, 2002, between Koninklijke quarterly period ended July 31, 2002 (see
Philips Electronics N.V. and Metatec Exhibit 10.4 therein).
International, Inc.
10(u) Letter agreement dated August 9, 2002, Quarterly Report on Form 10-Q for the
among U.S. Philips Corporation, quarterly period ended July 31, 2002 (see
Koninklijke Philips Electronics N.V. Exhibit 10.5 therein).
and Metatec International, Inc.
10(v) Patent License Agreement for Disc Amendment No. 1 to Registration
Products dated July 1, 1986, between Statement on Form S-1, File No. 33-60878
Metatec/ Discovery Systems, Inc. and (see Exhibit 10(t) therein).
Discovision Associates
10(w) Letter agreement dated October 9, Quarterly Report on Form 10-Q for the
2002, among Discovision Associates and quarterly period ended September 30, 2002
Metatec International, Inc. (see Exhibit 10.1 therein).
44
10(x) DVD Patent License Agreement dated Contained herein.
December 31, 2002, between Toshiba
Corporation and Metatec International,
Inc.
10(y) Letter agreement dated January 29, Contained herein.
2003, between Toshiba Corporation and
Metatec International, Inc.
10(z) Optical Disc Corporation NPR Amendment No. 1 to Registration
Technology License Agreement between Statement on Form S-1, File No. 33-60878
Optical Disc Corp-oration and (see Exhibit 10(v) therein).
Metatec/Discovery Systems effective
March 2, 1992
10(aa) Second Amended and Restated Loan Current Report on Form 8-K dated
Loan Agreement dated as of February 14, 2002 (See Exhibit
February 8, 2002, among 10.1 therein).
Metatec International, Inc.,
Bank One, NA, The Huntington
National Bank, other financial
institutions from time to time
party thereto, as banks, and The
Huntington National Bank, as
administrative agent for the
banks.
10(bb) $19.0 million Promissory Note and Annual Report on Form 10-K for the fiscal
Mortgage, Assignment of Rents and year ended December 31, 1999 (see Exhibit
Security Agreement, each dated July 10(y) therein).
28, 1999, between META Holdings, LLC
and Huntington Capital Corp.
10(cc) Employment Agreement dated November Annual Report on Form 10-K for the fiscal
22, 2000, between Metatec year ended December 31, 2000 (see Exhibit
International, Inc. and Christopher A. 10(z) therein).
Munro.
10(dd) First Amendment to Employment Annual Report on Form 10-K for the fiscal
Agreement dated as of March 26, 2002, year ended December 31, 2001 (see Exhibit
between Metatec International, Inc. 10(z) therein).
and Christopher A. Munro.
45
10(ee) Restricted Share Agreement effective Annual Report on Form 10-K for the fiscal
January 2, 2001, between Metatec year ended December 31, 2000 (see Exhibit
International, Inc. and Christopher A. 10(aa) therein).
Munro.
10(ff) First Amendment to Restricted Share Annual Report on Form 10-K for the fiscal
Agreement dated as of March 26, 2002, year ended December 31, 2001 (see Exhibit
between Metatec International, Inc. 10(bb) therein).
and Christopher A. Munro.
10(gg) Separation Agreement and Release Annual Report on Form 10-K for the fiscal
effective December 7, 2001, between year ended December 31, 2001 (see Exhibit
Metatec International, Inc. and 10(cc) therein).
Jeffrey M. Wilkins.
10(hh) Restricted Share Agreement dated as of Annual Report on Form 10-K for the fiscal
February 13, 2002, between Metatec year ended December 31, 2001 (see Exhibit
International, Inc. and Gary W. 10(dd) therein).
Qualmann.
21 Subsidiaries of Metatec International, Contained herein.
Inc.
23 Consent of Deloitte & Touche LLP and Contained herein.
Report on Schedule
24(a) Powers of Attorney for Joseph F. Annual Report on Form 10-K for the fiscal
Keeler, Jr., Peter J. Kight, David P. year ended December 31, 2001 (see Exhibit
Lauer, Jerry D. Miller, James V. 24(a) therein).
Pickett, Daniel D. Viren, and Jeffrey
M. Wilkins.
99.1 Certification Pursuant to 18 U.S.C. Contained herein.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
46
99.2 Certification Pursuant to 18 U.S.C. Contained herein.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
47