Metatec International, Inc.

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Metatec International, Inc.

7001 Metatec Blvd.
Dublin, Ohio 43017
U.S.A.
Telephone: (614) 761-2000
Fax: (614) 761-4258
Web site:http//www.metatec.com

Public Company
Incorporated: 1985 as Discovery Systems, Inc.
Employees: 500
Sales: $77.28 million (2001)
Stock Exchanges: OTC
Ticker Symbol: META
NAIC: 334612 Prerecorded Compact Disc (Except Software), Tape, and Record Reproducing; 334611 Software Reproducing

Metatec International, Inc. creates, manufactures, and distributes CD-ROMs and DVD-ROMs. The company offers its customers a complete line of services that range from disc mastering and graphic design through replicating, packaging, and distribution. Metatec’s clients, which number in the thousands, include such major names as CompuServe, General Motors, and Harcourt Brace. The publicly held company has factories at its headquarters in Dublin, Ohio, and in Breda, Netherlands.

Beginnings

Metatec traces its roots to 1985 when Jeffrey M. Wilkins founded Discovery Systems, Inc. to offer laserdisc-based video programs for employee training in the banking, fast food, and healthcare industries. Wilkins had earlier cofounded CompuServe, Inc. with his father-in-law, building it from a small data-processing concern into a leading information services and Videotext company. After selling it to H&R Block in 1980 for $22.4 million, Wilkins stayed on as CEO until he was dismissed in 1985. Following an unsuccessful attempt to buy back the company, Wilkins assembled more than $10 million in venture capital and set out on a new tack. He formed Discovery Systems in a suburb of Columbus, Ohio, where a new plant was built to produce laser discs. Unlike other companies in the nascent optical disc business, Discovery planned to develop content in addition to manufacturing the discs. To this end, the company soon bought Columbus-based Morning Star Video Productions.

During Discovery’s first year Wilkins decided to begin manufacturing compact discs for outside clients, as the new CD format was starting to take off and there were still relatively few replication plants in the United States. The technology was similar to that of laser discs, and Wilkins quickly moved to license a CD manufacturing system developed by U.S. Philips Corp. and DiscoVision Associates.

Soon after entering the field, however, Discovery found its CD output abilities dwarfed by many newly arrived competitors. By 1988 wholesale prices for the discs had dropped by more than half, and the company, which had also branched out into recording and releasing albums by the likes of Cincinnati, Ohio’s Pure Prairie League, found itself under siege from investors and creditors who sought millions of dollars in payments. The U.S. Bankruptcy Court in Columbus was petitioned to dissolve Discovery, but instead the judge approved a reorganization plan that included an infusion of new capital from Larry and Robert Liebert, Wilkins, and Silco Corp. of Lakeland, Florida, a publicly traded real estate firm. The Lieberts and Silco each controlled 48 percent of the company, with Wilkins owning the remainder.

The resuscitated company was renamed Discsystems and its focus was changed to the manufacturing of CD-ROM discs, which were compact disc lookalikes that could store large quantities of data (such as the contents of an entire encyclopedia), as well as sound and images, for use on a computer. CD-ROMs at this time were in wide use at institutions such as libraries, but were only just beginning to gain acceptance as a consumer format. The reorganized company found the CD-ROM business to be a steadier and more profitable one than manufacturing audio CDs, though the company continued to make some of the latter, primarily for syndicated radio programs.

Some months later Silco Corp. purchased the Lieberts’ and Wilkins’shares of Discsystems, and the merged company’s name was changed to Metatec. Wilkins, who was serving as president and CEO, later bought up shares of the firm, gaining control of more than 10 percent over the next few years.

Introduction of Nautilus in 1990

In 1990 Metatec introduced a “CD-ROM Magazine” called Nautilus. The multimedia disc, which included games, photos, sound files, and software demonstrations, was initially sold by subscription, but also reached some users when it was bundled with new computers. Several Nautilus spinoff discs were produced by Metatec during the early 1990s, including “Best of Sound Bytes Vol.1” and “Best of Photography Vol. 1,” priced at $49.95. A World Almanac and Book of Facts CD-ROM, based on the Pharos print version, was priced at $79.95.

In 1992 Metatec sold the remaining Silco real estate investments and eliminated its restricted Class ? stock. The company had by this time developed relationships with several hundred clients, putting, for example, General Motors’ parts catalog on CD-ROM for use by its dealers. Metatec’s distinction in the CD-ROM market was its ability to put the data together for a customer, format it, and manufacture the discs, permitting one-stop shopping for clients. The company had also become the leading manufacturer and distributor of compact discs for the radio syndication market. Metatec was still losing money at this time, however, reporting a loss of $370,000 for fiscal 1992 on revenues of $17.1 million.

In the fall of 1993 the company announced a strategic alliance with CompuServe to produce CD-ROMs for the latter’s online service. The discs contained multimedia programs that could be linked to information from the Web. The slow speeds of home Internet connections limited the amount and quality of audio and video that could be obtained online, but the higher capacity, faster CD-ROM could provide such features with ease.

By 1994 Metatec was beginning to see the need for increased manufacturing capacity, and it began construction of a 65,000-square-foot addition to its existing 55,000-square-foot facility in Dublin, Ohio. The new space would give the company the ability to manufacture 12 million discs per year, up from five million. A contract was also signed with Colorado-based Optimus Corp. to produce and distribute several CD-ROM titles including Fed Log, a federal parts and logistics information disc that sold an estimated one million units per year. Metatec’s Nautilus was now reaching 12,000 subscribers who paid $11 a month.

In October 1994 Metatec bought Compact Disc Services, Inc. of Saratoga, California. CDSI offered CD-ROM publishing services to customers on the West Coast. For fiscal 1994 the rapidly growing company reported revenues of $28.9 million and net earnings of $1.69 million.

In 1995 Metatec signed an agreement with Harcourt Interactive, a division of Harcourt Brace College Publishers, to help develop multimedia CD-ROM products that would complement various Harcourt Brace textbooks. The company also announced plans to work with International Data Group of Boston to create a CD-ROM magazine called Multimedia WorldLIVE!, based on IDG’s publication Multimedia World . The first issue was released in July. In the fall Metatec folded the Windows-based version of its money-losing Nautilus into Multimedia WorldLIVE!, while continuing to publish a separate Macintosh version for a time. Multimedia WorldLIVE! was bundled with Multimedia World print copies, 100,000 of which were sold through subscriptions and on newsstands.

In the spring of 1996 Metatec announced another expansion of its Dublin plant, adding 80,000 square feet to the existing 120,000. The new space would be used to produce a data- storage version of the latest evolution of the optical disc, the DVD-ROM, which was expected to take off in the near future. Some $5 million was earmarked for the expansion and for purchasing new equipment. The company had also created a new division, the New Media group, which focused on applications that combined CD-ROMs and the Internet, an area which CEO Wilkins felt was the way of the future. One of the division’s first ventures was called Metatec Access, which offered customers a complete package of design, programming, and manufacturing services for Internet-linked CD-ROMs. The initial response to these initiatives was not overwhelming, however, and late in the year the New Media division was shut down and its operations renamed Metatec Access Services. At the same time the company was experiencing a reduction in orders for CD-ROM supplements to magazines. Seeking new ways to capture business, Metatec began to increase the company’s capabilities for packaging and distributing discs.

In late 1997 Metatec reached an agreement to provide financing to Optical Disc Corporation of California, a CD-ROM and DVD mastering system maker that had been supplying Metatec with equipment for ten years. Metatec was now making 40 million CD-ROMs per year for thousands of different customers. The company’s forte was its quick turnaround time, with many discs mastered, pressed, and shipped within three days. Major clients of the firm included Hewlett-Packard, Sun, Microsoft, and Bell & Howell. Wall Street was not showing much interest in Metatec, however, and during 1997 the company bought back 1.1 million shares of its stock, seeking to shore up the sagging price.

Company Perspectives:

To be the preferred supplier of supply chain solutions to the software, hardware, publishing and select industrial markets .

Purchase oflmation CD-ROM Business: 1998

In the late summer of 1998 the company spent $39.8 million to acquire the CD-ROM Services business of Imation Corporation, which included replicating plants in Menomonie, Wisconsin, Fremont, California, and Breda, the Netherlands. Imation retained ownership of the Menomonie site and Metatec later transferred its equipment and employees to other facilities. The acquisition doubled Metatec’s manufacturing capacity, and the firm, which now had ten sales offices in the United States and one in Europe, changed its name to Metatec International.

Following the Imation purchase Metatec began to expand in Europe, first by doubling the capacity of the Breda plant and later by adding a sales office in Germany. In July 1999, the company bought the technology products and services business of SilverSpan from its bankrupt parent MegaSoft, renaming it Metatec Internet Products Group. The $314,000 acquisition gave Metatec the ability to distribute software and other information products over the Internet. SilverSpan’s customers included Merrill Lynch, Motorola, and Dow Jones. During 1999 Metatec began yet another expansion in Dublin, devoting $7 million to a 155,000-square-foot fulfillment and distribution center next door to its existing facility.

Integration of the Imation businesses was proving problematic and costly, and Metatec reported a loss of $2.8 million for 1999 on earnings of $120 million. In early 2000 the company announced a reduction of 12 percent of its workforce, mainly at its Dublin headquarters. Wilkins stated that Metatec would not make any acquisitions in the near future and would concentrate on developing its core business of CD-ROM manufacturing. The DVD-ROM category was still not taking off, with only a small percentage of the company’s revenues coming from it.

The year 2000 saw Metatec develop a new service for its customers, in which they could create online catalogs of their CD-ROMs with the company’s software, and then use Metatec’s fulfillment services for packaging and delivery of the orders. A seamless link would be made from their own web sites to a Metatec-hosted catalog page. The service was not intended for major e-commerce companies, but rather for ones which had little infrastructure in place to handle sales over the Web. Metatec hired Columbus-based Ultryx to help in the development of the new service.

In September 2000 Metatec introduced a new mini-CD-ROM called the Metatec DataCard. The disc’s surface could be printed with business card information and cut into a variety of shapes, and it could be played in a computer’s disc drive to display information or links to the Web. The new cards were popular, but did not put a significant dent in the company’s losses, which hit $18.4 million for the year, a figure which was largely attributed to a $16.1 million writedown of goodwill and assets.

The first half of 2001 saw Metatec let another 20 percent of its workforce go while streamlining manufacturing and reducing office space in continued efforts to stem the flow of red ink. The company also renegotiated hundreds of customer contracts and eliminated a number of other “low margin” ones. The tough situation only got worse after the terrorist attacks on the United States in September, and plans were soon announced to shut down the firm’s California CD-ROM manufacturing facility, which was later sold to Médius Corp.

Metatec defaulted on a $20.2 million loan in October, and negotiations were held throughout the fall with its lenders to develop a new payment plan. In December an additional 20 percent reduction in the workforce was announced as the company continued to struggle. That month company founder Jeffrey Wilkins stepped down from the roles of CEO and president, and his place was taken by Christopher Munro, who had joined the company a year earlier as chief operating officer. Final figures for 2001 saw a further shrinkage of earnings, to $77.3 million, with losses hitting $29.9 million, two-thirds of which was due to restructuring and asset writedown costs. The company’s battered stock was subsequently scheduled to move from the NASDAQ to the OTC market.

Reeling from the U.S. economic slowdown and the costly integration of Imation’s CD-ROM operations, Metatec International struggled to pare its business down to the essentials and get back on track. With a drastically reduced workforce and its manufacturing recently consolidated, the company was looking to fresh leadership to bring it back to financial health.

Principal Subsidiaries

META Holdings, LLC; META Management, LLC; Metatec Worldwide, Inc.; Metatec International B.V. (The Netherlands).

Principal Competitors

Zomax, Inc. Cinram International, Inc.; DOCdata, N.V.; Technicolor Inc.

Key Dates:

1985:: Jeffrey Wilkins founds Discovery Systems, Inc.
1988:: Near bankruptcy, Wilkins gets help from new investors.
1989:: Company becomes Metatec, Inc.
1990:: Nautilus “multimedia magazine” is launched on CD-ROM.
1991:: Stock moves to the NASDAQ exchange.
1993:: Strategic alliance with CompuServe, Inc. is announced.
1998:: Company purchases Imation’s CD-ROM manufacturing business.
1998:: Corporate name is changed to Metatec International.
2001:: With losses mounting, Metatec lays off more than 40 percent of its workforce.
2002:: California manufacturing plant is sold; stock moves to the OTC market.