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, 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 April 23, 2002: 6,536,113
page 1 of 12
METATEC INTERNATIONAL, INC.
---------------------------
INDEX PAGE
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Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31,
2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Operations
for the three months ended March 31, 2002
and 2001 (unaudited) 4
Consolidated Statement of Shareholders'
Equity for the three months ended
March 31, 2002 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended March 31,
2002 and 2001 (unaudited) 6
Notes to Consolidated Financial
Statements (unaudited) 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 11
Part II: Other Information
Items 1-6 12
Signatures 12
page 2 of 12
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
METATEC INTERNATIONAL, INC.
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CONSOLIDATED BALANCE SHEETS At March 31, At December 31,
------------ ---------------
2002 2001
(Unaudited)
------------ ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 595,551 $ 1,981,184
Accounts receivable, net of allowance for
doubtful accounts of $400,000 10,125,523 12,006,645
Due from sale of assets - 1,000,000
Inventory 1,916,482 2,075,445
Prepaid expenses 897,058 760,470
Refundable income taxes 875,000 -
------------ ---------------
Total current assets 14,409,614 17,823,744
Property, plant and equipment - net 27,690,612 29,381,661
Other assets 163,649 169,166
------------ ---------------
TOTAL ASSETS $ 42,263,875 $ 47,374,571
============ ===============
LIABILITIES & SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 3,828,612 $ 5,088,149
Accrued expenses:
Royalties 5,879,705 5,468,135
Personal property taxes 1,337,356 1,110,819
Payroll 520,445 911,014
Restructuring 754,776 2,658,275
Taxes, benefits and other 1,636,611 1,510,377
Unearned income 177,005 194,366
Current maturities of long-term real estate debt 157,399 157,399
Current maturities of other long-term debt
and capital lease obligations 296,066 25,476
------------ ---------------
Total current liabilities 14,587,975 17,124,010
Long-term real estate debt 18,484,513 18,527,886
Other long-term debt and capital lease
obligations, less current maturities 17,328,378 20,194,352
Other long-term liabilities 658,042 673,403
------------ ---------------
Total liabilities 51,058,908 56,519,651
------------ ---------------
Shareholders' deficiency:
Common stock - no par value;
authorized 10,000,000 shares;
issued 2002 - 7,217,855, 2001 - 7,217,855 shares 33,008,138 35,031,138
Accumulated deficit (37,340,638) (37,547,201)
Accumulated other comprehensive loss (741,246) (786,480)
Treasury stock, at cost; 681,742 and 1,081,742 shares (3,670,537) (5,822,537)
Unamortized restricted stock (50,750) (20,000)
------------ ---------------
Total shareholders' deficiency (8,795,033) (9,145,080)
------------ ---------------
TOTAL LIABILITIES & SHAREHOLDERS' DEFICIENCY $ 42,263,875 $ 47,374,571
============ ===============
See notes to consolidated financial statements.
Page 3 of 12
METATEC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
------------------------------------
2002 2001
-------------------------------------------------------------------------------- ---------------- ---------------
NET SALES $ 15,245,673 $ 21,048,545
Cost of sales 10,506,921 15,306,172
---------------- ---------------
Gross profit 4,738,752 5,742,373
Selling, general and administrative expenses 4,659,249 6,647,554
Restructuring expenses 0 109,564
---------------- ---------------
OPERATING EARNINGS (LOSS) 79,503 (1,014,745)
Other income and (expense):
Investment income 4,024 35,046
Interest expense (751,964) (946,901)
---------------- ---------------
LOSS BEFORE INCOME TAXES (668,437) (1,926,600)
Income tax benefit 875,000 0
---------------- ---------------
NET INCOME (LOSS) $ 206,563 $ (1,926,600)
================ ===============
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted $ 0.03 $ (0.31)
================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 6,453,891 6,135,669
================ ===============
See notes to condensed consolidated financial statements.
Page 4 of 12
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 206,563 206,563
Foreign currency
translation adjustments 55,529 55,529
Accretion of gain on termination
of forward contracts (10,295) (10,295)
-----------
Comprehensive income 251,797
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 8,250 8,250
----------- ------------ ------------ ----------- ----------- -----------
BALANCE AT MARCH 31, 2002 $33,008,138 $(37,340,638) $ (741,246) $(3,670,537) $ (50,750) $(8,795,033)
=========== ============ ============ =========== =========== ===========
See notes to consolidated financial statements.
Page 5 of 12
METATEC INTERNATIONAL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2002 2001
----------------------------------------------------------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 206,563 $ (1,926,600)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,519,412 2,778,346
Deferred income taxes 0 18,711
Net gain on sales of property, plant and equipment 0 (1,852)
Changes in assets and liabilities:
Accounts receivable 1,847,271 2,415,418
Inventory 154,141 40,114
Prepaid expenses and other assets (1,013,044) (418,092)
Accounts payable and accrued expenses (2,680,712) (930,400)
Unearned income (14,434) (46,128)
-------------- --------------
Net cash provided by operating activities 19,197 1,929,517
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (22,058) (551,243)
Proceeds from the sales of property, plant and equipment 1,185,234 3,000
-------------- --------------
Net cash provided by (used in) investing activities 1,163,176 (548,243)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt 16,622,586 3,450,000
Payment of long-term debt and capital lease obligations (19,261,343) (2,066,608)
-------------- --------------
Net cash provided by (used in) financing activities (2,638,757) 1,383,392
-------------- --------------
Effect of exchange rate on cash 70,751 (4,396)
Increase (decrease) in cash and cash equivalents (1,385,633) 2,760,270
Cash and cash equivalents at beginning of period 1,981,184 2,086,228
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 595,551 $ 4,846,498
=============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 691,179 $ 854,645
=============== ==============
Income tax refunds received $ (5,700) $ (122,267)
=============== ==============
Assets purchased by the assumption of a liability $ 38,962 $ 123,230
=============== ==============
Issuance of restricted stock $ 39,000 $ 35,000
=============== ==============
Payment of accrued restrucuturing expense by the issuance
of treasury stock $ 90,000 $ 0
=============== ==============
See notes to condensed consolidated financial statements.
Page 6 of 12
METATEC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION - The consolidated balance sheet as of March 31, 2002,
the consolidated statements of operations for the three months ended March 31,
2002 and 2001, the consolidated statement of shareholders' equity for the three
months ended March 31, 2002, 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, 2001 annual report on Form 10-K. The results of operations for the
period ended March 31, 2002 are not necessarily indicative of the results for
the full year.
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 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2001
CRITICAL ACCOUNTING POLICIES
The Company's Form 10-K for the year ended December 31, 2001 included a
discussion of the Company's critical accounting policies, which discussion
should be read in conjunction with the quarterly information contained in this
Form 10-Q.
page 7 of 12
BUSINESS OF THE COMPANY
The Company is transitioning from a disc manufacturing company to a supply chain
solutions company that enables companies to streamline the process of delivering
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 March 31, 2002 were $15,246,000, a decrease
of $5,803,000, or 28% over the same period of the prior year. This decrease
resulted primarily from CD-ROM manufacturing sales decreasing $5,809,000 to
$13,832,000 for the three months ended, or 30%. This decrease was due to several
factors. First, the closing of the Company's Milpitas, California ("Silicon
Valley") plant and the planned restructuring that reduced manufacturing capacity
and eliminated certain low-margin customers. Second, the pricing for CD-ROM
products and services continued to decline or remained at low levels
industry-wide due to excess manufacturing capacity, a trend the Company
anticipates will continue through 2002. Finally, the 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 $642,000 during the
three months ended March 31, 2002, as compared to $624,000 for the same period
in the prior year.
Gross profit was 31% of net sales for the three months ended March 31, 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 elimination of certain low margin customers.
Selling, general and administrative ("SG&A") expenses were $4,659,000, or 31% of
net sales, for the three months ended March 31, 2002 as compared to $6,648,000,
or 32% of net sales, for same period of the prior year. The reduction in SG&A
expenses was primarily attributed to the restructuring and workforce reductions
announced during the fourth quarter of 2001.
No restructuring expenses were incurred during the first quarter 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 the U.S. workforce reduction of
approximately 6%.
Investment income was $4,000 and $35,000 for the three month periods ended March
31, 2002 and 2001, respectively.
page 8 of 12
Interest expense for the three months ended March 31, 2002 was $752,000 as
compared to $947,000 for the same period of the prior year. The decrease in
interest expense was due to decreased borrowings under 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 President signed the Job Creation and
Worker Assistance Act of 2002 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.
Based upon the foregoing, the net income for the three months ended March 31,
2002 was $206,000, 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 $1,927,000, or
net loss per basic or diluted common share of $.31.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
Source of Liquidity
The Company financed its business during the three months ended March 31, 2002
through cash generated from operations. Cash flow from operating activities was
$19,000 for the three months ended March 31, 2002, as compared to $1,924,000 for
the three months ended March 31, 2001. This decrease is primarily due to the
payment of accrued restructuring charges. The Company had cash and cash
equivalents of $596,000 as of March 31, 2002.
Bank Financing Matters
----------------------
As further described below, 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 March 31, 2002. As of March 31, 2002,
$9,791,000 and $6,549,000 were outstanding under the term loan facility and the
revolving loan facility, respectively.
On February 8, 2002, the Company entered into an amended and restated loan
agreement (the "Loan Agreement") with its banks which replaced the Company's
prior agreement with its banks. Under the Loan Agreement, the Credit Facilities
consist of three separate loans: (1) an asset based revolving loan facility with
a borrowing base as described below; (2) a term loan facility in the principal
amount of $9,326,250; and (3) a second term loan facility in the original
principal amount of $509,238, which principal amount may be increased up to
$1,000,000 by advances made to the Company through December 31, 2002. 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.
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. 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
page 9 of 12
Agreement. The revolving loan and the term loans accrue interest at a rate equal
to 3.5% in excess of the prime rate of the banks. 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 $18,641,912 as of March 31, 2002. This term loan facility is payable in
monthly principal and interest payments based upon a thirty year amortization
schedule, bears interest at a fixed rate of 8.2%, and matures on September 1,
2009. This loan facility is secured by a first lien on all real property of the
Company and letters of credit in favor of the lender, in an aggregate amount of
$1,650,000.
Other Liquidity Matters
-----------------------
The Company completed the sale of certain of its manufacturing assets associated
with its Silicon Valley facility on January 15, 2002 for approximately $1.0
million. The sale transaction was effective as of December 31, 2001.
The Company and the landlord of its Silicon Valley facility agreed to terminate
the lease for this facility on January 15, 2002. The lease termination agreement
was effective as of December 31, 2001. The lease termination relieved the
Company of paying approximately $12.2 million in lease payments due over the
next seven years. In exchange for its agreement to terminate the lease, the
landlord received a $1.5 million unsecured, non-interest bearing promissory note
(discounted to $1,228,349 at 8.5%) due in four equal installments beginning in
January 2003, approximately $1.1 million in cash, and 300,000 shares of the
Company's common stock.
Plan to Improve Liquidity and Financial Condition
The Company currently has a shareholders' deficiency of $8,795,000 as of March
31, 2002, as compared to a shareholders' deficiency of $9,145,000 as of December
31, 2001. These financial conditions present 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 quarter 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.
page 10 of 12
The Amended 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 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 11 of 12
PART II - OTHER INFORMATION
---------------------------
Items 1-4. Inapplicable.
-------------
Item 5. Other Information.
------------------
As of April 26, 2002, the Company's shares began trading on
the Over The Counter Bulletin Board (OTCBB). The stock ticker symbol
remains as "META." The Company had previously announced the anticipated
move to the OTCBB from the NASDAQ National Market, as described in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) none
(b) Reports on Form 8-K.
(i) The Company filed a Form 8-K dated January 3, 2002, under
Item 5 to report that the Company had entered into an
extension to a standstill agreement between the Company
and its banks with respect to a default by the Company
under its then-existing credit facilities.
(ii) The Company filed a Form 8-K dated February 14, 2002,
under Item 5 to report the sale of certain of its
manufacturing plant assets associated with its Milpitas,
California facility, the entering into of an amended and
restated loan agreement with its banks, and the hiring of
its new Chief Financial Officer.
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 9, 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 12 of 12
Form 10-Q
Exhibit Index
Exhibit Number Description of Exhibit
-------------- ----------------------
None.