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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-9220
METATEC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1647405
(State of Incorporation) (IRS Employer Identification No.)
7001 Metatec Boulevard
Dublin, Ohio 43017
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (614) 761-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Number of Common Shares outstanding as of October 22, 2002: 6,536,113
Page 1 of 18
METATEC INTERNATIONAL, INC.
INDEX PAGE
Part I : Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30,
2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Operations
for the three months ended September 30, 2002
and 2001 (unaudited) 4
Consolidated Statements of Operations
for the nine months ended September 30, 2002
and 2001 (unaudited) 5
Consolidated Statement of Shareholders'
Deficiency for the nine months ended
September 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows
for the nine months ended September 30,
2002 and 2001 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 14
Item 4 - Controls and Procedures 15
Part II: Other Information
Items 1-6 16
Signatures 16
Certifications 17-18
Page 2 of 18
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
METATEC INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS At September 30, At December 31,
---------------- ---------------
2002 2001
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 572,255 $ 1,291,778
Restricted cash 146,000 --
Accounts receivable, net of allowance for doubtful accounts of $300,000 and $300,000 6,896,440 10,508,964
Due from sale of assets -- 1,000,000
Inventory 1,764,825 1,841,292
Prepaid expenses 776,103 666,047
Net assets of discontinued operations -- 1,207,924
------------ ------------
Total current assets 10,155,623 16,516,006
Property, plant and equipment - net 24,904,265 28,770,668
Other assets 152,617 169,166
------------ ------------
TOTAL ASSETS $ 35,212,505 $ 45,455,840
============ ============
LIABILITIES & SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,953,286 $ 3,825,466
Accrued expenses:
Royalties 483,706 5,098,535
Personal property taxes 887,832 1,110,819
Payroll 695,835 893,341
Restructuring 592,006 2,658,275
Taxes, benefits and other 1,550,014 1,383,172
Unearned income 89,467 52,796
Current maturities of long-term real estate debt 167,500 157,399
Current maturities of other long-term debt and capital lease obligations 777,567 25,476
------------ ------------
Total current liabilities 8,197,213 15,205,280
Long-term real estate debt 18,401,989 18,527,886
Other long-term debt and capital lease obligations, less current maturities 18,454,748 20,194,352
Other long-term liabilities 1,096,578 673,403
------------ ------------
Total liabilities 46,150,528 54,600,921
------------ ------------
Shareholders' deficiency:
Common stock - no par value; authorized 10,000,000 shares;
issued 7,217,855 shares 33,008,138 35,031,138
Accumulated deficit (40,244,624) (37,547,201)
Accumulated other comprehensive loss -- (786,480)
Treasury stock, at cost; 681,742 and 1,081,742 shares (3,670,537) (5,822,537)
Unamortized restricted stock (31,000) (20,000)
------------ ------------
Total shareholders' deficiency (10,938,023) (9,145,080)
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIENCY $ 35,212,505 $ 45,455,840
============ ============
See notes to consolidated financial statements.
Page 3 of 18
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30,
---------------------------------
2002 2001
- ----------------------------------------------------------------- ------------ ------------
NET SALES $ 12,246,115 $ 15,456,900
Cost of sales 8,274,653 12,196,411
------------ ------------
Gross margin 3,971,462 3,260,489
Selling, general and administrative expenses 3,780,663 5,179,949
Restructuring expenses 0 426,989
------------ ------------
OPERATING EARNINGS (LOSS) FROM CONTINUING OPERATIONS 190,799 (2,346,449)
Other income and (expense):
Investment income 2,872 168
Interest expense (719,935) (826,732)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (526,264) (3,173,013)
Income taxes 0 0
------------ ------------
LOSS FROM CONTINUING OPERATIONS (526,264) (3,173,013)
Loss from discontinued operations (including loss on disposal
of $2,249,488 in 2002) (2,334,729) (309,760)
------------ ------------
NET LOSS $ (2,860,993) $ (3,482,773)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,536,113 6,136,113
============ ============
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic and diluted $ (0.08) $ (0.52)
============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.44) $ (0.57)
============ ============
See notes to consolidated financial statements.
Page 4 of 18
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30,
---------------------------------
2002 2001
- ------------------------------------------------------------------ ------------ ------------
NET SALES $ 37,328,142 $ 49,761,842
Cost of sales 25,145,085 36,977,373
------------ ------------
Gross margin 12,183,057 12,784,469
Selling, general and administrative expenses 12,019,763 16,937,798
Restructuring expense 0 433,992
------------ ------------
OPERATING EARNINGS (LOSS) FROM CONTINUING OPERATIONS 163,294 (4,587,321)
Other income and (expense):
Investment income 6,444 37,257
Interest expense (2,191,261) (2,669,413)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,021,523) (7,219,477)
Income tax benefit (875,000) 0
------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,146,523) (7,219,477)
Loss from discontinued operations (including loss on disposal
of $2,249,488 in 2002) (1,550,900) (285,439)
------------ ------------
NET LOSS $ (2,697,423) $ (7,504,916)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,508,706 6,135,965
============ ============
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic and diluted $ (0.18) $ (1.18)
============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.41) $ (1.22)
============ ============
See notes to consolidated financial statements.
Page 5 of 18
METATEC INTERNATIONAL, INC.
- -----------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY (UNAUDITED)
Accumulated Other Unamortized
Common Accumulated Comprehensive Treasury Restricted
Stock Deficit Loss Stock Stock Total
- ----------------------------------- ------------ ------------ ----------------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 $ 35,031,138 $(37,547,201) $ (786,480) $ (5,822,537) $ (20,000) $ (9,145,080)
Comprehensive Loss:
Net loss (2,697,423) (2,697,423)
Accretion of gain on termination
of forward contracts (937,248) (937,248)
Realization of loss on foreign
currency translation 1,723,728 1,723,728
------------
Comprehensive income (1,910,943)
Issuance of treasury stock (2,062,000) 2,152,000 90,000
Issuance of restricted shares 39,000 (39,000) 0
Amortization of restricted stock 28,000 28,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2002 $ 33,008,138 $(40,244,624) $ (0) $ (3,670,537) $ (31,000) $(10,938,023)
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
Page 6 of 18
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, 2002 2001
- ---------------------------------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,697,423) $(7,504,917)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,008,927 7,257,905
Net loss on sales of property, plant and equipment 1,463,008 2,814
Recognition of amount previously included in other comprehensive income 786,480 0
Changes in assets and liabilities:
Accounts receivable 3,612,524 3,687,354
Inventory 76,637 (219,491)
Prepaid expenses and other assets (110,058) (109,983)
Accounts payable and accrued expenses (2,885,750) (864,101)
Unearned income 36,672 (46,879)
Net assets of discontinued operations (255,084) 115,086
----------- -----------
Net cash provided by operating activities 4,035,933 2,317,788
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (370,003) (1,020,720)
Proceeds from the sales of property, plant and equipment 1,257,506 7,200
----------- -----------
Net cash received from (used in) investing activities 887,503 (1,013,520)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (146,000) 0
Increase in long-term debt 0 3,450,000
Payment of long-term debt and capital lease obligations (1,409,266) (4,653,365)
Net reduction in revolving line of credit (4,087,693) (1,913,021)
----------- -----------
Net cash used in financing activities (5,642,959) (3,116,386)
----------- -----------
Decrease in cash and cash equivalents (719,523) (1,812,118)
Cash and cash equivalents at beginning of period 1,291,778 2,086,228
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 572,255 $ 274,110
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 2,307,029 $ 2,430,566
=========== ===========
Income taxes paid/(refunds received) $ (897,182) $ (122,267)
=========== ===========
Assets purchased by the assumption of a liability $ 18,975 $ 174,830
=========== ===========
Payment of accrued restructuring expense by the issuance of treasury stock $ 90,000 $ 0
=========== ===========
Exchange of short-term accrued royalties obligation for a long-term notes payable $ 4,278,832 $ 0
=========== ===========
See notes to condensed consolidated financial statements.
Page 7 of 18
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation - The consolidated balance sheet as of September 30,
2002, the consolidated statements of operations for the three and nine months
ended September 30, 2002 and 2001, the consolidated statement of shareholders'
deficiency for the nine months ended September 30, 2002, and the consolidated
statements of cash flows for the nine month periods then ended have been
prepared by the Company, without audit. In the opinion of management, all
adjustments, which consist solely of normal recurring adjustments, necessary to
present fairly, in accordance with accounting principles generally accepted in
the United States of America, the financial position, results of operations and
changes in cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
December 31, 2001 annual report on Form 10-K. The results of operations for the
period ended September 30, 2002 are not necessarily indicative of the results
for the full year.
In August 2002, the Company entered into new licensing and other agreements with
one of its CD and DVD patent licensors which, among other things, provides for a
deferred payment schedule for accrued royalties owed by the Company under prior
licensing agreements, and, as a result, $3.5 million of accrued royalties were
reclassified to other long-term liabilities. In October 2002, the Company
entered into a settlement agreement with another of its CD patent licensors
which provides for a deferred payment schedule for accrued royalties owed under
the licensing agreement with that licensor, and, as a result, $1.6 million of
accrued royalties has been reclassified to other long-term liabilities as of
September 30, 2002. Of this amount, $800,000 may be forgiven in 2006 if the
Company meets certain conditions in the agreement.
Income taxes - In March 2002, the President signed the Job Creation and Worker
Assistance Act of 2002 into law. This law extended the carry back period from
two to five years for net operating losses arising in the 2001 and 2002 taxable
years. The Company recorded an income tax benefit of $875,000 in the quarter
ended March 31, 2002 related to this law.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangibles." SFAS 142 is effective for all fiscal
years beginning after December 15, 2001, and requires changes in the
amortization of certain goodwill and intangible assets, including an annual
assessment of possible impairment. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements because the
Company's goodwill and intangible assets were fully impaired at December 31,
2001 and written off.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." While this statement supercedes SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets to Be Disposed Of," it retains
the fundamental provisions of SFAS No. 121 for recognition of impairments of
assets to be held and used in operations and assets to be disposed of by sale.
This statement was adopted in the first quarter of 2002. The Company is
accounting for the sale of its European subsidiary, Breda, as a discontinued
operation under SFAS No. 144.
Page 8 of 18
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," will be effective for fiscal
years beginning after May 15, 2002 (December 31, 2002 for the Company). This
Statement rescinds FASB Statements No. 4 and 64 that dealt with issues relating
to the extinguishment of debt. This Statement also rescinds FASB Statement No.
44 that dealt with intangible assets of motor carriers. This Statement modifies
SFAS No. 13, "Accounting for Leases," so that certain capital lease
modifications must be accounted for by lessees as sale-leaseback transactions.
Additionally, this Statement identifies amendments that should have been made to
previously existing pronouncements and formally amends the appropriate
pronouncements. The adoption of SFAS No. 145 will not have a significant effect
on the Company's results of operations or its financial position.
SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities"
will be effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between
this Statement and Issue 94-3 is that this Statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The adoption
of SFAS No. 146 will not have a material impact on the Company's consolidated
financial statements.
2. Discontinued operations Pursuant to an agreement dated as of September 30,
2002, the Company sold its European CD-ROM manufacturing operations in Breda,
The Netherlands, to Nimbus, a Netherlands-based private investment group. The
transaction was structured as a sale of all of the shares of Metatec's European
subsidiary to Nimbus. The shares were sold in exchange for the assumption of the
European subsidiary's liabilities as of August 31, 2002. The Company is
accounting for these operations as discontinued operations, and has recognized a
non-cash charge of $2.25 million associated with this sale in the third quarter
of 2002.
European operations had revenues for the three months ended September 30, 2002
of $1.3 million, as compared to $2.0 million for the same time period for the
prior year. Net sales for the European operations for the nine months ended
September 30, 2002, were $6.3 million, as compared to $7.6 million for the same
time period for the prior year.
Pre-tax loss for the Company's European operations for the three months ended
September 30, 2002 including loss from disposal was $2.3 million, as compared to
$310,000 for the same time period of the prior year. Pre-tax loss for the same
operations for the nine-month period ended September 30, 2002 was $1.6 million,
as compared to $285,000 for the same time period for the prior year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2001 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of accounting policies, many of which require the Company's
management to make estimates and assumptions about future events and their
impact on amounts reported in the Company's financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
actual results will inevitably differ from management's estimates. Such
differences could be material to the Company's financial statements.
Page 9 of 18
Management believes that its application of accounting policies, and the
estimates inherently required therein, are reasonable. These accounting policies
and estimates are periodically reevaluated, and adjustments are made when facts
and circumstances indicate a change is necessary.
The Company's accounting policies are more fully described in Note 1 to the
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 2001. Described below are certain critical accounting
policies which management believes are important to a reader of the financial
statements. These critical accounting policies are not intended to be a
comprehensive list of all the Company's accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States of America, with
no need for management's judgment in their application. There are also areas in
which management's judgment in selecting other available alternatives would not
produce a materially different result.
Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, management completes an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets and reduces
their carrying value by the excess, if any, as a result of such calculation.
Management believes that the long-lived assets' carrying values and useful lives
are appropriate.
Allowance for doubtful accounts. Management attempts to reserve for expected
credit losses based on the Company's past experience with similar accounts
receivable, and it believes that the Company's reserves are adequate. It is
possible, however, that the accuracy of management's estimation process could be
materially impacted as the composition of this pool of accounts receivable
changes over time. Management periodically reviews and modifies the estimation
process as changes to the composition of this pool require.
Litigation. The Company and its legal counsel evaluate litigation and review the
likelihood of an outcome and the resulting materiality to the Company. The
Company is involved in various legal claims arising from the normal course of
its business. While the ultimate liability, if any, from these proceedings is
presently indeterminable, in the opinion of management, these matters should not
have a material adverse effect on the consolidated financial statements of the
Company.
Income taxes. The Company has a history of unprofitable operations. These losses
generated a significant federal tax net operating loss, or NOL, carryforward of
as of December 31, 2001. Accounting principles generally accepted in the United
States of America require the Company to record a valuation allowance against
the deferred tax asset associated with this NOL if it is "more likely than not"
that the Company will not be able to utilize the NOL to offset future taxes. Due
to the amount of the NOL carryforward in relation to the Company's history of
unprofitable operations, management has not recognized any net deferred tax
asset in the Company's financial statements.
In the future the Company could achieve levels of profitability which could
cause management to conclude that it is more likely than not that the Company
will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, the Company would record the estimated net realizable value of the
deferred tax asset at that time and would then provide for income taxes at a
rate equal to the Company's combined federal and state effective rates.
BUSINESS OF THE COMPANY
The Company is transitioning from a disc manufacturing company to a supply chain
solutions company that enables its customers to streamline the process of
delivering their products and information to market by providing technology
driven supply chain solutions that increase efficiencies and reduce costs. The
Company assists its customers with a wide range of services from preparing their
product for market to delivering their finished product into the distribution
channel or directly to the end-users. The solution is
Page 10 of 18
built on a solid technology foundation that includes both customized system
integration and a web-based reporting and tracking tool that makes real-time
information easily accessible. Technologies include CD-ROM and DVD manufacturing
services and secure Internet-based software distribution services. The Company's
core CD-ROM manufacturing, packaging and distribution capabilities serve as a
component of the supply chain. The Company's manufacturing and distribution
facilities are located in Dublin, Ohio.
RECENT EVENTS
Pursuant to an agreement dated as of September 30, 2002, the Company sold its
European CD-ROM manufacturing operations in Breda, The Netherlands, to Nimbus, a
Netherlands-based private investment group. The transaction was structured as a
sale of all of the shares of Metatec's European subsidiary to Nimbus. The shares
were sold in exchange for the assumption of the European subsidiary's
liabilities as of August 31, 2002. As discussed below, the Company is accounting
for these operations as discontinued operations.
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 2002, were $12.2 million, a
decrease of $3.2 million, or 21% over the same period of the prior year. This
decrease was due to several factors. First, the closing of the Company's
Milpitas, California ("Silicon Valley") plant and a restructuring of the Dublin,
Ohio operations reduced manufacturing capacity and eliminated certain low-margin
customers. Second, pricing of the Company's CD-ROM products and services
declined consistent with industry-wide excess manufacturing capacity, a trend
the Company anticipates will continue. Finally, demand for the Company's CD-ROM
products and services declined due to several factors, including a decline in
general economic conditions, the continued increase in customers using on-line
or electronic methods to distribute information, and the continued maturation of
the CD-ROM market.
Net sales for the nine months ended September 30, 2002, were $37.3 million, a
decrease of $12.4 million, or 25%, over the same period of the prior year. This
decrease was due to the factors noted above.
Gross margin was 32% of net sales for the three months ended September 30, 2002,
as compared to 21% of net sales for the same period of the prior year. Gross
margin was 33% of net sales for the nine months ended September 30, 2002, as
compared to 26% of net sales for the same period of the prior year. The 2001
gross margins for both the three-month and nine-month periods were significantly
impacted by the severe reduction in sales from the Company's Silicon Valley
plant (the plant was closed during the fourth quarter of 2001) without a
corresponding reduction in costs associated with that plant, and the
restructuring of the Dublin operations in 2001. However, the Company believes
that the significant improvement in gross margins in the period-to-period
comparisons also reflects management's focus on higher-margin customers in
certain industries and the elimination of certain low-margin customers. See
"Plan to Improve Liquidity and Financial Condition."
Selling, general and administrative ("SG&A") expenses were $3.8 million, or 31%
of net sales, for the three months ended September 30, 2002, as compared to $5.2
million, or 34% of net sales, for same period of the prior year. SG&A expenses
were $12.0 million, or 32% of net sales, for the nine months ended September 30,
2002, as compared to $16.9 million, or 34% of net sales, for same period of the
prior year. The improvement in the SG&A expense percentages, as well as the
reduction in SG&A expenses, for the period-to-period comparisons was primarily
attributed to the Dublin restructuring, workforce reductions, and closure of the
Silicon Valley location in the fourth quarter of 2001.
Page 11 of 18
No restructuring expenses were incurred during the nine months ended September
30, 2002. Restructuring expenses of $434,000 were incurred during the nine
months ended September 30, 2001, primarily related to severance and termination
benefits for a U.S. workforce reduction of approximately 6%.
Summary of Accrued Restructuring
In '000's
Termination Exit/Other
Description Benefits Costs Total
----------- ----------- ---------- -----
Accrued balance
December 31, 2001 $ 1,368 $ 3,100 $ 4,468
Payments year to date September 30, 2002 $ (633) $(3,011) $(3,644)
--------------------------------------------
Accrued balance
September 30, 2002 $ 735 $ 89 $ 824
============================================
$ 503 $ 89 $ 592
============================================
Investment income was $2,900 and $200 for the three month periods ended
September 30, 2002 and 2001, respectively. Investment income was $6,400 and
$37,000 for the nine-month periods ended 2002 and 2001, respectively.
Interest expense for the three months ended September 30, 2002 was $720,000, as
compared to $827,000 for the same period of the prior year. Interest expense for
the nine months ended September 30, 2002 was $2.2 million, as compared to $2.7
million for the same period of the prior year. The decrease in interest expense
was due to decreased debt balances under the Company's revolving loan and term
loan facilities, as well as lower interest rates.
The Company recognized an income tax benefit of $875,000 for the three months
ended March 31, 2002. In March 2002, the Job Creation and Worker Assistance Act
of 2002 was enacted into law. This law extended the carry back period from two
years to five years for net operating losses arising in the 2001 and 2002
taxable years. For the same period for the prior year, the Company did not
record an income tax benefit due to the uncertainty of realizing the value of
such benefit.
The net loss from continuing operations for the nine months ended September 30,
2002 was $1.1 million, or $(.18) from continuing operations per basic and
diluted common share, as compared to a net loss from continuing operations in
the same period of the prior year of $7.2 million, or $(1.18) from continuing
operations per basic and diluted common share . Including discontinued
operations, discussed below, the Company had a net loss of $2.7 million for the
nine months ended September 30, 2002, or $(.41) per basic and diluted common
share, as compared to a net loss in the same period of the prior year of $7.5
million, or $(1.22) per basic and diluted common share.
Page 12 of 18
Discontinued Operations
Pursuant to an agreement dated as of September 30, 2002, the Company sold its
European CD-ROM manufacturing operations in Breda, The Netherlands, to Nimbus, a
Netherlands-based private investment group. The transaction was structured as a
sale of all of the shares of Metatec's European subsidiary to Nimbus. The shares
were sold in exchange for the assumption of the European subsidiary's
liabilities as of August 31, 2002. The Company is accounting for these
operations as discontinued operations and has recognized a non-cash charge of
$2.25 million associated with this sale in the third quarter of 2002.
European operations had revenues for the three months ended September 30, 2002,
of $1.3 million, as compared to $2.0 million for the same time period for the
prior year. Net sales for the European operations for the nine months ended
September 30, 2002, were $6.3 million, as compared to $7.6 million for the same
time period for the prior year.
Pre-tax loss for the Company's European operations for the three months ended
September 30, 2002, was $2.3 million, as compared to $310,000 for the same time
period for the prior year. Pre-tax loss for the same operations for the
nine-month period ended September 30, 2002, was $1.6 million, as compared to
$285,000 for the same time period for the prior year.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Source of Liquidity
The Company financed its business during the nine months ended September 30,
2002 through cash generated from operations. Cash flow from operating activities
was $4.0 million for the nine months ended September 30, 2002, as compared to
$2.3 million for the nine months ended September 30, 2001. The Company had cash
and cash equivalents of $572,000 as of September 30, 2002, as compared to $1.3
million as of December 31, 2001.
Bank Financing Matters
The Company has a term loan facility and a revolving loan facility
(collectively, the "Credit Facilities") with its banks. The Company is required
to comply with certain financial and other loan covenants set forth in the loan
agreement for the Credit Facilities. The Company was in compliance with such
covenants as of September 30, 2002. As of September 30, 2002, $8.6 million and
$5.0 million were outstanding under the term loan facility and the revolving
loan facility, respectively. The borrowing base of the revolving loan facility
is limited to the lesser of (i) $12,490,762, or (ii) the sum of (A) 80% of
eligible domestic accounts receivable, plus (B) 30% of eligible domestic
inventory, plus (C) 90% of domestic machinery and equipment. The borrowing base
is further reduced by the aggregate amount of the Company's outstanding letters
of credit and is permanently reduced by the amount of any additional advances
made to the company under the second term loan facility. As of September 30,
2002 the Company had approximately $1.7 million available to draw on its
revolving loan facility.
The revolving loan and the term loans under the Credit Facilities mature on
April 1, 2004. Quarterly principal payments are required for the term loans
beginning in June 2002 if cash flows exceed certain specified targets over
designated periods of time. As of September 30, 2002, the Company had not
exceeded these targets. The Credit Facilities are secured by a first lien on all
non-real estate business assets of the Company and a pledge of the stock of the
Company's subsidiaries. The Company is required to comply with the financial and
other covenants. The revolving loan and the term loans accrue interest at a rate
equal to
Page 13 of 18
3.5% in excess of the prime rate of the banks. Certain fees are required to be
paid to the banks in connection with the Credit Facilities. The Company expects
that it will be able to negotiate a new borrowing facility prior to April 1,
2004. However, there can be no assurance that the Company will be able to do so.
The Company has a $19,000,000 term loan facility which was used to permanently
finance the Company's Dublin, Ohio distribution center (completed in 1999) and
to pay down other bank debt. The loan facility has an outstanding principal
balance of $18,569,489 as of September 30, 2002. This term loan facility is
payable in monthly principal and interest payments based upon a thirty year
amortization schedule, bears interest at a fixed rate of 8.2%, and matures on
September 1, 2009. This loan facility is secured by a first lien on all real
property of the Company and letters of credit in favor of the lender, in an
aggregate amount of $1,650,000.
Other Liquidity Matters
In August 2002, the Company entered into new licensing and other agreements with
one of its CD and DVD patent licensors which, among other things, provides for a
deferred payment schedule for accrued royalties owed by the Company under prior
licensing agreements, and, as a result, $3.5 million of accrued royalties were
reclassified to other long-term liabilities.
In October 2002, the Company entered into a settlement agreement with another of
its CD patent licensors which provides for a deferred payment schedule for
accrued royalties owed under its licensing agreement and, as a result, $1.6
million of accrued royalties has been reclassified to other long-term
liabilities as of September 30, 2002. Of this amount, $800,000 may be forgiven
in 2006 if the Company meets certain conditions in the agreement.
Plan to Improve Liquidity and Financial Condition
The Company currently has a shareholders' deficiency of $10.9 million as of
September 30, 2002, as compared to a shareholders' deficiency of $9.1 million as
of December 31, 2001. This financial condition presents both short-term and
long-term liquidity issues for the Company.
Management is addressing, and has addressed, the short-term liquidity situation.
In response to declining pricing and reduced demand for CD-ROM products,
management is transitioning the Company from a disc manufacturing company to a
supply chain solutions company. In addition, management is also focusing on
higher-margin customers in certain industries and reducing the number of the
Company's low-margin disc customers. Finally, in March 2001, management
successfully negotiated an extension of the maturity date of the Company's
Credit Facilities to April 2004.
The Company has generated positive cash flow from operations in each of the last
three fiscal years, as well as in the first three quarters of 2002. Management
believes that the Company's current focus on its core business customers and
continued cost saving measures will allow it to generate sufficient cash flows
to meet operational needs in 2002. However, there can be no assurance that such
measures will allow the Company to generate sufficient cash flows for the
remainder 2002. Furthermore, additional actions will need to be taken to address
the Company's long-term liquidity issues as a result of the Company's
shareholders' deficiency.
The Company's loan agreement with the banks includes financial covenants which
require the Company to meet specified cash flow thresholds over designated
periods of time. There can be no assurance that the Company will be able to meet
these cash flow thresholds over such periods of time.
Page 14 of 18
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in this Form 10-Q 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 actual results to differ materially
from those projected. Such risks and uncertainties that might cause such a
difference include, but are not limited to: changes in general business and
economic conditions; changes in demand for CD-ROM products or supply chain
services; excess capacity levels in the CD-ROM industry; the introduction of new
products or services by competitors; increased competition (including pricing
pressures); changes in manufacturing efficiencies, changes in supply chain
services techniques; changes in technology; changes in foreign currency exchange
rates; the Company's ability to meet the cash flow thresholds and other
financial covenants in its loan agreement with its banks, the failure of which
could result in the banks' exercising their legal remedies against the Company
or its assets; the Company's shareholders' deficiency, which means that
shareholders may not realize any value upon a sale or liquidation of the Company
or its assets; and other risks discussed in the Company's filings with the
Securities and Exchange Commission, including those risks discussed under the
caption "Forward Looking Statements; Risk Factors Affecting Future Results" and
elsewhere in the Form 10-K for Metatec's year ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There is no change in the quantitative and qualitative disclosures about the
Company' market risk from the disclosures contained in the Company's Form 10-K
for its fiscal year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the evaluation described in (a), above, was carried out.
Page 15 of 18
PART II - OTHER INFORMATION
Items 1-5. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Letter agreement dated October 9, 2002, among
DiscoVision Associates and Metatec International,
Inc.*
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Schedules and exhibits to this document have not been filed because the
Company believes such schedules and exhibits do not contain information
material to an investment decision that is not otherwise disclosed in such
document. The Company hereby agrees to furnish a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon its
request.
(b) Reports on Form 8-K.
(i) The Company filed a Form 8-K dated October 10, 2002, under
Item 5 to report that the Company had sold its European CD-ROM
manufacturing operations in Breda, The Netherlands, to Nimbus, a
Netherlands-based private investment group.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Metatec International, Inc.
/s/ Gary W. Qualmann
BY: Gary W. Qualmann
Date: November 12, 2002 Chief Financial Officer
(authorized signatory-
principal financial officer)
/s/ Julia A. Fratianne
BY: Julia A. Fratianne
Senior Vice President - Finance
(authorized signatory-
principal accounting officer)
Page 16 of 18
CERTIFICATIONS
I, Christopher A. Munro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metatec
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Christopher A. Munro
---------------------------------
Christopher A. Munro,
Chief Executive Officer
(Principal executive officer)
Page 17 of 18
I, Gary W. Qualmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metatec
International, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Gary W. Qualmann
--------------------------------
Gary W. Qualmann
Chief Executive Officer
(Principal financial officer)
Page 18 of 18
METATEC INTERNATIONAL, INC.
Form 10-Q
For Quarterly Period Ended September 30, 2002
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Letter agreement dated October 9, 2002, among DiscoVision
Associates and Metatec International, Inc.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002