<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarter period ended
August 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from _______ to ________
COMMISSION FILE NUMBER: 1-7736
TAB PRODUCTS CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1190862
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1400 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 852-2400
(REGISTRANT'S TELEPHONE NUMBER - INCLUDING AREA CODE)
NOT APPLICABLE
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the Registrant (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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding as of
August 31, 1999 - 5,024,589.
This report, including all exhibits and attachments, contains 23 pages.
1
<PAGE>
TAB PRODUCTS CO.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets
August 31, 1999 and May 31, 1999 3
Consolidated Condensed Statements of Earnings
Three months ended August 31,
1999 and 1998 4
Consolidated Condensed Statements of Cash Flows
Three months ended August 31, 1999 and 1998 5
Supplemental Financial Data - Notes 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosure About
Market Risks 18
PART II. OTHER INFORMATION
ITEM 6 Exhibits 19
Signatures 20
2
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1999 1999
---------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,038 $ 6,972
Short-term investments 3,770 2,941
Accounts receivable, less allowances of
$994 and $936 for doubtful accounts 25,193 26,397
Inventories 7,160 8,834
Prepaid income taxes and other expenses 9,811 6,210
-------- --------
TOTAL CURRENT ASSETS 56,972 51,354
Property, plant and equipment, net of accumulated
depreciation of $35,947 and $43,339 17,446 19,642
Goodwill, net 2,998 3,131
Other assets 3,708 1,201
-------- --------
TOTAL ASSETS $ 81,124 $ 75,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,438 $ 3,437
Accounts payable 7,709 7,648
Compensation payable 1,527 2,086
Other accrued liabilities 10,489 11,221
-------- --------
TOTAL CURRENT LIABILITIES 23,163 24,392
-------- --------
Long-term debt 3,898 3,953
-------- --------
Deferred taxes and other non-current liabilities 3,901 3,855
-------- --------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK: $.01 par value, authorized - -
500,000 shares, issued-none
COMMON STOCK: $.01 par value, authorized
25,000,000 shares, issued-August 1999 and May 1999-
7,606,116 shares 76 76
Additional paid-in capital 15,255 15,255
Retained earnings 70,060 63,031
TREASURY STOCK: August 1999-2,581,527 shares
and May 1999-2,578,427 shares (32,342) (32,320)
Accumulated other comprehensive loss (2,887) (2,914)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 50,162 43,128
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 81,124 $ 75,328
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
(000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Revenues $ 31,994 $ 37,444
----------- -----------
COSTS AND EXPENSES:
Cost of revenues 19,244 23,877
Selling, general and administrative 13,657 13,164
Research and development 193 256
----------- -----------
TOTAL COSTS AND EXPENSES 33,094 37,297
----------- -----------
OPERATING INCOME (LOSS) (1,100) 147
Gain on sale of Field Service Group 13,794 -
Interest, net, and other (143) (138)
----------- -----------
Earnings before income taxes 12,551 9
Provision for income taxes 5,271 4
----------- -----------
NET EARNINGS $ 7,280 $ 5
=========== ===========
Basic net earnings per share $ 1.45 $ 0.00
=========== ===========
Shares used in computing basic
net earnings per share 5,026,473 5,171,432
=========== ===========
Diluted net earnings per share $ 1.44 $ 0.00
=========== ===========
Shares used in computing diluted
net earnings per share 5,049,046 5,297,529
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 7,280 $ 5
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,118 1,204
Gain on sale of Field Service Group (8,001) -
Changes in operating assets and liabilities:
Accounts receivable 1,137 (301)
Inventories (522) (138)
Prepaid income taxes and other expenses (1,497) (297)
Other assets 663 (64)
Accounts payable (163) 239
Compensation payable (584) (1,528)
Other accrued liabilities (493) 201
-------- --------
NET CASH REQUIRED BY OPERATING ACTIVITIES (1,062) (679)
-------- --------
INVESTING ACTIVITIES:
Sale of Field Service Group 13,405 -
Purchase of property, plant and equipment, net (486) (2,391)
Purchases of short-term investments (1,820) (1,467)
Sales of short-term investments 991 1,961
-------- --------
NET CASH PROVIDED (REQUIRED) BY INVESTING ACTIVITIES 12,090 (1,897)
-------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt (81) (78)
Cash restricted to collateralize loan (6,625) -
Proceeds from issuance of common stock - 11
Repurchase of Treasury Stock (22) -
Dividends paid (251) (259)
-------- --------
NET CASH REQUIRED BY FINANCING ACTIVITIES (6,979) (326)
-------- --------
Effect of exchange rate changes on cash 17 (81)
-------- --------
Increase (decrease) in cash and cash equivalents 4,066 (2,983)
Cash and cash equivalents at beginning of period 6,972 7,199
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,038 $ 4,216
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
TAB PRODUCTS CO.
SUPPLEMENTAL FINANCIAL DATA - NOTES (UNAUDITED)
1. BASIS OF PRESENTATION
The Company's unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary to fairly state the Company's
financial position, results of operations, and cash flows for the periods
presented. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements included in the
Company's Form 10-K for the fiscal year ended May 31, 1999. The results of
operations for the three-month period ended August 31, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending May 31, 2000. The May 31, 1999 balance sheet was
derived from audited consolidated financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Certain amounts have been reclassified to conform to the current year
presentation.
2. INVENTORY
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
<S> <C> <C>
Finished goods $2,605 $2,415
Work in process 402 2,538
Raw materials 4,153 3,881
------ ------
$7,160 $8,834
====== ======
</TABLE>
3. DIVIDENDS
Dividends declared for the three month periods ended August 31, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
RECORD DATE SHARES OUTSTANDING DIVIDEND PER SHARE
----------- ------------------ ------------------
<S> <C> <C>
Fiscal 2000:
August 25, 1999 5,024,589 $ 0.05
Fiscal 1999:
August 25, 1998 5,171,514 $ 0.05
</TABLE>
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
4. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or chief decision making group, in deciding
how to allocate resources and in assessing performance. The President and Chief
Executive Officer is the Company's chief decision maker. The Company operates
and is managed internally by four geographic operating segments. The operating
segments include United States, Canada, the Netherlands and Australia. Outside
the United States, each operating segment has a general manager that reports to
the Chief Executive Officer. Within the United States, the Vice Presidents of
Operations, Marketing and Sales report directly to the Chief Executive Officer.
Information about segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
----------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
Revenues:
United States $ 25,760 $ 30,893
Canada 4,144 4,007
Netherlands 977 1,594
Australia 1,113 950
-------- --------
Consolidated Total $ 31,994 $ 37,444
======== ========
Income (Loss) before income taxes:
United States $ 12,722 $ 80
Canada (216) (357)
Netherlands 55 347
Australia (10) (61)
-------- --------
Consolidated Total $ 12,551 $ 9
======== ========
Depreciation and amortization:
United States $ 980 $ 1,097
Canada 109 73
Netherlands 17 17
Australia 12 17
-------- --------
Consolidated Total $ 1,118 $ 1,204
======== ========
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
Long-lived assets:
United States $ 20,084 $ 19,692
Canada 716 786
Netherlands 134 133
Australia 220 232
-------- --------
Consolidated Total $ 21,154 $ 20,843
======== ========
</TABLE>
Geographic revenues are based on the country from which customers are invoiced.
Income before tax is net sales less operating expenses, interest or other
expenses, but prior to income taxes.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
5. NET EARNING PER SHARE
Basic earnings per share is computed by dividing net earnings 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 quarters ended August 31, 1999 and 1998,
respectively, are calculated as follows (in thousands, except share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------------
1999 1998
------------ -----------
<S> <C> <C>
NET EARNINGS $ 7,280 $ 5
============ ===========
BASIC:
Weighted average common shares
outstanding used in computing
basic net earnings per share
5,026,473 5,171,432
============ ===========
BASIC NET EARNINGS PER SHARE $ 1.45 $ 0.00
============ ===========
DILUTED:
Weighted average common shares
outstanding 5,026,473 5,171,432
Dilutive options outstanding 22,573 126,097
============ ===========
Shares used in computing diluted
net earnings per share 5,049,046 5,297,529
============ ===========
DILUTED NET EARNINGS PER SHARE $ 1.44 $ 0.00
============ ===========
</TABLE>
6. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net earnings $7,280 $ 5
Foreign currency translation 27 (437)
------ ------
Comprehensive income (loss) $7,307 $ (432)
====== ======
</TABLE>
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
Accumulated other comprehensive loss, net of tax, presented on the
accompanying consolidated condensed balance sheets consists of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
<S> <C> <C>
Foreign currency translation $(506) $(533)
Minimum pension liability (2,381) (2,381)
----------- -----------
Accumulated other
comprehensive loss $(2,887) $(2,914)
=========== ===========
</TABLE>
7. STOCK REPURCHASE
In July 1999, the Company approved a new authorization to repurchase
up to 300,000 shares of Common Stock from time to time at prevailing market
prices. The authorization is effective until July 2000. During the three
months ended August 31, 1999, the Company repurchased 3,100 shares of Common
Stock under the Company's authorized repurchase program at a cost of $22,000.
As of August 31, 1999, the Company intends to repurchase the remaining
296,900 shares in the future to the extent such purchases are consistent with
the Company's investment objectives.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company expects to
adopt this Standard as of the beginning of its fiscal year 2001. The effect of
adopting the Standard is currently being evaluated, but is not expected to have
a material effect on the Company's financial position or results of operations.
9. EVENTS SUBSEQUENT TO AUGUST 31, 1999
Effective October 5, 1999, the Company announced a definitive agreement
to sell its corporate headquarters buildings and the associated land leases at
Stanford Research Park to Eagle Ridge Partners, a real estate investment group.
The agreement is subject to satisfactory completion of certain due diligence
prior to a target closing in early December. The gross sales price is
approximately $18 million and, if consummated, will result in a gain for the
Company.
9
<PAGE>
ITEM 2. 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.
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
Pursuant to the Agreement for Purchase and Sale of Assets (the
"Agreement"), by and between the Company and Bell & Howell Document Management
Products Company, a wholly-owned subsidiary of Bell & Howell Company ("Bell &
Howell"), the Company has sold its Field Service Group to Bell & Howell. The
Company's Field Service Group consisted of assets that include existing service
contracts and certain related tangible and intangible assets and certain
liabilities. The price of the Purchased Assets, as defined in the Agreement,
consisted of an initial cash payment from Bell & Howell to the Company of
$11,200,000, the assumption of liabilities and obligations of the Company valued
at $5,900,000 and a final payment of $2,200,000 paid in August 1999 based on
final adjustments to certain accounts attributable to the Field Service Group.
The sale was effective as of June 1, 1999. In order for the Company to obtain
consent for the sale from one of its lenders, the Company placed a portion of
the cash payment received from Bell & Howell in a restricted bank account and
pledged the funds as collateral for the existing loan. In exchange for the
pledge of collateral the lender modified the covenants of the loan and approved
the sale transaction.
On June 22, 1999, the Company announced the consolidation of its paper
manufacturing operations to its main plant located in Mayville, Wisconsin. The
Company will close its paper manufacturing facility located in Turlock,
California and transfer the inventory and equipment to Mayville by the end of
October 1999. As a result of the consolidation, the Company recorded a pre-tax
charge of approximately $435,000 in the first quarter of fiscal year 2000.
At August 31, 1999 the Company had cash and short-term investments
of $ 14.8 million, an increase of $ 4.9 million from the $9.9 million at May
31, 1999. The Company's working capital position at August 31, 1999 was $
33.8 million as compared with $27.0 million at May 31, 1999. The current
ratio of 2.5 at August 31, 1999 was higher than the current ratio of 2.1
reported for May 31, 1999. The increase in cash and working capital are the
result of the sale of the Field Service Group. Accounts receivable decreased
$1.2 million from $26.4 million on May 31, 1999 to $25.2 million on August
31, 1999. As part of the sale of the Field Service Group, the accounts
receivable related to that operation as of the date of the sale of $4.0
million were retained by the Company and collection of these receivables is
the Company's responsibility. As of August 31, 1999 $2.7 million of that
balance had been collected. Accounts receivable increased $1.5 million due to
product shipments associated with professional services which cannot be fully
collected until the services are complete. Inventories at August 31, 1999
were $7.2 million as compared to $8.8 million at May 31, 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
The decrease in inventory levels is due to Field Service inventories which
were included in the sale. In order for the Company to obtain consent for the
sale from one of its lenders, the Company chose to place a portion of the
cash payment received from the sale in a restricted bank account and pledge
the funds as collateral for the existing loan. The funds are classified as
other current assets and other non-current assets based on classification of
the collateralized debt.
Other current assets increased $3.6 million from $6.2 million at May
31, 1999 to $9.8 million at August 31, 1999 and other non-current assets
increased $2.5 million from $1.2 million at May 31, 1999 to $3.7 million at
August 31, 1999 primarily due to the collateralization. Current liabilities
decreased $1.2 million from $24.4 million at May 31, 1999 to $23.2 million at
August 31, 1999. Significant transactions which affect current liabilities
include the transfer of deferred revenue to Bell & Howell of $5.4 million as a
result of the sale of the Field Service Group offset by the establishment of a
liability for taxes of $5.8 million as a result of the gain on sale recorded in
the first quarter. Management believes that the Company's cash and cash
equivalents, available credit facilities and operational cash flow will
adequately finance anticipated growth, capital expenditures and debt obligations
for the foreseeable future.
Investments in property, plant and equipment, which were primarily
focused on enterprise management information systems and associated
infrastructure investments, were $0.5 million for the three months ended August
31, 1999. Capital expenditures to support operations for fiscal 2000 are
expected to total approximately $2.0 million.
In July 1999, the Company approved a new authorization to repurchase up
to 300,000 shares of Common Stock from time to time at prevailing market prices.
The authorization is effective until July 2000. During the three months ended
August 31, 1999, the Company repurchased 3,100 shares of Common Stock under the
Company's authorized repurchase program at a cost of $22,000. As of August 31,
1999, the Company intends to repurchase the remaining 296,900 shares in the
future to the extent such purchases are consistent with the Company's investment
objectives.
For the three month period ended August 31, 1999, the Company paid cash
dividends of $251,000, and for the three month period ended August 31, 1998, the
Company paid cash dividends of $259,000.
The Company has an unsecured revolving line of credit of $15 million
with a bank which expires on October 31, 2000. There were no borrowings
outstanding under the line of credit at August 31, 1999. Effective January 29,
1999, the Company entered into a master lease agreement with a technology
equipment leasing company for a total lease line of $0.5 million. As of August
31, 1999, the Company utilized the line to lease computer equipment with a cost
of $0.1 million. The lease is classified as an operating lease.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
For comparative purposes, the following unaudited pro forma condensed
consolidated statement of operations for the three months ended August 31, 1998
is presented as if the sale of the Field Service Group had occurred on June 1,
1998.
TAB PRODUCTS CO.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED AUGUST 31, 1998
(UNAUDITED)
(000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- --------------- -------------
<S> <C> <C> <C>
REVENUES $ 37,444 $ (3,478) $ 33,966
-------------- --------------- -------------
COSTS AND EXPENSES:
Cost of revenues 23,877 (3,240) 20,637
Selling, general and administrative 13,164 13,164
Research and development 256 256
-------------- --------------- -------------
TOTAL COSTS AND EXPENSES 37,297 (3,240) 34,057
-------------- --------------- -------------
OPERATING INCOME (LOSS) 147 (238) (91)
Interest, net, and other (138) (138)
-------------- --------------- -------------
EARNINGS BEFORE INCOME TAXES 9 (238) (229)
Provision for income taxes 4 (100) (96)
-------------- --------------- -------------
NET EARNINGS $ 5 $ (138) $ (133)
============== =============== =============
</TABLE>
CERTAIN AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR
PRESENTATION.
REVENUES for the first quarter of fiscal 2000 amounted to $32.0
million, down $2.0 million or 5.9% from $34.0 million pro forma revenue for the
first quarter of fiscal 1999. Revenue from the Independent Distributor channel
was down $1.2 million from the same period last year reflecting lower bookings
in the 4th quarter of fiscal year 1999 prior to the settlement of the year long
Independent Distributor contract dispute. Sales in Europe were lower by $0.6
million offset slightly by increases in other international operations.
BACKLOG of orders has historically not been a significant factor in
understanding the business of the Company because the order-to-ship cycle was
primarily completed within 30 to 60 days and revenue is generally recognized
upon product shipment. The Branch channel shift to projects with large
customers has created a lengthening order-to-execution period and a resultant
increase in backlog which is reflected in a lengthening order to revenue
period. The Company's order booking to invoice ratio ("book-to-bill") in the
third and fourth quarters of fiscal year 1999 were below previous quarters at
.84:1.0 resulting in declining backlog and product shipments. The
book-to-bill ratio in the first quarter of fiscal 2000 improved to 1.17:1.0,
but the carry-over effect of the lower third and fourth quarter order volumes
impacted the first quarter revenues and profitability.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
COST OF REVENUES, as a percentage of revenues, was 60.1% for the first
quarter of fiscal 2000 as compared to the 60.8% pro forma cost of revenues
reported in the first quarter of fiscal 1999 on comparable revenues. Cost of
revenues for the first quarter was $19.2 million as compared to the $20.6
million pro forma amount reported in the comparable quarter of fiscal 1999. The
decrease in cost of revenues, as a percentage of revenues, was the result of
improved margins on manufactured products offset by a charge to cost of
revenues of approximately $0.4 million related to the closure and relocation of
the Company's Turlock paper manufacturing facility.
OPERATING EXPENSES were $13.9 million or 43.3% of total revenues for
the first quarter of fiscal 2000 as compared to $13.4 million or 39.5% of
total pro forma revenues for the first quarter of fiscal 1999. The increase
in operating expenses as a percentage of revenues was primarily due to lower
than anticipated revenue volume.
INTEREST EXPENSE, NET, AND OTHER was a gain of $13.7 million in the
first quarter of fiscal 2000 as compared to an expense of $0.1 million in the
first quarter of fiscal 1999. The increase for the three months ended August 31,
1999 was primarily due to the gain on sale of the Field Service Group.
EARNINGS PER SHARE for the three months ended August 31, 1999 was $1.45
per share for basic and $1.44 for diluted shares compared to a pro forma loss of
$.03 per share for both basic and diluted shares, respectively, for the three
months ended August 31, 1998.
EVENTS SUBSEQUENT TO AUGUST 31, 1999
Effective October 5, 1999, the Company announced a definitive agreement
to sell its corporate headquarters buildings and the associated land leases at
Stanford Research Park to Eagle Ridge Partners, a real estate investment group.
The agreement is subject to satisfactory completion of certain due diligence
prior to a target closing in early December. The gross sales price is
approximately $18 million and, if consummated, will result in a gain for the
Company. The Company intends to relocate to a facility near its present location
and has engaged a broker to assist in identifying possible office locations.
MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 99 for 1999). On January 1, 2000, any clock
or date recording mechanism, including date sensitive software which uses only
two digits to represent the year, may recognize a date incorrectly (e.g.,
interpret the two digits 00 as the year 1900 rather than the year 2000). This
could result in a system failure or miscalculations causing disruption of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar activities.
The Company has undertaken a program to address Year 2000 compliance
with respect to the following: (i) the Company's information technology hardware
and software ("IT systems"); (ii) the Company's non-information technology
systems, such as buildings, plants, equipment, telephone systems, and other
infrastructure systems that may contain microcontroller technology ("non-IT
systems"); and (iii) exposure from third parties with which the Company does
business.
The Company's plan with regard to the Year 2000 issue for each of the
above involves the following phases: (i) assessment of systems to determine the
extent to which the Company may be vulnerable to the Year 2000 issue; (ii) the
development of remedies to address problems discovered in the assessment phase;
(iii) the testing of such remedies; and (iv) the preparation of contingency
plans to address potential worst case scenarios should the remedies not be
successful.
The Company has analyzed most of its IT systems in an effort to
identify any systems that are not Year 2000 compliant and implemented any
changes required to make such systems Year 2000 compliant. The result to date of
the analysis is that most of the IT systems used by the Company were not Year
2000 compliant. A Company-wide enterprise software solution was chosen as the
primary means to achieve Year 2000 compliance. The software was selected not
only to achieve Year 2000 compliance, but also to add functionality and
efficiency in the business processes of the
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE (CONTINUED)
Company. The software is being implemented in stages and in each of the
Company's operating locations. The first stage, which comprises most of the
manufacturing, sales and financial modules, was completed in April 1999. The
second stage includes the remaining manufacturing operations. This stage is
planned to be completed by the beginning of December 1999. Remediation and
testing of IT systems not replaced are planned to be completed by November 1999.
The Company chose to upgrade its human resources client server application to a
year 2000 compliant version instead of replacing the entire system.
This upgrade was completed in the first quarter.
The Company assessed its significant non-IT systems that may contain
embedded microcontrollers to determine what remediation efforts may be
necessary. To date, certain non-IT systems have been tested and most such tested
non-IT systems have been evaluated as being Year 2000 compliant. The remaining
non-IT systems will be assessed in the second quarter and remediated if
necessary.
The Company is taking steps designed to assess the Year 2000 readiness
of certain suppliers whose possible lack of Year 2000 readiness could, in the
Company's judgment, cause a materially adverse impact on the Company's business,
results of operations or financial condition. The Company has conducted
extensive inquiries of such suppliers compliance status during the fiscal year
and expects to complete the inquiries prior to November 30, 1999.
The Company believes that its most reasonably likely worst case Year
2000 scenarios would relate to problems with the systems of third parties rather
than with the Company's internal systems or its products. It is clear that the
Company has the least ability to assess and remediate the Year 2000 problems of
third parties, and the Company believes the risks are greatest with
infrastructure (e.g. electricity supply, water and sewer service),
telecommunications, transportation supply chains and critical suppliers of
materials.
The Company's production is conducted in domestic and foreign
facilities. Each location relies on local private and governmental suppliers for
electricity, water, sewer and other needed supplies. Failure of an electricity
grid or an uneven supply of power, as an example, would be a worst case scenario
that would completely shut down the affected facilities. Electrical failure
could also shut down airports and other transportation facilities. The Company
does not currently maintain facilities which would allow it to generate its own
electrical or water supply in lieu of that supplied by utilities. To the extent
possible, the Company is working with the infrastructure suppliers for its
manufacturing sites, major subcontractor sites and relevant transportation hubs
to seek to better ensure continuity of infrastructure services. Contingency
planning regarding major infrastructure failure generally emphasizes planned
increases in inventory levels of specific products.
A worst case scenario involving a critical supplier of materials would
be the partial or complete shutdown of the supplier and its resulting inability
to provide critical supplies to the Company on a timely basis. The Company does
not maintain the capability to replace most third party supplies with internal
production. Where efforts to work with critical suppliers to ensure Year 2000
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and in certain
limited situations includes a planned increase in the level of inventory
carried.
The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur. This
contingency planning will continue through 1999 as the Company learns more about
the preparations and vulnerabilities of third parties regarding Year 2000
issues. Due to the large number of variables involved, the Company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.
The total Year 2000 remediation project is estimated to cost
approximately $2.2 million of which approximately $2.1 million has been spent to
date. Since the system replacement costs are related to an overall systems
initiative, the Year 2000 compliance costs cannot be reasonably determined. The
costs and time schedules for the IT systems and non-IT systems changes are based
on management's best estimates.
The Company's technology products are believed to be Year 2000
compliant. For most of the Company's products the Year 2000 issue does not
apply. Products such as file supplies, furniture, forms handling equipment, file
storage equipment and mobile file equipment have no date-related processing,
hence are not affected by the arrival of the Year 2000.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company's fiscal year ending May 31, 2001. The
Company is currently evaluating the impact of SFAS No. 133 on its financial
statement and related 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. 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.
DISTRIBUTION CHANNELS
The Company is currently pursuing a strategy to refine and expand its
distribution channels. The Branch direct sales strategy has been shifted to
focus on projects with larger customers that bundle products and services as a
way of providing value-added solutions to the Company's customers. This has
resulted in a turnover in the Branch Channel and additional training time which
in turn has resulted and may continue to result in lower Branch Channel sales.
The Company is also expanding its call center operations and direct
replenishment business through this efficient distribution method. In
conjunction with handling inbound sales activity an initiative is underway to
generate sales through the use of outbound telemarketing.
In June 1998, the Company notified its existing independent
distributors (indirect channel) that effective June 1, 1999 the existing
distributor contract would be canceled. A new contract was offered that
eliminated the exclusive territory rights in the existing contract with other
material terms and conditions remaining substantially the same. By February
1999, approximately one third of the current independent distributors adopted
the new contract. In March 1999, the Company proposed an alternative contract
that allowed the independent distributors exclusivity on existing and designated
customers, but eliminated exclusivity on a territory basis. The Company believes
the removal of exclusivity is crucial to the Company's ability to serve its
larger nationwide customers where an independent's resources cannot support the
customer's professional services, technology and project management needs. As of
August 31, 1999 approximately 98% of the current independent distributors have
signed the revised contract. The signed distributors represent approximately 99%
of the total sales for this channel. The Company is also seeking to expand its
indirect distribution with the addition of dealers in Branch territories to
focus on small to mid-size customers.
These changes in distribution may disrupt the selling process of the
Company resulting in lower sales. Additionally, the sales cycle for larger scale
projects is substantially longer than the Company's historical sales-to-delivery
cycle resulting in additional working capital requirements. Market penetration
of larger customers may not happen as quickly as anticipated and may result in
higher selling costs.
RETAINING AND ATTRACTING QUALIFIED PERSONNEL
The Company's future performance may depend in significant part upon
attracting and retaining key senior management, sales, manufacturing, marketing
and technical support 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
BUSINESS ENVIRONMENT AND RISK FACTORS (CONTINUED)
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 times, fluctuations in manufacturing utilization, the
ability of the Company to achieve manufacturing volumes 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.
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 VOLUMES
On June 22, 1999, the Company announced the consolidation of its paper
manufacturing operations to its main plant located in Mayville, Wisconsin. The
Company will close its paper manufacturing facility located in Turlock,
California and transfer the inventory and equipment to Mayville by the end of
October 1999.
There can be no assurance that the Company's manufacturing facilities
will achieve or maintain acceptable manufacturing volumes in the future. The
inability of the Company to achieve planned volumes 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 or the
consolidation of its manufacturing operations could have a material adverse
effect on the Company's business, financial condition and results of operations.
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
in the digital arena could materially adversely affect the Company's business,
results of operations, financial condition and prospects.
BACKLOG
The backlog of orders has historically not been a significant factor in
understanding the business of the Company because the order-to-ship cycle was
primarily completed within 30 to 60 days and revenue is generally recognized
upon product shipment. The Branch channel shift to projects with large customers
has created a lengthening order-to-execution period. Additionally, the
professional services component of project sales is recognized as revenue when
the project is completed resulting in a longer order-to-revenue cycle. Due to
this shift in Branch sales strategy the Company may experience the need for
additional working capital to support the longer order-to-collection cycle being
experienced.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
BUSINESS ENVIRONMENT AND RISK FACTORS (CONTINUED)
The Company's order booking to invoice ratio ("book-to-bill") in the
third and fourth quarters of fiscal year 1999 were below previous quarters at
.84:1.0 resulting in declining backlog and product shipments. The book-to-bill
ratio in the first quarter improved to 1.17:1.0, but, the carry-over effect of
the lower third and fourth quarter order volumes impacted the first quarter
revenues and profitability. Orders from the independent distributor channel have
begun to rebound with 98% of the dealers signing the new dealer agreement. There
can be no assurance that the Company's book-to-bill ratio will continue at this
rate.
GOVERNMENT SALES
Government revenues primarily expose the Company to risks from
reductions in budget allocations to support regulation and administrative
offices. The current reinventing government initiative opens opportunities to
help the 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.
EURO CONVERSION
In January 1999, certain member countries of the European Union
established permanent, fixed conversion rates between their existing currencies
and the European Union's common currency (the Euro). The transition period for
the introduction of the Euro is scheduled to phase in over a period ending
January 1, 2002, with the existing currency being completely removed from
circulation on July 1, 2002. The timing of phasing out all uses of the existing
currencies will comply with the legal requirements and also be scheduled to
facilitate optimal coordination with the plans of our vendors, distributors and
customers. Work related to the introduction of the Euro and the phasing out of
the other currencies includes converting information technology systems;
recalculating currency risk; and taking action, if needed, regarding continuity
of contracts; and modifying our processes for preparing tax, accounting, payroll
and customer records. Management believes the introduction of the Euro and the
phasing out of the other currencies will not have a material impact on the
Company's Consolidated Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 19% and 18%,
respectively of the Company's total revenues in the first quarter of fiscal 2000
and 1999. 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,
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
BUSINESS ENVIRONMENT AND RISK FACTORS (CONTINUED)
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 planned
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is exposed to market risk related to fluctuations in
interest rates and in foreign currency exchange rates.
The Company's exposure to market risk due to fluctuations in interest
rates relates primarily to its short-term investment portfolio, which consists
of corporate debt securities, which are classified as available-for-sale and
were reported at an aggregate fair value of $3.8 million as of August 31, 1999.
These available-for-sale securities are subject to interest rate risk in as much
as their fair value will fall, if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from the levels
prevailing at August 31, 1999, the fair value of the portfolio would not decline
by a material amount. The Company does not use derivative financial instruments
to mitigate the risks inherent in these securities. However, the Company does
attempt to reduce such risks by typically limiting the maturity date of such
securities to no more than nine months, placing its investments with high credit
quality issuers and limiting the amount of credit exposure with any one issuer.
In addition, the Company believes that it currently has the ability to hold
these investments until maturity, and therefore, believes that reductions in the
value of such securities attributable to short-term fluctuations in interest
rates would not materially affect the financial position, results of operations
or cash flows of the Company. To the extent that the Company invests the
proceeds from the sale of the Field Service Group in instruments subject to
market risk, its overall exposure to market risk will correspondingly increase.
The Company's exposure to market risk due to fluctuations in foreign
currency exchange rates relates primarily to the intercompany balance with its
Canadian subsidiary. Although the Company transacts business with various
foreign countries, settlement amounts are usually based on local currency.
Transaction gains or losses have not been significant in the past and there is
no hedging activity on Canadian dollars or other currencies. Based on the
intercompany balance of $1.9 million at August 31, 1999, a hypothetical 10%
adverse change in Canadian dollars against U.S. dollars would not result in a
material foreign exchange loss. Consequently, the Company does not expect that
reductions in the value of such intercompany balances or of other accounts
denominated in foreign currencies, resulting from even a sudden or significant
fluctuation in foreign exchange rates, would have a direct material impact on
the Company's financial position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of
interest rate and foreign currency exchange rate fluctuations on the value of
certain of the Company's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, international demand
for the Company's products could be affected by foreign currency exchange rates.
In addition, interest rate fluctuations may affect the buying patterns of the
Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the general condition of the U.S., foreign
and global economies, which could materially and adversely affect the Company.
18
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) 10.1 Addendum to Employment Agreement between the Company
and Philip Kantz dated September 21, 1999 (1)
27 Financial Data Schedule
(1) Compensatory Plan or Arrangement
(b) Reports on Form 8-K
None
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TAB PRODUCTS CO.
(Registrant)
Date: October 15, 1999 /s/ David J. Davis
---------------------------------------
David J. Davis, Senior Vice
President, Operations and Chief
Financial Officer
Date: October 15, 1999 /s/ William R. Kinzie
---------------------------------------
William R. Kinzie, Corporate
Controller and Chief Accounting
Officer
20
<PAGE>
Exhibit 10.1
ADDENDUM TO EMPLOYMENT AGREEMENT
BY AND BETWEEN
TAB PRODUCTS, CO. AND PHILIP KANTZ
This Addendum hereby amends the employment agreement by and between TAB
Products, Co. (the "Company") and Philip Kantz (the "Executive"), effective
January 27, 1997 (the "Employment Agreement") to provide as follows:
1. DEFINITION OF "TRANSFER OF CONTROL".
A. A "Transfer of Control" shall, in addition to the
definition set forth in Section 3(e) of the Employment
Agreement, mean the occurrence of either of the following
events:
(1) the complete dissolution or liquidation of
the Company; or
(2) a change in the Board of Directors of the
Company within a two-year period, as a
result of which fewer than a majority of the
Directors are Incumbent Directors.
For purposes of this Addendum, an Incumbent Director
is any director who is either: (a) a director of the Company
as of the effective date of this Addendum; or (b) a director
who is appointed or nominated for election to the Board of
Directors of the Company by the Board of Directors or its
nominating committee and whose nomination or appointment is
approved by with the affirmative votes of at least a majority
of the Incumbent Directors at the time of such appointment or
nomination (but shall not include an individual whose election
or nomination is in connection with an actual or threatened
proxy contest relating to the election of directors to the
Company).
2. SECTIONS 5(b) AND 5(c): TERMINATION WITHOUT CAUSE AND
TERMINATION WITHOUT CAUSE FOLLOWING A TRANSFER OF CONTROL.
A. LUMP SUM PAYMENTS. Notwithstanding anything set forth in
the Employment Agreement, all severance payments made
pursuant to Sections 5(b) and 5(c) of the Employment
Agreement shall be paid in a lump sum within thirty (30)
days of the termination of employment.
B. COBRA. If Executive becomes entitled to severance payments
pursuant to either Section 5(b) or 5(c) of the Employment
Agreement and if Executive elects continued medical
insurance coverage in accordance with the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the
Company shall pay Executive's COBRA
<PAGE>
premiums for the duration of such COBRA coverage, or
twenty-four (24) months, whichever is less. If
Executive's medical coverage immediately prior to the
date of termination included Executive's dependents,
the Company paid COBRA premiums shall include such
dependents.
Executed effective as of September 21, 1999.
TAB Products, Co.
By: /s/ Hans A. Wolf /s/ Philip C. Kantz
---------------- -------------------
Hans A. Wolf Philip Kantz
Its: Chairman
--------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-1-1999
<PERIOD-END> AUG-31-1999
<CASH> 11,038
<SECURITIES> 3,770
<RECEIVABLES> 26,187
<ALLOWANCES> 994
<INVENTORY> 7,160<F1>
<CURRENT-ASSETS> 56,972
<PP&E> 53,393
<DEPRECIATION> 35,947
<TOTAL-ASSETS> 81,124
<CURRENT-LIABILITIES> 23,163
<BONDS> 3,898
53,049
0
<COMMON> 0
<OTHER-SE> (2,887)
<TOTAL-LIABILITY-AND-EQUITY> 81,124
<SALES> 28,006
<TOTAL-REVENUES> 31,994
<CGS> 17,016
<TOTAL-COSTS> 19,244
<OTHER-EXPENSES> 13,850
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 12,551
<INCOME-TAX> 5,271
<INCOME-CONTINUING> 7,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,280
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.44
<FN>
<F1>Inventory detail at August 31, 1999 was finished goods $2,605; work in process
$402; raw materials $4,153.
</FN>
</TABLE>
