-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, W671feAllyl7pmSFmKn6y9wJbPpokEnRG/t/vRn2aJqgo2i1NskfiSCy/h/n7HzC VuXZzVYm5e5mdA1MUZmPqA== 0000950152-95-001074.txt : 19950518 0000950152-95-001074.hdr.sgml : 19950518 ACCESSION NUMBER: 0000950152-95-001074 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950517 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METATEC CORP CENTRAL INDEX KEY: 0000203200 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 591698890 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-58733 FILM NUMBER: 95540524 BUSINESS ADDRESS: STREET 1: 7001METATEC BLVD CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147612000 MAIL ADDRESS: STREET 1: 7001 METATEC BLVD CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: SILCO INVESTORS CORP DATE OF NAME CHANGE: 19900801 S-1/A 1 METATEC S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1995 REGISTRATION NO. 33-58733 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ METATEC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 2741 59-1698890 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ 7001 METATEC BOULEVARD DUBLIN, OHIO 43017 (614) 761-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) JEFFREY M. WILKINS CHAIRMAN AND CHIEF EXECUTIVE OFFICER 7001 METATEC BOULEVARD DUBLIN, OHIO 43017 (614) 761-2000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: GARY A. WADMAN, ESQ. BARRY M. ABELSON, ESQ. BAKER & HOSTETLER PEPPER, HAMILTON & SCHEETZ 65 EAST STATE STREET 3000 TWO LOGAN SQUARE SUITE 2100 18TH AND ARCH STREETS COLUMBUS, OHIO 43215 PHILADELPHIA, PENNSYLVANIA 19103
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(Aa, MAY DETERMINE. ================================================================================ 2 METATEC CORPORATION CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS - -------------------------------------------------------- ------------------------------------- 1. Forepart of the Registration Statement and Outside Cover Page of Prospectus.......................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus........................................ Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges......................... Prospectus Summary; Investment Considerations 4. Use of Proceeds................................... Use of Proceeds; Capitalization 5. Determination of Offering Price................... Outside Front Cover Page; Underwriting 6. Dilution.......................................... Not Applicable 7. Selling Security Holders.......................... Not Applicable 8. Plan of Distribution.............................. Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered........ Outside Front Cover Page; Description of Capital Stock; Price Range of Common Shares and Dividend Policy 10. Interests of Named Experts and Counsel............ Legal Matters; Experts 11. Information with Respect to the Registrant........ Prospectus Summary; Investment Considerations; Use of Proceeds; Price Range of Common Shares and Dividend Policy; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Shareholders; Description of Capital Stock; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 17, 1995 PROSPECTUS 1,500,000 SHARES COMMON SHARES ------------------------ All of the Common Shares, $.10 par value (the "Shares"), offered hereby are being offered (the "Offering") by Metatec Corporation (the "Company"). The Shares are quoted on The Nasdaq Stock Market under the trading symbol "META." On May 15, 1995, the last reported sale price for the Shares, as reported on The Nasdaq Stock Market, was $11.00 per share. SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================= PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------- Per Share...................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(3)....................... $ $ $ =================================================================================================
(1) In addition, the Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated offering expenses of $ payable by the Company. See "Use of Proceeds." (3) The Company has granted the Underwriters a 30-day option to purchase up to 225,000 additional Shares from the Company on the same terms and conditions as set forth above solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." ------------------------ The Shares are offered subject to prior sale, when, as, and if issued to and accepted by the Underwriters, subject to their right to reject any order in whole or in part and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of certificates for the Shares will be made at the offices of Legg Mason Wood Walker, Incorporated, Baltimore, Maryland, on or about May , 1995. ------------------------ LEGG MASON WOOD WALKER VAN KASPER & COMPANY INCORPORATED May , 1995 4 FIGURE 1-PHOTO [CD-ROM TITLE PRODUCED BY METATEC CORPORATION FOR COMPUSERVE INCORPORATED, WITH RELATED PACKAGING.] FIGURE 2-PHOTO [CD-ROMS PRODUCED BY METATEC CORPORATION.] FIGURE 3-PHOTO [SAMPLE EDITION OF NAUTILUSCD AND RELATED PACKAGING.] Metatec Corporation is a leading provider of CD-ROM manufacturing, application software, consulting, and publishing services. As a one-stop source of CD-ROM solutions, the Company serves customers in publishing, communications, high technology, government, and professional services. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; at its New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; at its Los Angeles Regional Office, 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036; and at its Chicago Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Shares are traded on The Nasdaq Stock Market. Reports, proxy statements and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SHARES ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary information is qualified by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the term "Company" shall include Metatec Corporation and its wholly owned subsidiary, Metatec/Discovery Systems, Inc. ("Discovery Systems"), and all references in this Prospectus assume no exercise of the Underwriters' over-allotment option or of the options to purchase 469,742 Shares that are currently outstanding under the Company's stock option plans. See "Management -- Stock Option Plans." THE COMPANY Metatec Corporation is a leading provider of CD-ROM (compact disc-read only memory) manufacturing, application software consulting, and publishing services. The Company targets two principal markets: organizations seeking to publish information on CD-ROM and personal computer users who own CD-ROM equipped, multimedia computer systems. As a one-stop source of CD-ROM solutions, the Company serves approximately 200 customers in publishing, communications, high technology, government, and professional services. The Company, which has experienced compounded annual revenue growth of 29% from 1990 to 1994, is organized into three business divisions: - Manufacturing Services provides CD-ROM mastering, replication, and distribution services in addition to providing similar services to radio syndication customers for audio compact discs ("Audio CDs"). Current customers include Bell & Howell Publications Systems Company, Digital Equipment Corporation, and Research Institute of America Inc. - Software Services provides information publishers with design and development services for CD-ROM based publications which, in turn, often produce Manufacturing Services revenues for the Company. Current customers include Phillips Business Information, Inc., CompuServe Incorporated, and Harcourt Brace College Publishers. - Publishing Services produces and publishes NautilusCD, the first subscription-based monthly multimedia CD-ROM magazine, which has approximately 18,000 subscribers. CD-ROM technology combines audio, video, text, and graphics in one medium with the capability to store, search, and retrieve vast quantities of information. One CD-ROM can contain up to 650 megabytes of data, or the equivalent of approximately 800 high density floppy discs or 300,000 pages of text. The Company believes that businesses and individuals are increasingly turning to CD-ROM technology as a cost-effective means of organizing, storing, and disseminating large quantities of information quickly to widely diversified groups of users. According to published industry information, the North American installed base of CD-ROM disc drives increased from less than 1.5 million in 1991 to more than 19 million in 1994, and is estimated to be more than 37 million by the end of 1995. The Company believes that only a small percentage of applications suitable for CD-ROM have actually been implemented to date for both individuals and businesses. The Company's goal is to become the leading provider of information distribution services utilizing optical disc technology. The Company believes that the market for information distributed on CD-ROM can be expanded by the use of communication networks, such as the Internet, to provide interim database and application updates. The Company intends to begin offering such updating capability as part of its services during 1995. The principal offices of the Company are located at 7001 Metatec Boulevard, Dublin, Ohio 43017, and its telephone number is (614) 761-2000. THE OFFERING Shares offered................................. 1,500,000 Shares Shares to be outstanding after the Offering(1).................................. 6,775,964 Shares Use of proceeds................................ For repayment of bank indebtedness, expansion of manufacturing capacity, and general corporate and working capital purposes. See "Use of Proceeds." The Nasdaq Stock Market symbol................. META
- --------------- (1) Includes 600,000 Shares which are subject to risk of forfeiture. See "Management -- Certain Transactions" and Note 7 of the Notes to Consolidated Financial Statements. 3 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenues............................................... $10,355 $13,615 $16,877 $21,318 $28,943 $6,007 $9,179 Earnings (loss) from continuing operations before income taxes......................................... (1,149) (1,073) (371) 1,062 2,425 172 879 Income tax benefit (expense)........................... 65 (732) (52) (336) Net earnings (loss) from continuing operations......... (1,149) (1,008) (371) 1,062 1,693 120 543 Net earnings (loss).................................... 581 (428) (371) 1,062 1,693 120 543 Net earnings (loss) per common share from continuing operations: Primary.............................................. $ (0.35) $ (0.30) $ (0.11) $ .25 $ .33 $ .02 $ .10 Fully diluted........................................ $ (0.35) $ (0.30) $ (0.11) $ .21 $ .32 $ .02 $ .10 Primary net earnings (loss) per common share........... $ 0.18 $ (0.13) $ (0.11) $ .25 $ .33 $ .02 $ .10 Weighted average primary number of common shares(2).... 3,312 3,370 3,372 4,261 5,135 5,022 5,409 Pro forma primary net earnings (loss) per common share(3)............................................. $ .25 $ .10 Weighted average shares used in computing pro forma primary net earnings (loss) per common share(3)...... 6,635 6,909
MARCH 31, 1995 --------------------- AS ACTUAL ADJUSTED(4) ------- ----------- BALANCE SHEET DATA: Working capital..................................................................................... $ 1,276 $ 5,957 Property, plant and equipment, net.................................................................. 24,689 29,689 Total assets........................................................................................ 32,110 40,902 Long-term debt and capital lease obligations (including current maturities)......................... 8,386 258 Stockholders' equity................................................................................ $18,822 $ 35,742
- --------------- (1) Since 1990, information distribution services have been the primary business of the Company, and, in 1992, the Company discontinued its prior real estate operations. The 1990 amounts have been reclassified to conform with the 1991 presentation which treats prior real estate operations as discontinued. (2) Includes 196,242 and 524,477 Shares for the years ended December 31, 1993 and 1994, respectively, and 212,042 and 600,000 Shares for the three months ended March 31, 1994 and 1995, respectively, which are subject to risk of forfeiture. See "Management -- Certain Transactions" and Note 7 of the Notes to Consolidated Financial Statements. (3) Assumes that on January 1, 1994, the Company issued 1,500,000 Shares at an assumed public offering price of $12.25 per share, the last reported sale price of the Shares on April 19, 1995, and used the proceeds to retire long-term debt, the outstanding balances of which at March 31, 1995 aggregated $8,128,053. See Note 3 of the Notes to Consolidated Financial Statements. Pro forma primary net earnings per common share for 1994 is calculated based upon net earnings adjusted for: a reduction in after-tax interest expense of $230,000 relating to the repayment of the long-term debt (and a former capital lease refinanced in 1994 with such debt); an increase in income tax expense of $226,000 resulting from the elimination of the use of net operating loss carryforwards; and the elimination of the after tax gain on sale of a marketable security of $64,000. Pro forma primary net earnings per common share for the three months ended March 31, 1995 is calculated based upon net earnings adjusted for a $118,000 reduction in after-tax interest expense related to the repayment of the long-term debt. See "Use of Proceeds." (4) Adjusted to give effect to the Offering at an assumed public offering price of $12.25 per share, the last reported sale price of the Shares on April 19, 1995, and the application of the estimated net proceeds by the Company. See "Use of Proceeds." 4 7 INVESTMENT CONSIDERATIONS The securities offered hereby involve certain special investment considerations. Prospective investors should carefully consider, among other things, the following factors: Product Concentration. Revenues from the sale of CD-ROM products and services constituted a substantial portion of the Company's revenues for 1994, and such products and services are expected to continue to account for a substantial portion of the Company's revenues for the foreseeable future. In addition, the market for publishing of magazines on CD-ROM is still in the early stages of development. A decline in the demand for CD-ROM products and services, whether as a result of competition, technological change or otherwise, would have a material adverse effect on the Company's operating results. Included in the Company's CD-ROM products and services are Audio CDs for the radio syndication programming services market. The Company does not anticipate revenue growth in its radio syndication services because of the maturity of the market, the Company's existing market share, and increased price competition. Competition. The Company faces competition in the information distribution industry from a number of sources, such as traditional print publishers, on-line distributors of information, CD-ROM manufacturers, and others. The Company's competitors vary by market segment and include many companies which are larger, more established, and have substantially more resources than the Company. The Company does not benefit from patents or proprietary technology, and competition may increase in the future. See "Business -- Competition." Pricing. The CD-ROM and Audio CD industries have been characterized by new manufacturers continually entering the market and by declining prices for compact discs ("CDs"). CD-ROM prices declined industry-wide in 1994 and are expected to decline in the future. To date, continuing market growth has offset increased manufacturing capacity in the CD-ROM industry, and the Company has been able to maintain its profitability by increasing sales volumes and improving manufacturing efficiencies. However, the addition of manufacturing capacity to the industry has continued, and there can be no assurance that market growth will continue at the same rate, that prices paid to CD-ROM manufacturers will not continue to decline or that the Company will be able to continue to improve its manufacturing efficiencies. Technological Change. The market for information distribution services incorporating optical disc technology is based upon a sophisticated technology and is subject to rapid technological change. Current or new competitors may introduce new products, features or services that could adversely affect the Company's competitive position. Additionally, there can be no assurance that over time optical disc technology will not be replaced by another form of information storage and retrieval technology, such as on-line information services. To date, the Company has developed product and service enhancements to address customer requirements and to respond to competitive conditions. However, the Company must continue to improve its products and related services and develop and successfully market new products and services in order to remain competitive. There can be no assurance that it will be able to do so. See "Business -- Principal Products and Services." Dependence on Key Personnel. The Company is highly dependent upon the efforts of certain key personnel, particularly Jeffrey M. Wilkins, its Chairman of the Board and Chief Executive Officer. The loss of Mr. Wilkins' services to the Company could have an adverse effect on the Company. The Company has a $1.0 million life insurance policy on Mr. Wilkins' life and has entered into an employment agreement with him. See "Management." Single-Site Manufacturing Facility. All of the Company's manufacturing services are performed at its manufacturing facility in Dublin, Ohio, which operates seven days a week, 24 hours per day. In the event this facility is damaged by fire or other casualty, which damage could not be repaired within a short period of time, the Company's manufacturing services would be substantially interrupted and such casualty would be detrimental to the Company's operations. The Company does not maintain business interruption insurance. Possible Volatility of Stock Price. In the future, the market price of the Shares may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, quarterly variations in the Company's results of operations, conditions in the Company's markets, conditions in the financial markets, and conditions in the economy in general. See "Price Range of Common Shares and 5 8 Dividend Policy." Additionally, Jeffrey M. Wilkins has certain registration rights in 1996 with respect to up to 600,000 Shares issued to him in 1993, and the exercise of such rights could have an adverse effect on the market price of the Shares at that time. See "Management -- Certain Transactions." Factors Inhibiting Takeovers. The Company is subject to certain provisions of Florida law which impose restrictions on the ability of a third party to effect an unsolicited change in control of the Company. In addition, the Company's articles of incorporation do not provide for cumulative voting in the election of directors, and certain other provisions of the articles of incorporation, including provisions which divide the Company's board of directors into three separate classes, restrict the ability of shareholders to remove directors without cause, and require super majority shareholder voting for certain corporate transactions, may have the effect of delaying or preventing changes in control or management of the Company. These restrictions could adversely affect the market price of the Shares. See "Description of Capital Stock -- Florida Law." 6 9 USE OF PROCEEDS The net proceeds to the Company from the Offering (at an assumed public offering price of $12.25 per share) are estimated to be $16,920,000 ($19,503,000 if the Underwriters' over-allotment option is exercised in full). It is anticipated that approximately $8,128,000 of the net proceeds will be used for the repayment of bank indebtedness. Approximately $3,360,000 of this indebtedness is in the form of a term loan incurred in May 1994. The proceeds of this loan were utilized to construct an approximately 70,000 square foot expansion to the Company's manufacturing facility and principal offices, including land acquisition costs. The term loan matures on December 31, 1999, bears interest at a rate equal to the bank's prime rate (9% as of May 15, 1995), and provides for equal monthly payments of principal plus accrued interest. The term loan is secured by all of the Company's manufacturing and other equipment. The remaining portion of the indebtedness, approximately $4,768,000, is in the form of a mortgage loan incurred in September 1994. The proceeds of this loan were utilized to acquire the Company's existing 55,000 square foot manufacturing facility and principal offices from Jeffrey M. Wilkins, the Company's Chairman of the Board and Chief Executive Officer. See "Management -- Certain Transactions." The mortgage loan matures on January 1, 1998, bears interest at a rate equal to the bank's prime rate (9% as of May 15, 1995), and provides for 36 equal monthly payments of principal and interest, with a balloon principal payment due at maturity. The mortgage loan is secured by the Company's Dublin manufacturing and office facility. Approximately $5,000,000 of the net proceeds will be used to increase the Company's manufacturing capacity by the acquisition of additional mastering and replication equipment. See "Business -- Manufacturing." The balance of the net proceeds will be used for general corporate and working capital purposes, which may include the acquisition or construction of a second-site manufacturing facility. Pending application of the net proceeds of the Offering to the purposes described above, the net proceeds will be invested in short-term money market obligations, commercial paper or other interest bearing marketable securities. PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY Since June 24, 1993, the Shares have been traded on The Nasdaq Stock Market under the symbol META. From June 5, 1991 to June 23, 1993, transactions in the Shares were reported on the Nasdaq over-the-counter market. Prior to that time, there was no established trading market in the Shares. The following table reflects the range of the reported high and low sales prices, based on the Nasdaq daily closing price, for the period indicated, except that for periods prior to June 24, 1993, the high and low bid prices are shown.
HIGH LOW ------ ------ Fiscal Year 1993 First quarter (ended March 31)........................................... $ 8.25 $ 5.00 Second quarter (ended June 30)........................................... 9.50 7.50 Third quarter (ended September 30)....................................... 12.75 9.25 Fourth quarter (ended December 31)....................................... 16.13 12.63 Fiscal Year 1994 First quarter (ended March 31)........................................... $16.00 $11.50 Second quarter (ended June 30)........................................... 12.75 9.50 Third quarter (ended September 30)....................................... 12.25 9.25 Fourth quarter (ended December 31)....................................... 10.75 8.25 Fiscal Year 1995 First quarter (ended March 31)........................................... $14.25 $ 8.75 Second quarter (through May 15).......................................... 14.00 11.00
As of April 19, 1995, there were 4,300 holders of record of the Shares. On May 15, 1995, the last reported sale price for the Shares, as reported on The Nasdaq Stock Market, was $11.00 per share. The Company has never paid cash dividends on the Shares. The payment of dividends is within the discretion of the Company's board of directors and depends upon the earnings, capital requirements, and operating and financial condition of the Company, among other factors. The Company currently expects to retain its earnings to finance the growth and development of its business and does not expect to pay cash dividends in the foreseeable future. In addition, under the terms of a loan agreement with a bank, the Company is restricted from paying dividends in excess of 20% of its consolidated net earnings during each fiscal year, and is subject to additional financial covenants. At March 31, 1995, the Company was in compliance with all such covenants, including those which were amended by the bank through December 31, 1995. See Note 3 of the Notes to Consolidated Financial Statements. 7 10 CAPITALIZATION The capitalization of the Company as of March 31, 1995, and as adjusted to give effect to the Offering at an assumed public offering price of $12.25 per share and application of the estimated net proceeds therefrom is set forth below:
MARCH 31, 1995 -------------------- AS ACTUAL ADJUSTED ------- -------- (IN THOUSANDS) Current maturities of long-term debt and capital lease obligations....... $ 975 $ 86 ------- -------- Long-term debt and capital lease obligations, less current maturities: Term Loan.............................................................. 2,640 -- Mortgage Loan.......................................................... 4,599 -- Other.................................................................. 172 172 ------- -------- Total long-term debt and capital lease obligations, less current maturities......................................................... 7,411 172 ------- -------- Long-term debt and capital lease obligations, including current maturities(1).......................................................... 8,386 258 ------- -------- Shareholders' equity: Common Shares, $.10 par value; 10,083,500 shares authorized and 5,274,719 shares issued and outstanding (6,774,719 as adjusted)(2)........................................................ 527 677 Additional paid-in capital............................................... 15,647 32,417 Retained earnings........................................................ 6,584 6,584 ------- -------- 22,758 39,678 Less Common Shares held in treasury at cost, 2,755 shares................ (36) (36) Unamortized restricted stock........................................ (3,900) (3,900) ------- -------- Total shareholders' equity............................................. 18,822 35,742 ------- -------- Total capitalization..................................................... $27,208 $ 36,000 ======= =======
- --------------- (1) See Notes 3 and 4 of the Notes to Consolidated Financial Statements for a description of the Company's long-term debt and capital lease obligations. (2) Includes 600,000 Shares issued in March 1993, which are subject to risk of forfeiture. See "Management -- Certain Transactions" and Note 2 of the Notes to Consolidated Financial Statements. 8 11 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated financial data included in the following table should be read in conjunction with the Company's Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The selected consolidated financial data as of December 31, 1993 and 1994, and for each of the three years in the period ended December 31, 1994, have been derived from the Consolidated Financial Statements of the Company audited by Deloitte & Touche LLP, independent certified public accountants, which are included elsewhere in this Prospectus. The consolidated financial data for the three months ended March 31, 1994 and 1995, were derived from unaudited financial statements. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and results of operations for those periods. The consolidated financial data for the three months ended March 31, 1995, are not necessarily indicative of the combined results that may be expected for the full year.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------------------- ------------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1) Revenues.................................. $10,355 $13,615 $16,877 $21,318 $28,943 $ 6,007 $ 9,179 Costs and Expenses: Cost of products sold................... 7,875 9,933 11,198 12,071 16,301 3,612 5,134 Selling, general and administrative..... 3,426 4,533 5,975 8,226 10,060 2,275 2,992 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses.............. 11,301 14,466 17,173 20,297 26,361 5,887 8,126 ------- ------- ------- ------- ------- ------- ------- Operating Income (Loss)................... (946) (851) (296) 1,021 2,582 120 1,053 Other Income (Expense): Interest income......................... 38 143 104 135 55 24 21 Gain on sale of marketable security..... 106 Other -- net............................ 164 49 144 42 62 36 (4) Interest expense........................ (582) (414) (323) (136) (380) (8) (191) Pre-acquisition loss of acquired business interest..................... 177 ------- ------- ------- ------- ------- ------- ------- Total other income (expense).......... (203) (222) (75) 41 (157) 52 (174) ------- ------- ------- ------- ------- ------- ------- Earnings (Loss) From Continuing Operations Before Income Taxes..................... (1,149) (1,073) (371) 1,062 2,425 172 879 Income Tax Benefit (Expense).............. 65 (732) (52) (336) ------- ------- ------- ------- ------- ------- ------- Net Earnings (Loss) From Continuing Operations.............................. (1,149) (1,008) (371) 1,062 1,693 120 543 Gain on sale of discontinued operations... 248 Earnings from discontinued operations (net of taxes)............................... 1,730 332 ------- ------- ------- ------- ------- ------- ------- Net Earnings (Loss)....................... $ 581 $ (428) $ (371) $ 1,062 $ 1,693 $ 120 $ 543 ======= ======= ======= ======= ======= ======= ======= Net Earnings (Loss) Per Common Share from Continuing Operations Primary................................. $ (0.35) $ (0.30) $ (0.11) $ .25 $ .33 $ .02 $ .10 Fully diluted........................... $ (0.35) $ (0.30) $ (0.11) $ .21 $ .32 $ .02 $ .10 Net Earnings (Loss) per Common Share: Primary................................. $ .18 $ (0.13) $ (0.11) $ .25 $ .33 $ .02 $ .10 Fully diluted........................... $ .18 $ (0.13) $ (0.11) $ .21 $ .32 $ .02 $ .10 Weighted Average Number of Common Shares Outstanding(2) Primary................................. 3,312 3,370 3,372 4,261 5,135 5,022 5,409 Fully diluted........................... 3,312 3,370 3,372 4,953 5,324 5,022 5,418 Pro forma primary net earnings (loss) per common share(3)..................... $ .25 $ .10 Weighted average shares used in computing pro forma net earnings (loss) per common share(3)................................ 6,635 6,909 BALANCE SHEET DATA: Working capital........................... $ 2,104 $ 4,222 $ 1,576 $ 5,657 $ 1,536 $ 2,427 $ 1,276 Property, plant and equipment, net........ 5,540 5,741 6,490 9,724 24,082 17,791 24,689 Total assets.............................. 15,478 13,920 12,552 19,347 32,556 24,483 32,110 Long-term debt and capital lease obligations (including current maturities)............................. 4,136 2,846 3,645 227 8,620 5,009 8,386 Shareholders' equity...................... 9,584 9,156 6,720 16,207 18,276 16,415 18,822
9 12 - --------------- (1) Since 1990, information distribution services have been the primary business of the Company, and, in 1992, the Company discontinued its prior real estate operations. The 1990 amounts have been reclassified to conform with the 1991 presentation which treats prior real estate operations as discontinued. (2) Includes 196,242 and 524,477 Shares for the years ended December 31, 1993 and 1994, respectively, and 212,042 and 600,000 Shares for the three months ended March 31, 1994 and 1995, respectively, which are subject to risk of forfeiture. See "Management -- Certain Transactions" and Note 7 of the Notes to Consolidated Financial Statements. (3) Assumes that on January 1, 1994, the Company issued 1,500,000 Shares at an assumed public offering price of $12.25 per share, the last reported sale price of the Shares on April 19, 1995, and used the proceeds to retire long-term debt, the outstanding balances of which at March 31, 1995 aggregated $8,128,053. See Note 3 of the Notes to Consolidated Financial Statements. Pro forma primary net earnings per common share for 1994 is calculated based upon net earnings adjusted for: a reduction in after-tax interest expense of $230,000 relating to the repayment of the long-term debt (and a former capital lease refinanced in 1994 with such debt); an increase in income tax expense of $226,000 resulting from the elimination of the use of net operating loss carryforwards; and the elimination of the after-tax gain on sale of a marketable security of $64,000. Pro forma primary net earnings per common share for the three months ended March 31, 1995 is calculated based upon net earnings adjusted for a $118,000 reduction in after-tax interest expense related to the repayment of the long-term debt. See "Use of Proceeds." 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is organized into three business divisions which focus on market-specific CD-ROM product offerings. Manufacturing Services provides CD-ROM mastering, replication, and distribution services in addition to providing similar services to radio syndication customers for Audio CDs. Software Services provides information publishers with design and development services for CD-ROM based publications, which, in turn, often produce Manufacturing Services revenues. Publishing Services produces and publishes NautilusCD, a subscription based monthly multimedia CD-ROM magazine. During the last five years the Company has focused on CD-ROM manufacturing and software services, has increased subscriber growth for its NautilusCD product, and has discontinued the Audio CD manufacturing business except for the radio syndication market. The following table sets forth the revenues from each of the foregoing activities and their approximate percentage contribution to revenues during the periods indicated:
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------- -------------------------------------- 1992 1993 1994 1994 1995 ----------------- ----------------- ----------------- ----------------- ----------------- REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Manufacturing Services: CD-ROM............... $6,318 37% $10,918 51% $17,949 62% $3,476 58% $6,318 69% Radio................ 6,672 40 5,650 27 5,666 20 1,357 22 1,371 15 Software Services...... 556 3 1,281 6 2,980 10 476 8 954 10 Publishing Services.... 1,595 10 3,113 14 2,348 8 698 12 536 6 Audio CD............... 1,736 10 356 2 0 -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Revenues......... $16,877 100% $21,318 100% $28,943 100% $6,007 100% $9,179 100% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
The Company focuses on increasing revenues from its CD-ROM Manufacturing Services, Software Services, and Publishing Services divisions while maintaining its current market position within the mature radio syndication market. The Company's revenue has grown at a compound annual rate of 29% from 1990 to 1994. During 1994, the Company completed the first stage of a capacity expansion program started in 1993 with the installation of additional and replacement state-of-the-art disc molding, printing, and related equipment. This expansion program, which more than doubled the disc production capacity as compared to 1993 levels, became fully operational in the second half of 1994. The Company is planning additional expansion of manufacturing capacity in 1995. See "Use of Proceeds" and "Business -- Manufacturing." 11 14 RESULTS OF OPERATIONS Three Months Ended March 31, 1995 Compared to Three Months Ended March 31, 1994 Total revenues increased by approximately 53% from $6,007,000 for the three months ended March 31, 1994 to approximately $9,179,000 for the three months ended March 31, 1995. This increase resulted from CD-ROM Manufacturing Services and Software Services, with revenues of approximately $6,318,000 and $954,000 respectively, increasing approximately a combined $3,320,000, or 84%. This increase was partially offset by an approximate $162,000 decrease, or 23%, in Publishing Services revenues. Included in Manufacturing Services are radio syndication revenues of approximately $1,371,000, which remained constant for the three months ended March 31, 1995 as compared to the same period of the prior year. CD-ROM Manufacturing Services and Software Services revenue increases resulted from the Company's continued focus on the business and information services CD-ROM market. Publishing Services revenue decreased primarily as a result of a drop in sales of a product consisting of six different back issues of NautilusCD. The number of subscribers to NautilusCD increased from approximately 11,300 as of March 31, 1994 to approximately 17,800 as of March 31, 1995. This resulted in minimal revenue growth in subscription sales due to a decrease in the domestic per-issue price of NautilusCD from $9.95 to $6.95 in the second quarter of 1994. Cost of products sold was 56% of revenues for the three months ended March 31, 1995 as compared to 60% of revenues for the same period of the prior year. This decrease in the cost of products sold is primarily attributed to greater manufacturing efficiencies and increased production volumes. Selling, general and administrative expenses increased to $2,991,855, or 33% of revenues, for the three months ended March 31, 1995 as compared to $2,274,869 or 38% of revenues, for the three months ended March 31, 1994. This increase of $716,986 is primarily attributed to increased personnel costs, higher outside sales office costs, increased depreciation, and higher occupancy costs as a result of the Company's increased corporate office space. Increased personnel costs resulted primarily from increased staffing in the sales and administrative functions. Interest and other income for the three months ended March 31, 1995 was $17,276 as compared to $60,721 for the three months ended March 31, 1994. This decrease is attributed to lower cash balances available for investment purposes in the three months ended March 31, 1995 as compared to the same period of the prior years. Interest expense for the three months ended March 31, 1995 was $190,871 as compared to $8,281 for the three months ended March 31, 1994. This increase is attributed to higher long-term debt balances (including current maturities) which were incurred as a result of the purchase and expansion of the Company's primary manufacturing and office facility. For the three months ended March 31, 1995 an income tax provision of $336,600 was applied to earnings before income taxes based upon management's estimate of the full year 1995 expected income tax rate of approximately 38%. For the three months ended March 31, 1994 an income tax provision of $51,600 was applied to earnings before income taxes based upon management's estimate of the full year 1994 expected income tax rate of approximately 30%. The 1994 expected income tax rate was lower than the 1995 expected income tax rate primarily due to the use of the net operating loss carryforwards in 1994. For the three months ended March 31, 1995 net earnings were $542,618 compared to $120,424 for the three months ended March 31, 1994. Net earnings per common share was $0.10 for the three months ended March 31, 1995 as compared to $0.02 for the same period of the prior year. The increase in the weighted average number of shares from 5,021,595 for the three months ended March 31, 1994 to 5,408,670 for the three months ended March 31, 1995 is primarily a result of Shares earned under the Restricted Share Agreement with an executive officer of the Company. See "Management--Certain Transactions." 12 15 1994 Compared to 1993 Total revenues increased by approximately 36% from $21,318,000 in 1993 to approximately $28,943,000 in 1994. This increase resulted from CD-ROM Manufacturing Services and Software Services increasing approximately a combined $8,730,000, or 72%. This increase was partially offset by an approximate $765,000 decrease, or 25%, in Publishing Services revenues and the elimination of approximately $356,000 in Audio CD revenues. Radio syndication revenue remained constant in 1994 as compared to 1993. CD-ROM Manufacturing Services and Software Services revenue increases resulted from the Company's continued focus on the business and information services CD-ROM market. The Company increased the number of new customers, and its existing customers introduced new CD-ROM products and increased the size of their existing product orders from the Company. Publishing Services revenue decreased primarily as a result of a drop in sales of the CD-ROM "in-pack" product, an introductory version of the subscription-based NautilusCD product which was packaged and distributed with a variety of CD-ROM drives in 1993. The number of subscribers to NautilusCD increased from approximately 11,100 as of December 31, 1993 to approximately 17,000 as of December 31, 1994. This resulted in minimal revenue growth in subscription sales due to a decrease in the domestic per-issue price of NautilusCD from $9.95 to $6.95 in early 1994. Cost of products sold was 56% of revenues for 1994 as compared to 57% of revenues for 1993. This decrease is primarily attributed to greater manufacturing efficiencies and increased production volume. Selling, general and administrative expenses increased to $10,060,600, or 35% of revenues, for 1994 as compared to $8,225,564, or 39% of revenues, for 1993. This increase of $1,835,036 is primarily attributed to increased personnel costs and higher expenditures on product advertising and promotion in 1994. Increased personnel costs resulted primarily from increased sales personnel in the Manufacturing Services division and software development personnel in the Software Services division. Interest and other income was $222,904 and $176,494 for 1994 and 1993, respectively. Included in interest and other income for 1994 was a $106,000 gain on the sale of securities that were acquired prior to 1990. The interest and other income amounts were primarily a result of investment income from cash and cash equivalents and other activities during the periods. Interest expense for 1994 increased to $379,706 as compared to $135,847 for 1993 as a result of the Company's increase of its long-term debt from $227,258 at December 31, 1993 to $8,619,969 as of December 31, 1994. This increase in debt was a result of the acquisition of the Company's primary manufacturing and office facility and expansion of that facility in 1994. The income tax expense was $732,000 in 1994. The 1994 provision reflects a benefit of net operating loss carryforwards partially offset by the provision for state and local taxes. No significant net operating loss carryforwards are available for use beyond 1994. No provision for income taxes was necessary in 1993 due to the utilization of net operating loss carryforwards from prior years. Net earnings were $1,692,653 for 1994, with primary earnings per share of $.33 and fully diluted earnings per share of $.32, as compared to net earnings of $1,061,984 for 1993, with primary earnings per share of $.25 and fully diluted earnings per share of $.21. Fully diluted earnings per share reflect the treasury stock method utilizing a higher ending market price of the Shares. 1993 Compared to 1992 Total revenues increased by approximately 26% from $16,877,000 in 1992 to approximately $21,318,000 in 1993. This increase resulted from CD-ROM Manufacturing Services, Software Services and Publishing Services increasing approximately a combined $6,843,000, or 81%. CD-ROM Manufacturing Services and Software Services revenue increases resulted from the Company's continued focus on the business and information services CD-ROM market. Publishing Services revenue increased primarily from an increase in the number of subscribers to NautilusCD from approximately 6,900 subscribers as of December 31, 1992 to approximately 11,100 subscribers as of December 31, 1993 and increased "in-pack" product revenues generated by introductory versions of NautilusCD packaged with a variety of CD-ROM drives. Radio 13 16 syndication revenue decreased to approximately $5,650,000 for 1993, or 15% down from 1992, primarily due to lower product pricing. Cost of products sold was 57% of revenues for 1993 as compared to 66% of revenues for 1992. This decrease is primarily attributed to greater manufacturing efficiencies, increased production volume and a shift in revenue mix to higher gross profit CD-ROM products as compared to Audio CD products. Selling, general and administrative expenses increased to $8,225,564, or 39% of revenues, for 1993 as compared to $5,975,451, or 35% of revenues, for 1992. This increase is primarily attributed to increased personnel costs and higher levels of product advertising and promotion incurred in 1993. Increased personnel costs resulted primarily from increased staffing in the sales, customer support and software services functions. Interest and other income was $176,494 and $248,398 for 1993 and 1992, respectively. These amounts were primarily a result of investment income from cash and cash equivalents and other investments held during the periods. Interest expense for 1993 decreased to $135,847 as compared to $323,226 for 1992 as a result of the Company's reduction of its long-term debt from $3,644,941 at December 31, 1992 to $227,258 as of December 31, 1993. This decrease in debt was a result of repayment of debt with net proceeds from the Company's Share offering in June 1993. No provision for income taxes was necessary in 1993 due to the utilization of net operating loss carryforwards from prior years. No provision for income taxes was necessary for 1992 due to a loss incurred from operations. Net earnings were $1,061,984 for 1993, with primary earnings per share of $.25 and fully diluted earnings per share of $.21, as compared to a loss of $370,738 for 1992, with primary and fully diluted loss per share of $.11. Fully diluted earnings per share reflect the treasury stock method utilizing a higher ending market price of the Shares. IMPACT OF INFLATION The Company's operations are not significantly affected by inflationary pressures. Although inflation does affect salaries, employee benefits and other operating expenses, after considering general inflationary trends, total revenues of the Company produced growth in real terms in the first quarter of 1995 and in 1994 and 1993. Revenues increased primarily due to increased sales of CD-ROM and related products, rather than increases in inflation. LIQUIDITY AND CAPITAL RESOURCES The Company financed its business in 1994 through cash generated from operations, long-term debt, and available cash balances. In 1993, the Company also financed its business needs through the issuance of Shares. Cash flow from operating activities was $5,214,971, $3,858,564 and $2,244,615 for 1994, 1993 and 1992, respectively. For the three months ended March 31, 1995, the Company financed its business through cash generated from operations of $496,971 and available cash balances. In 1994, the Company acquired its principal manufacturing and office facility from Jeffrey M. Wilkins for $4,800,000 and constructed an approximately 70,000 square foot expansion to that facility. See "Management -- Certain Transactions." The cost of the expansion, including the land acquired, was approximately $5,500,000. The acquisition of the facility and expansion construction costs were financed with long-term debt provided by the Company's primary financial institution of approximately $8,400,000, with the balance provided by Company funds. In 1993, the Company completed a public Share offering that generated net proceeds of $8,297,529. Those proceeds, along with cash generated from operations, enabled the Company to reduce its long-term debt in 1993 and purchase property and equipment. At December 31, 1993 the Company had $4,849,710 in cash and cash equivalents which, along with net cash provided by operations during 1994 of $5,214,971, 14 17 enabled the Company to acquire approximately $6,820,000 in property and equipment, and acquire and expand the facility as previously discussed, which completed the first stage of the capacity expansion and equipment update program initiated in 1993. The Company has initiated the second stage of the capacity expansion program through the placement of mastering and replication purchase orders. The Company's obligation under these purchase commitments as of March 31, 1995 totalled approximately $2,762,000. The mastering and replication equipment is scheduled for delivery and installation in the second half of 1995. See "Business -- Manufacturing." The Company is also considering construction or acquisition of a second-site manufacturing facility. See "Use of Proceeds." The Company had cash and cash equivalents of $2,167,518 as of December 31, 1994, and $807,001 as of March 31, 1995, and additionally has $4,000,000 available under its revolving loan agreement (which matures in April 1996). With the availability of its line of credit, the net proceeds from the Offering, and funds generated from operations, the Company believes that it has sufficient liquidity and capital resources to meet its capital expenditure requirements and operating needs for the foreseeable future. 15 18 BUSINESS INDUSTRY OVERVIEW The principal methods for the distribution of business information currently include print, CD-ROM, and on-line services. CD-ROM technology was initially used primarily by institutions, such as libraries, for storing and searching vast quantities of data. Although print remains the dominant vehicle for business information distribution, publishers and other companies are increasingly using CD-ROM as a cost effective and portable format for distributing and providing access to large amounts of information, including multimedia applications and interactive software, to widely dispersed groups of users. In 1993, CD-ROM became one of the fastest-growing segments of the information services industry. CD-ROM drives were first available commercially in the mid-1980s, and, based on published industry information, the North American installed base of CD-ROM disc drives increased from less than 1.5 million in 1991 to more than 19 million in 1994, and is estimated to be more than 37 million by the end of 1995. A major factor contributing to the successful establishment of CD-ROM is the degree of standardization achieved in the early stages of market development. Adherence to these standards has created a climate of acceptance among both publishers and device users. Domestic manufacturers of personal computers now offer CD-ROM drives as standard equipment on virtually all of their desk-top models. As a method of distributing business information, on-line services lend themselves to information which requires frequent or continuous updating. CD-ROM is a more cost-effective distribution method for large amounts of information which require less frequent updating and provides audio, video, text, and graphics capabilities in one medium. The Company believes that only a small percentage of applications suitable for CD-ROM have actually been implemented to date for both individuals and businesses. As a result of the proliferation of CD-ROM drives through the embracement of CD-ROM technology by major computer hardware and software firms and the untapped number of applications of CD-ROM technology, the Company believes that the distribution of information to individuals and businesses through the use of CD-ROM technology will continue to increase significantly. STRATEGY The Company's strategy is to target customers which require turn-key CD-ROM publication services. Such customers generally have time-sensitive and recurring information distribution requirements and evolving technical and creative needs, demand high quality disc manufacturing, and may require fulfillment and distribution services directed to the ultimate user base. As an established independent manufacturer with the ability to produce efficiently the smaller production runs generally required by CD-ROM orders, the Company believes that it is strategically positioned to satisfy the needs of CD-ROM producers which require responsive turnaround on smaller orders and a high degree of personalized support and design services. The Company's goal is to become the leading provider of information distribution services utilizing optical disc technology. The Company believes that the market for information distributed on CD-ROM can be expanded by the use of communication networks, such as the Internet, to provide interim database and application updates. The Company intends to begin offering such updating capability as part of its services during 1995. PRINCIPAL PRODUCTS AND SERVICES Through its three business divisions which focus on market specific CD-ROM product offerings, the Company serves as a one-stop source of CD-ROM solutions. During the last five years, the Company has focused on CD-ROM manufacturing and software services, has increased subscriber growth for its NautilusCD product, and has discontinued the Audio CD manufacturing business except for that business which is related to the radio syndication market. Manufacturing Services. The Company manufactures CD-ROMs and provides technical and creative services to design and assist in the marketing of new CD-ROM applications by its customers. The Company's 16 19 services performed through the manufacturing process include conversion of data provided by customers to a digital format, encoding of the data on a master disc, replication from the master disc, data verification, quality control testing, and design and printing of the disc label. The Company provides full-service disc packaging and either ships the finished product back to its customers or distributes the product to the ultimate end user on behalf of its customers. The Company also manufactures Audio CDs for the radio syndication programming services market. Radio syndication customers utilize the Company's quick turn automated production lines, strict quality control, and end user distribution services to provide them a competitive advantage. The Company provides a full range of services to radio syndication customers from digital format conversion to fulfillment. The Company operates its automated production facility seven days a week, 24 hours per day in a state-of-the-art facility, permitting it to offer one-day turnaround of a master CD and high quality CD replicas for distribution for both its CD-ROM and radio syndication customers. Software Services. The Company provides a full range of software services to assist customers with designing and producing multimedia products integrating text, video, audio, graphics, and animation. These services include working with customers to develop CD-ROM applications and marketing strategies from technical and business consultation through the conversion of raw data to the final replication of information on disc. For example, the Company provides software programming services to develop indexing and user interfaces providing search and retrieval capabilities. Such user interfaces allow an ultimate end user to manipulate efficiently the information being distributed. In order to provide software development services, the Company currently uses search and retrieval software licensed to it by an independent third party for an indefinite term at a rate tied to the level of usage of the software. The Company believes that this software will continue to be available from this supplier and other suppliers. The services provided by the Company's Software Services division often result in customers using the Company's Manufacturing Services division for, among other things, replication, printing, and fulfillment of a given project. Publishing Services. The Company has developed the first subscription-based multimedia magazine regularly distributed on CD-ROM. Each issue of NautilusCD, which is published monthly, includes a variety of software demonstrations and presentations, shareware, multimedia applications, graphics/photo resources, audio tracks and music files, commentary, a shopping section, directories and databases, games, educational products, and a cumulative index. NautilusCD also contains the software necessary for subscribers to send their comments and ideas electronically to the editors. NautilusCD was originally published in September 1990 for the Macintosh(R) family of computers (Macintosh(R) is a registered trademark of Apple Computer, Inc.). A Windows(TM) version of the service was introduced in the first quarter of 1991 and distribution began in November 1991 (Windows(TM) is a registered trademark of Microsoft Corporation). As of March 31, 1995, NautilusCD had approximately 18,000 subscribers. In addition, certain software tools developed by the Publishing Services division are utilized in services provided by the Company's other divisions. MARKETING The Company markets its products and services, other than NautilusCD, through its own sales force of 20 employed associates based in San Jose, Chicago, Washington, D.C., New York, Denver, Dallas and Boston, in addition to Dublin, Ohio, where its principal offices are located. These associates are responsible for maintaining relationships with existing customers and developing new business relationships. The associates are supported by a customer service staff that is responsible for ensuring that each order is processed in a timely manner and all required support materials are in place. The Company believes that its high-quality manufacturing capability, customer responsiveness, and effective customer service have contributed to customer loyalty. The Company's base of approximately 200 customers is diversified and no one customer accounted for more than 7% of 1994 sales. The Company markets NautilusCD through direct mail with advertising and promotional support. 17 20 MANUFACTURING The Company operates from an approximately 125,000 square foot facility in Dublin, Ohio, of which approximately 60,000 square feet are used for manufacturing and distribution activities. The Company's manufacturing services include premastering and mastering of discs, from which duplicate CD-ROMs and Audio CDs can be made, disc label design and printing, packaging, distribution, and fulfillment services. During the last three years, the Company increased its mastering capacity and converted its disc manufacturing process from batch processing to monoline, or in-line, manufacturing. The Company believes that its increased mastering capacity is a competitive advantage, allowing the Company to react more responsively to customer timing requirements. The monoline process, which moves each disc through the various operations separately, reduces production time, permits the production of automated inspection equipment to detect flaws at an early stage, and improves quality. Each replicating machine is self-contained, eliminating the need for establishing and maintaining a separate production area clean room. In 1994, the Manufacturing Services group began the process for ISO 9000 quality system certification, which is targeted for completion in 1995. With the installation of additional and replacement disc molding, printing and related equipment during 1994, the Company completed the first stage of a capacity expansion program which was started in 1993. This expansion program more than doubled production capacity from 1993 levels and was fully operational in the second half of 1994. The Company intends to apply approximately $5,000,000 of the proceeds of the Offering to increase manufacturing capacity in 1995 through the acquisition of additional mastering and replication equipment. The Company utilizes certain patents and technology in its manufacturing activities which it licenses from third parties and which the Company believes to be generally available to other manufacturers. Although only one vendor currently produces a key raw material used by the Company in its manufacturing process, the Company generally maintains a six-month supply of this material and has obtained the rights to manufacture the material itself or through other third parties. The Company has multiple sources for all other raw materials and supplies used in its manufacturing operations. COMPETITION The Company has a number of competitors in each of its lines of business. Many of the Company's competitors are larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in the CD-ROM marketplace consist of service, quality, and reliability for the timely delivery of products. These factors, in addition to price, also affect the Audio CD marketplace. The Company believes it competes favorably with respect to these factors in the CD-ROM market and the radio syndication segment of the Audio CD market. In its CD-ROM Manufacturing and Software Services divisions, the Company differentiates itself from its competitors by providing short-run manufacturing flexibility (including quick turnaround times), personalized customer service, software development services, and complete CD-ROM solutions. Many firms demand a manufacturer like the Company which can provide additional services such as label design and printing, packaging, and distribution. In the Publishing Services division, the Company competes based on product innovation and content. ASSOCIATES The Company employed approximately 307 associates as of March 24, 1995. Approximately 190 associates are directly involved in the manufacturing and distribution process, approximately 55 associates are involved in the Software Services division, approximately 20 associates are directly involved with the Publishing Services division, and the remainder are involved in sales, administration, and support. The Company believes that its relations with its associates are good. 18 21 PROPERTIES The Company owns an approximately 125,000 square foot office and manufacturing facility situated on approximately 15 acres located at 7001 Metatec Boulevard, Dublin, Ohio. The Company's principal executive offices are located in this facility. This property is held subject to a mortgage in favor of a bank. See "Use of Proceeds." The Company also leases office space in San Jose, Chicago, Washington, D.C., New York, Denver, Dallas, and Boston. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceeding, nor, to the Company's knowledge, is any material legal proceeding threatened against it. CORPORATE BACKGROUND The Company was incorporated as a Florida corporation on September 9, 1976. Since 1990, information distribution services have been the primary business of the Company. Prior to that time, the Company's primary business was the development and sale of real estate. The Company entered the business of information distribution services in 1989 by acquiring a 48% interest in Discsystems, Inc., a company in which Jeffrey M. Wilkins, the Company's Chairman of the Board and Chief Executive Officer, also acquired a 4% interest. Discsystems, Inc. purchased the assets of The Wilkins Company, a compact disc manufacturer which was in a Chapter 11 bankruptcy proceeding. Mr. Wilkins was President and a shareholder of The Wilkins Company. In 1990, the Company acquired the remaining 52% interest in Discsystems, Inc. from Mr. Wilkins and such company's other shareholders, and, in 1991, Discsystems, Inc. changed its name to Metatec/ Discovery Systems, Inc. In 1992, the Company discontinued its real estate operations through a distribution of its real estate assets in exchange for all of its outstanding Class B Common Shares. Prior to such time, the holders of the Class B Common Shares were entitled to elect a majority of the Company's board of directors, and their vote was required to authorize certain major corporate transactions. Pursuant to a recapitalization effected in May 1993, the Company's Class B Common Shares were eliminated as a class of shares. 19 22 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows:
POSITIONS HELD NAME AGE WITH THE COMPANY - ------------------------- ---- ---------------------------------------------------------- Jeffrey M. Wilkins 50 Chairman of the Board, Chief Executive Officer, and Director Gregory T. Tillar 42 President, Chief Operating Officer, and Director William H. Largent 39 Vice President, Finance, Treasurer, Chief Financial Officer, and Director Thomas J. Harmon 45 Secretary Alexander P. Deak 34 Vice President and Chief Information Officer James E. Lang 56 Vice President, Manufacturing Operations John R. Rue 36 Vice President, Software Services Brad D. Warnick 42 Vice President, Publishing Services Christopher L. Winslow 33 Vice President, Manufacturing Services A. Grant Bowen 64 Director E. David Crockett 58 Director Peter J. Kight 38 Director Jerry D. Miller 59 Director James V. Pickett 53 Director
Jeffrey M. Wilkins has been Chairman of the Board, Chief Executive Officer, and a director of the Company since August 1989. In 1969, Mr. Wilkins founded CompuServe Incorporated, a provider of computer-based information services, and for 15 years served as its Chairman of the Board, President, and Chief Executive Officer. Mr. Wilkins holds bachelor's and master's degrees in electrical engineering. Gregory T. Tillar has been President of the Company since February 1995, Chief Operating Officer of the Company since April 1993, a director of the Company since April 1995, and has held various sales management positions with the Company since May 1990. Mr. Tillar was previously with CompuServe Incorporated for 11 years in its business services division in a variety of field sales and management positions. During his last four years with CompuServe, Incorporated, Mr. Tillar served as Vice President of Sales, managing 24 branch offices located throughout the United States. William H. Largent has been Vice President, Finance and Chief Financial Officer of the Company since March 1993, Treasurer of the Company since May 1993, and a director of the Company since May 1990. From October 1992 to March 1993, Mr. Largent was President of Liebert Capital Management Corporation, an investment management company, and from April 1990 to September 1992, he was Executive Vice President of L Corporation, an investment management affiliate of Liebert Capital Management Corporation. Mr. Largent also serves as a director of AmeriLink Corporation. Thomas J. Harmon has been Secretary of the Company since February 1977. Mr. Harmon was also a director of the Company from 1983 to 1994. Alexander P. Deak has been Chief Information Officer of the Company since December 1994, and has held information services and product management positions with the Company since 1990. Prior to joining the Company, Mr. Deak was in field account management and support, technical support management, and corporate technical support with CompuServe Incorporated. 20 23 James E. Lang, Ph.D., has been Vice President, Manufacturing Operations, of the Company since April 1993, and has supervised the Company's manufacturing operations since September 1991. Prior to joining the Company, Dr. Lang was a manufacturing consultant in the compact disc industry for two years, a production manager for Denon Digital Industries, a compact disc manufacturer in Madison, Georgia, for two years, and a director of videodisc mastering and director of information storage systems at the CBS Technology Center for seven years. Dr. Lang holds a Ph.D. degree in Materials Science. John R. Rue has been Vice President, Software Services, of the Company since January 1994, and has held various Manufacturing Services and Software Services management positions with the Company since 1990. From 1982 to 1990, Mr. Rue was in field sales management and was Director, Network Services, with CompuServe Incorporated. Brad D. Warnick has been Vice President, Publishing Services, of the Company since October 1994, and has held various product development and management positions with the Company since 1989. Christopher L. Winslow has been Vice President, Manufacturing Services, of the Company since July 1994, and has held various product management positions with the Company since 1992. From 1984 to 1992, Mr. Winslow was in sales and product management with CompuServe Incorporated. A. Grant Bowen has been a director of the Company since 1991. Mr. Bowen has served as a financial consultant since March 1986. Mr. Bowen also serves as a director of State Savings Bank. E. David Crockett has been a director of the Company since 1994. Mr. Crockett has been a General Partner of Aspen Venturers, a venture capital firm for high technology start-up companies, since April 1991. From December 1987 to April 1991, Mr. Crockett was Vice President of 3i Ventures, which was also a venture capital firm for high technology start-up companies. Mr. Crockett also serves as a director of Herman Miller Corporation and Cornerstone Imaging, Inc. Peter J. Kight has been a director of the Company since 1994. Mr. Kight has been the Chairman, Chief Executive Officer, and President of Checkfree Corporation, a company that provides a nationwide electronic bill paying system, since January 1981. Mr. Kight also serves as a director of Danninger Medical Technology, Inc. Jerry D. Miller has been a director of the Company since 1976. Mr. Miller has been the President of D&D Properties, Inc. and the President of MGB, Inc., both of which are engaged in the real estate business, since May 1992. Mr. Miller was the President and Treasurer of the Company from its incorporation in 1976 to May 1993, and was the Chairman of the Board from June 1978 to August 1989. James V. Pickett has been a director of the Company since April 1995. Mr. Pickett has been the Managing Director of the real estate investment group of Banc One Capital Corp., a subsidiary of Banc One Holding Corporation, since February 1993, and the President of Pickett Realty Advisors, Inc., an asset management firm for hotel owners, since December 1991. Mr. Pickett has also been the President of a group of affiliated companies and partnerships, collectively known as The Pickett Companies, involved in the development, management, and ownership of hotels, since 1965. In February 1991, a group of these entities, PH Management Corporation ("PHMC"), DCP Development Company ("DCP"), PHA Limited Partnership ("PHA"), and PC Development Limited Partnership ("PCD"), filed a Chapter 11 petition with the United States Bankruptcy Court for reorganization. In April 1992, the consolidated plan of reorganization for these entities was confirmed by the Bankruptcy Court. PHMC and PCD are continuing entities carrying out the plan of reorganization. PHA and DCP were dissolved as part of the plan. Mr. Pickett also serves as a director of Wendys International, Inc. and PHMC, which controls PSH Master L.P.I. 21 24 Board of Directors' Terms and Committees; Officers' Terms The Company's Board of Directors is divided into three classes, with each class elected to serve a staggered three-year term, and with the term of office of one class of directors to expire at each annual meeting of shareholders. The Board of Directors is currently classified as follows: Class I Directors (term expiring in 1997) -- William H. Largent, E. David Crockett, and Peter J. Kight; Class II Directors (term expiring in 1998) -- Gregory T. Tillar, Jerry D. Miller, and James V. Pickett; and Class III Directors (term expiring in 1996) -- Jeffrey M. Wilkins and A. Grant Bowen. The classified Board of Directors may increase the difficulty of, or discourage, a business combination or an attempt to gain control of the Company that is not approved by the Board of Directors. The Board of Directors has established an Executive Committee, a Compensation Committee, and a Finance and Audit Committee. The Executive Committee, whose current members are Jeffrey M. Wilkins, Gregory T. Tillar, William H. Largent, and A. Grant Bowen, may exercise all of the authority of the Board of Directors between its meetings. The Compensation Committee, whose current members are A. Grant Bowen, Jerry D. Miller, E. David Crockett, and James V. Pickett, is responsible for administering the Company's two stock option plans and may exercise the authority of the Board of Directors with respect to the compensation of employees of the Company. The Audit and Finance Committee, whose current members are A. Grant Bowen, Jerry D. Miller, Peter J. Kight, and James V. Pickett, is responsible for the appointment of the independent auditors, the annual audit of the Company's accounts by the independent auditors, and all related matters, along with other activities undertaken by such committee. Subject to an employment agreement with Mr. Wilkins, the Company's executive officers are elected annually by, and serve at the discretion of, the Board of Directors. See "Management -- Employment Agreement with Mr. Wilkins." EXECUTIVE COMPENSATION Set forth below is summary information regarding the annual and long-term compensation of the Company's chief executive officer and its only other executive officers whose annual compensation exceeded $100,000 during fiscal 1994: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ----------------- ANNUAL COMPENSATION SHARES UNDERLYING NAME AND -------------------- OPTIONS OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) GRANTED(2) COMPENSATION(3) - ------------------------------------ ---- -------- -------- ----------------- --------------- Jeffrey M. Wilkins 1994 $250,000 $127,286 $ 1,230 Chairman of the Board and 1993 $250,000 $ 57,447 $ 1,225 Chief Executive Officer 1992 $174,231 $ 10,000 Gregory T. Tillar 1994 $125,231 $ 82,000 20,000 $ 1,622 President and Chief 1993 $100,000 $ 57,956 10,000 $ 1,042 Operating Officer 1992 $102,692 $ 26,875 William H. Largent 1994 $108,231 $ 65,000 20,000 $ 900 Vice President-Finance, Treasurer, 1993 $ 82,696 $ 15,393 20,000 and Chief Financial Officer 1992
- --------------- (1) Bonuses, other than for Mr. Wilkins which are paid pursuant to his employment agreement with the Company, were earned pursuant to an Incentive Compensation Plan for certain key executives of the Company selected by the chief executive officer. Pursuant to this plan, an individual target incentive amount for each executive and a target amount for the Company's net income was established. Each participating executive was paid a bonus in an amount ranging from 65% to 140% of his target incentive amount based on his percentage of the target net income actually achieved by the Company. All bonuses under the Incentive Compensation Plan require approval by the Compensation Committee. (2) This column sets forth the number of Shares subject to options granted during the indicated year pursuant to the Company's 1990 Stock Option Plan. See "Management -- Stock Option Plans." 22 25 (3) Represents amounts contributed by the Company as matching contributions to its 401(k) retirement plan. OPTION GRANTS IN 1994 The following table sets forth all grants of stock options to the executive officers named in the Summary Compensation Table during fiscal 1994:
INDIVIDUAL GRANTS - ---------------------------------------------------------------------------------- POTENTIAL REALIZABLE NUMBER OF % OF TOTAL VALUE AT ASSUMED SHARES OPTIONS EXERCISE ANNUAL RATES OF STOCK UNDERLYING GRANTED TO PRICE PRICE APPRECIATION(2) OPTIONS EMPLOYEES IN PER EXPIRATION --------------------- NAME GRANTED FISCAL YEAR SHARE(1) DATE 5% 10% - ------------------------ ---------- ------------- -------- ---------- -------- -------- Jeffrey M. Wilkins -0- -0- -0- -0- -0- -0- Gregory T. Tillar 20,000 13.1% $11.50 4/27/04 $144,600 $366,600 William H. Largent 20,000 13.1% $11.50 4/27/04 $144,600 $366,600
- --------------- (1) The per share exercise price is equal to the fair market value of the Shares on the date of grant. (2) The dollar amounts under the 5% and 10% columns in the table are the result of calculations required by the rules of the Commission. AGGREGATED OPTION EXERCISES IN 1994 AND YEAR END OPTION VALUES The following table sets forth stock option exercises during fiscal 1994 by the executive officers named in the Summary Compensation Table and the value of in-the-money stock options held by those individuals as of December 31, 1994:
NUMBER OF SHARES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT 12/31/94 AT 12/31/94(2) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) REALIZED(1) UNEXERCISABLE UNEXERCISABLE ------------------ --------------- ----------- ---------------------- -------------------- Jeffrey M. Wilkins -0- -0- -0- -0- Gregory T. Tillar -0- -0- 30,000/20,000 $198,750/$0 William H. Largent -0- -0- 20,000/20,000 $82,500/$0
- --------------- (1) Aggregate market value of the Shares covered by the option less the aggregate price paid by the executive officer. (2) The value of in-the-money options was determined by subtracting the exercise price from the closing price of the Shares on December 31, 1994. EMPLOYMENT AGREEMENT WITH MR. WILKINS The Company and Mr. Wilkins are parties to an Amended and Restated Employment Agreement (the "Employment Agreement") pursuant to which Mr. Wilkins is serving as Chairman of the Board and Chief Executive Officer of the Company. The Employment Agreement continues until terminated by the parties. The Employment Agreement may be terminated by the Company for "Cause" (defined as dishonesty constituting a felony) or because of Mr. Wilkins' long-term disability, by Mr. Wilkins for "Good Reason" (defined as any material reduction in authority, title, or responsibility, any reduction in compensation or benefits or any assignment of additional duties), or by either party upon at least one year's notice. Under the Employment Agreement, Mr. Wilkins is entitled to an annual base salary of $250,000, fringe benefits to be determined by the Board of Directors of the type which are typically provided to chief executive officers of similarly situated companies, and an annual bonus equal to five percent of the net pre-tax profit of the Company (calculated without consideration of any such bonuses paid or payable to Mr. Wilkins) during each fiscal year beginning with fiscal year 1993. Upon termination of the Employment Agreement, unless the termination is by the Company for Cause or unless the termination is a voluntary termination by Mr. Wilkins 23 26 without Good Reason, Mr. Wilkins is entitled to receive a single payment equal to his full annual salary in effect at the time, he is entitled to continue receiving the annual bonuses for the three fiscal years of the Company ending after the date of termination, and the Company is to continue providing group life and group health insurance coverage for a one-year period after the date of termination. The Company has the option to purchase all of Mr. Wilkins' Shares at fair market value upon Mr. Wilkins' death or long-term disability or upon his voluntary termination other than for Good Reason or upon the Company's termination for Cause. For a period of three years after termination of his employment, Mr. Wilkins is prohibited from competing against the Company unless he is terminated by the Company without Cause or he voluntarily resigns for Good Reason. COMPENSATION OF DIRECTORS Employee directors receive no additional compensation for service on the Board of Directors or its committees. Directors of the Company who are not also employees of the Company receive a fee of $500 per board or committee meeting attended in person and $125 per board or committee meeting attended through telephonic communication. In addition, directors of the Company who are not officers or employees of the Company or any of its subsidiaries receive stock options pursuant to the Company's 1992 Directors' Stock Option Plan. See "Management -- Stock Option Plans." STOCK OPTION PLANS The Company has adopted a 1990 Stock Option Plan, a 1990 Directors' Stock Option Plan, and a 1992 Directors' Stock Option Plan (together referred to as the "Plans"). Pursuant to the 1990 Stock Option Plan, options may be granted to any of the full-time employees of the Company or its subsidiaries and, in the case of options not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), directors of subsidiaries (other than directors of such subsidiaries who are also directors of the Company). The option price of options granted under the 1990 Stock Option Plan which are intended to qualify as incentive stock options under Section 422 of the Code may not be less than the fair market value of the Shares subject thereto on the date the option is granted. The option price of any other options granted under such plan may not be less than 50% of the fair market value of the Shares subject thereto on the date the option is granted. A total of 510,000 Shares have been reserved for issuance (subject to anti-dilution adjustments) under such plan, and options for 501,550 Shares have been granted. As of May 15, 1995, options to purchase 352,950 Shares were outstanding, with an option price ranging between $1.50 and $11.50 per share. The 1990 Stock Option Plan, as well as the other Plans, is administered by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"), none of whom are eligible to participate in the 1990 Stock Option Plan. Such committee has exclusive authority, consistent with law and the terms of 1990 Stock Option Plan, to designate recipients of options to be granted thereunder and to determine the number and type of options and the number of Shares subject thereto. The 1990 Directors' Stock Option Plan expired in 1992, and no additional options may be granted under such plan. As of May 15, 1995, options to purchase 7,500 Shares were outstanding, with an option price ranging between $1.75 and $2.67 per share. Pursuant to the 1992 Directors' Stock Option Plan, options are granted to directors of the Company who are not employees of the Company or its subsidiaries. Currently, a total of five directors are eligible for options under the 1992 Directors' Stock Option Plan. Promptly following each annual meeting of shareholders of the Company, each eligible director is automatically granted an option to purchase 2,500 Shares. These options are fully vested at the time of grant and must be exercised within five years of the date of grant. In addition, each person who was an eligible director immediately following the 1994 annual meeting of shareholders and each person who for the first time becomes an eligible director after the 1994 annual meeting of shareholders and before the day after the 1996 annual meeting of shareholders is automatically granted an option, on a one-time basis, to purchase 10,000 Shares (the "One-Time Options"). The One-Time Options have five-year 24 27 terms and vest in equal annual installments over a four-year period. The option price of any Shares subject to an option under the 1992 Directors' Stock Option Plan is the fair market value of the Shares on the date the option is granted. The 1992 Directors' Stock Option Plan provides for certain early vesting and additional exercise rights with respect to a director who has reached the age of 70 and who thereafter ceases to be an eligible director under the plan for any reason other than death or discharge for cause. A total of 160,000 Shares (subject to anti-dilutive adjustments) have been reserved for issuance under such plan, and options for 109,292 Shares have been granted. As of May 15, 1995, options to purchase 109,292 Shares were outstanding, with an option price ranging between $3.69 and $11.50 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee are Jerry D. Miller, A. Grant Bowen, E. David Crockett, and James V. Pickett. Until May 1993, prior to his appointment to the Compensation Committee, Mr. Miller served as President of the Company. There are no interlocking relationships between any executive officers of the Company and any entity whose directors or executive officers serve on the Company's Board of Directors or Compensation Committee, except that Jeffrey M. Wilkins, the Company's Chairman and Chief Executive Officer, serves as a director and member of the compensation committee of Checkfree Corporation. Peter J. Kight, a director of the Company, is an executive officer of Checkfree Corporation. CERTAIN TRANSACTIONS In connection with the Company's 1990 acquisition of all of the shares of Discovery Systems held by two former directors of the Company and by Jeffrey M. Wilkins, the Company's Chairman of the Board and Chief Executive Officer, and in exchange for Mr. Wilkins' surrender of an option to purchase 48% of the shares of Discovery Systems, the Company agreed to issue an indefinite number of Shares to Mr. Wilkins on a deferred basis pursuant to an escrow arrangement intended to continue until the first quarter of 1996. In March 1993, the Company and Mr. Wilkins agreed to terminate this deferred share arrangement and effectively cap the number of Shares which could be received by Mr. Wilkins as a result of the termination of his original option by issuing 600,000 Shares to him. These Shares were issued to Mr. Wilkins subject to a risk that he will forfeit the Shares if his employment is terminated by the Company for Cause or by Mr. Wilkins without Good Reason (as these terms are defined in Mr. Wilkins' employment agreement with the Company) on or before February 29, 1996, and subject to a risk that he will forfeit all or part of the Shares under a formula based primarily on the pre-tax profits of Discovery Systems. Under that formula, an amount equal to 48% of the pre-tax profit or loss of Discovery Systems for each of the years 1991 through 1995, calculated with adjustments relating to certain intercompany transactions (including the cost of any capital provided by the Company) is discounted from the end of such year to December 31, 1989. The discounted amount is then divided by $2.67 per share (the Company's book value per share as of December 31, 1989) to determine a share number for that year (with the share number expressed as a negative number for any years in which Discovery Systems had a pre-tax loss). The share numbers for the five years ending with 1995 are then added together and that total is reduced by the result obtained when $480,000 (representing the option purchase price payable by Mr. Wilkins under his surrendered option) is divided by the fair market value of one Share on December 31, 1995, to determine the total number of Shares, if any, earned over the five-year period. If that total number is less than 600,000, then the difference is the number of Shares which are automatically forfeited by Mr. Wilkins. At March 31, 1995, 600,000 Shares had been tentatively earned by Mr. Wilkins under the formula. This number may decrease depending upon the pre-tax profit or loss of Discovery Systems for 1995. In addition, the Company has agreed to (a) register any unforfeited Shares at Mr. Wilkins' request, (b) pay Mr. Wilkins a bonus in an amount equal to any tax savings resulting to the Company from the issuance of the Shares and the payment of such bonus, up to the amount of Mr. Wilkins' individual tax liability with respect to the issuance of the Shares to him, and (c) use its best efforts to effect an underwriting of a number of the unforfeited Shares sufficient to enable Mr. Wilkins to cover any related tax liability to the extent not covered by the bonus described in (b), above. However, the Company does not anticipate the need to pay Mr. Wilkins the above described bonus or to effect an underwriting with respect to the issuance of the unforfeited Shares. 25 28 In September 1994, the Company purchased from Jeffrey M. Wilkins approximately seven acres of land and the approximately 55,000 square foot office and manufacturing facility situated thereon located at 7001 Metatec Boulevard, Dublin, Ohio (the "Dublin Facility"). Prior to that time, the Dublin Facility was leased by the Company from Mr. Wilkins as part of its manufacturing facility and principal executive offices. The Dublin Facility was purchased pursuant to the terms of an option to purchase which was contained in the lease for the Dublin Facility. This option provided that the Company could purchase the Dublin Facility at any time prior to the expiration of the lease term for a purchase price equal to the lesser of (a) $4.8 million or (b) an amount equal to the value in use of the Dublin Facility, as determined by an MAI appraiser, reduced by $660,000 (the value of Company improvements in use at the time the option was granted) and without consideration of any improvements made by the Company after January 1, 1994. Pursuant to the foregoing formula, the purchase price paid to Mr. Wilkins was $4.8 million. The Company also paid expenses in connection with the purchase totaling $4,710, none of which were paid to Mr. Wilkins. The lease was cancelled in connection with the purchase of the Dublin Facility. During 1994, and prior to the cancellation of the lease and consummation of the purchase, the Company paid Mr. Wilkins $378,900 for rent of the Dublin Facility. The lease which was in effect on the date of purchase was entered into effective March 1, 1994, and modified certain provisions of the prior lease between the Company and Mr. Wilkins. Prior to March 1994, the Dublin Facility was leased to Discovery Systems by Mr. Wilkins under a lease with a term expiring December 31, 1997. The prior lease was guaranteed by the Company, and provided for annual rent increases based on increases in the Consumer Price Index. Mr. Wilkins had granted the Company an option to purchase the Dublin Facility at any time prior to November 16, 1996, for a purchase price established by an MAI appraiser, less a commission amount of not less than three percent that would have been charged by a commercial real estate broker upon the sale of the Dublin Facility. The prior lease, the Company's guaranty, and the related purchase option agreement were terminated on the effective date of the new lease. Under the new lease, which had a 15-year term, Mr. Wilkins agreed to cap the rent at $48,519 per month, extend the term of the Company's purchase option to coincide with the lease term, and cap the purchase price payable upon exercise of the purchase option. Consistent with the prior lease, the Company paid all taxes, utility charges, and insurance premiums related to the Dublin Facility. Total rent paid to Mr. Wilkins under the leases was $481,800, $526,717, and $378,900 for 1992, 1993, and 1994, respectively. In February 1994, the Company purchased from Olde Poste Properties, an Ohio general partnership, approximately eight acres of land adjacent to the Dublin Facility for purposes of expanding the Dublin Facility to increase the Company's manufacturing and distribution capacity. The purchase price for the land was $645,300, and the Company paid expenses in connection with the purchase totaling approximately $48,700, including the commission payable to the seller's broker, the conveyance fee, and the premium for owner's title insurance. Mr. Wilkins is a general partner of Olde Poste Properties; however, Mr. Wilkins did not participate in the negotiations of any terms of the acquisition. Such terms were established by other partners of Olde Poste Properties and other officers of the Company. The Company believes the terms of the lease and purchase of the Dublin Facility from Mr. Wilkins and the purchase of adjacent land from Olde Poste Properties were no less favorable to it than it could obtain from independent third parties. During 1992 and 1993, the Company leased certain equipment from Mr. Wilkins for a monthly rental of $17,000. The lease expired on December 31, 1993, and on January 1, 1994, the Company purchased the equipment for $578,000, which the Company believes was no less favorable to it than it could obtain from independent third parties for similar equipment. On March 30, 1993, the Company entered into a severance agreement with Jerry D. Miller, pursuant to which he resigned from his positions as president and treasurer of the Company on May 20, 1993, following the 1993 annual meeting of shareholders. Under the agreement, the Company paid Mr. Miller severance compensation at the rate of $7,500 a month during the remainder of 1993, plus a lump sum payment of $45,000. Mr. Miller continues to serve as a director of the Company, and has been nominated for re-election at the Company's 1995 annual meeting of shareholders. 26 29 In accordance with an agreement in principle entered into in December 1992, on March 10, 1993, the Company distributed all of the outstanding common shares of its subsidiary, Silco Real Estate Exchange, Inc. ("Silco"), to Darla D. Lang and Denise Hunter, daughters of Jerry D. Miller who was at that time the President of the Company and who continues to serve as a director of the Company. The Silco shares were distributed in exchange for all of the Company's outstanding Class B common shares, par value $.10 a share (the "Class B Shares"). The exchange was completed pursuant to the terms of a Share Exchange Agreement among the Company, Silco, Ms. Lang, Ms. Hunter, and Messrs. Wilkins and Miller, individually and as Trustees under a Voting Trust Agreement dated August 8, 1990, for the benefit of Ms. Lang and Ms. Hunter (the "Exchange Agreement"). The exchange was valued at approximately $2,100,000 based upon independent appraisals of the Class B Shares and the Company's real estate assets. Prior to the exchange, the Company contributed and transferred control of substantially all of its real estate assets to Silco (the "Contributed Assets"), so that at the time of the exchange, Silco was the owner of substantially all of the Company's remaining real estate operations and related assets. Under the Exchange Agreement, Silco assumed all obligations and liabilities relating to the Contributed Assets (the "Assumed Liabilities") and agreed to indemnify the Company against the Assumed Liabilities. In addition, Ms. Lang and Ms. Hunter have guaranteed Silco's obligations with respect to all of the Assumed Liabilities, and Mr. Miller has guaranteed Silco's obligations with respect to a portion of the Assumed Liabilities, under a Guaranty and Indemnification Agreement executed pursuant to the Exchange Agreement. On May 20, 1993, the Company's articles of incorporation were amended to, among other things, eliminate the Class B Shares (none of which were outstanding at the time) and combine all of the Company's authorized common shares into one class. On April 26, 1993, the Company sold to MGB, Inc., a corporation in which Ms. Lang and Ms. Hunter are the sole shareholders ("MGB"), the Company's entire interest in Lunn Woods Partnership, a Florida general partnership engaged in real estate activities, including any rights of the Company accruing after February 28, 1993, with respect to the partnership interest, for a purchase price of $319,444, an amount equal to the book value of that partnership interest on the books of the Company as of February 28, 1993. MGB paid to the Company at the closing of the sale an amount equal to 20% of the total purchase price for the partnership interest plus interest on the total purchase price at the rate of 6.5% per annum from March 1, 1993, through the closing. The balance of the purchase price, $255,555, is to be paid pursuant to a promissory note with interest at the rate of 6.5% per annum, in 60 consecutive monthly installments of principal and interest payable beginning in May 1993, with the amount of the first 59 such installments determined based upon a 15-year amortization schedule and the entire unpaid balance of the note being payable on the date of the 60th such installment in April 1998. The promissory note is secured by a security interest in the partnership interest and personally guaranteed by Ms. Lang and Ms. Hunter. During 1994, E. David Crockett, a director of the Company, was paid a consulting fee by the Company in the amount of $3,500 for providing business planning services to the Company. In addition, Focus, Inc., the president of which is Dan R.E. Thomas, a former director of the Company, was paid a consulting fee by the Company in the amount of $61,179 for providing business planning services to the Company. 27 30 PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of May 15, 1995, with respect to the beneficial ownership of the Shares by (i) each shareholder known by the Company to be the beneficial owner of more than 5% of the Shares, (ii) each director and each executive officer named in the Executive Compensation Table (see "Management -- Executive Compensation"), and (iii) all executive officers and directors as a group:
PERCENTAGE OWNED ------------------------ SHARES BEFORE THE AFTER THE NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING - ----------------------------------------------------- --------------------- ---------- --------- Jeffrey M. Wilkins................................... 626,619(2) 11.9% 9.3 7001 Metatec Boulevard Dublin, Ohio 43017 Wells Fargo Bank, N.A................................ 268,700(3) 5.1 4.0 464 California Street San Francisco, California 94163 Gregory T. Tillar.................................... 60,286 1.1 * William H. Largent................................... 47,711 * * A. Grant Bowen....................................... 32,373 * * E. David Crockett.................................... 11,500 * * Peter J. Kight....................................... 7,500 * * Jerry D. Miller...................................... 161,500(4) 3.1 2.4 James V. Pickett..................................... 15,600(5) * * All executive officers and directors as a group (14 persons)............................ 1,103,508 20.9 16.3
- --------------- * Less than 1%. (1) Except as otherwise indicated in the notes to this table, the persons named in the table have sole voting and investment power with respect to all Shares owned by them. This table does not include options for Shares which are not currently exercisable or not exercisable within 60 days of April 19, 1995. (2) Includes 600,000 Shares subject to a risk of forfeiture. See "Management -- Certain Transactions." (3) Holdings as of December 31, 1994, based upon a Schedule 13G filed with the Securities and Exchange Commission on February 14, 1995. (4) Includes 13,000 Shares owned by Mr. Miller's spouse. Does not include 117,986 Shares owned by the adult children or grandchildren of Mr. Miller, for which Mr. Miller disclaims beneficial ownership. (5) Includes 1,000 Shares owned by a corporation controlled by Mr. Pickett and members of his family. DESCRIPTION OF CAPITAL STOCK The aggregate number of shares of capital stock which the Company has authority to issue is 10,083,500 Shares, all of which are common shares, $.10 par value. As of May 15, 1995, there were 5,275,964 Shares outstanding. COMMON SHARES The holders of Shares are entitled to receive such dividends as may be declared by the Company's board of directors out of funds legally available therefor. Upon dissolution or liquidation, holders of the Shares are entitled to a ratable share of the net assets of the Company after payment to creditors. All outstanding Shares are, and the shares offered hereby will be, fully paid and nonassessable. Holders of the Shares are entitled to one vote for each Share held of record for the election of directors and on all other matters submitted to the vote of shareholders. The Shares are not redeemable, and the holders of the Shares do not have cumulative voting rights in the election of directors or preemptive rights with respect to the issuance of the Company's securities. 28 31 The Company's Amended and Restated Articles of Incorporation (the "Restated Articles") provide that the number of directors may be fixed or changed by a resolution adopted by two-thirds in number of the board members then in office. Additionally, a director may not be removed from office without cause except by the affirmative vote of holders of at least 50% of the Shares. However, if the removal of a director without cause is approved by two-thirds in number of the board members then in office, then the 50% voting requirement will not apply and a director may be removed without cause under Florida law if the votes cast by the shareholders in favor of the director's removal exceed the votes cast in opposition of the director's removal at a meeting at which a quorum is present. This provision could have an anti-takeover effect because it could prevent someone who does not satisfy these special voting requirements from either increasing the number of directors and filling the new seats with enough directors to constitute a majority of the board or from removing existing directors without cause and replacing them with enough directors to constitute a majority of the board. The Restated Articles provide that special shareholder meetings may be called by the board of directors or by holders of Shares entitled to exercise 25% or more of the voting power of the Company. This provision prevents a shareholder from calling a special shareholder meeting to alter the composition of the board or to effect any other corporate transaction unless holders of at least 25% of the outstanding Shares were in favor of calling such meeting. This requirement makes calling a special shareholders meeting more difficult and therefore could have an anti-takeover effect. The Restated Articles provide for a classified board of directors. Directors are divided into three classes, designated as Class I, Class II and Class III, as nearly equal in number as possible. At each annual meeting of shareholders, one class of directors is elected for a three-year term. This provision could have an anti-takeover effect because, assuming there are no vacancies on the board of directors, it will take two annual elections of directors to gain control of a majority of the positions on the board of directors. The Restated Articles require the affirmative vote of not less than 60% of the outstanding Shares prior to effecting (a) a merger, consolidation or share exchange of the Company with or into any other corporation, or (b) the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company. However, such 60% voting requirement would not be applicable if the Company's board of directors has approved the transaction by two-thirds or more of its members. This provision could have an anti-takeover effect because transactions not approved by two-thirds or more of the members of the board of directors will require a higher approval percentage from shareholders than transactions approved by two-thirds or more of the members of the board of directors. The Restated Articles also require the affirmative vote of holders of not less than 60% of the outstanding Shares to amend such 60% voting requirements or the provisions of the Restated Articles relating to the number of directors, their removal without cause or their election into three classes. These provisions could also have an anti-takeover effect. FLORIDA LAW The Company is subject to Sections 607.0901 and 607.0902 of the Florida Business Corporation Act. In general, Section 607.0901 restricts the ability of a greater than 10% shareholder of a company from engaging in a wide range of specified transactions between such company and such shareholder or a person or entity controlled by or in control of such shareholder. The statute provides that such a transaction must be approved by the affirmative vote of the holders of two-thirds of such company's voting shares, unless it is approved by a majority of the disinterested directors. Section 607.0902 restricts the ability of a third party to effect an unsolicited change in control of a company. In general, the statute provides that shares acquired in a transaction which effects a certain threshold change in the ownership of a company's voting shares (a "control share acquisition") have the same voting rights as shares held by the acquiring person prior to the acquisition only to the extent granted by a resolution adopted by shareholders in a prescribed manner. These statutory provisions may have an anti-takeover effect by deterring unsolicited offers or delaying changes in control or management of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Shares is The Huntington Trust Company, N.A. 29 32 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, the Underwriters named below have agreed, severally and not jointly, through Legg Mason Wood Walker, Incorporated and Van Kasper & Company, the Representatives (the "Representatives") of the Underwriters, to purchase from the Company, and the Company has agreed to sell to the Underwriters, the number of Shares set forth opposite the name of the respective Underwriter at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus.
NUMBER OF UNDERWRITERS COMMON SHARES - ------------------------------------------------------------------------------ ------------- Legg Mason Wood Walker, Incorporated.......................................... Van Kasper & Company.......................................................... ------------- Total............................................................... 1,500,000 ============
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the Shares offered hereby, if any of the Shares are purchased. The Underwriters have advised the Company that they propose to offer all or a part of the Shares offered hereby directly to the public at the Price to Public set forth on the cover page of this Prospectus, that they may offer shares to certain dealers at a price which represents a concession of $ per share, and that they may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the commencement of the Offering, the Price to Public and the concessions may be changed. The Company has granted the Underwriters a 30-day option to purchase up to 225,000 additional Shares at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus. The Underwriters may exercise the option only to cover over-allotments. To the extent the Underwriters exercise the option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase the same percentage of additional Shares as the percentage of the initial 1,500,000 Shares offered hereby to be purchased by that Underwriter. The Company has agreed to indemnity the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The executive officers and directors of the Company have agreed that they will not, without the prior written consent of the Representatives, offer, sell or otherwise dispose of any Shares owned by them during the 120-day period following the date of this Prospectus, except for certain private transactions and for transfers to family members or related trusts, subject to the 120-day restriction, and that a certain director of the Company may sell, in addition, up to 10,000 Shares in the aggregate. The Company has agreed not to offer, sell, or otherwise dispose of any Shares during the 120-day period following the closing of the Offering, except that the Company may grant options pursuant to existing option plans in accordance with past practice, and issue Shares upon the exercise of options, subject to certain limitations. In connection with the Offering, the Underwriters and selling group members (if any) that currently act as market makers for the Shares may engage in "passive market making" in the Shares on The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also 30 33 Nasdaq Stock Market market makers in the security being distributed to engage in limited market making transactions during the period when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity. In general, under Rule 10b-6A, any Underwriter or selling group member (if any) engaged in passive market making in the Shares (i) may not effect transactions in, or display bids for, the Shares at a price that exceeds the highest bid for the Shares displayed on The Nasdaq Stock Market by a market maker that is not participating in the distribution of the Shares, (ii) may not have net daily purchases of the Shares that exceed 30% of its average daily trading volume in such Shares for the two full consecutive calendar months immediately preceding the filing date of the Registration Statement of which this Prospectus forms a part, and (iii) must identify its bids as bids made by a passive market maker. LEGAL MATTERS Certain legal matters in connection with the issuance of the Shares offered hereby will be passed upon for the Company by Baker & Hostetler, Columbus, Ohio, and for the Underwriters by Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania. EXPERTS The consolidated financial statements as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, included in this Prospectus and the related consolidated financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. For further information pertaining to the Company and the securities offered hereby, reference is hereby made to the Registration Statement, including the exhibits and the financial statement schedules filed therewith. Statements contained herein concerning the provisions of any documents filed as an exhibit to the Registration Statement are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. These documents may be examined without charge at the public reference facilities maintained by the Commission in Washington, D.C., and copies thereof may be obtained therefrom upon payment of the prescribed fees. 31 34 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1993 and 1994 and March 31, 1995 (unaudited)................................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 1992, 1993 and 1994 and for the three months ended March 31, 1994 and 1995 (unaudited)............. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and 1994 and for the three months ended March 31, 1995 (unaudited)............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and for the three months ended March 31, 1994 and 1995 (unaudited)............. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 35 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Metatec Corporation: We have audited the accompanying consolidated balance sheets of Metatec Corporation and its subsidiaries as of December 31, 1993 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Metatec Corporation and its subsidiaries at December 31, 1993 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 15, 1995 Columbus, Ohio F-2 36 METATEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS:
AS OF DECEMBER 31, ------------------------- MARCH 31, 1993 1994 1995 ----------- ----------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents............................. $ 4,849,710 $ 2,167,518 $ 807,001 Accounts receivable, net of allowance for doubtful accounts of $235,000 in 1993, $269,000 in 1994 and $291,000 in 1995................................... 2,977,335 4,092,038 4,075,987 Inventory............................................. 350,075 602,773 786,916 Current portion of long-term notes receivable......... 10,869 11,597 11,797 Prepaid expenses...................................... 458,662 460,258 604,150 Deferred income taxes................................. 522,000 532,000 ----------- ----------- ----------- Total current assets.......................... 8,646,651 7,856,184 6,817,851 ----------- ----------- ----------- LONG-TERM NOTES RECEIVABLE, LESS CURRENT PORTION........ 237,822 226,225 223,195 ----------- ----------- ----------- PROPERTY, PLANT AND EQUIPMENT -- NET.................... 9,724,330 24,081,612 24,689,100 ----------- ----------- ----------- OTHER ASSETS: Goodwill.............................................. 539,103 314,283 302,403 Other................................................. 199,456 77,700 77,700 ----------- ----------- ----------- Total other assets............................ 738,559 391,983 380,103 ----------- ----------- ----------- TOTAL ASSETS............................................ $19,347,362 $32,556,004 $32,110,249 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Current maturities of long-term debt and capital lease obligations........................................ $ 75,942 $ 975,335 $ 975,635 Accounts payable...................................... 622,289 2,462,243 1,406,485 Accrued royalties..................................... 304,395 559,157 573,552 Accrued personal property taxes....................... 213,749 378,210 467,985 Accrued payroll....................................... 199,362 359,400 511,060 Other accrued expenses................................ 532,295 411,585 395,141 Unearned income....................................... 1,041,311 888,940 766,606 Accrued income taxes.................................. 285,371 445,459 ----------- ----------- ----------- Total current liabilities..................... 2,989,343 6,320,241 5,541,923 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES.................................... 151,316 7,644,634 7,410,829 DEFERRED INCOME TAXES................................... 315,000 335,000 ----------- ----------- ----------- Total liabilities............................. 3,140,659 14,279,875 13,287,752 ----------- ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $.10 par value; authorized 10,083,500 shares; issued 1993 -- 5,209,619 shares; 1994 -- 5,272,219 shares; 1995 -- 5,274,719 shares............................................. 520,962 527,222 527,472 Additional paid-in capital............................ 15,273,400 15,643,913 15,647,413 Retained earnings..................................... 4,348,882 6,041,535 6,584,153 Less: Common stock held in treasury, at cost, 2,755 shares........................................... (36,541) (36,541) (36,541) Unamortized restricted stock....................... (3,900,000) (3,900,000) (3,900,000) ----------- ----------- ----------- Total stockholders' equity.................... 16,206,703 18,276,129 18,822,497 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $19,347,362 $32,556,004 $32,110,249 ========== ========== ==========
See notes to consolidated financial statements. F-3 37 METATEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ----------------------- 1992 1993 1994 1994 1995 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) REVENUES.......................... $16,877,079 $21,318,416 $28,942,748 $6,006,937 $9,178,622 COSTS AND EXPENSES: Cost of products sold........... 11,197,538 12,071,515 16,300,693 3,612,484 5,133,954 Selling, general and administrative............... 5,975,451 8,225,564 10,060,600 2,274,869 2,991,855 ----------- ----------- ----------- ---------- ---------- Total costs and expenses..... 17,172,989 20,297,079 26,361,293 5,887,353 8,125,809 ----------- ----------- ----------- ---------- ---------- OPERATING INCOME (LOSS)........... (295,910) 1,021,337 2,581,455 119,584 1,052,813 ----------- ----------- ----------- ---------- ---------- OTHER INCOME (EXPENSE): Interest income................. 103,876 134,637 54,616 24,212 21,649 Gain on sale of marketable security..................... 106,000 Other -- net.................... 144,522 41,857 62,288 36,509 (4,373) Interest expense................ (323,226) (135,847) (379,706) (8,281) (190,871) ----------- ----------- ----------- ---------- ---------- Total other income (expense).................. (74,828) 40,647 (156,802) 52,440 (173,595) ----------- ----------- ----------- ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES........................... (370,738) 1,061,984 2,424,653 172,024 879,218 INCOME TAXES...................... 732,000 51,600 336,600 ----------- ----------- ----------- ---------- ---------- NET EARNINGS (LOSS)............... $ (370,738) $ 1,061,984 $ 1,692,653 $ 120,424 $ 542,618 ========== ========== ========== ========= ========= NET EARNINGS (LOSS) PER COMMON SHARE: Primary......................... $ (0.11) $ .25 $ .33 $ .02 $ .10 Fully diluted................... $ (0.11) $ .21 $ .32 $ .02 $ .10 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Primary......................... 3,371,956 4,260,806 5,134,656 5,021,595 5,408,670 Fully diluted................... 3,371,956 4,953,412 5,323,503 5,021,595 5,417,918
See notes to consolidated financial statements. F-4 38 METATEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS B ADDITIONAL UNAMORTIZED COMMON COMMON PAID-IN RETAINED TREASURY RESTRICTED STOCK STOCK CAPITAL EARNINGS STOCK STOCK TOTAL -------- ------- ----------- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1991... $387,440 $1,309 $ 5,918,339 $3,657,636 $ (808,775) $ 9,155,949 Treasury shares retired...... (51,710 ) (1,049 ) (756,016) 808,775 Stock options exercised...... 2,300 32,200 34,500 Purchase of Class B common stock...................... (2,100,000) (2,100,000) Net loss..................... (370,738) (370,738) -------- ------- ----------- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1992... 338,030 260 5,194,523 3,286,898 (2,100,000) 6,719,711 Issuance of restricted shares..................... 60,000 3,840,000 $(3,900,000) Stock options exercised...... 7,932 156,088 164,020 Treasury shares acquired..... (36,541) (36,541) Elimination of Class B common stock...................... (260 ) (2,099,740) 2,100,000 Shares issued pursuant to a public offering, net of costs of $596,979.......... 115,000 8,182,529 8,297,529 Net earnings................. 1,061,984 1,061,984 -------- ------- ----------- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1993... 520,962 $ 0 15,273,400 4,348,882 (36,541) (3,900,000 ) 16,206,703 ======== Stock options exercised...... 6,260 176,513 182,773 Tax benefit related to stock options.................... 194,000 194,000 Net earnings................. 1,692,653 1,692,653 -------- ----------- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1994... 527,222 15,643,913 6,041,535 (36,541) (3,900,000 ) 18,276,129 Stock options exercised (unaudited).............. 250 3,500 3,750 Net earnings (unaudited)... 542,618 542,618 -------- ----------- ---------- ----------- ----------- ----------- BALANCE, MARCH 31, 1995 (unaudited)................ $527,472 $15,647,413 $6,584,153 $ (36,541) $(3,900,000) $18,822,497 ======== ========== ========= ========== =========== ==========
See notes to consolidated financial statements. F-5 39 METATEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED THREE MONTHS ENDED DECEMBER 31, 1994 MARCH 31, ---------------------------------------- ------------------------- 1992 1993 1994 1994 1995 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings (loss)...................................... $ (370,738) $ 1,061,984 $ 1,692,653 $ 120,424 $ 542,618 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization.......................... 2,137,641 2,128,620 3,227,325 613,006 1,022,520 Deferred income taxes.................................. (207,000) (10,000) Gain on sale of marketable security.................... (106,000) Net (gain) loss on sales of property and equipment..... (26,172) 5,258 37,305 (6,986) 12,435 Changes in assets and liabilities: Accounts receivable.................................. (440,196) (229,096) (1,114,703) 71,281 16,051 Inventory............................................ (90,041) (25,345) (252,698) (186,453) (184,143) Prepaid expenses and other current assets............ 47,529 190,689 6,584 (18,227) (153,892) Accounts payable and accrued expenses................ 20,728 233,171 2,083,876 276,841 (626,284) Unearned income...................................... 247,800 493,283 (152,371) (131,020) (122,334) Net assets of discontinued operations................ 718,064 ----------- ----------- ------------ ----------- ----------- Net cash provided by operating activities.......... 2,244,615 3,858,564 5,214,971 738,866 496,971 ----------- ----------- ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in long-term notes receivable................... 89,875 131,629 10,869 2,646 2,830 Purchase of property, plant and equipment................ (2,213,993) (5,144,985) (17,119,750) (8,810,848) (1,927,763) Proceeds from sale of fixed assets....................... 128,316 3,866 177,000 150,000 297,200 Decrease (increase) in goodwill.......................... (78,618) 178,000 Proceeds from sale of marketable security................ 219,576 ----------- ----------- ------------ ----------- ----------- Net cash used in investing activities.............. (2,074,420) (5,009,490) (16,534,305) (8,658,202) (1,627,733) ----------- ----------- ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in notes payable................................ 1,536,683 8,750,000 4,800,000 Payment of notes and leases payable...................... (1,487,592) (3,601,585) (489,631) (18,408) (233,505) Proceeds from issuance of stock (net of offering expenses).............................................. 8,297,529 Stock options exercised, including tax benefit........... 34,500 164,020 376,773 88,051 3,750 Treasury shares acquired................................. (36,541) ----------- ----------- ------------ ----------- ----------- Net cash provided by financing activities.......... 83,591 4,823,423 8,637,142 4,869,643 (229,755) ----------- ----------- ------------ ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 253,786 3,672,497 (2,682,192) (3,049,693) (1,360,517) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 923,427 1,177,213 4,849,710 4,849,710 2,167,518 ----------- ----------- ------------ ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 1,177,213 $ 4,849,710 $ 2,167,518 $ 1,800,017 $ 807,001 ========== ========== =========== ========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid, net of amounts capitalized................ $ 340,758 $ 172,311 $ 379,706 $ 8,281 $ 190,871 ========== ========== =========== ========== ========== Income taxes paid........................................ $ 118,000 $ 252,235 $ 4,000 $ 180,119 ========== =========== ========== ========== Assets purchased for the assumption of a liability....... $ 750,000 $ 183,902 $ 632,342 ========== ========== =========== Purchase of Class B common stock for transfer of assets of discontinued operations............................. $ 2,100,000 ========== Elimination of Class B common stock...................... $ 2,100,000 ========== Issuance of 600,000 common restricted shares, all unamortized............................................ $ 3,900,000 ==========
See notes to consolidated financial statements. F-6 40 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Metatec Corporation and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION -- The revenues from product sales are recognized at the time the products are shipped. Subscription revenues are recognized ratably over the subscription period. For financial reporting purposes, the Company recognizes profit on service contracts using the percentage of completion method, measured generally by the percentage of the cost of services completed to date to total cost of contract services. Earned revenue is determined on the basis of the profit as computed plus the contract costs incurred during this period. CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of highly liquid instruments such as certificates of deposit, time deposits, treasury notes and other money market instruments which generally have maturities of less than three months. The Company holds cash primarily in one financial institution. INVENTORY -- Inventory consists primarily of raw materials and are valued at the lower of cost or market with cost determined by the first-in, first-out (FIFO) method. GOODWILL -- Goodwill represents the excess of cost over net assets acquired and was being amortized using the straight-line method over 25 years. Effective April 1, 1993, the Company reduced the amortization period to 15 years prospectively from April 1, 1993, based upon a current evaluation by the Company. During 1994, the Company recognized the tax benefit of acquired net operating loss carryforwards and, accordingly, reduced goodwill by such benefit totaling $178,000. PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are recorded at cost. The cost of maintenance and repairs is charged against results of operations as incurred. Property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets which range from three to thirty years. For income tax purposes, accelerated methods are used for all eligible assets. Interest costs capitalized were $96,000 in 1994. ADVERTISING -- The Company expenses advertising costs as incurred. Advertising expense was $192,380, $401,577 and $784,039 for 1992, 1993 and 1994, respectively. For the three months ended March 31, 1994 and 1995, advertising costs were $172,353 and $151,624 respectively. INCOME TAXES -- During 1993, the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (see Note 6). Prior to January 1, 1993, the Company accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. EARNINGS (LOSS) PER SHARE OF COMMON STOCK -- Earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period, including, when their effect is dilutive, common stock equivalents consisting of shares subject to stock options and contingently issuable shares of stock. UNAUDITED INTERIM FINANCIAL REPORTING -- In the opinion of management, the unaudited information as of and for the three months ended March 31, 1994 and 1995 includes all adjustments (consisting solely of normal recurring accruals) the Company considers necessary for a fair presentation of such interim financial statements in accordance with generally accepted accounting principles. The results of F-7 41 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED operations for interim periods are not necessarily indicative of results for any other interim period or the full year. 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, --------------------------- MARCH 31, 1993 1994 1995 ----------- ----------- ----------- Land........................................ $ 1,292,679 $ 1,292,679 Buildings and improvements.................. 9,426,049 9,427,388 Machinery and equipment..................... $ 8,973,887 14,425,553 14,144,185 Furniture and fixtures...................... 986,469 1,845,433 1,882,911 Computer equipment and related software..... 2,727,122 3,880,956 4,144,657 Transportation equipment.................... 4,199 12,725 12,725 Leasehold improvements...................... 827,381 802,205 815,533 Equipment installation-in-progress.......... 3,091,369 62,139 1,073,872 ----------- ----------- ----------- Total............................. 16,610,427 31,747,739 32,793,950 Less accumulated depreciation............... (6,886,097) (7,666,127) (8,104,850) ----------- ----------- ----------- Net property, plant and equipment........... $ 9,724,330 $24,081,612 $24,689,100 ========== ========== ==========
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt consists of the following:
DECEMBER 31 ----------------------- MARCH 31, 1993 1994 1995 --------- ----------- ---------- Term loan, interest at 1/2% in excess of prime (total of 9% at December 31, 1994 and March 31, 1995), due in monthly installments to 1999...... $ 3,540,000 $3,360,000 Mortgage loan, interest at 1/2% in excess of prime (total of 9% at December 31, 1994 and March 31, 1995), due in monthly installments to 1998............................................ 4,800,000 4,768,053 --------- ----------- ---------- Total................................... 8,340,000 8,128,053 Capital lease obligations (see Note 4)............ $ 227,258 279,969 258,411 Less current maturities........................... (75,942) (975,335) (975,635) --------- ----------- ---------- Long-term debt and capital lease obligations, less current maturities.............................. $ 151,316 $ 7,644,634 $7,410,829 ========= ========== =========
The Company has a loan agreement with a bank that provides for advances of $4,000,000 on an unsecured revolving loan. The revolving loan bears interest at prime and is due April 30, 1995. No amounts were outstanding on the revolving loan at December 31, 1994 or March 31, 1995. The term loan and mortgage loan are secured by the property, plant and equipment of the Company. Effective February 1, 1995, the interest rate on the term loan and the mortgage loan were reduced to prime. The loan agreement contains restrictive covenants which, among others, require the Company to maintain a certain level of tangible net worth, limit dividends to 20% of net earnings, maintain certain financial F-8 42 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED ratios and limit capital expenditures. In 1994, the Company was not in compliance with certain of these covenants which were accordingly amended by the bank through December 31, 1995. Long-term debt, excluding capital lease obligations, matures as follows:
DECEMBER 31, 1994 ------------ Year ending December 31: 1995.................................................. $ 889,100 1996.................................................. 903,591 1997.................................................. 919,323 1998.................................................. 4,967,986 1999.................................................. 660,000 ------------ Total................................................... $8,340,000 ==========
There were no significant changes in maturities of long-term debt at March 31, 1995. 4. LEASES The Company leases office equipment under noncancellable capital lease agreements expiring at various dates through 1999. Maintenance, insurance, and tax expenses are the responsibility of the Company under the agreements. The Company also leased certain equipment under a capital lease agreement with an executive officer/stockholder of the Company which was purchased by the Company during 1994. The Company previously leased its principal manufacturing and office facility from an executive officer/ stockholder under an operating lease. In 1994 the Company entered into a new capital lease for the facilities and then subsequently exercised an option in the lease agreement to purchase the facilities from the executive officer/stockholder for $4,800,000. Total rent expense under the operating lease was $481,800, $526,717 and $87,786 for 1992, 1993 and 1994, respectively. Total lease payments under the capital lease were $291,114 in 1994. The future annual minimum lease payments under all capital leases, together with the present value of the minimum lease payments, and the future minimum rental payments required under all operating leases that have initial or remaining lease terms in excess of one year are as follows:
CAPITAL LEASES OPERATING LEASES ------------------------ ------------------------ DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1994 1995 1994 1995 ------------ --------- ------------ --------- Year ending December 31: 1995.................................. $103,409 $ 77,557 $121,088 $ 84,924 1996.................................. 86,394 86,394 105,572 105,572 1997.................................. 69,378 69,378 34,642 34,642 1998.................................. 45,371 45,371 8,426 8,426 1999.................................. 13,088 13,088 ------------ --------- ------------ --------- Total minimum lease payments............ $317,640 $ 291,788 $269,728 $ 233,564 ========== ======== Less amount representing interest....... (37,671) (33,377) ------------ --------- Present value of net minimum payments (see Note 3).......................... $279,969 $ 258,411 ========== ========
F-9 43 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED The following assets capitalized under lease agreements are included in property, plant and equipment at December 31, 1993 and 1994 and March 31, 1995:
DECEMBER 31, ------------------------ MARCH 31, 1993 1994 1995 --------- ---------- ---------- Machinery and equipment.................. $ 543,469 $ 543,469 $ 543,469 Computer equipment and related software............................... 84,399 84,399 84,399 Furniture and fixtures................... 268,552 400,895 400,895 --------- ---------- ---------- Total.................................. 896,420 1,028,763 1,028,763 Less accumulated depreciation............ (681,330) (706,677) (719,631) --------- ---------- ---------- Total.................................... $ 215,090 $ 322,086 $ 309,132 ========= ========= =========
5. COMMITMENTS AND CONTINGENCIES Self-Insurance -- The Company is self-insured with respect to medical and dental claims. The Company has obtained stop-loss insurance for claims in excess of $35,000 per individual per year and $1,000,000 lifetime maximum per individual. The Company has recorded an estimated liability at December 31, 1993 and 1994 and March 31, 1995 of $142,700, $171,000 and $171,000, respectively, for self-insured claims incurred but not reported. Property, plant and equipment -- The Company has commitments under contracts for the purchase of property and equipment. Portions of such contracts not completed at March 31, 1995 are not reflected in the Consolidated Financial Statements. These unrecorded commitments amounted to approximately $2,762,152. 6. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This standard requires, among other things, recognition of future tax benefits, measured by enacted tax rates, attributable to deductible temporary differences between the financial statement basis and income tax basis of assets and liabilities and net operating loss carryforwards to the extent realization is more likely than not. There was no cumulative effect of adopting SFAS No. 109 on the Company's consolidated financial statements since the Company provided a 100% valuation allowance against net deferred tax assets recorded as of January 1, 1993. Income tax expense (benefit) is as follows:
1994 ------------ Federal: Current....................................................... $ 778,000 Deferred...................................................... (207,000) ------------ Total Federal.............................................. 571,000 State and local............................................... 161,000 ------------ Total......................................................... $ 732,000 ==========
In 1993, no tax provision was necessary as the Company utilized a net operating loss carryforward. In 1992, no tax provision was established as the Company was in a net loss position. F-10 44 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED A reconciliation of recorded Federal income tax expense to the expected expense computed by applying the Federal statutory rate of 34% to income before income taxes follows: Expected expense at statutory rate............................... $ 824,000 State and local taxes including other -- net..................... 114,000 Reversal of valuation allowance.................................. (367,000) --------- Total............................................................ $ 571,000 =========
The Company expects a combined 38% income tax rate for 1995. Deferred income taxes recorded in the consolidated balance sheets at December 31, 1993 and 1994 consist of the following:
1993 1994 --------- -------- Deferred tax assets: AMT carryforwards (no expiration date)...................... $403,000 Net operating loss carryforwards............................ $ 627,000 122,000 Allowance for doubtful accounts............................. 80,000 92,000 Accrued self-insurance account.............................. 48,000 58,000 Other....................................................... 12,000 4,000 Valuation allowance......................................... (545,000) --------- -------- Total deferred tax assets........................... 222,000 679,000 --------- -------- Deferred tax liabilities: Depreciation................................................ 222,000 438,000 Other -- net................................................ 34,000 --------- -------- Total deferred tax liabilities...................... 222,000 472,000 --------- -------- Net deferred assets........................................... $ 0 $207,000 ========= ========
There is no significant change in the components of net deferred tax assets and liabilities at March 31, 1995. During 1994, the Company eliminated the valuation allowance based on its assessment that realization of its deferred tax assets is more likely than not given the nature and expected timing of its temporary differences and the recent and expected future profitable operations of the Company. The valuation allowance was reduced during 1993 by approximately $115,000 which reflected the usage of a portion of the net operating loss carryforwards to offset income before income taxes. The Company has available net operating loss carryforwards for tax purposes of approximately $360,000 which expire in 2005 which may only be used to offset future taxable income of Metatec/Discovery Systems, Inc. (a wholly-owned subsidiary of the Company). 7. EMPLOYMENT AGREEMENT AND BENEFIT PLAN The Company has an employment agreement with an executive officer/stockholder of the Company. The agreement continues until terminated by the executive or the Company and provides for a lump sum payment of one year's compensation upon termination. The executive is entitled to an annual cash bonus in addition to base salary. The same executive officer/stockholder was issued 600,000 common shares under a Restricted Share Agreement (the Agreement) dated March 23, 1993. These shares were issued subject to a risk of forfeiture of F-11 45 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED all of the shares if his employment is terminated by the Company for cause or by the executive officer/ stockholder without good reason (as those terms are defined in the Employment Agreement) on or before February 29, 1996. These shares are also subject to a risk of forfeiture of all or part of the shares as determined pursuant to an earnings formula as defined in the Agreement. Additionally, the Company has agreed to pay the officer/stockholder an amount equal to any tax savings resulting to the Company from the issuance and vesting of the shares and the payment of such additional amount, up to the amount of the officer's/ stockholder's individual tax liability. At December 31, 1994 and March 31, 1995, 524,447 and 600,000, respectively common shares have been earned by the officer/stockholder in accordance with the Agreement. Any shares issued under this contingent arrangement will be treated as adjustments to goodwill and be amortized over the remaining amortization period using the straight-line method. Substantially all associates are enrolled in a Company-sponsored defined contribution plan established under Section 401(k) of the Internal Revenue Code. The plan was established in 1993 and the Company contribution was approximately $41,500, $49,393, $10,123 and $15,763 for 1993, 1994 and the three months ended March 31, 1994 and 1995, respectively. The Company contribution is 20% of the associate's contribution up to maximum of 1% of the associates annual compensation. The funds are invested in mutual funds. 8. STOCK OPTION PLANS The Company implemented two stock option plans effective July 1, 1990. The first plan, the 1990 Directors' Stock Option Plan, was available only to directors who were not employees or officer/stockholders of the Company. As of December 31, 1994, and March 31, 1995 there have been 27,500 options granted of which 7,500 were exercisable. The plan expired in 1992 and no additional options may be granted under this Plan. All options under the 1990 Director's Plan were fully vested on the first anniversary date of the grant. In 1992, an additional Directors' Stock Option Plan was implemented under which a maximum of 160,000 Common Shares may be issued. This Plan, as amended, provides for each person who is an eligible director on the day after the Company's annual meeting of stockholders to be automatically granted an option for 2,500 shares, vesting on the grant date, and each person who first becomes an eligible director will automatically receive a one time grant of options for 10,000 shares. This one time option vests in equal installments over a four year period. At December 31, 1994 and March 31, 1995 24,292 shares were exercisable. The option price of shares subject to an option for the Directors' Stock Option Plans is the fair market value of the shares at the time the option is granted. No options issued are exercisable after five years from the date of grant. The second plan, the 1990 Stock Option Plan, is available to officer/stockholders and key employees of the Company or its subsidiary corporations and, in the case of non-qualified options, directors of subsidiaries of the Company (other than directors of such subsidiaries who are also directors of the Company). The maximum aggregate number of common shares which may be granted under the 1990 Stock Option Plan is 510,000 shares. The Company's Compensation Committee, which administers the plan, has the authority to grant incentive options and non-qualified options. Only officer/stockholders and other key employees of the Company or its subsidiary corporations are eligible for grants of incentive options. At December 31, 1994 and March 31, 1995, no incentive options had been granted. An option vests one year from the date of grant, and is F-12 46 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED not exercisable after 10 years from the date of grant. The option price is equal to the fair market value of the shares at the time the option is granted. The following summarizes all stock option transactions from January 1, 1992 through March 31, 1995:
AGGREGATE SHARES OPTION PRICE AMOUNT ------- ---------------- ---------- Outstanding at December 31, 1991.................... 256,500 $1.50 to $2.67 $ 410,075 Granted............................................. 42,555 $1.75 to $3.69 129,738 Exercised........................................... (23,000) $1.50 (34,500) Expired............................................. (24,000) $1.50 (36,000) ------- ---------- Outstanding at December 31, 1992.................... 252,055 $1.50 to $3.69 469,313 Granted............................................. 90,370 $5.50 to $10.50 501,493 Exercised........................................... (79,633) $1.50 to $3.69 (164,020) Expired............................................. (500) $6.00 (3,000) ------- ---------- Outstanding at December 31, 1993.................... 262,292 $1.50 to $10.50 803,786 Granted............................................. 229,425 $10.00 to $11.50 2,630,888 Exercised........................................... (62,600) $1.50 to $6.00 (182,773) Expired............................................. (3,525) $6.00 to $11.50 (35,038) ------- ---------- Outstanding at December 31, 1994.................... 425,592 $1.50 to $11.50 3,216,863 Granted............................................. 26,825 $9.37 to $11.25 265,450 Exercised........................................... (2,500) $1.50 (3,750) Expired............................................. (1,175) $11.50 (13,513) ------- ---------- Outstanding at March 31, 1995....................... 448,742 $1.50 to $11.50 $3,465,050 ======= =========
At December 31, 1994, 181,900 common shares under option were exercisable and 67,575 and 33,100 common shares (total of 100,675) were reserved for future grant under the 1992 Directors' Stock Option Plan and the 1990 Stock Option Plan, respectively. At March 31, 1995, 179,400 common shares under option were exercisable and 67,575 and 7,450 common shares (total of 75,025) were reserved for future grant under the 1992 Directors' Stock Option Plan and the 1990 Stock Option Plan, respectively. 9. RELATED PARTY TRANSACTIONS Effective April 26, 1993, the Company sold its interest in a partnership (which primarily held real estate) for a purchase price of $319,444 for cash and for a note receivable in the amount of $255,555. The note was received from a corporation which is wholly-owned by the adult daughters of a director/stockholder of the Company. The note bears interest at 6.5% and is payable in monthly installments of principal and interest of $2,226 with the balance due in 60 months. Effective January 19, 1994, the Company purchased, for cash, real estate from a partnership, in which an officer/stockholder of the Company is a partner. The tract of land included approximately eight acres and the purchase price totalled approximately $694,000. The land was used for the expansion at the existing facility. F-13 47 METATEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995 IS UNAUDITED 10. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ---------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- ------------ ----------- 1993 Revenues..................................... $5,044,767 $4,946,001 $5,526,458 $ 5,801,190 Gross Profit................................. 2,163,048 2,151,234 2,415,841 2,516,778 Net Earnings................................. 291,218 193,225 276,657 300,884 Net Earnings per common share Primary................................... $ 0.08 $ 0.05 $ 0.06 $ 0.06 Fully diluted............................. $ 0.08 $ 0.05 $ 0.06 $ 0.06 1994 Revenues..................................... $6,006,937 $6,538,579 $7,694,259 $ 8,702,973 Gross Profit................................. 2,394,453 2,802,730 3,378,152 4,066,720 Net Earnings................................. 120,424 308,625 384,962 878,642 Net Earnings per common share Primary................................... $ 0.02 $ 0.06 $ 0.08 $ 0.17 Fully diluted............................. $ 0.02 $ 0.06 $ 0.08 $ 0.17 1995 Revenues..................................... $9,178,622 Gross Profit................................. 4,044,668 Net Earnings................................. 542,618 Net Earnings per common share Primary................................... $ 0.10 Fully diluted............................. $ 0.10
F-14 48 FIGURE 4 - PHOTO [LOGO] [Metatec personnel operating mastering equipment.] FIGURE 5 - PHOTO [Metatec personnel presenting software services capabilities.] The Company currently is organized into FIGURE 6 - PHOTO three business divisions: [Metatec personnel - - MANUFACTURING SERVICES provides CD-ROM discussing NautilusCD.] mastering, replication, and distribution services in addition to providing similar services to radio syndication customers for Audio CDs. - - SOFTWARE SERVICES provides information publishers with design and development services of CD-ROM based publications, which, in turn, often produce Manufacturing Services revenues for the Company. - - PUBLISHING SERVICES produces and publishes NautilusCD.
49 ====================================================== NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE Available Information................. 2 Prospectus Summary.................... 3 Investment Considerations............. 5 Use of Proceeds....................... 7 Price Range of Common Shares and Dividend Policy..................... 7 Capitalization........................ 8 Selected Consolidated Financial Data................................ 9 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11 Business.............................. 16 Management............................ 20 Principal Shareholders................ 28 Description of Capital Stock.......... 28 Underwriting.......................... 30 Legal Matters......................... 31 Experts............................... 31 Additional Information................ 31 Index to Consolidated Financial Statements.......................... F-1 =============================================
====================================================== 1,500,000 SHARES [LOGO] COMMON SHARES ------------------------ PROSPECTUS ------------------------ LEGG MASON WOOD WALKER INCORPORATED VAN KASPER & COMPANY MAY , 1995 ====================================================== 50 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registration Fee -- Securities and Exchange Commission.................... $ 7,361 NASD Filing Fee........................................................... 2,635 The Nasdaq Stock Market Fees.............................................. 34,500* Legal Fees and Expenses................................................... 90,000* Printing and Engraving Fees and Expenses.................................. 70,000* Accounting Fees and Expenses.............................................. 60,000* Blue Sky Fees and Expenses................................................ 25,000* Transfer Agent and Registrar Fees and Expenses............................ 5,000* Miscellaneous Expenses.................................................... 5,504* -------- Total Expenses.................................................. $300,000* ========
- --------------- * Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 607.0850 of the Florida Business Corporation Act (the "Statute") sets forth conditions and limitations governing the indemnification of officers, directors, and other persons. Article VI of the Amended and Restated Bylaws of the Company (the "Bylaws"), a copy of which is filed as Exhibit 3(d), contains certain indemnification provisions adopted pursuant to authority contained in the Statute. Under the Bylaws, the Company will indemnify any person who is or was a director, officer, employee, or agent of the Company or who is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against: (a) liability incurred in connection with any proceeding (other than an action by or in the right of the Company) to which such person was or is a party by reason of acting in any such capacity, and (b) expenses and amounts paid in settlement (not exceeding, in the judgment of the Company's board of directors, the estimated expense of litigating the proceeding to conclusion) actually and reasonably incurred in connection with the defense or settlement of any proceeding by or in the right of the Company to procure a judgment in its favor to which such person was or is a party by reason of acting in any such capacity, provided that: (i) such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and (ii) no indemnification shall be made in respect of any claim, issue, or matter in any proceeding by or in the right of the Company as to which such person shall have been adjudged to be liable unless, and only to the extent that, the court in which such proceeding was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. For purposes of Article VI of the Bylaws: (A) the term "expenses" includes counsel fees, including those for appeal; (B) the term "liability" includes obligations to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to any employee benefit plan), and expenses actually and reasonably incurred with respect to a proceeding; and (C) the term "proceeding" includes any threatened, pending, or completed action, suit, or other type of proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal. Under the Bylaws, to the extent a director, officer, employee, or agent of the Company has been successful on the merits or otherwise in defense of any proceeding described above, or in the defense of any claim, issue, or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by him in connection therewith. For all other indemnification which may be provided under the Bylaws in connection with any proceeding, unless made pursuant to a determination by a court, indemnifica- II-1 51 tion shall be made only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the director, officer, employee or agent has met the applicable standard of conduct set forth in the Bylaws, which determination shall be made: (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such proceeding; (b) if such quorum is not obtainable, or even if obtainable, by majority vote of a committee duly designated by the board of directors consisting solely of two or more directors not at the time parties to the proceeding; (c) by independent legal counsel selected by the board of directors or a committee thereof as prescribed by the Statute; or (d) by the shareholders by majority vote of a quorum consisting of shareholders who were not parties to such proceeding or if such a quorum is not obtainable, by a majority vote of shareholders who were not parties to such proceeding. Evaluation as to reasonableness of expenses and authorization of indemnification must be made in the same manner as the determination that indemnification is permissible, except that if the determination of permissibility is made by independent legal counsel, then the board of directors or the committee thereof which appointed such legal counsel must evaluate the reasonableness of expenses and may authorize indemnification. The Bylaws also permit the Company to pay expenses incurred by its officers, directors, employees, and agents in advance of the final disposition of a proceeding, provided that the Company may advance expenses to a director or officer only after receiving an undertaking by or on behalf of such director or officer to repay such amount if he is ultimately found not to be entitled to indemnification pursuant to the Bylaws. The Company has entered into Indemnification Agreements with all of its directors, the form of which is filed as Exhibit 10(j). These agreements require the Company to indemnify its directors to the full extent permitted by the Statute, including without limitation, indemnification, to the extent permitted by applicable law, against all expenses (including legal fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by them in any threatened, pending or completed action or proceeding, including any action by or in the right of the Company, on account of their service as a director, officer, employee, or agent of the Company or at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, trust, or other enterprise. Coverage under these agreements is excluded: (i) on account of any suit in which judgment is rendered against the director for an accounting of profits made from the purchase or sale by the director of securities of the Company pursuant to Section 16(b) of the Exchange Act or any similar provisions of any federal, state, or local statutory law; or (ii) if a judgment or other final adjudication establishes that the director's actions, or omissions to act, were material to the cause of action so adjudicated and constitute (A) a violation of the criminal law, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful, (B) a transaction from which the director derived an improper personal benefit, (C) a circumstance under which the liability provisions of Section 607.0834 of the Statute (relating to unlawful distributions to shareholders) are applicable, or (D) willful misconduct or a conscious disregard for the best interests of the Company in a proceeding by or in right of the Company to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The Company's 1990 Stock Option Plan, 1990 Directors' Stock Option Plan, and 1992 Directors' Stock Option Plan all contain provisions under which each member of the Compensation Committee of the Board of Directors of the Company is provided indemnification against all costs and expenses incurred by him in connection with any action, suit, or proceeding to which he may be a party by reason of any action taken or failure to act under or in connection with any such plan or any option granted under any such plan, and against all amounts paid by him in satisfaction of a judgment in any such action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. These indemnification provisions are in addition to the indemnification provided under the Company's By-Laws and the Indemnification Agreements described above, but such provisions are to be construed in a manner consistent with applicable law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In April 1992, John C. Ryan, Jr., a former employee of the Company, exercised a stock option granted to him and purchased 1,000 Shares for a total purchase price of $1,500, or $1.50 per share. The option was II-2 52 granted to Mr. Ryan pursuant to the 1990 Stock Option Plan. At the time of such exercise, the Shares subject to the 1990 Stock Option Plan were not registered under the Securities Act. Such Shares were issued by the Company in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act based on Mr. Ryan's written investment representations to the Company. In March 1993, the Company issued 600,000 Shares to Jeffrey M. Wilkins, its Chairman of the Board and Chief Executive Officer. See "MANAGEMENT -- Certain Transactions." These Shares were issued by the Company in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION ------- ------------------------------------------------------------------------- 1* Form of Underwriting Agreement. 3(a) Amended and Restated Articles of Incorporation of Metatec Corporation (Incorporated by reference to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 3(a) therein)). 3(b) Amended and Restated By-laws of Metatec Corporation (Incorporated by reference to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 3(d) therein)). 4 Form of Share Certificate (Incorporated by reference to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 4 therein)). 5* Opinion of Baker & Hostetler. 10(a) Amended and Restated Employment Agreement dated March 23, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (See Exhibit 10(h) therein)). 10(b) Metatec Corporation 1990 Directors' Stock Option Plan and Amendment No. 1 thereto (Incorporated by reference to Registration Statement on Form S-8, File No. 33-48021 (see Exhibit 4(d) therein)). 10(c) Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (see Exhibit 10(k) therein)). 10(d) Amendment No. 1 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Registration Statement on Form S-8, File No. 33-84022 (see Exhibit 4(d) therein)). 10(e) Amendment No. 2 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(k) therein)). 10(f) Amendment No. 3 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(g) therein)). 10(g) Metatec Corporation 1992 Directors' Stock Option Plan (Incorporated by reference to Registration Statement on Form S-8, File No. 33-52700 (see Exhibit 4(c) therein)). 10(h) Amendment No. 1 to Metatec Corporation 1992 Directors' Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(i) therein)). 10(i) Metatec Corporation 1992 Incentive Compensation Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(p) therein)). 10(j) Form of Indemnification Agreement between Metatec Corporation and each of its officers and directors (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(q) therein)). 10(k) Restricted Share Agreement dated March 23, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(r) therein)).
II-3 53
EXHIBIT NO. EXHIBIT DESCRIPTION ------- ------------------------------------------------------------------------- 10(l) Amendment to Restricted Share Agreement dated April 8, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(o) therein)). 10(m) Patent License Agreement for Disc Products dated July 1, 1986, between Discovery Systems, Inc. and Discovision Associates (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(t) therein)). 10(n) CD Disc License Agreement dated January 1, 1986, between U.S. Philips Corporation and Discovery Systems, Inc. (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(u) therein)). 10(o) Optical Disc Corporation NPR Technology License Agreement between Optical Disc Corporation and Discovery Systems effective March 2, 1992 (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(v) therein)). 10(p) Lease and Option Agreement dated March 1, 1994, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(a) therein)). 10(q) Real Estate Purchase Agreement dated September 1, 1994, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(b) therein)). 10(r) Real Estate Purchase Contract dated January 19, 1994, between Metatec Corporation and Olde Post Properties (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(s) therein)). 10(s) Loan Agreement dated May 13, 1994, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(c) therein)). 10(t) First Amendment to Loan Agreement dated September 1, 1994, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(d) therein)). 10(u) Second Amendment to Loan Agreement dated February 1, 1995, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(e) therein)). 10(v) Share Exchange Agreement dated March 10, 1993, among Metatec Corporation, Darla D. Lang, Denise Hunter, Jeffrey M. Wilkins and Jerry D. Miller, as voting trustees, and Silco Real Estate Exchange, Inc. (Incorporated by reference to Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 25, 1993 (see Exhibit 1 therein)). 10(w) Agreement for Sale of Partnership Interest dated March 29, 1993, among Metatec Corporation, MGB, Inc., Darla D. Lang, and Denise Hunter (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(s) therein)). 10(x) Severance Agreement dated March 30, 1993, between Metatec Corporation and Jerry D. Miller (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(t) therein)). 21 Subsidiaries of Metatec Corporation (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 21 therein)). 23(a)* Consent of Baker & Hostetler (contained in Exhibit 5). 23(b)* Consent of Deloitte & Touche LLP. 24* Powers of Attorney (for James V. Pickett and Gregory T. Tillar). 27 Financial Data Schedule.
- --------------- * Filed herewith. II-4 54 (b) FINANCIAL STATEMENT SCHEDULES The following independent auditors' report and financial statement schedule of the Company are included in this Registration Statement: Independent Auditors' Report on Financial Statement Schedule Schedule II -- Consolidated Valuation and Qualifying Accounts All other schedules are omitted because the information prescribed thereon is not applicable nor required or is furnished in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 55 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF COLUMBUS, STATE OF OHIO, ON MAY 16, 1995. METATEC CORPORATION By: /S/ JEFFREY M. WILKINS ----------------------------- JEFFREY M. WILKINS, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------------- -------------------------------------- ----------------- /s/ JEFFREY M. WILKINS Chairman of the Board, Chief Executive May 16, 1995 - ------------------------------------- Officer (principal executive officer) JEFFREY M. WILKINS and Director /s/ WILLIAM H. LARGENT Vice President -- Finance, Treasurer May 16, 1995 - ------------------------------------- and Chief Financial Officer (principal WILLIAM H. LARGENT financial officer and principal accounting officer) and Director A. GRANT BOWEN* Director May 16, 1995 - ------------------------------------- A. GRANT BOWEN E. DAVID CROCKETT* Director May 16, 1995 - ------------------------------------- E. DAVID CROCKETT PETER J. KIGHT* Director May 16, 1995 - ------------------------------------- PETER J. KIGHT JERRY D. MILLER* Director May 16, 1995 - ------------------------------------- JERRY D. MILLER JAMES V. PICKETT* Director May 16, 1995 - ------------------------------------- JAMES V. PICKETT GREGORY T. TILLAR* Director May 16, 1995 - ------------------------------------- GREGORY T. TILLAR
- --------- *The undersigned, Jeffrey M. Wilkins, by signing his name hereto, does hereby execute this Amendment No. 1 to the Registration Statement on his own behalf personally and on behalf of each of the above-named directors of the Registrant pursuant to Powers of Attorney executed by such directors and filed with the Securities and Exchange Commission as exhibits to the Registration Statement. /s/ JEFFREY M. WILKINS - ------------------------------------- JEFFREY M. WILKINS II-6 56 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Metatec Corporation: We have audited the consolidated financial statements of Metatec Corporation and subsidiaries as of December 31, 1993 and 1994, and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated February 15, 1995 (included elsewhere in this Registration Statement). Our audits also included the consolidated financial statement schedule of Metatec Corporation and subsidiaries, listed in Item 16 of this Registration Statement. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP February 15, 1995 Columbus, Ohio S-1 57 METATEC CORPORATION AND SUBSIDIARIES SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- --------------------------- ---------- --------- CHARGED TO BALANCE AT COSTS CHARGED TO BALANCE BEGINNING AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ----------- ---------- ---------- -------------- ---------- --------- 1994 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE.......................... $ 235,000 $178,679 $144,679 $ 269,000 ======== ======== ======== ======== 1993 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE.......................... $ 206,000 $112,578 $ 83,578 $ 235,000 ======== ======== ======== ======== 1992 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE.......................... $ 208,000 $120,100 $122,100 $ 206,000 ======== ======== ======== ========
S-2 58 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------------------------------------------------------------------- 1* Form of Underwriting Agreement. 3(a) Amended and Restated Articles of Incorporation of Metatec Corporation (Incorporated by reference to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 3(a) therein)). 3(b) Amended and Restated By-laws of Metatec Corporation (Incorporated by reference to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 3(d) therein)). 4 Form of Share Certificate (Incorporated by reference to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 4 therein)). 5* Opinion of Baker & Hostetler. 10(a) Amended and Restated Employment Agreement dated March 23, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (See Exhibit 10(h) therein)). 10(b) Metatec Corporation 1990 Directors' Stock Option Plan and Amendment No. 1 thereto (Incorporated by reference to Registration Statement on Form S-8, File No. 33-48021 (see Exhibit 4(d) therein)). 10(c) Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (see Exhibit 10(k) therein)). 10(d) Amendment No. 1 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Registration Statement on Form S-8, File No. 33-84022 (see Exhibit 4(d) therein)). 10(e) Amendment No. 2 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(k) therein)). 10(f) Amendment No. 3 to Metatec Corporation 1990 Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(g) therein)). 10(g) Metatec Corporation 1992 Directors' Stock Option Plan (Incorporated by reference to Registration Statement on Form S-8, File No. 33-52700 (see Exhibit 4(c) therein)). 10(h) Amendment No. 1 to Metatec Corporation 1992 Directors' Stock Option Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(i) therein)). 10(i) Metatec Corporation 1992 Incentive Compensation Plan (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(p) therein)). 10(j) Form of Indemnification Agreement between Metatec Corporation and each of its officers and directors (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(q) therein)). 10(k) Restricted Share Agreement dated March 23, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(r) therein)). 10(l) Amendment to Restricted Share Agreement dated April 8, 1993, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(o) therein)). 10(m) Patent License Agreement for Disc Products dated July 1, 1986, between Discovery Systems, Inc. and Discovision Associates (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(t) therein)).
59
EXHIBIT NUMBER EXHIBIT DESCRIPTION ------ -------------------------------------------------------------------------------- 10(n) CD Disc License Agreement dated January 1, 1986, between U.S. Philips Corporation and Discovery Systems, Inc. (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(u) therein)). 10(o) Optical Disc Corporation NPR Technology License Agreement between Optical Disc Corporation and Discovery Systems effective March 2, 1992 (Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 10(v) therein)). 10(p) Lease and Option Agreement dated March 1, 1994, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(a) therein)). 10(q) Real Estate Purchase Agreement dated September 1, 1994, between Metatec Corporation and Jeffrey M. Wilkins (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(c) therein)). 10(r) Real Estate Purchase Contract dated January 19, 1994, between Metatec Corporation and Olde Post Properties (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 10(s) therein)). 10(s) Loan Agreement dated May 13, 1994, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(c) therein)). 10(t) First Amendment to Loan Agreement dated September 1, 1994, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(d) therein)). 10(u) Second Amendment to Loan Agreement dated February 1, 1995, between The Huntington National Bank, Metatec Corporation, and Discovery Systems, Inc. (Incorporated by reference to Current Report on Form 8-K filed with the Securities and Exchange Commission on March 28, 1995 (see Exhibit 10(e) therein)). 10(v) Share Exchange Agreement dated March 10, 1993, among Metatec Corporation, Darla D. Lang, Denise Hunter, Jeffrey M. Wilkins and Jerry D. Miller, as voting trustees, and Silco Real Estate Exchange, Inc. (Incorporated by reference to Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 25, 1993 (see Exhibit 1 therein)). 10(w) Agreement for Sale of Partnership Interest dated March 29, 1993, among Metatec Corporation, MGB, Inc., Darla D. Lang, and Denise Hunter (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(s) therein)). 10(x) Severance Agreement dated March 30, 1993, between Metatec Corporation and Jerry D. Miller (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (see Exhibit 10(t) therein)). 21 Subsidiaries of Metatec Corporation (Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 21 therein)). 23(a)* Consent of Baker & Hostetler (contained in Exhibit 5). 23(b)* Consent of Deloitte & Touche LLP. 24* Powers of Attorney (for James V. Pickett and Gregory T. Tillar). 27 Financial Data Schedules.
- --------------- * Filed herewith. EX-1 2 METATEC EX-1 1 1,500,000 Shares METATEC CORPORATION of Common Shares UNDERWRITING AGREEMENT May 19, 1995 Legg Mason Wood Walker, Incorporated and Van Kasper & Company As Representatives of the Several Underwriters c/o Legg Mason Wood Walker, Incorporated Legg Mason Tower 111 South Calvert Street, 20th Floor Baltimore, Maryland 21202 Gentlemen: Metatec Corporation, a Florida corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 9 hereof) named in Schedule I hereto for whom you are acting as representatives (the "Representatives"), 1,500,000 shares (the "Firm Shares") of the Company's Common Shares, $.10 par value (the "Common Stock"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. In addition, the Company proposes to grant to the Underwriters, solely for the purpose of covering over-allotments in the sale of Firm Shares, the option described in Section 2(b) of this Agreement to purchase up to 225,000 additional shares of Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company, and the Company is relying on your representation, (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters and (b) that you and the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 2 1. Representations and Warranties of the Company. The Company represents, warrants, covenants and agrees with Underwriters as follows: (a) REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form S-1 (File No. 33-58733 with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. Copies of such registration statement, including any amendments and supplements thereto, the preliminary prospectuses (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to the Representatives (and to such of the Underwriters which have requested the foregoing from the Company). Such registration statement, hereinafter referred to as the "Registration Statement", which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus, as defined below, has been declared effective by the Commission under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The form of prospectus first filed by the Company with the Commission pursuant to Rule 424(b) and Rule 430A of the Act as it may hereafter be supplemented or amended is herein referred to as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective and each form of prospectus that pursuant to Rule 430A of the Act omits certain information is herein referred to as a "Preliminary Prospectus". Any reference herein to the Prospectus shall be deemed to include any supplements or amendments thereto filed with the Commission after the date of filing of the Prospectus under Rules 424(b) and 430A, and during such longer period as the Prospectus may be required to be delivered in connection with the Shares by the Underwriters or any dealer. (b) COMPLIANCE WITH THE ACT. At the effective time of the Registration Statement and at all times subsequent thereto (except for the period between (a) the occurrence of an event which requires the filing of an amendment to the Registration Statement and (b) the filing thereof, so long as the Company promptly makes such filing and promptly notifies the Representatives of the occurrence of such event), up to and including the Closing Date and the Option Closing Date (as such terms are herein defined), and during such longer period until any post-effective amendment to the Registration Statement shall become effective, the Registration Statement and any post-effective amendment to the Registration Statement) will contain -2- 3 all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations under the Act and will fully comply in all material respects with the applicable provisions of the Act and the Rules and Regulations under the Act, and neither the Registration Statement nor any such amendment will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Prospectus as it may be amended or supplemented will at all times up to and including the Closing Date and the Option Closing Date (except for the period between (a) the occurrence of an event which requires the filing of an amendment or supplement to the Prospectus and (b) the filing thereof, so long as the Company promptly makes such filing and promptly notifies the Representatives of the occurrence of such event), and during such longer period as the Prospectus may be required to be delivered in connection with sales of the Shares by the Underwriters or any dealer, fully comply in all material respects with the provisions of the Act and the Rules and Regulations under the Act, and will not contain any untrue statement of a material fact and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement or the Prospectus or any amendment of, or supplement to, either of them in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for use in connection with the preparation of the Registration Statement or of the Prospectus. It is understood that the statements set forth (a) on the outside cover page of the Prospectus regarding (i) indemnity, (ii) compensation of underwriters and (iii) other information about the underwriting arrangements; (b) on the inside cover page of the Prospectus with respect to stabilization and passive market making; (c) under the section entitled "Underwriting" regarding the Underwriters and the underwriting arrangements; and (d) under the section entitled "Legal Matters" regarding the identity of counsel for the Underwriters, constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Registration Statement and Prospectus, as the case may be. (c) ORGANIZATION AND QUALIFICATION. Each of the Company and its wholly owned subsidiary, Metatec/Discovery Systems, Inc. ("Discovery Systems") has been duly incorporated and is validly existing as a corporation under the law of its respective state of incorporation. Each of the Company and Discovery Systems, is in good standing under the law of its respective state of incorporation, with the corporate power and authority -3- 4 to own, lease and operate its properties and conduct its business as described in the Registration Statement. Each of the Company and its subsidiaries (collectively, the "Subsidiaries") is duly qualified to transact business and is in good standing in all jurisdictions in which the conduct of its business requires such qualification except where the failure to so qualify would not have a materially adverse effect upon the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries taken as a whole. Sterling Health Services Corporation ("Sterling Health") and Sterling Investors Corporation ("Sterling Investors"), each subsidiaries of the Company incorporated under the laws of Florida, and Discovery Artists, Inc., a subsidiary of the Company incorporated under the laws of Ohio ("Discovery Artists"), are inactive. (d) SUBSIDIARIES. Exhibit 21 to the Registration Statement lists all of the Subsidiaries of the Company, other than Discovery Artists. Neither Discovery Artists, Sterling Investors nor Sterling Health constitute a significant subsidiary within the meaning of Rule 1-02(w) of Regulation S-X. Except as set forth on Exhibit 21 to the Registration Statement, the Company or its wholly-owned subsidiary, Discovery Systems, owns all of the issued an outstanding capital stock of each Subsidiary, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. (e) CAPITALIZATION; DESCRIPTION OF SECURITIES. All issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable (except to the extent that the risk of forfeiture and earnings requirements as described in the Registration Statement affects the full payment or nonassessability of the 600,000 shares of Common Stock issued to Jeffrey M. Wilkins in March, 1993), have been issued in compliance with all Federal and state securities laws, and were not issued in violation of, or subject to, any preemptive rights or other rights to subscribe for or purchase securities that were not provided or waived. The authorized and outstanding capital stock of the Company conforms, and the authorized and outstanding capital stock of the Company will conform as of the Closing Date and, if the Option Shares are purchased, the Option Closing Date in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company). The Firm Shares and the Option Shares (if and to the extent exercised) to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof. No further approval or authorization of any shareholder, the Board of Directors or others is required for the issuance and sale or transfer of the Shares in the manner set forth in this Agreement, except as may be required under the Act, the Securities Exchange Act of 1934, as amended (the -4- 5 "Exchange Act") or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all Federal and state securities laws and were not issued in violation of, or subject to, any preemptive rights or other rights to subscribe for or purchase securities that were not provided or waived. Except as disclosed in the Prospectus, neither the Company nor any Subsidiary has, or will have as of the Closing Date and the Option Closing Date, outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly present the information required to be shown with respect to such plans, arrangements, options and rights. The only outstanding shares of capital stock of the Company are 5,275,964 shares of Common Stock, being the sum of the number of shares outstanding at May 15, 1995 and the number of shares issued thereafter in a manner consistent with Section 4(h) hereof. (f) NO STOP ORDER. Neither the Commission nor any state securities commission in a jurisdiction designated by the Representatives pursuant to Section 4(c) has issued an order preventing or suspending the use of any Preliminary Prospectus related to the proposed offering of the Shares nor instituted proceedings for that purpose. (g) FINANCIAL STATEMENTS. The consolidated financial statements of the Company and its Subsidiaries (including the unaudited financial statements for the period ended March 31, 1995 (the "Unaudited Financial Statements")), together with related notes and schedules, as set forth in the Preliminary Prospectus, Prospectus and Registration Statement (collectively, the "Company Financial Statements"), present fairly, in all material respects, the consolidated financial position, the changes in stockholders' equity, the results of operations and the changes in cash flows of the Company and its Subsidiaries at the indicated dates and for the indicated periods and comply in all material respects with the requirements of the Act. Each of the Company Financial Statements has been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation in all material respects of results for such periods have been made subject, in the case of the Unaudited Financial Statements, to normal year-end audit adjustments, none of which will, individually or in the -5- 6 aggregate, be material. The financial statement schedules and summary, selected and statistical financial information and data, and related notes thereto, included in the Preliminary Prospectus, Prospectus and Registration Statement present fairly the information and data shown therein, have been compiled on a basis consistent with the Company Financial Statements presented therein and comply in all material respects with the requirements of the Act. The supporting notes and schedules included in the Preliminary Prospectus, Prospectus and Registration Statement fairly state in all material respects the information required to be stated therein in relation to the financial statements taken as a whole. The financial information included in the Prospectus under the caption "Prospectus Summary" and "Selected Consolidated Financial Data" presents fairly the information shown therein and has been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement; and comply with the requirements of the Securities Act and the Rules and Regulations. No other financial statements or schedules are required to be included in the Registration Statement. (h) LITIGATION. There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or any of their respective officers or any of their properties, assets or rights, before any court or administrative agency or body or otherwise which (A) might result in any materially adverse change in the business, condition (financial or otherwise), operations, earnings, or business prospects of the Company or any of its Subsidiaries or might materially adversely affect their properties, assets or rights, (B) if determined adversely to the Company or any of its Subsidiaries would prevent consummation of the transactions contemplated hereby or (C) is required to be disclosed in the Registration Statement or the Prospectus. There are no contracts or documents of the Company or any of its Subsidiaries that are required to be described in the Prospectus or to be filed as an exhibit to the Registration Statement by the Act or by the Rules and Regulations which have not been accurately described in all material respects in the Prospectus and filed as exhibits to the Registration Statement. The contracts so described in the Prospectus are in full force and effect on the date hereof and neither the Company nor any of its Subsidiaries, nor to the best knowledge of the Company, any other party, is in breach or default under any of such contracts. (i) TITLE TO ASSETS. The Company and its Subsidiaries have good and marketable title to all of the properties and assets reflected in the Company Financial Statements (or as described in the Registration Statement as owned by such party) subject to no lien, mortgage, pledge, charge or encumbrance of any kind, except those reflected in the Company Financial Statements or referred to in the Registration Statement, other than (A) liens for taxes and assessments not yet due and payable, (B) encumbrances relating to improvements made by the City of Dublin with respect to the Company's property located at 7001 Metatec Boulevard, Dublin, Ohio, (C) legal highways, zoning and building laws, ordinances and regulations, (D) covenants, restrictions, conditions and easements of record which do not unreasonably -6- 7 interfere with the current use made to such properties or assets, or (E) immaterial liens and encumbrances which do not unreasonably impair or interfere with the current use made to such properties or assets, and, with respect to the foregoing item (E), that do not and could not reasonably be expected to materially adversely affect the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and its Subsidiaries taken as a whole. Neither the Company nor any of its Subsidiaries is a party to any material lease under which the Company or its Subsidiaries holds properties or assets as lessee. (j) TAXES. The Company and each Subsidiary has filed all Federal, State, local and foreign income tax returns which have been required be filed and has paid all taxes indicated by said returns and all assessments received by it to the extent that such taxes have become due except to the extent that any such taxes are currently being contested in good faith and are not material to the Company or any of its Subsidiaries. There is no tax deficiency against the Company or its Subsidiaries and, to the Company's knowledge, there is no reasonable basis for the assertion of any such deficiency that, if determined adversely, would have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries taken as a whole, and all tax liabilities are adequately provided for on the books of the Company and its Subsidiaries. (k) NO MATERIAL ADVERSE CHANGE. Since the date as of which information is given in the Registration Statement and the Prospectus, (A) there has not been any materially adverse development in or affecting the condition (financial or otherwise), earnings, operations, business, or business prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, (B) there has not been any material transaction entered into by the Company or any of its Subsidiaries, other than transactions in the ordinary course of business and transactions disclosed in the Registration Statement, as it may be amended or supplemented, (C) there has not been any obligation that is material to the Company or any of its Subsidiaries, direct or contingent, incurred by the Company or any of its Subsidiaries, except obligations incurred in the ordinary course of business and the extension of the Company's $4,000,000 line of credit under its revolving loan agreement to mature in April 1996 (the "Revolving Loan Extension"), (D) there has not been any change in the capital stock or outstanding indebtedness of the Company or any of its Subsidiaries, that is material to the Company or any of its Subsidiaries, except the Revolving Loan Extension, and (E) the Company has not declared, paid or made any dividend or other distribution on its capital stock. -7- 8 The Company has no material contingent obligations which are not disclosed in the Registration Statement. (l) NO VIOLATION. Neither the Company nor any of its Subsidiaries is in violation of its charter or by-laws or is in default under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it or any of its properties is bound and which is material to the Company and its Subsidiaries taken as a whole. The consummation of the transactions herein contemplated and the execution and performance of this Agreement and the fulfillment of the terms hereof have been duly authorized by all necessary shareholder and other corporate action on the part of the Company and the Subsidiaries and do not and will not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default or require any payment by the Company or any of the Subsidiaries, or result in the creation or imposition of any lien, charge or encumbrance upon any property or asset of the Company or any Subsidiary under (i) any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound and which is material to the Company and its Subsidiaries taken as a whole, or of the charter or by-laws of the Company or any of its Subsidiaries or (ii) any law, order, rule, judgment, decree or regulation applicable to the Company or any of its Subsidiaries of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or any of its Subsidiaries or any of their properties except such defaults, conflicts or payments which are not material to the Company and its Subsidiaries taken as a whole. (m) AUTHORIZATIONS. Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated in this Agreement and in the Registration Statement or which may be necessary to qualify the Shares for public offering by the Underwriters under State securities or Blue Sky laws has been obtained or made and is in full force and effect. (n) PERMITS, LICENSES, ETC. The Company and its Subsidiaries are in possession of, and are operating in compliance with, all authorizations, licenses, certificates, consents, orders and permits ("Governmental Licenses") from governmental authorities which are necessary to the conduct of their business and are material to the Company and its Subsidiaries taken as a whole, all of which are valid and in full force and effect. Neither the Company nor any Subsidiary has received any written notice of proceedings relating to revocation or -8- 9 modification of any such Governmental Licenses. The Company and its Subsidiaries own, possess or have the right to use all patents, trade names, trademarks, service marks, copyrights, know-how (including trade secrets and other unpatented or unpatentable proprietary information) and other intellectual property, and rights thereto, described or referred to in the Prospectus or which are necessary for the conduct of their business. Neither the Company nor its Subsidiaries have, to the best of their knowledge, infringed, or received any notice of infringement of, any patents, trade names, trademarks, service marks, copyrights or intellectual property of other persons, or rights thereto which may have a material adverse affect on the Company and its Subsidiaries taken as a whole. (o) ACCOUNTANTS. Deloitte & Touche LLP have audited the Company Financial Statements (except for the Unaudited Financial Statements) filed as part of the Registration Statement and included in the Prospectus, to the extent set forth in its reports contained in the Registration Statement and Prospectus. Deloitte & Touche LLP are independent public accountants as required by the Act and the Rules under the Act. The Company and each Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (p) AUTHORITY. The Company has the full corporate legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement and the documents contemplated hereby have been duly authorized, executed and delivered by the Company, and constitute its valid and binding obligations, enforceable in accordance with their respective terms, except (A) as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and (B) as rights to indemnity and contribution may be limited by Federal or state securities laws or principles of public policy. (q) NO STABILIZATION OR MANIPULATION OF PRICE. Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed to, or which has constituted, or which might -9- 10 reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock of the Company or any outstanding securities convertible or exchangeable for the Common Stock. (r) AFFILIATIONS. To the Company's knowledge after due investigation, none of the officers, directors or 5% or greater shareholders of the Company have any affiliation with the National Association of Securities Dealers, Inc. (the "NASD"). (s) INSURANCE. The Company and its Subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for their respective business, including but not limited to, insurance covering real and personal property owned or leased by the Company or its Subsidiaries against theft, damages, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (t) LABOR MATTERS. No labor disturbance by the employees of the Company or any of its Subsidiaries exists or, to the best of the Company's knowledge, is imminent and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added suppliers, subcontractors, original equipment manufacturers, authorized dealers or distributors that would be expected to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or its Subsidiaries. No collective bargaining agreement exists with any of the Company's or its Subsidiaries' employees and, to the Company's knowledge, no such agreement is imminent. (u) COMPLIANCE WITH LAWS. Neither the Company nor any of its Subsidiaries has been advised, or has reason to believe, that it is not conducting business in compliance with all of the laws, rules and regulations of the jurisdiction in which it is conducting business except where failure to be so in compliance would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries taken as a whole. (v) DISTRIBUTION OF MATERIALS. Neither the Company nor any Subsidiary has distributed or will distribute any prospectus (as such term is defined in the Securities Act and the Rules and Regulations) in connection with the offering and sale of the Shares other than a Preliminary Prospectus or the Prospectus. (w) ILLEGAL CONTRIBUTIONS. Neither the Company nor any of its Subsidiaries has at any time during the last five -10- 11 years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any Federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (x) LOCK-UP AGREEMENTS. Each member of the Board of Directors of the Company and each officer (as such term is defined in Rule 16a-1(f) under the Exchange Act) of the Company has agreed that such person will not, for a period of 120 days after the date of this Underwriting Agreement (the "Restricted Period"), directly or indirectly sell, offer to sell, contract to sell, grant any option for the sale of, or otherwise dispose of, by any means, any shares of Common Stock or announce an intent to sell any shares of Common Stock, without the prior written consent of the Representatives. Notwithstanding the foregoing, during the Restricted Period, directors and officers may sell shares of Common Stock in private transactions not effected through any broker or dealer and not through any public market or stock exchange and may transfer shares of Common Stock to his or her spouse, children, descendants, parents or grandparents or to a trust for the benefit of one or more of such persons, provided that each transferee agrees in writing to be bound by this lock-up agreement. In addition, A. Grant Bowen, a director of the Company, may sell up to 10,000 shares of the Company's Common Stock, in the aggregate during the Restricted Period (in addition to the other sales permitted in this subparagraph). (y) LISTING OF SHARES. The Firm Shares and the Option Shares, if any, have been approved for quotation on The Nasdaq Stock Market, subject to official notice of issuance. (z) RELATED TRANSACTIONS. There are no business relationships or related-party transactions of the nature described in Item 404 of Regulation S-K of the Act, involving the Company and any other persons referred to in said Item 404, that are required to be described in the Prospectus and which have not been so disclosed. (aa) FILING OF REPORTS. Since January 1, 1990, the Company has filed on a timely basis all reports, statements, forms, schedules and other material required to be filed by it under the Exchange Act, except that the Commission had no record of the filing of the Company's Form 10-Q due September 15, 1992, which the Company refiled in May, 1993, and that the Company filed a Form 8-K on March 28, 1995, which was required to be filed by September 16, 1994. The Company has otherwise complied in all material respects with the Act. All such filings do not contain any untrue statement of a material fact and do not omit to state any material fact required to be stated therein or -11- 12 necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (ab) EXCHANGE OF CLASS B SHARES. In March 1993, the Company acquired all previously outstanding shares of its Class B common shares, $.10 par value per share (the "Class B Shares"), in exchange for all of the outstanding common shares of its wholly-owned subsidiary, Silco Real Estate Exchange, Inc. (the "Exchange"). All actions taken by the Company in connection with the Exchange were taken in accordance with all laws and regulations applicable to the Company or the Exchange and, except for conflicts, breaches, defaults or payments which have been waived or which do not exceed $75,000, the Exchange did not conflict with, or result in a breach of, any of the terms or provisions of, or constitute a default or require any payment by the Company under (i) any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of its Subsidiaries was a party or by which the Company or any of its Subsidiaries was bound at the time of the Exchange, or of the charter or by-laws of the Company or any of its Subsidiaries or (ii) any order, rule or regulation applicable to the Company or any of its Subsidiaries or of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or any of its Subsidiaries or any of their properties at the time of the Exchange. (ac) CHAPTER 11 PROCEEDINGS. Discovery Systems purchased substantially all of the assets of The Wilkins Company, dba Discovery Systems ("The Wilkins Company") pursuant to a Second Amended Plan of Reorganization (the "Plan") confirmed by Order dated April 19, 1989 (the "Confirmation Order"). Discovery Systems has performed in all material respects its obligations, under the Plan and has complied in all material respects with the terms of the Confirmation Order. The bankruptcy case of The Wilkins Company was closed by Order dated February 17, 1993. (ad) ENVIRONMENTAL LIABILITIES. The Company and its Subsidiaries have received all material permits and filed all material notifications required for handling of Hazardous Waste (as defined below) and have materially complied with all laws and regulations governing the treatment, handling, storage and disposal of Hazardous Wastes and, to the knowledge of the Company and its Subsidiaries, have materially complied with all Environmental Laws (as defined below) (except to the extent that failure to comply with such Environmental Laws would not have a material adverse effect on the condition (financial or otherwise), earnings, business affairs or business prospects of the Company and the Subsidiaries, taken as a whole). Neither the Company nor any of its Subsidiaries have received any notice from a regulatory agency that it has failed to comply in any material respect with laws or regulations governing the treatment, handling, storage and disposal of Hazardous Waste or, to the knowledge of the Company and its Subsidiaries, any Environmental Law. For purposes of this section, the term "Hazardous Waste" shall have the same meaning as "Hazardous Waste" under the Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et seq. and similar state laws or regulations. No release, leak, discharge, spill, disposal or emission ("Release") of Hazardous Substances -12- 13 has occured in, on , or under any property owned or used by the Company or any of its Subsidiaries which Release (i) had or has a material effect on the value of the property or (ii) may involve remediation or removal costs in excess of an aggregate of $50,000, and all such property is free in all material respects of Hazardous Substances except for those matters as to which the Company has undertaken remedial measures. For purposes of this section, the term "Hazardous Substances" shall have the same meaning as "Hazardous Substances" in the Comprehensive Environment Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq. and similar state statutes. As used herein, "Environmental Laws" means any federal, state or local law or regulation applicable to the Company's or the Subsidiaries' business operations or ownership or possession of any of their properties or assets relating to environmental matters. (ae) DIVIDENDS. The Company has not declared, paid or accrued any dividends or distributions to shareholders and will not hereafter declare, pay or accrue any such dividends -13- 14 or distributions prior to the Closing Date or the Option Closing Date. (af) NASD CONFLICTS. No NASD Member and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the common equity of the Company. (ag) Subsidiaries. None of the Company's Subsidiaries, except for Discovery Systems (collectively, the "Inactive Subsidiaries"), owns any tangible or intangible personal property, real property or other assets. None of the Inactive Subsidiaries has any Liabilities (as defined below) and neither the Company nor Discovery Systems has any Liabilities in respect of such Inactive Subsidiaries. For the purposes hereof, "Liabilities" means all indebtedness, obligations and other liabilities, whether direct or indirect, matured or unmatured, and any loss, damage, cost, contingent liability, loss contingency, unpaid expense, claim, deficiency, guaranty or endorsement of or by any person whether or not ascertainable. Any certificate signed by any officer of the Company or any Subsidiary in such capacity and delivered to the Representatives or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company or such Subsidiary to the several Underwriters as to the matters covered thereby. 2. Purchase and Delivery of the Shares. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of [$______] per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. Payment for the Firm Shares to be sold hereunder is to be made in Baltimore Clearing House funds (next day funds) by certified or bank cashier's checks drawn to the order of the Company for the Shares against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery is to be made at the offices of Legg Mason Wood Walker, Incorporated, Legg Mason Tower, 111 South Calvert Street, 20th Floor, Baltimore, Maryland at 10:00 AM, Baltimore time, on the fifth business day after the date of this Agreement or at such other time and date not later than five business days thereafter as the Representatives and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the third full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one full business day prior to the Closing Date. At the election of the Company, settlement for the Shares shall be made in same day funds in accordance with Section 5(a)(xiii) of this Agreement. It is understood that you have advised the Company, and the Company is relying on your representation, that each Underwriter has authorized you, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Shares that it has agreed to purchase. It is understood that each of you, -14- 15 individually and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by the Representatives prior to the Closing Date for the Firm Shares (or the Option Shares discussed below) to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in Section 2(a) of this Agreement. The option granted hereby may be exercised in whole or in part but only once and at any time upon written notice given within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than ten full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. If the option is exercised as to all or any portion of the Option Shares, the number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the aggregate number of Firm Shares, adjusted by the Representatives in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in Baltimore Clearing House funds (next day funds) by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of Legg Mason Wood Walker, Incorporated, Legg Mason Tower, 111 South Calvert Street, 20th Floor, Baltimore, Maryland. The certificates for the Firm Shares will be delivered in such denominations and in such registration as the Representatives -15- 16 request in writing not later than the third full business day prior to the Option Closing Date, and will be made available for inspection by the Representatives at least one full business day prior to the Option Closing Date. At the election of the Company, settlement for the Option Shares shall be made in same day funds in accordance with Section 5(a)(xiii) of this Agreement. Upon exercise of any option provided for in Section 2(b) hereof, the obligations of the Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment for such Option Shares) to the accuracy of and compliance with the representations and warranties of the Company, to the accuracy of the statements of the Company and officers of the Company, made pursuant to the provisions hereof, to the performance by the Company of its covenants hereunder and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be reasonably satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants of the Company or its compliance with any of the conditions herein contained. 3. Offering by the Underwriters. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2(b) hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and amendments thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; and it will notify you, promptly after it shall receive notice thereof, of the time when the Registration -16- 17 Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed. The Company will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations, a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (ii) not file or publish any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations, (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. In case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement in connection with the sale of the Shares, the Company will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. (b) The Company will advise the Representatives promptly of the receipt of any comments from the Commission, and of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or any Preliminary Prospectus or of the suspension of the qualification of the Shares for offering in any jurisdiction, or of the institution or threatening of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction in which the Company would be required thereby to qualify to do business or in which the Company would thereby become subject to taxation. The Company -17- 18 will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably require for the initial distribution of the Firm Shares and the Option Shares or for such longer period as may be required by law. (d) The Company will deliver to the Representatives, or such other entity or person as the Representatives may designate, from time to time, without charge, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to the Representatives, or such other entity or person as the Representatives may designate, without charge, during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, but without exhibits, and of all amendments thereto, as the Representatives may reasonably request. (e) The Company shall comply to the best of its ability with the Act and the Rules and Regulations, and the Exchange Act and the rules and regulations of the Commission thereunder so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company will promptly notify the Representatives of such event and will promptly prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law; provided that the Company shall make such changes in any such document as the Underwriters upon advice of counsel may reasonably request and, provided the Representatives have received the notification referred to above, you shall notify the Underwriters not to distribute or otherwise use any Prospectus that needs to be amended or supplemented until such amendment or supplement is complete. -18- 19 (f) The Company will make generally available to its shareholders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise the Representatives, and such of the Underwriters which request the foregoing from the Company, in writing when such statement has been so made available. (g) The Company will, for a period of three years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar information with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) No offering, sale or other disposition by the Company of any Common Stock or any other class of securities or warrants to purchase any class of securities of the Company will be made during the Restricted Period, directly or indirectly, otherwise than hereunder or with the prior written consent of the Representatives, except that the Company may, without such consent, (i) issue shares of Common Stock upon exercise of options outstanding as of the date hereof and which are identified in the Prospectus (provided that the party exercising such option, if a person referred to in Section 1(x) hereof, is subject to a lock-up agreement of the type described in Section 1(x) of this Agreement) and (ii) grant options pursuant to existing option plans in accordance with past practice (provided that either any such option cannot be exercised prior to the end of the Restricted Period or the party exercising any such option is subject to a lock-up agreement of the type described in Section 1(x) of this Agreement). (i) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (j) If at any time during the 90 day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event -19- 20 necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the course of the distribution of the Shares, the Company will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock. (l) The Company has complied and shall comply with all of the provisions of Florida H.B. 1771, as codified in Sec. 517.075 Florida Statutes, as amended, and all regulations promulgated thereunder relating to issuers doing business with Cuba. 5. Costs, Expenses and Fees. (a) Whether or not the transactions contemplated by this Agreement are consummated and regardless of the reason this Agreement is terminated, the Company will pay or cause to be paid, and bear or cause to be borne, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including (i) the fees and expenses of the accountants and counsel for the Company incurred in the preparation of the Registration Statement and any post-effective amendments thereto (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; (ii) printing and delivery expenses associated with the Registration Statement and any post-effective amendments thereto, the Preliminary Prospectus, the Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters' Questionnaire, the Power of Attorney, the Selected Dealer Agreement and related documents and the Preliminary Blue Sky Memorandum and any supplement thereto (excluding mailing expenses incurred by Underwriters in connection with sending a Preliminary Prospectus, Prospectus or other document to prospective purchasers of the Shares); (iii) the costs incident to the authentication, issuance, sale and delivery of the Shares to the Underwriters; (iv) all taxes, if any, on the issuance, delivery and transfer of the Shares to be sold by the Company; (v) NASD fees and the fees, expenses and all other costs of qualifying the Shares for sale under the securities or Blue Sky laws of those states in which the Shares are to be offered or -20- 21 sold, including the reasonable fees and disbursements of Underwriters' counsel and such local counsel as may have been reasonably required and retained for such purpose; (vi) the filing fees incident to securing any review or approvals by or from the NASD; (vii) the filing fees of the Commission; (viii) the cost of furnishing to the Underwriters copies of the Registration Statement, Preliminary Prospectuses and Prospectuses as herein provided; (ix) the Company's travel expenses in connection with meetings with the brokerage community and institutional investors; (x) the fees for listing the Shares on The Nasdaq Stock Market; (xi) the cost of printing certificates for the Shares; (xi) the cost and charges of any transfer agent; (xii) the cost of preparing and binding closing binders for the Company, the Representatives and their counsel; (xiii) settlement in same day funds, if desired by the Company; and (xiv) all other costs and expenses reasonably incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. Subject to the reimbursement provided for in Section 5(c) below, the Underwriters agree to pay all fees and expenses of their legal counsel, other than counsel fees and expenses relating to the "Blue Sky" matters referred to in clause (v) above, and all advertising, telephone, travel, clerical or other office costs incurred or to be incurred by the Underwriters or by their sales personnel in connection with the offering of the Shares. (b) The Company shall pay as due any state registration, qualification and filing fees and any accountable out-of-pocket disbursements in connection with such registration, qualification or filing in the states in which the Representatives shall reasonably determine, to offer or sell the Shares. (c) In the event that the transactions contemplated by this Agreement are not consummated for any reason, other than as a result of the Underwriters' intentional refusal to proceed without cause or the Underwriters' breach of their obligations under this Agreement, or if the Representatives terminate this Agreement pursuant to Section 10(a) hereof, then the Company shall reimburse the Representatives for its accountable reasonable out-of-pocket expenses associated with the offering contemplated hereby, including, without limitation, reasonable fees and disbursements of counsel for the Underwriters, in an amount not to exceed $150,000. If the Firm Shares are not purchased or the Offering is not consummated as a result of the Underwriters' intentional refusal to proceed without cause or the Underwriters' breach of their obligations under this Agreement, the Representatives shall not be entitled to any expense reimbursement pursuant to the preceding sentence. For purposes of this paragraph, "cause" shall not include the Underwriter's inability to market the Offering where there have not been any events materially adverse to the Company or the -21- 22 financial markets in general. This amount shall be in addition to reimbursement of fees of counsel for the Underwriters incurred in qualifying the Shares under state securities or Blue Sky laws to be paid by the Company to the Representatives pursuant to Section 5(a)(v) above. 6. Conditions of Obligations of the Underwriters. The obligation of any of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the date of this Agreement and the Closing Date and the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 p.m. on the date of this Agreement. All filings, if any, required by Rules 424 and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission; and any request for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Underwriters' counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issuance, sale and delivery of the Shares, shall have been taken to the reasonable satisfaction of Underwriters' counsel, and such counsel shall have been furnished with such documents and information as they may reasonably have requested to enable them to pass upon the matters referred to in this subsection. (c) The Representatives shall have received on the Closing Date and the Option Closing Date, as the case may be, the opinion of Baker & Hostetler, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) Each of the Company and Discovery Systems has been duly incorporated and is validly existing as a corporation under the law of its state of incorporation. Each of the Company and Discovery Systems is in good standing under the law of its respective state of incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; the Company and its Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of -22- 23 their business as described in the Prospectus requires such qualification except where the failure to qualify would not have a materially adverse effect upon the business of the Company and its Subsidiaries taken as a whole. (ii) The Company has authorized and outstanding capital stock as set forth in the Prospectus under the heading "Capitalization". The outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable except to the extent that the risk of forfeiture and earnings requirement of the 600,000 shares of Common Stock issued to Jeffrey M. Wilkins may affect the full payment or nonassessability of such shares. All of the Shares conform to the description thereof contained in the Prospectus. The certificates for the Shares are in due and proper form under the Florida Business Corporation Act; the Firm Shares and the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for in accordance with the terms of this Agreement; and no preemptive rights of shareholders exist under applicable law or, to the knowledge of such counsel, by agreement or otherwise, with respect to any of the Shares or the issue and sale thereof. (iii) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (iv) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules and other financial or statistical information included therein). (v) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required. (vi) Discovery Systems has authorized and outstanding capital stock as set forth in Schedule II to this Agreement. The outstanding shares of Discovery Systems' capital stock have been duly authorized and validly issued and are fully paid and non-assessable and none of the outstanding shares of the capital stock of Discovery System was issued in violation of statutory or, to the best of such counsel's knowledge, contractual preemptive rights. To such counsel's knowledge, the -23- 24 ownership of the shares of Discovery Systems' capital stock is as set forth on Schedule II. (vii) To the knowledge of such counsel, there are no governmental or legal proceedings pending or threatened against the Company or any of its Subsidiaries of a character which are required to be disclosed in the Registration Statement or the Prospectus, by the Act or the applicable Rules and Regulations, except as described in the Prospectus. (viii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification, contribution or related or similar obligations hereunder, as to which no opinion need be expressed) will not (a) result in any violation of the Company's or Discovery Systems' charter or bylaws, or (b) to such counsel's knowledge, result in the material breach or violation of any of the terms and provisions, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which their properties are bound that is an exhibit to the Registration Statement, or any applicable statute, rule or regulation or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries or over any of their properties or operations; provided, however, that no opinion need be rendered concerning state securities or Blue Sky laws. (ix) The Company is not an investment company within the meaning of the Investment Company Act of 1940, as amended. (x) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Firm Shares or the Option Shares, as the case may be. This Agreement has been duly authorized by all necessary corporate action by the Company, and has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by the other parties hereto, constitutes its valid and binding obligation, enforceable in accordance with its terms, except (A) as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally and general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and (B) as enforceability of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy. -24- 25 (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) To such counsel's knowledge, neither the Company nor any of its Subsidiaries is presently in material breach of, or in material default under, any bond, debenture, note or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of their property is bound that is material to the financial condition, earnings, operations, business or business prospects of the Company and its Subsidiaries taken as a whole. (xiii) To such counsel's knowledge, except as set forth in the Registration Statement and the Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company, and no holders of securities of the Company have rights to registration of such shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company. For purposes of the opinion set forth in (x) above as it relates to the enforceability of this Agreement, such counsel may assume that the provisions in this Agreement selecting Pennsylvania law as the governing law have selected Ohio law without regard for principles of choice of law. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, as of the time it became effective under the Act, (ii) the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b), or (iii) the Registration Statement, or the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no -25- 26 view as to financial statements, schedules and other financial or statistical information included therein). (d) The Representatives shall have received from Pepper, Hamilton & Scheetz, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The Company is a corporation validly existing and in good standing under the laws of the State of Florida. (ii) The issuance and sale of the Shares by the Company pursuant to this Agreement have been duly authorized by all necessary corporate action and the Shares, upon delivery thereof against payment as provided for in this Agreement, will be validly issued, fully paid and nonassessable. (iii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. (iv) To the knowledge of such counsel, no stop order suspending effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or threatened by the Commission. (v) The Registration Statement and the Prospectus (except for the financial and statistical information referred to above, as to which such counsel need not express any opinion) as of the effective date of the Registration Statement, comply as to form in all material respects with the Act and the Rules and Regulations of the Act relating to registration statements and prospectuses. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently, and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement as of the time it became effective under the Act, (ii) the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b), or (iii) the Registration Statement or the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). -26- 27 (e) The Representatives shall have received at or prior to the Closing Date from Pepper, Hamilton & Scheetz a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the state securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) At the time this Agreement is executed and at the Closing Date and the Option Closing Date, as the case may be, the Representatives shall have received a letter addressed to them individually and as Representatives of the several Underwriters in form and substance reasonably satisfactory to such Representatives (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) from Deloitte & Touche LLP dated as of the date of this Agreement, the Closing Date and the Option Closing Date, as the case may be: (i) confirming that they are independent public accountants within the meaning of the Act and the Rules and Regulations and stating that the section of the Registration Statement under the caption "Experts" is correct insofar as it relates to them; (ii) stating that, in their opinion, the Company Financial Statements, together with the related notes and schedules as set forth in the Preliminary Prospectus, the Prospectus and the Registration Statement, examined by them and the summary, selected, and statistical financial information and data, and related notes thereto, to the extent derived from the financial statements examined by them and included in the Preliminary Prospectus, the Prospectus and the Registration Statement, comply in form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (iii) stating that, on the basis of specified procedures which included a reading of the Unaudited Financial Statements and the latest available unaudited interim consolidated financial statements of the Company (with an indication of the date of such statements), a reading of the minutes of the meetings of the shareholders and the Board of Directors of the Company and audit and compensation committees of such Board, if any, and inquiries to certain officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would cause them to believe that (A) the Unaudited Financial Statements and related schedules of the Company included in the Preliminary Prospectus, the Prospectus and the Registration Statement (1) do not comply in form in all material respects with the applicable accounting requirements of -27- 28 the Act and the Rules and Regulations, or (2) were not fairly presented in conformity with generally accepted accounting principles on a basis substantially consistent with that of the audited consolidated Company Financial Statements and related schedules included in the Preliminary Prospectus, the Prospectus and the Registration Statement; or (B) (1) at a specified date, not more than three business days prior to the date of such letter, there was any change in the capital stock or consolidated short-term or long-term debt or any decrease in consolidated net current assets, total assets or stockholders' equity as compared with the amounts shown in the March 31, 1995 unaudited consolidated balance sheet of the Company, other than as set forth in or contemplated by the Registration Statement and Prospectus, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (2) during the period from March 31, 1995 to a specified date not more than three business days prior to the date of such letter, there has been any decrease in revenues or in income from continuing operations or in total or per share net income of the Company as compared with the corresponding period of the prior year other than as set forth in the Registration Statement, or, if there was any such decrease or increase, setting forth the amount thereof; and (iv) stating that they have compared specific dollar amounts, numbers of shares and other information pertaining to the Company set forth in the Registraion Statement and Prospectus, which have been specified by the Representatives prior to the date of this Agreement, to the extent that such amounts, numbers, percentages and information may be derived from the general accounting or other records of the Company, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. (g) The Representatives shall have received on the Closing Date and the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased and the Company has complied with all of its covenants contained herein to be complied with prior to Closing and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any -28- 29 later date on which Option Shares are to be purchased, as the case may be. (ii) The Registration Statement has become effective under the Act, no stop order suspending the effectiveness of the Registration Statement has been issued, and, to his knowledge, no proceedings for such purpose have been taken or are contemplated by the Commission. (iii) He does not know of any litigation instituted or threatened against the Company or any of its Subsidiaries of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any contract required to be filed as an exhibit to the Registration Statement which is not so filed; and, to his knowledge, the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be. (iv) He has carefully examined the Registration Statement and the Prospectus and in his opinion, as of the effective date of the Registration Statement, the Registration Statement and the Prospectus did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, in his opinion, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (v) Except as described in the Registration Statement or Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (A) any material adverse change in the properties or assets described or referred to in the Registration Statement and the Prospectus or in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business; (B) any transaction which is material to the Company and its Subsidiaries, except transactions entered into in the ordinary course of business; (C) any obligation, direct or contingent, incurred by the Company or any of its Subsidiaries which is material to the Company or its Subsidiaries, except obligations incurred in the ordinary course of business; (D) any change in the capital stock or outstanding indebtedness of the Company or any of its Subsidiaries which is material to the Company or any of its Subsidiaries; or (E) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its Subsidiaries. -29- 30 (h) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties contained herein and related matters as the Representatives or Pepper, Hamilton & Scheetz, counsel for the Underwriters, may reasonably have requested. (i) The Firm Shares, and Option Shares, if any, shall have been approved by all requisite corporate action by the Company and shall have been approved for quotation upon official notice of issuance on the Nasdaq Stock Market. (j) The Company shall have obtained and delivered to you an agreement from each member of the Board of Directors of the Company and each officer (as such term is defined in Rule 16a-1(f) under the Exchange Act) of the Company in writing prior to the date hereof, that such person will not, during the Restricted Period, offer to sell, sell, contract to sell or otherwise sell or dispose of, any shares of Common Stock of the Company, any options or warrants to purchase any shares of Company Stock of the Company or any securities convertible into or exchangeable for shares of the Common Stock of the Company owned by such person or entity or with respect to which such person has the power of disposition otherwise than (i) in private transactions not effected through any broker or dealer and not through any public market or stock exchange, or (ii) to his or her spouse, children, descendants, parents or grandparents or to a trust for the benefit of one or more of such persons, provided that each transferee and other person acquiring shares of Common Stock agrees in writing to be bound by such lock-up agreement. Each such person shall also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of shares of Common Stock held by such person except in compliance with the foregoing restrictions. In addition, A. Grant Bowen, a director of the Company, may sell up to 10,000 shares of the Common Stock, in the aggregate during the Restricted Period (in addition to other sales permitted in this subparagraph). (k) The NASD shall have indicated that it had no objection to the underwriting arrangements pertaining to the sale of the Shares and the participation by the Underwriters in the sale of the Firm Shares and the Option Shares. (l) There shall have been duly tendered to the Representatives for the respective accounts of the Underwriters certificates representing all of the Shares to be purchased by the Underwriters on the Closing Date or any Option Closing Date, as the case may be. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representatives and to Pepper, Hamilton & Scheetz, counsel for the Underwriters. -30- 31 If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram or by facsimile at or prior to the Closing Date or the Option Closing Date, as the case may be, and any such termination shall be without liability of any party to any other party, except to the extent provided in Sections 5 and 8 of this Agreement, which Sections shall survive such termination. 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the condition that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and their respective officers, directors, employees and agents, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each Underwriter and each such other person or entity previously described in this Paragraph 8(a) is hereinafter sometimes referred to as an "Indemnified Underwriter Person" and collectively as the Indemnified Underwriter Persons") from and against all claims, liabilities, losses or damages (or actions or proceedings in respect thereof) to which any such Indemnified Underwriter Person may become subject under the Act or otherwise, insofar as such claims, liabilities, losses or damages (or actions or proceedings in respect thereof) arise out of, are related to or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, (iii) any enforcement of any of the Underwriters' rights hereunder, or (iv) any misrepresentation with respect to or breach or violation of the representations, warranties and covenants of the Company set forth in this Agreement or any Certificate delivered pursuant to this Agreement, or (v) any written misrepresentations of the Company, or the officers, directors, employees or agents (other than any Indemnified Underwriter Person) of the Company in such capacities in connection with the offering and sale of the Shares, and will reimburse each Indemnified Underwriter Person for any legal or other expenses -31- 32 reasonably incurred by such Indemnified Underwriter Person in connection with investigating or defending any such claim, liability, loss, damage, action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such claim, liability, loss or damage arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives and specifically approved in writing by the Representatives for use in the preparation thereof and provided further that the indemnification contained in this paragraph with respect to, based on or arising out of an untrue statement or omission or alleged untrue statement or omission in a Preliminary Prospectus shall not inure to the benefit of any Underwriter or Indemnified Underwriter Person with respect to a claim made by a third party if (i) a copy of the Prospectus, as amended or supplemented, shall have been received by the Representatives prior to the date on which the Representatives shall be required by the Act and the Rules and Regulations to deliver such Prospectus, (ii) such Prospectus, as amended or supplemented shall not have been delivered or sent to the person making claims or seeking damages or to impose liabilities or losses within the time required by the Act and the Rules and Regulations, (iii) the untrue statement or omission or the alleged untrue statement or omission was corrected in the Prospectus, as amended or supplemented and (iv) the delivery of such Prospectus would have constituted a complete defense to the claim asserted by such person. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, (each of the Company and each such other person or entity previously described in this Paragraph 8(b) is hereinafter sometimes individually referred to as an "Indemnified Company Person" and collectively as the Indemnified Company Persons"), from and against all claims, liabilities, losses or damages (or actions or proceedings in respect thereof) to which any such Indemnified Company Person may become subject under the Act or otherwise, insofar as such claims, liabilities, losses or damages (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or -32- 33 necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse each Indemnified Company Person for any legal or other expenses reasonably incurred by such Indemnified Company Person in connection with investigating or defending any such claim, liability, loss, damage, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives and specifically approved in writing by the Representatives for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense; provided, however, that the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to counsel for the indemnifying party) for all such indemnified parties. Such firm shall be designated in writing by the Representatives in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the -33- 34 indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any claims, liabilities, losses or damages (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such claims, liabilities, losses or damages (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such claims, liabilities, losses or damages (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that in the event the Underwriters shall have purchased any Option Shares hereunder, any determination of the relative benefits received by the Company or the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company and the underwriting discounts and commissions received by the Underwriters from the sale of such Option Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the -34- 35 order and method of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the claims, liabilities, losses or damages (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Each indemnifying party agrees that it will not settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought from it by an indemnified party (whether any indemnified party is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party hereunder from all liability arising out of such claim, action, suit or proceeding. (g) If any personnel of any indemnified party appear as witnesses, are deposed or are otherwise involved in any action (except to the extent that it is finally judicially determined that such action resulted from such indemnified party's gross negligence or willful misconduct) against any indemnified party, the indemnifying party agrees to reimburse such indemnified party for all expenses (including fees and expenses of counsel) incurred by it by reason of any of its personnel being involved in any such action and will compensate such person for time spent by its employees preparing for and -35- 36 testifying as witnesses in any deposition or proceeding at the indemnified party's customary rates, as the case may be. 9. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your best efforts to procure within 24 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 24 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Sections 5 and 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Termination. This Agreement may be terminated by the Representatives by notice to the Company as follows: -36- 37 (a) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any materially adverse change or any development involving a prospective materially adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, operations, management, business or business prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any material adverse change in the financial markets in the United States or internationally or any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change on the financial markets of the United States would, in the Representatives' reasonable judgment, make the offering or delivery of the Shares impracticable, (iii) suspension of trading in securities on the New York Stock Exchange, the American Stock Exchange, the NASDAQ Stock Market or the over-the-counter market or limitation on prices (other than limitations on hours or numbers of days of trading) for securities, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the Representatives' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company and its Subsidiaries taken as a whole, (v) declaration of a banking moratorium by either federal or New York State authorities, (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Representatives' reasonable opinion has a material adverse effect on the securities markets in the United States; (vii) or trading in any securities of the Company shall have been suspended or halted by the NASDAQ Stock Market or the Commission; or (b) as provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by the Representatives, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events descried in subparagraph (a) above or as provided in Sections 6 and 9 of this Agreement. 11. Default by the Company. If the Company shall fail at the Closing Date to sell and deliver the number of Offered Shares that it is obligated to sell, then this Agreement shall -37- 38 terminate without any liability on the part of any non-defaulting party except to the extent provided in Section 5 and except that the provisions of Section 8 shall remain in effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 12. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telegraphed or sent by facsimile and confirmed (postage and costs prepaid) as follows: if to the Underwriters, to Legg Mason Wood Walker, Incorporated, Legg Mason Tower, 111 South Calvert Street - 20th Floor, Baltimore, Maryland 21202, Attention: Edmund J. Cashman, Jr., Facsimile (410) 539-4508, with a copy to Pepper, Hamilton & Scheetz, 3000 Two Logan Square, Philadelphia, Pennsylvania 19103, Attention: Barry M. Abelson, Esquire, Facsimile (215) 981-4750, if to the Company, to Metatec Corporation, 7001 Metatec Boulevard, Dublin, Ohio, Attention: Jeffrey M. Wilkins, Facsimile (614) 766-3146, with a copy to Baker & Hostetler, 65 East State Street, Columbus, Ohio 43215, Facsimile (614) 462-2616, Attention: Gary A. Wadman, Esquire. 13. Governing Law: Waiver of Trial by Jury: Severability. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania, without giving effect to the principles of conflicts of law thereof. For the purpose of expediting the resolution of any controversy, claim or dispute arising out of or related to this Agreement or the transactions or agreements contemplated hereby, the Company and the Underwriters hereby waive trial by jury. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed severable from the remainder of this Agreement, and the remaining terms and provisions contained in this Agreement shall be construed to preserve to the maximum permissible extent the intent and purposes of this Agreement. Any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such term or provision in any other jurisdiction. 14. Successors. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. 15. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of -38- 39 any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement contains the entire agreement among the parties hereto with respect to the matters governed hereby. All section headings used herein are for convenience and ease of reference only and do not constitute part of this Agreement and shall not be referred to for the purpose of defining, interpreting, construing or enforcing any of the provisions of this Agreement. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. One or more counterparts of this Agreement may be delivered by facsimile, with the intention that they shall have the same effect as an original counterpart hereof. If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, METATEC CORPORATION By ------------------------- Name: William H. Largent Title: Vice President, Finance The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. LEGG MASON WOOD WALKER, INCORPORATED VAN KASPER & COMPANY As Representatives of the several Underwriters listed on Schedule I hereto By: Legg Mason Wood Walker, Incorporated By: ------------------------------ Authorized Representative By: Van Kasper & Company -39- 40 By: ------------------------------ Authorized Representative -40- 41 SCHEDULE I Schedule of Underwriters
Number of Firm Shares Underwriter to be Purchased - ----------- --------------- Legg Mason Wood Walker, Incorporated Van Kasper & Company Total 1,500,000 =========
-41- 42 SCHEDULE II METATEC/DISCOVERY SYSTEMS, INC. -- Jurisdiction of Incorporation, Authorized Capital and Percentage Ownership
Authorized Subsidiary Jurisdiction % Ownership Capital - ---------- ------------ ----------- ---------- Metatec/Discovery Systems, Inc. Ohio 100% 500
-42- 43 SCHEDULE III Subsidiaries of the Company, Jurisdiction of Incorporation, Authorized Capital and Percentage Ownership
Authorized Subsidiary Jurisdiction % Ownership Capital - ---------- ------------ ----------- ---------- Metatec/Discovery Systems, Inc. Ohio 100% Sterling Investors Corporation Florida 100% Sterling Health Service Corporation Florida 80%
-43- EX-5 3 METATEC EX-5 1 EXHIBIT 5 May 16, 1995 Metatec Corporation 7001 Metatec Boulevard Dublin, Ohio 43017 Gentlemen: We are acting as counsel to Metatec Corporation, a Florida corporation (the "Company"), in connection with its Registration Statement on Form S-1 (File No. 33-58733), as amended (the "Registration Statement"), filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, to register 1,725,000 common shares, $0.10 par value, of the Company (the "Shares"). In connection therewith, we have examined the Company's Amended and Restated Articles of Incorporation, the Company's Amended and Restated Bylaws, the records, as exhibited to us, of the corporate proceedings of the Company, and such other documents and records as we considered necessary for purposes of this opinion. In rendering this opinion, we have assumed, without independent investigation, the genuineness of all signatures on all documents examined by us, the conformity to original documents of all documents submitted to us as certified or facsimile copies and the authenticity of all such documents. Based upon the foregoing, we are of the opinion that: (1) The Company is a corporation duly organized and validly existing under the laws of the State of Florida; and (2) The Shares have been duly authorized and, when sold and paid for in the manner contemplated by the Registration Statement, will have been validly issued and will be fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the caption "Legal Matters" in the Prospectus which is part of the Registration Statement. Very truly yours, /s/ Baker & Hostetler --------------------- BAKER & HOSTETLER EX-23.B 4 METATEC EX-23(B) 1 EXHIBIT 23(b) INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 33-58733 of Metatec Corporation on Form S-1 of our report dated February 15, 1995, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated February 15, 1995 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Columbus, Ohio May 17, 1995 EX-24 5 METATEC EX-24 1 POWER OF ATTORNEY ----------------- The undersigned, a director and/or officer of Metatec Corporation, a Florida corporation (the "Company"), hereby constitutes and appoints Jeffrey M. Wilkins and William H. Largent, and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, with full power and authority in each and said attorney-in-fact and agent, to sign for the undersigned and in his name as a director and/or officer of the Company and in any and all other capacities, the Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-58733) of the Company and any and all subsequent amendments (including post-effective amendments) to such Registration Statement to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in connection with the proposed public offering by the Company of 1,725,000 common shares, $.10 par value, of the Company, including shares to be issued upon exercise of the underwriters' over-allotment option, and to file such amended Registration Statement with all exhibits and other related documents and any and all such further amendments with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all acts taken by each said attorney-in-fact and agent, or any of them, or their substitutes, as herein authorized. Date: May 15, 1995 /s/ James V. Pickett -------------------- Signature James V. Pickett -------------------- Print Name Director -------------------- Position(s) with Company POWER OF ATTORNEY ----------------- The undersigned, a director and/or officer of Metatec Corporation, a Florida corporation (the "Company"), hereby constitutes and appoints Jeffrey M. Wilkins and William H. Largent, and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, with full power and authority in each and said attorney-in-fact and agent, to sign for the undersigned and in his name as a director and/or officer of the Company and in any and all other capacities, the Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-58733) of the Company and any and all subsequent amendments (including post-effective amendments) to such Registration Statement to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in connection with the proposed public offering by the Company of 1,725,000 common shares, $.10 par value, of the Company, including shares to be issued upon exercise of the underwriters' over-allotment option, and to file such amended Registration Statement with all exhibits and other related documents and any and all such further amendments with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all acts taken by each said attorney-in-fact and agent, or any of them, or their substitutes, as herein authorized. Date: May 16, 1995 /s/ Gregory T. Tillar --------------------- Signature Gregory T. Tillar --------------------- Print Name President, Chief Operating Officer and Director ---------------------- Position(s) with Company -----END PRIVACY-ENHANCED MESSAGE-----