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 March 31, 2003
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
Not applicable
--------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
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 __
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
Number of Common Shares outstanding as of April 15, 2003: 6,536,113
Page 1 of 19
METATEC INTERNATIONAL, INC.
---------------------------
FORM 10-Q
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical facts,
included in this Form 10-Q of Metatec International, Inc. (the "Company") or
incorporated herein by reference, including, without limitation, statements
regarding the Company's future financial position, business strategy, budgets,
projected costs, goals and plans and objectives of management for future
operations, are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "project," "believe" or
"continue" or the negative thereof or variations thereon or similar terminology.
Forward-looking statements speak only as the date the statements were made.
Although the Company believes that the expectations reflected in forward-looking
statements have a reasonable basis, it can give no assurance that these
expectations will prove to be correct. Forward-looking statements are subject to
risks and uncertainties that could cause actual events or results to differ
materially from those expressed in or implied by the statements. For a
discussion of the most significant risks and uncertainties that could cause the
Company's actual results to differ materially from those projected, see the
Company's Form 10-K for its fiscal year ending December 31, 2002, Item
7--Forward-Looking Statements; Risk Factors Affecting Future Results. Except to
the limited extent required by applicable law, the Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
Page 2 of 19
INDEX PAGE
----- ----
Part I : Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31,
2003 (unaudited) and December 31, 2002 4
Consolidated Statements of Operations
for the three months ended March 31, 2003
and 2002 (unaudited) 5
Consolidated Statement of Shareholders'
Deficiency for the three months ended
March 31, 2003 (unaudited) 6
Consolidated Statements of Cash Flows
for the three months ended March 31,
2003 and 2002 (unaudited) 7
Notes to Consolidated Financial
Statements (unaudited) 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
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 17
Certifications 18-19
Page 3 of 19
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
METATEC INTERNATIONAL, INC.
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS At March 31, At December 31,
------------ ------------
2003 2002
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 617,340 $ 336,597
Restricted cash 146,000 146,000
Accounts receivable, net of allowance for doubtful accounts of $200,000 6,553,632 7,251,086
Inventory 1,074,866 1,096,912
Prepaid expenses 770,152 920,514
------------ ------------
Total current assets 9,161,990 9,751,109
Property, plant and equipment - net 23,072,646 24,094,376
Other assets 141,584 147,101
------------ ------------
TOTAL ASSETS $ 32,376,220 $ 33,992,586
============ ============
LIABILITIES & SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,289,449 $ 2,556,727
Accrued expenses:
Royalties 314,993 452,152
Personal property taxes and real estate taxes 1,435,715 1,362,188
Payroll and benefits 722,990 1,059,480
Restructuring 535,745 901,721
Other 524,510 615,120
Unearned income 62,530 58,767
Current maturities of long-term real estate debt 170,995 170,995
Current maturities of other long-term debt and capital lease obligations 781,278 793,850
------------ ------------
Total current liabilities 6,838,205 7,971,000
Long-term real estate debt 18,310,269 18,356,891
Other long-term debt and capital lease obligations, less current maturities 16,300,232 17,018,611
Other long-term liabilities 1,155,505 1,148,638
------------ ------------
Total liabilities 42,604,211 44,495,140
------------ ------------
Shareholders' deficiency:
Common stock - no par value; authorized 10,000,000 shares;
issued 7,217,855 shares 33,008,138 33,008,138
Accumulated deficit (39,549,342) (39,819,030)
Treasury stock, at cost; 681,742 shares (3,670,537) (3,670,537)
Unamortized restricted stock (16,250) (21,125)
------------ ------------
Total shareholders' deficiency (10,227,991) (10,502,554)
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIENCY $ 32,376,220 $ 33,992,586
============ ============
See notes to consolidated financial statements.
Page 4 of 19
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
--------------------------------
2003 2002
------------------------------------------------------------- -------------- -------------
NET SALES $ 10,449,055 $ 13,125,697
Cost of sales 6,584,975 9,026,233
------------ ------------
Gross margin 3,864,080 4,099,464
Selling, general and administrative expenses (3,391,736) (4,119,388)
Gain on sale of assets 456,509 0
------------ ------------
OPERATING EARNINGS (LOSS) FROM CONTINUING OPERATIONS 928,853 (19,924)
Other income and (expense):
Investment income 63 357
Interest expense (659,228) (751,964)
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 269,688 (771,531)
Income tax benefit 0 875,000
------------ ------------
INCOME FROM CONTINUING OPERATIONS 269,688 103,469
Income from discontinued operations 0 103,094
------------ ------------
NET INCOME $ 269,688 $ 206,563
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,536,113 6,453,891
============ ============
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic and diluted $ 0.04 $ 0.02
============ ============
NET INCOME COMMON SHARE
Basic and diluted $ 0.04 $ 0.03
============ ============
See notes to condensed consolidated financial statements.
Page 5 of 19
METATEC INTERNATIONAL, INC.
----------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY (UNAUDITED)
Unamortized
Common Accumulated Treasury Restricted
Stock Deficit Stock Stock Total
---------------------------------------- -------------- -------------- ------------- ----------- ---------------
BALANCE AT DECEMBER 31, 2002 $ 33,008,138 $ (39,819,030) $ (3,670,537) $ (21,125) $ (10,502,554)
Net income 269,688 269,688
Amortization of restricted stock 4,875 4,875
------------ ------------- ------------ --------- --------------
BALANCE AT MARCH 31, 2003 $ 33,008,138 $ (39,549,342) $ (3,670,537) $ (16,250) $ (10,227,991)
============ ============= ============ ========= ==============
See notes to consolidated financial statements.
Page 6 of 19
METATEC INTERNATIONAL, INC.
-----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2003 2002
------------------------------------------------------------ --------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 269,688 $ 206,563
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,009,549 1,401,962
Gain on sale of assets (456,505) 0
Changes in assets and liabilities:
Accounts receivable 787,454 2,038,858
Inventory 22,046 121,629
Prepaid expenses and other assets 102,217 (843,437)
Accounts payable and accrued expenses (1,085,833) (2,755,771)
Unearned income 3,763 (14,434)
Net assets of discontinued operations 0 128,866
-----------------------------
Net cash provided by operating activities 652,379 284,236
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (87,734) (20,876)
Proceeds from the sales of property, plant and equipment 566,075 1,185,234
----------- -----------
Net cash provided by investing activities 478,341 1,164,358
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt and capital lease obligations (1,064,339) (91,898)
Net increase (reduction) in revolving line of credit 214,362 (2,546,859)
----------- -----------
Net cash used in financing activities (849,977) (2,638,757)
----------- -----------
Increase (decrease) in cash and cash equivalents 280,743 (1,190,163)
Cash and cash equivalents at beginning of period 336,597 1,291,778
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 617,340 $ 101,615
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 632,875 $ 691,179
=========== ===========
Income tax refunds received $ 0 $ (5,700)
=========== ===========
Assets purchased by the assumption of a liability $ 52,799 $ 19,184
=========== ===========
Issuance of restricted stock $ 0 $ 39,000
=========== ===========
Payment of accrued restrucuturing expense by the issuance
of treasury stock $ 0 $ 90,000
=========== ===========
Assets sold for the assumption of a receivable $ 90,000 $ 0
=========== ===========
See notes to condensed consolidated financial statements.
Page 7 of 19
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION - The consolidated balance sheet as of March 31, 2003,
the consolidated statements of operations for the three months ended March 31,
2003 and 2002, the consolidated statement of shareholders' deficiency for the
three months ended March 31, 2003, and the consolidated statements of cash flows
for the three 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, 2002 annual report on Form 10-K. The results of operations for the
period ended March 31, 2003 are not necessarily indicative of the results for
the full year.
In January 2003, the Company sold its Internet-based electronic software
distribution ("ESD") business to Digital River, Inc. ("Digital River"), a global
e-commerce outsource solutions provider based in Minneapolis, Minnesota. Under
the terms of the agreement, Digital River acquired certain assets and assumed
certain liabilities associated with the Company's ESD business, and the Company
received approximately $1,100,000 in cash and notes, subject to adjustment based
on an earn out computation. The Company recognized a gain on the sale of
approximately $457,000 during the first quarter of 2003.
In February 2003, the Company entered into a licensing agreement with one of its
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, $137,000 of accrued royalties were reclassified to
other long-term liabilities as of December 31, 2002.
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.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," is effective for fiscal years
beginning after May 15, 2002 (December 31, 2003 for the Company). This Statement
rescinds FASB Statements No. 4 and 64 that dealt with issues relating to the
extinguishment of debt. This Statement also rescinds FASB Statement No. 44 that
dealt with intangible assets of motor carriers. This Statement modifies SFAS No.
13, "Accounting for Leases," so that certain capital lease modifications must be
accounted for by lessees as sale-leaseback transactions. Additionally, this
Statement identifies amendments that should have been made to previously
existing pronouncements and formally amends the appropriate pronouncements. The
adoption of SFAS No. 145 does 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"
is 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
Page 8 of 19
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 did not have a material
impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to
provide alternative methods for an entity that voluntarily changes to the fair
value based method of accounting for stock-based compensation, amends the
disclosure provisions of SFAS 123 and amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. The transition guidance and annual disclosure provisions
of SFAS 148 are effective for fiscal years ending after December 15, 2002. In
addition, this Statement amends the disclosure requirements of Statement No. 123
to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002 and are included in the notes to these
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for the current fiscal year and were not material in relation to the Company's
2002 consolidated financial statements. However, the provisions for initial
recognition and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The adoption of FIN 45 did not have a material impact on
the Company's financial condition or results of operations.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest entity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The initial adoption of this accounting
pronouncement did 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.
European operations had revenues for the three months ended March 31, 2002 of
$2,120,000.
Pre-tax income for the Company's European operations for the three months ended
March 31, 2002 was $103,000.
The Company accounted for these operations as discontinued operations in the
2002 consolidated financial statements.
Page 9 of 19
3. STOCK OPTIONS During the three months ended March 31, 2003, the Company's
stock options activity and weighted average exercise prices were as follows:
Shares Exercise Price
------ --------------
Outstanding, December 31, 2002 1,171,750 $3.89
Granted 0 $0.00
Exercised 0 $0.00
Forfeited 77,525 $4.24
--------------- -----------------
Outstanding, March 31, 2003 1,094,225 $3.86
--------------- -----------------
The Company accounts for employee and director stock options using the intrinsic
value method. Under this method, no compensation expense was recorded in all
years presented because all stock options were granted at an exercise price
equal to the fair market value of the Company's stock on the date of the grant.
If compensation expense for the Company's stock option grants had been
determined based on their estimated fair value at the grant dates, the Company's
net income and earnings per share for the quarter ending March 31, 2003 would
have been as follows:
Net income, as reported $269,688
Deduct: total stock-based compensation expense determined
under the fair value method for all awards, net of
related tax benefits (20,581)
--------
Pro forma net income $249,107
========
Earnings per common share, basic and diluted:
As reported $.04
Pro forma $.04
The fair value of options granted was estimated on the date of the grant using
the Black-Scholes option-pricing model.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2002
BUSINESS OF THE COMPANY
The Company provides technology driven supply chain solutions that enable its
customers to streamline the process of delivering their products and information
to market, increase efficiencies and reduce costs. The Company assists its
customers with a wide range of services, from preparing their products for
market to delivering their finished products into the distribution channel or
directly to the end-users. The Company's solutions are built on a solid
technology foundation that includes both customized system integration and a
web-based reporting and tracking tool that makes real-time information easily
accessible. Technologies include CD-ROM and DVD manufacturing services and
secure Internet-based software distribution services. The Company's core CD-ROM
manufacturing, packaging and distribution capabilities serve as a component of
the supply chain. The Company's manufacturing and distribution facilities are
located in Dublin, Ohio.
Page 10 of 19
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 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, 2002. 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 as
of March 31, 2003 and December 31, 2002. Accounting principles generally
accepted in the United States of America require the Company to record a
valuation allowance against the deferred tax asset associated with this NOL if
it is "more likely than not" that the Company will not be able to utilize the
NOL to offset future taxes. Due to the amount of the NOL carryforward in
relation to the Company's history of unprofitable operations, management has
recorded a valuation allowance in the Company's financial statements to offset
the deferred tax asset associated with the NOL because of the uncertainty
surrounding the realizability of such asset.
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 reduce the valuation allowance which would
increase 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.
Page 11 of 19
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 2003, were $10,449,000, a
decrease of $2,677,000, or 20% over the same period of the prior year. This
decrease was primarily due to declining prices for the Company's CD-ROM products
and services caused by industry-wide excess manufacturing capacity, a trend the
Company anticipates will continue. In addition, demand for the Company's CD-ROM
products and services declined due to several factors, including the continued
poor general economic conditions, the continued increase in customers using
on-line or electronic methods to distribute information, and the continued
maturation of the CD-ROM market.
Gross margin was 37% of net sales for the three months ended March 31, 2003, as
compared to 31% of net sales for the same period of the prior year. The Company
believes that the improvement in gross margins in the period-to-period
comparisons reflects management's focus on supply chain services and its
continued cost-cutting and emphasis on operational efficiency.
Selling, general and administrative ("SG&A") expenses were $3,392,000, or 32% of
net sales, for the three months ended March 31, 2003, as compared to $4,119,000,
or 31% of net sales, for same period of the prior year. The reduction in SG&A
expenses for the period-to-period comparison was the result of the Company's
cost-cutting initiatives, such as workforce reductions and facility closures or
sales, while the increase in the SG&A expense percentage for the
period-to-period comparison was the result of decreased sales, as fixed expenses
were spread over a smaller sales base.
On January 14, 2003, the Company sold its Internet-based electronic software
distribution ("ESD") business to Digital River, Inc. ("Digital River"), a global
e-commerce outsource solutions provider based in Minneapolis, Minnesota. Under
the terms of the agreement, Digital River acquired certain assets and assumed
certain liabilities associated with the Company's ESD business, and the Company
received approximately $1,100,000 in cash and notes, subject to adjustment based
on an earn out computation. The Company recognized a gain on the sale of
approximately $457,000 during the first quarter of 2003.
No restructuring expenses were incurred during the three months ended March 31,
2003 or the three months of the prior year.
Summary of Accrued Restructuring
In '000's
Termination Exit/Other
Description Benefits Costs Total
----------- -------- ----- -----
Accrued balance
December 31, 2002 $ 873 $ 1,361 $ 2,234
Payments year to date March 31, 2003 $ (350) $ (371) $ (721)
----------------------------------------------
Accrued balance
March 31, 2003 $ 523 $ 990 $ 1,513
==============================================
Accrued Restructuring-Current $ 523 $ 325 $ 848
==============================================
Page 12 of 19
Interest expense for the three months ended March 31, 2003 was $659,000, as
compared to $752,000 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 and 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 three months ended March 31, 2003 the Company utilized
approximately $300,000 of its net operating loss carryforward and, therefore,
did not record any income tax expense.
The net income from continuing operations for the three months ended March 31,
2003 was $270,000, or $.04 per basic and diluted common share, as compared to a
net income from continuing operations in the same period of the prior year of
$103,000, or $.02 per basic and diluted common share . Including discontinued
operations, discussed below, the Company had a net income of $270,000 for the
three months ended March 31, 2003, or $.04 per basic and diluted common share,
as compared to net income in the same period of the prior year of $207,000, or
$.03 per basic and diluted common share.
Discontinued Operations
Pursuant to an agreement dated as of September 30, 2002, the Company sold its
European CD-ROM manufacturing operations in Breda, The Netherlands, to Nimbus, a
Netherlands-based private investment group. The transaction was structured as a
sale of all of the shares of Metatec's European subsidiary to Nimbus. The shares
were sold in exchange for the assumption of the European subsidiary's
liabilities as of August 31, 2002.
European operations had revenues for the three months ended March 31, 2002, of
$2,120,000.
Pre-tax income for the Company's European operations for the three months ended
March 31, 2002, was $103,000.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Source of Liquidity
The Company financed its business during the three months ended March 31, 2003,
through cash generated from operations. Cash flow from operating activities was
$652,000 for the three months ended March 31, 2003, as compared to $284,000 for
the three months ended March 31, 2002. The Company had cash and cash equivalents
of $617,000 as of March 31, 2003, as compared to $102,000 as of March 31, 2002.
Bank Financing Matters
The Company has a term loan facility and a revolving loan facility
(collectively, the "Credit Facilities") with its banks. The borrowing base of
the revolving loan facility is limited to the lesser of (i) $10,000,000, or (ii)
the sum of (A) 80% of eligible domestic accounts receivable, plus (B) 30% of
eligible domestic inventory, plus (C) 90% of domestic machinery and equipment.
The borrowing base is further reduced by the aggregate amount of the Company's
outstanding letters of credit. As of March 31, 2003, $8,066,000 and $3,824,000
were outstanding under the term loan facility and revolving loan facility,
respectively, and the Company had approximately $3,288,000 available to draw on
its revolving loan facility.
Page 13 of 19
The revolving loan and the term loans under the Credit Facilities mature on
April 1, 2004. Quarterly principal payments are required for the term loan if
cash flows exceed certain specified targets over designated periods of time. As
of March 31, 2003, the Company exceeded these targets and will make a principle
payment of $202,592 on May 1, 2003. The Credit Facilities are secured by a first
lien on all non-real estate business assets of the Company and a pledge of the
stock of the Company's subsidiaries. The Company is required to comply with the
financial and other covenants contained in the loan agreement for the Credit
Facilities. As of March 31, 2003, the Company was in compliance with these
covenants. The Credit Facilities accrue interest at a rate equal to 3.5% in
excess of the prime rate of the banks. Certain fees are required to be paid to
the banks in connection with the Credit Facilities. The Company expects that it
will be able to negotiate a new borrowing facility prior to April 1, 2004.
However, there can be no assurance that the Company will be able to do so.
The Company has a $19,000,000 term loan facility which was used to permanently
finance the Company's Dublin, Ohio distribution center (completed in 1999) and
to pay down other bank debt. The loan facility has an outstanding principal
balance of $18,481,265 as of March 31, 2003. 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, which are renewed annually.
Other Liquidity Matters
In February 2003, the Company entered into a licensing agreement with one of its
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, $137,000 of accrued royalties were reclassified to
other long-term liabilities.
As previously discussed, the Company sold its EDS business to Digital River on
January 14, 2003.
The Company did not carry any off-balance sheet derivative financial instruments
or have any off-balance sheet financial arrangements at March 31, 2003.
Plan to Improve Liquidity and Financial Condition
The Company had a shareholders' deficiency of $10,228,000 as of March 31, 2003,
as compared to a shareholders' deficiency of $10,503,000 as of December 31,
2002. 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 implementing a plan to increase revenues from its supply chain
solution services. 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 generated positive cash flow from operations in each of the last
four fiscal years. Management believes that the Company's current focus on its
core business customers and continued cost saving measures will allow it to
generate sufficient cash flows to meet operational needs in 2003. However, there
can be no assurance that such measures will allow the Company to generate
sufficient cash flows for the remainder of 2003. Furthermore, additional actions
will need to be taken to address the Company's long-term liquidity issues as a
result of the Company's shareholders' deficiency.
Page 14 of 19
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; 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 the Company's year
ended December 31, 2002.
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, 2002.
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 19
PART II - OTHER INFORMATION
---------------------------
Items 1-5. Inapplicable.
-------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
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
(b) Reports on Form 8-K.
(i) The Company filed a Form 8-K dated January 31,
2003, under Item 5 to report that the Company
had sold its Internet-based electronic software
distribution business.
Page 16 of 19
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: May 12, 2003 Chief Financial Officer
(authorized signatory-
principal financial officer)
/s/ Julia A. Fratianne
BY: Julia A. Fratianne
Vice President - Finance
(authorized signatory-
principal accounting officer)
Page 17 of 19
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: May 12, 2003 /s/ Christopher A. Munro
---------------------------------
Christopher A. Munro,
Chief Executive Officer
(Principal executive officer)
Page 18 of 19
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: May 12, 2003 /s/ Gary W. Qualmann
-----------------------------------
Gary W. Qualmann
Chief Financial Officer
(Principal financial officer)
Page 19 of 19
METATEC INTERNATIONAL, INC.
Form 10-Q
For Quarterly Period Ended March 31, 2003
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
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