<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 February 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number: 1-7736
TAB PRODUCTS CO.
---------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 94-1190862
- - -------------------------------- ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1400 PAGE MILL ROAD, PALO ALTO, CALIFORNIA 94304
- - ------------------------------------------- --------------
(Address of principal executive offices) (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
February 28, 1999 - 5,027,689.
This report, including all exhibits and attachments, contains 27 pages.
1
<PAGE>
TAB PRODUCTS CO.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
ITEM 1 Financial Statements:
Consolidated Condensed Balance Sheets
February 28, 1999 and May 31, 1998 3
Consolidated Condensed Statements of Earnings
Three months and Nine months ended February 28,
1999 and 1998 4
Consolidated Condensed Statements of Cash Flows
Nine months ended February 28, 1999 and 1998 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 6 Exhibits 17
Signatures 18
</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>
February 28, May 31,
1999 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,710 $ 7,199
Short-term investments 2,977 4,896
Accounts receivable, less allowances of
$977 and $947 for doubtful accounts 28,320 24,943
Inventories 9,422 11,015
Prepaid income taxes and other expenses 5,725 5,725
--------- --------
Total current assets 52,154 53,778
Property, plant and equipment, net of accumulated
depreciation of $42,837 and $40,162 19,464 19,063
Goodwill, net 3,175 3,683
Other assets 958 964
--------- --------
Total Assets $ 75,751 $ 77,488
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,438 $ 3,437
Accounts payable 6,915 6,257
Compensation payable 1,759 3,910
Other accrued liabilities 10,296 8,389
--------- --------
Total current liabilities 22,408 21,993
--------- --------
Long-term debt 6,531 7,391
--------- --------
Deferred taxes and other non-current
liabilities 3,337 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-February 1999-
7,606,116 shares and May 1998-7,601,616
shares 76 76
Additional paid-in capital 15,244 15,219
Retained earnings 63,485 63,885
Treasury stock: February 1999-2,578,427
shares and May 1998-2,432,227 shares (32,320) (31,365)
Accumulated other comprehensive income (3,010) (2,918)
--------- --------
Total stockholders' equity 43,475 44,897
--------- --------
Total liabilities and stockholder's equity $ 75,751 $ 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 Nine Months Ended
February 28, February 28,
--------------------------------------- -----------------------------------
1999 1998 1999 1998
------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 40,575 $41,096 $ 117,975 $ 122,112
------------------- ------------------ ---------------- -----------------
Costs and expenses:
Cost of revenues 24,690 23,807 72,788 71,385
Selling, general and
administrative 14,729 14,463 43,145 43,069
Research and development 257 215 719 663
------------------- ------------------ ---------------- -----------------
Total costs and expenses 39,676 38,485 116,652 115,117
------------------- ------------------ ---------------- -----------------
Operating income 899 2,611 1,323 6,995
Interest, net, and other (288) (130) (559) (461)
------------------- ------------------ ---------------- -----------------
Earnings before income taxes 611 2,481 764 6,534
Provision for income taxes 331 1,079 400 2,842
------------------- ------------------ ---------------- -----------------
Net earnings $ 280 $ 1,402 $ 364 $3,692
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Basic net earnings per share $ 0.06 $ 0.27 $ 0.07 $ 0.73
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Shares used in computing basic
net earnings per share 5,045,000 5,135,156 5,111,000 5,079,793
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Diluted net earnings per share $ 0.06 $ 0.26 $ 0.07 $ 0.70
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Shares used in computing diluted
net earnings per share 5,047,000 5,315,576 5,158,000 5,269,782
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
</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>
Nine Months Ended
February 28,
-----------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
Operating Activities:
Net earnings $ 364 $ 3,692
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,839 3,211
Other - 21
Changes in operating assets and liabilities:
Accounts receivable (3,447) (143)
Inventories 1,601 (1,241)
Prepaid income taxes and other expenses 261 (299)
Other assets 188 406
Accounts payable 676 908
Compensation payable (2,138) 127
Other accrued liabilities 1,356 379
----------------- ---------------
Net cash provided by operating activities 2,700 7,061
----------------- ---------------
Investing Activities:
Purchase of property, plant and equipment, net (3,899) (3,691)
Purchases of short-term investments (4,464) (6,848)
Sales of short-term investments 6,383 5,679
----------------- ---------------
Net cash required by investing activities (1,980) (4,860)
----------------- ---------------
Financing Activities:
Repayment of long-term debt (859) (734)
Proceeds from issuance of common stock 25 1,385
Repurchase of Treasury Stock (955) -
Dividends paid (764) (765)
----------------- ---------------
Net cash required by financing activities (2,553) (114)
----------------- ---------------
Effect of exchange rate changes on cash 344 (481)
----------------- ---------------
Increase (decrease) in cash and cash equivalents (1,489) 1,606
Cash and cash equivalents at beginning of period 7,199 8,568
----------------- ---------------
Cash and cash equivalents at end of period $ 5,710 $ 10,174
----------------- ---------------
----------------- ---------------
</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 nine-month period ended February 28, 1999 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>
February 28, 1999 May 31, 1998
----------------- ---------------
<S> <C> <C>
Finished goods $ 4,739 $ 4,265
Work in process 572 2,704
Raw materials 4,111 4,046
----------------- ---------------
$ 9,422 $ 11,015
----------------- ---------------
----------------- ---------------
</TABLE>
3. Dividends
Dividends declared for the nine month periods ended February 28, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
Record Date Shares Outstanding Dividend Per Share
----------- ------------------ ------------------
<S> <C> <C>
Fiscal 1999:
August 25, 1998 5,171,514 $ 0.05
November 25, 1998 5,084,889 $ 0.05
February 25, 1999 5,027,689 $ 0.05
Fiscal 1998:
August 25, 1997 5,041,576 $ 0.05
November 25, 1997 5,103,014 $ 0.05
February 25, 1998 5,161,764 $ 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 nine-months ended February 28, 1999 and
1998, respectively, are calculated as follows (in thousands, except share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------------------------- -----------------------------------
1999 1998 1999 1998
------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Net earnings $ 280 $ 1,402 $ 364 $ 3,692
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Basic:
Weighted average common shares outstanding
used in computing basic net earnings
per share 5,045,127 5,135,156 5,110,787 5,079,793
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Basic net earnings per share $ 0.06 $ 0.27 $ 0.07 $ 0.73
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Diluted:
Weighted average common
shares outstanding 5,045,127 5,135,156 5,110,787 5,079,793
Dilutive options outstanding 2,023 180,420 47,464 189,989
------------------- ------------------ ---------------- -----------------
Shares used in computing diluted
net earnings per share 5,047,150 5,315,576 5,158,251 5,269,782
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
Diluted net earnings per share $ 0.06 $ 0.26 $ 0.07 $ 0.70
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
</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 earnings or total stockholders' equity.
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------------------------- -----------------------------------
1999 1998 1999 1998
------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Net earnings $ 280 $ 1,402 $ 364 $ 3,692
Foreign currency translation 315 23 (92) (481)
------------------- ------------------ ---------------- -----------------
Comprehensive income $ 595 $ 1,425 $ 272 $ 3,211
------------------- ------------------ ---------------- -----------------
------------------- ------------------ ---------------- -----------------
</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>
February 28, May 31,
1999 1998
------------------------ ------------------------
<S> <C> <C>
Foreign currency translation $ (592) $ (500)
Minimum pension liability (2,418) (2,418)
------------------------ ------------------------
Accumulated other
comprehensive loss $(3,010) $(2,918)
------------------------ ------------------------
------------------------ ------------------------
</TABLE>
6. Stock Repurchase
During the three and nine months ended February 28, 1999, the Company
repurchased 57,200 and 146,200 shares of Common Stock under the Company's
authorized repurchase program at a cost of $314,000 and $955,000, respectively.
As of February 28, 1999, the Company intends to repurchase in the future an
additional 153,800 shares under the previously announced 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. Events Subsequent to February 28, 1999
During March 1999, the Company announced that the Tab Products Co. Pension
Plan, (the "Plan") for which all domestic employees of the Company are eligible
to participate, would be suspended as of March 31, 1999. After this date
employees will not receive any further pension credits and no new employees
will enter the
8
<PAGE>
Item 1. Financial Statements (continued)
Tab Products Co., Notes to Consolidated Condensed Financial Statements
(continued)
Plan. All employees will become fully vested in the Pension benefit they have
accrued to March 31, 1999. The pension expense related to the Plan for fiscal
1999 will be approximately the same as if the Plan had not been suspended, as
certain curtailment costs will have to be expensed that will offset the
savings of suspending the plan two months before the end of fiscal 1999.
The Company also announced plans to enhance the Company matching component of
its Tax Deferred Savings Plan ("401(k)") effective with the fiscal year
beginning June 1, 1999. The Company match is currently a maximum of 2% and
will be increased to a maximum of 3% effective June 1, 1999; however, the
impact to the Company will depend on employee participation. In fiscal 1999
the Company's contribution will be approximately $450,000.
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 February 28, 1999 the Company had cash and short-term investments of $8.7
million, a decrease of $3.4 million from the $12.1 million at May 31, 1998.
The Company's working capital position at February 28, 1999 was $29.7 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.
Accounts receivable has been impacted by product sales related to services
projects resulting in a longer payment cycle. The current ratio of 2.3 at
February 28, 1999 was slightly lower
9 <PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Financial Condition (Continued)
than the current ratio of 2.4 reported for May 31, 1998. Inventories at February
28, 1999 were $ 9.4 million as compared to $11.0 million at May 31, 1998. The
decrease in inventory levels is due to a program to reduce inventory in the
manufacturing operations. Management believes that the Company's cash and cash
equivalents, available credit facilities and operational cash flow will
adequately finance anticipated growth, capital expenditures and debt obligations
for the foreseeable future.
Investments in property, plant and equipment, which were primarily focused on
enterprise management information systems and associated infrastructure
investments and in retainable parts to support the growth of service contracts
in the Company's field services operation, were $0.7 and $3.9 million for the
three and nine months ended February 28, 1999, respectively. Capital
expenditures to support operations for fiscal 1999 are expected to total
approximately $5.0 million.
During the three and nine months ended February 28, 1999, the Company
repurchased 57,200 and 146,200 shares of Common Stock under the Company's
authorized repurchase program at a cost of $314,000 and $955,000, respectively.
As of February 28, 1999, the Company intends to repurchase an additional 153,800
shares in the future under the previously announced stock repurchase program.
The Company currently has no plans to reissue the stock which has been
repurchased.
For the nine month period ended February 28, 1999 the Company paid cash
dividends of $764,000 as compared to $765,000 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 February 28, 1999. Effective January 29, 1999, the Company
entered into a master lease agreement with a technology equipment leasing
company for a total lease line of $0.5 million. The Company utilized the line to
lease computer equipment with a cost of $0.1 million at the end of February. The
lease is classified as an operating lease.
RESULTS OF OPERATIONS
REVENUES for the third quarter of fiscal 1999 amounted to $40.6 million, down
$.5 million or 1% from the $41.1 million reported in the third quarter of fiscal
1998. Revenues for the nine months ended February 28, 1999 were $118.0 million,
down $4.1 million or 3% from revenues of $122.1 million reported in the first
nine months of the prior fiscal year. As in the Company's first two quarters,
the Company continued to experience revenue decreases associated with products
previously withdrawn from its sales channels as a result of the Company's change
in strategy. In addition, the Company experienced softness in domestic
manufactured product sales offset somewhat by increased technology product sales
and international product and services sales.
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.
COST OF REVENUE, as a percentage of revenues, was 60.9% for the third quarter of
fiscal 1999 as compared to the 57.9% reported in the third quarter of fiscal
1998. Cost of revenues for the third quarter was $24.7 million as compared to
the $23.8 million reported in the comparable quarter of fiscal 1998. For the
nine months
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations (continued)
ended February 28, 1999 cost of revenues was 61.7% as compared to 58.5% in the
first nine months of the prior fiscal year. The increase in cost of revenues as
a percentage of revenue was the result of sales mix and increased manufacturing
costs due to lower factory efficiencies.
OPERATING EXPENSES were $15.0 million or 37.0% of total revenues for the third
quarter of fiscal 1999 as compared to $14.7 million or 35.8% of total revenues
for the third quarter of fiscal 1998. For the nine months ended February 28,
1999 Operating Expenses were $43.9 million or 37.2% of total revenues as
compared to $43.7 million or 35.8% 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 nine months.
INTEREST EXPENSE, net, and other was $288,000 in the third quarter of fiscal
1999 as compared to $130,000 in the third quarter of fiscal 1998. For the nine
months ended February 28, 1999 interest expense, net, and other was $559,000 as
compared to $461,000 in the prior fiscal year. The increase for the three and
nine months ended February 28, 1999 was primarily due to foreign currency
translation losses in international operations of $155,000.
EARNINGS PER SHARE for the three months ended February 28, 1999 were $0.06 per
share for both basic and diluted shares compared to $0.27 and $0.26 per basic
and diluted shares, respectively, for the three months ended February 28, 1998.
For the nine months ended February 28, 1999 earnings per share were $0.07 per
share for both basic and diluted shares compared to $0.73 and $0.70 per basic
and diluted shares, respectively, for the prior fiscal year.
EVENTS SUBSEQUENT TO FEBRUARY 28, 1999
During March 1999, the Company announced that the Tab Products Co. Pension
Plan, (the "Plan") for which all domestic employees of the Company are
eligible to participate, would be suspended as of March 31, 1999. After this
date employees will not receive any further pension credits and no new
employees will enter the Plan. All employees will become fully vested in the
Pension benefit they have accrued to March 31, 1999. The pension expense
related to the Plan for fiscal 1999 will be approximately the same as if the
Plan had not been suspended, as certain curtailment costs will have to be
expensed that will offset the savings of suspending the Plan two months
before the end of fiscal 1999.
The Company also announced plans to enhance the Company matching component of
its Tax Deferred Savings Plan ("401(k)") effective with the fiscal year
beginning June 1, 1999.
MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the date has been stored
as just two digits (e.g. 99 for 1999). On January 1, 2000, any clock or date
recording mechanism, including date sensitive software which uses only two
digits to represent the year, may recognize a date incorrectly (e.g., interpret
the two digits 00 as the year 1900 rather than the year 2000). This could result
in a system failure or miscalculations causing disruption of operations,
including among other things, a temporary inability to process transactions,
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)
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 not only to achieve Year
2000 compliance, but also to add functionality and efficiency in the business
processes of the Company. The software is being implemented in stages and in
each of the Company's operating locations. The first stage, which comprises most
of the manufacturing, sales and financial modules, was recently implemented. 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 fiscal year
and expects to complete the inquiries over the next eight 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
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)
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
capability have not been successful, contingency planning generally emphasizes
the identification of substitute and second-source suppliers, and in certain
limited situations includes a planned increase in the level of inventory
carried.
The Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is currently assessing scenarios and taking steps to
mitigate the impacts of various scenarios if they were to occur. This
contingency planning will continue through 1999 as the Company learns more about
the preparations and vulnerabilities of third parties regarding year 2000
issues. Due to the large number of variables involved, the Company cannot
provide an estimate of the damage it might suffer if any of these scenarios were
to occur.
The total Year 2000 remediation project is estimated to cost approximately $1.8
to $2.2 million of which approximately $1.5 million has been spent to date.
Since the system replacement costs are related to an overall systems initiative,
the Year 2000 compliance costs cannot be reasonably determined. The costs and
time schedules for the IT systems and non-IT systems changes are based on
management's best estimates.
The Company's technology products have all been determined to be Year 2000
compliant. For most of the Company's products the Year 2000 issue does not
apply. Products such as file supplies, furniture, forms handling equipment, file
storage equipment and mobile file equipment have no date-related processing,
hence are not affected by the arrival of the Year 2000.
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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
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 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 February
28, 1999 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 the remaining independent distributors. The Company is
also seeking to expand its indirect distribution with the addition of dealers 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. Market penetration
of larger customers may not happen as quickly as anticipated and may result in
higher selling costs.
Retaining and Attracting Qualified Personnel
The Company's future performance may depend in significant part upon attracting
and retaining key senior management, manufacturing, sales, marketing and
technical support personnel. Competition for such personnel is intense and the
inability to retain its current key personnel or to attract, assimilate or
retain other highly qualified personnel in the future on a timely basis could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Business Environment and Risk Factors (continued)
these or other factors can materially affect the Company's quarterly or annual
operating results or gross margins.
Competition
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets with similar or alternative document management solutions that
may be less costly or provide additional features. Such competition could result
in lower gross margins in the future, if the Company's average selling prices
decrease faster than its costs and could result in lost sales.
Dependence on Sole Source Suppliers
The Company purchases several critical components from single or sole source
vendors for which alternative sources are not currently developed. Development
of alternative suppliers would require a significant amount of time to qualify
in the case of certain of the Company's components. The Company does not
maintain long-term supply agreements with any of these vendors. The inability to
develop alternative sources for these single or sole source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect the Company's
business, financial condition and results of operations.
New Processes and Products and Manufacturing 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 nine 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.
Management of Growth
The Company has increased its expense levels to support its planned growth. The
Company expects to continue to increase its operating expenses by hiring
additional personnel to support expected growth, increased marketing efforts and
additional research and development activities. If the Company does not achieve
increased levels of revenues commensurate with these increased levels of
operating expenses, or if the Company's revenues decrease or do not meet the
Company's expectations for a particular period, the Company's business,
financial condition and results of operations will be materially adversely
affected.
16
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) 10.1 Lease Agreement dated January 29, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<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: April 14, 1999 /s/ David J. Davis
---------------------------------------
David J. Davis, Senior Vice
President, Operations and Chief
Financial Officer
Date: April 14, 1999 /s/ William R. Kinzie
---------------------------------------
William R. Kinzie, Corporate
Controller and Chief Accounting
Officer
18
<PAGE>
Exhibit 10.1
WINTHROP
FINANCIAL SERVICES
LEASE AGREEMENT NUMBER TA012999
LEASE AGREEMENT
THIS LEASE AGREEMENT, DATED January 29, 1999, BY AND BETWEEN WINTHROP
RESOURCES CORPORATION (THE "LESSOR") WITH AN OFFICE LOCATED AT 1015 OPUS
CENTER, 9900 BREN ROAD EAST, MINNETONKA, MINNESOTA 55343 AND TAB PRODUCTS
CO. (THE "LESSEE") WITH AN OFFICE LOCATED AT 1400 Page Mill Rd., Palo Alto,
CA 94304 LESSOR HEREBY LEASES OR GRANTS TO THE LESSEE THE RIGHT TO USE AND
LESSEE HEREBY RENTS AND ACCEPTS THE RIGHT TO USE THE EQUIPMENT LISTED BY
SERIAL NUMBER AND RELATED SERVICES, AND SOFTWARE AND RELATED SERVICES ON
THE LEASE SCHEDULE(S) ATTACHED HERETO OR INCORPORATED HEREIN BY REFERENCE
FROM TIME TO TIME (COLLECTIVELY, THE EQUIPMENT, SOFTWARE AND SERVICES ARE
THE "EQUIPMENT"), SUBJECT TO THE TERMS AND CONDITIONS HEREOF, AS
SUPPLEMENTED WITH RESPECT TO EACH ITEM OF EQUIPMENT BY THE TERMS AND
CONDITIONS SET FORTH IN THE APPROPRIATE LEASE SCHEDULE. THE TERM "LEASE
AGREEMENT" SHALL INCLUDE THIS LEASE AGREEMENT AND THE VARIOUS LEASE
SCHEDULE(S) IDENTIFYING EACH ITEM OF EQUIPMENT OR THE APPROPRIATE LEASE
SCHEDULE(S) IDENTIFYING ONE OR MORE PARTICULAR ITEMS OF EQUIPMENT.
1. TERM
This Lease Agreement is effective from the date it is executed by both
parties. The term of this Lease Agreement as to all Equipment designated on any
particular Lease Schedule shall commence on the Installation Date for all
Equipment on such Lease Schedule and shall continue for an initial period ending
that number of months from the Commencement Date as set forth in such Lease
Schedule (the "Initial Term") and shall continue from year to year thereafter
until terminated. The term of this Lease Agreement as to all Equipment
designated on any particular Lease Schedule may be terminated without cause at
the end of the Initial Term or any year thereafter by either party mailing
written notice of its termination to the other party not less than one-hundred
twenty (120) days prior to such termination date.
2. COMMENCEMENT DATE
The Installation Date for each item of Equipment shall be the day said
item of Equipment is installed at the Location of Installation, ready for use,
and accepted in writing by the Lessee. The Commencement Date for any Lease
Schedule is the first of the month following installation of all the Equipment
on the Lease Schedule, unless the latest Installation Date for any Equipment on
the Lease Schedule falls on the first day of the month, in which case that is
the Commencement Date. The Lessee agrees to complete, execute and deliver a
Certificate of Acceptance to Lessor upon installation of the Equipment.
3. LEASE CHARGE
The lease charges for the Equipment leased pursuant to this Lease
Agreement shall be the aggregate "Monthly Lease Charge[s]" as set forth on each
and every Lease Schedule executed pursuant hereto (the aggregate "Monthly Lease
Charge[s]" are the "Lease Charges"). Lessee agrees to pay to Lessor the Lease
Charges in accordance with the Lease Schedule(s), and the payments shall be made
at Lessor's address indicated thereon. The Lease Charges shall be paid by Lessee
monthly in advance with the first full month's payment due on the Commencement
Date. If the Installation Date does not fall on the first day of a month, the
Lease Charge for the period from the Installation Date to the Commencement Date
shall be an amount equal to the "Monthly Lease Charge" divided by thirty (30)
and multiplied by the number of days from and including the Installation Date to
the Commencement Date and such amount shall be due and payable upon receipt of
an invoice from Lessor. Charges for taxes made in accordance with Section 4 and
charges made under any other provision of this Lease Agreement and payable by
Lessee shall be paid to Lessor at Lessor's address specified on the Lease
Schedule(s) on the date specified in invoices delivered to Lessee. If payment as
specified above is not received by Lessor on the due date, Lessee agrees to and
shall, to the extent permitted by law, pay on demand, as a late charge, an
amount equal to one and one-half percent (1 1/2%), or the maximum percentage
allowed by law if less, of the amount past due ("Late Charges"). Late Charges
shall be charged and added to any past due amount on the date such payment is
due and every thirty (30) days thereafter until all past due amounts are paid in
full to Lessor.
4. TAXES
In addition to the Lease Charges set forth in Section 3, the Lessee
shall reimburse Lessor for all license or registration fees, assessments, sales
and use taxes, rental taxes, gross receipts taxes, personal property taxes and
other taxes now or hereafter imposed by any government, agency, province or
otherwise upon the Equipment, the Lease Charges or upon the ownership, leasing,
renting, purchase, possession or use of the Equipment, whether the same be
assessed to Lessor or Lessee (the "Taxes"). Lessor shall file all property tax
returns and pay all Taxes when due. Lessee, upon notice to Lessor, may, in
<PAGE>
Lessee's own name, contest or protest any Taxes, and Lessor shall honor any such
notice except when in Lessor's sole opinion such contest is futile or will cause
a levy or lien to arise on the Equipment or cloud Lessor's title thereto. Lessee
shall, in addition, be responsible to Lessor for the payment and discharge of
any penalties or interest as a result of Lessee's actions or inactions. Nothing
herein shall be construed to require Lessee to be responsible for any federal or
state taxes or payments in lieu thereof, imposed upon or measured by the net
income of Lessor, or state franchise taxes of Lessor, or except as provided
hereinabove, any penalties or interest resulting from Lessor's failure to timely
remit such tax payments.
5. DELIVERY AND FREIGHT COSTS
Lessee shall accept delivery of the Equipment and allow the Equipment to
be installed within seven (7) days after delivery.
All transportation charges upon the Equipment for delivery to Lessee's
designated Location of Installation are to be paid by Lessee. All rigging,
drayage charges, structural alterations, rental of heavy equipment and/or other
expense necessary to place the Equipment at the Location of Installation are to
be promptly paid by Lessee.
6. INSTALLATION
Lessee agrees to pay for the actual installation of the Equipment at
Lessee's site. Lessee shall make available and agrees to pay for all costs
associated with providing a suitable place of installation and necessary
electrical power, outlets and air conditioning required for operating the
Equipment as defined in the Equipment manufacturer's installation manual or
instructions. All supplies consumed or required by the Equipment shall be
furnished and paid for by Lessee.
7. RETURN TO LESSOR
On the day following the last day of the lease term associated with a
Lease Schedule (the "Return Date"), Lessee shall cause and pay for the Equipment
on that Lease Schedule to be deinstalled, packed, using the manufacturer's
standard packing materials, and shipped to a location designated in writing by
Lessor (the "Return Location"). If the Equipment on the applicable Lease
Schedule is not at the Return Location within ten (10) days of the Return Date,
or Lessee fails to deinstall the Equipment on the Return Date, then any written
notice of termination delivered by Lessee shall become void, and the Lease
Schedule shall continue in accordance with this Lease Agreement. Irrespective of
any other provision hereof, Lessee will bear the risk of damage from fire, the
elements or otherwise until delivery of the Equipment to the Return Location. At
such time as the Equipment is delivered to the Lessor at the Return Location,
the Equipment will be at the risk of Lessor.
8. MAINTENANCE
Lessee, at its sole expense, shall maintain the Equipment in good
working order and condition. Lessee shall enter into, pay for and maintain in
force during the entire term of any Lease Schedule, a maintenance agreement with
the manufacturer of the Equipment providing for continuous uninterrupted
maintenance of the Equipment (the "Maintenance Agreement"). Lessee will cause
the manufacturer to keep the Equipment in good working order in accordance with
the provisions of the Maintenance Agreement and make all necessary adjustments
and repairs to the Equipment. The manufacturer is hereby authorized to accept
the directions of Lessee with respect thereto. Lessee agrees to allow the
manufacturer full and free access to the Equipment. All maintenance and service
charges, whether under the Maintenance Agreement or otherwise, and all expenses,
if any, of the manufacturer's customer engineers incurred in connection with
maintenance and repair services, shall be promptly paid by Lessee. Upon the
termination of any Lease Schedule or this Lease Agreement, Lessee warrants that
the Equipment shall be eligible for the manufacturer's standard maintenance
agreement upon delivery to the Lessor. Should the equipment not be eligible for
the manufacturer's standard maintenance agreement, Lessee agrees to reimburse
Lessor for any costs it incurs in making the Equipment eligible for such
standard maintenance.
9. LOCATION, OWNERSHIP AND USE
The Equipment shall, at all times, be the sole and exclusive property of
Lessor. Lessee shall have no right or property interest therein, except for the
right to use the Equipment in the normal operation of its business at the
Location of Installation, or as otherwise provided herein. The Equipment is and
shall remain personal property even if installed in or attached to real
property. Lessor shall be permitted to display notice of its ownership on the
Equipment by means of a suitable stencil, label or plaque affixed thereto.
Lessee shall keep the Equipment at all times free and clear from all
claims, levies, encumbrances and process. Lessee shall give Lessor immediate
notice of any such attachment or other judicial process affecting any of the
Equipment. Without Lessor's written permission, Lessee shall not attempt to
or actually: (i) pledge, lend, create a security interest in, sublet,
exchange, trade, assign, swap, use for an allowance or credit or otherwise;
(ii) allow another to use; (iii) part with possession; (iv) dispose of; or
(v) remove from the Location of Installation, any item of Equipment. If any
item of Equipment is exchanged, assigned, traded, swapped, used for an
allowance or credit or otherwise to acquire new or different equipment (the
"New Equipment") without Lessor's prior written consent, then all of the New
Equipment shall become Equipment owned by Lessor subject to this Lease
Agreement and the applicable Lease Schedule.
Any feature(s) installed on the Equipment at the time of delivery
which are not specified on the Lease Schedule(s) are and shall remain the
sole property of the Lessor.
Lessee shall cause the Equipment to be operated in accordance with
the applicable vendor's or manufacturer's manual of instructions by competent
and qualified personnel.
10. FINANCING STATEMENT
Lessor is hereby authorized by Lessee to cause this Lease Agreement or
other instruments, including Uniform Commercial Code Financing Statements, to be
filed or recorded for the purposes of showing Lessor's interest in the
Equipment. Lessee agrees to execute any such instruments as Lessor may request
from time to time.
11. ALTERATIONS AND ATTACHMENTS
Upon prior written notice to Lessor, Lessee may, at its own expense,
make minor alterations in or add attachments to the Equipment, provided such
alterations and attachments shall not interfere with the normal operation of the
Equipment and do not otherwise involve the pledge, assignment, exchange, trade
or substitution of the Equipment or any component or part thereof. All such
alterations and attachments to the Equipment shall become part of the Equipment
leased to Lessee and owned by Lessor. If, in Lessor's sole determination, the
alteration or
Page Number 2 of 6 Winthrop Resources Corporation
<PAGE>
attachment reduces the value of the Equipment or interferes with the normal and
satisfactory operation or maintenance of any of the Equipment, or creates a
safety hazard, Lessee shall, upon notice from Lessor to that effect, promptly
remove the alteration or attachment at Lessee's expense and restore the
Equipment to the condition the Equipment was in just prior to the alteration or
attachment.
12. LOSS AND DAMAGE
Lessee shall assume and bear the risk of loss, theft and damage
(including any governmental requisition, condemnation or confiscation) to the
Equipment and all component parts thereof from any and every cause whatsoever,
whether or not covered by insurance. No loss or damage to the Equipment or any
component part thereof shall impair any obligation of Lessee under this Lease
Agreement, which shall continue in full force and effect except as hereinafter
expressly provided. Lessee shall repair or cause to be repaired all damage to
the Equipment. In the event that all or part of the Equipment shall, as a result
of any cause whatsoever, become lost, stolen, destroyed or otherwise rendered
irreparably unusable or damaged (collectively, the "Loss") then Lessee shall,
within ten (10) days after the Loss, fully inform Lessor in regard thereto and
shall pay to Lessor the following amounts: (i) the Monthly Lease Charges (and
other amounts) due and owing under this Lease Agreement at the time of the Loss,
plus (ii) one-hundred twelve (112%) percent of the original cost of the
Equipment subject to the Loss amortized by the Monthly Lease Charges received by
Lessor during the Initial Term using an amortization rate of 350 basis points
over the interest rate of the three (3) year United States Treasury Note as
reported by THE WALL STREET JOURNAL on the Commencement Date (collectively, the
sum of (i) plus (ii) shall be the "Casualty Loss Value"). Upon receipt by Lessor
of the Casualty Loss Value: (i) the applicable Equipment shall be removed from
the Lease Schedule; and (ii) Lessee's obligation to pay Lease Charges associated
with the applicable Equipment shall cease. Lessor may request, and Lessee shall
complete, an affidavit(s) which swears out the facts supporting the Loss of any
item of Equipment.
13. INSURANCE
Until the Equipment is returned to Lessor or as otherwise herein
provided, whether or not this Lease Agreement has terminated as to the
Equipment, Lessee, at its expense, shall maintain: (i) property and casualty
insurance insuring the Equipment for its Casualty Loss Value naming Lessor or
its assigns as sole loss payee; and (ii) comprehensive public liability and
third-party property insurance naming Lessor and its assigns as additional loss
payees. The insurance shall cover the interest of both the Lessor and Lessee in
the Equipment, or as the case may be, shall protect both the Lessor and Lessee
in respect to all risks arising out of the condition, delivery, installation,
maintenance, use or operation of the Equipment. All such insurance shall provide
for thirty (30) days prior written notice to Lessor of cancellation,
restriction, or reduction of coverage. Lessee hereby irrevocably appoints Lessor
as Lessee's attorney-in-fact to make claim for, receive payment of and execute
and endorse all documents, checks or drafts for loss or damage or return premium
under any insurance policy issued on the Equipment. Prior to installation of the
Equipment, all policies or certificates of insurance shall be delivered to
Lessor by Lessee. Lessee agrees to keep the Equipment insured with an insurance
company which is at least "A" rated by A.M. Best. The proceeds of any loss or
damage insurance shall be payable to Lessor, but Lessor shall remit all such
insurance proceeds to Lessee at such time as Lessee either (i) provides Lessor
satisfactory proof that the damage has been repaired and the Equipment has been
restored to good working order and condition or (ii) pays to Lessor the Casualty
Loss Value. It is understood and agreed that any payments made by Lessee or its
insurance carrier for loss or damage of any kind whatsoever to the Equipment are
not made as accelerated rental payments or adjustments of rental, but are made
solely as indemnity to Lessor for loss or damage of its Equipment.
14. ENFORCEMENT OF WARRANTIES
Upon receipt of a written request from Lessee, Lessor shall, so long as
this Lease Agreement is in force, take all reasonable action requested by Lessee
to enforce the Equipment manufacturer's warranties, expressed or implied, issued
on or applicable to the Equipment, which are enforceable by Lessor in its own
name. Lessor shall obtain for Lessee all service furnished by manufacturer in
connection therewith; provided, however, that Lessor shall not be required to
commence any suit or action or resort to litigation to enforce any such warranty
unless Lessee shall first pay to Lessor in advance all expenses in connection
therewith, including attorneys' fees.
If any such warranty shall be enforceable by Lessee in its own name, Lessee
shall, upon receipt of written request from Lessor, so long as this Lease
Agreement is in force, take all reasonable action requested by Lessor to enforce
any such warranty which is enforceable by Lessee in its own name; provided,
however, that Lessee shall not be obligated to commence any suit or action or
resort to litigation to enforce any such warranty unless Lessor shall pay all
expenses in connection therewith.
15. WARRANTIES, DISCLAIMERS AND INDEMNITY
Lessor warrants that at the time the Equipment is delivered to Lessee,
Lessor will have full right, power and authority to lease the Equipment to
Lessee. EXCEPT FOR THE WARRANTY IN THE SENTENCE DIRECTLY PRECEDING THIS ONE, THE
LESSOR DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING THE
WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. LESSEE
ACKNOWLEDGES THAT IT IS NOT RELYING ON LESSOR'S SKILL OR JUDGEMENT TO SELECT OR
FURNISH GOODS SUITABLE FOR ANY PARTICULAR PURPOSE AND THAT THERE ARE NO
WARRANTIES CONTAINED IN THIS LEASE AGREEMENT. LESSOR SHALL NOT BE LIABLE FOR
DAMAGES, INCLUDING SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE PERFORMANCE OF THE EQUIPMENT OR ITS USE BY LESSEE, AND
SHALL NOT BE LIABLE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
OUT OF OR IN CONNECTION WITH LESSOR'S FAILURE TO PERFORM ITS OBLIGATION
HEREUNDER. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM
COMMERCIAL CODE WILL BE CONFERRED ON LESSEE.
Lessee agrees that Lessor shall not be liable to Lessee for, and Lessee shall
indemnify, defend and hold Lessor harmless with respect to, any claim from a
third party for any liability, claim, loss, damage or expense of any kind or
nature, whether based upon a theory of strict liability or otherwise, caused,
directly or indirectly, by: (i) the inadequacy of any item of Equipment,
including software, for any purpose; (ii) any
Page Number 3 of 6 Winthrop Resources Corporation
<PAGE>
deficiency or any latent or other defects in any Equipment, including software,
whether or not detectable by Lessee; (iii) the selection, manufacture,
rejection, ownership, lease, possession, maintenance, operation, use or
performance of any item of Equipment, including software; (iv) any interruption
or loss of service, use or performance of any item of Equipment, including
software; (v) patent, trademark or copyright infringement; or (vi) any loss of
business or other special, incidental or consequential damages whether or not
resulting from any of the foregoing. Lessee's duty to defend and indemnify
Lessor shall survive the expiration, termination, cancellation or assignment of
this Lease Agreement or a Lease Schedule and shall be binding upon Lessee's
successors and permitted assigns.
16. EVENT OF DEFAULT
The occurrence of any of the following events shall constitute an Event
of Default under this Lease Agreement and/or any Lease Schedule:
(1) the nonpayment by Lessee of any Lease Charges when due, or the
nonpayment by Lessee of any other sum required hereunder to be
paid by Lessee which non-payment continues for a period of ten
(10) days from the date when due;
(2) the failure of Lessee to perform any other term, covenant or
condition of this Lease Agreement, any Lease Schedule or any
other document, agreement or instrument executed pursuant hereto
or in connection herewith which is not cured within ten (10) days
after written notice thereof from Lessor;
(3) Lessee attempts to or does remove, transfer, sell, swap, assign,
sublease, trade, exchange, encumber, receive an allowance or
credit for, or part with possession of, any item of Equipment;
(4) Lessee ceases doing business as a going concern, is insolvent,
makes an assignment for the benefit of creditors, fails to pay
its debts as they become due, offers a settlement to creditors or
calls a meeting of creditors for any such purpose, files a
voluntary petition in bankruptcy, is subject to an involuntary
petition in bankruptcy, is adjudicated bankrupt or insolvent,
files or has filed against it a petition seeking any
reorganization, arrangement or composition, under any present or
future statute, law or regulation.
(5) any of Lessee's representations or warranties made herein or on
any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or
misleading in any material respect:
(6) Lessee defaults under or otherwise has accelerated any material
obligation, credit agreement, loan agreement, conditional sales
contract, lease, indenture or debenture; or Lessee defaults under
any other agreement now existing or hereafter made with Lessor;
or
(7) the breach or repudiation by any party thereto of any guaranty,
subordination agreement or other agreement running in favor of
Lessor obtained in connection with this Lease Agreement.
17. REMEDIES
Should any Event of Default occur and be continuing, Lessor may, in
order to protect its interests and reasonably expected profits, with or without
notice or demand upon Lessee, pursue and enforce, alternatively, successively
and/or concurrently, any one or more of the following remedies:
(1) recover from Lessee all accrued and unpaid Lease Charges and
other amounts due and owing on the date of the default;
(2) recover from Lessee from time to time all Lease Charges and other
amounts as and when becoming due hereunder;
(3) accelerate, cause to become immediately due and recover the
present value of all Lease Charges and other amounts due and/or
likely to become due hereunder from the date of the default to
the end of the lease term using a discount rate of six (6%)
percent;
(4) cause to become immediately due and payable and recover from
Lessee the Casualty Loss Value of the Equipment:
(5) terminate any or all of the Lessee's rights, but not its
obligations, associated with the lease of Equipment under this
Lease Agreement;
(6) retake (by Lessor, independent contractor, or by requiring Lessee
to assemble and surrender the Equipment in accordance with the
provisions of Section 7 hereinabove) possession of the Equipment
without terminating the Lease Schedule or the Lease Agreement
free from claims by Lessee which claims are hereby expressly
waived by Lessee;
(7) require Lessee to deliver the Equipment to a location designated
by Lessor;
(8) proceed by court action to enforce performance by Lessee of its
obligations associated with any Lease Schedule and/or this Lease
Agreement; and/or
(9) pursue any other remedy Lessor may otherwise have, at law, equity
or under any statute, and recover damages and expenses (including
attorneys' fees) incurred by Lessor by reason of the Event of
Default.
Upon repossession of the Equipment, Lessor shall have the right to
lease, sell or otherwise dispose of such Equipment in a commercially reasonable
manner, with or without notice, at a public or private sale, and apply the net
proceeds thereof to the amounts owed by Lessee hereunder. For purposes of this
paragraph, net proceeds shall mean either: (i) the present value of the Monthly
Lease Charges to be received under the new lease using a term not to exceed the
remaining number of months in the Initial Term of the Lease Schedule in default
and a discount rate of twelve (12%) percent; or (ii) the amount received in cash
upon the sale of the Equipment, less, in either event, all expenses incurred by
or for Lessor in connection with such lease or sale, including, but not limited
to, reconditioning and removal expenses, repair costs, commissions and
attorneys' fees. If the net proceeds are not enough to satisfy all of the
amounts owed by Lessee hereunder, Lessee shall remain liable to Lessor for any
deficiency. Lessor's pursuit and enforcement of any one or more remedies shall
not be deemed an election or waiver by Lessor of any other remedy. Lessor shall
not be obligated to sell or re-lease the Equipment. Any sale or re-lease may be
held at such place or places as are selected by Lessor, with or without having
the Equipment present. Any such sale or re-lease, may be at wholesale or retail,
in bulk or in parcels. Time and exactitude of each of the terms and conditions
of this Lease Agreement are hereby declared to be of the essence. Lessor may
accept past due payments without modifying the terms of
Page Number 4 of 6 Winthrop Resources Corporation
<PAGE>
this Lease Agreement and without waiving any rights of Lessor hereunder.
18. COSTS AND ATTORNEYS' FEES
In the event of any default, claim, proceeding, including a bankruptcy
proceeding, arbitration, mediation, counter-claim, action (whether legal or
equitable), appeal or otherwise, whether initiated by Lessor or Lessee (or a
debtor-in-possession or bankruptcy trustee), which arises out of, under, or is
related in any way to this Lease Agreement, any Lease Schedule, or any other
document, agreement or instrument executed pursuant hereto or in connection
herewith, or any governmental examination or investigation of Lessee which
requires Lessor's participation (individually and collectively, the "Claim"),
Lessee, in addition to all other sums which Lessee may be called upon to pay
under the provisions of this Lease Agreement, shall pay to Lessor, on demand,
all costs, expenses and fees paid or payable in connection with the Claim,
including, but not limited to, attorneys' fees and out-of-pocket costs,
including travel and related expenses incurred by Lessor or its attorneys.
19. LESSOR'S PERFORMANCE OPTION
Should Lessee fail to make any payment or to do any act as provided by
this Lease Agreement, then Lessor shall have the right (but not the obligation),
without notice to Lessee of its intention to do so and without releasing Lessee
from any obligation hereunder to make or to do the same, to make advances to
preserve the Equipment or Lessor's title thereto, and to pay, purchase, contest
or compromise any insurance premium, encumbrance, charge, tax, lien or other sum
which in the judgment of Lessor appears to affect the Equipment, and in
exercising any such rights, Lessor may incur any liability and expend whatever
amounts in its absolute discretion it may deem necessary therefor. All sums so
incurred or expended by Lessor shall be due and payable by Lessee within ten
(10) days of notice thereof.
20. QUIET POSSESSION AND INSPECTION
Lessor hereby covenants with Lessee that Lessee shall quietly possess
the Equipment subject to and in accordance with the provisions hereof so long as
Lessee is not in default hereunder; provided, however, that Lessor or its
designated agent may, at any and all reasonable times during business hours,
enter Lessee's premises for the purposes of inspecting the Equipment and the
manner in which it is being used.
21. ASSIGNMENTS
This Lease Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. Lessee, however,
shall not assign this Lease Agreement or sublet any of the Equipment without
first obtaining the prior written consent of Lessor and its assigns, if any.
Lessee acknowledges that the terms and conditions of this Lease Agreement have
been fixed in anticipation of the possible assignment of Lessor's rights under
this Lease Agreement and in and to the Equipment as collateral security to a
third party ("Assignee" herein) which will rely upon and be entitled to the
benefit of the provisions of this Lease Agreement. Lessee agrees to provide
Lessor or its potential assigns with Lessee's most recent audited and its most
current financial statements. Lessee agrees with Lessor and such Assignee to
recognize in writing any such assignment within fifteen (15) days after receipt
of written notice thereof and to pay thereafter all sums due to Lessor hereunder
directly to such Assignee if directed by Lessor, notwithstanding any defense,
set-off or counterclaim whatsoever (whether arising from a breach of this Lease
Agreement or not) that Lessee may from time to time have against Lessor. Upon
such assignment, the Lessor shall remain obligated to perform any obligations it
may have under this Lease Agreement and the Assignee shall (unless otherwise
expressly agreed to in writing by the Assignee) have no obligation to perform
such obligations. Any such assignment shall be subject to Lessee's rights to use
and possession of the Equipment so long as Lessee is not in default hereunder.
22. SURVIVAL OF OBLIGATIONS
All covenants, agreements, representations, and warranties contained in
this Lease Agreement, any Lease Schedules, or in any document attached thereto,
shall be for the benefit of Lessor and Lessee and their successors, any assignee
or secured party and shall survive the execution and delivery of this Lease
Agreement and the expiration or other termination of this Lease Agreement.
23. CORPORATE AUTHORITY
The parties hereto covenant and warrant that the persons executing this
Lease Agreement and each Lease Schedule on their behalf have been duly
authorized to do so, and this Lease Agreement and any Lease Schedule constitute
a valid and binding obligation of the parties hereto. The Lessee will, if
requested by Lessor, provide to Lessor Certificates of Authority naming the
officers of the Lessee who have the authority to execute this Lease Agreement
and any Lease Schedules attached thereto.
24. LANDLORDS' AND MORTGAGEES' WAIVER
If requested, Lessee shall furnish waivers, in form and substance
satisfactory to Lessor, from all landlords and mortgagees of any premises upon
which any Equipment is located.
25. MISCELLANEOUS
This Lease Agreement, the Lease Schedule(s), attached riders and any
documents or instruments issued or executed pursuant hereto will have been made,
executed and delivered in, and shall be governed by the internal laws (as
opposed to conflicts of law provisions) and decisions of, the State of
Minnesota. Lessee and Lessor consent to jurisdiction of any local, state or
federal court located within Minnesota. Venue shall be in Minnesota and Lessee
hereby waives local venue and any objection relating to Minnesota being an
improper venue to conduct any proceeding relating to this Lease Agreement. At
Lessor's sole election and determination, Lessor may select an alternative
forum, including arbitration or mediation, to adjudicate any dispute arising out
of this Lease Agreement.
This Lease Agreement was jointly drafted by the parties and the parties
hereby agree that neither should be favored in the construction, interpretation
or application of any provision or any ambiguity. This Lease Agreement and
associated Lease Schedule(s) constitute the entire agreement between Lessor and
Lessee with respect to the lease of the Equipment superseding all prior
correspondence between the parties. No provision of this Lease Agreement or any
Lease Schedule shall be deemed waived, amended or modified by either party
unless such waiver, amendment or modification is in writing and signed by each
of the parties hereto. If any one or more of the provisions of this Lease
Agreement or any Lease Schedule is for any reason held invalid, illegal or
unenforceable, the remaining provisions of this
Page Number 5 of 6 Winthrop Resources Corporation
<PAGE>
Lease Agreement and any such Lease Schedule will be unimpaired, and the invalid,
illegal or unenforceable provisions shall be replaced by a mutually acceptable
valid, legal and enforceable provision that is closest to the original intention
of the parties. Lessee agrees that neither the manufacturer, nor the supplier,
nor any of their salespersons, employees or agents are agents of Lessor.
Any notice provided for herein shall be in writing and sent by certified or
registered mail to the parties at the addresses stated on page 1 of this Lease
Agreement.
This Lease Agreement shall not become effective until delivered to Lessor at
its offices at Minnetonka, Minnesota and executed by Lessor. If this Lease
Agreement shall be executed by Lessor prior to being executed by Lessee, it
shall become void at Lessor's option five (5) days after the date of Lessor's
execution hereof, unless Lessor shall have received by such date a copy hereof
executed by a duly authorized representative of Lessee.
This Lease Agreement is made subject to the terms and conditions included
herein and Lessee's acceptance is effective only to the extent that such terms
and conditions are consistent with the terms and conditions herein. Any
acceptance which contains terms and conditions which are in addition to or
inconsistent with the terms and conditions herein will be a counter-offer and
will not be binding unless agreed to in writing by Lessor.
The terms used in this Lease Agreement, unless otherwise defined, shall have
the meanings ascribed to them in the Lease Schedule(s).
26. REPOSSESSION
LESSEE ACKNOWLEDGES THAT, PURSUANT TO SECTION 17 HEREOF, LESSOR HAS BEEN
GIVEN THE RIGHT TO REPOSSESS THE EQUIPMENT SHOULD LESSEE BECOME IN DEFAULT OF
ITS OBLIGATIONS HEREUNDER. LESSEE HEREBY WAIVES THE RIGHT, IF ANY, TO REQUIRE
LESSOR TO GIVE LESSEE NOTICE AND A JUDICIAL HEARING PRIOR TO EXERCISING SUCH
RIGHT OF REPOSSESSION.
27. NET LEASE
This Lease Agreement is a net lease and Lessee's obligations to pay all
Lease Charges and other amounts payable hereunder shall be absolute and
unconditional and, except as expressly provided herein, shall not be subject to
any: (i) delay, abatement, reduction, defense, counterclaim,. set-off, or
recoupment; (ii) discontinuance or termination of any license: (iii) Equipment
failure, defect or deficiency; (iv) damage to or destruction of the Equipment;
or (v) dissatisfaction with the Equipment or otherwise, including any present or
future claim against Lessor or the manufacturer, supplier, reseller, vendor of
the Equipment. To the extent that the Equipment includes intangible (or
intellectual) property, Lessee understands and agrees that: (i) Lessor is not a
party to and does not have any responsibility under any software license and/or
other agreement with respect to any software; and (ii) Lessee will be
responsible to pay all of the Lease Charges and perform all its other
obligations under this Lease Agreement despite any defect, deficiency, failure,
termination, dissatisfaction, damage or destruction of any software or software
license. Except as expressly provided herein, this Lease Agreement shall not
terminate for any reason, including any defect in the Equipment or Lessor's
title thereto or any destruction or loss of use of any item of Equipment.
28. Headings
Section headings herein are used for convenience only and shall not
otherwise affect the provisions of this Lease Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Lease Agreement to be
signed by their respective duly authorized representative.
Every Term is Agreed to and Accepted: Every Term is Agreed to and Accepted:
WINTHROP RESOURCES CORPORATION TAB PRODUCTS CO.
-------------------------------------
By: /s/ Paul L. Gendler By: /s/ David J. Davis
----------------------------------- ----------------------------------
Print Print
Name: Paul L. Gendler Name: David J. Davis
----------------------------------- -------------------------------
Title: Senior Vice President Title: SVP Operations & CFO
----------------------------------- ------------------------------
Date: 2-3-99 Date: 2-2-99
----------------------------------- --------------------------------
Page Number 6 of 6 Winthrop Resources Corporation
<PAGE>
MASTER LEASE SCHEDULE A
This Lease Schedule is issued pursuant to the Lease Agreement Number TA012999
dated January 29, 1999. The terms of the Lease Agreement and serial numbers
contained on Certificates of Acceptance are a part hereof and are incorporated
by reference herein.
LESSOR LESSEE
Winthrop Resources Corporation Tab Products Co.
1015 Opus Center 1400 Page Mill Rd.
9900 Bren Road East Palo Alto, CA 94304
Minnetonka, MN 55343
SUPPLIER OF EQUIPMENT LOCATION OF EQUIPMENT
Term of Lease from Commencement Date: 36 Months
Monthly Lease Charge: $14,999.00
Anticipated Delivery and Installation: February 1999 through July 1999
Security Deposit: Upon Lessee's execution of this Lease Schedule, Lessee shall
deliver a security deposit in the amount of 7,500.00 If there is no event of
default, this security deposit will be applied toward the total Lease charges
associated with the last month of this Lease Schedule.
EQUIPMENT
MANUFACTURER QTY MACHINE/MODEL EQUIPMENT DESCRIPTION (including features)
Dell/Compaq PCS
Dell/Compaq Servers
3COM Routers/Hubs
Monthly Lease Schedules will be used to phase in the Equipment listed above and
will be adjusted for final costs and configurations. The Monthly Lease Charge
will be prorated and charged as interim rent between the date an item of
equipment is accepted and the Commencement Date.
Agreed to and Accepted: Agreed to and Accepted:
WINTHROP RESOURCES CORPORATION TAB PRODUCTS CO.
"LESSOR" "LESSEE"
By: /s/ Paul L. Gendler By: /s/ David Davis
------------------------------------ ----------------------------
Print Print
Name: Paul L. Gendler Name: David Davis
---------------------------------- --------------------------
Title: Senior Vice President Title: Sr. VP & CFO
--------------------------------- -------------------------
Date: 2-3-99 Date: 2-2-99
---------------------------------- --------------------------
<PAGE>
Rider Number: 001
Lease Agreement Number: TA012999
Master Lease Schedule: ALL
Lessee Name: Tab Products Co.
Lease Dated: January 29,1999
INTEREST RATE FLUCTUATION
This lease is intended to be a fixed rate lease from commencement date to the
end of the term. The three year treasury rate is an integral part of the lease
rate in this lease. The Lessee and Lessor agree that the lease rate shall be
fixed for the interim period and that should the three year treasury note
increase between the execution date of this Agreement and commencement date, the
lease rate will be adjusted accordingly and will then be fixed for the term of
the lease.
Agreed to and Accepted: Agreed to and Accepted:
WINTHROP RESOURCES CORPORATION TAB PRODUCTS CO.
"LESSOR" "LESSEE"
By: /s/ Paul L. Gendler By: /s/ David Davis
----------------------------------- ----------------------------
Print Print
Name: Paul L. Gendler Name: David Davis
--------------------------------- --------------------------
Title: Senior Vice President Title: Sr. VP & CFO
-------------------------------- -------------------------
Date: 2-3-99 Date: 2-2-99
--------------------------------- --------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 5,710
<SECURITIES> 2,977
<RECEIVABLES> 29,297
<ALLOWANCES> 977
<INVENTORY> 9,422<F1>
<CURRENT-ASSETS> 52,154
<PP&E> 62,301
<DEPRECIATION> 42,837
<TOTAL-ASSETS> 75,751
<CURRENT-LIABILITIES> 22,408
<BONDS> 6,531
0
0
<COMMON> 46,485
<OTHER-SE> (3,010)
<TOTAL-LIABILITY-AND-EQUITY> 75,751
<SALES> 95,445
<TOTAL-REVENUES> 117,975
<CGS> 55,302
<TOTAL-COSTS> 72,788
<OTHER-EXPENSES> 43,864
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 559
<INCOME-PRETAX> 764
<INCOME-TAX> 400
<INCOME-CONTINUING> 364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 364
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1> Inventory detail at February 28, 1999 was finished goods $4,739; work in
process $572; raw materials $4,111.
</FN>
</TABLE>
