SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934]
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20743
OPEN PLAN SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
Virginia 54-1515256
State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4299 Carolina Avenue, Building C 23222
Richmond, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 228-5600
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. The issuer's revenues for the fiscal year
ended December 31, 1997 were $31,968,000.
The aggregate market value of the Common Stock held by non-affiliates of
the Company as of March 16, 1998 was $11,986,120.
The number of shares of Common Stock outstanding as of March 16, 1998, was
4,472,433.
Transitional Small Business Disclosure Format (check one): Yes _____ No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders (to be filed) is incorporated by reference into Part III
of this Form 10-KSB.
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TABLE OF CONTENTS
PART I
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Page
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Item 1 Description of Business................................................................. 1
Item 2 Description of Property................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................ 8
Item 6. Management's Discussion and Analysis or Plan of Operation............................... 9
Item 7. Financial Statements.................................................................... 15
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................................. 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....................................... 31
Item 10. Executive Compensation.................................................................. 31
Item 11. Security Ownership of Certain Beneficial Owners and Management.......................... 31
Item 12. Certain Relationships and Related Transactions.......................................... 31
Item 13. Exhibits, List and Reports on Form 8-K.................................................. 32
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<PAGE>
PART I
Item 1. .........Description of Business
Open Plan Systems, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Virginia on September 11, 1989. The Company restores,
remanufactures, manufactures and markets modular office Work Stations. The
Company operates remanufacturing facilities in Richmond, Virginia and Lansing,
Michigan, light remanufacturing in Dallas, Texas and manufactures its own line
of Work Stations at its Richmond, Virginia facility.
The Office Furniture Industry
The trend in the office furniture industry for the past twenty years has
been away from a simple desk and file design to a sophisticated Work Station
design because of the flexibility and productivity advantages that such Work
Stations provide. Work Stations have become more sophisticated as the usage of
computers and telecommunications equipment has increased in modern offices.
The Company competes in the office furniture industry with national and
regional manufacturers of new office furniture and with local and regional
remanufacturers of used office furniture. Steelcase, Inc. ("Steelcase"), Herman
Miller, Inc. ("Herman Miller") and Haworth, Inc. ("Haworth") constitute the
dominant manufacturers, collectively representing approximately two-thirds of
the installed base of Work Stations. Each of these manufacturers has created a
unique system for connecting panels, power and telecommunications raceways,
resulting in virtually no interchangeability between products of different
manufacturers. Each manufacturer's Work Stations provide for several hundred
variations. In recent years, more sophisticated telecommunications, power
distribution and wire management elements have been added to Work Stations as
computer usage has increased in offices. With respect to independent
remanufacturers of used Work Stations, the Company believes that the vast
majority of such remanufacturers are local operations serving a single city or
metropolitan area from a single sales office.
Since the mid-1980s, end-users with existing Work Stations have had four
primary options when considering changes in their existing Work Stations: (i)
acquire upgraded power components, new fabric and panel trim from the Work
Station manufacturer to be retrofitted on existing Work Stations, frequently
during installation in a new facility; (ii) acquire new Work Stations from a
manufacturer or dealer while disposing of existing furniture and Work Stations
to a broker or remanufacturing company; (iii) acquire remanufactured Work
Stations while disposing of the old furniture and Work Stations to brokers or
the remanufacturer; and (iv) acquire "as is" Work Stations.
The business of remanufacturing Work Stations has grown steadily over the
past several years. The Company believes this growth is principally due to the
greater availability of high quality remanufactured Work Stations at prices
substantially below manufacturers' retail list prices for new Work Stations,
thereby providing end-users with substantial value. In addition, the growth of
the remanufacturing business has been assisted by the increased availability of
used Work Stations for remanufacturing. Used Work Stations have become more
readily available in recent years due to an increased base of installed Work
Stations and corporate events such as mergers, acquisitions, divestitures,
downsizings and relocations. The adoption of recycling programs or policies by
businesses has also been a major factor leading to increased demand for
remanufactured Work Stations.
Overview of the Company's Operations
The Company's primary business to date has been the remanufacture of
modular office Work Stations. The Company purchases used Work Stations from
end-users, brokers and dealers and transports the Work Stations to its
facilities in Richmond, Virginia and Lansing, Michigan. The Work Stations are
disassembled, inventoried by component parts and stored. The Company then
restores the used Work Stations through the remanufacturing process to meet
customers' needs. Remanufacturing usually includes sanding, painting,
laminating, reupholstering and updating electrical components. In addition to
the remanufacture of used Work Stations, the Company in 1996 began to
manufacture its own line of new Work Stations as part of its growth strategy.
See "- Products" below. As a result of its increased manufacturing capacity, the
Company also has increased its ability to manufacture new component parts for
installation in its remanufactured Work Stations.
The Company's design staff works with customers to maximize available
office space through customized space plans. Customers are able to choose from
among several colors of laminate and paint and over 1,000 different fabrics.
After the initial sales call, the Company responds to the customer's needs with
a proposal which includes a computer aided design of the space, the number of
Work Stations and the cost, typically within 72 hours. Once a purchase order is
received, the fabric selected by the customer is applied to the panels, and the
various components of the Work Stations are assembled for shipping. The Work
Stations sold by the Company's direct sales force are installed at the
customer's offices by the Company's employees or by approved outside installers
giving the Company control over the entire process. The Company's large
inventory of disassembled component parts permits shipping generally within one
to four weeks, depending on the product and fabrics required, of receiving a
purchase order. The Company believes that its ability to provide high quality
Work Stations at discounted prices, coupled with its emphasis on superior
customer service through its design staff and Company trained or approved
installers, gives it a competitive advantage over manufacturers and other
remanufacturers of Work Stations.
The Company's Richmond, Virginia and Lansing, Michigan facilities include
all of the equipment required to remanufacture Work Stations including closed
and open painting and drying booths as well as sanding, woodworking and
reupholstering equipment. Plant layout has been designed to facilitate the most
efficient flow of materials and streamline the remanufacturing process through
disassembly, storage, remanufacturing and shipping. Quality control for the
remanufactured products occurs at various stages during the remanufacturing
process including the final quality control verifications at shipment and upon
installation. The Company's own line of private label Work Stations is
manufactured in its Richmond, Virginia, facility. The Company also has the
capability of doing light remanufacturing at its Dallas, Texas facility.
The Company sells Work Stations primarily through a network of fifteen
Company-owned direct sales offices. The Company believes that each of the fifty
largest metropolitan areas of the United States will support a sales office. In
marketing its products, the Company utilizes several innovative programs,
including its asset banking program, which allows customers to trade-in used
Work Stations in exchange for a credit towards future purchases.
Products
The Company's principal product to date has been remanufactured Herman
Miller Work Stations. However, with the October 1996 acquisition of Immaculate
Eagle, Inc., d/b/a TFM Remanufactured Office Furniture ("TFM"), a privately-held
regional manufacturer of Work Stations based in Lansing, Michigan, the Company
is now able to remanufacture panel systems produced by Haworth, the nation's
third largest manufacturer of new office Work Stations.
The Company believes that Work Stations offer significant advantages over
the traditional desk, free-standing file and permanent drywall dividers common
to historical office layouts. Work Stations enable businesses to house more
people in a given space than previously was possible because Work Stations
combine moveable panels, work surfaces, storage units, lighting and electrical
distribution combined into a single integrated unit. The end result is less
square feet of office space per worker and, therefore, lower facility costs per
employee.
Work Stations often are acoustically treated to provide conversational
privacy required by closer quarters. Because Work Stations usually are lower
than ceiling height, lighting, heating, ventilation and air conditioning are not
confined to individual spaces, allowing distribution among more workers which
reduces building and operating costs per employee. Work Stations incorporate
electrical circuitry necessary to operate computers and telecommunications
equipment. The Company's Work Stations meet the safety standards established by
Underwriters Laboratories. The Company believes it is one of only a few
remanufacturers whose Work Station components are listed with Underwriters
Laboratories.
Manufacturers and remanufacturers customize Work Stations to accommodate
specific job functions. Each manufacturer offers its Work Stations with or
without power access in a variety of panel heights, widths, paint colors and
fabrics. Work surfaces, drawer and file pedestals, storage components and
accessories are offered with various size and finish options.
The core of the Work Station is a panel two inches thick with widths
varying from 12 inches to 60 inches. Heights vary from 34 inches to 96 inches.
The panel frame may be covered with a laminated surface or, most frequently,
fabric over an acoustical batting to which removable, slotted steel side rails
and top caps are attached to accommodate the customized interconnection of
panels and the hanging of work surfaces or other components. Electrical outlets
and space for telephone and computer cables are provided by removable raceways
of metal and plastic attached at the base of the panel.
The Company currently offers office chairs, desks and other case goods from
various manufacturers. In addition, with the June 1996 purchase of certain
assets from Birum Corporation, a Michigan City, Indiana manufacturer of modular
office products, the Company has introduced its own newly-manufactured private
label Work Stations which it intends to market and sell through selected office
products dealers. The Company intends to continue marketing these products to
customers; however, this will not be the primary product line of the Company.
Inventory
The number of installed Work Stations has increased steadily over the past
twenty years and is now believed to exceed 19 million. The gradual aging of this
installed base of Work Stations has resulted in the increased availability of
used Work Stations for remanufacturing. The Company continuously seeks
opportunities to purchase used Work Stations throughout the United States
through competitive bids or private negotiations with end-users, brokers and
dealers.
Manufacturers of new Work Stations have developed trade-in programs to
assist their dealers in encouraging their customers to purchase the most current
products. Trade-ins also have been used to entice customers of dealers and
manufacturers to trade-in a competitor's Work Stations for new Work Stations of
the manufacturer. While each manufacturer has a slightly different approach to
the trade-in market, each manufacturer frequently contacts a list of brokers or
remanufacturers, such as the Company, to solicit the highest bid for the entire
inventory.
At the time the Company purchases inventory, it disassembles the Work
Stations and ships the disassembled Work Stations to its facilities where the
Company determines whether the parts should be cleaned and sold as part of its
"as is" sales program or remanufactured and stored as inventory and sold
thereafter. The Company strives to ship all of its customers' orders in four
weeks or less. The Company initiated one, two and four week lead time programs
to accommodate shorter lead times from customers given that these customers must
use a limited selection of fabrics and laminates. The Company also has the
ability to purchase or produce new parts and accessories which are in short
supply in the used furniture market, thereby eliminating the need to purchase
additional Work Stations for these specific parts. The Company believes its
ability to opportunistically acquire used Work Stations at attractive prices and
hold them for future sale gives it a competitive advantage over other
remanufacturers with less capital to do the same.
The Company utilizes a computerized inventory control system which serves
its sales, production, shipping and accounting functions. The system enables the
Company to continually monitor its inventory of component parts, to determine
its needs for additional purchases of used Work Stations, to track its work in
process and to facilitate the prompt delivery of remanufactured Work Stations to
its customers.
Distribution
Sales Offices. The Company currently operates fifteen sales offices in the
metropolitan areas of Richmond, Washington D.C., Baltimore, Atlanta, Charlotte,
Nashville, Chicago, New York, Philadelphia, Raleigh, Norfolk, Dallas,
Cincinnati, Lansing and Detroit. The Company believes that marketing and
distributing its Work Stations through a direct sales force located in
geographically dispersed sales offices gives it a competitive advantage over
independent remanufacturing competitors who are typically local companies with
limited sales and distribution capacity outside of their immediate market area.
Approximately 80% of the Company's sales historically have been made to
end-users by the Company's own sales representatives. In 1998, the Company
intends to focus on improving the performance of its existing sales offices and
based on the progress made in improving that performance may elect to open
additional sales offices as conditions permit. It will also continue to evaluate
the on-going viability of its existing sales offices and may reduce the number
of sales offices should they not be profitable.
Marketing and distributing its Work Stations through its own sales staff
allows the Company to eliminate the costs and additional price mark-up
associated with wholesale distribution, as well as enabling the Company to
retain direct control and oversight of its products and the selling process. A
direct sales force also permits the Company to deliver quality service to each
customer through its design and installation programs.
Dealer Network. In addition to its own sales staff, the Company maintains a
dealer network in those markets that are not sufficiently developed to support a
sales office or in larger markets where the Company does not yet have a sales
office. The dealer network allows the Company to market Work Stations on a
cost-effective basis to a large number of businesses which may not be reached by
the Company's sales representatives. Approximately 20% of the Company's sales
historically have been made through dealers. The Company believes that its
limited dealer network complements its strategy of expanding revenues through
its own sales offices. All dealer agreements are non-exclusive and may be
terminated at any time, which gives the Company the ability to establish a sales
office as soon as a market becomes capable of supporting an office.
"As Is" Sales. A small but profitable portion of the Company's sales is
made to brokers, end-users and others who buy used Work Stations from the
Company on an "as is" basis. The Company's "as is" program involves the
selective purchase of used Work Stations in good condition that do not require
substantial repair or other alteration. The Company sells "as is" Work Stations
at prices that are typically 17% of the retail list price for new Work Stations.
The "as is" program appeals to customers seeking sizable quantities of quality
Work Stations at "budget" prices.
Sales and Marketing
General. The Company's sales and marketing strategy relies primarily upon
producing quality products at competitive prices and providing superior customer
service. Each sales office advertises through direct mail, billboards,
newspapers, business magazines and journals. Direct mailing to targeted
professional groups as well as mailings prior to and following trade shows have
resulted in large sales to several new customers. The Company often uses booth
displays at trade shows for national organizations of purchasing managers,
facility managers, interior designers, architects and local business groups. The
Company is firmly committed to advertising and constantly re-evaluates the most
efficient means of reaching prospective customers.
The Company's marketing also emphasizes its commitment to recycling.
Through its remanufacturing process, the Company recycles several million pounds
of office systems furniture each year that might otherwise be deposited in
landfills. Some companies have adopted recycling policies or programs that
require those businesses to purchase recycled products in varying quantities.
Because the Company's remanufactured Work Stations are a recycled product, the
Company may have a marketing advantage over manufacturers of new Work Stations.
Asset Banking. The Company developed its asset banking program in 1994 as a
means to offer additional services to larger middle market and Fortune 500
businesses who reconfigure, dismantle and warehouse large quantities of Work
Stations as an ongoing part of their operations. The asset banking program
allows businesses to trade-in used Work Stations by "depositing" them with the
Company in exchange for a "credit" based on current list prices of new Work
Stations toward future purchases of the Company's remanufactured Work Stations.
Work Stations "deposited" by customers become part of the Company's inventory of
used Work Stations that can be remanufactured and are not expected to be
returned to the customer. When a business with a "credit" chooses to purchase
Work Stations at then-prevailing prices, the customer can make a complete or
partial "withdrawal" from its account to pay for the Work Stations. The customer
has the option to receive cash rather than a "credit" toward a Work Station
purchase. The effect of the program is to make a customer's used Work Stations a
renewable asset. The program eliminates the customer's inventory, storage and
maintenance costs for Work Stations not in use, while at the same time
positioning the Company for a future sale and increasing the Company's inventory
which can be immediately remanufactured and sold. The Company also provides
value-added services, such as design and project management, without charge to
the customer to enhance the attractiveness of the program. The Company is
currently able to offer both Herman Miller and Haworth Work Stations as a result
of the Company's recent expansion into the Haworth product line, thereby
expanding the availability and attractiveness of the program to more prospective
purchasers of Work Stations.
Rental Program. The Company's rental program offers a cost-effective
alternative to ownership of Work Stations. Under the rental program, the Company
rents Work Stations for a minimum term of six months. Rates charged by the
Company vary with the term of the rental, with higher rates being charged for
terms of less than one year. Rent payments typically are due monthly from
customers during the term of the rental. Upon expiration of the term of the
rental, the Work Stations are returned to the Company and can be rented again or
remanufactured and sold for an additional profit. The rental program is an
attractive alternative for those customers with capital spending constraints. In
addition, customers who wish to evaluate long-term furniture requirements are
able to defer a commitment to purchase Work Stations while meeting their
short-term requirements for office furniture. To date, substantially all of the
Company's rentals have been of "as is" Work Stations, although the Company is
planning to expand its rentals of remanufactured Work Stations. The rental
program has not contributed significantly to the Company's past revenues due to
the limited number of rentals which have occurred to date under the program.
Government Services Administration. The United States Government Services
Administration ("GSA") in 1996 approved the Company's inclusion on the New
Introductory Schedule as a distributor of Work Stations and other related
products and services to the federal government. This has enabled the Company to
sell its remanufactured Work Stations to the federal government as well as
develop a previously untapped source of supply through trade-ins and "asset
banking." The Company believes that its asset banking program should be very
attractive to the government due to the large inventories of excess and aging
Work Stations held by the government. The Company made its first sales to GSA
customers during 1997 and believes that this business will continue to grow in
1998.
Customers
The Company's customers range from small businesses to Fortune 500
companies. The typical size of a customer order is ten Work Stations or
approximately $25,000. Profit margins on smaller orders by small to mid-sized
customers are greater than on larger orders by Fortune 500 companies due to
volume discounts provided by manufacturers of new Work Stations on large orders,
which the Company is required to meet to compete for such orders. The Company is
not dependent upon any single customer or any single group of customers for a
significant portion of its sales. In 1997, the largest customer accounted for
less than 5% of sales. The loss of any one customer would not have a material
adverse effect on the Company.
Competition
The Company experiences intense competition in both the purchase of used
Work Stations and the sale of remanufactured and "as is" Work Stations. In
purchasing used Work Stations, the Company competes with manufacturers, dealers,
brokers and other remanufacturers. The competition between remanufacturers and
either manufacturers or dealers generally takes place in connection with
trade-ins by end-users of used Work Stations for new Work Stations. Brokers
typically purchase used Work Stations for resale to end-users and customers
which may include the Company, while other remanufacturers generally purchase
Work Stations for their own remanufacturing activities.
The Company competes with manufacturers, dealers, brokers and other
remanufacturers in the sale of its newly manufactured, remanufactured and "as
is" Work Stations. Competition is primarily based upon price, design, quality
and customer service. Certain manufacturers, such as Herman Miller and
Steelcase, remanufacture their own brand of used Work Stations for resale to
customers. These manufacturers and their dealers are able to offer both new and
remanufactured Work Stations to customers. The Company believes it has a
competitive advantage over such manufacturers and other remanufacturers due to
its innovative marketing programs, direct sales force, discount pricing and
customer service. However, manufacturers and dealers of new and remanufactured
Work Stations have certain competitive advantages including established
distribution channels and marketing programs, substantial financial strength,
long-term customers, ready access to component parts, and availability of used
Work Stations through trade-ins. Manufacturers also can sell new Work Stations
at very substantial discounts which reduces the Company's pricing advantage.
Such deeply discounted sales, however, generally occur only for very large
orders which often provide remanufacturers such as the Company the opportunity
to acquire used Work Stations of such purchasers at very attractive prices.
The Company believes it is the largest independent remanufacturer of Work
Stations in the United States based on gross revenues. Unlike most independent
remanufacturers, which are typically local operations serving a single city or
metropolitan area from a single sales office, the Company is able to compete
effectively in many markets through its distribution channels. The Company also
believes that its remanufacturing services are more comprehensive than the
services provided by most other remanufacturers. Many remanufacturers provide
minor repair services, but lack the personnel, equipment and facilities
necessary to completely remanufacture Work Stations. The Company's manufacturing
facilities include all of the equipment required to produce new as well as
remanufactured Work Stations including sanding, painting, drying, woodworking
and reupholstering equipment, and parts manufacturing equipment.
Intellectual Property
The Company is the owner of a service mark for "Open Plan Systems"
registered with the United States Patent and Trademark Office. The Company has
no trademarks or patents.
Original equipment manufacturers have obtained United States' patents on
certain component parts and design and manufacturing processes associated with
their own Work Stations. Management of the Company believes that the
remanufacturing of such Work Stations does not constitute an infringement of any
patents held by these manufacturers. However, there can be no assurance that
infringement claims will not be asserted against the Company. If such claims
were asserted, the Company could incur significant costs and diversion of
resources defending such claims and, in the event the Company did not prevail in
its defense, the Company could incur substantial damages that could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company manufactures new component parts that it cannot purchase
through the used Work Station market. In addition, the Company inaugurated a new
product line in 1997 with some limited success, including one major
installation. The Company intends to continue to review existing patents
applicable to Work Stations in the ordinary course of manufacturing new
component parts and developing its own product line.
Seasonality and Backlog
Historically, the Company's sales volume has been lower in the spring and
summer months and higher in the fall and winter months. The Company believes
that this seasonal increase in sales volume, which generally coincides with the
first and fourth quarters of the Company's fiscal year, is due to the tendency
of customers to expend funds budgeted for office furniture either early in the
calendar year or after the summer vacation season. Because the Company
recognizes revenues upon shipment and typically ships Work Stations within three
weeks of an order, a substantial portion of the Company's revenue in each
quarter results from orders placed by customers during that quarter. As a
result, the Company's revenues and profits are difficult to predict and may
fluctuate from quarter to quarter. The Company typically does not have any
significant backlog of customer orders because it generally ships products
within three weeks of receipt of an order.
Employees
As of December 31, 1997, the Company had 268 full time employees,
consisting of 103 manufacturing and remanufacturing personnel, 13 sales
managers, 56 salespersons, 34 installers, 52 office administrators and designers
and 7 management employees. The Company also had 3 part time employees. The
Company believes that its continued success depends on its ability to attract
and retain highly qualified personnel. None of the Company's employees are
covered by a collective bargaining agreement with the Company. The executive
officers and substantially all of the salespersons of the Company have agreed
that they will not disclose certain proprietary information of the Company, and
upon termination, will not solicit any customer of the Company for two years and
will not compete with the Company for one year. The Company has never suffered a
work stoppage and considers its relations with employees to be good.
Government Regulation
The Company's operations are subject to a variety of federal, state and
local environmental laws and regulations including those which limit the
discharge, storage, handling and disposal of hazardous materials. The Company's
principal environmental concerns relate to the handling and disposal of paints
and solvents. Management believes that the Company is in material compliance
with applicable federal, state and local environmental regulations. Compliance
with these regulations has not in the past had any material effect on the
Company's earnings, capital expenditures or competitive position; however, the
effect of such compliance in the future cannot be determined. Regulations
currently proposed under the Clean Air Act Amendments of 1990 may require
reduced emissions of volatile organic compounds including emissions from paints
and solvents used by the Company in the remanufacturing process. As a result,
the Company may be required to institute changes in its remanufacturing
processes in order to comply with these reduced emission standards. The
furniture industry and its suppliers are attempting to develop water-based paint
and finishing materials to replace commonly-used organic-based paints and
finishes which are a major source of regulated emissions. The Company cannot at
this time estimate the impact of these new standards on the Company's operations
and future capital expenditure requirements, or the cost of compliance.
The Company's operations are also governed by laws and regulations relating
to work-place safety and worker health, principally the Occupational Safety and
Health Act and accompanying regulations and various state laws and regulations.
The Company does not believe that future compliance with current laws and
regulations will have a material adverse effect on its financial condition or
results of operations.
Insurance
The Company maintains liability insurance policies covering a number of
risks, including business interruption, property, commercial crime,
comprehensive general liability and workers compensation and employer's
liability insurance. The Company believes that its insurance coverage is
adequate. In addition, the Company has obtained "key-man" insurance in the
amount of $3,000,000 on the life of Mr. Fischer naming the Company as sole
beneficiary.
Item 2. .........Description of Property
The Company leases 180,000 square feet of space at its facility in
Richmond, Virginia and 107,000 square feet of space at its facility in Lansing,
Michigan. The Richmond lease expires in July 1999, subject to an option to renew
for an additional three-year term. The Lansing lease expires in December 1998.
The Company also has numerous other leases for its sales offices throughout the
states in which it operates. The Company owns substantially all of its
equipment, including office and manufacturing equipment. The Company believes
that its properties are maintained in good operating condition and are suitable
for its purposes.
Item 3. .........Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, or any proceedings known to be
contemplated by governmental authorities, to which the Company is a party or of
which any of its property is the subject.
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 fiscal year covered by this report.
<PAGE>
PART II
Item 5. .........Market for Common Equity and Related Stockholder Matters
Market for Common Stock. The Company's Common Stock is listed on the Nasdaq
National Market under the symbol "PLAN." The following table shows, for the
periods indicated, the high and low sales prices per share for the Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Calendar Year High Low
<S> <C> <C> <C> <C>
1996
Second Quarter (from May 31, 1996) (1).............................................$13.00 $11.13
Third Quarter......................................................................$12.00 $ 8.75
Fourth Quarter.....................................................................$10.25 $ 8.25
1997
First Quarter .....................................................................$ 9.25 $ 5.00
Second Quarter.....................................................................$ 5.00 $ 3.50
Third Quarter......................................................................$ 6.75 $ 3.50
Fourth Quarter.....................................................................$ 6.25 $ 2.63
1998
First Quarter (through March 16, 1998).............................................$ 3.50 $ 2.63
</TABLE>
1) The Company's Common Stock began trading on the Nasdaq National Market on May
31, 1996, at an initial public offering price of $10.00 per share. Prior to that
date, there was no established trading market for the Common Stock.
As of March 16, 1998, there were approximately 1,204 holders of record of the
Company's Common Stock.
Dividend Policy. Prior to the Company's initial public offering in May
1996, the Company elected to be treated as an S Corporation for federal and
state income tax purposes. As a result, the Company's taxable net earnings were
taxed as income to the Company's shareholders in proportion to their individual
stockholdings. Commencing in 1992, the Company made distributions to
shareholders to enable them to pay the federal and state income taxes on their
pro rata share of the Company's S Corporation earnings and to provide a return
on their investment. In 1996, the Company made distributions to shareholders in
the amount of approximately $4,350,000. The amount distributed in 1996 included
$1,131,000 in March 1996 and $3,219,000 as a final S Corporation distribution in
June 1996, payable out of the net proceeds of the offering.
Since the Company's initial public offering, the Company has not declared
or paid any cash dividends or distributions on its capital stock (other than the
final S Corporation distribution described above). The Company currently intends
to retain earnings of the Company to support operations and to finance expansion
and therefore does not anticipate paying cash dividends on the Common Stock in
the foreseeable future. The payment of cash dividends in the future will depend
upon such factors as earnings levels, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
1997 Compared to 1996
Net Sales. Net sales for the year ended December 31, 1997 increased to
$32.0 million from $22.4 million for the year ended December 31, 1996, an
increase of 42.9%. The increase was primarily due to the acquisition of TFM in
the fall of 1996 and continued growth of existing sales offices. For those sales
offices which were open in excess of one year, five of the 10 sales offices
showed increased sales revenues in 1997 while the others remained constant or
decreased from 1996 levels. The Company also opened five new sales offices
during the year giving the Company a total of fifteen sales offices.
The Company's product sales mix for 1997 was split between remanufactured
Herman Miller (44%), new products including case goods and manufactured product
(41%) and remanufactured Haworth (15%). In 1996, the Company's sales volume was
more heavily weighted toward remanufactured Herman Miller product with smaller
concentrations of both Haworth and new product. During 1997, the Company also
resold more new furniture that it purchased from new furniture manufacturers and
new furniture the Company made. The Company believes that its reemphasis on the
remanufactured furniture markets will reduce its dependence on these alternate
revenue sources in future periods. The Company also anticipates further
integration of product lines across all branch offices during the next year.
During 1997, the Company opened five new sales offices versus the three new
offices it opened in 1996. Management believes that its strategy of controlling
distribution through its own sales offices provides an important competitive
advantage over manufacturers of new Work Stations who distribute through a
dealer network and over independent remanufacturers. Independent remanufacturers
are primarily local operations without a significant number of trained sales
employees. A direct sales force not only gives the Company control over the
selling process, but also allows the Company to capture a portion of the
dealer's "mark-up" in addition to manufacturing profit.
At the end of 1997, the Company reorganized its sales force into four
regions or groups. Three of the regions relate to the Company's direct sales
offices. The fourth group, National Sales, deals exclusively with larger
accounts, brokers, dealers and other buyers of the Company's products that are
best served by the corporate office. Each of these groups is managed by an
experienced manager with extensive furniture experience. The Company believes
that the addition of these managers will provide additional oversight and
training to the new sales offices and salespeople in order to increase market
share. The Company is also in the process of hiring additional managers and
salespeople in branches where the market demand dictates and the Company's
investment in those markets can be better leveraged.
Gross Margin. The Company's gross margin increased from $7.2 million for
the year ended December 31, 1996 to $8.4 million for the year ended December 31,
1997, an increase of 16.7% from prior year levels. This increase was caused by
the Company's increased sales volume. However, the Company's gross margin
percentage decreased from 32.3% in 1996 to 26.2% in 1997. This was attributable
to two primary causes. The first was the increased cost of making items new
rather than remanufacturing used product as the Company had done in prior years.
This manifested itself in higher overhead costs as the result of the additional
equipment and management required to produce the new product lines. The second
factor was the Company's overall discounting levels which were higher due to a
shift in the Company's revenue stream during the year. The Company sold more
product to National Account customers as opposed to its historical small and
middle market customers. National Account customers typically require higher
discounting levels due to increased levels of competition for these accounts
from the large manufacturers. The combination of these factors contributed to
the decrease in gross margin for the year.
During 1997, the Company analyzed its procurement options with a major
emphasis on determining the best, most cost effective manner of procuring each
item used in the manufacture and production of its product offerings. The
Company has implemented a three-prong approach to product acquisition. The
Company will continue to purchase product on the used furniture market when the
cost of such product does not exceed certain pricing thresholds, it will
purchase new product to meet demand when the purchase price is less than that of
remanufacturing or manufacturing the part, and it will make products where it is
cost advantageous to do so. The Company is also refocusing on producing
remanufactured product cost effectively. The Company is in the process of
reconfiguring the Richmond manufacturing plant to accomplish a better product
flow for its remanufacturing processes to reduce cost. Additionally, the Company
is focused on reducing inventory levels. While it is anticipated that all of
these programs will generate long-term benefits for the Company, the Company
will produce less product in the short-term meaning higher unit costs for those
products produced as inventory is drawn down.
Operating Expenses. Selling expenses increased by 91.2% to $6.5 million for
the year ended December 31, 1997 from $3.4 million for the year ended December
31, 1996. Selling expenses increased in terms of absolute dollars and as a
percentage of sales. The increase in the amount of spending was caused by the
Company's increased sales volume, extensive experimental advertising in certain
new markets and the Company's efforts to integrate TFM, including expenses to
announce the name change of TFM to Open Plan Systems. Additionally, the
Company's expenses increased as a percentage of sales due to the large number of
sales offices opened during the year. When the Company opens new sales offices,
it typically takes several years to generate enough sales to provide targeted
returns. With the large increase in sales offices, the higher initial costs of
these sales offices have not yet been offset with the increased sales volume
expected from these offices.
General and administrative expenses increased by 62.5% to $2.6 million for
the year ended December 31, 1997 from $1.6 million for the year ended December
31, 1996. The increase in 1997 was related to several items. First and foremost,
the Company incurred additional compensation expenses as the result of the
growth of the Company and the addition of several new management level resources
to handle the Company's increased size and complexity. The Company also recorded
a severance charge of $123,000 related to the termination of three employees of
the Company in the fourth quarter of the year. Additionally, the Company became
publicly traded in 1996 and incurred significant costs related to the increased
costs of SEC and shareholder reporting requirements. Finally, the Company
dedicated significant resources in the evaluation of potential business
combination relationships that determined not to be strategic fits for the
Company over the long-term. The Company believes that it has added the
appropriate resources to manage the Company's current operations and foreseeable
future growth. The primary initiatives in 1998 relate to the further integration
of TFM into the operations of the Company. This will be accomplished through the
completion of a project to modernize and integrate management information
systems on a common platform which should be accomplished in the second quarter
of this year. The Company believes that these expenses will continue to decrease
as a percentage of sales as revenue growth continues.
Other Non-Operating Income and Expenses. Total other income and expense
decreased from income of $143,000 for the year ended December 31, 1996 to income
of $14,000 for the year ended December 31, 1997. The primary reasons are that
the Company drew down its entire cash balance during the year and borrowed on
its line of credit during the year.
Income Taxes. The Company recorded an income tax benefit for the year of
$269,000 as opposed to expense of $376,000 in the prior year. The Company's
effective tax rate was 26.5% for 1997 as opposed to a pro-forma tax rate of
40.1%. The reason for the decrease in effective tax rates is due primarily to
the effect of permanent differences, such as goodwill and premiums on life
insurance policies increasing taxable income. The Company anticipates that this
will normalize somewhat over the next year.
Net (Loss) Income. The net loss for the year ended December 31, 1997 was $
748,000 versus a profit of $1.9 million for the year ended December 31, 1996.
The net loss was caused by higher production costs relative to sales revenue,
dramatically higher selling expenses and higher general and administrative
costs.
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash used by operations was $3.5
million for the year ended December 31, 1997 versus $1.5 million for the year
ended December 31, 1996. The decrease in cash from operations is due to the
Company's net loss for the year combined with higher inventory levels without a
corresponding increase in accounts payable. Accounts receivable grew in
correlation to sales volume but decreased and should continue to decrease with
relation to the number of days sales outstanding. The increase in inventories is
due to the new product lines manufactured, as well as the raw materials required
to manufacture, or remanufacture, such items. The Company has begun a program to
reduce these inventory levels and levels should decrease as the year progresses.
Cash Flows from Investing Activities. Net cash used in investing activities
was $1.4 million in 1997 versus $5.9 million in 1996. The decrease in investing
activities was the result of the TFM acquisition which totaled $4.0 million in
1996. The remaining decrease is due to the asset purchase from Birum Corporation
in 1996 offset by some additional spending on the new information systems
network.
Cash Flows from Financing Activities. Net cash provided by financing
activities was $1.9 million in 1997 versus $10.2 million in 1996. Net cash from
financing activities in 1996 was primarily related to the issuance of Common
Stock of $17.6 million. Of these proceeds, $3.8 million was distributed to prior
S Corporation shareholders to fund their tax liabilities and provide them with a
return on their investment in the Company until the initial public offering.
Additionally, the Company repaid $3.0 million of borrowings on revolving lines
of credits, including amounts acquired in the acquisition of TFM. In 1997, the
Company had to borrow from its line of credit to fund the additions to
inventory.
Expected Future Cash Flows. Cash provided by operating activities should
increase in 1998 as a return to profitability coupled with decreases in
inventory should offset any purchases of capital assets in 1998. The Company
anticipates that current cash balances plus cash flows from operating activities
and borrowings under its credit line will be adequate to fund its capital
expenditures.
Capital expenditures are anticipated to range between $1 to $2 million this
year as the Company continues to grow its manufacturing and remanufacturing
capabilities and improves the efficiency of its remanufacturing operations.
The Company does not currently anticipate making future strategic business
acquisitions but may elect to acquire such a company should the right
opportunity exist.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or in the year
2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000 issue") will depend on a number of factors, including
their software and hardware and the nature of their industries. Companies must
also coordinate with other entities with which they electronically interact,
including suppliers, customers, creditors, borrowers and financial service
organizations.
The Company has examined the Year 2000 issue and the potential costs and
consequences to the Company in addressing this issue. Although, as part of its
business and growth strategy, the Company is investing in new management
information systems, the Company has determined that its existing systems are
"Year 2000" compliant and therefore the Company will not have to convert any
existing software or hardware systems in order to process transactions in the
Year 2000. The Company also has considered the potential impact of the Year 2000
issue on third parties with which it does business and does not believe that
further action is necessary with respect to the Year 2000 issue. As a result,
management believes that the Year 2000 issue is not expected to have a material
impact on the Company's operations and that the cost of the Company addressing
the Year 2000 issue is not a material event or uncertainty that would cause its
reported financial information not to be necessarily indicative of future
operating results or financial condition.
Seasonality and Impact of Inflation
Historically, the Company has experienced lower net sales levels in the
second and third quarters of the year and increased levels in the first and
fourth quarters. The Company believes that this seasonal increase in sales
volume is due to the tendency of customers to expend funds budgeted for office
furniture either early in the calendar year or after the summer vacation season.
The Company believes that its new product offerings will enable it to be
somewhat more competitive on a year-round basis. Because the Company recognizes
revenues upon shipment and typically ships Work Stations within three weeks of
an order, a substantial portion of the Company's revenues in each quarter
results from orders placed by customers during that quarter. As a result, the
Company's results may vary from quarter to quarter.
Inflation has not had a material impact on the Company's net sales or
income to date. However, there can be no assurances that the Company's business
will not be affected in the future by inflation.
Forward-Looking Statements
The foregoing discussion contains certain forward-looking statements, which
may be identified by phrases such as "the Company expects" or words of similar
effect. In addition, from time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. The following
important factors, among other things, in some cases have affected, and in the
future could affect, the Company's actual results and could cause the Company's
actual results for fiscal year 1998 and any interim period to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. The Company assumes no duty to update any of the statements in this
report.
Potential Limitations on Future Growth. The Company has experienced rapid
growth since it commenced operations in 1989. The Company's continued growth
will be dependent in part on the Company's ability to manage growth effectively,
including the improvement of the Company's financial and management information
systems, the expansion of the Company's manufacturing and remanufacturing
operations and the recruitment and retention of executive staff and key
employees. The Company also will be required to manage working capital and
generate cash flow from operations to meet the needs of an expanding business.
There can be no assurances that the Company's future growth will not be limited
by insufficient cash flow or the lack of adequate financing required to fund
such growth.
Impact of Customer Preferences and Technological Advances on Sales. Certain
potential customers may prefer new Work Stations to the Company's remanufactured
Work Stations due to various factors, including the more developed and better
financed marketing efforts of new Work Station manufacturers and such potential
customers' reluctance to purchase remanufactured products because of image,
perceived questions of quality or other factors. In addition, technological
advances are frequently incorporated in new Work Stations by the leading
manufacturers, particularly with respect to electrical circuits necessary for
more advanced computer and telecommunications features. Although the Company has
the ability to incorporate these technological advances in its remanufactured
Work Stations, any such incorporation may increase remanufacturing costs and may
reduce the price advantage of remanufactured Work Stations over newly
manufactured Work Stations.
Dependence Upon Supply of Work Stations and Component Parts. The Company
presently purchases only used Herman Miller and Haworth Work Stations in its
remanufacturing operations. The Company does not have any binding agreements
relating to the purchase of used Herman Miller or Haworth Work Stations for
remanufacturing and generally purchases such used Work Stations from end-users,
brokers and dealers through competitive bids or directly negotiated
transactions. Although the Company in the past has not experienced a shortage of
used Work Stations at competitive prices, the success of the Company in the
future will depend in part upon its continued ability to obtain Herman Miller,
Haworth and other manufacturers' used Work Stations for remanufacturing in
sufficient quantities and at competitive prices. While the Company believes that
the availability of used Work Stations for remanufacturing will increase as the
installed base of Work Stations increases and ages, there may be periods of
tight supply as the demand for used Work Stations increases which could have a
material adverse effect on the Company's business and profitability.
The Company also purchases new and used component parts for use in the
remanufacture of Work Stations. Although the Company can manufacture many of its
component parts, there can be no assurances that shortages of certain component
parts or higher prices for such parts will not occur in the future. An inability
to produce or purchase necessary component parts in adequate quantities and at
competitive prices could have a material adverse effect on the Company's results
of operations and financial condition.
Dependence on Sales Office Profitability. The Company depends heavily on
its sales offices to provide revenue growth. The Company has opened several new
offices in the past two years. The Company's experience indicates that it takes
several years for a sales office to develop adequate sales volumes to generate
expected returns. Until that time, the Company's selling expenses increase
faster than the gross profit generated from those sales. An inability to
increase revenues of new sales offices to levels that would offset the
continuing expenses of such sales offices may adversely affect the profitability
of the Company's business.
No Assurance of Expansion of Product Lines and Business. The Company
historically has concentrated its business on remanufacturing Work Stations
manufactured by Herman Miller. However, in October 1996, the Company acquired a
privately-held remanufacturer of Haworth Work Stations. The Company intends to
continue to expand its product line to include Work Stations of other
manufacturers (particularly Steelcase) through the acquisition of companies
specializing in remanufacturing products of those manufacturers or the
establishment of additional remanufacturing facilities. The Company has limited
experience in remanufacturing Work Stations of manufacturers other than Herman
Miller and Haworth. Due to the differences in and lack of interchangeability of
the various Work Stations and certain component parts produced by the major
manufacturers, the Company's expansion of its product line will require
additional training of production personnel, the establishment of additional
sources of supply of used Work Stations and component parts and, in some cases,
the establishment of different remanufacturing processes. As a result of these
factors, there can be no assurance that the Company will be able to expand
successfully its product line or maintain its historical gross margins. The
failure of the Company to expand successfully its product line could have a
material adverse effect on the growth and profitability of the Company's
business.
Dependence Upon Primary Remanufacturing Facilities. The Company primarily
remanufactures Herman Miller Work Stations at one facility in Richmond,
Virginia, and Haworth Work Stations at one facility in Lansing, Michigan.
Although the Company presently maintains $3,000,000 of business interruption
insurance on the Richmond facility and $250,000 of such insurance on the Lansing
facility, a lengthy interruption of its remanufacturing operations at the
Richmond or Lansing facilities would have a material adverse effect on the
Company's results of operations and financial condition.
Tax Matters Associated with Prior S Corporation Status. Until May 31, 1996,
the Company had elected to be taxed under Subchapter S of the Internal Revenue
Code of 1986, as amended, as an S Corporation for federal and state income tax
purposes since its incorporation in 1989. Unlike a regular or "C Corporation,"
an S Corporation is generally not subject to income tax at the corporate level;
instead, the S Corporation's income is taxed on the personal income tax returns
of its shareholders. The Company's status as an S Corporation was terminated
upon commencement of its initial public offering. If the Company's S Corporation
status were denied for any periods prior to this termination by reason of a
failure to satisfy the S Corporation election or eligibility requirements of the
Code, the Company would be subject to tax on its income as if it were a C
Corporation for these periods. The payment of any such tax could have a material
adverse effect on the Company's financial condition and results of operations if
the full amount thereof is not reimbursed by those individuals who were
shareholders of the Company prior to the initial public offering. Such
shareholders have agreed to pay their pro rata share of any such tax and any
applicable interest, penalties and expenses in the event that the Company's S
Corporation status is denied for any taxable periods up to the date of the
termination of the Company's S Corporation status on May 31, 1996.
Potential Fluctuations in Quarterly Results; Seasonality. Historically, the
Company's business has been significantly affected by seasonal factors. The
Company typically has higher sales during the first and fourth quarters of its
fiscal year due primarily to the tendency of customers to expend funds budgeted
for office furniture either early in the calendar year or after the summer
vacation season. Because the Company recognizes revenues upon shipment and
typically ships Work Stations within three weeks of an order, a substantial
portion of the Company's revenue in each quarter results from orders placed by
customers in that quarter. Accordingly, quarterly revenue levels are subject to
substantial fluctuations and are often difficult to predict. Fluctuations in
operating results could result in volatility in the price of the Company's
Common Stock. If revenue levels are below expectations, operating results will
be adversely affected.
Competition. Competition in the Work Station segment of the office
furniture industry is intense. The Company competes with many other companies in
the sale of its new and remanufactured products as well as in the purchase of
"as is" Work Stations and component parts for use in the Company's
remanufactured Work Stations. In the sale of new and remanufactured Work
Stations, the Company competes with manufacturers of new Work Stations and their
remanufacturing subsidiaries, other independent remanufacturers and dealers of
"as is" Work Stations. In the purchase of used Work Stations that are the
primary source of the Company's supply for its remanufacturing operations, the
Company competes with the manufacturers of new Work Stations and their
remanufacturing subsidiaries, both of which sometimes provide a trade-in
allowance to purchasers of their products, other independent remanufacturers and
Work Station brokers and dealers.
Sales of the Company's remanufactured Work Stations depend on maintaining a
successful balance between price and quality so that its Work Stations are
positioned in the marketplace to provide a product that is (i) comparable or
superior in quality, design and appearance to higher cost new Work Stations and
(ii) superior in quality, features and appearance to lower cost "as is" Work
Stations. Failure by the Company to maintain this balance due to increased
competition in either the purchase or sale of Work Stations could adversely
affect the Company's business. Additionally, certain of the Company's
competitors have greater financial, technical, manufacturing, marketing, sales
and other resources than the Company.
Environmental Regulations. The Company is subject to a variety of federal,
state and local governmental regulations related to the storage, use, discharge
and disposal of toxic, volatile or otherwise hazardous chemicals used in its
manufacturing processes. In addition, regulations currently proposed under the
Clean Air Act Amendments of 1990 may require reduced emissions of volatile
organic compounds including emissions from paints and solvents used by the
Company in the remanufacturing process. As a result, the Company may be required
to institute changes in its remanufacturing processes in order to comply with
these reduced emission standards. There can be no assurance that these and other
changes in environmental regulations in the future will not result in the need
for capital expenditures or otherwise impose financial burdens on the Company.
Further, such regulations could restrict the Company's ability to expand its
operations. Any failure by the Company to obtain required permits for, control
the use of, or adequately restrict the discharge of, hazardous substances under
present or future regulations could subject the Company to substantial liability
or could cause its manufacturing operations to be suspended. Such liability or
suspension of manufacturing operations could have a material adverse effect on
the Company's results of operations and financial condition.
Risk of Patent Infringement Claims. Newly manufactured Work Stations
contain numerous patented component parts. Although the Company is not aware of
any existing or threatened patent infringement claims asserted against it and
does not believe that the remanufacturing of Work Stations infringes the
proprietary rights of any third parties, there can be no assurance that
infringement claims will not be asserted against the Company. In addition, the
Company manufactures or purchases certain new and used component parts included
in its remanufactured Work Stations and has begun to sell newly manufactured
private label Work Stations. To the extent that such activities involve
purchasing or manufacturing component parts similar to patented component parts,
the Company could become subject to claims of patent infringement if the
manufacture or use of such component parts infringed the proprietary rights of
third parties. In addition, the existence of third party proprietary rights
could limit the Company's ability to produce or use certain component parts.
Damages for violation of third party proprietary rights could be substantial and
could have a material adverse effect on the Company's financial condition and
results of operation. Regardless of the validity or the successful assertion of
such claims, the Company would incur significant costs and diversion of
resources with respect to the defense thereof.
<PAGE>
Item 7. .........Financial Statements
The following audited consolidated financial statements of the Company
are included in this report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Open Plan Systems, Inc.
We have audited the accompanying consolidated balance sheets of Open Plan
Systems, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Open Plan Systems,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
March 17, 1998
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Balance Sheets
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------
<S><C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 73 $ 3,066
Accounts receivable, net 5,486 5,252
Inventories (Note 3) 10,780 6,807
Prepaids and other 686 431
Refundable income taxes 795 385
Deferred income taxes (Note 7) 106 52
------------------------------------
Total current assets 17,926 15,993
Property and equipment, net (Note 4) 3,493 2,698
Goodwill, net (Note 2) 4,427 4,621
Other 468 398
------------------------------------
Total assets $26,314 $23,710
====================================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit (Note 5) $ 2,110 $ -
Trade accounts payable 2,411 1,457
Accrued compensation 393 247
Other accrued liabilities 280 150
Customer deposits 841 655
Current portion of long-term debt (Note 5) 126 212
------------------------------------
Total current liabilities 6,161 2,721
Deferred income taxes (Note 7) 110 106
Long-term debt, less current portion (Note 5) - 92
------------------------------------
Total liabilities 6,271 2,919
Shareholders' equity (Note 6):
Preferred stock, no par value:
Authorized shares - 5,000
Issued and outstanding shares - none - -
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,472 20,088 20,088
Additional capital (Note 7) 137 137
Retained earnings (deficit) (182) 566
------------------------------------
Total shareholders' equity 20,043 20,791
------------------------------------
Total liabilities and shareholders' equity $26,314 $23,710
====================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Income
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996
--------------------------------
<S><C> <C> <C>
Net sales $31,968 $22,398
Cost of sales 23,593 15,160
--------------------------------
Gross profit 8,375 7,238
Operating expenses:
Amortization of intangibles 275 70
Selling and marketing 6,524 3,410
General and administrative 2,607 1,584
--------------------------------
9,406 5,064
--------------------------------
Operating (loss) income (1,031) 2,174
Other (income) expense:
Interest expense 70 141
Interest income (68) (266)
Other, net (16) (18)
--------------------------------
(14) (143)
--------------------------------
Income (loss) before income taxes (1,017) 2,317
Provision (benefit) for income taxes (Note 7) (269) 376
--------------------------------
Net (loss) income $ (748) $ 1,941
================================
Basic and diluted loss per share $ (.17)
================
Weighted average common shares outstanding 4,472
================
Pro forma income data (Unaudited) (Note 12):
Pro forma income before income taxes $2,317
Pro forma provision for income taxes 930
----------------
Pro forma net income $1,387
================
Pro forma earnings per common share $.38
================
Weighted average common shares outstanding 3,676
================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997 and 1996
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Capital Earnings Total
(Deficit)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,215 $ - $3,112 $ 4,327
Distributions to shareholders:
Cash - - (3,760) (3,760)
Offset against advances to shareholders - - (590) (590)
Reclassification of undistributed
S Corporation retained earnings (Note 7) - 137 (137) -
Initial Public Offering (Note 6) 17,560 - - 17,560
Issuance of common stock in connection
with acquisition (Note 2) 1,313 - - 1,313
Net income for 1996 - - 1,941 1,941
-------------------------------------------------------------------------
Balance at December 31, 1996 $20,088 $137 $ 566 $20,791
Net loss for 1997 - - (748) (748)
-------------------------------------------------------------------------
Balance at December 31, 1997 $20,088 $137 $ (182) $20,043
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996
----------------------------------
<S> <C> <C> <C>
Operating activities
Net (loss) income $ (748) $ 1,941
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Provision for losses on receivables 59 29
Depreciation expense 631 299
Amortization expense 275 70
(Gain) loss on disposal of property and equipment 23 (3)
Deferred income taxes (50) 46
Changes in operating assets and liabilities:
Accounts receivable (293) (1,290)
Inventories (3,973) (2,136)
Prepaids and other current assets (255) (30)
Refundable income taxes (410) (261)
Other non-current assets (151) (45)
Trade accounts payable 954 126
Customer deposits 186 (23)
Accrued and other liabilities 276 (186)
----------------------------------
Net cash used by operating activities (3,476) (1,463)
Investing activities
Proceeds from sale of property and equipment 12 80
Purchases of property and equipment (1,461) (1,940)
Acquisition (net of cash acquired) - (4,033)
Other - (15)
----------------------------------
Net cash used in investing activities (1,449) (5,908)
</TABLE>
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows (continued)
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
December 31
1997 1996
-----------------------------------
<S> <C> <C>
Financing activities
Advances to shareholders $ - $ (306)
Repayment of advances to shareholders - 84
Net borrowings (repayments) on revolving lines of credit 2,110 (3,036)
Principal payments on notes payable, long-term debt,
and capital lease obligations (178) (347)
Proceeds from sale of common stock - 17,560
Distributions to shareholders - (3,760)
-----------------------------------
Net cash provided by financing activities 1,932 10,195
-----------------------------------
(Decrease) increase in cash and cash equivalents (2,993) 2,824
Cash and cash equivalents at beginning of year 3,066 242
===================================
Cash and cash equivalents at end of year $ 73 $ 3,066
===================================
Supplemental disclosures
Interest paid $ 70 $ 144
===================================
Income taxes paid $ 191 $ 585
===================================
Summary of noncash transactions
Amounts offset against advances to shareholders:
Distributions to shareholders $ - $ 590
===================================
Issuance of common stock in connection with acquisition $ - $ 1,313
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
Note 1. Summary of Significant Accounting Policies
Open Plan Systems, Inc. (the "Company") was incorporated in Virginia in
September 1989 and is a remanufacturer and marketer of modular office Work
Stations. The Company principally manufactures new product and remanufactures
Herman Miller and Haworth product lines and markets them through Company sales
offices located in the East Coast and Mid-West regions of the United States. In
addition, the Company also sells new product office workstation components from
other manufacturers. The following is a description of the Company's more
significant accounting policies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of average cost or market. Work-in-process
inventories include both the direct and indirect costs of manufacturing such
products.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation of equipment
and vehicles is provided by straight-line or accelerated methods over the
estimated useful lives of the related assets, generally three to seven years.
Improvements to leased properties are amortized on a straight-line basis over
the shorter of the term of the respective lease or the estimated useful lives of
the related assets.
Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over
the fair value of net assets acquired (see Note 2) and is being amortized on the
straight-line method over a period of twenty years. The carrying value of
goodwill is periodically evaluated by management based on undiscounted cash
flows of the related business units to determine if there has been an impairment
in value. Accumulated amortization was $295,000 at December 31, 1997.
Revenue Recognition
Revenues from product sales are recognized when the products are shipped and
title and risk of loss pass to the customer.
Advertising
Production costs associated with advertising are expensed as incurred.
Communication costs associated with advertising are reported as advertising
expense as the related space is used. Prepaid advertising costs were $326,000
and $157,000 at December 31, 1997 and 1996, respectively. Advertising costs
charged to expense totaled $653,000 in 1997 and $414,000 in 1996.
Income Taxes
Deferred income taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years the differences are expected to reverse.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996 and, such adoption
had no effect on the consolidated financial statements. Prior to the adoption of
Statement 121, the Company periodically reviewed the remaining utility of its
property and equipment, which constituted its only material long-lived assets,
and considered the ultimate net realizable value. Any situation involving what
was considered permanent impairment would have resulted in adjustment to
carrying value.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. For 1997 and 1996, there was no difference between basic and diluted
earnings per share.
Note 2. Acquisition
On October 1, 1996, the Company acquired all of the outstanding common stock of
Immaculate Eagle, Inc. (d/b/a TFM Remanufactured Office Furniture) ("TFM") for
an aggregate purchase price of $5,346,000, including transaction costs. TFM is
located in Lansing, Michigan and is a specialized remanufacturer of panel
systems produced by Haworth, Inc. Consideration for the acquisition consisted of
cash of $4,033,000 and 87,500 shares of common stock valued at a price of $15
per share. The 87,500 shares will be held in escrow until October 1, 1998 as
security for indemnification obligations of the former Shareholders of TFM.
Under the terms of the purchase agreement, if the closing sales price of the
Company's common stock on October 1, 1998 is less than $15 per share (subject to
certain adjustments), the Company will make a cash payment to the former
Shareholders equal to the difference between the closing sales price on that
date and $15, multiplied times the 87,500 shares of common stock.
The acquisition of TFM was recorded using the purchase method of accounting and
the excess of the purchase price over the estimated fair value of the net assets
acquired was recorded as goodwill. The results of operations have been included
in the accompanying consolidated results of operations since the date of
acquisition.
The following unaudited summarized, pro forma data for the year ended December
31, 1996 presents the combined results of the Company as if the TFM acquisition
had occurred at the beginning of 1996 (in thousands $, except per share
amounts):
<TABLE>
<S> <C>
Net sales $27,093
Income before income taxes $1,798
Pro forma net income $1,079
Pro forma earnings per share $.29
</TABLE>
Note 3. Inventories
Inventories are in two main stages of completion and consisted of the following
(in thousands $):
<TABLE>
<CAPTION>
December 31
1997 1996
---------------- ----------------
<S> <C> <C>
Components and fabric $ 7,650 $ 3,355
Jobs in process and finished goods 3,130 3,452
---------------- ----------------
$ 10,780 $ 6,807
================ ================
</TABLE>
Note 4. Property and Equipment
Property and equipment by major classification was as follows (in thousands $):
<TABLE>
<CAPTION>
December 31
1997 1996
---------------- ----------------
<S> <C> <C>
Production and warehouse equipment $ 2,725 $ 2,240
Office equipment 1,008 758
Vehicles 258 204
Leasehold improvements 415 201
Construction-in-process 397 -
---------------- ----------------
4,803 3,403
Accumulated depreciation and amortization (1,310) (705)
---------------- ----------------
$ 3,493 $ 2,698
================ ================
</TABLE>
Note 5. Indebtedness
During June 1997, the Company renegotiated its revolving line of credit with a
bank. The new credit facility provides for borrowings up to $10,000,000 through
May 1998. The borrowings bear interest at variable rates, the determination of
which varies based on operating results. Outstanding borrowings under the line
of credit totaled $2,110,000 at December 31, 1997 at a rate of 7.219%. Advances
under the line are secured by substantially all assets and are limited to
specified percentages of accounts receivables and inventories. Under the terms
of the agreement, the Company is required to maintain a defined earnings to debt
ratio and an interest coverage ratio. The Company was not in compliance with
these covenants at December 31, 1997. On March 17, 1998, the Company and the
lender agreed that the noncompliance with the covenants would be waived and the
amount of the line would be reduced to $6,000,000.
Long-term debt consisted of the following (in thousands $):
<TABLE>
<CAPTION>
December 31
1997 1996
------------------ ----------------
<S> <C> <C>
Note payable to bank, due $8 per month, plus interest at
7.75% per annum, through November 1998 $ 92 $ 191
Note payable to bank, due $5 per month, plus interest at
8.25% per annum - 57
Capital lease obligations (see Note 8) 34 56
------------------ ----------------
126 304
Less current portion 126 212
------------------ ----------------
$ - $ 92
================== ================
</TABLE>
Substantially all assets are pledged as collateral for the above indebtedness.
Note 6. Shareholders' Equity
In June 1996, the Company completed an initial public offering of its common
stock, pursuant to which the Company sold 1,955,000 shares of common stock at an
initial offering price of $10 per share.
The Company has agreements with two officers to purchase upon the death of each
all of the shares of common stock owned at the time of his death. In order to
fund its potential purchase obligations under these agreements, the Company owns
and is the beneficiary of certain life insurance policies. The purchase price
for the shares will be the fair market value of the shares on the date of death,
except that the Company's purchase obligations under the agreements are limited
to the face amounts of the policies which total $4,000,000.
In March 1996, the Company's shareholders adopted the 1996 Stock Incentive Plan
(the "Incentive Plan") and the 1996 Stock Option Plan for Non-Employee Directors
(the "Outside Directors' Plan").
The maximum aggregate number of shares of common stock that may be issued
pursuant to the Outside Directors' Plan is 25,000. The Outside Directors' Plan
will terminate following the annual meeting of shareholders in 2000. Under the
Outside Directors' Plan, each non-employee director of the Company serving on
the Board of Directors on July 1, 1996 was granted an option to purchase 1,000
shares of common stock of the Company. Thereafter, each non-employee director
serving on the Board of Directors shall receive an option to purchase 1,000
shares of common stock on the first business day following each annual meeting
of shareholders. The exercise price of stock options granted under the Outside
Directors' Plan must be equal to the fair market value of the common stock on
the date of grant. Each option is first exercisable on the date which is six
months from the date of grant of the option and shall continue to be exercisable
for a term of ten years, subject to certain exceptions. At December 31, 1997 and
December 31, 1996, respectively, the Company had 10,000 and 5,000 options
outstanding with weighted average exercise prices of $8.86 and $11.75 per share,
respectively. In both 1997 and 1996, the Company granted 5,000 options under the
Plan, and the weighted average fair value of these options at grant date was
$4.03 and $4.00 per share, respectively. The options outstanding had a weighted
average remaining contractual life of nine years, having exercise prices between
$5.97 and $11.75 per share at December 31, 1997, and $11.75 per share at
December 31, 1996. 10,000 and 5,000 shares were exercisable at December 31, 1997
and 1996, respectively.
The maximum aggregate number of shares of common stock that may be issued
pursuant to the Incentive Plan is 400,000. The Incentive Plan provides for
grants of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, and/or phantom stock to any officer,
director, or key employee of the Company. The Incentive Plan will terminate in
March 2006.
The exercise price of incentive stock options granted under the Incentive Plan
must be equal to at least the fair market value of the common stock on the date
of grant. The exercise price for non-statutory stock options will be established
by the Compensation Committee. The terms of all other options granted under the
Incentive Plan will be determined by the Compensation Committee. The aggregate
fair market value of common stock (determined as of the date of the option
grant) for which an incentive stock option, or related stock appreciation rights
may for the first time become exercisable in any calendar year may not exceed
$100,000. These options have a term of seven years. Transactions involving the
Incentive Plan are as follows:
<TABLE>
<CAPTION>
Average
Exercise
Shares Price
-------------- -----------
<S> <C> <C> <C>
Issued in 1996 109,375 $9.88
--------------
Outstanding at December 31, 1996 109,375 $9.88
Issued 109,375 $5.98
Cancelled (56,250) $8.36
--------------
Outstanding at December 31, 1997 162,500 $7.79
==============
</TABLE>
The options outstanding have a weighted average remaining contractual life of
six years and exercise prices between $3.875 and $9.875 per share at December
31,1997, and $9.875 per share at December 31, 1996. 18,750 shares were
exercisable at December 31, 1997, and none were exercisable at December 31,
1996. The options granted in 1997 and 1996 had a weighted average fair value at
grant date of $4.05 and $3.36 per share, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This statement defines a fair
value based method of accounting for employee stock options whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, companies may elect to continue to use the intrinsic value based method
as prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and provide pro forma disclosures as if the
Company had accounted for its employee stock options under the fair value based
method. Under the intrinsic value based method, compensation cost is the excess,
if any, of the market price of the stock at the grant date over the exercise
price.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. If the Company had accounted for its
employee stock options under the fair value based method the net loss would have
increased by $147,040, or $.03 per share for the year ended December 31, 1997
and the net income would have decreased by $29,000, or $.01 per share for the
year ended December 31, 1996. These amounts are not indicative of future effects
of applying the fair value based method since the vesting period was used to
measure compensation expense. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model assuming a
risk-free interest rate of 5.6%, dividend yield of 0.0%, and a weighted average
expected life of the option of 6 years for 1997 and 1996. In 1997 and 1996,
respectively, the volatility factors utilized were .706 and .20. Note 7. Income
Taxes
Prior to the Company's initial public offering of common stock in June 1996, the
Company had elected by consent of its shareholders to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under these provisions,
the Company did not pay federal and state income taxes on its corporate income.
Instead the Company's income was included in the income of its shareholders for
federal and state income tax purposes. The Company revoked its S Corporation
election effective May 31, 1996 and a deferred tax asset of $21,000 and related
benefit was recognized representing cumulative temporary differences at that
date. The undistributed balance of retained earnings of $137,000 as of May 31,
1996 was reclassified to additional capital.
The provision (benefit) for income taxes is comprised of the following (in
thousands $):
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Current:
Federal $ (198) $ 282
State (21) 48
----------------- ----------------
(219) 330
Deferred:
Federal (49) 62
State (1) 5
----------------- ----------------
(50) 67
Deferred tax asset recognized at
S Corporation termination - (21)
----------------- ----------------
$ (269) $ 376
================= ================
</TABLE>
A reconciliation of the provision for income taxes for the year ended December
31, 1997 and December 31, 1996 and the amount computed by applying the U.S.
statutory federal income tax rate of 34% to income before income taxes is as
follows (in thousands $):
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Income tax at U.S. statutory rates $ (347) $ 788
State taxes, net of federal benefit (21) 37
Tax effect on earnings during S Corporation period - (468)
Deferred tax asset recognized at S Corporation termination - (21)
Amortization of goodwill 86 20
Other, net 13 20
------------------ -----------------
Total provision for income taxes $ (269) $ 376
================== =================
</TABLE>
The net deferred tax liability at December 31, 1997 and December 31, 1996
consisted of the following (in thousands $):
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Deferred tax assets
Accounts receivable allowances $ 57 $ 44
Accrued Liabilities 22 -
Net operating losses 38 -
Other 35 8
Deferred tax liabilities:
Tax over book depreciation (156) (106)
------------------ -----------------
$ (4) $ (54)
================== =================
</TABLE>
The net deferred tax liability is classified in the accompanying consolidated
balance sheets as a current asset of $106,000 and a noncurrent liability of
$110,000. Net operating loss carryforwards of $100,000 expire in 2012.
Note 8. Commitments and Contingencies
During 1995, the Company entered into capital lease agreements to purchase two
trucks with an aggregate cost of $81,000. The net book value of these trucks was
$34,000 and $59,000 at December 31, 1997 and 1996, respectively. Amortization of
these trucks is included in depreciation expense.
The Company leases office space and production facilities in Richmond and
Lansing. The Richmond lease expires in July 1999 and provides for an option to
renew for an additional three years. The Lansing lease expires in December 1998.
In addition, the Company leases its sales offices under operating lease
agreements expiring in various periods through December 2001. Automobiles are
also leased under terms not exceeding three years. All of the aforementioned
leases are accounted for as operating leases.
Future minimum lease payments under the above leases were as follows at December
31, 1997 (in thousands $):
<TABLE>
<CAPTION>
Year Capital Operating
------------------------------
<S> <C> <C> <C>
1998 $ 19 $ 1,111
1999 13 586
2000 10 220
2001 - 51
2002 - -
------------------------------
Total minimum lease payments 42 $ 1,968
===============
Amounts representing interest 8
---------------
Present value of total minimum lease payments $ 34
===============
</TABLE>
The above amounts have been reduced by expected sublease rentals of $78,000 in
1998 and $26,000 in 1999.
Rent expense amounted to $977,000 in 1997 and $747,000 in 1996.
Note 9. Employee Benefit Plan
In January 1995, the Company adopted a defined contribution plan covering
substantially all employees meeting eligibility requirements. Under the plan,
participants may elect to contribute a specified portion of their compensation
to the plan on a tax deferred basis. The Company will match one-half of the
participant's contributions up to six percent of compensation. The Company may
make additional contributions at its discretion.
Additionally, the Company's wholly-owned subsidiary maintains a similar plan for
its employees. The plan allows participants to contribute a specified portion of
their compensation to the plan on a tax deferred basis. The Company matches a
pre-determined amount. According to the terms of the purchase agreement,
participants of the subsidiary's plan would be eligible to participate in the
Company's plan at the first plan entry date after the first annual anniversary
date of the complete distribution of assets from the subsidiary's plan. At
January 1, 1998, the Company merged the subsidiary plan into the parent company
plan.
The Company recorded total expense related to these plans of $86,000 in 1997 and
$75,000 in 1996.
Note 10. Related Party Transactions
Prior to the consummation of its initial public offering the Company advanced
funds to certain shareholders from time to time. At December 31, 1995, these
advances bore interest at rates ranging from 6.58% to 8.19% per annum. All
outstanding advances were repaid in May 1996. Interest income recognized on
these advances amounted to $10,000 in 1996.
The Company incurred legal fees of $150,000 in 1997 and $306,000 in 1996 to a
law firm in which one of the Company's directors is a principal.
A customer whose President is a director of the Company purchased $1,500,000 of
product in 1997.
In connection with the Company's initial public offering, the Company paid
underwriting fees of $606,000 to an investment banking firm in which one of the
Company's directors is an officer. The Company's revolving line of credit, its
notes payable and certain of the operating bank accounts are with a bank in
which one of the Company's directors is an officer (see Note 5).
Note 11. Concentrations of Credit Risk and Financial Instruments
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents and accounts receivable. The
Company's temporary cash is invested in short-term money market accounts.
The Company markets its products and services to customers located primarily in
the Eastern and Mid-West regions of the United States. Production is primarily
in response to customer orders and larger jobs typically require advance
deposits. The Company performs credit evaluations of its customers prior to
delivery or commencement of services and normally does not require collateral.
Payments are typically due within thirty days of billing. The Company maintains
an allowance for potential credit losses and losses have historically been
within management's expectations.
The carrying values of amounts classified as current assets or current
liabilities approximate fair value due to the short-term maturities of these
instruments. The carrying value of long-term debt approximates fair value as the
current rates approximate market rates.
Note 12. Pro Forma Information (Unaudited)
The accompanying pro forma income data reflects a provision for income taxes as
if the Company's earnings had been subject to federal and state income taxes as
a regular corporation for all years presented.
Pro forma earnings per common share are based on the weighted average common
shares outstanding increased by 270,000 shares of common stock deemed to be
outstanding, which represents the approximate number of common shares deemed
sold by the Company at the initial public offering of $10 per share to fund the
final S Corporation distribution of $2,695,000 to the Company's shareholders.
<PAGE>
Note 13. Selected Quarterly Financial Data (Unaudited)
Results of operations for each of the quarters during the years ended December
31, 1997 and 1996 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March June September December
31st 30th 30th 31st
------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Net sales $ 6,437 $ 7,164 $ 9,408 $ 8,959
Operating income (loss) $ (586) $ 8 $ 179 $ (509)
Income (loss) before income taxes $ (549) $ 25 $ 180 $ (673)
Net income (loss) $ (315) $ 25 $ 147 $ (605)
Earnings (loss) per common share $ (.07) $ .01 $ .03 $ (.14)
Year ended December 31, 1996
Net sales $ 5,580 $ 4,965 $ 4,402 $ 7,451
Operating income $ 963 $ 577 $ 227 $ 407
Income before income taxes $ 914 $ 564 $ 363 $ 476
Pro forma net income $ 558 $ 344 $ 216 $ 269
Pro forma earnings per common share $ .21 $ .11 $ .05 $ .06
</TABLE>
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1997 fiscal year.
Item 10. Executive Compensation
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1997 fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1997 fiscal year.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1997 fiscal year.
<PAGE>
PART IV
Item 13. Exhibits, List and Reports on Form 8-K
<TABLE>
<S> <C> <C> <C>
(a) Exhibits
The following exhibits are filed on behalf of the Company as part of this report:
3(i) Amended and Restated Articles of Incorporation, incorporated by reference to
Exhibit 3(i) of the Registrant's Form SB-2 Registration Statement, as amended,
File No. 333-3188.
3(ii) Amended and Restated Bylaws, incorporated by reference to Exhibit 3(ii) of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
4 Form of Stock Certificate, incorporated by reference to Exhibit 4 of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.1 Deed of Lease, as amended, dated April 6, 1992, between Lingerfelt and
Carpenter and Open Plan Systems, Inc., incorporated by reference to Exhibit
10.1 of the Registrant's Form SB-2 Registration Statement, as amended, File
No. 333-3188.
10.2 Commercial Lease Contract, dated May 4, 1993, between M.D. Hodges Enterprises,
Inc. and Open Plan Systems, Inc., incorporated by reference to Exhibit 10.2 of
the Registrant's Form SB-2 Registration Statement, as amended, File No.
333-3188.
10.3 Commercial Note made by Open Plan Systems, Inc. in favor of Crestar Bank as of
May 9, 1996, incorporated by reference to Exhibit 10.3 of the Registrant's
Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.4 Security Agreement, dated May 7, 1996, between Crestar Bank and Open Plan
Systems, Inc., incorporated by reference to Exhibit 10.4 of the Registrant's
Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.5 Open Plan Systems, Inc. 1996 Stock Incentive Plan, as amended, incorporated by
reference to Exhibit 4.4 of the Registrant's Form S-8 Registration Statement,
File No. 333-15217.
10.6 Open Plan Systems, Inc. 1996 Stock Option Plan For Non-Employee Directors, as
amended, incorporated by reference to Exhibit 4.4 of the Registrant's Form S-8
Registration Statement, File No. 333-15219.
10.7 Buy-Sell Agreement, dated May 24, 1996, between the Company and Stan A.
Fischer, incorporated by reference to Exhibit 10.7 of the Registrant's Form
SB-2 Registration Statement, as amended, File No. 333-3188.
10.8 Buy-Sell Agreement, dated May 15, 1996, between the Company and Gregory P.
Campbell, incorporated by reference to Exhibit 10.8 of the Registrant's Form
SB-2 Registration Statement, as amended, File No. 333-3188.
10.9 Tax Sharing Agreement, dated May 1, 1996, between the Company and each of the
shareholders named therein, incorporated by reference to Exhibit 10.9 of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.10 Form of Employee Non-Qualified Stock Option Agreement*
10.11 Form of Non-Employee Director Non-Qualified Stock Option Agreement*
10.12 Stock Purchase Agreement, dated September 24, 1996, between Open Plan Systems,
Inc., Immaculate Eagle, Inc., Paul A. Covert, Todd A. Thomann and Siimon,
Inc., incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K
filed October 16, 1996, File No. 0-20743.
10.13 Lease, dated August 8, 1993, between Quality Dairy Company and Immaculate
Eagle, Inc.
10.14 Open Plan Systems, Inc. Bonus Program for Officers
10.15 $10,000,000 Line of Credit Agreement with Crestar Bank
11 Statement re: Computation of Earnings Per Share
16 Letter from Martin, Dolan & Holton, Ltd. regarding change in accountants,
incorporated by reference to Exhibit 16 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Ernst & Young LLP*
27 Financial Data Schedule * (filed electronically only)
</TABLE>
________
* Filed herewith
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on November
13, 1997 to report the election of Paul Covert as President and
Chief Operating Officer.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPEN PLAN SYSTEMS, INC.
By: /s/ Paul A. Covert
Paul A. Covert
March 17, 1998 President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Paul A. Covert President and Director (principal March 17, 1998
Paul A. Covert executive officer)
/s/ Gary M. Farrell Chief Financial Officer, Secretary and March 17, 1998
Gary M. Farrell Director (principal financial officer)
/s/ Neil F. Suffa Corporate Controller March 17, 1998
Neil F. Suffa (principal accounting officer)
/s/ Stan A. Fischer Director March 17, 1998
Stan A. Fischer
/s/ Troy A. Peery, Jr. Director March 17, 1998
Troy A. Peery, Jr.
/s/ Anthony F. Markel Director March 17, 1998
Anthony F. Markel
/s/ Theodore L. Chandler, Jr Director March 17, 1998
Theodore L. Chandler, Jr.
/s/ Robert F. Mizell Director March 17, 1998
Robert F. Mizell
/s/ C. T. Hill Director March 17, 1998
C. T. Hill
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
<S> <C>
3(i) Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) of
the Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
3(ii) Amended and Restated Bylaws, incorporated by reference to Exhibit 3(ii) of the Registrant's
Form SB-2 Registration Statement, as amended, File No. 333-3188.
4 Form of Stock Certificate, incorporated by reference to Exhibit 4 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.1 Deed of Lease, as amended, dated April 6, 1992, between Lingerfelt and Carpenter and Open Plan
Systems, Inc., incorporated by reference to Exhibit 10.1 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.2 Commercial Lease Contract, dated May 4, 1993, between M.D. Hodges Enterprises, Inc. and Open
Plan Systems, Inc., incorporated by reference to Exhibit 10.2 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.3 Commercial Note made by Open Plan Systems, Inc. in favor of Crestar Bank as of May 9, 1996,
incorporated by reference to Exhibit 10.3 of the Registrant's Form SB-2 Registration Statement,
as amended, File No. 333-3188.
10.4 Security Agreement, dated May 7, 1996, between Crestar Bank and Open Plan Systems, Inc.,
incorporated by reference to Exhibit 10.4 of the Registrant's Form SB-2 Registration Statement,
as amended, File No. 333-3188.
10.5 Open Plan Systems, Inc. 1996 Stock Incentive Plan, as amended, incorporated by reference to
Exhibit 4.4 of the Registrant's Form S-8 Registration Statement, File No. 333-15217.
10.6 Open Plan Systems, Inc. 1996 Stock Option Plan For Non-Employee Directors, as amended,
incorporated by reference to Exhibit 4.4 of the Registrant's Form S-8 Registration Statement,
File No. 333-15219.
10.7 Buy-Sell Agreement, dated May 24, 1996, between the Company and Stan A. Fischer, incorporated
by reference to Exhibit 10.7 of the Registrant's Form SB-2 Registration Statement, as amended,
File No. 333-3188.
10.8 Buy-Sell Agreement, dated May 15, 1996, between the Company and Gregory P. Campbell,
incorporated by reference to Exhibit 10.8 of the Registrant's Form SB-2 Registration Statement,
as amended, File No. 333-3188.
10.9 Tax Sharing Agreement, dated May 1, 1996, between the Company and each of the shareholders
named therein, incorporated by reference to Exhibit 10.9 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.10 Form of Employee Non-Qualified Stock Option Agreement
10.11 Form of Non-Employee Director Non-Qualified Stock Option Agreement
10.12 Stock Purchase Agreement, dated September 24, 1996, between Open Plan Systems, Inc., Immaculate
Eagle, Inc., Paul A. Covert, Todd A. Thomann and Siimon, Inc., incorporated by reference to
Exhibit 2.1 of the Registrant's Form 8-K filed October 16, 1996, File No. 0-20743.
10.13 Lease, dated August 8, 1993, between Quality Dairy Company and Immaculate Eagle, Inc.
10.14 Open Plan Systems, Inc. Bonus Program for Officers
10.15 $10,000,000 Line of Credit Agreement with Crestar Bank dated June 26, 1997
11 Statement re: Computation of Earnings Per Share
16 Letter from Martin, Dolan & Holton, Ltd. regarding change in accountants, incorporated by
reference to Exhibit 16 of the Registrant's Form SB-2 Registration Statement, as amended, File
No. 333-3188.
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Ernst & Young LLP*
27 Financial Data Schedule * (filed electronically only)
</TABLE>
* Filed herewith
Exhibit 23.1
Consent of independent auditors
We consent to the imcorporation by reference in the Registration Statement (Form
S-8, No.333-15219) pertaining to the Open Plan Systems, Inc. 1996 Stock Option
Plan for Non-Employee Directors of our report dated March 17, 1998, with respect
to the consolidated financial statements of Open Plan Systems, Inc. included in
the Annual Report (Form 10-KSB) for the year ended December 31, 1997.
/s/ ERNST & YOUNG
Richmond, Virginia
March 25, 1998
Exhibit 23.2
Consent of Independent Auditors
We consent to the imcorporation by reference in the Registration Statement (Form
S-8, No.333-15217) pertaining to the Open Plan Systems, Inc. 1996 Stock
Incentive Plan of our report dated March 17, 1998, with respect to the
consolidated financial statements of Open Plan Systems, Inc. included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1997.
/s/ ERNST & YOUNG
Richmond, Virginia
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF OPEN PLAN SYSTEMS, INC. AS OF DECEMBER 31, 1997
AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001011738
<NAME> OPEN PLAN SYSTEMS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 73
<SECURITIES> 0
<RECEIVABLES> 5,628
<ALLOWANCES> (142)
<INVENTORY> 10,780
<CURRENT-ASSETS> 17,926
<PP&E> 4,803
<DEPRECIATION> (1,310)
<TOTAL-ASSETS> 26,314
<CURRENT-LIABILITIES> 6,161
<BONDS> 0
0
0
<COMMON> 20,088
<OTHER-SE> (45)
<TOTAL-LIABILITY-AND-EQUITY> 26,314
<SALES> 31,968
<TOTAL-REVENUES> 31,968
<CGS> 23,593
<TOTAL-COSTS> 23,593
<OTHER-EXPENSES> 9,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (1,017)
<INCOME-TAX> (269)
<INCOME-CONTINUING> (748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (748)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
<FN>
Basic and diluted (loss) earnings per share were the same for all periods
reported in the financial statements and attachments thereto and therefore the
Company has not restated prior periods pursuant to FAS #128.
</FN>
</TABLE>
