-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E9anyrNqfDHj6ZBmfOK1eD1EGVHkRwI2LjnGpwTIB/r6CN4r/vZ7eBEC+plzetKk 7pbdPZr7cYgT87AvIfIF4Q== 0000950152-99-002792.txt : 19990402 0000950152-99-002792.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002792 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 10-K SEC ACT: SEC FILE NUMBER: 000-09220 FILM NUMBER: 99579953 BUSINESS ADDRESS: STREET 1: 7001 METATEC 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 10-K 1 METATEC CORPORATION 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 0-9220 METATEC CORPORATION (Exact name of Registrant as specified in its charter) FLORIDA 59-1698890 (State of Incorporation) (I.R.S. Employer Identification No.) 7001 Metatec Boulevard Dublin, Ohio 43017 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (614) 761-2000 Securities registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Shares, $.10 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Shares held by nonaffiliates of the Registrant as of March 24, 1999, was $29,370,053. On March 24, 1999, the Registrant had 6,075,614 Common Shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for its annual meeting of shareholders to be held on April 20, 1999, which proxy statement was filed with the Securities and Exchange Commission on March 22, 1999, are incorporated by reference into Part III, Items 10, 11, 12, and 13 of this Report. 2 METATEC CORPORATION FORM 10-K PART I ITEM 1. BUSINESS GENERAL Metatec Corporation, an international information distribution company ("Metatec"), helps customers utilize CD-ROM (compact disc-read only memory) and DVD-ROM (digital versatile disc-read only memory) technologies to publish and distribute information and software. Metatec operates ISO-9000 certified manufacturing and fulfillment sites in Ohio, California and The Netherlands. Metatec offers its customers a variety of services, including data preparation and mastering, optical disc replication and printing, packaging, bulk distribution and individual fulfillment, inventory management, project management, and a variety of electronic monitoring and tracking services. Metatec's customers represent a host of industries and organizations, such as publishing firms, computer hardware and software companies, government agencies, and professional associations. Metatec and its subsidiaries are hereinafter collectively referred to as the "Company." CD-ROM technology combines audio, video, text, and graphics in one medium with the capability to store, search, and retrieve large quantities of information. One CD-ROM can contain up to 650 megabytes of data. 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. DVD-ROM technology represents a new type of optical disc which can hold up to 18 gigabytes of information, or over twenty times the amount of the current CD-ROM. It is projected that DVD-ROM will coexist and eventually replace CD-ROM and expand the utilization of optical disc with greater graphic and video applications. This expansion will first require new DVD-ROM drives to be installed in order to have significant market penetration. DVD-ROM drives began to be introduced during 1997. In September 1998, the Company purchased the CD-ROM services business assets of Imation Corporation ("Imation"). These assets are used in connection with the Company's manufacture and distribution of CD-ROM and DVD-ROM products and related services, including data preparation and mastering, disc replication, printing, and electronic tracking. The assets purchased included Imation's plant operations in Fremont, California, Breda, The Netherlands, and Menomonie, Wisconsin. The Menomonie plant operations were transferred to the Company's Dublin, Ohio, manufacturing plant during the fourth quarter of 1998 after completion of a transitional operations period in Menomonie. A client services center providing customer and technical support continues to be maintained in Menomonie. The acquisition more than doubled the Company's revenues, expanded its operations to Europe, expanded its major operating facilities from one to three, and added approximately 200 new employees. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisition of Imation's CD-ROM Services Business. During 1997, the Company exited a line of business which provided a broad range of software development and media preparation services for customers creating custom CD-ROM products and frequently published periodicals on optical media. This line of business, known as the access services group, also offered network services for information publishers desiring integrated worldwide web access to support their CD-ROM publications. The Company exited this line of business because the market for 3 providing custom multimedia products was significantly reduced with the increasing availability of low-cost software and publishing tools. Metatec is a Florida corporation which was incorporated on September 9, 1976. FINANCIAL INFORMATION ON INDUSTRY SEGMENTS Financial information on industry segments as required by Item 101(b) of Regulation S-K is set forth in Note 12 of the Notes to the Consolidated Financial Statements, which Note is part of the financial statements contained in Item 8 of this Form 10-K, which Note is incorporated herein by reference. 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. 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. 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. PRINCIPAL PRODUCTS AND SERVICES The Company offers its customers a variety of services, including data preparation and mastering, optical disc replication and printing, packaging, bulk distribution and individual fulfillment, inventory management, project management, and a variety of electronic monitoring and tracking services. The Company's strategy targets customers which generally have time-sensitive and recurring information distribution requirements, demand high quality disc manufacturing, and need fulfillment and distribution services. The Company manufactures CD-ROMs and DVD-ROMs, as well as audio CDs for the radio syndication programming services market. The Company's 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. 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. During 1998, the Company expanded its packaging and fulfillment services. The Company provides full-service disc packaging, warehousing, and direct-to-user product shipping. The Company is currently constructing a 151,000 square foot distribution center at its Dublin, Ohio location to expand its packaging and fulfillment services. 4 The Company operates manufacturing and fulfillment sites in Dublin, Ohio, Fremont, California, and Breda, The Netherlands. These state-of-the-art, ISO-9000 certified, facilities operate seven days a week, 24 hours per day, permitting the Company to offer one-day turnaround of a master CD and high quality CD replicas for distribution for its CD-ROM, DVD-ROM, and radio syndication customers. The ISO-9000 quality system certification means that the Company's manufacturing facilities meet worldwide standards for quality practices. The Company's manufacturing services include premastering and mastering of the discs, from which duplicate CD-ROMs, DVD-ROMs, and audio CDs can be made, disc label design and printing, packaging and fulfillment services. During the last five years, the Company has increased its mastering capacity. The Company believes that its increased mastering capacity is a competitive advantage, allowing the Company to react more responsively to customer timing requirements. 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 to twelve month supply of this material and is currently investigating other alternatives to this material. The Company has multiple sources for all other raw materials and supplies used in its manufacturing operations. The Company does not believe that compliance with federal, state, and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has had or will have a material effect upon the capital expenditures, earnings, or competitive position of the Company. The Company does not anticipate any material capital expenditures for environmental control facilities for 1999. MARKETING The Company markets it products and services through its own sales force of 58 employed associates based in Breda, The Netherlands, San Francisco, Chicago, Washington, D.C., New York, Denver, Dallas, Boston, Atlanta, and Seattle, 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 maintains customer support operations at all of its manufacturing facilities and at a relocated client support center in Menomonie, Wisconsin. COMPETITION The Company has a number of competitors, some of which are larger and have greater financial resources than the Company. The Company believes that the principal competitive factors in the CD-ROM and DVD-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 and DVD-ROM market and the radio syndication segment of the audio CD market. The Company differentiates itself from its competitors by providing manufacturing flexibility (including quick turnaround times), personalized customer service, fulfillment services, and complete CD-ROM and DVD-ROM solutions. Many firms demand a manufacturer like the Company which can provide additional services such as label design and printing, packaging, and distribution. 5 EMPLOYEES The Company employed approximately 800 persons as of March 15, 1999. Approximately 520 employees are directly involved in the manufacturing and distribution process, and the remainder are involved in sales, administration, and support. The Company believes that its relations with its employees is good. ITEM 2. PROPERTIES The Company owns a 205,000 square foot office and manufacturing facility situated on approximately 25 acres located at 7001 Metatec Boulevard, Dublin, Ohio. The Company's principal executive offices are located at this facility. This facility also includes customer support operations and a distribution and fulfillment center. In October 1998, the Company began construction of an approximate 151,000 square foot distribution center at this location. A first mortgage on the real estate and improvements at this location secure the $7,000,000 construction loan for the new distribution center. The Company currently leases approximately 50,000 square feet of manufacturing, customer support, and distribution and fulfillment facilities in Fremont, California. The Company also leases approximately 25,000 square feet of manufacturing, customer support, and distribution and fulfillment facilities in Breda, The Netherlands. The Company also leases office space in San Francisco, Chicago, Washington, D.C., New York, Denver, Dallas, Boston, Atlanta, and Seattle for use as regional sales offices and in Menomonie, Wisconsin for use as a client services center. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year. 6 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their respective ages and present positions with the Company are as follows:
Officers Age Present Position(s) with the Company -------- --- ------------------------------------ Jeffrey M. Wilkins 54 Chairman of the Board, President and Chief Executive Officer Julia A. Pollner 36 Senior Vice President, Finance, Secretary and Treasurer Alexander P. Deak 38 Vice President and Chief Information Officer Nicholas J. Fortine 33 Vice President, Sales David P. Iverson 38 Vice President, Marketing Tammi Nance Spayde 36 Vice President, Organizational Development Martin G. Stokman 38 Vice President, Europe Christopher L. Winslow 37 Vice President, Manufacturing Services
Mr. Wilkins has been Chairman of the Board and Chief Executive Officer of the Company since August 1989. Ms. Pollner has been Senior Vice President, Finance, Treasurer, and Secretary since May 1997, and has held various accounting and finance positions with the Company since 1987. Mr. Deak has been Vice President and Chief Information Officer of the Company since December 1994, and has held various information services and product management positions with the Company since 1990. Mr. Fortine has been Vice President, Sales of the Company since August 1998, and has held various sales and marketing positions with the Company since 1992. Mr. Iverson has been Vice President, Marketing of the Company since January 1999, and joined the Company in October 1998, in connection with the Company's acquisition of the CD-ROM services business assets of Imation. From 1997 to 1998, Mr. Iverson was Imation's business manager for its CD-ROM services business in Europe. From 1995 to 1997, Mr. Iverson was a manager of a European distribution center for 3M, the former owner of Imation. 7 Ms. Spayde has been Vice President, Organizational Development of the Company since August 1998. From 1984 to August 1998, Ms. Spayde held various human resources and administration positions with OhioHealth Corporation, an entity engaged in the ownership and operation of hospitals. Mr. Stokman has been Vice President, Europe of the Company since January 1999, and joined the Company in October 1998, in connection with the Company's acquisition of the CD-ROM services business assets of Imation. From 1997 to 1998, Mr. Stokman was Imation's business manager for its CD-ROM services business in Europe. From 1995 to 1997, Mr. Stokman was a manager of a European distribution center for 3M, the former owner of Imation. Mr. Winslow has been Vice President, Manufacturing Services since 1994. Mr. Winslow has held various marketing and manufacturing positions with the company since 1992. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Company Shares are traded on the Nasdaq National Market system under the symbol META. The following table reflects the range of reported high and low last sales prices for the Common Shares for the periods indicated.
High Low For the quarter ended 1998 March 31 $5.00 $4.00 June 30 $6.50 $4.63 September 30 $5.81 $3.50 December 31 $8.00 $3.38 For the quarter ended 1997 March 31 $7.00 $3.88 June 30 $6.00 $2.63 September 30 $6.38 $5.25 December 31 $6.00 $4.38
As of March 15, 1999, there were 3,906 holders of record of the Common Shares, and the last sales price per share on that date, as reported by the Nasdaq National Market system, was $5.69. The Company has never paid cash dividends on the Common Shares. The payment of dividends is within the discretion of the Company's board of directors and depends upon the earnings, the capital requirements, and the 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, the terms of the Company's credit facilities prohibit it from paying cash dividends or making any other distributions of any kind to shareholders without the prior consents of the administrative agent of these credit facilities and the banks providing two-thirds of the funding for such facilities. 8 ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data
1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Sales $80,919,128 $48,933,634 $46,150,105 $39,261,463 $28,942,748 Earnings before income taxes $ 2,684,769 $1,040,534 $3,398,728 $4,140,980 $2,424,653 Net earnings $ 1,422,769 $ 491,534 $2,040,728 $2,808,980 $1,692,653 Earnings per common share: Basic $ 0.23 $ 0.07 $ 0.29 $ 0.44 $ 0.34 Diluted $ 0.23 $ 0.07 $ 0.29 $ 0.44 $ 0.33 Weighted average number of common shares outstanding: Basic 6,058,414 6,791,836 7,064,194 6,333,706 4,983,879 Diluted 6,115,084 7,189,266 7,159,775 6,441,105 5,066,447 Total assets $105,442,814 $52,871,893 $52,517,477 $50,076,076 $32,556,004 Long-term liabilities $41,031,569 $5,893,410 $1,335,105 $ 845,875 $7,959,634 Shareholders' equity $41,949,897 $41,194,053 $45,265,791 $43,301,079 $18,276,129
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACQUISITION OF IMATION'S CD-ROM SERVICES BUSINESS On September 11, 1998, Metatec purchased the CD-ROM services business assets of Imation Corporation ("Imation") for $39,800,000. This acquisition significantly impacted the Company's 1998 results of operations. The asset purchase included Imation's plant operations in Fremont, California; Breda, The Netherlands; and Menomonie, Wisconsin. The Menomonie plant operations were transferred to Metatec's Dublin, Ohio, manufacturing plant by the end of the fourth quarter of 1998 after completion of a transitional operations period in Menomonie. A client services center providing customer and technical support will be maintained in Menomonie. The purchase price for the Imation assets was $39.8 million, which price is subject to a post-closing adjustment based upon the closing date working capital statement related to working capital assets transferred by Imation. The Company financed the asset purchase through a $30.0 million term loan facility and a portion of a $20.0 million revolving loan facility. These credit facilities were obtained through a participation arrangement between The Huntington National Bank and Bank One, NA. See "Liquidity and Capital Resources" for a further discussion of these credit facilities. RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 Net sales in 1998 were at a record level of $80,919,000, an increase of $31,985,000, or 65% over 1997. This increase resulted primarily from CD-ROM manufacturing sales increasing $31,834,000 to $73,854,000 for 1998, or 76%. A significant portion of this increase was attributable to sales from the CD-ROM services business acquired from Imation. Radio syndication sales decreased $751,000, or 13%, in 1998 primarily as a result of some customers choosing to use CD-Recordable as a distribution method for smaller size orders. DVD sales accounted for $190,000 in 1998, as compared to $6,000 in 1997. Gross profit was 29% of net sales for 1998 as compared to 31% of net sales for 1997. This decrease is primarily attributed to additional costs incurred related to the Wisconsin facility that was closed in December 1998. In addition, sales price erosion continued during 1998, albeit at a slower rate than in prior years. Selling, general and administrative expenses ("SG&A") increased to $18,980,000, or 23% of net sales, for 1998 as compared to $13,847,000, or 28% of net sales, for 1997. SG&A expenses decreased in 1998 as a percentage of sales due to the leverage achieved on the significantly increased sales dollars. Business realignment expenses of $825,975 were incurred during 1998. These expenses primarily related to integration costs due to the Imation CD-ROM services business acquisition and certain rent, utilities and labor expenses associated with closing the acquired Wisconsin facility. Of these expenses, $367,813 had been paid as of December 31, 1998. 10 Investment income was $35,000 for 1998 as compared to $49,000 for 1997. The decrease in investment income was a result of lower cash and cash equivalent balances. Interest expense for 1998 was $1,186,000 as compared to $74,000 for 1997. During 1998 the Company borrowed against its revolving line of credit and term loan as more fully discussed in the Financial Condition section. Income tax expense was $1,262,000 in 1998, or an effective tax rate of 47%, as compared to $549,000 in 1997, or an effective tax rate of 53%. The 1998 effective tax rate decreased due to the lessened effect of the non deductibility of certain goodwill for income tax purposes. This goodwill was related to shares earned by an officer/shareholder which vested in late 1995. Net earnings for 1998 were $1,423,000, or basic and diluted earnings per common share of $.23, as compared to 1997 net earnings of $492,000, or basic and diluted earnings per common share of $.07. This increase was primarily a result of increased sales, reduced SG&A expenses as a percentage of sales, and a lower effective tax rate as noted above. RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 Net sales in 1997 were $48,934,000, an increase of $2,784,000, or 6% over 1996. This increase resulted primarily from CD-ROM and Radio Syndication manufacturing increasing $6,252,000 to $47,673,000 for 1997, or 15%. The Access Services Group (formerly known as the New Media Solutions Group) decreased $3,468,000 to $1,261,000 for 1997, or 73%. This combined net sales increase of $2,784,000 was primarily as a result of solid CD-ROM replication growth. During 1997 the decision was made to exit the business segment known as the Access Services Group. Gross profit was 31% of net sales for 1997 as compared to 36% of net sales for 1996. This decrease is primarily attributed to an under utilization of manufacturing capacity during 1997. In addition, sales price erosion continued during 1997. Selling, general and administrative expenses ("SG&A") increased to $13,847,000, or 28% of net sales, for 1997 as compared to $13,492,000, or 29% of net sales, for 1996. A restructuring charge of $206,000 occurred during 1997. This charge related to a reorganization and downsizing of the Access Services Group. Investment income was $49,000 for 1997 as compared to $303,000 for 1996. The decrease in investment income was a result of lower cash and cash equivalent balances. Interest expense for 1997 was $74,000 as compared to $19,000 for 1996. During 1997 the Company borrowed against its revolving line of credit. Income tax expense was $549,000 in 1997, or an effective tax rate of 53%, as compared to $1,358,000 in 1996, or an effective tax rate of 40%. The 1997 effective tax rate increased due to the non deductibility for income tax purposes of the additional goodwill which began being 11 charged to earnings in 1996. This goodwill charge was $410,000 and is related to shares earned by an officer/shareholder which vested in late 1995. Net earnings for 1997 were $492,000, or basic and diluted earnings per common share of $.07, as compared to 1996 net earnings of $2,041,000, or basic and diluted earnings per common share of $.29. This decrease was primarily a result of lower gross profit, costs associated with exiting the Access Services business, and a higher effective tax rate as noted above. 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 sales of the Company produced growth in real terms in 1998 and 1997. Net sales increased primarily due to increased sales of CD-ROM and related products, rather than increases in inflation. FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES The Company financed its business in 1998 through cash generated from operations, the use of debt, and the use of available cash balances. Historically, the Company also financed business needs through the issuance of common stock. Cash flow from operating activities was $19,292,000, $8,200,000, and $8,992,000 for 1998, 1997 and 1996, respectively. During 1998, the Company continued to increase its manufacturing capacity over the 1997 levels. These additions, along with recurring capital needs, resulted in the purchase of $16,030,000 in property, plant and equipment during 1998 as compared to $8,933,000 in 1997 and $13,011,000 in 1996. The Company also has commitments under contracts of approximately $7,000,000 for a 151,000 square foot distribution center in Dublin, Ohio. The Company began construction of the distribution center in October 1998. The Company is currently financing the construction through cash generated through operations and funds available under the Company's new $7,000,000 construction loan facility, discussed below. The Company is continuing to evaluate additional long term real estate financing options. On September 11, 1998, the Company purchased the CD-ROM services business assets of Imation for $39,800,000, which price is subject to a post-closing adjustment based upon the closing date working capital statement related to working capital assets transferred by Imation. The Company financed this asset purchase through a $30,000,000 term loan facility and a portion of a $25,000,000 revolving loan facility, discussed below. The Huntington National Bank and Bank One, NA have provided a $30,000,000 term loan facility and a $25,000,000 revolving loan facility to the Company (the "Credit Facilities"). In December 1998 the revolving loan was amended to $20,000,000 in connection with the addition of the $7,000,000 construction loan, discussed below. The following is a summary of the terms of the Credit Facilities. The revolving loan facility is available for five years and replaced the Company's prior $15,000,000 line of credit. The term loan facility is payable over five years in 12 quarterly principal payments which escalate over the term of the loan. The term loan facility and a portion of the revolving loan facility were used to finance the Imation asset purchase. The remaining portion of the revolving loan facility is available for general corporate purposes. Borrowings under the Credit Facilities bear interest, at the Company's option, at either the federal funds rate plus 50 basis points or prime rate (whichever of the two are higher) or the London Interbank offered Rate (LIBOR) rate plus a margin based upon the Company's debt coverage ratio (which ranges from not less than 75 basis points to not more than 150 basis points). The Credit Facilities are secured by a first lien on all non-real estate business assets of the Company and a pledge of the stock of the Company's subsidiaries. The Company is required to comply with certain financial and other covenants. In January 1999, the Company received a $7,000,000 construction loan to finance the distribution center being constructed. Borrowings under this construction loan bear interest, at the Company's option, at either the prime rate or the LIBOR rate plus 165 basis points. The construction loan contains an option to convert the principal balance to a 20 year term loan, at various interest rate options. The construction loan is secured by a mortgage in the real property, fixtures, and improvements located at the Dublin, Ohio site. The Company has cash and cash equivalents of $2,557,000 as of December 31, 1998 and additionally has available $7,500,000 under its revolving loan agreement. Management believes that these funding sources, plus cash to be generated from operations will provide sufficient capital to meet the current and anticipated future business needs of the Company. In addition, management continues to review other long term financing options. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in a system failure or miscalculations causing disruptions of uncertain duration in operations including, among other things, a temporary inability to process transactions, or engage in similar normal business activities. The Company utilizes information technology ("IT") and non-IT systems which are essential to its operations. Non-IT systems typically include embedded technology, such as microcontrollers. The Company created a task force during 1997 to address the Company's Year 2000 issues, and this task force has been actively assessing the Company's Year 2000 readiness since that time. As of December 31, 1998, all of the Company's proprietary IT systems and applications were Year 2000 compliant. In addition, non-proprietary IT systems utilized by the Company are either Year 2000 compliant or will be Year 2000 compliant upon installation of available patches and upgrades. The Company currently believes that all of its IT systems will be Year 2000 compliant by June 30, 1999. The Company also performed a Year 2000 readiness review of the CD-ROM services business assets acquired from Imation. A sample of each type of manufacturing equipment in the Dublin facility has been tested for continued operation with dates after January 1, 2000. Known 13 problems have been documented and suppliers notified. Testing of each production line in Dublin is currently underway. Similar testing is underway for the manufacturing equipment acquired from Imation. The Company expects testing to be completed and all patches and upgrades to be in place by June 30, 1999. The Company's task force is working with third party vendors with which it has significant relationships to verify that they are Year 2000 compliant. The Company currently believes that all Year 2000 issues will be resolved in a timely manner and that costs associated with Year 2000 compliance issues will not be material to the Company's financial position or results of operations. However, there is a risk that third parties will not achieve Year 2000 compliance in a timely manner, which could have an adverse effect on the Company's operations. The task force intends to develop appropriate contingency plans as necessary to address Year 2000 compliance issues as they arise. The Company currently believes that the only costs associated with Year 2000 compliance issues include in-house time associated with administration, review and testing of systems. These costs have not been calculated, but the Company believes the costs are not material. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information, all other statements made in this report are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause the Company's actual results to differ materially from those projected. Such risks and uncertainties that might cause such a difference include, but are not limited to, changes in general business and economic conditions, changes in demand for CD-ROM products, excess capacity levels in the CD-ROM industry, the introduction of new products by competitors, increased competition (including pricing pressures), changes in manufacturing efficiencies, changes in technology, failure to achieve Year 2000 compliance by the Company or third party vendors with which it has significant relationships, and other risks indicated in the company's filings with the Securities and Exchange Commission, including Form 10-K for Metatec's year ended December 31, 1998. 14 STATEMENT OF MANAGEMENT RESPONSIBILITY The consolidated financial statements of Metatec Corporation are the responsibility of management, and those statements have been prepared in accordance with generally accepted accounting principles. All available information and management's judgment of current conditions and circumstances have been reflected. Management accepts full responsibility for the accuracy, integrity and objectivity of the financial information included in this report. To provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that accounting records are reliable for preparing financial statements, management maintains systems of accounting and internal controls, including written policies and procedures, which are communicated to all appropriate levels of the Company. Management believes that the Company's accounting and internal control systems provide reasonable assurance that assets are safeguarded and financial information is reliable. Maintenance of sound internal control by division of responsibilities is augmented by internal review programs and an Audit Committee of the Board of Directors comprised solely of directors independent of management. The Audit Committee reviews the scope of the audits performed by the independent public accountants, Deloitte & Touche LLP, together with their audit report and any recommendations made by them. The independent accountants have free access to meet with the Audit Committee and Board of Directors with or without management representatives present. Jeffrey M. Wilkins Chairman of the Board and Chief Executive Officer Julia A. Pollner Senior Vice President, Finance 15 FORWARD LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS Statements contained in this Form 10-K or any other reports or documents prepared by the Company or made by management of the Company may be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause the Company's operating results to differ materially from those projected. The following factors, among others, in some cases have affected and in the future could affect the Company's actual financial performance. PRODUCT CONCENTRATION Revenues from the sale of CD-ROM and DVD-ROM products and services constituted substantially all of the Company's revenues for 1998, and such products and services are expected to continue to account for substantially all of the Company's revenues for the foreseeable future. A decline in the demand for CD-ROM and DVD-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. PRICING The CD-ROM and audio CD industries have been characterized by new manufacturers continually entering the market and by declining prices for CDs. CD-ROM prices declined industry-wide in recent years, and this trend may continue in the future. To date, continuing market growth has offset increased manufacturing capacity in the CD-ROM industry. However, the addition of manufacturing capacity to the industry has continued, and there can be no assurance that market growth will continue at 16 the same rate or that prices paid to CD-ROM manufacturers will not continue to decline. In addition, the Company's pricing of its new products and services may not in all cases be competitive with the other providers in the marketplace, and some new products and services may not be profitable. 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. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company does not expect any material loss with respect to its investment portfolio. The Company utilizes term and revolving debt with variable interest rates of 75 to 150 basis points above LIBOR, and therefore is affected by changes in market interest rates. The Company is currently reviewing alternative financing which would convert a portion of such debt to a fixed-rate debt instrument. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurances that interest rates will not significantly change. The effect of foreign exchange rate fluctuations on the Company for the year's ended December 31, 1998 and 1997 was not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
METATEC CORPORATION - ------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS At December 31, --------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------- --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 2,557,221 $ 1,381,057 Accounts receivable, net of allowance for doubtful accounts of $490,000 and $301,000 21,635,889 7,215,178 Inventory 3,207,460 1,155,519 Prepaid expenses 1,037,945 362,801 Prepaid income taxes 580,879 -- Current portion of long-term note receivable -- 364,087 Deferred income taxes 143,000 327,000 --------------- --------------- Total current assets 29,162,394 10,805,642 Long-term note receivable, less current portion -- 186,562 Property, plant and equipment - net 55,827,054 38,629,006 Goodwill - net 20,453,366 3,250,683 --------------- --------------- TOTAL ASSETS $ 105,442,814 $ 52,871,893 =============== =============== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,052,442 $ 2,058,587 Accrued royalties 2,053,691 1,109,257 Accrued personal property taxes 993,399 809,399 Other accrued expenses 2,526,684 814,569 Accrued payroll 1,598,507 567,315 Accrued income taxes -- 249,747 Unearned income 156,440 73,778 Current maturities of long-term debt and capital lease obligations 3,080,185 101,778 --------------- --------------- Total current liabilities 22,461,348 5,784,430 Long-term debt and capital lease obligations, less current maturities 39,506,376 4,578,410 Other long-term liabilities 45,193 - Deferred income taxes 1,480,000 1,315,000 --------------- --------------- Total liabilities 63,492,917 11,677,840 --------------- --------------- Commitments and contingencies (Notes 2, 6, and 7) Shareholders' equity: Common stock, $.10 par value; authorized 10,083,500 shares; issued 1998 - 7,153,480 shares; 1997 - 7,108,479 shares 715,348 710,848 Additional paid-in capital 34,218,577 34,102,325 Foreign currency translation adjustments 32,963 -- Retained earnings 12,805,546 11,382,777 Treasury stock, at cost; 1998 - 1,081,742 shares; 1997 - 912,755 shares (5,822,537) (5,001,897) --------------- --------------- Total shareholders' equity 41,949,897 41,194,053 --------------- --------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 105,442,814 $ 52,871,893 =============== ===============
See notes to consolidated financial statements. 17 METATEC CORPORATION - ------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------ ============= ================ ============== CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,422,769 $ 491,534 $ 2,040,728 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 9,976,282 7,914,342 6,963,466 Deferred income taxes 349,000 192,000 742,000 Stock awards for employees 0 31,480 20,775 Net loss on sales of property, plant and equipment 68,218 54,962 59,738 Changes in assets and liabilities: Accounts receivable (3,494,680) (504,582) (429,136) Inventory 351,314 (206,781) (63,631) Prepaid expenses and other assets (1,256,023) 97,929 145,541 Accounts payable and accrued expenses 11,792,093 257,285 (321,814) Unearned income 82,662 (131,365) (165,278) ------------- -------------- -------------- Net cash provided by operating activities 19,291,635 8,196,804 8,992,389 ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in long-term note receivable 550,649 (336,799) 12,375 Purchase of property, plant and equipment (14,290,702) (8,566,133) (12,523,821) Proceeds from the sales of property, plant and equipment 20,638 83,434 7,545 Net cash used for acquisition (41,635,504) 0 0 ------------- -------------- -------------- Net cash used in investing activities (55,354,919) (8,819,498) (12,503,901) ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt 46,332,261 4,500,000 0 Payment of long-term debt and capital lease obligations (8,425,888) (116,252) (75,870) Stock options exercised, including tax benefit 120,752 138,504 135,309 Treasury stock acquired (820,640) (4,733,256) (232,100) ------------- -------------- -------------- Net cash provided (used) by financing activities 37,206,485 (211,004) (172,661) ------------- -------------- -------------- Effect of exchange rate on cash 32,963 0 0 Increase (decrease) in cash and cash equivalents 1,176,164 (833,698) (3,684,173) Cash and cash equivalents at beginning of year 1,381,057 2,214,755 5,898,928 ------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,557,221 $ 1,381,057 $ 2,214,755 ============= ================ ============== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 429,606 $ 65,197 $ 18,676 ============= ================ ============== Income taxes paid $ 1,824,155 $ 64,785 $ 1,042,081 ============= ================ ============== Assets purchased for the assumption of liabilities $ 1,739,058 $ 367,137 $ 487,651 ============= ================ ============== Acquisition of receivables and inventory for the assumption of liabilities $ 497,028 $ 0 $ 0 ============= ================ ==============
See notes to consolidated financial statements. 18 METATEC CORPORATION - -------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Common Paid-in Retained Foreign Currency Stock Capital Earnings Translation Adjustments - ------------------------------------------------- ---------- ----------- ------------ ----------------------- BALANCE AT DECEMBER 31, 1995 $ 705,474 $33,781,631 $ 8,850,515 $ 0 Net earnings 2,040,728 Treasury shares acquired Stock awards for employees 266 20,509 Stock options exercised 1,596 111,713 Tax benefit relating to stock options 22,000 --------- ----------- ------------ ------------- BALANCE AT DECEMBER 31, 1996 707,336 33,935,853 10,891,243 0 Net earnings 491,534 Treasury shares acquired Stock awards for employees 641 30,839 Stock options exercised 2,871 127,633 Tax benefit relating to stock options 8,000 --------- ----------- ------------ ------------- BALANCE AT DECEMBER 31, 1997 710,848 34,102,325 11,382,777 0 Net earnings 1,422,769 Treasury shares acquired Stock options exercised 4,500 66,252 Tax benefit relating to stock options 50,000 Foreign currency translation adjustments 32,963 --------- ----------- ------------ ------------- BALANCE AT DECEMBER 31, 1998 715,348 $34,218,577 $ 12,805,546 $ 32,963 ========= =========== ============ ============= CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Treasury Stock Total - ------------------------------------------------- ------------ ------------ BALANCE AT DECEMBER 31, 1995 $ (36,541) $ 43,301,079 Net earnings 2,040,728 Treasury shares acquired (232,100) (232,100) Stock awards for employees 20,775 Stock options exercised 113,309 Tax benefit relating to stock options 22,000 ----------- ------------ BALANCE AT DECEMBER 31, 1996 (268,641) 45,265,791 Net earnings 491,534 Treasury shares acquired (4,733,256) (4,733,256) Stock awards for employees 31,480 Stock options exercised 130,504 Tax benefit relating to stock options 8,000 ----------- ------------ BALANCE AT DECEMBER 31, 1997 (5,001,897) 41,194,053 Net earnings 1,422,769 Treasury shares acquired (820,640) (820,640) Stock options exercised 70,752 Tax benefit relating to stock options 50,000 Foreign currency translation adjustments 32,963 ----------- ------------ BALANCE AT DECEMBER 31, 1998 $(5,822,537) $ 41,949,897 =========== ============
See notes to consolidated financial statements. 19 METATEC CORPORATION - ----------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, --------------------------------------------------- 1998 1997 1996 - ---------------------------------------------- --------------- -------------- -------------- NET SALES $ 80,919,128 $ 48,933,634 $ 46,150,105 Cost of sales 57,276,391 33,815,791 29,543,583 --------------- -------------- -------------- Gross profit 23,642,737 15,117,843 16,606,522 Selling, general and administrative expenses 18,980,164 13,847,028 13,491,823 Business realignment 825,975 0 0 Restructuring expenses 0 206,000 0 --------------- -------------- -------------- OPERATING EARNINGS 3,836,598 1,064,815 3,114,699 Other income and (expense): Investment income 34,546 49,459 302,705 Interest expense (1,186,375) (73,740) (18,676) --------------- -------------- -------------- EARNINGS BEFORE INCOME TAXES 2,684,769 1,040,534 3,398,728 Income taxes 1,262,000 549,000 1,358,000 --------------- -------------- -------------- NET EARNINGS $ 1,422,769 $ 491,534 $ 2,040,728 =============== ============== ============== NET EARNINGS PER COMMON SHARE: Basic $ 0.23 $ 0.07 $ 0.29 =============== ============== ============== Diluted $ 0.23 $ 0.07 $ 0.29 =============== ============== ============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 6,058,414 6,791,836 7,064,194 =============== ============== ============== Diluted 6,115,084 7,189,266 7,159,775 =============== ============== ==============
See notes to consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Management believes those estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from these estimates. Nature of Operations - The operations of the Company are in the information industry primarily providing optical disc manufacturing and distribution, for specific customers primarily in North America and Europe, with a majority of the customers under contract. The Company maintains three manufacturing, sales, distribution and development facilities with sales offices located in eleven different locations around the United States and Europe. The revenues from product sales are recognized at the time the products are shipped. For software development services, the Company recognizes profit using the percentage of completion method, measured by the percentage of the cost of services completed to date compared to total planned cost of services. Earned revenue is determined on the basis of the profit recognized plus the contract costs incurred during the 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 carrying amounts reported in the balance sheets approximate fair value. The Company holds cash primarily in one financial institution. Inventory - Inventory consists primarily of raw materials and spare parts and is valued at the lower of cost or market with cost determined by the first-in, first-out method. 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. Goodwill - Goodwill represents the excess of cost over net assets acquired and is being amortized using the straight-line method over periods ranging from 10 to 15 years. At September 12, 1998 goodwill increased $18,025,184 as part of the purchase of Imation's Corporation CD-ROM business. The additional $18,025,184 in goodwill, beginning in September, 1998, is being amortized using the straight-line method through 2013. Accumulated amortization was $1,928,727 and $1,106,226 at December 31, 1998 and 1997, respectively. At each balance sheet date, a determination is made by management to ascertain whether goodwill has been impaired based on several criteria, including, but not limited to, revenue trends, undiscounted operating cash flows and other operating factors. For the years presented there has been no impairment of goodwill. Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which uses the liability method to calculate deferred 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 carry forwards to the extent realization is more likely than not. 21 Advertising - The Company expenses advertising costs as incurred. Advertising expense was $15,508, $26,963 and $197,440 for 1998, 1997 and 1996, respectively. Net Earnings Per Common Share - Basic net earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is computed similarly but including the effect of stock options. Comprehensive Income - In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income". This statement requires the reporting and display of comprehensive income and its components for all years presented. The Company had other comprehensive income related to foreign currency translation adjustments of $32,963 in 1998. Recently Issued Financial Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is effective for fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Additionally, in March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and is effective for fiscal years beginning after December 15, 1998. The Company is presently evaluating the applicability of SFAS 133 and SOP 98-1 to its operations. Reclassifications - Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 presentation. 2. BUSINESS COMBINATIONS On September 11, 1998, Metatec purchased the CD-ROM services business assets of Imation Corporation ("Imation") for $39.8 million, excluding professional service fees, in a business combination accounted for under the purchase method. Accordingly, the assets acquired were recorded at their fair values and included goodwill of $18,025,184 which is being amortized over 15 years using the straight-line method. The results of operations of the acquired entity have been included in the accompanying financial statements from the date of acquisition. The asset purchase included Imation's plant operations in Fremont, California, Breda; The Netherlands; and Menomonie, Wisconsin. The Menomonie plant operations were transferred to Metatec's Dublin, Ohio, manufacturing plant by the end of the fourth quarter of 1998 after completion of a transitional operations period in Menomonie. A client services center providing customer and technical support will be maintained in Menomonie. The purchase price for the Imation assets was $39.8 million, which price is subject to a post-closing adjustment based upon the closing date working capital statement related to working capital assets transferred by Imation. The Company financed the asset purchase through a $30.0 million term loan facility and a portion of a $20.0 million revolving loan facility. The pro forma results of operations of the Company for 1998 and 1997, assuming the Imation acquisition occurred at the beginning of each period presented are as follows:
1998 1997 Net revenues $ 127,023,636 $ 110,815,634 Net Income 5,725,750 2,831,340 Basic net earnings per share 0.95 0.42 Diluted net earnings per share 0.94 0.39
22 Business realignment expenses of $825,975 were incurred during 1998. These expenses primarily related to integration costs due to the Imation CD-ROM services business acquisition and certain rent, utilities and labor expenses associated with closing the acquired Wisconsin facility. Of these expenses, $367,813 had been paid as of December 31, 1998. 3. RESTRUCTURING CHARGES During 1997 the Company made a decision to exit its business of providing publishing tools and software development services. As a result of this action the company incurred restructuring charges of $206,000 primarily for severance and termination benefits all of which were paid in 1997. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at December 31:
1998 1997 Land $ 2,579,787 $ 1,779,573 Buildings and improvements 18,098,312 18,085,187 Machinery and equipment 48,979,434 29,802,219 Furniture and fixtures 3,970,336 2,930,663 Computer equipment and related software 7,436,858 5,784,275 Transportation equipment 35,465 28,665 Equipment installation and building in progress 3,656,616 880,291 ------------ ------------ Total 84,756,808 59,290,873 Less accumulated depreciation (28,929,754) (20,661,867) ------------ ------------ Net property, plant and equipment $ 55,827,054 $ 38,629,006 ============ ============
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consists of the following at December 31:
1998 1997 Term Debt $ 30,000,000 Revolving line of credit 12,500,000 $ 4,500,000 Capital lease obligations 86,561 180,188 Less current maturities (3,080,185) (101,778) ------------ ----------- Long-term debt and capital lease obligations $ 39,506,376 $ 4,578,410 ============ ===========
The Company has a Credit Facilities agreement with a bank that provides for advances of $20,000,000 on a $20,000,000 revolving loan due September 10, 2003 of which $12,500,000 23 was outstanding at December 31, 1998. In addition, this Credit Facilities agreement includes a term loan which was issued in a single advance on September 11, 1998 of $30,000,000. The term loan is to be repaid in installments with the total balance due September 11, 2003. Borrowings under the Credit Facilities bear interest, at the Company's option, at either the federal funds rate plus 50 basis points or prime rate (whichever of the two are higher) or the London Interbank Offered Rate (LIBOR) plus a margin based upon the Company's debt coverage ratio (which ranges from not less than 75 basis points to not more than 150 basis points). The interest rates on the borrowings at December 31, 1998 ranged from 6.9% to 7.25%. The Credit Facilities are secured by a first lien on all non-real estate business assets of the Company and a pledge of the stock of the Company's subsidiaries. The Company is required to comply with certain financial and other covenants. At December 31, 1998, the Company had a $400,000 letter of credit outstanding which had not been drawn upon before year end. In January 1999, a $7,000,000 construction loan was put in place to finance the distribution center being constructed. Borrowings under the construction loan bear interest, at the Company's option, at either the prime rate or the LIBOR rate plus 165 basis points. The construction loan contains an option to convert the principal balance to a 20 year term loan, at various interest rate options. The construction loan is secured by a mortgage in the real property, fixtures, and improvements located at the Dublin, Ohio site. The estimated fair value of the Company's long-term obligations approximated their carrying amount at December 31, 1998, based on current market prices for the same or similar issues. 6. LEASES At December 31, 1998, the Company leases $507,135 of office equipment, with related accumulated depreciation of $331,673, under non-cancelable capital lease agreements expiring at various dates through 2000. Maintenance, insurance, and tax expenses are the responsibility of the Company under the agreements. Operating lease expense was $1,865,688, $370,597 and $342,635 for 1998, 1997 and 1996, respectively. 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:
Year ending December 31: CAPITAL LEASES OPERATING LEASES 1999 81,581 2,041,715 2000 6,398 1,598,126 2001 1,198,072 2002 1,013,086 2003 662,464 Thereafter 660,242 ----------- ----------- Total minimum lease payments 87,979 $ 7,173,705 =========== Less amount representing interest (1,418) ----------- Present value of net minimum payments $ 86,561 ===========
24 The Company is also the lessor of certain of its main office facilities to an unrelated third party, under an operating lease which expires March 31, 1999. Minimum future rentals under this lease to be received are approximately $109,500. 7. COMMITMENTS AND CONTINGENCIES Self-Insurance - The Company is self insured with respect to medical and dental claims for United States employees. The Company has obtained stop-loss insurance for claims in excess of $50,000 per individual per year and $1,000,000 lifetime maximum per individual. The Company has recorded an estimated liability for self-insured claims incurred but not reported at December 31, 1998 and 1997 of $331,000 and $202,000, respectively. The Company is also self insured with respect to short term disability claims. Property, plant and equipment - The Company has commitments under contracts for the purchase of property, plant and equipment. Portions of such contracts at December 31, 1998 are not reflected in the consolidated financial statements. These unrecorded commitments amounted to approximately $244,698 of outstanding equipment purchase commitments and $5,124,776 of outstanding building purchases. 8. INCOME TAXES The components of income tax expense (benefit) were as follows:
1998 1997 1996 Federal: Current $ 600,000 $ 279,000 $ 511,000 Deferred 272,000 101,000 554,000 ----------- ----------- ----------- Total Federal 872,000 380,000 1,065,000 ----------- ----------- ----------- State and Local: Current 160,000 78,000 105,000 Deferred 77,000 91,000 188,000 ----------- ----------- ----------- Total State and Local 237,000 169,000 293,000 Foreign Current 153,000 ----------- ----------- ----------- Total $ 1,262,000 $ 549,000 $ 1,358,000 =========== =========== ===========
Total earnings before income taxes in 1998 is comprised of $354,705 foreign earnings and $2,330,064 domestic earnings. There were no foreign earnings in 1997 or 1996. Significant differences between income taxes recorded for financial reporting purposes and income taxes calculated using the Federal statutory rate of 34% are as follows:
1998 1997 1996 Tax expense at statutory rate $ 913,000 $ 354,000 $ 1,155,000 State and local tax expense (benefit), net of federal benefit 156,000 111,000 194,000 Non deductible goodwill 156,000 156,000 156,000 Other 37,000 (72,000) (147,000) ----------- --------- ----------- Total $ 1,262,000 $ 549,000 $ 1,358,000 =========== ========= ===========
25 Deferred income taxes recorded in the consolidated balance sheets at December 31, 1998 and 1997 consist of the following:
1998 1997 Deferred tax assets: State tax credit (expires 2001) $ 357,000 $ 222,000 AMT carryforwards (no expiration date) 36,000 Allowance for doubtful accounts 183,000 134,000 Net operating loss carryforwards 96,000 112,000 Inventory 105,000 90,000 Other 126,000 131,000 ----------- ----------- Total deferred tax assets 867,000 725,000 ----------- ----------- Deferred tax liabilities: Depreciation 1,908,000 1,684,000 Other 296,000 29,000 ----------- ----------- Total deferred tax liabilities 2,204,000 1,713,000 ----------- ----------- Net deferred tax (liability) $(1,337,000) $ (988,000) =========== ===========
The Company has available net operating loss carry forwards for tax purposes of approximately $216,000 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). Based on management's projection of income the Company will more likely than not realize such benefits of such state tax credits. 9. BENEFIT PLANS Substantially all U.S. associates are enrolled in a Company-sponsored defined contribution plan established under Section 401(k) of the Internal Revenue Code. The Company's contribution under the plan was approximately $284,100, $170,300 and $170,700 for 1998, 1997 and 1996, respectively. During 1998, the Company increased it's contribution to 75% of the associate's contribution up to a maximum of 3.75% of the associate's annual compensation. The funds are invested in mutual funds. The company initiated a discretionary common stock award program for employees during 1996. The value of the 1997 and 1996 stock awards was $31,480 and $20,775, respectively. The program was discontinued at the end of 1997. The company initiated a performance sharing plan (Open Book Management Plan) for employees during 1998. All employees are eligible for this plan after a six month waiting period. Each employee is assigned points at the beginning of the year, and these points pay quarterly bonuses based on actual results as compared to planned results. The Company recorded $1,106,756 in performance sharing bonuses earned for 1998, of which $438,293 was paid as of December 31, 1998. 10. STOCK OPTION PLANS In 1992, the Company established a Directors' Stock Option Plan under which a maximum of 210,000 Common Shares may be issued. This Plan, as amended, automatically grants 2,500 options to each non-employee director on the day after the Company's annual meeting of shareholders. These options are fully vested on the grant date. In addition, for each non-employee director, when they first become a director, the Plan automatically grants 10,000 one 26 time options. This one time option vests in equal installments over a four year period. As of December 31, 1998, there have been 164,925 options granted of which 30,080 were forfeited, 22,345 were exercised and 102,500 are 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 Company established the 1990 Stock Option Plan under which a maximum of 1,610,000 Common Shares may be issued. 600,000 of these options are subject to shareholder approval at the Company's next annual meeting. This Plan, as amended, is available to officers 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). As of December 31, 1998, there have been 1,987,550 options granted of which 770,400 were forfeited, 267,575 were exercised and 408,300 are exercisable. In February 1997, the Compensation Committee, which administers the plan, approved a stock option exchange program for employees holding options previously granted under the 1990 Stock Option Plan. Under this program, employees were given the opportunity to exchange their options having exercise prices above the then-current fair market value for the Company's common shares (which was $4.38 at that time) for new options having an exercise price equal to such current fair market value. However, all new options would be subject to a four-year vesting schedule in which an equal number of options would vest each year. The stock option exchange was contingent upon the grantee of the new option terminating, effective as of the grant date, existing options for the same number of common shares. Under this stock option exchange program, a total of 350,000 new options were granted at an exercise price of $4.38 (subject to the above-described vesting schedule), and the same number of existing options were terminated. The Company's Compensation Committee has the authority to grant incentive options and non-qualified options. Only officers and other key employees of the Company or its subsidiary corporations are eligible for grants of incentive options. At December 31, 1998, no incentive options had been granted. Both incentive and non-qualified options vest over a period of from one to four years from the date of grant, and are not exercisable after 10 years from the date of grant. The option price of both incentive options and non-qualified options is equal to the fair market value of the shares at the time the options are granted. The following summarizes all stock option transactions from January 1, 1996 through December 31, 1998:
Per Share Weighted Average Shares Option Price Exercise Price Outstanding at December 31, 1995 405,477 $1.50 to $11.50 $ 8.29 Granted 268,100 $6.63 to $12.88 $ 9.96 Exercised (15,961) $1.50 to $11.50 $ 7.10 Terminated (11,750) $9.37 to $11.50 $10.58 --------- Outstanding at December 31, 1996 645,866 $1.50 to $12.88 $ 8.97 Granted 806,000 $4.13 to $ 6.00 $ 5.19 Exercised (28,711) $1.75 to $ 5.50 $ 4.55 Terminated (520,000) $4.38 to $11.50 $ 9.03 --------- Outstanding at December 31, 1997 903,155 $1.50 to $12.88 $ 5.70 Granted 412,200 $3.88 to $ 6.13 $ 4.96 Exercised (45,000) $1.50 to $ 1.75 $ 1.57 Terminated (208,280) $4.25 to $12.88 $ 5.77 --------- Outstanding at December 31, 1998 1,062,075 $1.50 to $12.88 $ 5.58 =========
27 The following presents information for common shares exercisable as of December 31:
1998 1997 1996 Weighted Average Exercise Price $ 6.35 $ 6.68 $ 8.80 ======= ======= ======= Common Shares Exercisable 510,800 186,455 546,216 ======= ======= =======
The following table summarizes information about options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Weighted-Average Range of Remaining Weighted-Average Weighted-Average Exercise Prices Number Contractual Life Exercise Price Number Exercise Price $ 1.50 - $ 1.75 22,500 1.8 $ 1.56 22,500 $ 1.56 $ 3.50 - $ 4.38 340,100 8.4 $ 4.19 84,525 $ 4.24 $ 5.13 - $ 6.00 605,700 8.9 $ 5.67 312,500 $ 6.00 $ 6.13 - $11.00 32,775 2.5 $ 9.13 30,275 $ 8.97 $11.25 - $12.88 61,000 0.4 $11.52 61,000 $11.52 --------- ------- 1,062,075 $ 5.58 510,800 $ 6.35 ========= =======
The weighted average fair value of options granted during 1998, 1997 and 1996 were $4.96, $4.03 and $5.42, respectively. At December 31, 1998, 510,800 common shares under option were exercisable and 75,155 and 392,850 common shares (total of 468,005) were reserved for future grant under the 1992 Directors' Stock Option Plan and the 1990 Stock Option Plan, respectively. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation costs for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement No. 123, the Company's net earnings and net earnings per common share, net of related income tax benefits, would have resulted in the amounts as reported below. In determining the estimated fair value of each option granted on the date of grant, the Company uses the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 1998, 1997 and 1996, respectively: dividend yield of 0%; expected volatility of 61%, 56% and 49%; risk-free interest rates of 6.4%, and expected life of 6 years.
1998 1997 1996 Net earnings - As reported $ 1,422,769 $ 491,534 $ 2,040,728 Pro forma $ 810,441 $ (661,075) $ 1,186,304 Earnings per share - As reported Basic $ 0.23 $ 0.07 $ 0.29 Diluted $ 0.23 $ 0.07 $ 0.29 Pro forma - Basic $ 0.13 $ (0.10) $ 0.17 Diluted $ 0.13 $ (0.09) $ 0.17
28 The pro forma amounts are not representative of the effects on reported net earnings or earnings per common share for future years. 11. RELATED PARTY TRANSACTIONS In 1996, the Company purchased, for cash, real estate from a partnership in which an officer/shareholder of the Company is a partner. The tract of land acquired included approximately five acres and the purchase price totaled approximately $485,000. The land which is adjacent to the existing manufacturing facility, is currently being utilized for the distribution center expansion, described above. 12. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION In June 1997 the FASB issued Statement of Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial information about operating segments. In accordance with SFAS 131, the Company has determined that it has one reportable segment. However, the Company does operate in two primary geographic areas. Revenues are attributed to specific geographical areas based on origin of order generation. Geographic information for the years ended December 31 are as follows:
1998 U.S. EUROPE - ---- ---- ------ Sales $ 76,630,600 $ 4,288,528 Long-lived assets $ 69,634,124 $ 6,646,296 1997 Sales $ 48,933,634 $ 0 Long-lived assets $ 41,879,689 $ 0 1996 Sales $ 46,150,105 $ 0 Long-lived assets $ 41,484,808 $ 0
The Company had one customer that accounted for approximately 11.5% of net sales in 1996; no other customer accounted for greater than 10% of net sales for any of the three years in the period ended December 31, 1998. 13. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended March 31 June 30 September 30 December 31 1998 Net Sales $14,717,057 $14,085,060 $18,981,471 $33,135,540 Gross Profit 4,886,682 4,886,899 5,490,248 8,378,908 Net Earnings 578,069 475,676 179,534 189,490 Net Earnings per common share: Basic $ 0.09 $ 0.08 $ 0.03 $ 0.03 Diluted $ 0.09 $ 0.08 $ 0.03 $ 0.03 1997 Net Sales $11,678,574 $12,007,932 $11,890,865 $13,356,263 Gross Profit 3,625,987 3,991,610 3,402,072 4,098,174 Net Earnings (204,011) 367,528 51,735 276,282 Net Earnings per common share: Basic $ (0.03) $ 0.05 $ 0.01 $ 0.04 Diluted $ (0.03) $ 0.05 $ 0.01 $ 0.04
To the Board of Directors and Shareholders of Metatec Corporation: We have audited the accompanying consolidated balance sheets of Metatec Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP February 25, 1999 Columbus, Ohio ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required under this Item with respect to directors is contained in the Company's proxy statement which was filed with the Securities and Exchange Commission on March 22, 1999, and is hereby incorporated herein by reference. Information regarding the executive officers of the Company may be found under the caption "Executive Officers of the Company" in Part I and is also incorporated by reference into this Item 10. ITEM 11. EXECUTIVE COMPENSATION Information required under this Item is contained in the Company's proxy statement which was filed with the Securities and Exchange Commission on March 22, 1999, and is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this Item is contained in the Company's proxy statement which was filed with the Securities and Exchange Commission on March 22, 1999, and is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following financial statements of the Company are included in Item 8: Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 30 Notes to Consolidated Financial Statements Independent Auditors' Report (a)(2) FINANCIAL STATEMENT SCHEDULES The following independent auditors' report and financial statement schedule for the years ended December 31, 1998, 1997 and 1996 are included in this report following the signatures and should be read in conjunction with the Consolidated Financial Statements included in Item 8: Independent Auditors' Report on Financial Statement Schedule Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves All other financial statement schedules have been omitted because they are not applicable or the required information is included in the Company's consolidated financial statements or notes thereto. (a)(3) LISTING OF EXHIBITS 31
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 2 Asset Purchase Agreement dated July Current Report on Form 8-K dated 29, 1998, among Metatec Corporation, September 11, 1998 (See Exhibit 2 Metatec Acquisition Corp., Metatec therein). International B.V., Imation Corp., Imation International B.V., and Imation Enterprises Corp. 3(a) Amended and Restated Amendment No. 2 to Registration Articles of Incorporation Statement on Form S-1, File No. of Metatec Corporation 33-60878 (see Exhibit 3(a) therein). 3(b) Amended and Restated By-laws Registration Statement on Form S-1, of Metatec Corporation File No. 33-60878 (see Exhibit 3(d) therein). 4 Form of Share Certificate Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 4 therein). 10(a)* Metatec Corporation 1990 Directors' Registration Statement on Form S-8, Stock Option Plan and Amendment No. 1 File No. 33-48021 (see Exhibit 4(d) thereto therein). 10(b)* Amended and Restated Employment Annual Report on Form 10-K for the Agreement dated March 23, 1993, fiscal year ended December 31, 1992 between Metatec Corporation and (See Exhibit 10(h) therein). Jeffrey M. Wilkins 10(c)* First Amendment to Amended and Annual Report on Form 10-K for the Restated Employment Agreement dated fiscal year ended December 31, 1995 March 21, 1996, between Metatec (See Exhibit 10(c) therein). Corporation and Jeffrey M. Wilkins
32
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 10(d)* Second Amendment to Amended and Contained herein. Restated Employment Agreement dated February 17, 1999, between Metatec Corporation and Jeffrey M. Wilkins 10(e)* Metatec Corporation 1990 Stock Option Annual Report on Form 10-K for the Plan fiscal year ended December 31, 1991 (see Exhibit 10(k) therein). 10(f)* Amendment No. 1 to Metatec Corporation Registration Statement on Form S-8, 1990 Stock Option Plan File No. 33-48022 (see Exhibit 4(d) therein). 10(g)* Amendment No. 2 to Metatec Corporation Annual Report on Form 10-K for the 1990 Stock Option Plan fiscal year ended December 31, 1992 (see Exhibit 10(k) therein). 10(h)* Amendment No. 3 to Metatec Corporation Annual Report on Form 10-K for the 1990 Stock Option Plan fiscal year ended December 31, 1993 (see Exhibit 10(g) therein). 10(i)* Amendment No. 4 to Metatec Corporation Annual Report on Form 10-K for the 1990 Stock Option Plan fiscal year ended December 31, 1995 (See Exhibit 10(h) therein). 10(j)* Amendment No. 5 to Metatec Corporation Annual Report on Form 10-K for the 1990 Stock Option Plan fiscal year ended December 31, 1997 (See Exhibit 10(I) therein). 10(k)* Metatec Corporation 1992 Directors' Registration Statement on Form S-8, Stock Option Plan File No. 33-5200 (see Exhibit 4(c) therein). 10(l)* Amendment No. 1 to Metatec Corporation Annual Report on Form 10-K for the 1992 Directors' Stock Option Plan fiscal year ended December 31, 1993 (see Exhibit 10(i) therein).
33
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 10(m)* Amendment No. 2 to Metatec Corporation Annual Report on Form 10-K for the 1992 Directors' Stock Option Plan fiscal year ended December 31, 1995 (see Exhibit 10(k) therein). 10(n)* Amendment No. 3 to Metatec Corporation Annual Report on Form 10-K for the 1992 Directors' Stock Option Plan fiscal year ended December 31, 1995 (see Exhibit 10(i) therein). 10(o)* Amendment No. 4 to Metatec Corporation Annual Report on Form 10-K for the 1992 Directors' Stock Option Plan fiscal year ended December 31, 1996 (see Exhibit 10(m) therein). 10(p)* Metatec Corporation Open Book Contained herein. Management Plan 10(q)* Metatec Corporation Directors Deferred Annual Report on Form 10-K for the Compensation Plan fiscal year ended December 31, 1997 (see Exhibit 10(p) therein). 10(r) Form of Indemnification Agreement Annual Report on Form 10-K for the between Metatec Corporation and each fiscal year ended December 31, 1992 of its officers and directors (see Exhibit 10(q) therein). 10(s) Patent License Agreement for Disc Amendment No. 1 to Registration Products dated July 1, 1986, between Statement on Form S-1, File No. Metatec/ Discovery Systems, Inc. and 33-60878 (see Exhibit 10(t) therein). Discovision Associates 10(t) CD Disc License Agreement dated Amendment No. 1 to January 1, 1986, between U.S. Registration Statement on Philips Corporation and Form S-1, File No. 33-60878 (see Metatec/ Discovery Systems, Inc. Exhibit 10(u) therein).
34
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 10(u) Optical Disc Corporation NPR Amendment No. 1 to Technology License Agreement between Registration Statement on Optical Disc Corp-oration and Form S-1, File No. 33-60878 (see Metatec/Discovery Systems effective Exhibit 10(v) therein). March 2, 1992 10(v) Loan Agreement dated September 11, Current Report on Form 8-K dated 1998, among Metatec Corporation, Bank September 11, 1998 (See Exhibit 10(a) One, NA, The Huntington National Bank, therein). other financial institutions from time to time a party thereto, as banks, and The Huntington National Bank, as administrative agent for the banks. 10(w) Construction Loan Agreement dated Contained herein. January 15, 1999, between The Huntington National Bank and Metatec Corporation 21 Subsidiaries of Metatec Contained herein. Corporation 23 Consent of Deloitte & Touche LLP Contained herein. 24(a) Powers of Attorney for Peter J. Kight Annual Report on Form 10-K for the and A. Grant Bowen fiscal year ended December 31, 1994 (see Exhibit 24 therein). 24(b) Powers of Attorney for Jerry D. Miller Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 24 therein). 24(c) Power of Attorney for James V. Pickett Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (see Exhibit 24(c) therein).
35
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 24(d) Power of Attorney for Joseph F. Annual Report on Form 10-K for the Keeler, Jr. fiscal year ended December 31, 1997 (see Exhibit 24(d) therein). 27 Financial Data Schedule Contained herein.
*Executive compensation plans and arrangements required to be filed pursuant to Item 601(b)(10) of Regulation S-K. (b) REPORTS ON FORM 8-K On November 25, 1998, the Company filed a Form 8-K/A (dated November 25, 1998) amending its Form 8-K (dated September 11, 1998) filed on September 29, 1998. The Form 8-K (dated September 11, 1998) reported under Item 2 the completion of the Company's purchase of the CD-ROM services business assets of Imation Corporation (the "Acquired Business"). The Form 8-K/A (dated November 25, 1998) reported under Item 7 and included: (i) the audited balance sheets of the Acquired Business as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997; (ii) the unaudited balance sheet of the Acquired Business as of June 30, 1998, and the statements of operations for the six-month periods ended June 30, 1998 and 1997; and (iii) the unaudited condensed pro forma combined balance sheet of the Company and the Acquired Business at June 30, 1998, and the combined statements of earnings for the year ended December 31, 1997 and the six-month period ended June 30, 1998. (c) EXHIBITS The exhibits in response to this portion of Item 14 are submitted following the signatures. (d) FINANCIAL STATEMENT SCHEDULES The financial statement schedule and the independent auditors' report thereon are submitted following the signatures. 36 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. METATEC CORPORATION Date: March 30, 1999 By /s/ Jeffrey M. Wilkins ------------------------------------------- Jeffrey M. Wilkins, Chairman of the Board President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Jeffrey M. Wilkins Chairman of the Board, March 30, 1999 - ------------------------------------ Chief Executive Officer Jeffrey M. Wilkins (principal executive officer) and Director /s/ Julia A. Pollner Senior Vice President, Finance, March 30, 1999 - ------------------------------------ Secretary, and Treasurer Julia A. Pollner (principal financial officer and principal accounting officer) Peter J. Kight* Director March 30, 1999 - ------------------------------------ Peter J. Kight Jerry D. Miller* Director March 30, 1999 - ------------------------------------ Jerry D. Miller A. Grant Bowen* Director March 30, 1999 - ------------------------------------ A. Grant Bowen James V. Pickett* Director March 30, 1999 - ------------------------------------ James V. Pickett Joseph F. Keeler, Jr.* Director March 30, 1999 - --------------------------------- Joseph F. Keeler, Jr.
*Jeffrey M. Wilkins, by signing his name hereto, does sign this document on behalf of the person indicated above pursuant to a Power of Attorney duly executed by such person. By /s/ Jeffrey M. Wilkins March 30, 1999 ----------------------------------------- Jeffrey M. Wilkins, Attorney In Fact 37 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Metatec Corporation: We have audited the consolidated financial statements of Metatec Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 25, 1999; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Metatec Corporation and subsidiaries listed in Item 14. 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, presents fairly in all material respects the information set forth therein. /s/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP March 29, 1999 Columbus, Ohio 38 METATEC CORPORATION AND SUBSIDIARIES SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Column A Column B Column C Column D Column E ----------------------------- Balance at Charged to Charged to Balance At Beginning of Costs and Other End Of Description Year Expenses Accounts Deductions(A) Year 1998 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE $301,000 $260,000 $71,000 $490,000 ======== ======== ======= ======== 1997 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE $321,000 $7,000 $27,000 $301,000 ======== ====== ======= ======== 1996 ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE $338,000 $124,382 $141,382 $321,000 ======== ======== ======== ======== (A) Amount represents uncollectible accounts written off.
39 EXHIBIT INDEX 40
If Incorporated by Reference, Exhibit Document with which Exhibit was No. Description of Exhibit Previously Filed with SEC - ------- ---------------------- ------------------------- 2 Asset Purchase Agreement dated July Current Report on Form 8-K dated September 11, 29, 1998, among Metatec Corporation, 1998 (See Exhibit 2 therein). Metatec Acquisition Corp., Metatec International B.V., Imation Corp., Imation International B.V., and Imation Enterprises Corp. 3(a) Amended and Restated Amendment No. 2 to Registration Statement on Articles of Incorporation Form S-1, File No. 33-60878 (see Exhibit 3(a) of Metatec Corporation therein). 3(b) Amended and Restated By-laws Registration Statement on Form S-1, File No. of Metatec Corporation 33-60878 (see Exhibit 3(d) therein). 4 Form of Share Certificate Amendment No. 2 to Registration Statement on Form S-1, File No. 33-60878 (see Exhibit 4 therein). 10(a) Metatec Corporation 1990 Directors' Registration Statement on Form S-8, File No. Stock Option Plan and Amendment No. 1 33-48021 (see Exhibit 4(d) therein). thereto 10(b) Amended and Restated Employment Annual Report on Form 10-K for the fiscal year Agreement dated March 23, 1993, ended December 31, 1992 (See Exhibit 10(h) between Metatec Corporation and therein). Jeffrey M. Wilkins 10(c) First Amendment to Amended and Annual Report on Form 10-K for the fiscal year Restated Employment Agreement dated ended December 31, 1995 (See Exhibit 10(c) March 21, 1996, between Metatec therein). Corporation and Jeffrey M. Wilkins 10(d) Second Amendment to Amended and Contained herein. Restated Employment Agreement dated February 17, 1999, between Metatec Corporation and Jeffrey M. Wilkins
41 10(e) Metatec Corporation 1990 Stock Option Annual Report on Form 10-K for the fiscal year Plan ended December 31, 1991 (see Exhibit 10(k) therein). 10(f) Amendment No. 1 to Metatec Corporation Registration Statement on Form S-8, File No. 1990 Stock Option Plan 33-48022 (see Exhibit 4(d) therein). 10(g) Amendment No. 2 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1990 Stock Option Plan ended December 31, 1992 (see Exhibit 10(k) therein). 10(h) Amendment No. 3 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1990 Stock Option Plan ended December 31, 1993 (see Exhibit 10(g) therein). 10(i) Amendment No. 4 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1990 Stock Option Plan ended December 31, 1995 (See Exhibit 10(h) therein). 10(j) Amendment No. 5 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1990 Stock Option Plan ended December 31, 1997 (See Exhibit 10(I) therein). 10(k) Metatec Corporation 1992 Directors' Registration Statement on Form S-8, File No. Stock Option Plan 33-5200 (see Exhibit 4(c) therein). 10(l) Amendment No. 1 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1992 Directors' Stock Option Plan ended December 31, 1993 (see Exhibit 10(i) therein). 10(m) Amendment No. 2 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1992 Directors' Stock Option Plan ended December 31, 1995 (see Exhibit 10(k) therein). 10(n) Amendment No. 3 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1992 Directors' Stock Option Plan ended December 31, 1995 (see Exhibit 10(i) therein). 10(o) Amendment No. 4 to Metatec Corporation Annual Report on Form 10-K for the fiscal year 1992 Directors' Stock Option Plan ended December 31, 1996 (see Exhibit 10(m) therein). 10(p) Metatec Corporation Open Book Contained herein. Management Plan
42 10(q) Metatec Corporation Directors Deferred Annual Report on Form 10-K for the fiscal year Compensation Plan ended December 31, 1997 (see Exhibit 10(p) therein). 10(r) Form of Indemnification Agreement Annual Report on Form 10-K for the fiscal year between Metatec Corporation and each ended December 31, 1992 (see Exhibit 10(q) of its officers and directors therein). 10(s) Patent License Agreement for Disc Amendment No. 1 to Registration Products dated July 1, 1986, between Statement on Form S-1, File No. 33-60878 (see Metatec/ Discovery Systems, Inc. and Exhibit 10(t) therein). Discovision Associates 10(t) CD Disc License Agreement dated Amendment No. 1 to Registration January 1, 1986, between U.S. Statement on Form S-1, File No. 33-60878 (see Philips Corporation and Exhibit 10(u) therein). Metatec/ Discovery Systems, Inc. 10(u) Optical Disc Corporation NPR Amendment No. 1 to Registration Technology License Agreement between Statement on Form S-1, File No. 33-60878 (see Optical Disc Corporation and Exhibit 10(v) therein). Metatec/Discovery Systems effective March 2, 1992 10(v) Loan Agreement dated September 11, Current Report on Form 8-K dated September 11, 1998, among Metatec Corporation, Bank 1998 (See Exhibit 10(a) therein). One, NA, The Huntington National Bank, other financial institutions from time to time a party thereto, as banks, and The Huntington National Bank, as administrative agent for the banks 10(w) Construction Loan Agreement dated Contained herein. January 15, 1999, between The Huntington National Bank and Metatec Corporation 21 Subsidiaries of Metatec Contained herein. Corporation
43 23 Consent of Deloitte & Touche LLP Contained herein. 24(a) Powers of Attorney for Peter J. Kight Annual Report on Form 10-K for the fiscal year and A. Grant Bowen ended December 31, 1994 (see Exhibit 24 therein). 24(b) Powers of Attorney for Jerry D. Miller Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (see Exhibit 24 therein). 24(c) Power of Attorney for James V. Pickett Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (see Exhibit 24(c) therein). 24(d) Power of Attorney for Joseph F. Annual Report on Form 10-K for the fiscal year Keeler, Jr. ended December 31, 1997 (see Exhibit 24(d) therein). 27 Financial Data Schedule Contained herein.
EX-10.D 2 EXHIBIT 10(D) 1 EXHIBIT 10(d) SECOND AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT This is an amendment made effective February 17, 1999, to the Amended and Restated Employment Agreement dated March 23, 1993 (the "Original Agreement") between Metatec Corporation, a Florida corporation (the "Company"), and Jeffrey M. Wilkins ("Mr. Wilkins"), as amended by the First Amendment To Amended and Restated Employment Agreement dated March 21, 1996 between the Company and Mr. Wilkins (the "First Amendment", and together with the Original Agreement, the "Agreement"). The Company and Mr. Wilkins hereby agree as follows: Section 1. Board Committee Authorization. For purposes of clarification, and without limiting any provision of the Agreement, the authority of the Company's board of directors under the Agreement may be exercised by any duly designated committee of the board. Section 2. Incentive Bonus Plan. Section 6 of the Original Agreement and Section 1 of the First Amendment are hereby deleted from the Original Agreement and the First Amendment, respectively, in their entirety, and no bonuses shall be payable under those provisions for any period after December 31, 1998. Beginning with calendar year 1999 and for each calendar year thereafter, the Company shall pay to Mr. Wilkins an annual bonus (the "Incentive bonus") based upon the amount of the Pre-Tax Profit (defined below) for the applicable calendar year, with the amount of the Incentive Bonus calculated as follows: (a) For calendar year 1999, the Incentive Bonus shall be an amount equal to 5% of the Pre-Tax Profit that year, up to a maximum of $7.5 million of Pre-Tax Profit (the "Threshold"), plus 2.5% of any Pre-Tax Profit that year in excess of the Threshold. (b) For calendar year 2000, the Incentive Bonus shall be an amount equal to 4% of the Pre-Tax Profit that year, up to the Threshold, plus 2.5% of any Pre-Tax Profit that year in excess of the Threshold. (c) For calendar year 2001, the Incentive Bonus shall be an amount equal to 3% of the Pre-Tax Profit that year, up to the Threshold, plus 2.5% of any Pre-Tax Profit that year in excess of the Threshold. (d) For calendar year 2002 and each calendar year thereafter, the Incentive Bonus shall be an amount equal to 2.5% of the Pre-Tax Profit for the applicable calendar year. Each annual Incentive Bonus shall be payable in quarterly installments, based upon calendar quarters, with each quarterly installment to be in an amount equal to the result obtained when (i) the Pre-Tax Profit for that calendar quarter and all prior calendar quarters is multiplied by the percentage or percentages applicable to such Pre-Tax Profit under the preceding provisions of this section, and (ii) the result is reduced by the aggregate amount of all Incentive Bonus installment payments previously made with respect to that calendar year; provided that if Mr. Wilkins receives Incentive Bonus installment payments for any or all of the first three calendar quarters in any calendar year in an aggregate amount 2 which exceeds the annual Incentive Bonus payable for that calendar year, then the Company shall have the right to offset such excess against the amounts next payable by the Company under the Agreement until such excess is fully recovered by the Company or, if such offsets are insufficient to permit the recovery of such excess, require Mr. Wilkins to repay the unrecovered portion of such excess promptly following the Company's request. The Incentive Bonus installment payments for the first three calendar quarters of each calendar year shall be paid not later than 30 days after the applicable calendar quarter, and the final Incentive Bonus installment payment, if any, for each calendar year shall be payable not later than 90 days after the end of that calendar year. The obligation of the Company to pay Incentive Bonuses shall continue with respect to the three calendar years of the Company ending after the date of termination of Mr. Wilkins' employment under the Agreement, including without limitation termination in the event of Mr. Wilkins' death or Long-Term Disability or termination by Mr. Wilkins for Good Reason under Section 10(c) of the Agreement (as those terms are defined in the Agreement), unless such termination is a result of a voluntary termination by Mr. Wilkins other than for Good Reason under Section 10(c) of the Agreement or a termination by the Company for Cause under Section 10(b) of the Agreement (as those terms are defined in the Agreement). For purposes of this amendment and the Agreement, the term "Pre-Tax Profit" for any period shall mean the net pre-tax profit of the Company for such period, determined on a consolidated basis in accordance with generally accepted accounting principles, consistently applied, before deducting (A) any amounts payable for any federal, state, or local taxes based upon or measured by income, and (B) any amounts paid or payable to Mr. Wilkins under this section. Section 3. Construction. In the event of any inconsistency between the provisions of this amendment and the Agreement, the provisions of this amendment shall control. Except as modified by this amendment, the Agreement shall continue in full force and effect with change. METATEC CORPORATION By /s/ Julia A. Pollner --------------------------------------------- Julia A. Pollner, Vice President, Finance /s/ Jeffrey M. Wilkins --------------------------------------------- JEFFREY M. WILKINS EX-10.P 3 EXHIBIT 10(P) 1 EXHIBIT 10(p) METATEC CORPORATION OPEN BOOK MANAGEMENT PLAN WHAT IS OPEN BOOK Open Book Management is a way of MANAGEMENT? operating and growing a business that involves a company's associates in its financial operations; allowing them to think, feel, and act like owners. Important numbers from the company's operations including the annual plan, income statement and balance sheet are shared, allowing associates to understand and affect business performance. In addition, through a Performance Sharing system, associates have a stake in the outcome of the business. With Open Book Management, people are expected to have greater influence over the future performance of their company and therefore their own career opportunities. Open Book Management Open Book Management at Metatec is At Metatec designed to make the numbers of Metatec our business understandable, give everyone a stake in the results and essentially make every associate a member of a high performance team; a team that delivers "great performance." It is our intent that associates see themselves as partners in the business and teammates with all other associates. As teammates and partners in Metatec, expected to help run the business as part of their daily responsibilities, everyone needs to understand what the business is all about. In order to understand and help influence profitable business growth, associates receive the company's financial information so that they can evaluate, understand and act on it. Regular team meetings take place all across the company to communicate this information and to solicit feedback. The meetings follow a monthly "Scorecard Meeting" where people with operational responsibilities update revenue and expense forecasts. This allows income and expense adjustments to be made quickly, thereby keeping the business on track and identifying opportunities for improving performance. Performance Sharing An important part of Open Book Management is providing teammates with a stake in the outcome. At Metatec, this program is called "Performance Sharing." The program financially rewards Metatec associates for helping achieve the company's financial goals. It emphasizes achievement of an annual financial plan for the company ("The Fixed Plan") and provides a financial reward for meeting operating goals. The Performance Sharing program is based upon points assigned to associates on an annual basis. The value of points is directly related to the financial performance of the company relative to 2 the annual plan and is frequently updated and communicated to all associates. Each Scorecard Meeting includes a projection for the value of a Performance Sharing point for the current quarter. All eligible associates are assigned a number of points and can calculate the amount of Performance Sharing that they can receive for that quarter. After the end of the quarter, payments are made equal to the number of points held times the value per point for the quarter. A maximum percentage of the Performance Sharing is paid out in any given quarter equal to the percentage of the annual plan earnings expected to that date. If results fall short of plan in any quarter, but results for the year meet or exceed plan, the entire amount of the Performance Sharing may be earned. Associates are eligible to participate in the Performance Sharing system starting with the first full quarter following the end of their initial six months of employment. An associate must be with the company for the entire quarter to receive a Performance Sharing payment for that quarter. Performance Sharing points are assigned based upon classification of the job held by the associate. Terminology Open Book Management uses certain words and phrases to describe various program elements. Here are just a few: The Scorecard - A breakdown of the revenue and expense forecast for the current and next two months, updated on a monthly basis. The Scorecard also determines the value of points for the Performance Sharing program. The Scorecard Meeting - A monthly meeting held to update revenue and expense forecasts for the current month and next two months, explain significant variances, review previous month's performance, share success stories, and discuss upcoming events. Team Scorecard Meeting - A monthly meeting held at the department or work unit level to review the Scorecard and discuss departmental and company issues. Scorecard Line Item Owners - The global team that meets monthly to update the Scorecard and discuss current business issues. Each member of the team is responsible for forecasting a particular section of the company's revenues or expenses. Performance Sharing - A program to give teammates a stake in the outcome of the business. 3 Critical Numbers - The numbers that determine a company's success. When they move in the right direction, a company is on the right track toward achieving its objectives. Metatec's critical number in 1999 is operating profit before performance sharing expense. The Annual Plan - A plan developed and finalized each year by the executive management team of the company. The overall consideration in the formulation of the plan is the performance necessary to assure adequate access to growth capital, to earn and maintain equity market confidence, to assure adequate and steady stock price growth and to generate capital for growth and diversification. The Guidelines - Refers to the Official Guidelines for Tracking Company Stock and Handling "Insider" Information. The Guidelines include details of the policy which govern current and former associates regarding buying, selling or trading company securities and the non-disclosure of material information. Certification - A letter signed by associates who wish to participate in the Performance Sharing program saying they understand and agree to comply with the guidelines. Compliance - A compliance letter signed by associates who wish to participate in the Performance Sharing program saying they have complied with and will continue to comply with the guidelines. Material Information - Any information that an investor would consider important in a decision to buy, hold, or sell stock. Examples of such information would include projections of future earnings, news of a major pending transaction, gain or loss of a customer and development of a major new product or service. Public Information - Material information about a company made public through a widely disseminated public announcement. Scorecard Terminology Revenue - Sales dollars generated by billing clients for jobs shipped during that month. COPS - Stands for the Cost of Product Sold, which is all the costs directly incurred in order to produce, package and ship the jobs. 4 COPS is divided into two categories: 1) Cost Centers, and 2) Unallocated COPS. Cost Centers - The expenses generated by individual departments as they produce products (i.e. Wages, benefits, maintenance, etc.). Unallocated COPS - Includes general expenses associated with making a product, such as polycarbonate, ink royalties and freight. Gross Profit - Revenue minus COPS. SG&A - Stands for Sales, General and Administrative expenses. These include indirect expenses incurred by the organization in making the product. SG&A is divided into two categories: 1) Direct SG&A, and 2) Corporate SG&A. Direct SG&A - Includes expenses incurred specifically because we sell the product (i.e. sales, product management, customer support). Corporate SG&A - Includes all other departments that support the organization (i.e. OD, IS, Accounting). Operating Profit - Gross Profit minus Total SG&A. Other Income & Expenses - Includes additions and subtractions of items not directly associated with operations (i.e. interest expense, income from rent, etc.). Operating Profit Before Performance Sharing - The profit before we pay Performance Sharing. THIS IS THE KEY NUMBER. Performance Sharing What it is Program Description An essential part of the company's Open Book Management system is giving associates a stake in the outcome. In 1999, the rewards of the company's success will be shared with all associates through a program called Performance Sharing. How it works Each eligible associate is assigned points. Supervisors will communicate to associates what the points are for their job group. 5 Each quarter the company will distribute Performance Sharing to all eligible associates. The dollar amount of the Performance Sharing is based upon the number of points an associate has been assigned multiplied by the dollar value of a Performance Sharing point for that quarter. How points were assigned All jobs at Metatec were classified into one of six groups. Performance Sharing points were then assigned to each job group. When assigning points to jobs, the senior team took into account the extent to which a job affects revenue, assets, and people, and otherwise impacts the organization. Eligibility Associates are eligible for Performance Sharing points The First Full Quarter After they have completed an initial 6-month waiting period.
Hire Month Eligible for Points Before July 1998 1st Quarter 1999 July, August, September 1998 2nd Quarter 1999 October, November, December 1998 3rd Quarter 1999 January, February, March 1999 4th Quarter 1999
Associates must also sign the Open Book Management Certification letter in order to be eligible for Performance Sharing. Part-time associates Part-time associates are eligible for the program on the same schedule as full-time associates and will receive half of the Performance Sharing points for full-time associates in the same job group. Re-hires If associates leave the company and then rejoin at a later time, any full calendar quarters that they worked prior to leaving will count toward the initial six-month waiting period. Once rehired, they are eligible for Performance Sharing the next full calendar quarter after their rehire date (assuming they have met the six-month requirement). 6 The effect of job changes When associates move into a position that has more points assigned to it than their previous position, they will be eligible for the additional points in the first full quarter they are in the new position. Performance Sharing distribution Performance Sharing will be distributed the month following each quarter. Time is needed to complete the financials for the quarter and to calculate the actual value of Performance Sharing points. Performance Sharing will be distributed each quarter up to the amount projected for that quarter and any excess will be carried over into the next quarter. If the profit goal is not reached for that quarter, it can be made up in later quarters. Any excess for the year will be distributed after the end of the year with the 4th quarter Performance Sharing. Calculating Performance Sharing amounts The profit projected for each quarter in the company's 1999 Annual Plan varies based on the timing of our customers' work and when we invest in our business. The monthly Scorecard shows the projected Performance Sharing for each quarter. The goal for the company this year is to make $12.2 million in operating profit before Performance Sharing expense. If the company reaches this goal, the value of a Performance Sharing point for the year is designed to total $10. To calculate what an associate's Performance Sharing before deductions will be for the year if the company meets its plan, multiply the number of points by $10. Associate termination Eligible associates will receive Performance Sharing if they are on the company's payroll through the end of the quarter. In order to receive any excess for the year, they need to be on payroll through the end of 1999. Exceeding or not meeting profit plans If the company has an operating profit before Performance Sharing expense greater than $12.2 million, a portion of the 7 profits in excess of that amount will be placed into the Performance Sharing pool for distribution after the end of the year. The dollar value of Performance Sharing points would increase accordingly, and Performance Sharing would be distributed to associates based on the number of points they are assigned. If the company does not meet its plan, there is a formula that calculates a straight percentage of distribution from 99% down to 50%, at which point it drops more rapidly. For example, if the company reaches 80% of its profit goal for the year, then Performance Sharing points would be worth approximately $8 each for the year. Guidelines and Policy for The Open Book Management program at Trading Company Stock and Metatec allows everyone to act Handling Confidential like company owners and have a financial Information stake in the outcome. This happens, in part, by the company sharing confidential financial and non-financial information with associates. Knowing the information makes associates "insiders," a term used by the Securities and Exchange Commission, which means associates know information that could be financially beneficial to them, their family, friends and acquaintances when involving the buying or selling of Metatec securities (in our case, Metatec common stock). Being an insider gives associates a stake in the outcome, but also carries responsibilities. These guidelines will help clarify key issues and procedures. Important Things to Remember There are three important things to remember: 1. The information the company shares with associates is confidential - "for your eyes only." 2. There are times when associates can buy and sell Metatec stock, and times when they can't. 3. Failure to comply with these guidelines can have serious consequences for associates and for Metatec, including possible civil and criminal penalties. The Policy Here is Metatec's Policy: 1. Associates are not permitted to disclose confidential information about Metatec to anyone outside the company. 2. Neither associates, their families, nor members of their households are permitted to buy or sell Metatec stock or other company securities when in possession of material non-public information about the company. Material 8 information means information that an investor would consider important in a decision to buy, hold or sell stock or other securities. Examples include projections of future earnings, news of a major pending transaction, gain or loss of a customer and development of a major new product or service. This includes bad news as well as good news. Typically, company information will be considered "public" beginning on the third business day after it has been announced publicly by the company. 3. The same rules regarding stock trading and non-disclosure apply to information about any other company, such as Metatec's customers or suppliers, which is obtained in the course of employment by the company. Before Buying or Selling Metatec The company provides associates with help Stock, Contact the Compliance in staying in compliance with the above Officer policy. 1. To avoid accidental violation of the Policy, all transactions in Metatec's stock must be pre-cleared. 2. Contact Mary McDonald, Compliance Officer (ext. 3727 in Dublin), at least 10 days before buying or selling Metatec stock. 3. As a general rule, STOCK TRANSACTIONS WILL BE CLEARED ONLY ONCE EACH CALENDAR QUARTER DURING A 21-DAY PERIOD BEGINNING THE THIRD BUSINESS DAY FOLLOWING THE ANNOUNCEMENT OF METATEC'S QUARTERLY OR ANNUAL EARNINGS, but each transaction must be pre-cleared even if it is within that 21-day period. 4. This requirement does not apply to exercises of stock options, but it does apply to sales of option stock, including sales occurring at the same time as the exercise of an option. 5. Changes to associates' participation in the Metatec Associate Stock Purchase Program are subject to the same pre-clearance requirement. 6. For associates' and the company's protection, Metatec requires associates to certify understanding of and compliance with these guidelines on a periodic basis. If you have any questions about these guidelines, please contact the Compliance Officer. These guidelines are effective January 22, 1999. Metatec may supplement or modify these guidelines as circumstances require. EX-10.W 4 EXHIBIT 10(W) 1 EXHIBIT 10(w) CONSTRUCTION LOAN AGREEMENT THIS CONSTRUCTION LOAN AGREEMENT ("Loan Agreement"), dated as of the 15th day of January, 1999, by and between THE HUNTINGTON NATIONAL BANK, a national banking association, having an office at 41 South High Street, Columbus, Ohio 43215 ("Huntington") and METATEC CORPORATION, a Florida corporation, having an office at 7001 Metatec Boulevard, Dublin, Ohio 43017 ("Borrower"). WITNESSETH: In consideration of the covenants contained herein and other valuable consideration, Huntington and Borrower agree as follows: DEFINITIONS The following terms wherever used in this Loan Agreement shall have the following meanings: "Acquisition Costs" shall mean the costs of acquiring the Property. "Acquisition Costs Loan" shall mean that portion of the Loan Amount applicable and equal to the sum of the Loan Budget Amount for Acquisition Costs shown on the Cost Breakdown. "Acquisition Costs Statement" shall mean a statement setting forth, by line item and category, Acquisition Costs incurred, to be prepared, certified and approved as accurate by Borrower. "Change Orders" shall mean any amendments or modifications to the Plans or General Contract. "Completion" shall mean substantial completion of the Project, in accordance with the Plans, and of any necessary access and utilities serving the Project; issuance of all approvals and certificates by Governmental Authorities required for the permanent use and occupancy of the Project; issuance of a Certificate of Substantial Completion on AIA Document G704 by the Project Architect and the General Contractor; verification of substantial completion by Huntington's architect; and presentation of evidence of acceptance by all tenants having a right of acceptance as a lease condition. "Completion Date" shall mean January 1, 2000. "Construction Loan Checking Account" shall mean a separate non-interest bearing checking account established by Borrower with Huntington. 2 "Cost Breakdown" shall mean a statement setting forth, by line item and category, the Acquisition Costs, Hard Costs and Soft Costs and the Loan Budget Amounts in respect of Acquisition Costs, Hard Costs and Soft Costs, which statement is attached hereto as Exhibit A. "General Contract" shall mean any contract between Borrower and the General Contractor or any other person which requires the General Contractor or such other person to provide, or supervise or manage the procurement of, substantially all labor and materials needed for Completion of the Project. "General Contractor" shall mean Ruscilli Construction Company, Inc., and any successor engaged by Borrower with Huntington's consent. "Governmental Authorities" shall mean the United States, the state in which the Property is located and any political subdivision, agency, department, commission, board, bureau or instrumentality of either of them, including any local authorities, which exercises jurisdiction over the Project or the Property. "Hard Costs" shall mean the costs of all labor, materials, equipment, fixtures and furnishings necessary for Completion of the Project. "Hard Costs Loan" shall mean that portion of the Loan Amount applicable and equal to the sum of the Loan Budget Amount for Hard Costs shown on the Cost Breakdown. "Hard Costs Statement" shall mean a statement on AIA Documents G702 and G703 setting forth, by line item and category, Hard Costs incurred, to be prepared and certified by the General Contractor, certified and approved as accurate by Borrower, Project Architect and such others as Huntington shall reasonably require. "Huntington's Counsel" shall mean Bricker & Eckler LLP, 100 South Third Street, Columbus, Ohio 43215. "Initial Advance" shall mean the first advance of Loan proceeds. "Lien Waivers" shall mean lien waivers or releases from the General Contractor, subcontractors and suppliers evidencing payment of Hard Costs. 3 "Loan" shall mean the aggregate of the Acquisition Costs Loan, the Hard Costs Loan and Soft Costs Loan, which aggregate is equal to the Loan Amount. "Loan Amount" shall mean Seven Million Dollars ($7,000,000.00). "Loan Budget Amounts" shall mean the portion of the Loan Amount set forth in the Cost Breakdown to be advanced for each line item and category of Acquisition Costs, Hard Costs and Soft Costs. "Loan Documents" shall mean collectively the Loan Agreement, Note, Mortgage, and any other instrument, document, certificate or affidavit heretofore, now or hereafter given by Borrower evidencing or securing all or any part of the foregoing. "Mortgage" shall mean that certain Open-End Mortgage, Assignment of Rents and Security Agreement, of even date herewith, granted by Borrower to Huntington to secure payment and performance by Borrower in accordance with the terms and conditions of the Loan Documents. "Mortgaged Property" shall mean the Property and other property comprising "Mortgaged Property", as said term is defined in the Mortgage. "Net Operating Income" shall mean all rents and revenues of the Project and Property, less all reasonable and customary costs and expenses of operating the Project and Property, exclusive of any payment of interest or principal on the Note and of any charges or fees for the services of Borrower, or any party or entity financially affiliated with Borrower. "Note" shall mean collectively that certain Note, of even date herewith, made by Borrower to Huntington in the Loan Amount to evidence the Loan and any and all renewals, amendments, modifications, reductions and extensions thereof and substitutions therefor. "Plans" shall mean collectively the final plans and specifications prepared by Borrower, Project Architect or the General Contractor, and approved by Huntington, which describe and show the labor, materials, equipment, fixtures and furnishings necessary for the Completion of the Project, including all amendments and modifications thereof made by approved Change Orders. "Project" shall mean the 151,000 square foot warehouse facility to be developed and constructed on the Property. 4 "Project Architect" shall mean Wandel & Schnell, Architects, Inc., and any successor engaged by Borrower with Huntington's consent. "Property" shall mean the real property described in the Mortgage, upon which the Project is to be developed and constructed. "Retained Amounts" shall mean the greater of ten percent (10%) of Hard Costs incurred by Borrower through the end of the period covered by each Requisition or the actual amounts retained from the General Contractor, any subcontractor and any supplier for the same period. "Requisition" shall mean a statement executed by Borrower setting forth the amount of the Loan advance requested in each instance and including: the Acquisition Costs Statement, Hard Costs Statement and Soft Costs Statement; a list of proposed payees; Lien Waivers from the General Contractor for all Hard Costs covered by the Requisition. proof of payment of all Acquisition Costs covered by the preceding Requisition; Lien Waivers from all subcontractors and suppliers for all Hard Costs covered by the preceding Requisition; and proof of payment of all Soft Costs covered by the preceding Requisition; "Soft Costs" shall mean all costs, other than Hard Costs, necessary for Completion of the Project, including without limitation, architects' and attorneys' fees, ground rents, interest, real estate taxes, survey costs and insurance premiums. "Soft Costs Loan" shall mean that portion of the Loan Amount applicable and equal to the sum of the Loan Budget Amount for Soft Costs shown on the Cost Breakdown. "Soft Costs Statement" shall mean a statement setting forth, by line item and category, Soft Costs incurred and to be incurred, to be prepared, certified and approved as accurate by Borrower. 5 "Stored Materials Statement" shall mean a statement, which, if advances are to be made for stored materials pursuant to Section 3.12 hereof, shall be submitted with and made a part of the Hard Cost Statement. "Title Insurer" shall mean the issuer of the title insurance policy insuring the lien of the Mortgage. BORROWER COVENANTS Borrower shall commence construction of the Project no later than thirty (30) days from the date hereof and thereafter prosecute the same continuously and diligently, except during the existence of delays of not more than thirty (30) days caused by events beyond Borrower's control, and cause Completion of the Project on or before the Completion Date, time being of the essence. Borrower shall construct the Project in a good and workmanlike manner and in accordance with the Plans, using only materials, fixtures, furnishings and equipment that are not used or obsolete and shall cause the Completion of the Project free from defects and in accordance with the Plans. Upon demand of Huntington, Borrower shall correct any defects in the Project or any departures from the Plans not approved by Huntington. Borrower shall protect from theft and vandalism all portions of the Project and all tools and building materials stored on the Property. Borrower shall pay all Acquisition Costs, Hard Costs and Soft Costs required for Completion of the Project and all costs of completing any work required to be performed by Borrower under any purchase contract for or lease of all or part or the Project, or detailed work letter with respect thereto, to permit the lawful occupancy of space, including public space, in the Project by purchasers or lessees of such space as contemplated in the purchase contracts or leases for the same. Borrower shall keep the Project free from mechanics' and materialmen's liens, except as expressly permitted in the Loan Documents. Borrower shall pay all costs and expenses in connection with entering into the Loan with Huntington, the sale of participating interests in the Loan, the making of the Loan, the advance of Loan proceeds and the satisfaction of the terms and conditions of this Loan Agreement, including without limitation, the following: all costs and expenses of satisfying Lender's loan closing requirements, whether denominated as pre-closing, closing or general; all filing and recording fees and expenses and all document, mortgage, stamp or similar taxes; 6 all expenses of Huntington's in-house architect, engineer or inspector and all fees and expenses of any independent architect, engineer or consultant retained by Huntington in connection with the Project; all fees and expenses of Huntington's Counsel; all fees and expenses of any disbursing agent; and all fees and commissions of any broker, lawfully due and arising through Borrower from the making of the Loan. Borrower shall defend and indemnify Huntington against any claim by any broker for fees or commissions, arising through Borrower from the making of the Loan. Borrower shall receive and deposit all Loan advances in the Construction Loan Checking Account and hold the same as a trust fund for the purpose of paying only Acquisition Costs, Hard Costs and Soft Costs. Borrower shall not enter into any Change Order until Huntington shall have received a copy thereof. Further, Borrower shall not enter into any Change Order without Huntington's written consent if such Change Order (a) will increase or decrease the cost of achieving Completion in excess of Forty Thousand Dollars ($40,000.00), (b) will, when aggregated with all previous Change Orders, increase or decrease the cost of achieving Completion in excess of One Hundred Thousand Dollars ($100,000.00) or (c) will change the character, size, value or utility of the Project. The approval of any Change Order by Huntington shall not be construed as obligating Huntington to increase or advance any Loan Budget Amount on account of any such Change Order. Borrower shall permit Huntington and its representatives to enter upon the Property, inspect the Project and all materials to be used in the construction thereof and examine all detailed plans and shop drawings which are or may be kept at the construction site. Borrower will cooperate and cause the General Contractor to cooperate with Huntington in the performance of such inspections. At the time of each such inspection, Borrower will make available to Huntington on demand, daily log sheets covering the period since the immediately preceding inspection, showing the date, weather, subcontractors on the job, number of workers and status of construction. Borrower shall comply with all laws, statutes, ordinances, rules, regulations and orders of Governmental Authorities and shall promptly furnish Huntington with reports of any official searches and claims of violations made by Governmental Authorities. Borrower shall comply with all restrictions, covenants and easements affecting the Project or the Property and shall satisfy and keep satisfied any conditions to the zoning of the Property and to the 7 approvals of Public Authorities, including without limitation, conditions to building permits, curb cut permits, storm water and other discharge permits, operating permits, licenses and site plan approvals. Borrower shall promptly provide to Huntington copies of all contracts, bills of sale, statements, receipted vouchers and agreements under which title is claimed by Borrower to any materials, furniture, fixtures or equipment incorporated into the Project or subject to the lien of the Mortgage and any other data or documents in connection with the Project as Huntington may from time to time request. Borrower shall comply with Ohio Revised Code Sections 1311.01 to 1311.22, inclusive. Without limiting the generality of such obligation, the Borrower shall, immediately after the filing of the Mortgage, but prior to the performance of any labor or work or the furnishing of any materials for the Project that may give rise to a mechanics' lien, prepare and file with the County Recorder a Notice of Commencement; shall post and keep posted a copy of the same in a conspicuous place on the Property during construction of the Project; shall serve a copy of the same on each general contractor; and shall amend such Notice of Commencement and likewise file, post and serve each amendment, all as required by Ohio Revised Code Section 1311.04. Borrower shall maintain a complete record of the foregoing, of each Notice of Furnishing received by Borrower and of each release and waiver of a right to a mechanic's lien. Borrower shall faithfully keep and perform each and every covenant contained in the other Loan Documents, each of which is incorporated by reference herein. Borrower shall faithfully cause each of the representations made by it in Section 6 hereof to be continuously true and correct. Further, each Requisition presented by Borrower to Huntington, and the receipt of the funds requested thereby, shall constitute an affirmation by Borrower that the representations made by it in Section 6 hereof are true and correct as of the date of the Requisition and as of the date of the receipt of the funds requested thereby. Borrower shall indemnify and hold Huntington harmless from all claims of every person, including, without limitation, employees, contractors and tenants of Borrower, subcontractors, subtenants or concessionaires of any contractors or tenants, and employees and business invitees of any contractors, subcontractors, tenants, subtenants or concessionaires, arising from or out of the acquisition, development, construction, use, occupancy or possession of the Project or the Property, excluding however, any claim arising solely from the gross negligence of Huntington, its officers, employees, agents or contractors. LOAN ADVANCES GENERALLY Subject to the provisions of this Loan Agreement, Huntington will advance and Borrower will accept the Loan Amount in installments. The Initial Advance and all subsequent advances shall be made upon satisfaction of the applicable conditions precedent set forth in Section 4 hereof, in amounts which shall be equal to the aggregate of the Acquisition Costs, Hard Costs and Soft Costs incurred by Borrower through the end of the period covered by the Requisition less: 8 the Retained Amounts; and the total of the Loan advances theretofore made; and at the election of Huntington, any combination of the following further amounts: (1) all or a portion of the amount by which any Acquisition Costs, Hard Costs or Soft Costs are or are reasonably estimated by Huntington to be greater than the respective Loan Budget Amounts for such costs; and (2) any costs covered by the Requisition not approved or certified by Borrower, Project Architect or General Contractor, as the case may be, any Acquisition Costs covered by a previous Requisition for which proof of payment has not been received by Huntington, any Hard Costs covered by a previous Requisition for which Lien Waivers have not been received by Huntington and any Soft Costs covered by a previous Requisition for which proof of payment has not been received by Huntington. Borrower shall submit a Requisition for the Initial Advance within thirty (30) days after commencement of construction, for subsequent advances, not more frequently than monthly thereafter, and for a final advance promptly upon Completion. Requisitions shall conform to the Cost Breakdown and shall be received by Huntington at least ten (10) business days prior to the date of the requested advance. All advances to Borrower are to be made at Huntington's principal office or at such other place as Huntington may designate and shall be deposited in the Construction Loan Checking Account. Borrower's Requisition, the progress of construction and the conformity of the construction with the Plans is subject to Huntington's verification and approval. Huntington may use its own in-house engineers, architects and inspectors for such verification and to review plans, specifications and engineering reports, but shall have the right to engage the services of independent contractors, engineers, architects or consultants for such purposes. Borrower shall include in the Requisition for the Initial Advance all utility tap, frontage and capacity charges required for the Project and within seven (7) days after receipt of the Initial Advance provide evidence to Huntington that the right to tap and use all necessary utilities has been granted. Borrower hereby irrevocably authorizes Huntington to advance Loan proceeds to pay interest on the Note as it comes due and, provided that there is no Event of Default under the Note or Mortgage, as defined therein, or any event or state of facts, which after notice or the passage of time, or both, would constitute such an Event of Default, Huntington shall advance Loan proceeds and credit the same against interest then due under the Note, but not more in the aggregate than the Loan Budget Amount for interest as set forth in the Cost Breakdown. Loan advances for interest as set forth in the Cost Breakdown, however, shall be reduced by the Net Operating Income of the Project and Property. After Completion and prior to the advance of the full Loan Budget Amount for interest as set forth in the Cost Breakdown, Borrower shall (a) determine the Net Operating Income of the Project and Property for each calendar month, which 9 determination shall be certified to Huntington by the chief executive or financial officer of Borrower not later than the fifteenth (15th) day of the succeeding month, and (b) remit such Net Operating Income, or so much thereof as may be necessary, for timely payment of interest under the Note for such succeeding calendar month. Borrower hereby irrevocably authorizes Huntington to advance Loan proceeds to pay any or all of the costs and expenses set forth in Section 2.6 hereof, notwithstanding that Borrower may not have requested advance of such amounts and that there may be an Event of Default under the Note or Mortgage, as defined therein. In the event Borrower has not requested payment, Huntington shall give notice to Borrower that a payment has been made. The authorization granted hereby shall not prevent Borrower from paying such expenses from Borrower's own funds and shall not be construed as discharging Borrower's obligation to pay such expenses, as and when due. Further, Huntington shall not be obligated to advance Loan proceeds for such expenses unless Borrower has submitted a Requisition for the same and Huntington is otherwise obligated to advance Loan proceeds against such Requisition. Retained Amounts shall be advanced upon the satisfaction of the conditions set forth in Section 4.2 hereof, provided that Retained Amounts with respect to future tenant improvements, if any, shall be separately retained and advanced on a tenant by tenant basis. Subject to the prior application of the Net Operating Income of the Project against interest, Loan Budget Amounts for Soft Costs not advanced prior to Completion shall be advanced until exhausted, not more frequently than once a month, for Soft Costs after Completion. Huntington shall not advance Loan proceeds after the Conversion Date, as defined in the Note, and shall not re-advance repaid Loan advances. Huntington may, in its sole discretion, advance all or any portion of the amounts to be advanced hereunder, without regard to Borrower's satisfaction of the conditions precedent to its entitlement to Loan proceeds, and no person dealing with Borrower or the General Contractor or any other person shall have standing to demand any different performance from Huntington. Huntington may require that Loan advances be disbursed through a disbursing agent selected by Huntington and that disbursements be made directly to General Contractor, subcontractors and materialmen. In such event, interest shall accrue to Huntington from the time the Loan proceeds are advanced to the disbursing agent. Further, Huntington may, in lieu of the presentation of proofs of payment and Lien Waivers with the Requisition for the succeeding month, require the immediate presentation of proofs of payment and Lien Waivers against the advance of Loan proceeds. Huntington shall not make Loan advances for materials or furnishings which are stored on the Property, but not yet affixed to or incorporated into the Project, except in the case of major materials approved by Huntington and intended to be incorporated into the Project pursuant to the Plans, and then not until 10 Huntington shall have received: (a) bills of sale and other documentation evidencing payment in full for such materials, Borrower's ownership thereof and the release of any right, title or lien in respect thereof by any vendor; (b) evidence that such materials are covered by the insurance policies required by the Loan Documents and are identified and protected against loss, theft and damage in a manner acceptable to Huntington; and (c) evidence that advances made by Huntington for said materials do not, at any one time, exceed in the aggregate One Hundred Thousand Dollars ($100,000.00) inclusive of the amount requested. A drawing under any letter of credit which Huntington has issued or hereafter issues in connection with the Project or Property, irrespective of the account party thereunder, shall constitute an advance of Loan proceeds under this Loan Agreement and the amount thereof shall be evidenced and secured by the Loan Documents. The issuance of any such letter of credit shall effect a reduction, by the amount and during the existence thereof, of available Loan proceeds and Huntington, in its reasonable discretion, shall allocate such reduction to the Loan Budget Amounts which it deems most appropriate. CONDITIONS PRECEDENT TO OBLIGATION TO MAKE LOAN ADVANCES Huntington shall not be obligated to make the Initial Advance or subsequent advances unless the following conditions precedent shall have been and remain satisfied: Huntington shall have received a Requisition for the Initial Advance or subsequent advance, as the case may be; Huntington shall have received a Loan Fee in an amount equal to one-half percent (.50%) of the Loan Amount; Huntington shall have received and approved every item required to satisfy every loan closing requirement of Lender, whether denominated as preclosing, closing or general; Huntington shall have received and approved evidence of Borrower's payment of not less than One Million Three Hundred Eighty-Six Thousand Dollars ($1,386,000.00) of the Acquisition Costs, Hard Costs and Soft Costs shown in the Cost Breakdown as the required equity contribution; Borrower shall have certified that Huntington has been provided a copy of any amended Notice of Commencement required to be filed, posted and served in accordance with Ohio Revised Code Section 1311.04 and of any Notice of Furnishing received by Borrower in accordance with Ohio Revised Code Section 1311.05; Huntington shall have received an endorsement to the title insurance policy insuring the lien of the Mortgage, which endorsement shall (i) modify the effective date of such title insurance 11 policy to or immediately prior to the date of the advance, (ii) show no additional exceptions, except those approved by Huntington's Counsel and (iii) acknowledge the aggregate amount of Loan proceeds then advanced; For the advance immediately after the foundation of the Project has been constructed, Huntington shall have received and approved a survey of the foundation and Property, certified to within ten (10) days of the advance to Huntington and the Title Insurer, and otherwise in form and content acceptable to Lender; Existing improvements on the Property, if any, shall not have been materially injured or damaged by fire or other casualty unless, Huntington shall have received insurance proceeds sufficient in the reasonable judgment of Huntington to effect the satisfactory restoration of the said improvements and to permit completion of said improvements prior to the Completion Date, pursuant to terms of disbursement satisfactory to Huntington; The representations made in Section 6 hereof shall be true and correct on and as of the date of the advance with the same effect as if made on such date; and There shall exist no Event of Default under the Note or Mortgage, as therein defined, or any event or state of facts which after notice or the passage of time, or both, could give rise to such an Event of Default. Huntington shall not be obligated to advance Retained Amounts unless the following additional conditions precedent shall have been and remain satisfied: Huntington shall have received and approved evidence that Completion has been achieved; and Huntington shall have received and approved an "as built" survey of the Project and the Property, certified to within ten (10) days of the advance to Huntington and the Title Insurer, and otherwise in form and content acceptable to Lender. Notwithstanding the foregoing provision, Retained Amounts with respect to future tenant improvements shall be separately retained and advanced on a tenant by tenant basis. Borrower shall cause the satisfaction of each and every of the foregoing conditions precedent, whether precedent to the obligation to make the Initial Advance, a subsequent advance or the advance of Retained Amounts. ADJUSTMENTS TO COST BREAKDOWN Borrower shall prepare, certify and provide to Huntington a revised Cost Breakdown on AIA Document G703 with any Change Order provided to Huntington as required under Section 2.8 hereof. 12 If at any time Huntington gives notice to Borrower that, in Huntington's sole discretion, the undisbursed balance of the Loan Budget Amount for any line item or category of cost shown on the Cost Breakdown is insufficient to achieve Completion and to pay the Acquisition Costs, Hard Costs and Soft Costs, as the case may be, remaining unpaid, then Huntington may reallocate to such Loan Budget Amount any excess in any other Loan Budget Amount balance that Huntington, in its sole discretion, deems to be excessive. In such event, Borrower shall prepare, certify and provide to Huntington a revised Cost Breakdown on AIA Document G703. If at any time Huntington gives notice to Borrower that, in Huntington's sole discretion, the undisbursed balance of the Loan, including Retained Amounts, is insufficient to achieve Completion and to pay the Acquisition Costs, Hard Costs and Soft Costs remaining unpaid, Borrower, at its option, shall either: (a) deposit with Huntington an amount equal to such deficiency, which Huntington shall from time to time apply, or allow Borrower to apply, to such Acquisition Costs, Hard Costs or Soft Costs; or (b) make a payment against such Acquisition Costs, Hard Costs or Soft Costs in the amount of such deficiency so that the undisbursed balance of the Loan, including Retained Amounts, shall be sufficient to achieve Completion and to pay the Acquisition Costs, Hard Costs and Soft Costs remaining unpaid, and shall furnish Huntington with such evidence thereof as Huntington may require. In such event, Borrower shall prepare, certify and provide to Huntington a revised Cost Breakdown on AIA Document G703. Huntington shall have a lien on and security interest in any sums deposited pursuant to clause (a) above. Borrower shall have no right to withdraw any such sums, except for the payment of Acquisition Costs, Hard Costs or Soft Costs approved by Huntington. Any such sums not so used shall be released to Borrower upon Completion. If prior to Completion, an Event of Default shall occur under the Note or Mortgage, as defined therein, or any event or state of facts which after notice or the passage of time, or both, would constitute such an Event of Default, Huntington shall have all of the rights and remedies of a secured party under the Uniform Commercial Code, as enacted in the State of Ohio and may, at its option, apply such sums either to the costs of completing the Project or to the immediate reduction of outstanding principal, or interest or both under the Note. BORROWER REPRESENTATIONS Borrower represents that, if Borrower or any general partner of Borrower is a corporation, the same is duly organized, validly existing and in good standing under the laws of the state of its incorporation, has stock outstanding which has been duly and validly issued, is qualified to do business and is in good standing in the state in which the Project and Property are located, with full power and authority to consummate the transactions contemplated hereby; if Borrower or any general partner of Borrower is a partnership, the same is duly formed and validly existing, is fully qualified under the laws of the state in which the Project and Property is located to do business therein and has full power and authority to consummate the transactions contemplated hereby. Borrower represents that the Plans are satisfactory to Borrower, have been reviewed and approved by the General Contractor and the Project Architect; by all Governmental Authorities, to the extent required by applicable law; by each beneficiary under any effective restrictive covenant; and by each tenant under any lease covenant requiring plan approval. Further, that all construction, if any, already performed on the Project has been performed in accordance with the Plans approved by the persons named above and with any restrictive covenants applicable thereto; there are no structural defects in the Project or violations of any requirement of any Governmental Authorities with respect thereto; that the planned use 13 of the Project complies with applicable zoning ordinances, regulations and restrictive covenants affecting the Property as well as all environmental, ecological, landmark and other applicable laws and regulations; and that all requirements for such use have been satisfied. Borrower represents that the financial statements heretofore delivered to Huntington are true, correct and current in all respects and fairly present the respective financial conditions of the subjects thereof as of the respective dates thereof; that no material adverse change has occurred in the financial conditions reflected therein since the respective dates thereof and no borrowings, except the Loan, which might give rise to a lien or claim against the Mortgaged Property or Loan proceeds have been made by Borrower, or others since the date thereof. Borrower represents that there are no actions, suits or proceedings pending, or to the knowledge of Borrower, threatened against or affecting Borrower, the Property, the validity or enforceability of the Mortgage or the priority of the lien thereof at law, in equity or before or by any Governmental Authorities and that Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or Governmental Authorities. Borrower represents that the consummation of the transactions contemplated hereby and performance of this Loan Agreement, the Note and Mortgage have not and will not result in any breach of, or constitute a default under, any mortgage, deed of trust, lease, bank loan or credit agreement, corporate charter, by-laws, partnership agreement or other instrument to which Borrower is a party or by which Borrower may be bound or affected. Borrower represents that all utility services necessary for the construction of the Project and the operation thereof for their intended purposes are available in adequate capacities at the boundaries of the Property, including water supply, storm and sanitary sewer, gas, electric power and telephone facilities, and all of such utility services enter the Property through public rights-of-way or through recorded private easements reviewed and approved by Huntington. Borrower represents that it has entered into no contract or arrangement of any kind, the performance of which by the other party thereto would give rise to a lien on the Mortgaged Property, except for its arrangements with Project Architect, General Contractor, and contractors or subcontractors who have been paid in full and have filed Lien Waivers for all payments due under said arrangements as of the end of the period covered by the last Requisition. Borrower represents that all roads necessary for the full utilization of the Project for its intended purposes have either been completed or the necessary rights-of-way therefor have been acquired by appropriate Governmental Authorities or dedicated to public use and accepted by said Governmental Authorities, and all necessary steps have been taken by Borrower and said Governmental Authorities to assure the complete construction and installation thereof no later than the Completion Date or any earlier date required by any law, order or regulation. 14 Borrower represents that each of the leases of the Property are unmodified and in full force and effect, there are no defaults under any thereof and all conditions to the effectiveness and continuing effectiveness thereof required to be satisfied as of the date hereof have been satisfied. Borrower represents that there exists no Event of Default under the Note or Mortgage, as defined therein, and no event or state of facts exists which after notice or the passage of time, or both, would constitute such an Event of Default. Borrower represents that the Plans are the same as the filed plans referred to in the building permits for the Project. Borrower represents that Borrower has advised the Title Insurer in writing prior to the issuance of the title policy insuring the Mortgage, whether any site development, excavation or other work related to construction of the Project was begun or done before the Mortgage was recorded. Borrower represents that no assessments, except installments not yet due and payable, of any nature will remain unpaid after the last Hard Costs Loan advance, including, without limitation, assessments relating to streets, roads, entrances, water lines, sanitary and storm sewers, gas lines and all other utilities including, without limitation, impact fees and capacity charges. Borrower represents that the Property has not been damaged or injured as a result of any fire, explosion, accident, flood, gasoline or chemical leakage or other casualty. DEFAULT Upon the occurrence of any Event of Default under the Note or Mortgage, as defined therein, Borrower does hereby irrevocably authorize Huntington to complete the acquisition, development, construction and equipping of the Project and Property, with such changes as Huntington may, in its sole discretion, deem appropriate, all at the risk, cost and expense of Borrower, but Huntington is not obligated to do so. In the event that Huntington elects to proceed under such authorization, Huntington may assume or reject any contract entered into by Borrower in connection with the acquisition, development, construction or equipping of the Project or the Property, may enter into additional or different contracts for services, labor and materials required in the judgment of Huntington, to complete such acquisition, development, construction or equipping, and may make, compromise and settle all claims in connection with such acquisition, development, construction or equipping. All sums expended by Huntington in completing the acquisition, development, construction and equipping of the Project and the Property shall be deemed advances made by Huntington to Borrower secured by the Mortgage and, to the extent such advances exceed the Loan Amount, such advances shall be deemed to be for the protection of the Mortgaged Property and Borrower shall repay such sums upon 15 demand together with interest from the date of each advance at the Default Rate of Interest, as defined in the Note. Huntington may at any time abandon acquisition, development, construction and equipping of the Project and Property, after having commenced it, and may recommence such acquisition, development, construction and equipping of the Project and Property, upon Huntington's election to do so. For the purposes of completing the acquisition, development, construction and equipping of the Project and Property after an Event of Default under the Note or Mortgage, as defined therein, Borrower does hereby irrevocably appoint Huntington its attorney-in-fact with full power of substitution to execute and deliver such documents, to pay and receive such bonds, and to take such action as may be desirable in the judgment of Huntington to complete such acquisition, development, construction and equipping, all in the name of Borrower. Notwithstanding the foregoing, upon the occurrence of any Event of Default under the Note or Mortgage, as defined therein, Borrower does hereby irrevocably authorize Huntington to advance any undisbursed Loan proceeds directly to the General Contractor, subcontractors, materialmen and other persons to pay for Completion of the Project, but Huntington is under no obligation to do so. No further direction or authorization from Borrower shall be necessary to warrant such direct advances and all such advances shall satisfy pro tanto the obligations of Huntington hereunder and shall be secured by the Loan Documents as fully as if made to Borrower, regardless of the disposition thereof by the General Contractor, or other person. OTHER All documentation required or deemed by Huntington to be necessary in connection with this Loan Agreement shall be acceptable to and subject to the approval of Huntington as to form and content. Borrower acknowledges that Borrower has selected all architects, engineers, contractors, subcontractors, materialmen, and others furnishing services or materials for the Project and that Huntington shall have no responsibility whatsoever for them or for any inspection reports or for the quality of their materials or workmanship. It is understood that Huntington's sole function is that of lender and that the only consideration passing from Huntington to Borrower are the Loan proceeds in accordance with and subject to the terms of this Loan Agreement. Neither Borrower, nor any other person, shall have any right to rely on any approvals or procedures required by Huntington herein, such approvals and procedures being solely for the benefit and protection of Huntington. 16 Any advance by Huntington of Loan proceeds hereunder made prior to or without the fulfillment by Borrower of all of the conditions precedent thereto, whether or not known to Huntington, shall not constitute a waiver by Huntington of the requirement that all conditions precedent, including the non-performed conditions precedent, shall be required with respect to all future advances. No provision of the Loan Documents may be changed, waived, discharged or terminated orally, by telephone or by any other means, except an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. All conditions precedent to Huntington's obligation to make advances hereunder are imposed solely and exclusively for the benefit of Huntington and may be freely waived or modified in whole or in part by Huntington at any time, if in its sole discretion Huntington deems it advisable to do so. Upon satisfaction or waiver of all such conditions precedent, no person other than Borrower shall have standing to require Huntington to make any Loan advances or to be a beneficiary of this Loan Agreement or any advances to be made hereunder. Any notice required or permitted to be given hereunder shall be in writing. If mailed by first class United States mail, postage prepaid, registered or certified with return receipt requested, then such notice shall be effective upon its deposit in the mails. Notice given in any other manner shall be effective only if and when received by the addressee. For purposes of notice, the addresses of Borrower and Huntington shall be as set forth below; provided however, that either party shall have the right to change such party's address for notice hereunder to any other location within the continental United States by the giving of thirty (30) days' notice to the other party. If to Borrower: Metatec Corporation 7001 Metatec Boulevard Dublin, Ohio 43017 Attn: Julia A. Pollner If to Huntington: The Huntington National Bank Commercial Real Estate Department 8th Floor 41 South High Street Columbus, Ohio 43215 Except as herein provided, this Loan Agreement shall be binding upon and inure to the benefit of Borrower and Huntington and their respective heirs, personal representatives, successors and assigns. Notwithstanding the foregoing, Borrower may not assign, transfer or set over to another, in whole or in part, all or any part of its benefits, rights, duties and obligations hereunder, including, without limitation, performance of and compliance with conditions hereof and the right to receive the proceeds of current or future advances. HUNTINGTON AND BORROWER HEREBY MUTUALLY, VOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVE FOR THE BENEFIT OF THE OTHER ANY RIGHT TO HAVE 17 A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE LOAN DOCUMENTS, THE TRANSACTIONS RELATED THERETO OR THE RELATIONSHIP ESTABLISHED THEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT TO HUNTINGTON AND BORROWER TO ENTER INTO THIS TRANSACTION. IT SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY HUNTINGTON'S ABILITY TO PURSUE ITS REMEDIES INCLUDING, BUT NOT LIMITED TO, ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN THE LOAN DOCUMENTS. IN WITNESS WHEREOF, the parties have executed this Loan Agreement as of the day and year first above written, the execution hereof by Borrower constituting: (a) a certification that the representations made in Section 6 hereof are true and correct as of the date hereof; and (b) the undertaking of said Borrower that each Requisition shall constitute personal affirmation that at the time thereof said representations are true and correct. THE HUNTINGTON NATIONAL BANK, METATEC CORPORATION, a national banking association a Florida corporation By: /s/ Charles A. Gisha By: /s/ Julia A. Pollner --------------------------- -------------------------------- Its: Vice President Its: Vice President-Finance -------------------------- ------------------------------- EX-21 5 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF METATEC CORPORATION Metatec/Discovery Systems, Inc., an Ohio corporation Metatec Worldwide, Inc. an Ohio corporation Metatec International B.V., a Netherlands corporation Metatec International, Inc., an Ohio corporation Metatec Acquisition Corp., an Ohio corporation EX-23 6 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-48021, No. 33-52700, No. 33-80172, No. 33-84022, No. 33-71080, No. 33-80170, No. 333-03125, and No. 31027 of Metatec Corporation on Form S-8 and Registration Statement No. 333-03123 on Form S-3 of our reports dated February 25, 1999, included in this Annual Report on Form 10-K of Metatec Corporation for the year ended December 31, 1998. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP March 29, 1999 Columbus, Ohio EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET DATED AS OF DECEMBER 31, 1998, AND ITS CONSOLIDATED STATEMENT OF OPERATIONS, CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, AND CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998, WHICH FINANCIAL STATEMENTS ARE INCLUDED IN ITEM 8 OF THIS REPORT, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. Year DEC-31-1998 JAN-01-1998 DEC-31-1998 2,557,221 0 22,125,889 490,000 3,207,460 29,162,394 84,756,808 (28,929,754) 105,442,814 22,461,348 41,031,569 0 0 715,348 41,234,549 105,442,814 80,919,128 80,919,128 57,276,391 77,082,530 0 260,000 1,186,375 2,684,769 1,262,000 1,422,769 0 0 0 1,422,769 0.23 0.23
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