<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarter period ended
August 31, 2000
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.)
2130 GOLD STREET, P.O. BOX 649061
SAN JOSE, CALIFORNIA 95164-9061
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 586-1600
(REGISTRANT'S TELEPHONE NUMBER - INCLUDING AREA CODE)
NOT APPLICABLE
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding, as
of August 31, 2000 - 5,120,147.
This report, including all exhibits and attachments, contains 19 pages.
<PAGE>
TAB PRODUCTS CO.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ITEM 1 FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets
August 31, 2000 and May 31, 2000 3
Consolidated Condensed Statements of Earnings
Three months ended August 31, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows
Three months ended August 31, 2000 and 1999 5
Supplemental Financial Data - Notes 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosure About Market Risks 16
PART II. OTHER INFORMATION
ITEM 6 Exhibits 17
Signatures 18
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
2000 2000
------------------------ ------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,212 $ 5,724
Short-term investments 4,104 5,170
Accounts receivable, less allowances of
$1,184 and $1,095 for doubtful accounts 24,323 29,685
Inventories 6,824 6,842
Prepaid income taxes and other expenses 7,120 3,837
------------------------ ------------------------
TOTAL CURRENT ASSETS
46,583 51,258
------------------------ ------------------------
Property, plant and equipment, net of accumulated
depreciation of $29,548 and $28,845 11,266 12,253
Goodwill, net 7,094 7,387
Other assets 2,491 2,395
------------------------ ------------------------
TOTAL ASSETS $ 67,434 $ 73,293
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,817 $ 10,024
Compensation payable 1,699 2,911
Other accrued liabilities 5,954 6,099
------------------------ ------------------------
TOTAL CURRENT LIABILITIES 16,470 19,034
------------------------ ------------------------
Deferred taxes and other non-current liabilities 1,501 1,579
------------------------ ------------------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK: $.01 par value, authorized
500,000 shares, issued-none - -
COMMON STOCK: $.01 par value, authorized
25,000,000 shares, issued-August 2000 and May 2000-
7,611,116 shares 76 76
Additional paid-in capital 14,541 15,286
Stock subscriptions-notes receivable (695) (1,374)
Retained earnings 67,381 70,573
TREASURY STOCK: August 2000-2,490,969 shares
and May 2000-2,404,027 shares (31,036) (31,164)
Accumulated other comprehensive loss (804) (717)
------------------------ ------------------------
TOTAL STOCKHOLDERS' EQUITY 49,463 52,680
------------------------ ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,434 $ 73,293
======================== ========================
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
(000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------------------------------
2000 1999
----------------------- -------------------------
<S> <C> <C>
Revenues $ 29,725 $ 31,994
----------------------- -------------------------
COSTS AND EXPENSES:
Cost of revenues 19,273 19,244
Selling, general and administrative 14,993 13,657
Research and development 197 193
----------------------- -------------------------
TOTAL COSTS AND EXPENSES 34,463 33,094
----------------------- -------------------------
OPERATING LOSS (4,738) (1,100)
Gain on sale of Field Service Group - 13,794
Interest income (expense), net, and other 113 (143)
----------------------- -------------------------
(Loss) earnings before income taxes (4,625) 12,551
(Benefit) provision for income taxes (1,694) 5,271
----------------------- -------------------------
NET (LOSS) EARNINGS $ (2,931) $ 7,280
======================= =========================
Basic net (loss) earnings per share $ (.56) $ 1.45
======================= =========================
Shares used in computing basic
net (loss) earnings per share 5,206,313 5,026,473
======================= =========================
Diluted net (loss) earnings per share $ (.56) $ 1.44
======================= =========================
Shares used in computing diluted
net (loss) earnings per share 5,206,313 5,049,046
======================= =========================
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-------------------------------------------------
2000 1999
----------------------- ------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) earnings $ (2,931) $ 7,280
ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO NET CASH
REQUIRED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,086 1,118
Deferred income taxes and other 242 -
Gain on sale of Field Service Group - (8,001)
Changes in operating assets and liabilities:
Accounts receivable, net 5,379 1,137
Inventories 21 (522)
Prepaid income taxes and other expenses (3,529) (1,497)
Other assets (94) 663
Accounts payable (1,218) (163)
Compensation payable (1,160) (584)
Other accrued liabilities (224) (493)
----------------------- ------------------------
NET CASH REQUIRED BY OPERATING ACTIVITIES (2,428) (1,062)
----------------------- ------------------------
INVESTING ACTIVITIES:
Sale of Field Service Group - 13,405
Purchase of property, plant and equipment, net (134) (486)
Purchases of short-term investments (1,487) (1,820)
Sales of short-term investments 2,553 991
----------------------- ------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 932 12,090
----------------------- ------------------------
FINANCING ACTIVITIES:
Repayment of long-term debt - (81)
Cash restricted to collateralize loan - (6,625)
Proceeds from issuance of common stock 62 -
Repurchase of Treasury Stock - (22)
Dividends paid (256) (251)
----------------------- ------------------------
NET CASH REQUIRED BY FINANCING ACTIVITIES (194) (6,979)
----------------------- ------------------------
Effect of exchange rate changes on cash 178 17
----------------------- ------------------------
Increase (decrease) in cash and cash equivalents (1,512) 4,066
Cash and cash equivalents at beginning of period 5,724 6,972
----------------------- ------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,212 $ 11,038
======================= ========================
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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, 2000. The results of
operations for the three-month period ended August 31, 2000 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending May 31, 2001. The May 31, 2000 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>
AUGUST 31, 2000 MAY 31, 2000
--------------- ------------
<S> <C> <C>
Finished goods $ 2,211 $ 2,164
Work in process 297 273
Raw materials 4,316 4,405
------------ ------------
$ 6,824 $ 6,842
============ ============
</TABLE>
3. DIVIDENDS
Dividends declared for the three month periods ended August 31, 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
RECORD DATE SHARES OUTSTANDING DIVIDEND PER SHARE
----------- ------------------ ------------------
<S> <C> <C>
Fiscal 2001:
August 25, 2000 5,120,147 $0.05
Fiscal 2000:
August 25, 1999 5,024,589 $0.05
</TABLE>
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
4. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or chief decision making group, in deciding
how to allocate resources and in assessing performance. The Chief Executive
Officer is the Company's chief decision maker. The Company operates and is
managed internally by four geographic operating segments. The operating segments
include United States, Canada, the Netherlands and Australia. Each operating
segment has a general manager that reports to the Chief Executive Officer.
Information about segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-------------------------------------------------
2000 1999
----------------------- ------------------------
<S> <C> <C>
Revenues:
United States $ 22,772 $ 25,760
Canada 4,961 4,144
Netherlands 972 977
Australia 1,020 1,113
----------------------- ------------------------
Consolidated Total $ 29,725 $ 31,994
======================= ========================
Income (Loss) before income taxes:
United States $ (4,922) $ 12,722
Canada 188 (216)
Netherlands 92 55
Australia 17 (10)
----------------------- ------------------------
Consolidated Total $ (4,625) $ 12,551
======================= ========================
Depreciation and amortization:
United States $ 987 $ 980
Canada 72 109
Netherlands 15 17
Australia 12 12
----------------------- ------------------------
Consolidated Total $ 1,086 $ 1,118
======================= ========================
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 2000 MAY 31, 2000
----------------------- ------------------------
<S> <C> <C>
Long-lived assets:
United States $ 12,830 $ 13,585
Canada 583 733
Netherlands 121 151
Australia 223 179
----------------------- ------------------------
Consolidated Total $ 13,757 $ 14,648
======================= ========================
</TABLE>
Geographic revenues are based on the country from which customers are invoiced.
Income before tax is net sales less operating expenses, interest or other
expenses, but prior to income taxes.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
5. NET (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share is computed by dividing net (loss)
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 (loss) earnings per share for the quarters ended August 31,
2000 and 1999, respectively, are calculated as follows (in thousands, except
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------------------------------
2000 1999
----------------------- -------------------------
<S> <C> <C>
NET (LOSS) EARNINGS $ (2,931) $ 7,280
======================= =========================
BASIC:
Weighted average common shares
outstanding used in computing
basic net earnings per share 5,206,313 5,026,473
======================= =========================
BASIC NET (LOSS) EARNINGS PER SHARE $ (.56) $ 1.45
======================= =========================
DILUTED:
Weighted average common shares
outstanding 5,206,313 5,026,473
Dilutive options outstanding - 22,573
----------------------- -------------------------
Shares used in computing diluted
net earnings per share 5,206,313 5,049,046
======================= =========================
DILUTED NET (LOSS) EARNINGS PER SHARE $ (.56) $ 1.44
======================= =========================
</TABLE>
6. COMPREHENSIVE INCOME
The components of comprehensive (loss) income, net of tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------------------------------------
2000 1999
----------------------- -------------------------
<S> <C> <C>
Net (loss) earnings $ (2,931) $ 7,280
Foreign currency translation (87) 27
----------------------- -------------------------
Comprehensive (loss) income $ (3,018) $ 7,307
======================= =========================
</TABLE>
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
Accumulated other comprehensive loss, net of tax, presented on the accompanying
consolidated condensed balance sheets consists of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, 2000 MAY 31, 2000
------------------------ ------------------------
<S> <C> <C>
Foreign currency translation $ (804) $ (717)
======================== ========================
</TABLE>
7. STOCK REPURCHASE
In July 1999, the Company authorized the repurchase of up to 300,000
shares of Common Stock from time to time at prevailing market prices. The
authorization was effective until July 2000. During fiscal 2000 the Company
repurchased 33,100 shares of Common Stock under the repurchase program at a cost
of $218,000. The Company has not extended the authorization of the stock
repurchase program.
8. EVENTS SUBSEQUENT TO AUGUST 31, 2000
The Company has entered into a non-binding letter of intent to sell
unutilized property and a building for $2.9 million subject to due diligence
and finalization of a definitive agreement.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
Company anticipates that the adoption of SFAS No. 133 will not have a material
impact on its financial position, results of operations or cash flows. The
Company will adopt SFAS No. 133 in its first fiscal quarter of 2002.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion 20, Accounting Changes. Subsequently, SAB No. 101A and
101B were issued to delay the implementation of SAB No. 101. It will be
effective in the Company's fourth quarter of fiscal 2001. The Company is
currently evaluating the impact, if any, SAB No. 101 will have on its financial
position or results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report, including without limitation the following section
regarding Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding the Company and its
business, financial condition, results of operations and prospects. Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"foreseeable," "estimates," and similar expressions or variations of such words
are intended to identify forward-looking statements, but are not the exclusive
means of identifying forward-looking statements in this report. Additionally,
statements concerning future matters such as the development of new products,
enhancements or technologies, possible changes in legislation and other
statements regarding matters that are not historical are forward-looking
statements.
Although forward-looking statements in this report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
in "Business Environment and Risk Factors" as well as those discussed elsewhere
in this report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report, which attempt to advise interested parties of the
risks and factors that may affect the Company's business, financial condition,
results of operations and prospects.
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements of the Company.
FINANCIAL CONDITION
At August 31, 2000 the Company had cash and short-term investments of
$8.3 million, a decrease of $2.6 million from the $10.9 million at May 31, 2000.
The Company's working capital position at August 31, 2000 was $30.1 million as
compared with $32.2 million at May 31, 2000. The current ratio of 2.8 at August
31, 2000 was higher than the current ratio of 2.7 reported for May 31, 2000.
The decrease in cash and working capital are the result of the payment of
liabilities assumed as a result of the Docucon acquisition, which closed on May
25, 2000, and the payment of compensation accrued in the prior year. Offsetting
the decrease in cash was an accounts receivable decrease of $5.4 million from
$29.7 million on May 31, 2000 to $24.3 million on August 31, 2000. Inventories
at August 31, 2000 and at May 31, 2000 were unchanged at $6.8 million.
Pursuant to the Agreement for Purchase and Sale of Assets (the
"Agreement"), by and between the Company and Bell & Howell Document Management
Products Company, a wholly-owned subsidiary of Bell & Howell Company ("Bell &
Howell"), the Company sold its Field Service Group to Bell & Howell. The
Company's Field Service Group consisted of assets that include existing service
contracts and certain related tangible and intangible assets and certain
liabilities. The price of the Purchased Assets, as defined in the Agreement,
consisted of an initial cash payment from Bell & Howell to the Company of
$11,200,000, the assumption of liabilities and obligations of the Company valued
at an estimated $4,300,000 and up to an additional $3,500,000 payable to the
Company subject to certain adjustments for changes in certain accounts
attributable to the Field Service Group. The sale was effective as of June 1,
1999. In connection with the sale the Company recorded a pre-tax gain on sale of
$13.8 million in the first quarter of fiscal year 2000.
On June 22, 1999, the Company announced the consolidation of its paper
manufacturing operations to its main plant located in Mayville, Wisconsin. The
Company closed its paper manufacturing facility located in Turlock, California
and transferred the inventory and equipment to Mayville. As a result of the
consolidation, the Company recorded a pre-tax charge of approximately $435,000
in the first quarter of fiscal year 2000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
Other current assets increased $3.3 million from $3.8 million at May
31, 2000 to $7.1 million at August 31, 2000 and other non-current assets
increased $0.1 million from $2.4 million at May 31, 2000 to $2.5 million at
August 31, 2000 primarily due to an increased tax receivable which will be
realized on the carryback of current operating losses to prior years. Current
liabilities decreased $2.5 million from $19.0 million at May 31, 2000 to $16.5
million at August 31, 2000. Significant transactions which affected current
liabilities included the payment of accrued liabilities assumed as a result of
the Docucon acquisition of assets and assumption of liabilities and by the
payment of compensation accrued in the prior year.
Investments in property, plant and equipment, which were primarily
focused on enterprise management information systems and associated
infrastructure investments, were $0.1 million for the three months ended August
31, 2000. Capital expenditures to support operations for fiscal 2001 are
expected to total approximately $0.6 million.
In July 1999, the Company authorized the repurchase of up to 300,000
shares of Common Stock from time to time at prevailing market prices. The
authorization was effective until July 2000. During fiscal 2000 the Company
repurchased 33,100 shares of Common Stock under the Company's authorized
repurchase program at a cost of $218,000. The Company has not extended the
authorization of the stock repurchase program.
For the three month period ended August 31, 2000, the Company paid cash
dividends of $256,000, and for the three month period ended August 31, 1999, the
Company paid cash dividends of $251,000.
The Company currently has no outstanding debt. The Company's
unsecured $5 million revolving line of credit was terminated as of June 22,
2000. The Company has received and signed a commitment letter from a bank for
a $5 million secured line of credit. The agreement will be finalized upon
completion of customary bank due diligence. The Company believes that its
cash and borrowing capacity will provide sufficient working capital for the
next twelve months.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
REVENUES for the first quarter of fiscal 2001 amounted to $29.7
million, down $2.3 million or 7.2% from $32.0 million revenue for the first
quarter of fiscal 2000. The decline is primarily related to a decrease in the
sales of filing supplies and file storage equipment only partially offset by
higher U.S. revenue from services and higher revenues from TAB's Canadian
operation.
BACKLOG The Company's order booking to invoice ratio ("book-to-bill
ratio") was 1.1:1.0 for the first three quarters of fiscal 2000, resulting in
a substantial increase in backlog. The ratio dropped to .94:1.0 in the fourth
quarter of fiscal 2000, causing a reduction of backlog. There was a further
small reduction of backlog in the first quarter of fiscal 2001 although the
ratio improved to .98:1.0. There can be no assurance that the Company's
book-to-bill ratio will continue to improve.
COST OF REVENUES, as a percentage of revenues, was 64.8% for the first
quarter of fiscal 2001 as compared to the 60.1% cost of revenues reported in the
first quarter of fiscal 2000 on comparable revenues. Cost of revenues for the
first quarter was $19.3 million as compared to the $19.2 million amount reported
in the comparable quarter of fiscal 2000. The increase in cost of revenues, as a
percentage of revenues, was the result of higher costs of professional services
and higher fixed costs related to imaging services.
OPERATING EXPENSES were $15.2 million or 51.1% of total revenues for
the first quarter of fiscal 2001 as compared to $13.9 million or 43.3% of total
revenues for the first quarter of fiscal 2000. The increase in operating
expenses as a percentage of revenues was primarily due to lower revenues and a
one-time charge of $1.4 million due to the retirement of the Company's Chief
Executive Officer.
INTEREST (EXPENSE) INCOME, NET, AND OTHER was a gain of $0.1 million in
the first quarter of fiscal 2001 as compared to a gain of $13.7 million in the
first quarter of fiscal 2000. The decrease for the three months ended August 31,
2000 was primarily due to the gain on sale of the Field Service Group in the
first quarter of the prior year.
INCOME TAX BENEFIT Net losses for the period ended August 31, 2000 have
been reduced by the amount of tax refunds available from the carryback of net
operating losses to prior years. The effective rate of 36.6% for the period
ended August 31, 2000 is lower than the effective rate of 42.0% for the prior
year due to limitation on carrybacks by certain states.
EARNINGS (LOSS) PER SHARE for the three months ended August 31, 2000
was a loss of $.56 per share for both basic and diluted shares, respectively,
compared to a gain of $1.45 per share for basic and a gain of $1.44 per share
for diluted shares for the three months ended August 31, 1999.
EVENTS SUBSEQUENT TO AUGUST 31, 2000
The Company has entered into a non-binding letter of intent to sell
unutilized property and a building for $2.9 million subject to due diligence
and finalization of a definitive agreement.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
Company anticipates that the adoption of SFAS No. 133 will not have a material
impact on its financial position, results of operations or cash flows. The
Company will adopt SFAS No. 133 in its first fiscal quarter of 2002.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principal at the time of implementation in accordance with Accounting
Principles Board Opinion 20, Accounting Changes. Subsequently, SAB No. 101A and
101B were issued to delay the implementation of SAB No. 101.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
It will be effective in the Company's fourth quarter of fiscal 2001. The Company
is currently evaluating the impact, if any, SAB No. 101 will have on its
financial position or results of operations.
BUSINESS ENVIRONMENT AND RISK FACTORS
The Company's future operating results may be affected by various
trends and factors, which the Company must successfully manage in order to
achieve favorable operating results. In addition, there are trends and factors
beyond the Company's control, which affect its operations. Such trends and
factors include, but are not limited to, adverse changes in general economic
conditions or conditions in the specific markets for the Company's products,
governmental regulation, fluctuations in foreign exchange rates, and other
factors, including those listed below.
DISTRIBUTION CHANNELS
The Company reaches its North American customers through a broad
distribution system, which currently includes 24 sales branches in the U.S.
and Canada employing approximately 140 account managers who primarily call on
large companies and government agencies. The Company currently also has
approximately 100 U.S. and Canadian independent Channel Partners who
primarily serve medium and smaller size firms. Additional Channel Partners
may be appointed in the future. The Company also maintains a call center to
receive orders by telephone and intends to expand the call center operation
to include outbound solicitation of orders. There can be no assurance that
the Company's distribution system will obtain sufficient orders to return the
Company to profitability.
RETAINING AND ATTRACTING QUALIFIED PERSONNEL
The Company's future performance may depend in significant part upon
attracting and retaining key senior management, sales, manufacturing, marketing
and technical support personnel. Competition for such personnel is intense and
the inability to retain its current key personnel or to attract, assimilate or
retain other highly qualified personnel in the future on a timely basis could
have a material adverse effect on the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN OPERATING RESULTS
Factors affecting the Company's operating results and gross margins
include the volume of product sales, competitive pricing pressures, the ability
of the Company to match supply with demand, changes in product and customer mix,
market acceptance of new or enhanced versions of the Company's products and
services, changes in the channels through which the Company's products and
services are distributed, timing of new product announcements and introductions
by the Company and its competitors, fluctuations in product costs, variations in
manufacturing cycle times, fluctuations in manufacturing utilization, the
ability of the Company to achieve manufacturing volumes with its new and
existing products, increased research and development expenses, exchange rate
fluctuations, a change in the Company's effective tax rate and changes in
general economic conditions. All of these factors are difficult to forecast and
these or other factors can materially affect the Company's quarterly or annual
operating results.
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 lost sales and in lower operating results, if the Company's average selling
prices decrease faster than its costs.
PROFESSIONAL SERVICES
The Company's Professional Services business requires submitting
bids to customers based on estimates of the time and expense needed to meet
various project specifications and deadlines. Failure to estimate accurately
and execute within proper estimates has had a negative impact on our gross
margins and may continue to do so. Management is developing improved systems,
cost controls and management oversight to produce better estimates and
project execution. There can be no assurance that these improvements will be
successful.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
BUSINESS ENVIRONMENT AND RISK FACTORS (CONTINUED)
DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company purchases several critical components from single or sole
source vendors for which alternative sources are not currently developed.
Development of alternative suppliers would require a significant amount of time
to qualify in the case of certain of the Company's components. The Company does
not maintain long-term supply agreements with any of these vendors. The
inability to develop alternative sources for these single or sole source
components or to obtain sufficient quantities of these components could result
in delays or reductions in product shipments, which could adversely affect the
Company's business, financial condition and results of operations.
NEW PROCESSES AND PRODUCTS AND MANUFACTURING VOLUMES
There can be no assurance that the Company's manufacturing facilities
will achieve or maintain acceptable manufacturing volumes in the future. The
inability of the Company to achieve planned volumes from its manufacturing
facilities could have an adverse effect on the Company's business, financial
condition and results of operations. Any problems experienced by the Company in
its current or future transitions to new processes and products or the
consolidation of its manufacturing operations could have a material adverse
effect on the Company's business, financial condition and results of operations.
Recent market research indicates there may be an accelerated move to
digital technologies, such as imaging, by large paper intensive organizations.
This trend could result in a weakening of demand for the Company's paper-based
records management supplies and records storage products. Failure of the Company
to match the changing market with new document management products and services
in the digital arena could materially adversely affect the Company's business,
results of operations, financial condition and prospects.
BACKLOG
The backlog of orders has historically not been a significant factor
in understanding the business of the Company because the order-to-revenue cycle
was typically completed within 30 to 60 days from receipt of an order. In recent
periods, however, the orders obtained by the Company have included a higher
percentage of larger projects with a longer order-to-revenue cycle. Revenue from
product sales is generally recognized upon product shipment. Professional
service projects, some of which include product sales, tend to have a longer
order-to-revenue cycle. The Company's working capital needs have increased to
support the consequently longer order-to-collection cycle. The Company is
currently attempting to achieve a more favorable mix of orders of varying sizes
and types. There can be no assurance that these efforts will be successful.
The Company's order booking to invoicing ratio ("book-to-bill ratio")
was 1.1:1.0 for the first three quarters of fiscal 2000, resulting in a
substantial increase in backlog. The ratio dropped to .94:1.0 in the fourth
quarter of fiscal 2000, causing a reduction of backlog. There was a further
small reduction in backlog in the first quarter of fiscal 2001 although the
ratio improved to .98:1.0. There can be no assurance that the Company's
book-to-bill ratio will continue to improve.
GOVERNMENT SALES
Government revenues primarily expose the Company to risks from
reductions in budget allocations to support regulation and administrative
offices. The current reinventing government initiative opens opportunities to
help the government streamline workflow processes, reduce paperwork and increase
customer service which may provide short-term opportunities for the Company.
However, the long-term effect of a government initiative to streamline processes
could have a negative impact on the Company's business, financial condition and
results of operations.
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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.
EURO CONVERSION
In January 1999, certain member countries of the European Union
established permanent, fixed conversion rates between their existing currencies
and the European Union's common currency (the Euro). The transition period for
the introduction of the Euro is scheduled to phase in over a period ending
January 1, 2002, with the existing currency being completely removed from
circulation on July 1, 2002. The timing of phasing out all uses of the existing
currencies will comply with the legal requirements and also be scheduled to
facilitate optimal coordination with the plans of our vendors, distributors and
customers. Work related to the introduction of the Euro and the phasing out of
the other currencies includes converting information technology systems;
recalculating currency risk; and taking action, if needed, regarding continuity
of contracts; and modifying our processes for preparing tax, accounting, payroll
and customer records. Management believes the introduction of the Euro and the
phasing out of the other currencies will not have a material impact on the
Company's Consolidated Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales accounted for approximately 23% and 19%,
respectively of the Company's total revenues in the first quarter of fiscal 2001
and 2000. 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.
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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 increased its expense levels to support its planned growth
over the last two years. The Company will be focusing on reducing costs since
growth has not materialized as planned. If the cost reduction measures do not
align with the current revenue levels, the Company's business, financial
condition and results of operations will be materially adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is exposed to market risk related to fluctuations in
interest rates and in foreign currency exchange rates.
The Company's exposure to market risk due to fluctuations in interest
rates relates primarily to its short-term investment portfolio, which consists
of corporate debt securities, which are classified as available-for-sale and
were reported at an aggregate fair value of $4.1 million as of August 31, 2000.
These available-for-sale securities are subject to interest rate risk in as much
as their fair value will fall, if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from the levels
prevailing at August 31, 2000, the fair value of the portfolio would not decline
by a material amount. The Company does not use derivative financial instruments
to mitigate the risks inherent in these securities. However, the Company does
attempt to reduce such risks by typically limiting the maturity date of such
securities to no more than nine months, placing its investments with high credit
quality issuers and limiting the amount of credit exposure with any one issuer.
In addition, the Company believes that it currently has the ability to hold
these investments until maturity, and therefore, believes that reductions in the
value of such securities attributable to short-term fluctuations in interest
rates would not materially affect the financial position, results of operations
or cash flows of the Company.
The Company's exposure to market risk due to fluctuations in foreign
currency exchange rates relates primarily to the intercompany balance with its
Australian subsidiary. Although the Company transacts business with various
foreign countries, settlement amounts are usually based on local currency.
Transaction gains or losses have not been significant in the past and there is
no hedging activity on Australian dollars or other currencies. Based on the
intercompany balance of $0.8 million at August 31, 2000, a hypothetical 10%
adverse change in Australian dollars against U.S. dollars would not result in a
material foreign exchange loss. Consequently, the Company does not expect that
reductions in the value of such intercompany balances or of other accounts
denominated in foreign currencies, resulting from even a sudden or significant
fluctuation in foreign exchange rates, would have a direct material impact on
the Company's financial position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of
interest rate and foreign currency exchange rate fluctuations on the value of
certain of the Company's investments and accounts, the indirect effects of such
fluctuations could have a material adverse effect on the Company's business,
financial condition and results of operations. For example, international demand
for the Company's products could be affected by foreign currency exchange rates.
In addition, interest rate fluctuations may affect the buying patterns of the
Company's customers. Furthermore, interest rate and currency exchange rate
fluctuations have broad influence on the general condition of the U.S., foreign
and global economies, which could materially and adversely affect the Company.
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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) 27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed September 22, 2000
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TAB PRODUCTS CO.
(Registrant)
Date: October 13, 2000 /s/ David J. Davis
---------------------------------------
David J. Davis, Senior Vice
President and Chief Financial Officer
Date: October 13, 2000 /s/ William R. Kinzie
---------------------------------------
William R. Kinzie, Corporate
Controller and Chief Accounting Officer
18
