<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 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) (Zip Code)
Registrant's telephone number - including area code (650) 852-2400
--------------------
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 November 30, 1998 - 5,084,889.
This report, including all exhibits and attachments, contains 37 pages.
----
1
<PAGE>
TAB PRODUCTS CO.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1 Financial Statements:
Consolidated Condensed Balance Sheets
November 30, 1998 and May 31, 1998 3
Consolidated Condensed Statements of Earnings
Three months and Six months ended November 30,
1998 and 1997 4
Consolidated Condensed Statements of Cash Flows
Six months ended November 30, 1998 and 1997 5
Supplemental Financial Data - Notes 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 Quantitative and Qualitative Disclosure About
Market Risks 17
PART II. OTHER INFORMATION
ITEM 4. Submission of matters to a vote of security holders 18
ITEM 6 Exhibits 18
Signatures 19
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(000's omitted except share data)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,235 $ 7,199
Short-term investments 3,459 4,896
Accounts receivable, less allowances of
$825 and $947 for doubtful accounts 27,560 24,943
Inventories 12,084 11,015
Prepaid income taxes and other expenses 6,468 5,725
---------- ----------
Total current assets 52,806 53,778
Property, plant and equipment, net of
accumulated depreciation of $41,875 and
$40,162 19,960 19,063
Goodwill, net 3,238 3,683
Other assets 1,014 964
---------- ----------
Total Assets $ 77,018 $ 77,488
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,438 $ 3,437
Accounts payable 9,138 6,257
Compensation payable 2,059 3,910
Other accrued liabilities 8,743 8,389
---------- ----------
Total current liabilities 23,378 21,993
---------- ----------
Long-term debt 6,609 7,391
---------- ----------
Deferred taxes and other non-current
liabilities 3,586 3,207
---------- ----------
Stockholders' equity:
Preferred stock: $.01 par value,
authorized - 500,000 shares, issued - none - -
Common stock: $.01 par value, authorized -
25,000,000 shares, issued - November 1998 -
7,606,116 shares and May 1998 - 7,601,616 shares 76 76
Additional paid-in capital 15,244 15,219
Retained earnings 63,456 63,885
Treasury stock: November 1998 - 2,521,227 shares
and May 1998 - 2,432,227 shares (32,006) (31,365)
Accumulated other comprehensive income (3,325) (2,918)
---------- ----------
Total stockholders' equity 43,445 44,897
---------- ----------
Total liabilities and stockholder's equity $ 77,018 $ 77,488
---------- ----------
---------- ----------
</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 Six Months Ended
November 30, November 30,
---------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 39,272 $ 41,573 $ 77,400 $ 81,016
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues 24,221 24,057 48,098 47,578
Selling, general and
administrative 14,568 14,644 28,416 28,606
Research and development 206 224 462 448
---------- ---------- ---------- ----------
Total costs and expenses 38,995 38,925 76,976 76,632
---------- ---------- ---------- ----------
Operating income 277 2,648 424 4,384
Interest, net (133) (163) (271) (331)
---------- ---------- ---------- ----------
Earnings before income taxes 144 2,485 153 4,053
Provision for income taxes 65 1,081 69 1,763
---------- ---------- ---------- ----------
Net earnings $ 79 $ 1,404 $ 84 $ 2,290
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net earnings per share $ 0.02 $ 0.28 $ 0.02 $ 0.45
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing basic
net earnings per share 5,114,414 5,096,569 5,143,079 5,052,566
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net earnings per share $ 0.02 $ 0.27 $ 0.02 $ 0.44
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing diluted
net earnings per share 5,148,532 5,298,089 5,221,761 5,244,716
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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>
Six Months Ended
November 30,
1998 1997
-------- -------
<S> <C> <C>
Operating Activities:
Net earnings $ 84 $ 2,290
Adjustments to reconcile net earnings to net cash
provided (required) by operating activities:
Depreciation and amortization 2,458 2,114
Other - 81
Changes in operating assets and liabilities:
Accounts receivable (2,676) (1,818)
Inventories (1,049) (1,207)
Prepaid income taxes and other expenses (213) (353)
Other assets 60 24
Accounts payable 2,901 112
Commissions payable (1,842) 730
Other accrued liabilities 93 (666)
-------- -------
Net cash provided (required) by operating activities (184) 1,307
-------- -------
Investing Activities:
Purchase of property, plant and equipment, net (3,239) (1,753)
Purchases of short-term investments (2,961) (4,885)
Sales of short-term investments 4,398 3,723
-------- -------
Net cash required by investing activities (1,802) (2,915)
-------- -------
Financing Activities:
Repayment of long-term debt (781) (656)
Proceeds from issuance of common stock 25 1,019
Repurchase of Treasury Stock (641)
Dividends paid (513) (507)
-------- -------
Net cash required by financing activities (1,910) (144)
-------- -------
Effect of exchange rate changes on cash (68) (137)
-------- -------
Decrease in cash and cash equivalents (3,964) (1,889)
Cash and cash equivalents at beginning of period 7,199 8,568
-------- -------
Cash and cash equivalents at end of period $ 3,235 $ 6,679
-------- -------
-------- -------
</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, 1998.
The results of operations for the six-month period ended November 30, 1998
are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending May 31, 1999. The May
31, 1998 balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Inventory
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
November 30, 1998 May 31, 1998
----------------- ---------------
<S> <C> <C>
Finished goods $ 6,214 $ 4,265
Work in process 612 2,704
Raw materials 5,258 4,046
--------------- ---------------
$ 12,084 $ 11,015
--------------- ---------------
--------------- ---------------
</TABLE>
3. Dividends
Dividends declared for the six month periods ended November 30, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
Record Date Shares Outstanding Dividend Per Share
----------- ------------------ ------------------
<S> <C> <C>
August 25, 1998 5,171,514 $ 0.05
November 25, 1998 5,084,889 $ 0.05
August 25, 1997 5,041,576 $ 0.05
November 25, 1997 5,103,014 $ 0.05
</TABLE>
6
<PAGE>
Item 1. Financial Statements (continued)
Tab Products Co., Notes to Consolidated Condensed Financial Statements
(continued)
4. Net Earnings 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 and six-months ended November
30, 1998 and 1997, respectively, are calculated as follows (in thousands,
except share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 79 $ 1,404 $ 84 $ 2,290
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Basic:
Weighted average common shares
outstanding used in computing
basic net earnings per share 5,114,414 5,096,569 5,143,079 5,052,566
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Basic net earnings per share $ 0.02 $ 0.28 $ 0.02 $ 0.45
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Diluted:
Weighted average common
shares outstanding 5,114,414 5,096,569 5,143,079 5,052,566
Dilutive options outstanding 34,118 201,520 78,682 192,150
----------- ----------- ---------- -----------
Shares used in computing diluted
net earnings per share 5,148,532 5,298,089 5,221,761 5,244,716
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Diluted net earnings per share $ 0.02 $ 0.27 $ 0.02 $ 0.44
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
5. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter
of fiscal 1999. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, it has no impact
on the Company's net income or total stockholders' equity.
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 79 $ 1,404 $ 84 $ 2,290
Foreign currency translation 30 (326) (407) (504)
----------- ----------- ---------- -----------
Comprehensive income (loss) $ 109 $ 1,078 $ (323) $ 1,786
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
7
<PAGE>
Item 1. Financial Statements (continued)
Tab Products Co., Notes to Consolidated Condensed Financial Statements
(continued)
Accumulated other comprehensive income, net of tax, presented on the
accompanying consolidated condensed balance sheets consists of the following
(in thousands):
<TABLE>
<CAPTION>
November 30, 1998 May 31, 1998
----------------- ---------------
<S> <C> <C>
Foreign currency translation $ (907) $ (500)
Minimum pension liability (2,418) (2,418)
--------------- ---------------
Accumulated other
comprehensive income (loss) $ (3,325) $ (2,918)
--------------- ---------------
--------------- ---------------
</TABLE>
6. Stock Repurchase
During the three months ended November 30, 1998, the Company repurchased
89,000 shares of Common Stock under the Company's authorized repurchase
program at a cost of $641,000. As of November 30, 1998, the Company intends
to repurchase an additional 211,000 shares under the previously announced
common stock repurchase program.
7. Recently Issued Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The Statement establishes standards for the manner in
which public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This statement is effective for annual financial
statements for periods beginning after December 15, 1997, and for interim
periods after the first year of adoption. The Company has not determined the
impact of the adoption of this new accounting standard on its consolidated
financial statement disclosures.
In February 1998, the FASB issued SFAS No. 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 Financial Accounting Standards Board 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.
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, 1999. 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.
8
<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 "experts," "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
judgement 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
At November 30, 1998 the Company had cash and short-term investments of $6.7
million, a decrease of $5.4 million from the $12.1 million at May 31, 1998.
The Company's working capital position at November 30, 1998 was $29.4 million
as compared with $31.8 million at May 31, 1998. The decrease in cash and
working capital are the result of investments in new enterprise software,
hardware infrastructure improvements, stock repurchases, debt repayments and
foreign exchange impacts. 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. The current ratio
of 2.3 at November 30, 1998 was slightly lower than the current ratio of 2.4
reported for May 31, 1998. Inventories at November 30, 1998 were $12.1
million as compared to $11.0 million at May 31, 1998. The increase in
inventory levels was planned to meet product demands in the September to
December time frame. 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Financial Condition (continued)
Investments in property, plant and equipment, which were primarily focused on
enterprise management information systems and associated infrastructure
investments and in retainable parts to support the growth of service
contracts in the Company's field services operation, were $3.2 million for
the six months ended November 30, 1998. Capital expenditures to support
operations for fiscal 1999 are expected to be in the range of $6.5 to $7.0
million.
For the six month period ended November 30, 1998 the Company paid cash
dividends of $513,000 as compared to $507,000 in the prior fiscal year.
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 November 30, 1998.
RESULTS OF OPERATIONS
REVENUES for the second quarter of fiscal 1999 amounted to $39.3 million,
down $2.3 million or 5.5% from the $41.6 million reported in the second
quarter of fiscal 1998. Revenues for the six months ended November 30, 1998
were $77.4 million, down $3.6 million or 4.5% from revenues of $81.0 million
reported in the first six months of the prior fiscal year. As in the
Company's first quarter, the Company continued to experience revenue
decreases associated with products previously withdrawn from its sales
channels.In addition, the Company experienced lower sales in manufactured
products offset somewhat by increased sales in technology products and
services in the domestic market. International revenues were up slightly
year over year even though impacted by adverse foreign exchange fluctuations.
COST OF REVENUES, as a percentage of revenues, was 61.7% for the second
quarter of fiscal 1999 as compared to the 57.9% reported in the second
quarter of fiscal 1998. Cost of revenues for the second quarter was $24.2
million as compared to the $24.1 million reported in the comparable quarter
of fiscal 1998. For the six months ended November 30, 1998 cost of revenues
was 62.1% as compared to 58.7% in the first six months of the prior fiscal
year. The increase in cost of revenues as a percentage of revenue was the
result of both lower revenues, sales mix and increased manufacturing costs
due to lower factory efficiencies.
OPERATING EXPENSES were $14.8 million or 37.6% of total revenues for the
second quarter of fiscal 1999 as compared to $14.9 million or 35.8% of total
revenues for the second quarter of fiscal 1998. For the six months ended
November 30, 1998 Operating Expenses were $28.9 million or 37.3% of total
revenues for the first six months of fiscal 1999 as compared to $29.1 million
or 35.9% of total revenues for the prior fiscal year. The increase in
operating expenses as a percentage of revenues was primarily driven by
increases in defined benefit pension costs, sales training, systems
development costs, technology support costs and continued overlap of a new
sales compensation plan implemented at the start of the fiscal year.
Offsetting these increases were reductions in expenses for operating the
Company's sales branches and reduction of management incentive plan expense
as a result of lower revenues in the first six months.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations (continued)
INTEREST EXPENSE, net, was $133,000 in the second quarter of fiscal 1999 as
compared to $163,000 in the second quarter of fiscal 1998. For the six
months ended November 30, 1998 interest expense, net, was $271,000 as
compared to $331,000 in the prior fiscal year. The decrease for the three
and six months ended November 30, 1998 was primarily due to a $3.5 million
reduction in the overall debt level as compared to November 30, 1997 as a
result of debt repayments.
EARNINGS PER SHARE for the three months ended November 30, 1998 were $.02 per
share for both basic and diluted shares compared to $.28 and $.27 per basic
and diluted shares, respectively, for the three months ended November 30,
1997. For the six months ended November 30, 1998 earnings per share were
$.02 per share for both basic and diluted shares compared to $.45 and $.44
per basic and diluted shares, respectively, for the prior fiscal year.
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. 98 for 1998). 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, plant, 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 implement 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 are 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 to
add functionality and efficiency in the Company's business processes in
addition to achieving Year 2000 compliance.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Management System Upgrades and Year 2000 Compliance (continued)
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, all sales and all financial modules, is planned to be tested
and in operation by the end of March 1999. The second stage includes project
accounting, human resources and the remaining manufacturing operations. This
stage is planned to be completed by the end of August 1999. Remediation and
testing of IT systems not replaced are planned to be completed by September
1999.
The Company is assessing its significant non-IT systems that may contain
embedded microcontrollers to determine what remediation efforts may be
necessary. The assessment is planned to be completed by July 1999. To date,
certain non-IT systems have been tested and most such tested non-IT systems
have been evaluated as being Year 2000 compliant. Remediation plans for those
systems not Year 2000 compliant are planned to be in place by July 1999.
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
last year and expects to complete the inquires over the next six months.
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 the shift of production to other, unaffected
sites, if appropriate, or 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
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Management System Upgrades and Year 2000 Compliance (continued)
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 IT system upgrade project, which includes the Year 2000
remediation, is estimated to cost approximately $1.6 to $2.0 million of which
approximately $1.4 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.
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 Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, 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.
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.
The Company is also seeking to expand its call center operations and to
direct replenishment 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.
The Company has notified its existing independent distributors (indirect
channel) that effective June 1, 1999 the existing distributor contract is
canceled. A new contract has been offered that eliminates the exclusive
territory rights in the
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
existing contract with other material terms and conditions remaining
substantially the same. 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 November 30, 1998
approximately one third of the current independent distributors have signed
the new contract. The Company is working to achieve acceptance of the new
dealer agreement with those who remain non-committal. The Company is also
seeking to expand its indirect distribution with the addition of dealer to
Branch territories to focus on small to mid-size customers.
These changes in distribution, including the potential loss of existing
independent distributors, 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.
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, 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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
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 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 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 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. Additionally, the growing professional services component of
project sales is recognized as revenue when the project is completed
resulting in a longer order-to-revenue cycle for a component of the Company's
revenue stream.
Government Sales
With the government, both Federal and State/Local comprising 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 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
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.
Risks Associated with International Sales
In fiscal 1998, international sales accounted for approximately 20% of the
Company's total revenues and in the first six months of fiscal 1999 they
accounted for approximately 19% 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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
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.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The company held its annual meeting of stockholders
on October 29, 1998.
(b) All of management's nominees as listed in the proxy
statement were elected.
(c) The votes for each Director are indicated below:
<TABLE>
<CAPTION>
Director For Withheld Authority
-------- --- ------------------
<S> <C> <C>
R. R. Augsburger 4,632,095 55,109
R. S. Cecil 4,630,794 56,410
K. S. Hanson 4,630,694 56,510
P. C. Kantz 4,471,757 215,447
J. K. Myers 4,089,379 597,825
H. A. Wolf 4,473,685 213,519
</TABLE>
(d) The company's appointment of Deloitte & Touche LLP as the
independent accountants for the fiscal year ending May 31, 1999
was approved. The vote is indicated below:
<TABLE>
<S> <C>
For 4,645,194
Against 13,260
Abstain 28,750
Non-Vote 0
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) 10.1 Bank of America Business Loan Agreement dated November 1,
1998
27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
<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: January 14, 1999 /s/ David J. Davis
---------------------------------------
David J. Davis, Senior Vice
President, Operations and Chief
Financial Officer
Date: January 14, 1999 /s/ William R. Kinzie
---------------------------------------
William R. Kinzie, Corporate
Controller and Chief Accounting
Officer
19
<PAGE>
BUSINESS LOAN AGREEMENT
This Agreement dated as of November 1, 1998, is between Bank of America
National Trust and Savings Association (the "Bank") and Tab Products Co. (the
"Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit ("Facility No. 1") to the Borrower. The amount of the line
of credit (the "Facility No. 1 Commitment") is Fifteen Million and 00/100
Dollars ($15,000,000.00).
(b) This is a revolving line of credit providing for cash advances and
letters of credit. During the availability period, the Borrower may repay
principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not
yet reimbursed, to exceed the Facility No. 1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and November 1, 2000 (the "Facility No. 1 Expiration Date")
unless the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference Rate.
The Reference Rate is set by the Bank based on various factors, including
the Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in
the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on November 1, 1998, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Facility No. 1 Expiration Date. Any interest period for an optional
interest rate (as described below) shall expire no later than the Facility
No. 1 Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below for this Facility No. 1 during interest periods agreed to by the
Bank and the Borrower. The optional interest rates shall be subject to the
terms and conditions described later in this Agreement. Any principal amount
bearing interest at an optional rate under this Agreement is referred to as a
"Portion." The following optional interest rates are available:
(a) Fixed Rates.
(b) Offshore Rates.
1.6 LETTERS OF CREDIT.
(a) This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity of 365 days but
not to extend beyond the Facility No. 1 Expiration Date.
- 1 -
<PAGE>
(ii) The amount of letters of credit outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Two Million and 00/100 Dollars
($2,000,000.00).
(b) The Borrower agrees:
(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately prepay
and make the Bank whole for any outstanding letters of credit.
(iii) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and
must be in form and content satisfactory to the Bank and in favor
of a beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and Agreement for Standby
Letter of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of
credit for the Borrower.
(vi) to allow the Bank to automatically charge its checking account
for applicable fees, discounts, and other charges.
1.7 FOREIGN EXCHANGE FACILITY.
(a) During the availability period, the Bank at its discretion may enter into
spot and forward foreign exchange contracts with the Borrower. The
foreign exchange contract limit will be Four Million and 00/100 U.S.
Dollars (U.S. $4,000,000.00), and the settlement limit will be One
Million and 00/100 U.S. Dollars (U.S. $1,000,000.00). The "foreign
exchange contract limit" is the maximum limit on the net difference
between the total foreign exchange contracts outstanding less the total
foreign exchange contracts for which the Borrower has already
compensated the Bank. The "settlement limit" is the maximum limit on the
gross total amount of all sale and purchase contracts on which delivery
is to be effected and settlement allowed on any one banking day.
(b) The Bank shall not be obligated to permit the Borrower to enter into any
foreign exchange contracts which would exceed the settlement limit.
However, if the Bank decides, in its discretion, to waive the settlement
limit for foreign exchange contracts which will settle on any particular
banking day, the Bank shall not be required to make any U.S. Dollar or
foreign currency settlement payment to the Borrower until the Bank
receives evidence satisfactory to it that the Borrower has paid the Bank
all of the Borrower's U.S. Dollar and foreign currency settlement
payments. The Bank shall not be liable for interest or other damages
caused by any such failure to pay or deliver or any such delay in
payment or delivery.
(c) The Borrower will pay the Bank on demand the Bank's then standard
foreign exchange contract fees for each contract.
(d) Foreign exchange contracts will be in form and substance satisfactory to
the Bank.
(e) No foreign exchange contracts will mature later than one hundred eighty
(180) days after the Facility No. 1 Expiration Date.
(f) The Borrower understands the risks of, and is financially able to bear
any losses resulting from, entering into foreign exchange contracts.
The Bank shall not be liable for any loss suffered by the Borrower as
a result of the Borrower's foreign exchange trading. The Borrower will
enter into each foreign exchange contract in reliance only upon the
Borrower's own judgment. The Borrower acknowledges that in entering
into foreign exchange contracts with the Borrower, the Bank is not
acting as a fiduciary. The Borrower understands that neither the Bank
nor the Borrower has any obligation to enter into any particular foreign
exchange contract with the other.
(g) The Borrower hereby requests the Bank to rely upon and execute the
Borrower's telephonic instructions regarding foreign exchange contracts,
and the Borrower agrees that the Bank shall incur no liability for its
acts or omissions which result from interruption of communications,
misunderstood communications or instructions from unauthorized persons,
unless caused by the willful misconduct of the Bank or its officers or
employees. The Borrower agrees to protect the Bank and hold it harmless
from any and all loss, damage, claim, expense (including the reasonable
fees of outside counsel and the allocated costs of staff counsel) or
inconvenience, however arising, which the Bank suffers or incurs or
might suffer or incur, based on or arising out of said acts or omissions.
- 2 -
<PAGE>
(h) The Borrower agrees to promptly review all confirmations sent to the
Borrower by the Bank. The Borrower understands that these confirmations
are not legal contracts but only evidence of the valid and binding oral
contract which the Borrower has already entered into with the Bank. The
Borrower agrees to promptly execute and return to the Bank confirmations
which accurately reflect the terms of a foreign exchange contract, and
immediately contact the Bank if the Borrower believes a confirmation is
not accurate. In the event of a conflict, inconsistency or ambiguity
between the provisions of this Agreement and the provisions of a
confirmation, the provisions of this Agreement will prevail.
(i) The Borrower agrees that the Bank may electronically record all
telephonic conversations with the Borrower relating to foreign exchange
contracts and that such tape recordings may be submitted in evidence to
any court or in any other proceedings relating to such contracts. The
Borrower agrees that in the event of a conflict, inconsistency or
ambiguity between the terms of a foreign exchange contract as reflected
in a tape recording and the terms stated on a confirmation, the terms
reflected in the tape recording shall control.
(j) Any sum owed to the Bank under a foreign exchange contract may, at the
option of the Bank, be added to the principal amount outstanding under
this Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement. The Borrower hereby authorizes the Bank to
debit the Borrower's account with the Bank for payments due from the
Borrower to the Bank with respect to any foreign exchange contract.
(k) In addition to any other rights or remedies which the Bank may have
under this Agreement or otherwise, upon the occurrence of an event of
default under this Agreement, the Bank may:
(i) Suspend performance of its obligations to the Borrower under any
foreign exchange contract;
(ii) Declare all foreign exchange contracts, interest and any other
amounts which are payable by the Borrower to the Bank immediately
due and payable; and
(iii) Without notice to the Borrower, close out any or all foreign
exchange contracts or positions of the Borrower with the Bank.
The Bank shall not be under any obligation to exercise any such rights
or remedies or to exercise them at a time or in a manner beneficial to
the Borrower. The Borrower shall be liable for any amounts owing to the
Bank after exercise of any such rights and remedies.
2. FACILITY NO. 2 : TERM LOAN AMOUNT AND TERMS
2.1 OUTSTANDING TERM LOAN. There is outstanding from the Bank to the
Borrower a term loan in the original principal amount of Two Million Five
Hundred Thousand and 00/100 Dollars ($2,500,000.00). This term loan is
currently subject to the terms and conditions of Facility No. 2 of the
Business Loan Agreement dated August 26, 1996. As of the date of this
Agreement, the term loan shall be deemed to be outstanding as Facility No. 2
under this Agreement, and shall be subject to all the terms and conditions
stated in this Agreement.
2.2 INTEREST RATE. Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate plus 0.5
percentage point.
2.3 REPAYMENT TERMS.
(a) The Borrower will pay all accrued but unpaid interest on November 1,
1998, and then monthly thereafter and upon payment in full of the
principal of the loan.
(b) The Borrower will repay principal in forty six (46) successive monthly
installments of Twenty Six Thousand Forty One and 67/100 Dollars
($26,041.67) starting November 1, 1998. On August 1, 2002, the Borrower
will repay the remaining principal balance plus any interest then due.
(c) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote payment of principal due
under Paragraph 2.3(b) above.
2.4 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below for this Facility No. 2 during interest periods agreed to by the
Bank and the Borrower. The optional interest rates shall be subject to the
terms and conditions described later in this Agreement. Any principal amount
bearing interest at an optional rate under this Agreement is referred to as a
"Portion." The following optional interest rates are available:
- 3 -
<PAGE>
(a) Fixed Rates.
(b) Offshore Rates.
(c) Long Term Rates.
3. FACILITY NO. 3: LINE OF CREDIT AMOUNT AND TERMS
3.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit ("Facility No. 3") to the Borrower. The amount of the line
of credit (the "Facility No. 3 Commitment") is One Million Five Hundred
Thousand and 00/100 Dollars ($1,500,000.00).
(b) This is a non-revolving line of credit with a term repayment option, and
providing for cash advances. Any amount borrowed, even if repaid before
the end of the availability period, permanently reduces the remaining
available line of credit.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit to exceed the Facility No. 3 Commitment.
3.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and November 1, 1999 (the "Facility No. 3 Expiration Date")
unless the Borrower is in default.
3.3 INTEREST RATE. Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate plus 0.25
percentage point.
3.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on November 1, 1998, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay the principal amount outstanding on the Facility
No. 3 Expiration Date in 60 successive equal monthly installments starting
December 1, 1999. On November 1, 2004, the Borrower will repay the
remaining principal balance plus any interest then due.
(c) The Borrower may repay the loan in full or in part at any time. The
prepayment will be applied to the most remote payment of principal due
under Paragraph 3.4(b) above.
3.5 MANDATORY PREPAYMENT; EARLY TERMINATION. Anything herein to the contrary
notwithstanding, if Facility No. 1, as now in effect or as hereafter renewed,
amended or restated, terminates for any reason, including, without
limitation, termination at the request of the Borrower, termination resulting
from failure by the Bank to renew Facility No. 1 beyond any availability
period applicable thereto, or termination as otherwise provided or permitted
under this Agreement, the entire principal balance of these Facility No. 2
and Facility No. 3, together with all accrued interest thereon, shall be due
and payable on the effective date of such termination.
3.6 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below for this Facility No. 3 during interest periods agreed to by the
Bank and the Borrower. The optional interest rates shall be subject to the
terms and conditions described later in this Agreement. Any principal amount
bearing interest at an optional rate under this Agreement is referred to as
a "Portion." The following optional interest rates are available:
(a) Fixed Rates.
(b) Offshore Rates.
4. OPTIONAL INTEREST RATES
4.1 OPTIONAL RATES. Each optional interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day of
each month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
- 4 -
<PAGE>
4.2 FIXED RATE. The election of Fixed Rates shall be subject to the
following terms and requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and Borrower
agree will apply during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be no shorter than 30 days and no longer than 180 days.
(c) Each Fixed Rate Portion will be for an amount not less Five Hundred
Thousand Dollars ($500,000).
(d) Each prepayment of a Fixed Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described
below. A "prepayment" is a payment of an amount on a date earlier than
the scheduled payment date for such amount as required by this Agreement.
The prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or
other appropriate money market selected by the Bank for a period
starting on the date on which it was prepaid and ending on the
last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
4.3 OFFSHORE RATE. The election of Offshore Rates shall be subject to the
following terms and requirements:
(a) The "Offshore Rate" means the interest rate the Bank and the Borrower
agree will apply to the Portion during the applicable interest period.
(b) The interest period during which the Offshore Rate will be in effect
will be no shorter than 30 days and no longer than 180 days. The last day
of the interest period will be determined by the Bank using the practices
of the offshore dollar inter-bank market.
(c) Each Offshore Rate Portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(d) Each prepayment of an Offshore Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the
amount of accrued interest on the amount prepaid, and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement. The prepayment fee shall be equal to the amount (if any)
by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic certificate of
deposit market, the eurodollar deposit market, or other appropriate
money market selected by the Bank for a period starting on the date
on which it was prepaid and ending on the last day of the interest
period for such Portion (or the scheduled payment date for the
amount prepaid, if earlier).
(e) The Bank will have no obligation to accept an election for an Offshore
Rate Portion if any of the following described events has occured and
is continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of an Offshore Rate Portion are not available
in the offshore dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate Portion.
4.4 LONG TERM RATE. The election of Long Term Rates shall be subject to the
following terms and requirements:
(a) The interest period during which the Long Term Rate will be in effect
will be one year or more.
(b) The "Long Term Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the Portion during the applicable interest
period.
(c) Each Long Term Rate Portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
- 5 -
<PAGE>
(d) The Borrower may prepay the Long Term Rate Portion in whole or in part
in the minimum amount of One Hundred Thousand and 00/100 Dollars
($100,000). The Borrower will give the Bank irrevocable written notice of
the Borrower's intention to make the prepayment, specifying the date and
amount of the prepayment. The notice must be received by the Bank at
least 5 banking days in advance of the prepayment. All prepayments of
principal on the Long Term Rate Portion will be applied on the most
remote payment of principal then unpaid.
(e) Each prepayment of a Long Term Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by payment of
all accrued interest on the amount of the prepayment and the prepayment
fee described below.
(f) The prepayment fee will be the sum of fees calculated separately
for each Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which
would have accrued each month for the Prepaid Installment had it
remained outstanding until the applicable Original Payment Date,
using the Long Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would
accrue for that Prepaid Installment if it were reinvested from
the date of prepayment through the Original Payment Date, using
the Treasury Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is
greater than zero, the Bank will discount the monthly differences
to the date of prepayment by the Treasury Rate. The Bank will
then add together all of the discounted monthly differences for
the Prepaid Installment.
(g) The following definitions will apply to the calculation of the prepayment
fee:
"Original Payment Dates" mean the dates on which principal of the
Long Term Rate Portion would have been paid if there had been no
prepayment. If any of the principal would have been paid later than the
end of the interest period in effect at the time of prepayment, then the
Original Payment Date for that amount will be the last day of the interest
period.
"Prepaid Installment" means the amount of the prepaid principal of the
Long Term Rate Portion which would have been paid on a single Original
Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by
reinvesting a specified Prepaid Installment in such securities from the
date of prepayment through the Original Payment Date.
(h) The Bank may adjust the Treasury Rate to reflect the compounding,
accrual basis, or other costs of the Long Term Rate Portion. Each of the
rates is the Bank's estimate only and the Bank is under no obligation to
actually reinvest any prepayment. The rates will be based on information
from either the Telerate or Reuters information services, THE WALL STREET
JOURNAL, or other information sources the Bank deems appropriate.
5. FEES AND EXPENSES
5.1 FEES.
(a) LOAN FEE (FACILITY NO. 1). The Borrower agrees to pay a loan fee
in the amount of Fifty Six Thousand Two Hundred Fifty and 00/100 Dollars
($56,250.00). This fee is due on November 1, 1999 and on each anniversary
of that date thereafter until the expiration of the availability period
(Fee for 1998 was paid on October 16, 1998).
(b) UNUSED COMMITMENT FEE (FACILITY NO. 3). The Borrower agrees to pay
a fee on any difference between the Facility No. 3 Commitment and
the amount of credit it actually uses, determined by the weighted average
credit outstanding during the specified period. The fee will be
calculated at 0.25% per year.
This fee is due on February 1, 1999, and on the first day of each
following quarter until the expiration of the availability period.
(c) WAIVER FEE. If the Bank, at its discretion, agrees to waive or
amend any terms of this Agreement, the Borrower will, at the Bank's
option, pay the Bank a fee for each waiver or amendment in an amount
advised by the Bank at the time the Borrower requests the waiver or
amendment. Nothing in this paragraph shall imply that the Bank is
obligated to agree to any waiver or amendment requested by the Borrower.
The Bank may impose additional requirements as a condition to any waiver
or amendment.
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5.2 REIMBURSEMENT COSTS.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
6.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
6.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates and telefax
requests for the issuance of letters of credit given by any one of the
individuals authorized to sign loan agreements on behalf of the
Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14934-03755, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax
instructions the Bank reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity and
excuse will survive this Agreement's termination.
6.4 DIRECT DEBIT.
(a) The Borrower agrees that interest and principal payments and any fees
will be deducted automatically on the due date from the Borrower's
account number 14934-03755, or such other of the Borrower's accounts
with the Bank as designated in writing by the Borrower.
(b) The Bank will debit the account on the dates the payments become due.
If a due date does not fall on a banking day, the Bank will debit the
account on the first banking day following the due date.
(c) The Borrower will maintain sufficient funds in the account on the dates
the Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
6.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an offshore rate (if
any), a banking day is a day other than a Saturday or a Sunday on which the
Bank is open for business in California and dealing in offshore dollars. All
payments and disbursements which would be due on a day which is not a banking
day will be due on the next banking day. All payments received on a day which
is not a banking day will be applied to the credit on the next banking day.
6.6 TAXES. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes
from any payments it makes to the Bank. If any such taxes are imposed on any
payments made by the Borrower (including payments under this paragraph), the
Borrower will pay the taxes and will also pay to the Bank, at the time
interest is paid, any additional amount which the Bank specifies as necessary
to preserve the after-tax yield the Bank would have received if such taxes
had not been imposed. The Borrower will confirm that it has paid the taxes
by giving the Bank official tax receipts (or notarized copies) within 30 days
after the due date.
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6.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request
or requirement of a regulatory agency which is applicable to all national
banks or a class of all national banks. The costs and losses will be
allocated to the loan in a manner determined by the Bank, using any
reasonable method. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
6.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year
and the actual number of days elapsed. This results in more interest or a
higher fee than if a 365-day year is used. Installments of principal which
are not paid when due under this Agreement shall continue to bear interest
until paid.
6.9 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is 2
percentage point(s) higher than the rate of interest otherwise provided under
this Agreement. This will not constitute a waiver of any default.
6.10 INTEREST COMPOUNDING. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement
shall bear interest from the due date at the Bank's Reference Rate for
Facility No. 1, at the Bank's Reference Rate plus 0.5 percentage point for
Facility No. 2 and at the Bank's Reference Rate plus 0.25 percentage point
for Facility No. 3. This may result in compounding of interest.
6.11 OVERDRAFTS. At the Bank's sole option in each instance, the Bank may
do one of the following:
(a) The Bank may make advances under this Agreement to prevent or cover an
overdraft on any account of the Borrower with the Bank. Each such advance
will accrue interest from the date of the advance or the date on which the
account is overdrawn, whichever occurs first, at the interest rate
described in this Agreement.
(b) The Bank may reduce the amount of credit otherwise available under this
Agreement by the amount of any overdraft on any account of the Borrower
with the Bank.
This paragraph shall not be deemed to authorize the Borrower to create
overdrafts on any of the Borrower's accounts with the Bank.
7. CONDITIONS
The Bank must receive the following items, in form and content acceptable to
the Bank, before it is required to extend any credit to the Borrower under
this Agreement:
7.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower of this Agreement and any instrument or agreement required
under this Agreement have been duly authorized.
7.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation.
7.3 OTHER ITEMS. Any other items that the Bank reasonably requires.
8. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each
request for an extension of credit constitutes a renewed representation:
8.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
8.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and
do not conflict with any of its organizational papers.
8.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance
with its terms, and any instrument or agreement required hereunder, when
executed and delivered, will be similarly legal, valid, binding and
enforceable.
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<PAGE>
8.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
8.5 NO CONFLICTS. This Agreement does not conflict with any law,
agreement, or obligation by which the Borrower is bound.
8.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all
material contingent liabilities.
(b) in compliance with all government regulations that apply.
8.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been
disclosed in writing to the Bank.
8.8 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade
name rights, patent rights and fictitious name rights necessary to enable it
to conduct the business in which it is now engaged.
8.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation.
8.10 INCOME TAX MATTERS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
8.11 NO EVENT OF DEFAULT. There is no event which is, or with notice of
lapse of time or both would be, a default under this Agreement.
8.12 INSURANCE. The Borrower has obtained, and maintained in effect, the
insurance coverage required in the "Covenants" section of this Agreement.
8.13 ERISA PLANS.
(a) Each Plan (other than a multiemployer plan) is in compliance in
all material respects with the applicable provisions of ERISA, the Code
and other federal or state law. Each Plan has received a favorable
determination letter from the IRS and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such
qualification. The Borrower has fulfilled its obligations, if any, under
the minimum funding standards of ERISA and the Code with respect to
each Plan, and has not incurred any liability with respect to any Plan
under Title IV of ERISA.
(b) There are no claims, lawsuits or actions (including by any governmental
authority), and there has been no prohibited transaction or violation of
the fiduciary responsibility rules, with respect to any Plan which has
resulted or could reasonably be expected to result in a material adverse
effect.
(c) With respect to any Plan subject to Title IV of ERISA:
(i) No reportable event has occurred under Section 4043(c) of ERISA
for which the PBGC requires 30 day notice.
(ii) No action by the Borrower or any ERISA Affiliate to terminate or
withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(iii) No termination proceeding has been commenced with respect to a
Plan under Section 4042 of ERISA, and no event has occurred or
condition exists which might constitute grounds for the
commencement of such a proceeding.
(d) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
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<PAGE>
(iii) "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the
meaning of Section 414(b) or (c) of the Code.
(iv) "PBGC" means the Pension Benefit Guaranty Corporation.
(v) "Plan" means a pension, profit-sharing, or stock bonus plan
intended to qualify under Section 401(a) of the Code, maintained or
contributed to by the borrower or any ERISA Affiliate, including
any multiemployer plan within the meaning of Section 4001(a)(3)
of ERISA.
8.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this
Agreement.
8.15 YEAR 2000 COMPLIANCE. The Borrower has developed and budgeted for a
comprehensive program to address the "year 2000 problem" (that is, the
inability of computers, as well as embedded microchips in non-computing
devices, to properly perform date-sensitive functions with respect to certain
dates prior to and after December 31, 1999). The Borrower has implemented
that program substantially in accordance with its timetable and budget and
reasonably anticipates that it will substantially avoid the year 2000 problem
as to all computers, as well as embedded microchips in non-computing devices,
that are material to the Borrower's business, properties or operations. The
Borrower has developed adequate contingency plans to ensure uninterrupted and
unimpaired business operation in the event of a failure of its own or a third
party's systems or equipment due to the year 2000 problem, including those of
vendors, customers, and suppliers, as well as a general failure of or
interruption in its communications and delivery infrastructure.
9. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
9.1 USE OF PROCEEDS. To use the proceeds of Facility No. 1 only for working
capital and support performance standby letters of credit and to use the
proceeds of Facility No. 3 only to finance capital expenditure for 1999
fiscal year.
9.2 FINANCIAL INFORMATION. To provide the following financial information
and statements in form and content acceptable to the Bank, and such
additional information as requested by the Bank from time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with
an unqualified opinion) by a Certified Public Accountant ("CPA")
acceptable to the Bank. The statements shall be prepared on a
consolidated basis and must include a supplemental consolidating
schedule detailing the assets, liabilities, income and expenses of
each subsidiary, domestic or foreign, of the Borrower.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated and consolidating basis.
(c) Copies of the Borrower's Form 10-K Annual Report, Form 10-Q Quarterly
Report and Form 8-K Current Report within 15 days after the date of
filing with the Securities and Exchange Commission.
(d) Within the period(s) provided in (a) and (b) above, a compliance
certificate of the Borrower signed by an authorized financial officer
of the Borrower setting forth (i) the information and computations
(in sufficient detail) to establish that the Borrower is in compliance
with all financial covenants at the end of the period covered by the
financial statements then being furnished and (ii) whether there existed
as of the date of such financial statements and whether there exists
as of the date of the certificate, any default under this Agreement and,
if any such default exists, specifying the nature thereof and the
action the Borrower is taking and proposes to take with respect
thereto.
9.3 QUICK ASSETS. To maintain on a consolidated basis as of the end of each
quarterly accounting period quick assets in excess of current liabilities by
at least Eight Million Dollars ($8,000,000).
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term investments. "Current
liabilities" shall include (a) all obligations classified as current
liabilities under generally accepted accounting principles, plus (b) all
principal amounts outstanding under revolving lines of credit, whether
classified as current or long-term, which are not already included under (a)
above.
9.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH. To maintain on a consolidated
basis a ratio of total liabilities to tangible net worth not exceeding
1.25:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities including deferred taxes.
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<PAGE>
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, capitalized or
deferred research and development costs, deferred marketing expenses,
deferred receivables, and other like intangibles), less total liabilities,
including but not limited to accrued and deferred income taxes, and any
reserves against assets.
9.5 FIXED CHARGE COVERAGE RATIO. To maintain on a consolidated basis a fixed
charge coverage ratio of at least 1.15:1.0.
"Fixed charge coverage ratio" means the ratio of cash flow to fixed charges.
"Fixed charges" means the sum of (i) the principal payments on debt
(including, without limitation, prepayments and regularly scheduled payments
of the Senior Notes and the Senior Guaranteed Notes (both as defined below)
and regularly scheduled payments (but not prepayments) of debt to the Bank,
(ii) interest expense, and (iii) capital lease expense.
"Cash flow" means (a) the sum of (i) net income after taxes, (ii)
depreciation, (iii) amortization, (iv) interest expense, and (v) net proceeds
received by the Borrower resulting from its issuance of any equity securities
(including, without limitation, proceeds resulting from the exercise of their
options by the holders of options to purchase the Borrower's shares), LESS
(b) the sum of (i) any amounts paid by the Borrower to purchase, redeem or
otherwise acquire any of its shares and (ii) dividends paid by the Borrower.
"Senior Notes" means the Borrower's 8.73% senior promissory note(s) in the
original principal amount of Fifteen Million Dollars ($15,000,000) due March
20, 2001, authorized by and subject to the terms and conditions of that
certain Note Agreement executed as of March 20, 1992, by the Borrower in
favor of The Prudential Insurance Company of America ("Prudential"), as now
in effect and as hereafter amended or restated (the "Note Agreement").
"Senior Guaranteed Notes" means the Borrower's 6.9% senior promissory note(s)
in the original principal amount of Five Million Dollars ($5,000,000) due
September 20, 2002, authorized by and subject to the terms and conditions of
that certain Note Agreement executed as of October 7, 1993, by the Borrower
in favor of Prudential, as now in effect and as hereafter amended or restated
(the "Guaranteed Note Agreement").
This ratio will be calculated at the end of each fiscal quarter, using the
results of that quarter and each of the 3 immediately preceding quarters.
9.6 PROFITABILITY. To maintain on a consolidated basis a positive net income
before taxes and extraordinary items and a positive net income after taxes
and extraordinary items (i) as of the end of each quarterly accounting period
on a fiscal year-to-date basis and (ii) for each annual accounting period.
9.7 LIMITATION ON LOSSES. Not to incur on a consolidated basis a net loss
before taxes and extraordinary items in any two (2) consecutive quarterly
accounting periods.
9.8 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
liabilities or lease obligations (other than those to the Bank), or become
liable for the liabilities of others, without the Bank's written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities in existence on the date of this Agreement disclosed in
writing to the Bank.
(e) Additional debts for business purposes which do not exceed a total
principal amount of Five Hundred Thousand Dollars ($500,000) outstanding
at any one time.
(f) Contingent debts of the Borrower under its guaranty in the amount of Two
Hundred Thousand U.S. Dollars (U.S. $200,000) in favor of the Australian
and New Zealand Banking Company guarantying debt of Tab Products PTY Ltd.
(g) Additional debts for the purpose of financing operating or capital
leases of the new J.D. Edwards software system which do not exceed a
total principal amount of Two Million Seven Hundred Thousand Dollars
($2,700,000).
9.9 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
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(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Additional purchase money security interests in personal property
acquired after the date of this Agreement, if the total principal amount
of debts secured by such liens does not exceed Five Hundred Thousand
Dollars ($500,000) at any one time.
(e) Additional liens permitted under Subparagraph (g) above.
9.10 CAPITAL EXPENDITURES. Not to spend (including the total amount of any
capital leases) more than Seven Million Dollars ($7,000,000) in fiscal year
1999 and Five Million Dollars ($5,000,000) in any single fiscal year
thereafter to acquire fixed or capital assets.
9.11 LOANS TO SUBSIDIARIES. Not to make any loans or advances to any of the
Borrower's subsidiaries, except loans or advances in existence on the date of
this Agreement disclosed in writing to the Bank.
9.12 LOANS TO OFFICERS. Not to make any loans, advances or other extensions
of credit (including extensions of credit in the nature of accounts
receivable or notes receivable arising from the sale or lease of goods or
services) to any of the Borrower's executives, officers, directors or
shareholders (or any relatives of any of the foregoing), except in the
aggregate amount not to exceed One Million Dollars ($1,000,000).
9.13 OUT OF DEBT PERIOD (FACILITY NO. 1). To repay any advances in full, and
not to draw any additional advances on its revolving line of credit, for a
period of at least 30 consecutive days in each line-year. "Line-year" means
the period between the date of this Agreement and November 1, 1999, and each
subsequent one-year period (if any). For the purposes of this paragraph,
"advances" does not include the undrawn amounts of outstanding letters of
credit.
9.14 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower
(or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
9.15 BOOKS AND RECORDS. To maintain adequate books and records.
9.16 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are
in the possession of a third party, the Borrower authorizes that third party
to permit the Bank or its agents to have access to perform inspections or
audits and to respond to the Bank's requests for information concerning such
properties, books and records.
9.17 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
9.18 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
9.19 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
9.20 COOPERATION. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
9.21 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
9.22 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
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(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for less
than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a substantial
part of the Borrower's business or the Borrower's assets except in the
ordinary course of the Borrower's business.
(f) enter into any sale and leaseback agreement covering any of its fixed
assets.
(g) acquire or purchase a business or its assets.
(h) voluntarily suspend its business for more than 5 days in any 30 day
period.
9.23 ERISA PLANS. With respect to a Plan subject to Title IV of ERISA, to
give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(c) of ERISA for
which the PBGC requires 30 day notice.
(b) Any action by the Borrower or any ERISA Affiliate to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate
under Section 4041 of ERISA.
(c) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
9.24 GUARANTIES. To obtain guaranties in the amount no less than the total
Bank commitments from any of the Borrower's domestic subsidiaries. It is
provided, however, the revenues or assets of such subsidiaries have to be 10%
or greater of the consolidated company.
10. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under or about the Borrower's property
or operations or property leased to the Borrower. The indemnity includes but
is not limited to attorney's fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys and assigns. "Hazardous substances"
means any substance, material or waste that is or becomes designated or
regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar
designation or regulation under any federal, state or local law (whether
under common law, statute, regulation or otherwise) or judicial or
administrative interpretation of such, including without limitation petroleum
or natural gas. This indemnity will survive repayment of the Borrower's
obligations to the Bank.
11. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. With respect to Paragraphs 11.1, 11.4,
11.5, 11.6, 11.10 and 11.12, the Bank agrees that it will not have the right
to exercise its rights under the immediately preceding sentence unless the
Borrower has failed to cure such event of default in a manner acceptable to
the Bank within 5 days of its occurrence (for Paragraphs 11.1, 11.4 and 11.5)
or within 5 banking days of the Borrower's receipt of notice of such event of
default (for Paragraphs 11.6, 11.10 and 11.12). If an event of default occurs
under the paragraph entitled "Bankruptcy," below, with respect to the
Borrower, then the entire debt outstanding under this Agreement will
automatically be due immediately.
11.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
11.2 FALSE INFORMATION. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
11.3 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition,
a bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors. The default will be deemed cured if any bankruptcy petition filed
against the Borrower (or any guarantor) is dismissed
- 13 -
<PAGE>
within a period of 30 days after the filing; provided, however, that the Bank
will not be obligated to extend any additional credit to the Borrower during
that period.
11.4 RECEIVERS. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
11.5 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into
any settlement agreements with respect to any litigation or arbitration, in
an aggregate amount of One Million Dollars ($1,000,000) or more in excess of
any insurance coverage.
11.6 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
11.7 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) financial
condition, properties or prospects, or ability to repay the credit.
11.8 CROSS-DEFAULT. Any default occurs and has not been cured or waived in
a manner acceptable to the Bank under any agreement in connection with any
credit the Borrower (or any guarantor) has obtained from anyone else or which
the Borrower (or any guarantor) had guaranteed.
11.9 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by
this Agreement is violated or no longer in effect.
11.10 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other
agreement the Borrower (or any guarantor) has with the Bank or any affiliate
of the Bank.
11.11 ERISA PLANS. Any one or more of the following events occurs with
respect to a Plan of the Borrower subject to Title IV of ERISA, provided such
event or events could reasonably be expected, in the judgment of the Bank, to
subject the Borrower to any tax, penalty or liability (or any combination of
the foregoing) which, in the aggregate, could have a material adverse effect
on the financial condition of the Borrower:
(a) A reportable event shall occur under Section 4043(c) of ERISA with
respect to a Plan.
(b) Any Plan termination (or commencement of proceedings to terminate a
Plan) or the full or partial withdrawal from a Plan by the Borrower or
any ERISA Affiliate.
11.12 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article. This includes any
failure or anticipated failure by the Borrower to comply with any financial
covenants set forth in this Agreement, whether such failure is evidenced by
financial statements delivered to the Bank or is otherwise known to the
Borrower or the Bank.
11.13 PRUDENTIAL DOCUMENTS. The Borrower fails to promptly provide the Bank
with copies of any extensions, amendments, revisions, renewals, or
restatements of the Senior Notes, Senior Guaranteed Notes, Note Agreement or
Guaranteed Note Agreement, within 30 days from the date of any such
extensions, amendments, revisions, renewals, or restatements.
11.14 DEBTS OF SUBSIDIARIES. Any subsidiary of the Borrower has outstanding
or incurs any direct or contingent debts (other than those to the Bank), or
becomes liable for the debts of others without the Bank's written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
(e) Contingent debts of Tab Canada under a guaranty in the maximum amount
of Five Million Dollars ($5,000,000) in favor or Prudential.
(f) Debts of Tab Products PTY Ltd. owed to Australian and New Zealand
Banking Company in the maximum amount of Two Hundred Thousand U.S.
Dollars (U.S. $200,000).
- 14 -
<PAGE>
11.5 FINANCIAL COVENANTS. Any financial covenant under any loan or other
agreement executed by the Borrower evidencing indebtedness permitted in
Paragraph 9.8 is more restrictive than any financial covenant under this
Agreement.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made
under generally accepted accounting principles, consistently applied.
12.2 CALIFORNIA LAW. This Agreement is governed by California law.
12.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's
and the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the
right of set-off against the Borrower.
12.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank
must consent to submission of the claim or controversy to arbitration.
If both parties do not consent to arbitration, the controversy or
claim will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of
California Code of Civil Procedure Sections 644 and 645.
- 15 -
<PAGE>
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral;
or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not constitute
a waiver of the right of the Borrower or the Bank, including the suing party,
to submit the controversy or claim to arbitration if the other party contests
the lawsuit. However, if the controversy or claim arises form or relates to
an obligation to the Bank which is secured by real property located in
California at the time of the proposed submission to arbitration, this right
is limited according to the provision above requiring the consent of both the
Borrower and the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under the
deed of trust or mortgage, or to proceed by judicial foreclosure.
12.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default,
it may enforce a later default. Any consent or waiver under this Agreement
must be in writing.
12.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
12.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with
the enforcement or preservation of any rights or remedies under this
Agreement and any other documents executed in connection with this Agreement,
and in connection with any amendment, waiver, "workout" or restructuring
under this Agreement. In the event of a lawsuit or arbitration proceeding,
the prevailing party is entitled to recover costs and reasonable attorneys'
fees incurred in connection with the lawsuit or arbitration proceeding, as
determined by the court or arbitrator. In the event that any case is
commenced by or against the Borrower under the Bankruptcy code (Title 11,
United States Code) or any similar or successor statute, the Bank is entitled
to recover costs and reasonable attorneys' fees incurred by the Bank related
to the preservation, protection, or enforcement of any rights of the Bank in
such a case. As used in this paragraph, "attorneys' fees" includes the
allocated costs of the Bank's in-house counsel.
12.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
12.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating
to or arising directly or indirectly out of (a) this Agreement or any
document required hereunder, (b) any credit extended or committed by the Bank
to the Borrower hereunder, and (c) any litigation or proceeding related to or
arising out of this Agreement, any such document, or any such credit. This
indemnity includes but is not limited to attorneys' fees (including the
allocated cost of in-house counsel). This indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys, and assigns. This indemnity will survive repayment of
the Borrower's obligations to the Bank. All sums due to the Bank hereunder
shall be obligations of the Borrower, due and payable immediately without
demand.
12.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on
the signature page of this Agreement, or to such other addresses as the Bank
and the Borrower may specify from time to time in writing.
- 16 -
<PAGE>
12.11 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
12.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original
but all such counterparts shall constitute but one and the same agreement.
12.13 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of August 26, 1996, between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION TAB PRODUCTS CO.
X /s/ Chris P. Giannotti X /s/ David J. Davis
------------------------------------- ----------------------------------
By: Chris P. Giannotti, Vice President By: David J. Davis, SVP,
Operations and Chief Financial
Address where notices to the Bank Officer
are to be sent:
X /s/ Robert J. Sexton
Palo Alto Commercial Banking Office #01493 ----------------------------------
530 Lytton Ave. By:
Palo Alto, CA 94301
Address for Notices:
1400 Page Mill Road
Palo Alto, CA 94304
- 17 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 3,235
<SECURITIES> 3,459
<RECEIVABLES> 28,385
<ALLOWANCES> 825
<INVENTORY> 12,084<F1>
<CURRENT-ASSETS> 52,806
<PP&E> 61,835
<DEPRECIATION> 41,875
<TOTAL-ASSETS> 77,018
<CURRENT-LIABILITIES> 23,378
<BONDS> 6,609
0
0
<COMMON> 46,770
<OTHER-SE> (3,325)
<TOTAL-LIABILITY-AND-EQUITY> 77,018
<SALES> 67,685
<TOTAL-REVENUES> 77,400
<CGS> 41,552
<TOTAL-COSTS> 48,098
<OTHER-EXPENSES> 28,878
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 271
<INCOME-PRETAX> 153
<INCOME-TAX> 69
<INCOME-CONTINUING> 84
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<FN>
<F1>INVENTORY DETAIL AT NOVEMBER 30, 1998 WAS FINISHED GOODS $6214; WORK IN
PROCESS $612; RAW MATERIALS $5258.
</FN>
</TABLE>
