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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, 2000
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. [ ]
The aggregate market value of the Common Shares held by nonaffiliates
of the Registrant as of March 8, 2001, was $6,619,659.
On March 8, 2001, the Registrant had 6,136,113 Common Shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its annual meeting of
shareholders to be held on May 15, 2001, which proxy statement will be filed
with the Securities and Exchange Commission within 120 days of December 31,2000,
are incorporated by reference into Part III, Items 10, 11, 12, and 13 of this
Report.
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METATEC INTERNATIONAL, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Metatec International, Inc., an international information distribution
company ("Metatec"), helps customers utilize CD-ROM (compact disc-read only
memory), DVD-ROM (digital versatile disc-read only memory), DVD-Video (visual
presentations such as movies), and Internet technologies to publish and
distribute information and software. Metatec operates ISO-9000 certified
manufacturing and fulfillment sites in Ohio, California and The Netherlands.
Metatec offers its customers a variety of services, including data preparation
and mastering, optical disc replication and printing, packaging, bulk
distribution and individual fulfillment, inventory management, project
management, secure online transmission, and a variety of electronic monitoring
and tracking services. Metatec's customers represent a host of industries and
organizations, such as publishing firms, computer hardware and software
companies, government agencies, and professional associations. Metatec and its
subsidiaries are hereinafter collectively referred to as the "Company."
CD-ROM technology combines audio, video, text, and graphics in one
medium with the capability to store, search, and retrieve large quantities of
information. One CD-ROM can contain up to 650 megabytes of data. The Company
believes that businesses and individuals use CD-ROM technology as a
cost-effective means of organizing, storing, and disseminating large quantities
of information quickly to widely diversified groups of users.
DVD-ROM technology represents a type of optical disc that can hold up
to 18 gigabytes of information, or over twenty times the amount of the current
CD-ROM. It is projected that DVD-ROM will coexist and could eventually replace
CD-ROM and expand the utilization of optical disc with greater graphic and video
applications. This expansion will first require new DVD-ROM drives to be
installed in order to have significant market penetration. DVD-ROM drives began
to be introduced during 1997 and are standard equipment on most new personal
computers. Early adaptation of DVD technology primarily has been for movies.
Because of the capacity of DVD-Video, movies can be presented in more than one
language, can have movie outtakes, interviews, behind-the-scenes information and
web connectivity; capabilities absent on videotape formats. It is also believed
that DVD-Video could be used for company training and sales presentations.
For the past several years, the Company has provided packaging and
fulfillment services to its customers. Within the last two years the Company has
focused its packaging and fulfillment services in the area of making "supply
chain management services" available to customers. For customers requesting
supply chain management services, the Company will manage all aspects of the job
order, from disc replication to packaging, warehousing, fulfillment and returns
management. These services are supported by extensive information technology
that permits customers to track job status and inventory information.
Internet technologies are developed and offered through the Company's
Internet Products Group. This group provides secure, trackable and verifiable
transmission of software and information over the Internet, Extranets and
Intranets. Software and information distribution services are made available
through two offerings. The first, Metatec Express, is a hosted, managed service
providing secure, same day delivery of software and electronic documents
anywhere in the world. The second, Metatec Web Transporter(TM), is a product
that works with existing network technologies and companies' internal
distribution capabilities to manage, distribute, and track any type of
application or data.
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Prior to May 1, 1999, the registrant was Metatec Corporation, a Florida
corporation which was incorporated on September 9, 1976. At the annual meeting
of shareholders on April 30, 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 on April 30, 1999, at 11:59 p.m. 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 12 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
Methods for the distribution of business information include print,
optical disc, audio and video, and Internet services. CD-ROM, one form of
optical disc technology, was initially used for storing vast quantities of data.
Today, CD-ROM is the primary method of software distribution for many
business-to-business and consumer software companies. CD-ROM is also a popular
medium for marketing, training, promotions, game distribution and other types of
communication. With the growing use of DVD, or digital versatile disc, optical
disc technology has the opportunity for increased penetration into business and
consumer products and services. DVD is predicted to eventually displace
videotape as the primary form of distributing popular movies. With DVD's vast
storage, it is expected to play an increasingly important role in corporate
training and presentation programs that require extensive use of graphics,
audio, video and interactive presentation capabilities. A major factor
contributing to the successful establishment of optical technology is the degree
of standardization achieved in the early stages of market development. Adherence
to these standards has significantly contributed to the growth of optical disc
technology.
With increased competition and a nationwide shortage of workers,
companies are seeking better methods to manage costs and speed products to
market. These events have given rise to a focus on supply chain management
services in many industries, including technology. Companies are looking for
help in compressing the supply chain with single-source providers of services.
The Company's history of providing packaging and fulfillment services to
software companies presents an opportunity for growing the Company's business in
providing supply chain management services.
As a method of distributing business information, Internet services -
sometimes called on-line or electronic services - lend themselves to information
that requires frequent or continuous updating or requires rapid deployment. The
growing use of Extranets (businesses serving their clients through Internet
technology) and Intranets (businesses serving their employees or other divisions
of their company through Internet technology) provides an opportunity for the
rapid and secure distribution of software, electronic documents and other
information. While Internet services to consumers receive substantial attention
in the popular press, business-to-business services through Internet technology
hold more potential for growth and development as a method of commerce.
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PRINCIPAL PRODUCTS AND SERVICES
The Company is an integrator of technologies and services to meet its
customers' information distribution needs. Metatec's expertise in quick-turn
optical disc replication is merging with e-business and supply chain service
offerings to both the business-to-business and retail marketplaces. The Company
also offers logistics services online and through a direct sales force that
encompass packaging, distribution, warehousing and fulfillment capabilities. The
Company's strategy targets customers who generally have time-sensitive and
recurring information distribution requirements, demand high quality disc
manufacturing, and need fulfillment and distribution services.
In optical disc production, the Company manufactures CD-ROMs and
DVD-ROMs and DVD-Videos. The Company offers its customers a variety of services
including data preparation and mastering, optical disc replication and printing,
packaging, bulk distribution and individual fulfillment, inventory management,
project management, and a variety of electronic monitoring and tracking
services.
The Company provides full-service disc packaging, warehousing, and
direct-to-user product shipping. The Company constructed a 151,000 square foot
distribution center at its Dublin, Ohio location to expand its packaging and
fulfillment services and also offers similar services at its Silicon Valley
location. Logistics are a growth area for Metatec as more companies require such
value-added services beyond disc manufacturing.
The Company offers a suite of work monitoring and productivity tools
called Metatec Exchange. Customers with access to the Internet can access a
secure online area to check packaging inventory levels, monitor job progress
through Metatec's manufacturing plants and approve disc art work. Metatec
Exchange decreases communication time and enhances the exchange of information
between Metatec and its customers.
The Company's Internet products are developed and offered through
Metatec Internet Products. This group provides secure, trackable and verifiable
transmission of software and information over the Internet, Extranets and
Intranets. Software and information distribution services are made available
through two offerings. The Company's hosted offering is called Metatec
Express(sm.). It is a managed service providing secure same day delivery of
software and electronic documents anywhere in the world. The second, Metatec Web
Transporter(TM), is a product that works with existing network technologies and
companies' internal distribution systems to manage, distribute and track any
type of application or data.
The Company's optical disc manufacturing, e-business, logistics and
Internet services can be used individually or in an integrated fashion by
customers. For example, customers requiring software distribution through disc
manufacturing can also offer updates or immediate content availability online.
Also, customers might purchase certain Metatec services through the direct sales
force or have direct access through Internet-based e-commerce services.
The Company operates manufacturing and fulfillment sites in Dublin,
Ohio; Milpitas, California ("Silicon Valley"); and Breda, The Netherlands. These
state-of-the-art, ISO-9000 certified, facilities permit the Company to offer
quick-turn services to major population centers and low-cost solutions to
companies with geographically disbursed information distribution needs. 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.
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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 2001.
MARKETING
The Company markets it products and services through multiple sales
channels and by using employed associates. These associates are responsible for
maintaining relationships with existing customers and developing new business
relationships. The associates are supported by a customer service staff that is
responsible for ensuring that each order is processed in a timely manner and all
required support materials are in place. The Company maintains customer support
operations at all of its manufacturing facilities. In addition, the Company's
products and services are marketed online through its web site and through
directory listings. The Company also makes use of a variety of marketing
communications initiatives such as news media relations, the creation and
distribution of sales collateral materials, electronic chat boards, online
conferencing and presentation services and news wires.
COMPETITION
The Company has a number of competitors, some of which are larger and
have greater financial resources than the Company. The Company believes that the
principal competitive factors in the CD-ROM and DVD-ROM marketplace consist of
service, quality, and reliability for the timely delivery of products. The
Company believes it competes favorably with respect to these factors in the
CD-ROM and DVD-ROM market.
The Company differentiates itself from its competitors by providing a
fully integrated approach to information distribution that includes
manufacturing flexibility (including quick turnaround times), personalized
customer service, logistics services, e-business solutions and Internet-based
distribution solutions.
EMPLOYEES
The Company employed approximately 741 persons as of March 5, 2001.
Approximately 450 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 operations. A first mortgage on the real
estate and improvements at this location secures a credit facility of the
Company.
The Company currently leases approximately 142,500 square feet of
manufacturing, customer support, and distribution and fulfillment facilities in
Milpitas, California ("Silicon Valley"). The Company also leases approximately
25,000 square feet of manufacturing, customer support, and distribution and
fulfillment facilities in Breda, The Netherlands.
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The Company also leases office space in Chicago, New York, Boston,
Seattle, and Somerville, New Jersey, for use as regional sales offices.
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 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 not a party to any other material pending legal
proceeding, nor to the Company's knowledge, is any material legal proceeding
threatened against it.
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
-------- --- ------------------------------------
Jeffrey M. Wilkins 56 Chairman of the Board, President and Chief
Executive Officer
Christopher A. Munro 40 Chief Operating Officer
Julia A. Pollner 38 Senior Vice President, Finance, Secretary and
Treasurer
Christopher T. Haynor 36 Vice President, Sales
Tammi Nance Spayde 38 Vice President-Business Management and Human
Resources/Organizational Development
Martin G. Stokman 40 Vice President, Europe
Jeffrey F. Tarplin 46 Vice President and General Manager, Internet
Products Group
Mr. Wilkins has been Chairman of the Board and Chief Executive Officer
of the Company since August 1989.
Mr. Munro joined the Company on January 2, 2001, as Chief Operating
Officer. Prior to joining the Company Mr. Munro held the position of Senior Vice
President of Strategy and Development of Exel Logistics, a worldwide supply
chain company with global headquarters in London UK. Mr. Munro was employed by
Exel Logistics for over twenty years.
Ms. Pollner has been Senior Vice President, Finance, Treasurer, and
Secretary since May 1998, and has held various accounting and finance positions
with the Company since 1987.
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Mr. Haynor has been Vice President of Sales since September 1999. Since
1994, when Mr. Haynor joined the company from Dun & Bradstreet Corporation, he
has held several sales positions.
Ms. Spayde has been Vice President of Human Resources/Organizational
Development of the Company since August 1998, and in June of 2000, was appointed
Vice President of Business Management. From 1984 until joining the Company in
1998, Ms. Spayde held various human resource and administration positions with
OhioHealth Corporation, an integrated healthcare system.
Mr. Stokman has been Vice President, Europe of the Company since
January 1999. Mr. Stokman joined the Company in October 1998, in connection with
the Company's acquisition of the CD-ROM services business assets of Imation.
From 1997 to 1998, Mr. Stokman was Imation's business manager for its CD-ROM
services business in Europe. From 1995 to 1997, Mr. Stokman was a manager of a
European distribution center for 3M, the former owner of Imation.
Mr. Tarplin has been Vice President and General Manager, Internet
Products Group since July, 1999. From 1996, until joining the Company, Mr.
Tarplin was president of Megasoft Online, Inc. an Internet software and services
company. Megasoft, Inc. filed for Chapter 11 bankruptcy protection in January
1999, and the Company acquired Megasoft's Silverspan business through a
court-approved sale under such bankruptcy in 1999. See Note (2) of the Financial
Statements contained in Item 8 of this Form 10-K. From 1993 to 1999, Mr. Tarplin
was senior vice president and director, Megasoft Holdings, Inc., the parent
corporation of Megasoft Online, Inc. and a holding company for operating
businesses involved in contract software manufacturing and distribution services
and Internet software products and services.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares are traded on the Nasdaq National Market
system under the symbol META. 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 2000
March 31 $7.25 $2.66
June 30 $3.88 $2.34
September 30 $3.38 $2.00
December 31 $2.44 $0.81
For the quarter ended 1999
March 31 $8.00 $4.00
June 30 $6.25 $3.75
September 30 $6.38 $3.06
December 31 $4.50 $2.00
As of March 2, 2001, there were 3,735 holders of record of the Common
Shares, and the last sales price per share on that date, as reported by the
Nasdaq National Market system, was $1.13.
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The Company has never paid cash dividends on its Common Shares. The
payment of dividends is within the discretion of the Company's board of
directors and depends upon the earnings, the capital requirements, and the
operating and financial condition of the Company, among other factors. The
Company does not expect to pay cash dividends in the foreseeable future.
In addition, the terms of the Company's credit facilities prohibit it
from paying cash dividends or making any other distributions of any kind to
shareholders without the prior consents of the administrative agent of these
credit facilities and the banks providing two-thirds of the funding for such
facilities.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Sales $104,231,047 $120,281,047 $ 80,919,128 $48,933,634 $46,150,105
Earnings (loss) before income taxes $(18,362,618) $ (4,166,290) $ 2,684,769 $ 1,040,534 $ 3,398,728
Net earnings (loss) $(17,532,618) $ (2,846,290) $ 1,422,769 $ 491,534 $ 2,040,728
Earnings (loss) per common share:
Basic and diluted $ (2.88) $ (0.47) $ 0.23 $ 0.07 $ 0.29
Weighted average number of
common shares outstanding:
Basic 6,085,426 6,074,879 6,058,414 6,791,836 7,064,194
Diluted 6,085,426 6,074,879 6,115,084 7,189,266 7,159,775
Total assets $ 77,332,873 $111,407,753 $105,442,814 $52,871,893 $52,517,477
Long-term liabilities $ 35,920,387 $ 47,382,793 $ 41,031,569 $ 5,893,410 $ 1,335,105
Shareholders' equity $ 20,171,877 $ 37,862,192 $ 41,949,897 $41,194,053 $45,265,791
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
Net sales in 2000 were $104,231,000, a decrease of $16,050,000, or 13% from
1999. This decrease resulted primarily from CD-ROM manufacturing sales
decreasing $14,959,000 to $97,790,000 for 2000, or 13%. This decrease was due to
several factors. In 2000, the pricing for CD-ROM products and services continued
to decline industry-wide due to excess manufacturing capacity, a trend the
Company anticipates will continue into 2001. In addition, the demand for the
Company's CD-ROM products and services declined due to several factors,
including a decline in general economic conditions which caused many of the
Company's software customers to delay or reduce their software releases, the
continued increase in customers using on-line or electronic methods to
distribute information, and the continued maturation of the CD-ROM market. The
Company anticipates that these factors may continue to impact the demand for the
Company's CD-ROM products and services in 2001. Radio syndication sales
decreased $1,050,000, or 25%, to $3,153,000 in 2000, primarily as a result of
some customers choosing to use CD-Recordable as a distribution method for
smaller size orders. The company expects this trend to continue for the
foreseeable future. DVD sales accounted for $1,973,000 in 2000, as compared to
$751,000 in 1999.
Gross profit was 28% of net sales for 2000 and 1999.
Selling, general and administrative expenses ("SG&A") decreased to $27,374,000,
or 26% of net sales, for 2000 as compared to $32,911,000, or 27% of net sales,
for 1999. This reduction was primarily attributed to the restructuring and
workforce reductions, which occurred in the first quarter of 2000.
At each balance sheet date, a determination is made by management to ascertain
whether goodwill or any fixed 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 2000, management
evaluated these criteria and determined that certain goodwill and fixed assets
associated with the Company's Milpitas, California ("Silicon Valley")
operations, which were acquired from Imation Corporation ("Imation") in
September 1998, were impaired. Accordingly, in the fourth quarter of 2000, the
Company recorded a $15.6 million writedown of the carrying value of these
impaired assets based on the discounted cash flows of the operations. At
December 31, 2000, the remaining goodwill on the balance sheet was $4.6 million
as compared to $18.3 million at December 31, 1999.
Restructuring expenses of $431,000 and $44,000 were incurred during the first
and fourth quarters of 2000. These restructuring expenses consisted primarily of
severance and termination benefits related to the completion of a U.S. workforce
reduction of approximately 12%. The workforce reduction was accomplished through
attrition, unfilled vacancies, and layoffs of temporary and some full time
employees.
Investment income was $33,000 for 2000 as compared to $25,000 for 1999. The
increase in investment income was a result of higher cash and cash equivalent
balances.
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Interest expense was $4,242,000 for 2000 as compared to $3,336,000 for
1999. The increase in interest expense was the result of increased borrowings
under the Company's credit facilities, as well as increases in the interest
rate.
The income tax benefit was $830,000 in 2000, or an effective tax benefit of
4.5%, as compared to an income tax benefit of $1,320,000 in 1999, or an
effective tax rate of 32%. The primary reason for the decrease was the recording
of a valuation allowance in connection with the writedown of the carrying value
of fixed assets and goodwill associated with the Silicon Valley operations
acquired from Imation, due to the uncertainty of realizing the value of such
benefit.
As a result of the foregoing, the net loss for 2000 was $17,533,000, or basic
and diluted losses per common share of $(2.88), as compared to the 1999 net loss
of $2,846,000, or basic and diluted losses per common share of $(.47).
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
Net sales in 1999 were $120,281,000, an increase of $39,362,000, or 49% over
1998. This increase resulted primarily from CD-ROM manufacturing sales
increasing $38,895,000 to $112,749,000 for 1999, or 53%. A significant portion
of this increase was attributable to the inclusion of a full year of sales from
the CD-ROM services business acquired from Imation in September 1998. Radio
syndication sales decreased $693,000, or 14%, to $4,203,000 in 1999, primarily
as a result of some customers choosing to use CD-Recordable as a distribution
method for smaller size orders. DVD sales accounted for $751,000 in 1999, as
compared to $190,000 in 1998.
Gross profit was 28% of net sales for 1999 as compared to 29% of net sales for
1998. The decrease in gross profit percentage was primarily attributable to the
continuation of price erosion during 1999, albeit at a slower rate than in prior
years.
Selling, general and administrative expenses ("SG&A") increased to $32,911,000,
or 27% of net sales, for 1999 as compared to $18,980,000, or 23% of net sales,
for 1998. SG&A expenses increased in 1999 as a percentage of sales due to the
increased overhead needed to absorb the additional sites, employee levels, and
systems acquired in connection with the acquisition of Imation's CD-ROM services
business.
Restructuring expenses of $1,051,000 were incurred during the fourth quarter of
1999. These restructuring expenses included approximately $488,000 of severance
and termination benefits related to the Company's decision to close its
Wisconsin client services center and approximately $563,000 associated with
consolidating manufacturing and packaging operations formerly located in
Fremont, California into a single facility in Silicon Valley. These costs
related primarily to estimated lease costs, net of estimated sub-lease rental
income, which will be incurred during the remainder of the Fremont lease term.
Restructuring expenses of $826,000 were incurred during 1998. The 1998
restructuring expenses primarily related to integration costs due to the Imation
CD-ROM services business acquisition and certain rent, utilities and labor
expenses associated with closing a Wisconsin manufacturing facility acquired in
that acquisition.
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Investment income was $25,000 for 1999 as compared to $35,000 for 1998. The
decrease in investment income was a result of lower cash and cash equivalent
balances.
Interest expense was $3,336,000 for 1999 as compared to $1,186,000 for 1998. The
increase in interest expense was the result of increased borrowings under the
Company's credit facilities.
Income tax benefit was $1,320,000 in 1999, or an effective tax benefit of 32%,
as compared to an income tax expense of $1,262,000 in 1998, or an effective tax
rate of 47%. The 1999 income tax benefit was primarily the result of a loss
before income taxes of $4,166,000 in 1999, as compared to earnings before income
taxes of $2,685,000 in 1998.
The net loss for 1999 was $2,846,000, or basic and diluted losses per common
share of $(.47), as compared to 1998 net earnings of $1,423,000, or basic and
diluted earnings per common share of $.23. This decrease was primarily the
result of lower gross margins and increased SG&A expenses as a percentage of
sales.
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 2000.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financials Accounting Standards (SFAS) No. 133, Accounting
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company will adopt SFAS 133 effective
January 1, 2001. Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company financed its business in 2000 through cash generated from
operations, the use of debt, and the use of available cash balances. Cash flow
from operating activities was $14,783,000, $10,694,000, and $19,342,000 for
2000, 1999 and 1998, respectively. The Company has cash and cash equivalents of
$2,086,000 as of December 31, 2000.
During 2000, the Company continued to increase its distribution capacity over
the 1999 levels. These additions, along with recurring capital needs, resulted
in the purchase of $5,298,000 in property, plant and equipment during 2000 as
compared to $22,823,000 in 1999 and $16,030,000 in 1998.
The Company completed construction of its distribution center in October 1999.
The Company financed the construction through cash generated through operations
and funds available under a
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$7,000,000 construction loan facility. This construction loan was replaced in
1999 by a permanent loan facility, discussed below. Total interest capitalized
during 1999, related to the distribution center, was $74,242.
The Huntington National Bank and Bank One, NA have provided a $37,000,000 term
loan facility and a $13,000,000 revolving loan facility to the Company (the
"Credit Facilities"). The term loan facility and a portion of the revolving loan
facility were used to finance the Imation asset purchase. As of December 31,
2000, $14,958,000 and $7,500,000 was outstanding under the term loan facility
and the revolving loan facility, respectively. The Company was not in compliance
with certain of its financial and other covenants as of December 31, 2000, and
the banks waived compliance with these covenants through December 31, 2000. The
banks modified the financial covenants, and the Company anticipates being in
compliance with the revised covenants through the remainder of 2001. If such
modified financial covenants would have been in effect at December 31, 2000, the
Company would have been in compliance with them as of that date.
On April 2, 2001, the banks and the Company amended certain terms and financial
covenants of the Credit Facilities. The following is a summary of the terms of
the amended Credit Facilities. As part of the amended Credit Facilities, the
revolving loan and the term loan will mature on April 1, 2002. The revolving
loan has been changed to an asset based lending arrangement wherein a
$13,000,000 borrowing base will be limited by the amounts of any outstanding
letters of credit and 80% of eligible domestic accounts receivable, 80% of
eligible insured foreign accounts receivable, 30% of eligible domestic
inventory, and 20% of domestic machinery and equipment at net book value,
eligibility to be determined by the banks. 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 certain financial and other covenants. In addition, effective March 31,
2001, interest will accrue at 2% in excess of the prime rate of the banks, and
quarterly commitment fees are required to be paid. The Company expects that it
will be able to negotiate a new borrowing facility prior to April 1, 2002,
however, there can be no assurance that the Company will be able to do so.
The Company has a $19,000,000 loan facility with Huntington Capital Corp which
is payable in monthly principal and interest payments based upon a thirty year
amortization schedule and bears interest at a fixed rate of 8.2%. This term loan
facility was used to permanently finance the Company's new Dublin, Ohio
distribution center and to pay down other bank debt. This loan facility is
payable in monthly installments over 10 years, with a 30 year amortization
period, and 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.
Management believes that current cash balances, plus the funds available under
its current and future credit facilities, plus cash to be generated from future
operations should provide sufficient capital to meet the current business needs
of the Company for the foreseeable future.
During the first quarter of 2001, the Company's board of directors approved a
plan to restructure certain of the Company's operations. As part of the plan,
the Company implemented a workforce reduction for its Dublin facility during the
first quarter of 2001, and the Company expects to implement other portions of
this plan during the remainder of 2001.
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 generally
accepted accounting principles. 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.
12
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 comprised solely of directors independent of management. 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.
Jeffrey M. Wilkins
Chairman of the Board and
Chief Executive Officer
Julia A. Pollner
Senior Vice President and
Secretary, Treasurer
13
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.
PRODUCT CONCENTRATION; DEMAND FOR PRODUCTS
Revenues from CD-ROM manufacturing sales constituted substantially all
of the Company's revenues for 2000. Although the Company is implementing a plan
to increase revenues from its fulfillment packaging and distribution services,
CD-ROM manufacturing sales are expected to continue to account for substantially
all of the Company's revenues for the foreseeable future.
The Company experienced a material decrease in revenues in its CD-ROM
manufacturing sales in 2000. This decrease was the caused, in part, by a decline
in the demand for the Company's CD-ROM products and services, which decline in
demand was caused primarily by (i) the continuation of customers to increase
their use of electronic methods to distribute information rather than CD-ROM,
and (ii) the continuation of the maturity 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 and services in 2001, which may cause a further
decline in CD-ROM manufacturing sales in 2001. The continued decrease in demand
for the Company's products and services would have a material adverse effect on
the Company's 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
significantly declined in 2000 and 1999 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 2000, the pricing for CD-ROM products and services continued to
decline industry-wide due to excess manufacturing capacity, a trend the Company
anticipates will continue into 2001. In prior years, market growth offset
increased manufacturing capacity in the CD-ROM industry. However, this growth is
not anticipated to continue due to the continued 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.
RISKS RELATED TO INTANGIBLE ASSETS
A portion of the Company's consolidated total assets are represented by
intangible assets. In the event of any sale or liquidation of the Company or a
portion of its assets, there can be no assurance that the value of the Company's
intangible assets will be realized. In addition, the Company periodically
evaluates whether events or circumstances have occurred indicating that any
portion of the remaining balance of the amount allocable to the Company's
intangible assets may not be recoverable. When factors indicate that the amount
allocable to the Company's intangible assets has been impaired, the Company
would be required to write down the carrying value of such assets. In 2000,
based on this evaluation, management determined that it was necessary to write
down approximately $15.6 million of intangible assets associated with its
Silicon Valley facility. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." Any future
14
determination requiring the write down of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition, and results of operations.
COMPETITION
The Company faces competition in the information distribution industry
from a number of sources, such as traditional print publishers, on-line
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 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.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the efforts of certain key
personnel, particularly Jeffrey M. Wilkins, its Chairman of the Board and Chief
Executive Officer. The loss of Mr. Wilkins' services to the Company could have
an adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments in its
investment portfolio except for forward contracts used to hedge the net
receivable/payable position arising from an intercompany note between Metatec
International and the European subsidiary. 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 75 to 150 basis points above LIBOR, and therefore affected 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 2001, 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 the year's ended December 31, 2000 and 1999 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, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. 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.
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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
February 26, 2001, except for Note 5, as to which the date is April 2, 2001
Columbus, Ohio
15
METATEC INTERNATIONAL, INC.
- ---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31,
------------------------
2000 1999 1998
- ----------------------------------------------------------------- ------------- ------------- -------------
NET SALES $ 104,231,047 $ 120,281,047 $80,919,128
Cost of sales 74,897,674 87,174,319 57,276,391
------------- ------------- -----------
Gross profit 29,333,373 33,106,728 23,642,737
Selling, general and administrative expenses 27,374,306 32,910,549 18,980,164
Impairment of goodwill and assets and other restructuring costs 16,112,287 1,050,722 825,975
------------- ------------- -----------
OPERATING EARNINGS (LOSS) (14,153,220) (854,543) 3,836,598
Other income and (expense):
Investment income 32,844 24,520 34,546
Interest expense (4,242,242) (3,336,267) (1,186,375)
------------- ------------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (18,362,618) (4,166,290) 2,684,769
Income taxes (benefit) (830,000) (1,320,000) 1,262,000
------------- ------------- -----------
NET EARNINGS (LOSS) $ (17,532,618) $ (2,846,290) $ 1,422,769
============= ============= ===========
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted $ (2.88) $ (0.47) $ 0.23
============= ============= ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 6,085,426 6,074,879 6,058,414
============= ============= ===========
Diluted 6,085,426 6,074,879 6,115,084
============= ============= ===========
See notes to consolidated financial statements.
16
METATEC INTERNATIONAL, INC.
- -----------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS At December 31,
------------------------------------
2000 1999
- --------------------------------------------------------------------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,086,228 $ 1,695,884
Accounts receivable, net of allowance for doubtful
accounts of $351,000 and $480,000 15,146,714 20,628,847
Inventory 2,970,219 3,671,639
Prepaid expenses 1,054,362 1,050,898
Prepaid income taxes 0 234,302
Deferred income taxes 588,107 1,784,000
------------- -------------
Total current assets 21,845,630 29,065,570
Property, plant and equipment - net 50,455,317 63,748,238
Goodwill - net 4,631,036 18,380,164
Other Assets 296,890 213,781
Deferred income taxes 104,000 0
------------- -------------
TOTAL ASSETS $ 77,332,873 $ 111,407,753
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,472,385 $ 12,663,558
Accrued Expenses:
Royalties 3,712,796 1,749,508
Personal Property Taxes 1,270,425 1,241,638
Payroll 1,193,054 1,384,775
Other 1,209,600 1,927,464
Unearned income 234,235 195,975
Current maturities of long-term real estate debt 170,087 152,528
Current maturities of other long-term debt and capital lease obligations 6,978,028 6,847,322
------------- -------------
Total current liabilities 21,240,610 26,162,768
Long-term Real Estate debt 18,623,708 18,798,008
Other Long-term debt and capital lease obligations, less current maturities 16,769,506 26,703,860
Other long-term liabilities 527,172 450,925
Deferred income taxes 0 1,430,000
------------- -------------
Total liabilities 57,160,996 73,545,561
------------- -------------
Commitments and contingencies (Notes 6, and 7)
Shareholders' equity:
Common stock, no par value; authorized
10,000,000 shares; issued 2000 -
7,177,855 shares; 1999 - 7,157,355 shares 34,991,138 34,949,138
Retained earnings (accumulated deficit) (7,573,362) 9,959,256
Accumulated other comprehensive loss (1,423,362) (1,223,665)
Treasury stock, at cost; 1,081,742 shares (5,822,537) (5,822,537)
------------- -------------
Total shareholders' equity 20,171,877 37,862,192
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 77,332,873 $ 111,407,753
============= =============
See notes to consolidated financial statements.
17
METATEC INTERNATIONAL, INC.
- --------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Additional Earnings/ Accumulated Other
Common Paid-in (Accumulated Comprehensive Treasury
Stock Capital Deficit) Income (Loss) Stock Total
- ---------------------------- ------------ ------------ ------------ ------------- ------------- ------------
BALANCE AT DECEMBER 31, 1997 $ 710,848 $ 34,102,325 $ 11,382,777 $ 0 $ (5,001,897) $ 41,194,053
Comprehensive Income:
Net earnings 1,422,769 1,422,769
Foreign currency
translation adjustments 32,963 32,963
------------
Comprehensive income 1,455,732
Treasury shares acquired (820,640) (820,640)
Stock options exercised 4,500 66,252 70,752
Tax benefit relating to
stock options 50,000 50,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 715,348 34,218,577 12,805,546 32,963 (5,822,537) 41,949,897
Comprehensive Loss:
Net loss (2,846,290) (2,846,290)
Foreign currency
translation adjustments (1,256,628) (1,256,628)
------------
Comprehensive loss (4,102,918)
Stock options exercised 388 10,825 11,213
Tax benefit relating to
stock options 4,000 4,000
Elimination of par value 34,233,402 (34,233,402)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 34,949,138 0 9,959,256 (1,223,665) (5,822,537) 37,862,192
Comprehensive Loss:
Net loss (17,532,618) (17,532,618)
Foreign currency
translation adjustments (199,697) (199,697)
------------
Comprehensive loss (17,732,314)
Stock options exercised 32,000 32,000
Tax benefit relating to
stock options 10,000 10,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 $ 34,991,138 $ 0 $ (7,573,361) $ (1,423,362) $ (5,822,537) $ 20,171,878
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
18
METATEC INTERNATIONAL, INC.
- -----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
-----------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------ ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(17,532,618) $ (2,846,290) $ 1,422,769
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization 14,525,737 14,346,593 9,976,282
Write-down of carrying value of capital assets and goodwill 15,637,642 0 0
Deferred income taxes (benefit) (326,071) (1,691,000) 349,000
Tax benefit from stock options exercised 10,000 4,000 50,000
Net loss (gain) on sales of property, plant and equipment (139,879) (62,094) 68,218
Changes in assets and liabilities:
Accounts receivable 5,326,390 606,178 (3,494,680)
Inventory 673,818 (535,012) 351,314
Prepaid expenses and other assets 278,908 105,334 (1,256,023)
Accounts payable and accrued expenses (3,719,477) 708,606 11,792,093
Unearned income 48,933 57,617 82,662
------------ ------------ ------------
Net cash provided by operating activities 14,783,383 10,693,932 19,341,635
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in long-term note receivable 0 0 550,649
Purchase of property, plant and equipment (5,060,166) (21,371,106) (14,290,702)
Proceeds from the sales of property, plant and equipment 314,893 267,668 20,638
Net cash used for acquisitions 0 (314,212) (41,635,504)
------------ ------------ ------------
Net cash used in investing activities (4,745,273) (21,417,650) (55,354,919)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt and capital lease obligations 4,139,597 33,595,339 46,332,261
Payment of long-term debt and capital lease obligations (14,099,986) (23,680,182) (8,425,888)
Stock options exercised 32,000 11,213 70,752
Treasury stock acquired 0 0 (820,640)
------------ ------------ ------------
Net cash provided (used) by financing activities (9,928,389) 9,926,370 37,156,485
------------ ------------ ------------
Effect of exchange rate on cash 280,623 (63,989) 32,963
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 390,344 (861,337) 1,176,164
Cash and cash equivalents at beginning of year 1,695,884 2,557,221 1,381,057
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,086,228 $ 1,695,884 $ 2,557,221
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 4,250,213 $ 3,950,812 $ 429,606
============ ============ ============
Income taxes paid (refunded) $ (837,228) $ 34,249 $ 1,824,155
============ ============ ============
Assets purchased for the assumption of liabilities $ 237,738 $ 1,452,313 $ 1,739,058
============ ============ ============
Acquisition of receivables and inventory for the assumption of liabilities $ 0 $ 0 $ 497,028
============ ============ ============
Assets sold for the assumption of receivable $ 0 $ 41,993 $ 0
============ ============ ============
See notes to consolidated financial statements.
19
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 and distribution for
specific customers, primarily in North America and Europe. The Company maintains
three manufacturing, sales, distribution and development facilities with sales
offices located in five different locations around the United States and Europe.
The revenues from product sales are recognized at the time the products are
shipped. For software development services, the Company recognizes profit using
the percentage of completion method, measured by the percentage of the cost of
services completed to date compared to total planned cost of services. Earned
revenue is determined on the basis of the profit recognized plus the contract
costs incurred during the period.
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.
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.
Interest is capitalized in connection with the construction of major facilities.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life. In 1998, $74,242 of
interest cost was capitalized. No interest was capitalized in 2000 or 1999.
Goodwill - Goodwill represents the excess of cost over net assets acquired and
is being amortized using the straight-line method over estimated useful lives
ranging from 10 to 15 years. Accumulated amortization was $5,810,929 and
$3,549,801 at December 31, 2000 and 1999, respectively.
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, undercounted operating cash flows and other
operating factors. At the end of 2000, management determined that certain assets
were impaired (See Note 3). No impairment was noted in other years presented.
20
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 $10,153, $8,711 and $15,508 for 2000, 1999 and 1998, respectively.
Net Earnings(Loss) Per Common Share - Basic net earnings (loss) per common share
is computed based on the weighted average number of common shares outstanding
during the period. Diluted net earnings (loss) per common share is computed
similarly but includes the dilutive effect of stock options. During 2000 and
1999, the effect of stock options was anti-dilutive.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income" requires
the reporting and display of comprehensive income and its components for all
years presented. The Company had other comprehensive losses related to foreign
currency translation adjustments of $199,697 in 2000, and $1,256,628 for 1999.
Financial Instruments - The Company entered into a series of forward contracts
(against the Dutch guilder and U.S. Dollar) to hedge the new receivable/payable
position arising from an intercompany note between Metatec 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 is 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 have been designed
to correspond with the repayment schedule contained within the intercompany
note. While these hedging instruments are subject to fluctuations in value, such
fluctuations are generally offset by the value of the underlying exposures being
hedged.
Foreign Currency Translation - The assets and liabilities of the Company's
subsidiaries outside the United States are translated into U.S. dollars at the
rates of exchange in effect at the balance sheet dates. Income and expense items
are translated at the average exchange rates prevailing during the period. Gains
and losses resulting from foreign currency transactions are recognized currently
in net income and those resulting from translation of financial statements are
recognized currently in comprehensive income.
Impact of New Accounting Standards -SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for all fiscal years beginning
after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company will adopt SFAS 133 effective January 1,
2001. Management does not expect the adoption of SFAS 133 to have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
Reclassifications - Certain reclassifications have been made to the prior year
financial statements to conform with the 2000 presentation.
21
2. BUSINESS COMBINATIONS
On July 2, 1999, the Company purchased the technology products and services
business of a company called SilverSpan for a purchase price of $314,212, which
included $64,212 in goodwill, plus an earnout to be paid over a 42-month period.
Total amount of payments in 2000 $6,335 and none in 1999.
SilverSpan was a software products and technology services firm specializing in
secure, managed delivery of software, digital documents and information products
for business customers over the Internet, corporate Intranets, and Extranets.
The Company acquired the SilverSpan business through a court-approved sale under
the Chapter 11 proceedings of Megasoft, SilverSpan's parent company. The Company
financed the purchase through funds borrowed under the Company's existing
revolving loan facility. The impact of the purchase of SilverSpan was not
material to the Company's 1999 results of operations.
During 1998, the Company purchased the CD-ROM services business assets of
Imation Corporation ("Imation") for $39.8 million, excluding professional
service fees, in a business combination accounted for under the purchase method.
The assets acquired were recorded at their fair values and included goodwill of
$18,025,184 which is being amortized over 15 years using the straight-line
method (see Note 3).
The asset purchase included Imation's plant operations in Fremont, California;
Breda, The Netherlands; and Menomonie, Wisconsin. The Menomonie plant operations
were transferred to Metatec's Dublin, Ohio, manufacturing plant by the end of
the fourth quarter of 1998 after completion of a transitional operations period
in Menomonie.
The purchase price for the Imation assets was $39.8 million. The Company
financed the asset purchase through a $30.0 million term loan facility and a
portion of a $20.0 million revolving loan facility.
The pro forma results of operations of the Company for 1998, assuming the
Imation acquisition occurred at the beginning of the year, are as follows:
Net revenues $127,023,636
Net Income 5,725,750
Basic net earnings per share 0.95
Diluted net earnings per share 0.94
3. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
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 Dublin and in 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 a further workforce reduction at the Silicon Valley facility
resulting in a restructuring charge of $44,084 primarily for severance and
termination benefits. All of the severance and termination benefits were paid as
of December 31, 2000.
22
At the end of 2000, a determination was made by management that goodwill and
specific fixed assets associated with the Company's Milpitas, California
("Silicon Valley") operations, which were acquired from Imation Corporation
("Imation") in September 1998, were impaired. This decision was based upon an
analysis of expected future cash flows and necessitated a writedown of these
assets. Accordingly, a writedown of goodwill ($11,695,618) and fixed assets
($3,942,024) totaling $15,637,642, was realized using discounted future cash
flow to estimate fair value.
During the fourth quarter of 1999, the Company made a decision to close its
Menomonie, Wisconsin client services center. As a result of this action, the
Company incurred restructuring charges of $488,255 primarily for severance and
termination benefits, $198,622 of which had been paid as of December 31, 1999
and the balance of which was paid in 2000. In addition, the Company relocated
its California facility from Fremont to Silicon Valley during 1999, causing the
Company to incur restructuring charges of $562,467. These costs related
primarily to estimated lease costs, net of estimated sub-lease rentals of
$1,067,000, which will be incurred during the remainder of the Fremont lease
term to 2003.
Restructuring charges of $825,975 were incurred during 1998. These expenses
primarily related to integration costs due to the Imation CD-ROM services
business acquisition and certain rent, utilities and labor expenses associated
with the closing of a Wisconsin manufacturing facility acquired in connection
with such acquisition. Approximately $368,000 of these expenses were paid in
1998 and the balance was paid in 1999.
During the first quarter of 2001, the Company's board of directors approved a
plan to restructure certain of the Company's operations. As part of the plan,
the Company implemented a workforce reduction for its Dublin facility during the
first quarter of 2001, and the Company expects to implement other portions of
this plan during the remainder of 2001.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
2000 1999
Land $ 2,579,787 $ 2,579,787
Buildings and improvements 29,839,604 29,659,406
Machinery and equipment 51,583,135 52,279,812
Furniture and fixtures 6,138,325 5,930,555
Computer equipment
and related software 11,455,271 5,930,555
Equipment installation
and building in progress 2,860,754 2,918,746
------------- -------------
Total 104,456,876 103,492,414
Less accumulated
depreciation and impairment (54,001,559) (39,744,176)
------------- -------------
Net property, plant
and equipment $ 50,455,317 $ 63,748,238
============= =============
23
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
December 31:
2000 1999
Term debt $ 14,958,000 $ 14,250,000
Revolving line of credit 7,500,000 17,950,000
Real estate financing 18,793,796 18,950,535
Capital lease obligations 1,289,534 1,351,183
------------ ------------
Total 42,541,330 52,501,718
Less current maturities (7,148,115) (6,999,850)
------------ ------------
Long-term debt and capital
lease obligations $ 35,393,215 $ 45,501,868
============ ============
The Huntington National Bank and Bank One, NA have provided a $37,000,000 term
loan facility and a $13,000,000 revolving loan facility to the Company (the
"Credit Facilities"). The term loan facility and a portion of the revolving loan
facility were used to finance the Imation asset purchase. As of December 31,
2000, $14,958,000 and $7,500,000 was outstanding under the term loan facility
and the revolving loan facility, respectively. The Company was not in compliance
with certain of its financial and other covenants as of December 31, 2000, and
the banks waived compliance with these covenants through December 31, 2000. The
banks modified the financial covenants, and the Company anticipates being in
compliance with the revised covenants through the remainder of 2001. If such
modified financial covenants would have been in effect at December 31, 2000, the
Company would have been in compliance with them as of that date.
On April 2, 2001, the banks and the Company amended certain terms and financial
covenants of the Credit Facilities. The following is a summary of the terms of
the amended Credit Facilities. As part of the amended Credit Facilities, the
revolving loan and the term loan will mature on April 1, 2002. The revolving
loan has been changed to an asset based lending arrangement wherein a
$13,000,000 borrowing base will be limited by the amounts of any outstanding
letters of credit and 80% of eligible domestic accounts receivable, 80% of
eligible insured foreign accounts receivable, 30% of eligible domestic
inventory, and 20% of domestic machinery and equipment at net book value,
eligibility to be determined by the banks. 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 certain financial and other covenants. In addition, effective March 31,
2001, interest will accrue at 2% in excess of the prime rate of the banks, and
quarterly commitment fees are required to be paid. The Company expects that it
will be able to negotiate a new borrowing facility prior to April 1, 2002,
however, there can be no assurance that the Company will be able to do so.
The Company also has a $19,000,000 loan facility with a lender ($18,793,796
principal balance at December 31, 2000) which is payable in monthly principal
and interest payments based upon a thirty year amortization schedule and bears
interest at a fixed rate of 8.2%. This term loan facility was used to
permanently finance the Company's Dublin, Ohio distribution center and to pay
down other bank debt. The loan is structured such that the borrower is a
Company-owned Holding company; the assets of which are not available to pay the
creditors of any other person. The loan 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.
At December 31, 2000, the Company had a $400,000 and a $1,650,000 letter of
credit outstanding which had not been drawn upon before year end.
The estimated fair value of the Company's long-term obligations approximated
their carrying amount at December 31, 2000 and 1999, 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 of any kind to shareholders without
the prior consents of the administrative agent of these credit facilities and
the banks providing two-thirds of the funding for such facilities.
24
Total long-term debt maturities in 2001 to 2005, are $7,148,115, $15,901,135,
$332,081, $352,243, $384,876 respectively, and $18,422,880 thereafter.
6. LEASES
At December 31, 2000, the Company leased $1,439,597 of office equipment and
building improvements, with related accumulated depreciation of $235,805, under
non-cancelable capital lease agreements expiring at various dates through 2009.
Maintenance, insurance, and tax expenses are the responsibility of the Company
under the agreements.
Operating lease expense was $2,229,479, $3,126,464 and $1,865,688 for 2000, 1999
and 1998, respectively.
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:
Year ending December 31: Capital Leases Operating Leases
2001 $ 226,441 $ 2,091,845
2002 245,411 1,822,777
2003 230,931 1,737,490
2004 220,944 1,567,879
2005 220,944 1,389,069
Thereafter 754,890 5,117,540
Total minimum lease ----------- -----------
payments 1,899,561 $13,726,600
===========
Less amount representing
interest (610,027)
-----------
Present value of net
minimum payments $ 1,289,534
===========
7. COMMITMENTS AND CONTINGENCIES
Self-Insurance - The Company is self-insured with respect to medical and dental
claims for United States 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, 2000 and 1999 of
$350,000 and $450,000, respectively. The Company is also self- insured with
respect to short term disability claims.
8. INCOME TAXES
The components of income tax expense (benefit) were as follows:
2000 1999 1998
Federal:
Current $ (638,000) $ 132,000 $ 600,000
Deferred 9,000 (909,000) 272,000
----------- ----------- -----------
Total Federal (629,000) (777,000) 872,000
----------- ----------- -----------
State and Local:
Current 72,000 444,000 160,000
25
Deferred (230,000) (618,000) 77,000
----------- ----------- -----------
Total State and Local (158,000) (174,000) 237,000
Foreign
Current (21,000) (205,000) 153,000
Deferred (22,000) (164,000)
----------- ----------- -----------
Total Foreign (43,000) (369,000) 153,000
----------- ----------- -----------
Total $ (830,000) $(1,320,000) $ 1,262,000
=========== =========== ===========
Total loss before income tax benefit in 2000 was comprised of $167,475 in
foreign losses and $18,195,139 in domestic losses. Total loss before income tax
benefit in 1999 was comprised of $732,584 in foreign losses and $3,433,706 in
domestic losses. Total earnings before income taxes in 1998 was comprised of
$354,705 in foreign earnings and $2,330,064 in domestic earnings.
Significant differences between income tax benefit recorded for financial
reporting purposes and income taxes (benefit) calculated using the Federal
statutory rate of 34% are as follows:
2000 1999 1998
Tax expense (benefit) at statutory rate $(6,244,000) $(1,417,000) $ 913,000
State and local tax expense (benefit),
net of federal benefit (104,000) (114,000) 156,000
Non deductible goodwill 161,000 156,000 156,000
Change in Valuation Reserve 5,317,000
Other 40,000 55,000 37,000
----------- ----------- -----------
Total $ (830,000) $(1,320,000) $ 1,262,000
=========== =========== ===========
Deferred income taxes recorded in the consolidated balance sheets at December
31, 2000 and 1999 consisted of the following:
2000 1999
Deferred tax assets:
State tax credit (expires 2005) $ 687,000 $ 409,000
Allowance for doubtful accounts 116,000 167,000
Net operating loss carryforwards 7,188,000 1,740,000
Valuation allowance (5,317,000)
Accrued medical insurance 156,000 185,000
Foreign currency 94,000
Other 360,000 479,000
----------- -----------
Total deferred tax assets 3,284,000 2,980,000
----------- -----------
Deferred tax liabilities:
Depreciation 2,047,000 2,114,000
Prepaid Expenses 177,000 234,000
Other 368,000 278,000
----------- -----------
Total deferred tax liabilities 2,592,000 2,626,000
----------- -----------
Net deferred tax asset (liability) $ 692,000 $ 354,000
=========== ===========
The Company has available net operating loss carry forwards for tax purposes of
approximately $2,318,000 expiring through 2015. Included in this balance are
foreign net operating loss carry forwards of approximately $675,000. The Company
also has available certain net operating loss carry forwards for
26
tax purposes of approximately $216,000 which expire in 2005 which may only be
used to offset future taxable income of the Company.
A valuation allowance has been provided to offset a portion of the net deferred
tax assets due to the uncertainty surrounding the realizability of such assets.
At December 31, 2000 there were no unremitted earnings of subsidiaries outside
the United States, due to cumulative net losses in these subsidiaries.
Accordingly, no deferred income taxes for additional United States federal
income taxes from the distribution of foreign earnings is required.
9. BENEFIT PLANS
Substantially all U.S. 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 $641,900, $703,300
and $284,100 for 2000, 1999 and 1998, respectively. During 1998, the Company
increased its contribution to 75% of the associate's contribution up to a
maximum of 3.75% of the associate's annual compensation. The funds are invested
in mutual funds.
The Company initiated a performance sharing plan (Open Book Management Plan) for
employees during 1998. All employees are eligible for this plan after a
six-month waiting period. Each employee is assigned points at the beginning of
the year, and these points pay quarterly bonuses based on actual results as
compared to planned results. No performance sharing was recorded or distributed
for the year 2000. The Company recorded $427,028 in performance sharing bonuses
earned for 1999, of which $357,674 was paid as of December 31, 1999. The Company
recorded $1,106,756 in performance sharing bonuses earned for 1998, of which
$438,293 was paid as of December 31, 1998.
10. 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, 2000, there have been 60,000 options granted
under the 1999 Directors Plan, none of which were forfeited, none of which were
exercised, and all but 10,000 were exercisable. As of December 31, 2000, there
have been 164,925 options granted under the 1992 Director's Stock Option Plan,
100,080 of which were forfeited, 22,345 of which were exercised and 37,500 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, 2000,
there have been 2,532,350 options granted under this plan, 1,165,675 of which
were forfeited, 291,950 of which were exercised and 607,219 of which are
exercisable.
27
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, 2000, 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, 1998
through December 31, 2000:
Per Share Weighted Average
Shares Option Price Exercise Price
Outstanding at December 31, 1997 903,155 $1.50 to $12.88 $5.70
Granted 412,200 $3.88 to $6.13 $4.96
Exercised (45,000) $1.50 to $1.75 $1.57
Terminated (208,280) $4.25 to $12.88 $5.77
---------
Outstanding at December 31, 1998 1,062,075 $1.50 to $12.88 $5.58
Granted 299,500 $3.00 to $6.63 $5.02
Exercised (3,875) $1.50 to $4.38 $2.89
Terminated (84,875) $4.38 to $11.50 $8.82
---------
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
=========
The following presents information for common shares exercisable as of December
31:
2000 1999 1998
Weighted Average Exercise Price $ 5.52 $ 5.56 $ 6.35
======= ======= ========
Common Shares Exercisable 694,719 660,500 510,800
======= ======= ========
The following table summarizes information about options outstanding at December
31, 2000:
Options Outstanding Options Exercisable
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
$1.03 5,000 10.0 $ 1.03 0 $ 0.00
$2.50 - $3.19 310,300 8.8 $ 2.62 27,500 $ 2.74
$3.88 - $5.31 481,025 3.2 $ 4.69 291,319 $ 4.68
$5.87 - $6.63 370,000 6.7 $ 6.17 365,000 $ 6.18
$11.50 - $12.88 10,900 0.6 $12.77 10,900 $12.77
--------- ------
1,177,225 $ 4.67 694,719 $ 5.52
========= =======
28
The weighted average fair value of options granted during 2000, 1999 and 1998
were $2.58, $5.02 and $4.96, respectively.
At December 31, 2000 options for 240,000 and 243,325 common shares (total of
483,325) 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 earnings (loss) and net earnings (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, 2000, 1999 and 1998, respectively: dividend yield of 0%;
expected volatility of 83.16%, 62% and 61%; risk-free interest rates based on
the constant maturity rates for Treasuries that mature in accordance with the
vesting period of the options granted.
2000 1999 1998
Net earnings (loss) -
As reported $(17,532,618) $(2,846,290) $1,422,769
Pro forma $(17,665,757) $(3,116,219) $ 810,441
Earnings per share -
As reported
Basic and diluted $ (2.88) $ (0.47) $ 0.23
Pro forma -
Basic and diluted $ (2.90) $ (0.51) $ 0.13
The pro forma amounts are not representative of the effects on reported net
earnings or earnings per common share for future years.
11. FINANCIAL INSTRUMENTS
Off balance sheet derivative financial instruments at December 31, 2000, include
a foreign currency forward contract.
The Company entered into a series of forward contracts (against the Dutch
guilder and U.S. Dollar) to hedge the new receivable/payable position arising
from an intercompany note between Metatec 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 is 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 have been designed to
correspond with the repayment schedule contained within the intercompany note.
The last payment on the note will be made on 12/31/2003. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposures being hedged.
Foreign currency forward contracts had contract values, and fair values of
$5,447,711 and $4,706,028, respectively, at December 31, 2000.
29
12. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131) 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 does operate in two primary geographic areas and two
classes of products.
Revenues are attributed to specific geographical areas based on origin of order
generation. Geographic information for the years ended December 31 are as
follows:
2000 U.S. EUROPE
- ---- ---- ------
Sales $ 92,856,252 $ 11,374,795
Long-lived assets $ 50,835,750 $ 4,547,493
1999
- ----
Sales $107,644,368 $ 12,636,679
Long-lived assets $ 76,267,397 $ 6,074,786
1998
- ----
Sales $ 76,630,600 $ 4,288,528
Long-lived assets $ 69,634,124 $ 6,646,296
Revenues attributed to product types are distinguished as CD-ROM sales and other
sales. Segment information for the years ended December 31 are as follows:
2000 CD-ROM OTHER PRODUCTS
- ---- ------ --------------
Sales $ 97,790,000 $ 6,441,000
1999
- ----
Sales $112,749,000 $ 7,532,000
1998
- ----
Sales $ 73,854,000 $ 7,065,000
No customer accounted for greater than 10% of net sales for any of the three
years in the period ended December 31, 2000.
13. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended March 31 June 30 September 30 December 31
2000
Net Sales $ 27,637,107 $ 26,178,157 $ 26,351,076 $ 24,064,708
Gross Profit 8,158,795 7,318,880 6,908,390 6,947,308
Net Earnings (loss) (168,239) 70,200 (886,626) (16,547,953)
Net Earnings (loss) per
common share:
Basic and diluted ($ 0.03) $ 0.01 ($ 0.15) ($ 2.71)
1999
Net Sales $ 31,067,983 $ 29,488,771 $ 28,152,547 $ 31,571,746
Gross Profit 10,067,663 7,556,234 6,849,548 8,633,283
Net Earnings 857,790 (556,620) (1,628,777) (1,518,683)
Net Earnings per
common share:
Basic and diluted $ 0.14 ($ 0.09) ($ 0.27) ($ 0.25)
30
The quarter ended March 31, 2000, included $430,561 of restructuring charges.
The quarter ended December 31, 2000 included a $15,681,726 charge of which
$15,637,642 represents the write down of goodwill and assets associated with the
Imation purchase of Silicon Valley assets.
The quarter ended December 31, 1999, included an approximate $650,000 reduction
of expenses for prior quarters of 1999 due to a change in estimate related to
manufacturing royalties. The quarter also included $1,050,722 of restructuring
charges.
31
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, 2000, 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, 2000, and is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 2000, 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, 2000, and is hereby incorporated herein by reference.
PART IV
ITEM 14. 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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998
32
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following independent auditors' report and financial
statement schedule for the years ended December 31, 2000, 1999
and 1998 are included in this report following the signatures
and should be read in conjunction with the Consolidated
Financial Statements included in Item 8:
Independent Auditors' Report on Financial Statement Schedule
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.
33
(a)(3) LISTING OF EXHIBITS
34
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)* Amended and Restated Employment Annual Report on Form 10-K for the fiscal
Agreement dated March 23, 1993, year ended December 31, 1992 (See Exhibit
between Metatec International, Inc. 10(h) therein).
and Jeffrey M. Wilkins
10(b)* First Amendment to Amended and Annual Report on Form 10-K for the fiscal
Restated Employment Agreement dated year ended December 31, 1995 (See Exhibit
March 21, 1996, between Metatec 10(c) therein).
International, Inc. and Jeffrey M.
Wilkins
10(c)* Second Amendment to Amended and Annual Report on Form 10-K for the fiscal
Restated Employment Agreement dated year ended December 31, 1998 (see Exhibit
February 17, 1998, between Metatec 10(d) therein).
International, Inc. and Jeffrey M.
Wilkins
10(d)* 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(e)* 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(f)* 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).
35
10(g)* 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(h)* 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(i)* 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(j)* 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(k)* Metatec International, Inc. 1992 Registration Statement on Form S-8, File
Directors' Stock Option Plan No. 33-52700 (see Exhibit 4(c) therein).
10(l)* 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(m)* 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(n)* 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(o)* 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(p) 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(q)* Metatec International, Inc. 1999 Registration Statement on Form S-8, File
Directors Stock Option Plan No. 333-10442 (see Exhibit 4(d) therein).
10(r)* Metatec International, Inc. Open Book Annual Report on Form 10-K for the
Management Plan fiscal year ended December 31, 1998 (see
Exhibit 10(p) therein).
36
10(s)* 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(t) 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(u) 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(v) CD Disc License Agreement dated Amendment No. 1 to Registration
January 1, 1986, between U.S. Statement on Form S-1, File No. 33-60878
Philips Corporation and (see Exhibit 10(u) therein).
Metatec/Discovery Systems, Inc.
10(w) 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(x) Loan Agreement dated September 11, Current Report on Form 8-K dated
1998, among Metatec International, September 11, 1998 (See Exhibit 10(a)
Inc., Bank One, NA, The Huntington therein).
National Bank, other financial
institutions from time to time a party
thereto, as banks, and The Huntington
National Bank, as administrative agent
for the banks.
37
10(y) $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.
Employment Agreement dated November
10(z) 22, 2000, between Metatec Contained herein.
International, Inc. and Christopher A.
Munro
Restricted Share Agreement effective
10(aa) January 2, 2001, between Metatec Contained herein.
International, Inc. and Christopher A.
Munro
21 Subsidiaries of Metatec International, Contained herein.
Inc.
23 Consent of Deloitte & Touche LLP Contained herein.
24(a) Power of Attorney for Peter J. Kight Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (see Exhibit
24 therein).
24(b) Powers of Attorney for Jerry D. Miller Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 (see Exhibit
24 therein).
24(c) Power of Attorney for James V. Pickett Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (see Exhibit
24(c) therein).
24(d) Power of Attorney for Joseph F. Annual Report on Form 10-K for the fiscal
Keeler, Jr. year ended December 31, 1997 (see Exhibit
24(d) therein).
24(e) Powers of Attorney for David P. Lauer Contained herein.
and Daniel D. Viren
*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
None
38
(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 and the independent auditors'
report thereon are submitted following the signatures.
39
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
METATEC INTERNATIONAL, INC.
Date: April 2, 2001 By /s/ Jeffrey M. Wilkins
---------------------------------------------
Jeffrey M. Wilkins, Chairman of the Board
President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jeffrey M. Wilkins Chairman of the Board, April 2, 2001
- -------------------------------------- Chief Executive Officer
Jeffrey M. Wilkins (principal executive
officer) and Director
/s/ Julia A. Pollner Senior Vice President, Finance April 2, 2001
- ------------------------------------ (principal financial officer
Julia A. Pollner and principal accounting officer)
Peter J. Kight* Director April 2, 2001
- --------------------------------------
Peter J. Kight
Jerry D. Miller* Director April 2, 2001
- --------------------------------------
Jerry D. Miller
David P. Lauer* Director April 2, 2001
- ---------------------------------
David P. Lauer
James V. Pickett* Director April 2, 2001
- --------------------------------
James V. Pickett
Joseph F. Keeler, Jr.* Director April 2, 2001
- ---------------------------------
Joseph F. Keeler, Jr.
Daniel D. Viren* Director April 2, 2001
- ---------------------------
Daniel D. Viren
*Jeffrey M. Wilkins, 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/ Jeffrey M. Wilkins April 2, 2001
-----------------------------------------
Jeffrey M. Wilkins, Attorney In Fact
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Metatec International, Inc.:
We have audited the consolidated financial statements of Metatec International,
Inc. and subsidiaries as of December 31, 2000 and 1999, and for each of the
three years in the period ended December 31, 2000, and have issued our report
thereon dated February 26, 2001 (April 2, 2001 as to the waiver and amendment of
certain covenants in Note 5 to the consolidated financial statements); such
report is included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Metatec International, Inc. and
subsidiaries listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
February 26, 2001 (April 2, 2001 as to the waiver and amendment of certain
covenants in Note 5 to the consolidated financial statements)
Columbus, Ohio
41
METATEC INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Column A Column B Column C Column D Column E
---------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other At End
Description Year Expenses Accounts Deductions(A) Of Year
2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE $480,000 $375,000 $504,000 $351,000
======== ======== ======== ========
1999
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE $490,000 $403,000 $413,000 $480,000
======== ======== ======== ========
1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE $301,000 $260,000 $ 71,000 $490,000
======== ======== ======== ========
(A) Amount represents uncollectible accounts written off.
42
EXHIBIT INDEX
43
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) Amended and Restated Employment Annual Report on Form 10-K for the fiscal
Agreement dated March 23, 1993, year ended December 31, 1992 (See Exhibit
between Metatec International, Inc. 10(h) therein).
and Jeffrey M. Wilkins
10(b) First Amendment to Amended and Annual Report on Form 10-K for the fiscal
Restated Employment Agreement dated year ended December 31, 1995 (See Exhibit
March 21, 1996, between Metatec 10(c) therein).
International, Inc. and Jeffrey M.
Wilkins
10(c) Second Amendment to Amended and Annual Report on Form 10-K for the fiscal
Restated Employment Agreement dated year ended December 31, 1998 (see Exhibit
February 17, 1998, between Metatec 10(d) therein).
International, Inc. and Jeffrey M.
Wilkins
10(d) 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(e) 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(f) 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).
44
10(g) 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(h) 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(i) 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(j) 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(k) Metatec International, Inc. 1992 Registration Statement on Form S-8, File
Directors' Stock Option Plan No. 33-52700 (see Exhibit 4(c) therein).
10(l) 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(m) 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(n) 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(o) 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(p) 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(q) Metatec International, Inc. 1999 Registration Statement on Form S-8, File
Directors Stock Option Plan No. 333-10442 (see Exhibit 4(d) therein).
10(r) Metatec International, Inc. Open Book Annual Report on Form 10-K for the
Management Plan fiscal year ended December 31, 1998 (see
Exhibit 10(p) therein).
45
10(s) 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(t) 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(u) 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(v) CD Disc License Agreement dated Amendment No. 1 to Registration
January 1, 1986, between U.S. Statement on Form S-1, File No. 33-60878
Philips Corporation and (see Exhibit 10(u) therein).
Metatec/Discovery Systems, Inc.
10(w) 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(x) Loan Agreement dated September 11, Current Report on Form 8-K dated
1998, among Metatec International, September 11, 1998 (See Exhibit 10(a)
Inc., Bank One, NA, The Huntington therein).
National Bank, other financial
institutions from time to time a party
thereto, as banks, and The Huntington
National Bank, as administrative agent
for the banks.
46
10(y) $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.
Employment Agreement dated November
10(z) 22, 2000, between Metatec Contained herein.
International, Inc. and Christopher A.
Munro
Restricted Share Agreement effective
10(aa) January 2, 2001, between Metatec Contained herein.
International, Inc. and Christopher A.
Munro
21 Subsidiaries of Metatec International, Contained herein.
Inc.
23 Consent of Deloitte & Touche LLP Contained herein.
24(a) Power of Attorney for Peter J. Kight Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (see Exhibit
24 therein).
24(b) Powers of Attorney for Jerry D. Miller Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 (see Exhibit
24 therein).
24(c) Power of Attorney for James V. Pickett Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 (see Exhibit
24(c) therein).
24(d) Power of Attorney for Joseph F. Annual Report on Form 10-K for the fiscal
Keeler, Jr. year ended December 31, 1997 (see Exhibit
24(d) therein).
24(e) Powers of Attorney for David P. Lauer Contained herein.
and Daniel D. Viren