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 June 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 August 14, 2002: 6,536,113
Page 1 of 16
METATEC INTERNATIONAL, INC.
---------------------------
INDEX PAGE
----- ----
Part I : Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30,
2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Operations
for the three months ended June 30, 2002
and 2001 (unaudited) 4
Consolidated Statements of Operations
for the six months ended June 30, 2002
and 2001 (unaudited) 5
Consolidated Statement of Shareholders'
Deficiency for the six months ended
June 30, 2002 (unaudited) 6
Consolidated Statements of Cash Flows
for the six months ended June 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
Part II: Other Information
Items 1-6 15-16
Signatures 16
Page 2 of 16
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
METATEC INTERNATIONAL, INC.
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS At June 30, At December 31,
----------- ---------------
2002 2001
(Unaudited)
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 386,645 $ 1,981,184
Accounts receivable, net of allowance for doubtful accounts of $400,000 9,762,363 12,006,645
Due from sale of assets - 1,000,000
Inventory 2,122,118 2,075,445
Prepaid expenses 937,070 760,470
------------ ------------
Total current assets 13,208,196 17,823,744
Property, plant and equipment - net 26,405,634 29,381,661
Other assets 158,133 169,166
------------ ------------
Total Assets $ 39,771,963 $ 47,374,571
============ ============
Liabilities & Shareholders' Deficiency
Current liabilities:
Accounts payable $ 3,990,514 $ 5,088,149
Accrued expenses:
Royalties 2,619,040 5,468,135
Personal property taxes 1,148,475 1,110,819
Payroll 778,567 911,014
Restructuring 675,661 2,658,275
Taxes, benefits and other 1,436,497 1,510,377
Unearned income 244,543 194,366
Current maturities of long-term real estate debt 164,038 157,399
Current maturities of other long-term debt and capital lease obligations 348,271 25,476
------------ ------------
Total current liabilities 11,405,606 17,124,010
Long-term real estate debt 18,442,057 18,527,886
Other long-term debt and capital lease obligations, less current maturities 18,557,037 20,194,352
Other long-term liabilities 405,179 673,403
------------ ------------
Total liabilities 48,809,879 56,519,651
------------ ------------
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 (37,383,631) (37,547,201)
Accumulated other comprehensive loss (951,011) (786,480)
Treasury stock, at cost; 681,742 and 1,081,742 shares (3,670,537) (5,822,537)
Unamortized restricted stock (40,875) (20,000)
------------ ------------
Total shareholders' deficiency (9,037,916) (9,145,080)
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIENCY $ 39,771,963 $ 47,374,571
============ ============
See notes to consolidated financial statements.
Page 3 of 16
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30,
------------------------------
2002 2001
------------------------------------------------- ------------ ------------
NET SALES $ 14,826,105 $ 18,861,865
Cost of sales 9,946,914 13,697,185
------------ ------------
Gross profit 4,879,191 5,164,680
Selling, general and administrative expenses 4,194,506 6,367,857
------------ ------------
OPERATING EARNINGS (LOSS) 684,685 (1,203,177)
Other income and (expense):
Investment income 6,601 5,654
Interest expense (734,280) (898,024)
------------ ------------
LOSS BEFORE INCOME TAXES (42,994) (2,095,547)
Income taxes 0 0
------------ ------------
NET LOSS $ (42,994) $ (2,095,547)
============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.01) $ (0.34)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,536,113 6,136,113
============ ============
See notes to condensed consolidated financial statements.
Page 4 of 16
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended June 30,
------------------------------
2002 2001
-------------------------------------------------- ------------ ------------
NET SALES $ 30,071,779 $ 39,910,413
Cost of sales 20,453,835 29,003,252
------------ ------------
Gross profit 9,617,944 10,907,161
Selling, general and administrative expenses 8,853,755 13,015,516
Restructuring expense 0 109,564
------------ ------------
OPERATING EARNINGS (LOSS) 764,189 (2,217,919)
Other income and (expense):
Investment income 10,625 40,700
Interest expense (1,486,244) (1,844,925)
------------ ------------
LOSS BEFORE INCOME TAXES (711,430) (4,022,144)
Income taxes (benefit) (875,000) 0
------------ ------------
NET EARNINGS (LOSS) $ 163,570 $ (4,022,144)
============ ============
NET EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted $ 0.03 $ (0.66)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,495,002 6,135,891
============ ============
See notes to condensed consolidated financial statements.
Page 5 of 16
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 Income:
Net income 163,570 163,570
Foreign currency translation adjustments (143,565) (143,565)
Accretion of gain on termination of forward contracts (20,966) (20,966)
-----------
Comprehensive income (961)
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 18,125 18,125
----------- ------------ --------- ----------- -------- -----------
BALANCE AT JUNE 30, 2002 $33,008,138 $(37,383,631) $(951,011) $(3,670,537) $(40,875) $(9,037,916)
=========== ============ ========= =========== ======== ===========
See notes to consolidated financial statements.
Page 6 of 16
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, 2002 2001
------------------------------------------------------------------------------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 163,570 $(4,022,144)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,984,259 5,425,477
Deferred income taxes 0 30,434
Net loss on sales of property, plant and equipment 0 4,602
Changes in assets and liabilities:
Accounts receivable 2,466,629 3,040,204
Inventory (23,785) 19,284
Prepaid expenses and other assets (147,203) (315,213)
Accounts payable and accrued expenses (2,930,208) (1,264,439)
Unearned income 34,988 (19,993)
------------ -----------
Net cash provided by operating activities 2,548,250 2,898,212
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (158,426) (839,893)
Proceeds from the sales of property, plant and equipment 1,209,134 7,200
------------ -----------
Net cash received from (used in) investing activities 1,050,708 (832,693)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt 30,412,847 4,186,939
Payment of long-term debt and capital lease obligations (35,360,142) (7,770,200)
------------ -----------
Net cash used in financing activities (4,947,295) (3,583,261)
------------ -----------
Effect of exchange rate on cash (246,202) 54,004
Decrease in cash and cash equivalents (1,594,539) (1,463,738)
Cash and cash equivalents at beginning of period 1,981,184 2,086,228
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 386,645 $ 622,490
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 1,412,861 $ 1,836,982
============ ===========
Income taxes paid/(refunds received) $ (897,182) $ (122,267)
============ ===========
Assets purchased by the assumption of a liability $ 34,377 $ 290,452
============ ===========
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 note payable $ 3,500,000 $ 0
============ ===========
See notes to condensed consolidated financial statements.
Page 7 of 16
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION - The consolidated balance sheet as of June 30, 2002,
the consolidated statements of operations for the three and six months ended
June 30, 2002 and 2001, the consolidated statement of shareholders' deficiency
for the six months ended June 30, 2002, and the consolidated statements of cash
flows for the six 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 condensed
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 June 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 has
been reclassified to other long-term liabilities at June 30, 2002. The Company
is negotiating similar arrangements with other licensors concerning the payment
of accrued royalties owed by the Company to these licensors on licensed
technology. While the Company anticipates reaching acceptable agreements with
each of these licensors in the near future, there can be no assurance that the
Company will be able to do so. The failure to reach agreement with these
licensors on the payment of accrued but unpaid royalties could result in these
licensors taking action to suspend or terminate the applicable licensing
agreement, which would prevent the Company from using such technology in its
manufacturing process and could have a material adverse effect on the Company's
financial condition and results of operations.
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 since 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 and impairments of
assets to be held and used, and assets to be disposed of by sale. This statement
was adopted in the first quarter of the year ended December 31, 2002. The
adoption of this statement did not have a material effect on the Company's
consolidated financial statements.
Page 8 of 16
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). The
standard rescinds FASB Statements No. 4 and 64 that dealt with issues relating
to the extinguishment of debt. The standard also rescinds FASB Statement No. 44
that dealt with intangible assets of motor carriers. The standard modifies SFAS
No. 13, "Accounting for Leases," so that certain capital lease modifications
must be accounted for by lessees as sale-leaseback transactions. Additionally,
the standard 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2001 AND THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX
MONTHS ENDED JUNE 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.
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 indictate 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.
Page 9 of 16
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 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 service. The Company's core CD-ROM
manufacturing capabilities serve as a component of the supply chain. The Company
maintains operations in Ohio and The Netherlands. Revenues attributed to product
types are distinguished as CD-ROM sales and other sales. As its core business, a
majority of the Company's revenue continues to come from its optical disc
manufacturing business.
Results of Operations
Net sales for the three months ended June 30, 2002, were $14.8 million, a
decrease of $4.0 million, or 21% over the same period of the prior year. This
decrease resulted primarily from CD-ROM sales decreasing $4.2 million or 24%, to
$13.3 million for the three months then ended. 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 for CD-ROM products and services continued to decline industry-wide due
to 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. DVD
sales accounted for $621,000 during the three months ended June 30, 2002, as
compared to $514,000 for the same period in the prior year.
Net sales for the six months ended June 30, 2002, were $30.1 million, a decrease
of $9.8 million, or 25%, over the same period of the prior year. This decrease
resulted primarily from CD-ROM sales decreasing $10.0 million to $27.1 million,
or 27%, for the six months ended. This decrease was due to the factors noted
above.
Page 10 of 16
Gross profit was 33% of net sales for the three months ended June 30, 2002, as
compared to 27%
of net sales for the same period of the prior year. This increase was due mainly
to the closing of the Company's Silicon Valley plant and the restructuring of
the Dublin operations. Gross profit was 32% of net sales for the six months
ended June 30, 2002, as compared to 27% of net sales for the same period of the
prior year.
Selling, general and administrative ("SG&A") expenses were $4.2 million, or 28%
of net sales, for the three months ended June 30, 2002, as compared to $6.4
million, or 34% of net sales, for same period of the prior year. The reduction
in SG&A expenses was primarily attributed to the Dublin restructuring and
workforce reductions. SG&A expenses were $8.9 million, or 29% of net sales, for
the six months ended June 30, 2002, as compared to $13.0 million, or 33% of net
sales, for same period of the prior year.
No restructuring expenses were incurred during the first half of 2002.
Restructuring expenses of $110,000 were incurred during the three months ended
March 31, 2001. These 2001 restructuring expenses consisted primarily of
severance and termination benefits related to a U.S. workforce reduction of
approximately 6%.
Summary of Accrued Restructuring
In Thousands
Termination Exit/Other
Description Benefits Costs Total
----------- -------- ----- -----
Accrued balance
December 31, 2001 $ 1,368 $ 3,100 $ 4,468
Provision year to date June 30, 2002 $ - $ - $ -
Payments year to date June 30, 2002 $ (603) $(2,957) $ (3,560)
------------------------------------------
Accrued balance
June 30, 2002 $ 765 $ 143 $ 908
==========================================
Accrued Restructuring-Current $ 533 $ 143 $ 676
==========================================
Investment income was $6,600 and $5,700 for the three month periods ended June
30, 2002 and 2001, respectively. Investment income was $10,600 and $41,000 for
the six month periods ended 2002 and 2001, respectively.
Interest expense for the three months ended June 30, 2002 was $734,000, as
compared to $898,000 for the same period of the prior year. Interest expense for
the six months ended June 30, 2002 was $1.5 million, as compared to $1.8 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 decreases in 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 time 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.
Page 11 of 16
Based upon the foregoing, the net income for the six months ended June 30, 2002
was $164,000, or net income per basic or diluted common share of $.03, as
compared to a net loss in the same period of the prior year of $4.0 million, or
net loss per basic or diluted common share of $.66.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Source of Liquidity
The Company financed its business during the six months ended June 30, 2002
through cash generated from operations. Cash flow from operating activities was
$2.5 million for the six months ended June 30, 2002, as compared to $2.9 million
for the six months ended June 30, 2001. The Company had cash and cash
equivalents of $387,000 as of June 30, 2002, as compared to $2.0 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 June 30, 2002. As of June 30, 2002, $8.9 million and $5.2
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 June 30, 2002 the Company had
approximately $2.7 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 June 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 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 $18,606,095 as of June 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.
Page 12 of 16
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 has
been reclassified to other long-term liabilities at June 30, 2002. The Company
is negotiating similar arrangements with other licensors concerning the payment
of accrued royalties owed by the Company to these licensors on licensed
technology. While the Company anticipates reaching acceptable agreements with
each of these licensors in the near future, there can be no assurance that the
Company will be able to do so. The failure to reach agreement with these
licensors on the payment of accrued but unpaid royalties could result in these
licensors taking action to suspend or terminate the applicable licensing
agreement, which would prevent the Company from using such technology in its
manufacturing process and could have a material adverse effect on the Company's
financial condition and results of operations.
Plan to Improve Liquidity and Financial Condition
The Company currently has a shareholders' deficiency of $9.0 million as of June
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, the maturity date of the Company's
Credit Facilities was extended until 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 two 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.
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
Page 13 of 16
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.
Page 14 of 16
PART II - OTHER INFORMATION
---------------------------
Items 1-3. Inapplicable.
-------------
Items 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of shareholders was held May 16, 2002.
(b) David P. Lauer and Jeffrey M. Wilkins were elected as
Directors. Joseph F. Keller, Peter J. Kight, Jerry D. Miller,
James V. Pickett and Daniel D. Viren continued as Directors.
(c) The following two directors were elected to three-year terms:
David P. Lauer with 5,232,182 votes for and 111,828 votes
withheld; and Jeffrey M. Wilkins with 5,178,139 votes for and
165,871 votes withheld.
(d) Inapplicable.
Item 5. Inapplicable
-------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 DVD Video and DVD ROM Disc Patent License
Agreement dated August 9, 2002, between
Koninklijke Philips Electronics N.V. and Metatec
International, Inc.*
10.2 Patent License Agreement for the Use of AC-3
Technology in the Manufacture of DVD-Video Discs
dated August 9, 2002, between Koninklijke Philips
Electronics N.V. and Metatec International, Inc.*
10.3 MPEG Audio Patent License Agreement dated August
9, 2002, between Koninklijke Philips Electronics
N.V. and Metatec International, Inc.*
10.4 CD Disc Patent License Agreement dated August 9,
2002, between Koninklijke Philips Electronics
N.V. and Metatec International, Inc.*
10.5 Letter agreement dated August 9, 2002, among U.S.
Philips Corporation, Koninklijke Philips
Electronics N.V. 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.
Page 15 of 16
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 2002.
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: August 14, 2002 Chief Financial Officer
(authorized signatory-
principal financial officer)
/s/ Julia A. Pollner
BY: Julie A. Pollner
Senior Vice President - Finance
(authorized signatory-
principal accounting officer)
Page 16 of 16
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 DVD Video and DVD ROM Disc Patent License Agreement dated
August 9, 2002, between Koninklijke Philips Electronics
N.V. and Metatec International, Inc.*
10.2 Patent License Agreement for the Use of AC-3 Technology
in the Manufacture of DVD-Video Discs dated August 9,
2002, between Koninklijke Philips Electronics N.V. and
Metatec International, Inc.*
10.3 MPEG Audio Patent License Agreement dated August 9, 2002,
between Koninklijke Philips Electronics N.V. and Metatec
International, Inc.*
10.4 CD Disc Patent License Agreement dated August 9, 2002,
between Koninklijke Philips Electronics N.V. and Metatec
International, Inc.*
10.5 Letter agreement dated August 9, 2002, among U.S. Philips
Corporation, Koninklijke Philips Electronics N.V. 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.