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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended MAY 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7736
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TAB PRODUCTS CO.
(Exact name of Company as specified in its charter)
DELAWARE 94-1190862
-------- -----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1400 PAGE MILL RD., PALO ALTO, CALIFORNIA 94304
- - ----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Company's telephone number - including area code (650) 852-2400
---------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
- - ---------------------------- -----------------------
(Title of Each Class) (Name of Exchange On Which Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
----
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[ X ] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Company as of June 30, 1998 was approximately $28,093,275. Shares of common
stock held by each officer and director and by each person or group who owns
5% or more of the outstanding common stock have been excluded in that such
persons or groups may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. The number of shares of the Company's Common Stock outstanding as
of July 31, 1998 was 5,171,514.
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DOCUMENTS INCORPORATED BY REFERENCE
To the extent stated herein, portions of the Definitive Proxy Statement,
which will be filed within 120 days after the end of the Company's fiscal
year, for the Annual Meeting of Stockholders ("Proxy Statement") to be held
on October 29, 1998, are incorporated by reference into Part III.
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PART I
Item 1. BUSINESS
GENERAL
Tab Products Co. (the "Company") is engaged in a single industry segment that
manufactures and markets records management solutions, including professional
services and products. The Company sells its offerings into multiple
industries, including government agencies and the insurance, finance and
health care industries. The Company was incorporated in February, 1954, and
subsequently reorganized as a corporation under Delaware law in September,
1986.
BUSINESS STRATEGY
The Company's primary business strategy is to address each client's unique
needs in managing internal documentation utilizing a consultative approach
that integrates all services and products into a total systems solution. The
Company believes that its extensive knowledge of paper-based systems and
document management requirements give it a significant advantage over its
competition. Additionally, it possesses a wealth of internal knowledge
regarding the individual legal and regulatory requirements of four major
industry segments: insurance, government, finance and health care. The
Company capitalizes on this knowledge in developing client solutions in those
industries.
PRINCIPAL PRODUCTS AND SERVICES
The Company provides solutions - in the form of both professional services
and products - that are designed to help its clients organize, control and
find their critical documents. By leveraging its 50 years of expertise in
managing paper records and files, the Company effectively supports those
clients who wish to integrate their paper-based systems into emerging
technologies.
The Company's principal products and services are:
- - - Information & Records Management Supplies
- - - Modular Office Furniture
- - - Professional Services
- - - Records Storage Solutions
- - - Technology-based Automated Tracking Solutions
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1. INFORMATION AND RECORDS-MANAGEMENT SUPPLIES
The Company provides a complete line of filing supplies, each of which can be
used alone or integrated with other TAB products, systems and services.
Products include:
End Tab Folders, Roll Labels, Classification Folders, Expansion Pockets,
Filing System Guides, X-Ray Jackets, Small Document Pockets,
Pressure-sensitive Pockets and Fasteners, Oversized Pockets with flap, 2-tab
Folders and Mylar-strip Folders.
The Company will also provide custom-made supplies tailored to fit a client's
specific needs.
The Company believes that its products' quality, high level of service and
systems approach to its products and services give it a strong competitive
position.
2. MODULAR OFFICE FURNITURE
The Company markets a line of modular office furniture components that may be
put together in a limitless number of productive configurations. They include
office panel systems and clustered workcenters with related components. This
product line is directed at the established market for the open office
environment.
Primary areas of competition in this market are product design, quality and
price.
3. PROFESSIONAL SERVICES
The Company's Professional Services organization provides a broad range of
integrated service and support programs to fit the specific needs of its
clients. These services are offered through the Company's own technical
personnel and through its direct management of specialized service suppliers.
Services include:
Consulting Services - Using a thorough needs-assessment analysis, the
Company's consultants work closely with clients to standardize their file
structures and reduce duplicate files by designing and implementing an
efficient records-classification and data-storage system. This increases the
clients' productivity and provides significant space savings. TAB's
Consulting Services also help clients design a strategy for implementing
imaging systems in their organizations.
File-Conversion Services - TAB provides full planning and implementation of
the process by which clients transform their documents from one medium to
another, such as changing from top-tab vertical drawers to side-tab color
code, or from paper to optical-image format. This change is designed to
produce a system that is more appropriate for the client's current needs,
thus providing a greater degree of efficiency in both storing and locating
critical records and documents.
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Imaging Services - Imaging conversions involve the use of integrated
technology with an emphasis on the documents with the files as well as a
higher level of indexing, often including a conversion to color code or
archive. In addition to handling all phases of integration into the chosen
technology, it is also necessary to archive the original documents into a
traditional hard copy system.
Field Services - TAB provides comprehensive, nationwide, on-site support for
the imaging technology systems used to store critical documents (CD-ROM,
Optical Disks and tape). The Field Services program is designed to ensure
that clients will enjoy maximum equipment operability and minimum down-time.
TAB also provides service for Forms Handling Equipment.
The high level of service and systems approach in this market give it a
strong competitive position.
4. RECORDS STORAGE SOLUTIONS
The Company provides both stationary and mobile records storage systems. Mobile
shelving systems, combined with expertise in design and implementation, provide
the most efficient system for filing and use of storage space. Mobile Products
include:
Side-Trac-Registered Trademark- - A high-density, custom storage solution
with cabinets arranged in two compact rows. The front cabinets glide from
side to side on wheels, creating access to the cabinets in back.
Tab-Trac-Registered Trademark- - A high-density, custom storage solution that
uses carriages on tracks to create aisles only where and when they are
needed. This eliminates the need for fixed aisles and yields up to 100%
greater storage capacity. Based on the client's needs, stored materials are
moved either by mechanical-assist systems or electric motors.
Stationary Products include:
Spacefinder Cabinets - Slim, durable and mobile-ready cabinets, appropriate
for use when floor space, strength and economy are the key determinants.
Harmony-TM- Cabinets - A complete line of durable, maximum-capacity,
pre-configured cabinets that blend harmoniously into any office environment
and can be color-coordinated perfectly with other TAB equipment and furniture.
Designer Series-TM- Cabinets - A high-quality, fully customizable cabinet
solution that can accept any combination of components, thus offering
unlimited flexibility and potential for growth. Designer cabinets are also
mobile-ready, making it possible to quickly and easily increase storage
density.
TwinFile-Registered Trademark- - A compact, modular, rotating filing unit
that provides more linear filing inches per square foot than almost any other
filing system.
Unit Spacefinder - A filing system using TAB's "capsule concept," whereby the
identification of records is in plain view from any position. Unit
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Spacefinder requires very little floor space and allows multiple users to
access files simultaneously.
Open Shelf Filing - An economical, easy-to-assemble shelving system for
facilities with limited floor space. Units are available in letter and legal
size, with single- or double-faced sections, and are designed to grow with an
organization's storage needs.
Forms Handling Equipment - The Company manufactures a line of Forms Handling
Equipment, including continuous forms bursters, decollators and mergers. The
distribution rights for these products have been granted to
Bescorp-Registered Trademark- Inc.
The Company also manufactures a full range of high speed mailing systems,
including InfoSeal-Registered Trademark-, a high speed mailing system
developed in conjunction with Transkrit-Registered Trademark- Corp., which
uses a proprietary technique for folding and sealing computer-generated
mailing pieces. These products are directly marketed and sold by Transkrit
Corp.
Primary areas of competition in this market are product design, quality and
price.
5. TECHNOLOGY-BASED AUTOMATED TRACKING SOLUTIONS
The Company's Technology-Based Automated Tracking Solutions are designed to
provide clients full control of all their paper-based records, from the time
those records are created through the time they are destroyed. Products
include:
File Tracker-TM- for Windows-Registered Trademark- - A barcode-based
software system that provides users with information regarding all current
location of files. The system consists of File Tracker software, barcode
labels and barcode readers, all integrated to provide an easy-to-use,
powerful system.
All File Tracker software systems include on-site consultation, customization
and training from an experienced document management specialist. A
fully-staffed support organization is available through a toll-free number to
provide expert advice on all File Tracker issues.
TABQUIK-Registered Trademark- Computerized Color Labeling System - Automated
labeling software and a patented application system that provides easy,
on-site production and application of custom-printed color labels and
barcoding for folders or other media. TABQUIK is a customizable filing
solution available in a Windows environment, appropriate for organizations of
all sizes, from the small office to the large corporation.
The Company also offers customized labels provided directly to the client
from TAB, based on electronic submission of client data; and FilePak, a
cost-effective folder-labeling solution when a high degree of customization
is not required.
The Company believes that its products' quality and high level of service
give it a strong competitive position.
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The Company believes that its business is not seasonal.
COMPETITION
Primary competitive factors in this market are product quality, service and
price. The Company believes that its products' quality, high level of
service and systems approach to its products and services give it a strong
competitive position.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative document management solutions that
may be less costly or provide additional features. Such competition could
result in lower gross margins in the future, if the Company's average selling
prices decrease faster than its costs, and could result in lost sales.
MARKETING AND SALES
The Company's products are marketed in the United States, Canada, Europe and
Australia through its sales branches and independent sales offices,
distributors and telesales. In other geographic areas, products are sold
exclusively through independent distributors. The Company is currently
pursuing a strategy to refine and expand its distribution channels. It is
seeking to reorient its direct channel from local distribution centers to
sales execution centers and focus them on major accounts. The Company is
also seeking to expand its call center operations and to direct reorder
business through this efficient distribution method. In conjunction with
handling inbound sales activity a new initiative is underway to generate
sales through the use of outbound telemarketing. Additionally, the Company
is seeking to remove exclusivity from its independent distributors. This
will allow the Company to institute electronic commerce as part of its
distribution channel fabric. These changes may result in temporary or
permanent loss of sales people and independent distributors and the resultant
loss of revenue they currently generate. This result could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company has three foreign subsidiaries which market their products and
services in Canada, Australia and Europe, while foreign sales in the
remainder of the world are conducted through a Foreign Sales Corporation.
Foreign revenues were $32,533,000, $32,214,000 and $30,132,000 for the years
ended May 31, 1998, 1997 and 1996, respectively. Foreign operating income
was $1,703,000, $2,240,000 and $1,045,000 for the years ended May 31, 1998,
1997 and 1996, respectively. Total identifiable assets (excluding cash) and
liabilities in foreign countries were $9,141,000 and $2,905,000,
respectively, at May 31, 1998 compared with $9,216,000 and $3,151,000 at May
31, 1997. Transaction and exchange losses included in earnings, amounted to
approximately $102,000, $18,000 and $225,000 in fiscal 1998, 1997 and 1996,
respectively.
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CUSTOMERS
The Company focuses on customers that have a high volume of paper-based
documents where access to those documents is critical to their business
operations. The Company's primary customers include government agencies,
health care companies, insurance companies, financial services companies and
industrial companies. The Company's largest customer is the U.S. Government
(including its agencies and GSA subcontractors). No single customer
accounted for greater than 10% of consolidated revenues in fiscal 1998 and
1997. Sales to the U.S. Government, as a percentage of total revenues, was
10% for fiscal year 1996.
BACKLOG
The backlog of orders at May 31, 1998 and 1997 is not a significant factor in
understanding the business of the Company. The nature of the Company's
business is such that the value of backlog represents only a small portion of
the on-going revenues of the business. No one order would normally account
for a significant value of backlog.
INTELLECTUAL PROPERTY
The Company holds several patents and trademarks in the United States,
Canada, Europe and Australia. The Company does not consider any of its
patents to be material to its business.
The Company relies on a combination of patents, contractual rights,
trademarks, copyright and trade secret laws, confidentiality procedures and
licensing arrangements to establish and protect its intellectual property
rights. The Company has been notified in the past and the Company may be
notified in the future of claims that they may be infringing upon patents or
other intellectual property rights owned by third parties. There can be no
assurance that in the future any patents held by the Company will not be
invalidated, that patents will be issued for any of the Company's pending
applications or that any claims allowed from existing or pending patents will
be of sufficient scope or strength or be issued in the primary countries
where the Company's products can be sold to provide meaningful protection or
any commercial advantage to the Company. Additionally, competitors of the
Company may be able to design around the Company's patents.
MANUFACTURING
Products are manufactured through the use of in-house production facilities
in Mayville, Wisconsin and Turlock, California and contractors. Raw materials
for the Company's manufacturing are purchased directly by the Company;
whereas, contract manufacturers purchase raw materials for production. The
majority of raw material is purchased domestically and is considered to be
widely available. It is not anticipated that the availability of raw material
will be a significant factor in the Company's business.
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There can be no assurance that the Company's manufacturing facilities will
achieve or maintain acceptable manufacturing efficiencies in the future. The
inability of the Company to achieve planned efficiencies from its
manufacturing facilities could have an adverse effect on the Company's
business, financial condition and results of operations. Any problems
experienced by the Company in its current or future transitions to new
processes and products could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company purchases several critical components from single or sole source
vendors for which alternative sources are not currently developed.
Development of alternative suppliers would require a significant amount of
time to qualify in the case of certain of the Company's components. The
Company does not maintain long-term supply agreements with any of these
vendors. The inability to develop alternative sources for these single or
sole source components or to obtain sufficient quantities of these components
could result in delays or reductions in product shipments which could
adversely affect the Company's business, financial condition and results of
operations.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are primarily related to
the development of new products and the improvement of existing products in
the mobile storage, high speed mailing and Forms Handling Equipment areas.
Expenditures for research and development were $.9 million, $.8 million and
$.5 million in fiscal years 1998, 1997 and 1996, respectively.
EMPLOYEES
At May 31, 1998, the Company employed approximately 1,050 full-time
employees. None of the Company's employees are represented by a collective
bargaining unit.
EXECUTIVE OFFICERS
At July 31, 1998 the following individuals were executive officers of the
Company:
NAME AGE TITLE
- - ---- --- -----
Philip C. Kantz 54 Director; President and
Chief Executive Officer
Mr. Kantz has been Director, President and Chief Executive Officer
since January 27, 1997. Previously, he was President and Chief
Executive Officer of The Sandros Enterprise from February 1995 to
January 1997; Chief Executive Officer and a director of Transcisco
Industries, Inc. from February 1994 to January 1995; President and
Chief Executive Officer of Genetrix, Inc. from October 1992 to
September 1993 and President and Chief Executive Officer of Itel
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Containers International Corporation from 1988 through 1991.
Mr. Kantz is a member of 3COM Corporation's Board of Directors.
David J. Davis 42(1) Senior Vice President,
Operations and
Chief Financial Officer
Mr. Davis became Chief Financial Officer in May, 1998 and was appointed
Senior Vice President, Operations in June, 1997. Previously, he was
Vice President and Corporate Controller at PLM International, Inc. from
January 1994 to June 1997. Before that he was a consultant for PLM
International, Inc. and Itel Corporation from June 1993 to December
1993 and Chief Financial Officer of LB Credit Corp. from July 1991 to
May 1993.
Wendi A. Hill 40 Vice President, Human
Resources
Ms. Hill became Vice President, Human Resources in June 1995. Previously,
she was Director, Human Resources at The Upper Deck Co. from August 1993
to March 1995 and Vice President, Corporate Outplacement at Career Focus
from August 1991 to July 1993.
Joanne P. Grba 38 (2) Vice President, Marketing
Ms. Grba was appointed Vice President, Marketing for the Company in July
1997. Previously, she was an independent marketing consultant from
January 1997 to July 1997. Before that she was Director of Business
Development of Cisco Systems, Inc. from January 1996 to December 1996;
Vice President, Marketing of TGV, Inc. from October 1995 to January 1996;
Director of Marketing of FTP Software, Inc. from February 1993 to October
1995 and Product Line Manager of The Wollongong Group, Inc. from February
1991 to February 1993.
Thomas J. Rauscher 43 Vice President,
Manufacturing and Distribution
Mr. Rauscher became Vice President, Manufacturing and Distribution in
January 1996. Previously, he was Vice President, Operations at Fisher
Hamilton from October 1980 to January 1996.
Joel L. Sitak 30 (3) Vice President, North
American Sales
Mr. Sitak was appointed Vice President, North American Sales for the
Company in May 1998. Previously, he was President and General Manager,
Tab Products of Canada, Limited from June 1997 to May 1998, Vice
President, Sales, Tab Products of Canada, Limited from July 1995
- - ---------------------
(1) Effective June 1997 appointed an executive officer.
(2) Effective July 1997 appointed an executive officer.
(3) Effective May 1998 appointed an executive officer.
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to June 1997, Regional Manager, Tab Products of Canada, Limited from
November 1993 to July 1995 and Branch Manager, Tab Products of Canada,
Limited from May 1993 to November 1993.
Robert J. Sexton 64 Treasurer and Secretary
Mr. Sexton has acted as Secretary since March 1991 and Treasurer since
July 1982.
William R. Kinzie 52(4) Chief Accounting Officer
and Controller
Mr. Kinzie became Chief Accounting Officer and Controller in June 1998.
Previously, he served in the position of Controller at One Touch Systems
from October 1995 to June 1998 and was self-employed as a consultant in
the area of finance and accounting from June 1995 to October 1995. He
served as Controller at Photonics Corporation from June 1994 to June
1995. He was also self-employed as a consultant in the area of finance
and accounting from January 1993 to June 1994.
Nancy R. Green 48 Assistant Treasurer and
Assistant Secretary
Ms. Green became Assistant Treasurer and Assistant Secretary in July 1991
and previously served the Company as Director of Treasury from October
1990 to July 1991.
The executive officers of the Company are elected each year at the Annual
Organizational Meeting of the Board of Directors, which will be held this
year on October 29, 1998.
Item 2. PROPERTIES
The Company's Corporate Headquarters are located at 1400 Page Mill Road, Palo
Alto, California. The facility comprises three buildings which total 105,000
square feet. The Company is currently leasing one of these buildings
(approximately 50,000 square feet) to a tenant until January 2004. The
buildings are owned by the Company but are subject to land leases from
Stanford University. The land leases expire in 2011 and 2012, at which time
both the land and improvements will revert to Stanford University.
The Company owns a 356,000 square foot building located on 14 acres of land
in Mayville, Wisconsin. The Mayville facility serves as a central
warehousing, manufacturing and distribution center. Approximately 200,000
square feet of the facility is used as warehouse space. Approximately 50,000
square feet of the facility is used for the production of paper products
(primarily file folders) and the attachment of color-coded labeling systems.
Approximately 60,000 square feet is used for the production of panel systems
furniture. The Company also owns 16 acres of undeveloped land near the
current facility.
- - ----------------------
(4) Effective June 1998 appointed an executive officer.
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The Company owns a 45,000 square foot building located on 4 acres of land in
Lomira, Wisconsin. The facility is used for the manufacture of
TAB-TRAC-Registered Trademark- mobile filing storage units, plastic injection
molded parts and other light manufacturing and assembly operations. The
Company also owns a 45,000 square foot building in Horicon, Wisconsin.
The Company owns two manufacturing buildings located on 16 acres of land in
Turlock, California. One building is a 67,000 square foot paper products
plant which is used for the manufacture of file folders. The other building
consists of 104,000 square feet and is used for the manufacture of the
Company's high-speed mailing systems product line and Forms Handling
Equipment and as the headquarters for the Company's national field service
operations.
The Company leases office space for its sales and service branches in
numerous cities throughout the United States, Canada, Europe and Australia,
most of which are in major metropolitan areas. Tab Products of Canada,
Limited leases 60,000 square feet of office space in a building in North
York, Canada which expires in October 2000. Tab Products (Europa) B.V.
leases a 9,000 square foot building in Amsterdam, Netherlands which expires
in August 2001. Tab Products Pty Ltd leases a 22,000 square foot building in
St. Leonards, Australia which expires in June 2000. These buildings serve as
general office, sales and warehouse facilities.
In management's opinion, all buildings, machinery and equipment are in good
condition and are maintained and repaired on a basis consistent with sound
operations. The properties and equipment are deemed adequate and suitable
for their purposes.
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceeding.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the fourth quarter of the fiscal year ended May 31, 1998.
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PART II
Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the American Stock Exchange (AMEX) and its
trading symbol is TBP. Information with respect to per share common stock
dividends paid by the Company and the price ranges per share for each quarter
during the fiscal years ended May 31, 1998 and 1997 are set forth below.
TAB PER SHARE COMMON STOCK
DIVIDENDS AND PRICE RANGES
<TABLE>
<CAPTION>
DIVIDENDS PRICE RANGE PER SHARE
-------------- ------------------------------------------------------
1998 1997 1998 1997
------ ------- ------------------------- -----------------------
HIGH LOW HIGH LOW
----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Quarter Ended
AUGUST 31 $.05 $.05 $ 12 3/8 $ 9 1/8 $ 7 5/8 $ 6 1/2
NOVEMBER 30 .05 .05 $ 14 7/8 $ 11 1/8 $ 8 $ 6 1/4
FEBRUARY 28 .05 .05 $ 14 5/8 $ 11 3/16 $ 9 13/16 $ 7 3/8
MAY 31 .05 .05 $ 15 7/16 $ 12 1/2 $11 $ 8 5/8
</TABLE>
At May 31, 1998, the company had approximately 1,000 holders of record and
approximately 5,000 beneficial owners of Tab Products Co. stock.
The company's loan covenants contain certain restrictions on the payment of
dividends -see Note 4 of Notes to Consolidated Financial Statements.
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Item 6. SELECTED FINANCIAL DATA
TAB PRODUCTS CO.
CONSOLIDATED SELECTED FINANCIAL DATA, FIVE YEARS ENDED MAY 31
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND RATIO DATA)
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $165,943 $154,451 $152,698 $149,951 $140,122
Earnings before income taxes 4,590 6,657 4,887 2,157 3,796
Net earnings 2,435 3,761 2,761 1,219 2,176
Net earnings per share
Basic .48 .77 .57 .25 .45
Diluted .46 .75 .57 .25 .45
Book value per share 8.69 9.03 8.55 8.21 8.01
Dividends per share .20 .20 .20 .20 .20
Current assets 53,778 51,405 48,715 51,333 53,577
Working capital 31,785 28,463 27,424 30,082 30,879
Net cash provided by
operating activities 7,673 8,167 11,344 8,109 4,257
Purchase of property, plant and
equipment, net 4,927 3,309 2,825 1,946 2,678
Depreciation and amortization 7,018 4,001 4,065 4,215 3,668
Long-term debt, non-current 7,391 10,828 14,141 18,733 23,041
Stockholders' equity 44,897 44,527 41,462 39,828 38,652
Total assets $77,488 $80,699 $79,127 $81,649 $86,161
Current Ratio 2.4 2.2 2.3 2.4 2.4
Return on equity 5% 9% 7% 3% 6%
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report, including without limitation the following section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding the Company and its
business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"foreseeable," "estimates," and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this Report.
Additionally, statements concerning future matters such as the development of
new products, enhancements or technologies, possible changes in legislation
and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks and uncertainties
and actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes include
without limitation those discussed in "Business Environment and Risk Factors"
as well as those discussed elsewhere in this Report. Readers are urged not
to place undue reliance on these forward-looking statements, which speak only
as of the date of this Report. The Company undertakes no obligation to
revise or update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Report. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this Report, which attempt to advise interested parties of the
risks and factors that may affect the Company's business, financial
condition, results of operations and prospects.
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of the Company.
FINANCIAL CONDITION
At May 31, 1998 the Company had cash and short-term investments of $12.1
million, a decrease of $.1 million from $12.2 million at May 31, 1997.
Working capital at May 31, 1998 was $31.8 million, an increase of $3.3
million from the working capital of $28.5 million reported a year earlier.
The current ratio of 2.4 at May 31, 1998 increased from the current ratio of
2.2 at May 31, 1997. Management believes that the Company's cash and cash
equivalents, available credit facilities and operational cash flows will
adequately finance anticipated growth, capital expenditures and repayment of
debt obligations for the foreseeable future. Management intends to invest the
Company's cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.
During fiscal 1998 net cash provided from operating activities was $7.7 million,
a decrease of $.5 million compared to the $8.2 million generated in
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fiscal 1997. The decrease was caused by lower liabilities due to the timing
of purchases offset by decreased accounts receivable due to improvements in
collections.
During fiscal 1998, the Company invested approximately $4.9 million in
property, plant and equipment which primarily represented investments in
manufacturing equipment and management information systems. Capital
expenditures for fiscal 1999, which will consist primarily of investments in
manufacturing equipment and management information systems are expected to be
in the range of $6.0 million to $6.5 million. At May 31, 1998 the Company
had committed $.7 million for the purchase of new business system software
and in June 1998 the Company committed to another $.3 million related to the
hardware for the new system. The cost of the systems upgrade project and
general improvements to the infrastructure related to this upgrade is
estimated to be $1.6 to $2.0 million.
At May 31, 1998, the Company had $7.4 million of long-term debt outstanding
which bears interest at rates ranging from 6.9% to 9.0%. In fiscal 1998 the
Company made $3.3 million in scheduled debt repayments.
The Company also has available an unsecured revolving line of credit of $10
million as of May 31, 1998, which expires October 31, 1998. The credit line
does not require compensating balances and there were no borrowings under the
line at May 31, 1998. The Company intends to renew the line of credit and
believes it can do so on terms substantially similar to the current terms.
The Company believes its stock is undervalued and recently announced its
intention to begin a repurchase program. The Company intends to finance such
purchases from the Company's internally-generated funds.
At May 31, 1998, the Company's additional minimum liability for its defined
benefit plan was in excess of the unrecognized prior service costs and net
transition obligation and was recorded as a non-cash charge of $2,418,000 to
stockholders' equity, net of tax benefits of $1,612,000, in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions."
RESULTS OF OPERATIONS
TOTAL REVENUES - Total revenues for fiscal 1998 of $165.9 million were $11.4
million or 7% higher than the $154.5 million in fiscal 1997. The increased
revenues were attributable to increased volume in professional services,
technology-based automated tracking solutions, information & records
management supplies and records storage solution products. Revenues in
fiscal 1997 of $154.5 million were $1.8 million or 1% higher than the $152.7
million recorded in fiscal 1996. The fiscal 1997 increased revenues were
attributable to price increases and higher unit volumes. International
revenues were 20%, 21% and 20% of consolidated revenues in fiscal 1998, 1997
and 1996, respectively.
COST OF REVENUES - Cost of revenues, as a percentage of revenues, for fiscal
1998, 1997 and 1996 was 59.6%, 59.7% and 60.9%, respectively. The decrease
in the percentage for fiscal 1998 as compared to fiscal 1997 was due
primarily to an increase in manufacturing efficiencies offset by a one-time
$1.3 million pre-tax charge for a reduction in branch office inventories.
The reduction in branch inventories was consistent with the Company's shift
16
<PAGE>
in strategy to have its branches operate as sales execution centers rather
than local distribution centers. The decrease in the percentage for fiscal
1997 as compared to fiscal 1996 was due primarily to increased list prices
and continued efforts in reducing product costs.
OPERATING EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND
DEVELOPMENT) - Operating expenses, as a percentage of revenues, for fiscal
1998, 1997 and 1996 were 37.2%, 35.3% and 34.9%, respectively. Total
operating expenses for fiscal 1998 were $61.8 million, an increase of $7.2
million as compared to total operating expenses of $54.6 million in fiscal
1997. The increase in operating expenses was primarily attributable to
increased salaries and related expenses to support the Company's revenue
growth and the Company's decision to replace its current technology
infrastructure to align with its strategic focus, improve operational
performance and achieve year 2000 compliance. The pre-tax charge in fiscal
1998 was $2.7 million related to technology infrastructure.
Operating expenses for fiscal 1997 of $54.6 million represented an increase
of $1.4 million as compared to total operating expenses of $53.2 million in
fiscal 1996. The increase in operating expenses between the two fiscal years
was attributable to the implementation of telesales to all the Company's
branch sales operations, increased support and marketing costs for the
Company's technology products, increased support costs for the Company's
independent distribution channel and costs with respect to the search and
replacement of the Company's Chief Executive Officer.
INTEREST EXPENSE - Interest expense, net for fiscal 1998 was $335,000 lower
than the net interest expense for fiscal 1997. Net interest expense for
fiscal 1997 was $584,000 lower than the net interest expense for fiscal 1996.
The decrease in interest expense in both years was primarily because of
decreased levels of long-term debt due to scheduled debt repayments.
INCOME TAXES - Income taxes, as a percentage of pre-tax earnings, for fiscal
1998 was 46.9%, an increase of 3.4 percentage points as compared to the
effective tax rate of 43.5% in fiscal 1997. The increase in the effective
tax rate was primarily due to an increase in foreign taxes as well as the
proportionately greater impact of state taxes, goodwill and foreign taxes due
to lower pre-tax income in the current year. The effective tax rate of 43.5%
was unchanged for fiscal 1997 and 1996.
COMPETITION
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative document management solutions that
may be less costly or provide additional features. Such competition could
result in lower gross margins in the future, if the Company's average selling
prices decrease faster than its costs, and could result in lost sales.
CURRENT DEVELOPMENTS
The Company recently announced an agreement granting Bescorp-Registered
Trademark-Inc. exclusive distribution rights to several products in the
Company's Forms Handling Equipment line, including continuous forms bursters,
decollators and mergers.
17
<PAGE>
The Company also announced an agreement allowing Transkrit-Registered
Trademark-Corp. to directly market and sell high speed mailing systems,
including InfoSeal-Registered Trademark- folding and sealing equipment
manufactured by the Company.
MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE
The Company is aware of problems associated with computer systems as the year
2000 approaches. The Company's initiative to upgrade its systems to better
support its strategic direction and improve operational efficiencies will
also mitigate current year 2000 compliance issues with internal systems. The
cost of the systems upgrade project and general improvements to the
infrastructure related to this upgrade is estimated to be $1.6 to $2.0
million. Since the upgrade project costs are related to an overall systems
project, the year 2000 compliance costs cannot be reasonably determined. The
costs and time schedule for the systems upgrade are based on management's
best estimates for the implementation of this new management information
system and infrastructure upgrades. The Company has initiated programs to
identify, and mitigate to the best of its ability, any remaining internal and
external risks associated with the year 2000 problem. The risk of not
meeting its timeline or problems with suppliers or customers could materially
adversely affect the Company's business, results of operations, financial
condition and prospects.
TRENDS
Recent market research indicates there may be an accelerated move to digital
technologies, such as imaging, by large paper intensive organizations. This
trend could result in a weakening of demand for the Company's paper-based
records management supplies and records storage products. Failure of the
Company to match the changing market with new document management products
and services could materially adversely affect the Company's business,
results of operations, financial condition and prospects.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for fiscal
1999. This statement will require the Company to report in the financial
statements, in addition to net income, comprehensive income and its
components including foreign currency items and unrealized gains and losses
on certain investments in debt and equity securities. Upon adoption of FAS
130, the Company is also required to reclassify financial statements for
earlier periods provided for comparative purposes. The Company has not
determined the impact of the adoption of this new accounting standard on its
consolidated financial statement disclosures.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company is required to adopt for its fiscal 1999
annual financial statements. This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Under FAS 131, operating segments are to be
18
<PAGE>
determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of
this new accounting standard on its consolidated financial statement
disclosures.
In November 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company is required to adopt for agreements entered
into with customers beginning in 1998. This statement provides guidance for
recognizing revenue related to sales by software vendors. The adoption of
SOP 97-2 did not have a significant impact on the timing of the Company's
revenue recognition.
In February 1998, FASB issued Statement of Financial Accounting Standards No.
132 ("FAS 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which the Company is required to adopt for its
fiscal 1999 annual financial statements. This statement revises existing
disclosure requirements for pension and other postretirement benefit plans
thereby intending to improve the understandability of benefit disclosures,
eliminate certain requirements that the FASB believes are no longer
necessary, and standardize footnote disclosures. This statement requires
comparative information for earlier years to be restated. The Company has
not determined the impact of the adoption of this new accounting standard on
its consolidated financial statement disclosures.
BUSINESS ENVIRONMENT AND RISK FACTORS
The Company's future operating results may be affected by various trends and
factors which the Company must successfully manage in order to achieve
favorable operating results. In addition, there are trends and factors
beyond the Company's control which affect its operations. In accordance with
the provisions of the Private Securities Litigation Reform Act of 1995, the
cautionary statements set forth below identify important factors that could
cause actual results to differ materially from those in any forward-looking
statements contained in this report. Such trends and factors include, but are
not limited to, adverse changes in general economic conditions or conditions
in the specific markets for the Company's products, governmental regulation,
fluctuations in foreign exchange rates, and other factors, including those
listed below.
Focus on Services
The shift in the Company's strategy to focus on its professional services as
a way of providing value-added solutions to its customers has risk. The risk
is that the Company may not be able to generate the product sales along with
the service sales or that the level of product drag-along related to service
sales has been overestimated. In either situation, the loss of product sales
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Distribution Channels
The Company is currently pursuing a strategy to refine and expand its
distribution channels. It is seeking to reorient its direct channel from
local distribution centers to sales execution centers and focus them on major
accounts. The Company is also seeking to expand its call center
19
<PAGE>
operations and to direct reorder business through this efficient distribution
method. In conjunction with handling inbound sales activity a new initiative
is underway to generate sales through the use of outbound telemarketing.
Additionally, the Company is seeking to remove exclusivity from its
independent distributors. This will allow the Company to institute
electronic commerce as part of its distribution channel fabric. These
changes may result in temporary or permanent loss of sales people and
independent distributors and the resultant loss of revenue they currently
generate. This result could have a material adverse effect on the Company's
business, results of operations and financial condition.
Retaining and Attracting Qualified Personnel
The Company's future performance may depend in significant part upon
attracting and retaining key senior management, manufacturing, sales and
marketing personnel. Competition for such personnel is intense and the
inability to retain its current key personnel or to attract, assimilate or
retain other highly qualified personnel in the future on a timely basis could
have a material adverse effect on the Company's business, results of
operations and financial condition.
Fluctuations in Operating Results
Factors affecting the Company's operating results and gross margins include
the volume of product sales, competitive pricing pressures, the ability of
the Company to match supply with demand, changes in product and customer mix,
market acceptance of new or enhanced versions of the Company's products and
services, changes in the channels through which the Company's products and
services are distributed, timing of new product announcements and
introductions by the Company and its competitors, fluctuations in product
costs, variations in manufacturing cycle time, fluctuations in manufacturing
utilization, the ability of the Company to achieve manufacturing efficiencies
with its new and existing products, increased research and development
expenses, exchange rate fluctuations, a change in the Company's effective tax
rate and changes in general economic conditions. All of these factors are
difficult to forecast and these or other factors can materially affect the
Company's quarterly or annual operating results or gross margins.
Competition
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative document management solutions that
may be less costly or provide additional features. Such competition could
result in lower gross margins in the future, if the Company's average selling
prices decrease faster than its costs and could result in lost sales.
Management System Upgrades and Year 2000 Compliance
The Company is aware of problems associated with computer systems as the year
2000 approaches. The Company's initiative to upgrade its systems to better
support its strategic direction and improve operational efficiencies will
also mitigate current year 2000 compliance issues with internal systems. The
cost of the systems upgrade project and general improvements to the
infrastructure related to this upgrade is estimated to be $1.6 to $2.0
million. Since the upgrade project costs are related to an overall
20
<PAGE>
systems initiative, the year 2000 compliance costs cannot be reasonably
determined. The costs and time schedule for the systems upgrade are based on
management's best estimates for the implementation of this new management
information system and infrastructure upgrades. The Company has initiated
programs to identify, and mitigate to the best of its ability, any remaining
internal and external risks associated with the year 2000 problem. The risk
of not meeting its timeline or problems with suppliers or customers could
materially adversely affect the Company's business, results of operations,
financial condition and prospects.
Dependence on Sole Source Suppliers
The Company purchases several critical components from single or sole source
vendors for which alternative sources are not currently developed.
Development of alternative suppliers would require a significant amount of
time to qualify in the case of certain of the Company's components. The
Company does not maintain long-term supply agreements with any of these
vendors. The inability to develop alternative sources for these single or
sole source components or to obtain sufficient quantities of these components
could result in delays or reductions in product shipments which could
adversely affect the Company's business, financial condition and results of
operations.
New Processes and Products and Manufacturing Efficiencies
There can be no assurance that the Company's manufacturing facilities will
achieve or maintain acceptable manufacturing efficiencies in the future. The
inability of the Company to achieve planned efficiencies from its
manufacturing facilities could have an adverse effect on the Company's
business, financial condition and results of operations. Any problems
experienced by the Company in its current or future transitions to new
processes and products could have a material adverse effect on the Company's
business, financial condition and results of operations.
Backlog
The backlog of orders is not a significant factor in understanding the
business of the Company. The nature of the Company's business is such that
the value of backlog represents only a small portion of the on-going revenues
of the business. No one order would normally account for a significant value
of backlog.
Government Sales
With the government, both Federal and State/Local comprising 8-10% of the
Company's revenues, the Company is primarily exposed to risks from reductions
in budget allocations to support regulation and administrative offices. The
current reinventing government initiative opens opportunities to help
government streamline workflow processes, reduce paperwork and increase
customer service, which may provide short-term opportunities for the Company.
However, the long-term effect of a government initiative to streamline
processes could have a negative impact on the Company's business, financial
condition and results of operations.
Patents, Proprietary Rights and Related Litigation
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements
to protect its intellectual property rights. The Company has been notified
in the past and the Company may be notified in the future of claims that they
may be infringing upon patents or other intellectual property rights owned by
third parties. There can be no assurance that in the future any patents held
by the Company will not be invalidated, that patents will be issued for any
of the Company's pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength or be
issued in the primary countries where the Company's products can be sold to
provide meaningful protection or any commercial advantage to the Company.
Additionally, competitors of the Company may be able to design around the
Company's patents.
21
<PAGE>
Risks Associated with International Sales
In fiscal 1998, international sales accounted for approximately 20% of the
Company's total revenues. Fluctuations in currencies could adversely affect
the Company's business, financial condition and results of operations. In
addition, gains and losses on the conversion to United States dollars of
accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to
fluctuations in the Company's results of operations. Because sales of the
Company's products have been denominated to date primarily in United States
dollars, increases in the value of the United States dollar could increase
the price of the Company's products so that they become relatively more
expensive to customers in the local currency of a particular country, leading
to a reduction in sales and profitability in that country. The Company is
subject to the risks of conducting business internationally, including
foreign government regulation and general geopolitical risks such as
political and economic instability, potential hostilities and changes in
diplomatic and trade relationships. Manufacturing and sales of the Company's
products may also be materially adversely affected by factors such as
unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions, longer
payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, the burdens of complying with a variety
of foreign laws and other factors beyond the Company's control. In addition,
the laws of certain foreign countries in which the Company's products are or
may be developed, manufactured or sold, may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States and thus make piracy of the Company's products a more likely
possibility. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Management of Growth
The Company has increased its expense levels to support its recent growth.
The Company expects to continue to increase its operating expenses by hiring
additional personnel to support expected growth, increased marketing efforts
and additional research and development activities. If the Company does not
achieve increased levels of revenues commensurate with these increased levels
of operating expenses, or if the Company's revenues decrease or do not meet
the Company's expectations for a particular period, the Company's business,
financial condition and results of operations will be materially adversely
affected.
Effect of Anti-Takeover Provisions
The Company has taken a number of actions that could have the effect of
discouraging a takeover attempt that might be beneficial to stockholders who
wish to receive a premium for their shares from a potential bidder. The
Company has adopted a Shareholder Rights Plan that would cause substantial
dilution to a person who attempts to acquire the Company on terms not
approved by the Company's Board of Directors. The Shareholder Rights Plan
may therefore have the effect of delaying or preventing any change in control
and deterring any prospective acquisition of the Company. Furthermore, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law ("Section 203"), which
22
<PAGE>
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company.
Item 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are set forth
under Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The section entitled "Election of Directors," which appears in the Company's
Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is
incorporated herein by reference. For information with respect to the
executive officers of the Company, see "Executive Officers" in Part I of this
report.
Item 11. EXECUTIVE COMPENSATION
The information related to executive compensation which appears in the
Company's Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders in the section entitled "Executive Compensation and Other
Matters" is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Stock Ownership of Certain Beneficial Owners and
Management" which appears in the Company's Proxy Statement for the Company's
1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" which
appears in the Company's Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
23
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page Number
-----------
<C> <S> <C>
1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report 29
Consolidated Statements of Earnings for the
three years ended May 31, 1998 30
Consolidated Balance Sheets at May 31, 1998
and 1997 31
Consolidated Statements of Stockholders'
Equity for the three years ended May 31, 1998 32
Consolidated Statements of Cash Flows for
the three years ended May 31, 1998 33
Statement of Accounting Policies 34-36
Notes to Consolidated Financial Statements 37-44
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report 45
Schedule for the three years ended May 31, 1998:
II Valuation and Qualifying Accounts 46
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. Exhibits: See Index to Exhibits on page 25. The Exhibits listed in
the accompanying Index are referenced as part of this report.
B. Reports on Form 8-K:
None
</TABLE>
24
<PAGE>
3. EXHIBITS:
<TABLE>
<C> <S>
3.1 Certificate of Incorporation (Exhibit 3.1 of 1993 Form
10-K)(2)
3.2 Certificate of Designation, Preferences and Rights of the
Terms of the Series A Preferred Stock (Exhibit 3.2 filed
with Form 10-Q for the quarter ended November 30, 1996)(2)
3.3 Second Amended and Restated Bylaws of the Company dated
October 17, 1996 (Exhibit 4 of Form 8-K dated October 17,
1996)(2)
4.1 Form of Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent (including as
Exhibit A the form of Certificate of Designation, Preferences
and Rights of the Terms of the Series A Preferred Stock, as
Exhibit B the form of Right Certificate, and as Exhibit C the
Summary of Terms of Rights Agreement)(Exhibit 1 of Form 8-K
dated October 17, 1996)(2)
10.1 Tab Products Co. 1981 Incentive Stock Option Plan (Exhibit 10 of
the 1983 Form 10-K)(1), (2)
10.2 Amended 1981 Incentive Stock Option Plan (Exhibit 10 of the 1987
Form 10-K)(1), (2)
10.3 1991 Stock Option Plan (Exhibit 10.1 of the 1991 Form 10-K)(1), (2)
10.4 Note Agreement of Tab Products Co. dated as of March 20, 1992 in
the aggregate principal amount of $15,000,000 (Exhibit 10.5 of the
1992 Form 10-K)(2)
10.5 Amendment dated July 27, 1993 to Note Agreement of Tab Products Co.
dated as of March 20, 1992 (Exhibit 10.16 filed with the 1993
Form 10-K)(2)
10.6 Note Agreement of Tab Products Co. dated October 7, 1993 (Exhibit 10.20
filed with Form 10-Q for the quarter ended August 31, 1993)(2)
10.7 Letter dated October 7, 1993 amending the Prudential Note Agreement
dated March 20, 1992 (Exhibit 10.21 filed with Form 10-Q for the
quarter ended August 31, 1993)(2)
10.8 Letter dated October 27, 1993 amending the Prudential Note Agreement
dated March 20, 1992 (Exhibit 10.27 filed with the 1994 Form 10-K)(2)
10.9 Letter dated June 15, 1995 amending the Prudential Note Agreement
dated March 20, 1992 (Exhibit 10.32 filed with the 1995 Form 10-K)(2)
10.10 Letter dated July 21, 1995 amending the Prudential Note Agreement dated
March 20, 1992 (Exhibit 10.33 filed with the 1995 Form 10-K)(2)
10.11 Letter dated December 13, 1995 amending the Prudential Note Agreement
dated March 20, 1992 (Exhibit 10.35 filed with Form 10-Q for the quarter
ended November 30, 1995)(2)
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.12 Bank of America Business Loan Agreement dated August 26, 1996 (Exhibit
10.36 filed with the 1996 Form 10-K)(2)
10.13 Letter dated August 20, 1996 amending the Prudential Note Agreement dated
March 20, 1992 (Exhibit 10.37 filed with the 1996 Form 10-K)(2)
10.14 Form of Indemnity Agreement between the Company and each of its Executive
Officers and Directors (Exhibit 10.38 filed with Form 10-Q for the quarter
ended November 30, 1996)(1), (2)
10.15 Form of Change of Control Agreement between the Company and named Executive
Officers (Exhibit 10.40 filed with Form 10-Q for the quarter ended November 30,
1996)(1), (2)
10.16 Outside Directors' Option Plan and Agreement (Exhibit 10.41 filed with Form 10-Q
for the quarter ended November 30, 1996)(1), (2)
10.17 Employment Agreement between the Company and Philip C. Kantz (Exhibit 10.42
filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2)
10.18 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz
(Exhibit 10.43 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2)
10.19 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz
(Exhibit 10.44 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2)
10.20 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz
(Exhibit 10.45 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2)
10.21 Bank of America Amendment No. 1 dated November 4, 1997 to Business Loan Agreement
dated August 26, 1996 (Exhibit 10 filed with Form 10-Q for the quarter ended
November 30, 1997)(2)
23.1 Independent Auditors' Consent
27 Financial Data Schedule
(1) Compensatory Plan or Arrangement
(2) Incorporated by reference from the noted previously
filed document.
</TABLE>
26
<PAGE>
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, and State of California, on this twenty-eighth day of August, 1998.
TAB PRODUCTS CO.
/S/ PHILIP C. KANTZ
-----------------------------
Philip C. Kantz
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND TITLE DATE
- - -------------- ----
<S> <C>
/s/ Hans A. Wolf August 28, 1998
- - ------------------------------------------------- ---------------
Hans A. Wolf, Chairman of the Board
/s/ Philip C. Kantz August 28, 1998
- - ------------------------------------------------- ---------------
Philip C. Kantz, Director; President and
Chief Executive Officer
/s/ David J. Davis August 28, 1998
- - ------------------------------------------------- ---------------
David J. Davis, Senior Vice President,
Operations and Chief Financial Officer
/s/ William R. Kinzie August 28, 1998
- - ------------------------------------------------- ---------------
William R. Kinzie, Controller and Chief
Accounting Officer
/s/ Robert R. Augsburger August 28, 1998
- - ------------------------------------------------- ---------------
Robert R. Augsburger, Director
/s/ Robert S. Cecil August 28, 1998
- - ------------------------------------------------- ---------------
Robert S. Cecil, Director
/s/ Kathryn S. Hanson August 28, 1998
- - ------------------------------------------------- ---------------
Dr. Kathryn S. Hanson, Director
/s/ Jerry K. Myers August 28, 1998
- - ------------------------------------------------- ---------------
Jerry K. Myers, Director
</TABLE>
27
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
FORM 10-K ITEM 14
FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tab Products Co.:
We have audited the accompanying consolidated balance sheets of Tab Products
Co. and its subsidiaries as of May 31, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended May 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Tab Products Co. and its
subsidiaries as of May 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1998 in conformity with generally accepted accounting principles.
San Jose, California
June 25, 1998
29
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended May 31
---------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues $ 165,943,000 $ 154,451,000 $ 152,698,000
Costs and expenses:
Cost of revenues 98,913,000 92,270,000 93,025,000
Selling, general and administrative 60,912,000 53,765,000 52,726,000
Research and development 889,000 785,000 502,000
---------------- ---------------- -----------------
Total costs and expenses 160,714,000 146,820,000 146,253,000
---------------- ---------------- -----------------
Operating income 5,229,000 7,631,000 6,445,000
Interest, net (639,000) (974,000) (1,558,000)
---------------- ---------------- -----------------
Earnings before income taxes 4,590,000 6,657,000 4,887,000
Provision for income taxes 2,155,000 2,896,000 2,126,000
---------------- ---------------- -----------------
Net earnings $ 2,435,000 $ 3,761,000 $ 2,761,000
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Earnings per share
Basic $ .48 $ .77 $ .57
Diluted $ .46 $ .75 $ .57
Shares used in computation
Basic 5,101,565 4,879,131 4,851,951
Diluted 5,286,363 5,017,075 4,877,131
</TABLE>
See accompanying Statement of Accounting Policies and
Notes to Consolidated Financial Statements.
30
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31
----------------------------------
ASSETS 1998 1997
-------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,199,000 $ 8,568,000
Short-term investments 4,896,000 3,586,000
Accounts receivable, less allowances for doubtful
accounts of $947,000 and $769,000 24,943,000 25,550,000
Inventories 11,015,000 11,381,000
Prepaid income taxes and other expenses 5,725,000 2,320,000
-------------- ----------------
Total current assets 53,778,000 51,405,000
Property, plant and equipment, net 19,063,000 20,567,000
Goodwill, net 3,683,000 4,281,000
Other assets 964,000 4,446,000
-------------- ----------------
$77,488,000 $80,699,000
-------------- ----------------
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,437,000 $ 3,313,000
Accounts payable 6,257,000 6,677,000
Compensation payable 3,910,000 4,347,000
Other accrued liabilities 8,389,000 8,605,000
-------------- ----------------
Total current liabilities 21,993,000 22,942,000
-------------- ----------------
Long-term debt 7,391,000 10,828,000
-------------- ----------------
Deferred taxes and other noncurrent liabilities 3,207,000 2,402,000
-------------- ----------------
Commitments and contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized - 500,000 shares,
issued - none
Common stock, $.01 par value, authorized - 25,000,000 shares,
issued -1998- 7,601,616 shares, 1997 - 7,365,803 shares 76,000 74,000
Additional paid-in capital 15,219,000 13,309,000
Retained earnings 63,885,000 62,473,000
Minimum pension liability adjustment (2,418,000) -
Treasury stock, 1998 and 1997 - 2,432,227 shares (31,365,000) (31,365,000)
Cumulative translation adjustment (500,000) 36,000
-------------- ----------------
Total stockholders' equity 44,897,000 44,527,000
-------------- ----------------
$77,488,000 $80,699,000
-------------- ----------------
-------------- ----------------
</TABLE>
See accompanying Statement of Accounting Policies and
Notes to Consolidated Financial Statements.
31
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------
Number of Additional Minimum Cumulative
Shares Paid-in Retained Pension Treasury Translation
Outstanding Amount Capital Earnings Liability Stock Adjustment
------------- --------- ------------ ------------ ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JUNE 1, 1995 4,851,951 $ 73,000 $ 12,705,000 $ 57,898,000 $(31,365,000) $ 517,000
Net earnings 2,761,000
Dividends, $.20 per share (970,000)
Translation adjustment (157,000)
------------- --------- ------------ ------------ ----------- -------------- -----------
BALANCES, MAY 31, 1996 4,851,951 73,000 12,705,000 59,689,000 (31,365,000) 360,000
Net earnings 3,761,000
Dividends, $.20 per share (977,000)
Translation adjustment (324,000)
Stock options exercised
and tax benefit on
disqualified common
stock dispositions 81,625 1,000 604,000
------------- --------- ------------ ------------ ----------- -------------- -----------
BALANCES, MAY 31, 1997 4,933,576 74,000 13,309,000 62,473,000 (31,365,000) 36,000
Net earnings 2,435,000
Dividends, $.20 per share (1,023,000)
Translation adjustment (536,000)
Stock options exercised
and tax benefit on
disqualified common 235,813 2,000 1,910,000
stock dispositions
Minimum pension liability changes $(2,418,000)
------------- --------- ------------ ------------ ----------- -------------- -----------
BALANCES, MAY 31, 1998 5,169,389 $ 76,000 $15,219,000 $63,885,000 $(2,418,000) $(31,365,000) $ (500,000)
------------- --------- ------------ ------------ ----------- -------------- -----------
------------- --------- ------------ ------------ ----------- -------------- -----------
</TABLE>
See accompanying Statement of Accounting Policies and
Notes to Consolidated Financial Statements.
32
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 2,435,000 $ 3,761,000 $ 2,761,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 7,018,000 4,001,000 4,065,000
Deferred income taxes and other liabilities (410,000) 113,000 396,000
Other 381,000 200,000 (12,000)
Changes in operating assets and liabilities:
Accounts receivable, net 237,000 (2,029,000) 882,000
Inventories 122,000 (205,000) 3,271,000
Prepaid income taxes and other expenses (1,815,000) (490,000) 1,853,000
Other assets 551,000 361,000 (1,412,000)
Accounts payable (302,000) 895,000 (1,469,000)
Compensation payable (407,000) 811,000 635,000
Other accrued liabilities (137,000) 749,000 374,000
-------------- --------------- --------------
Net cash provided by operating activities 7,673,000 8,167,000 11,344,000
-------------- --------------- --------------
INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (4,927,000) (3,309,000) (2,825,000)
Purchases of short-term investments (9,282,000) (7,198,000) (5,998,000)
Sales of short-term investments 7,972,000 5,934,000 5,276,000
-------------- --------------- --------------
Net cash required by investing activities (6,237,000) (4,573,000) (3,547,000)
-------------- --------------- --------------
FINANCING ACTIVITIES
Repayment of debt (3,313,000) (3,813,000) (4,092,000)
Proceeds from issuance of common stock 1,910,000 491,000
Dividends paid (1,023,000) (977,000) (970,000)
-------------- --------------- --------------
Net cash required by financing activities (2,426,000) (4,299,000) (5,062,000)
-------------- --------------- --------------
Effect of exchange rate changes on cash (379,000) (58,000) (157,000)
-------------- --------------- --------------
Increase (decrease) in cash and cash equivalents (1,369,000) (763,000) 2,578,000
Cash and cash equivalents at beginning of year 8,568,000 9,331,000 6,753,000
-------------- --------------- --------------
Cash and cash equivalents at end of year $ 7,199,000 $ 8,568,000 $ 9,331,000
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
See accompanying Statement of Accounting Policies and
Notes to Consolidated Financial Statements.
33
<PAGE>
TAB PRODUCTS CO.
STATEMENT OF ACCOUNTING POLICIES
The Company's significant accounting policies are summarized below to assist
the reader in reviewing the financial statements and other data contained in
this report.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are
wholly-owned. InterCompany transactions have been eliminated in consolidation.
ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses as of the dates and for the periods
presented. Such estimates include the allowance for doubtful accounts,
warranty and obligations for post-retirement health care and pension
benefits. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES The current assets and liabilities of the
Company's Canadian, Australian and European subsidiaries are translated into
U.S. dollars at current exchange rates, long-term assets are translated at
historical rates, and revenue and expense items are translated at average
rates of exchange prevailing during the year. Resulting translation
adjustments are accumulated in a separate component of stockholders' equity.
Other foreign currency transaction gains and losses are included in net
earnings.
CASH AND CASH EQUIVALENTS are highly liquid investments purchased with an
original maturity of three months or less.
SHORT-TERM INVESTMENTS represent debt securities which are stated at fair
value. The difference between amortized cost (cost adjusted for amortization
of premiums and accretion of discounts which are recognized as adjustments to
interest income) and fair value representing unrealized holding gains or
losses, if material, are recorded as a separate component of stockholders'
equity until realized. While the Company's intent is to hold debt securities
to maturity, they are classified as available-for-sale because the sale of
such securities may be required prior to maturity. Any gains and losses on
the sale of debt securities are determined on a specific identification
basis. Unrealized holding gains and losses were not material for any periods
presented.
INVENTORIES are valued at the lower of cost or market. Cost of merchandise
inventories purchased for resale is determined on the last-in, first-out
(LIFO) method for domestic inventories, which was approximately $1,424,000 at
May 31, 1998 ($2,003,000 at May 31, 1997). Cost of the remainder of the
inventories is determined on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT, including significant improvements to existing
facilities are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
which are as follows: Field service parts 3-5 years; land improvements 10-30
years; buildings 20-50 years; machinery and equipment 3-15 years; furniture
and fixtures 3-10 years. Leasehold improvements are amortized over the
shorter of their useful lives or the term of the lease.
34
<PAGE>
GOODWILL represents the excess of the purchase price over the estimated fair
value of net assets of acquired businesses. Goodwill is being amortized on a
straight-line basis over periods not exceeding 25 years. Goodwill
amortization amounted to $598,000, $496,000 and $464,000 in fiscal years
1998, 1997 and 1996, respectively. The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.
RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting
Standards Board ("FASB") adopted Statements of Financial Accounting Standards
("SFAS") 130 (Reporting Comprehensive Income), which requires that an
enterprise report, by major components and as a single total, the change in
its net assets during the period from non-owner sources; and SFAS 131
(Disclosures about Segments of an Enterprise and Related Information), which
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. The Company has not determined the
impact of the adoption of these new accounting standards on its consolidated
financial statement disclosures.
In November 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company is required to adopt for agreements entered
into with customers beginning in 1998. This statement provides guidance for
recognizing revenue related to sales by software vendors. The adoption of
SOP 97-2 will not have a significant impact on the timing of the Company's
revenue recognition.
In February 1998, the FASB issued Statement of Financial Accounting Standards
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which the Company is required to adopt for its fiscal 1999 annual
financial statements. This statement revises existing disclosure
requirements for pension and other postretirement benefit plans thereby
intending to improve the understandability of benefit disclosures, eliminate
certain requirements that the FASB believes are no longer necessary, and
standardize footnote disclosures. This statement requires comparative
information for earlier years to be restated. The Company has not determined
the impact of the adoption of this new accounting standard on its
consolidated financial statement disclosures.
All of these statements became effective for the fiscal year beginning June
1, 1998.
REVENUE RECOGNITION Revenues on product sales are recognized upon product
shipment. Related installation revenues are recognized when installation is
complete. Equipment service revenues are recognized ratably over the
contractual period or as the services are performed.
EARNINGS PER SHARE (EPS) are computed as basic EPS using the average number
of common shares outstanding and diluted EPS using the average number of
common and dilutive common equivalent shares outstanding, in accordance with
SFAS 128 (see Note 12).
STOCKHOLDERS' EQUITY Shares of the Company which are repurchased are treated
as Treasury stock and are accounted for under the cost method.
INCOME TAXES Deferred income taxes are provided for temporary differences
between financial statements and income tax reporting, in accordance with
SFAS 109.
STOCK-BASED COMPENSATION The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.
35
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes that the carrying
amount for cash and cash equivalents, short-term investments, accounts
receivables, accounts payable and long-term debt approximated fair value as
of May 31, 1998.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and trade accounts
receivable. The Company places its cash and cash equivalents and short-term
investments with what it believes are high credit quality financial
institutions. The Company sells its products primarily to companies in North
America, Europe and Australia. The Company maintains reserves for potential
credit losses, but historically has not experienced any significant losses
related to individual customers or groups of customers in any particular
industry or geographic area.
36
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Short-Term Investments
The Company's short-term investments have been classified as
available-for-sale securities. The amortized cost of available-for-sale
securities at May 31, 1998 and May 31, 1997 are presented in the table which
follows. Available-for-sale securities are classified as current assets and
mature generally within six months. For each category of investment
securities the fair market value approximates amortized cost.
<TABLE>
<CAPTION>
May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Corporate obligations $ 3,923,000 $ 3,320,000
U.S. Government obligations 973,000 266,000
------------ ------------
$ 4,896,000 $ 3,586,000
------------ ------------
------------ ------------
<CAPTION>
2. Inventories May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Finished goods $ 4,265,000 $ 6,669,000
Work in process 2,704,000 1,319,000
Raw material 4,046,000 3,393,000
------------ ------------
$ 11,015,000 $ 11,381,000
------------ ------------
------------ ------------
</TABLE>
If the inventories for which the LIFO method is used were valued under the
FIFO method, such inventories would have been higher by $763,000 at May 31,
1998 and $1,190,000 at May 31, 1997. The liquidation of certain LIFO
inventory increased earnings before income tax by $427,000 in 1998, by
$220,000 in 1997 and had no significant impact on earnings in 1996.
<TABLE>
<CAPTION>
3. Property, Plant and Equipment May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements $ 990,000 $ 990,000
Buildings and improvements 19,486,000 18,667,000
Machinery and equipment 17,572,000 16,589,000
Furniture and fixtures 17,031,000 16,109,000
Leasehold improvements 332,000 276,000
Field service spare parts 3,814,000 2,867,000
------------ ------------
59,225,000 55,498,000
Less accumulated depreciation
and amortization (40,162,000) (34,931,000)
------------ ------------
$ 19,063,000 $ 20,567,000
------------ ------------
------------ ------------
<CAPTION>
4. Long-Term Debt and Credit Line May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Unsecured term loans $ 9,500,000 $ 12,500,000
Unsecured term loan from bank 1,328,000 1,641,000
------------ ------------
Total debt 10,828,000 14,141,000
Less current portion (3,437,000) (3,313,000)
------------ ------------
Long-term debt $ 7,391,000 $ 10,828,000
------------ ------------
------------ ------------
</TABLE>
The Company has $9,500,000 of unsecured term loans outstanding: $6,000,000
at 8.7% with principal payments through fiscal 2001 and $3,500,000 at 6.9%
with principal payments through fiscal 2003. The Company also has a
$1,328,000 unsecured term loan outstanding from a bank with principal
payments through fiscal 2003. Interest on the bank loan is at the bank's
reference rate (8.50% at May 31, 1998) plus .50%. The Company, at its
discretion, can select other interest rate methods for this bank loan. These
interest rate methods include a fixed rate option, long-term rate option and
an offshore rate option. The term loans contain restrictions with respect to
certain payments (including dividends), additional debt, creation of liens
and guarantees and maintenance of minimum quick assets and stockholders'
equity.
The Company has an unsecured revolving line of credit of $10 million with a
bank, as of May 31, 1998 which expires October 31, 1998. Borrowings are
available at the bank's reference rate (8.50% at May 31, 1998) or at certain
rate options, such as fixed rate, long-term rate and offshore rate options
which may be lower. The Company had no borrowings outstanding under this line
as of May 31, 1998.
Required principal payments of long-term debt are payable as follows: Year
ending May 31, 1999-$3,437,000; 2000-$3,437,000; 2001-$1,937,000;
2002-$1,062,000 and 2003-$955,000.
Cash paid for interest which approximates interest expense was $1,190,000,
$1,515,000 and $1,850,000 for fiscal 1998, 1997 and 1996, respectively.
37
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
5. Other Accrued Liabilities May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Payroll and related benefits $ 2,416,000 $ 2,138,000
Deferred service contract income 3,105,000 2,819,000
Dividends 258,000 247,000
Amount due to independent sales reps 750,000 943,000
Other 1,860,000 2,458,000
------------ ------------
$ 8,389,000 $ 8,605,000
------------ ------------
------------ ------------
</TABLE>
6. Income Taxes
Earnings before income taxes and the provision for income taxes are comprised
of the following for the years ended May 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Earnings before income taxes:
Domestic $ 3,008,000 $ 4,648,000 $ 3,785,000
Foreign 1,582,000 2,009,000 1,102,000
------------ ------------ -----------
$ 4,590,000 $ 6,657,000 $ 4,887,000
------------ ------------ -----------
------------ ------------ -----------
Provision (credit) for income taxes:
Current:
Federal $ 2,372,000 $ 1,685,000 $ 942,000
State 621,000 398,000 229,000
Foreign 668,000 740,000 568,000
------------ ------------ -----------
3,661,000 2,823,000 1,739,000
------------ ------------ -----------
------------ ------------ -----------
Deferred:
Federal (1,167,000) 13,000 354,000
State (325,000) 32,000 31,000
Foreign (14,000) 28,000 2,000
------------ ------------ -----------
(1,506,000) 73,000 387,000
------------ ------------ -----------
$ 2,155,000 $ 2,896,000 $ 2,126,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The following is a reconciliation of the effective income tax rates, for
financial statement purposes.
<TABLE>
<CAPTION>
Percentage of Pre-Tax Earnings
---------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
United States statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal income tax benefit 4.2 4.3 3.5
Non-deductible goodwill 4.2 2.6 3.6
Foreign taxes 1.8 - -
Other 1.7 1.6 1.4
Effective tax rate 46.9% 43.5% 43.5%
</TABLE>
38
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating losses and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Post-retirement benefit obligation $ 527,000 $ 524,000
Reserves not currently deductible 2,490,000 1,081,000
Vacation accrual 438,000 452,000
Allowance for doubtful accounts 305,000 228,000
Operating loss carry forwards - 46,000
Pension obligation 460,000 -
Cumulative translation adjustments 442,000 -
Other 136,000 119,000
------------ ------------
4,798,000 2,450,000
------------ ------------
DEFERRED TAX LIABILITIES
Differences between book and tax basis
of property (1,921,000) (1,891,000)
Pension contribution - (1,336,000)
Other (241,000) (147,000)
------------ ------------
(2,162,000) (3,374,000)
------------ ------------
Net deferred tax assets (liabilities) $ 2,636,000 $ (924,000)
------------ ------------
------------ ------------
<CAPTION>
May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET DEFERRED TAX ASSETS (LIABILITIES)
WERE COMPRISED OF THE FOLLOWING:
Current assets $ 3,076,000 $ 410,000
Non-current liabilities (440,000) (1,334,000)
------------ ------------
Net deferred tax assets (liabilities) $ 2,636,000 $ (924,000)
------------ ------------
------------ ------------
</TABLE>
The Company has not provided for income taxes on undistributed earnings of
certain foreign subsidiaries which the Company intends to reinvest
indefinitely. Cash payments for income taxes were: $2,984,000, $2,581,000
and $700,000 in 1998, 1997 and 1996, respectively.
7. Employee Benefit Plans
The Company maintains a defined benefit pension plan for substantially all
domestic employees. Plan benefits are based on compensation and length of
service and provide for normal retirement at age 65. The Company's policy is
to make annual contributions to the pension plan between the ERISA minimum
and the maximum tax deductible amount allowed.
The plan's assets are invested in short-term money market instruments, fixed
income securities and common stock.
Net pension cost was $450,000, $395,000 and $782,000 for fiscal 1998, 1997
and 1996, respectively, and included the following components.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cost of benefits earned $ 758,000 $ 729,000 $ 641,000
Interest cost on projected benefit
obligation 1,665,000 1,537,000 1,378,000
Actual return on plan assets (2,386,000) (1,694,000) (4,579,000)
Amortization of initial unrecognized
net obligation 22,000 22,000 22,000
Unrecognized prior service cost 19,000 19,000 19,000
Deferred gain (loss) 372,000 (218,000) 3,301,000
------------ ------------ ------------
Net pension cost $ 450,000 $ 395,000 $ 782,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
39
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plans funded status:
<TABLE>
<CAPTION>
May 31
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Pension plan assets at market value $ 23,313,000 $ 21,444,000
------------ -------------
Less present value of projected benefit obligation:
Vested 24,242,000 17,657,000
Non-vested 743,000 915,000
Effect of projected future compensation levels 3,463,000 2,743,000
------------ -------------
Projected benefit obligation 28,448,000 21,315,000
------------ -------------
Excess/(deficiency) of plan assets over projected
benefit obligation (5,135,000) 129,000
Prior service cost 210,000 229,000
Unrecognized net obligation at date of initial
application, amortized over 20 years 201,000 223,000
Unrecognized net loss 7,493,000 2,638,000
Adjustment to recognize minimum liability (4,441,000) -
------------ -------------
Prepaid pension assets (liabilities) $ (1,672,000) $ 3,219,000
------------ -------------
------------ -------------
</TABLE>
At May 31, 1998, the Company's additional minimum liability for its defined
benefit plan was in excess of the unrecognized prior service costs and net
transition obligation and was recorded as a non-cash charge of $2,418,000 to
stockholders' equity, net of tax benefits of $1,612,000, in accordance with
SFAS No. 87, "Employers'" Accounting for Pensions.
The weighted average discount rate and long-term rate of compensation
increase used in determining the actuarial present value of the projected
benefit obligations were 6.75% and 5%, respectively, at year end 1998 and 8%
and 5%, respectively, at year end 1997. The expected long-term rate of return
on plan assets for fiscal 1999 is 9.5%, the same as fiscal 1998.
The Company also provides a 401(k) Plan (tax deferred savings plan) for its
domestic employees. The plan provides that the Company make contributions in
either cash or common stock, at its option, equal to 50% of minimum
contributions made by participating employees. The plan also provides for
additional Company contributions up to a maximum of 75% of participating
employees' minimum contributions, for each fiscal year in which net earnings
are 5% or more of revenues. Company contributions charged to earnings were
$460,000, $445,000 and $419,000 for fiscal 1998, 1997 and 1996, respectively.
The Company has a plan that provides certain health care benefits for all of
its retired employees who meet certain age and service requirements while
working for the Company. Generally, Company-provided health care coverage is
coordinated with Medicare upon the retiree reaching the age of 65.
Net post-retirement benefit cost was $233,000, $172,000 and $178,000 for
fiscal years 1998, 1997 and 1996, respectively. The Company's
post-retirement health care plans are not funded.
Accumulated post-retirement benefit obligation:
<TABLE>
<CAPTION>
May 31
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Retirees $ 837,000 $ 1,078,000
Fully eligible active plan participants 239,000 146,000
Other active plan participants 889,000 332,000
------------ ------------
Total accumulated post-retirement benefit
obligation 1,965,000 1,556,000
Unrecognized prior service costs 67,000 77,000
Unrecognized net loss (788,000) (366,000)
------------ ------------
Accrued post-retirement benefit cost $ 1,244,000 $ 1,267,000
------------ ------------
------------ ------------
</TABLE>
Net post-retirement benefit costs consisted of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Service cost $ 85,000 $ 38,000 $ 33,000
Interest cost on accumulated
post-retirement benefit obligation 132,000 123,000 132,000
Net amortization and deferrals 16,000 11,000 13,000
------------ ------------ -----------
Net post-retirement benefit costs $ 233,000 $ 172,000 $ 178,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation as of June 1, 1997 was 10% decreasing
linearly each successive year until it reaches 5% in fiscal year 2003, after
which it will
40
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
remain constant. A one-percentage-point increase in the assumed health care
cost trend rates would increase the accumulated post-retirement benefit
obligation, service cost and interest cost components of the net periodic
post-retirement benefit cost by approximately 12%, 19% and 11%, respectively.
The impact of a 1% decrease in the trend rates would decrease these
components 10%, 15% and 8%, respectively. The assumed discount rate used in
determining the accumulated post-retirement benefit obligation was 6.75% for
fiscal 1998 and 8% for fiscal 1997.
8. Stock Option Plans and Stock Purchase Right Plan
Under the 1991 Employee Stock Option Plan (the Option Plan) the Company may
grant options to purchase shares of common stock to employees at prices not
less than the fair market value at date of grant for incentive stock options
and not less than 85% of fair market value for non-statutory stock options.
These options generally expire 10 years from the date of grant and become
exercisable ratably over a 4-year period.
In June, 1995 the Company canceled stock options to purchase 776,500 shares
of the Company's common stock at prices ranging from $6.38 to $13.50 and
exchanged them for options to purchase 576,500 shares of the Company's common
stock at the then current market value of $6.00 per share with new vesting
periods. The vesting for exchanged options was 50% on the first anniversary
of the grant, and 25% on each of the second and third anniversaries.
The Tab Products Co. 1996 Outside Directors' Option Plan (the Directors'
Plan) was adopted by the Company in fiscal 1996 and approved by stockholders
at the Annual Stockholders' Meeting on October 17, 1996. Under the
Directors' Plan, an initial grant of 10,000 shares was automatically granted
to all existing outside directors at the date of stockholder approval and to
all future new outside directors at the date they are appointed as directors.
The options are granted at the fair market value at date of grant, expire 10
years from the date of grant and become exercisable ratably over a 4-year
period.
Under the Directors' Plan outside directors of the Company are automatically
granted additional options annually, to purchase 2,000 shares of common stock
of the Company at the fair market value at the date of grant for each year
that such person remains a director of the Company. The grant date will be
the date of the Annual Stockholders' Meeting. Annual options granted under
the plan are immediately exercisable and expire 10 years from the date of
grant. The total shares authorized under the plan is 150,000 of which 10,000
shares were granted in fiscal 1998 and 50,000 shares were granted in fiscal
1997. All options issued under the Directors' Plan are non-qualified options.
On January 27, 1997 250,000 shares of common stock were granted to the
Company's President and Chief Executive Officer, of which 242,000 shares were
granted under Non-qualified Option Agreements. These shares were granted
separate from the Company's 1991 Employee Stock Option Plan. The shares were
granted at the fair market value at the date of grant ($9.25). These options
generally expire 10 years from the date of grant and become exercisable in
twelve quarterly installments from the grant date, except for 100,000 shares
that become exercisable in 50,000 share increments four and five years from
the grant date or sooner upon the achievement of certain business milestones.
In October 1996, the Company declared a dividend of one Preferred Stock
Purchase Right (Right) for each outstanding share of common stock. The Right
entitles a stockholder to purchase one one-hundredth of a share of preferred
stock at $35 per Right exercisable after a person acquires 15% or more of
TAB's common stock or announces a tender offer which could result in such
person owning 15% or more of the common stock. Each one one-hundredth of a
share of preferred stock has terms designed to make it substantially the
economic equivalent of one share of common stock. Under certain
circumstances, if a person acquires 15% or more of the common stock, the
Rights permit the holders to purchase TAB common stock having a market value
of twice the exercise price of the Rights, in lieu of the preferred stock. In
addition, in the event of certain business combinations, the Rights permit
purchase of the common stock of an acquiring person at a 50% discount. Rights
held by an acquiring person will become null and void in both cases. The
Rights are subject to redemption by the Company's Board of Directors for $.001
for each Right. The Rights expire on October 23, 2006.
41
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------- ------------
<S> <C> <C>
Outstanding, June 1, 1995 (620,500 exercisable at
a weighted average price of $10.38) 858,500 $10.12
Granted (weighted average fair value of $1.33) 722,000 6.08
Canceled (894,250) 9.96
----------- ------------
Outstanding, May 31, 1996 (3,750 exercisable at a
weighted average price of $6.38) 686,250 6.08
Granted (weighted average fair value of $2.26) 343,500 8.69
Exercised (81,625) 6.03
Canceled (171,750) 6.00
----------- ------------
Outstanding, May 31, 1997 (207,125 exercisable at
weighted average price of $6.26) 776,375 7.26
Granted (weighted average fair value of $2.82) 70,000 10.25
Exercised (235,813) 6.09
Canceled (98,812) 6.98
----------- ------------
Outstanding, May 31, 1998 (149,125 exercisable at
weighted average price of $7.58) 511,750 $8.26
-----------
-----------
</TABLE>
Additional information regarding options outstanding as of May 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ---------------------------------
Weighted Avg.
Remaining
Range of Number Contractual Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Exercise Price
- - ---------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.00 - $6.38 79,875 7.0 $6.05 44,125 $6.03
$6.50 - $7.63 123,125 8.0 6.84 42,500 6.74
$9.13 - $12.00 308,750 8.7 9.39 62,500 9.25
----------- -----------
$6.00 - $12.00 511,750 8.3 $8.26 149,125 $7.58
----------- -----------
----------- -----------
</TABLE>
At May 31, 1998 494,843 and 90,000 shares were available for future grants
under the Option Plan and Directors' Plan, respectively.
Additional Stock Plan Information
As discussed in the Statement of Accounting Policies, the Company continues
to account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method
as of the beginning of fiscal 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradeable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards.
These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 12 months following vesting; stock volatility,
32.9% in fiscal 1998 and 30.8% in fiscal 1997 and 1996; risk free interest
rates, 5.66% in fiscal 1998 and 6.25% in fiscal 1997 and 1996 and a dividend
rate of 2.5% in fiscal years 1998, 1997 and 1996. The Company's calculations
are based on a multiple option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the awards had been
amortized to expense over the vesting period of the awards, pro forma net
income would have been $2,242,000 ($.44 basic and $.42 diluted per share) in
fiscal 1998, $3,541,000 ($.73 basic and $.71 diluted per share) in fiscal
1997 and $2,286,000 ($.47 basic and diluted per share) in fiscal 1996. The
impact of outstanding non-vested stock options granted prior to fiscal 1996
has been excluded from the pro forma calculation; accordingly, the fiscal
1998, 1997 and 1996 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable
stock options.
42
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
The Company and its subsidiaries are obligated under leases of certain office
nad warehouse facilities expiring at various dates through 2012. The future
minimum rental payments under these lease agreements at May 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $1,758,000
2000 1,369,000
2001 704,000
2002 337,000
2003 149,000
Thereafter 200,000
-----------
$4,517,000
-----------
-----------
</TABLE>
Total rentals charged to expense amounted to $2,620,000 in 1998, $2,632,000
in 1997 and $2,802,000 in 1996.
10. Major Customer
No single customer accounted for greater than 10% of consolidated revenues in
fiscal 1998 and 1997. Revenues derived from the U.S. Government were 10% of
total revenues in fiscal year 1996.
11. Foreign Subsidiaries
The Company has three foreign subsidiaries which market their products in
Canada, Australia and Europe, while foreign sales in the remainder of the
world are conducted through a Foreign Sales Corporation.
Foreign revenues were $32,533,000, $32,214,000 and $30,132,000 for the years
ended May 31, 1998, 1997 and 1996, respectively. Foreign operating income
was $1,703,000, $2,240,000 and $1,045,000 for the years ended May 31, 1998,
1997 and 1996, respectively.
Total identifiable assets (excluding cash) and liabilities in foreign
countries were $9,141,000 and $2,905,000, respectively, at May 31, 1998
compared with $9,216,000 and $3,151,000 at May 31, 1997.
Transaction and exchange losses included in earnings, amounted to
approximately $102,000, $18,000 and $225,000 in fiscal 1998, 1997 and
1996, respectively.
12. Per Share Information
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period while diluted earnings per
share also includes the dilutive impact of stock options. Basic and diluted
earnings per share for the fiscal years ended May 31, 1998, 1997 and 1996,
respectively, are calculated as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
May 31
-------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average shares outstanding 5,102 4,879 4,852
Net earnings $2,435 $3,761 $2,761
Basic earnings per share $ .48 $ .77 $ .57
-------- -------- --------
-------- -------- --------
Weighted average shares outstanding 5,102 4,879 4,852
Dilutive effect of options 184 138 25
-------- -------- --------
Total 5,286 5,017 4,877
Net earnings $2,435 $3,761 $2,761
Diluted earnings per share $ .46 $ .75 $ .57
-------- -------- --------
-------- -------- --------
</TABLE>
43
<PAGE>
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Selected Quarterly Data (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Earnings (Loss) Per Share
Gross Net -------------------------
Fiscal Quarter Ended Revenues Profit (1) Earnings (Loss) Basic Diluted
- - -------------------- ------------ ---------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998
AUGUST 31 $ 39,443 $15,922 $ 886 $ .18 $ .17
NOVEMBER 30 41,573 17,516 1,404 .28 .27
FEBRUARY 28 41,096 17,289 1,402 .27 .26
MAY 31 43,831 16,303 (1,257) (.24) (.24)
------------ ---------- ---------------
$ 165,943 $67,030 $ 2,435 .48 .46
------------ ---------- ---------------
------------ ---------- ---------------
1997
AUGUST 31 $ 35,012 $14,105 $ 679 $ .14 $ .14
NOVEMBER 30 40,255 16,185 1,183 .24 .24
FEBRUARY 28 38,761 15,939 1,092 .22 .22
MAY 31 40,423 15,952 807 .16 .16
------------ ---------- ---------------
$ 154,451 $62,181 $ 3,761 .77 .75
------------ ---------- ---------------
------------ ---------- ---------------
</TABLE>
(1) Revenues less cost of revenues.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tab Products Co.:
We have audited the consolidated financial statements of Tab Products Co. and
its subsidiaries as of May 31, 1998 and 1997, and for each of the three years
in the period ended May 31, 1998, and have issued our report thereon dated
June 25, 1998; such financial statements and report are included in your
fiscal 1998 Annual Report to Stockholders. Our audits also included the
financial statements schedule of Tab Products Co., for the years ended May
31, 1998, 1997 and 1996, listed in Item 14(A)(2). This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth herein.
DELOITTE & TOUCHE LLP
San Jose, California
June 25, 1998
45
<PAGE>
TAB PRODUCTS CO. AND SUBSIDIARY COMPANIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Uncollectible
Balance at Charged to Accounts Balance at
Allowance for Doubtful Beginning Costs and Charged to End of
Accounts Receivable of Period Expenses Reserve Period
- - ----------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended May 31, 1998 $769,000 $462,000 $284,000 $947,000
Year ended May 31, 1997 $620,000 $400,000 $251,000 $769,000
Year ended May 31, 1996 $708,000 $187,000 $275,000 $620,000
</TABLE>
46
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-11914, 33-11838, 33-45071, 33-62357, 333-20693 and 333-25403 of Tab
Products Co. on Form S-8 of our reports dated June 25, 1998, appearing and
incorporated by reference in this Annual Report on Form 10-K of Tab Products
Co. for the fiscal year ended May 31, 1998.
DELOITTE & TOUCHE LLP
San Jose, California
August 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-1-1997
<PERIOD-END> MAY-31-1998
<CASH> 7,199
<SECURITIES> 4,896
<RECEIVABLES> 25,890
<ALLOWANCES> 947
<INVENTORY> 11,015<F1>
<CURRENT-ASSETS> 53,778
<PP&E> 59,225
<DEPRECIATION> 40,162
<TOTAL-ASSETS> 77,488
<CURRENT-LIABILITIES> 21,993
<BONDS> 7,391
45,397
0
<COMMON> 0
<OTHER-SE> (500)
<TOTAL-LIABILITY-AND-EQUITY> 77,488
<SALES> 153,179
<TOTAL-REVENUES> 165,943
<CGS> 87,901
<TOTAL-COSTS> 98,913
<OTHER-EXPENSES> 61,801
<LOSS-PROVISION> 462
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> 4,590
<INCOME-TAX> 2,155
<INCOME-CONTINUING> 2,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,435
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
<FN>
<F1>INVENTOR DETAIL AT MAY 31, 1998 WAS FINISHED GOODS $4,265, WORK IN PROCESS
$2,704, AND RAW MATERIAL $4,046.
</FN>
</TABLE>
