ITEM 1. BUSINESS
GENERAL
Tab Products Co. (the "Company") operates in a single industry that manufactures and markets document management solutions, including services and products. The Company sells its offerings to, among other entities, government, insurance, finance and health care organizations. The Company was incorporated in February, 1954, and subsequently reorganized as a corporation under Delaware law in September, 1986.
BUSINESS STRATEGY
The Company's primary business strategy is to address each client's unique needs in document management utilizing a consultative approach that integrates all services and products into a total systems solution. The Company believes that its extensive knowledge of paper-based systems and document management technology give it an advantage over its competition. Additionally, it possesses a wealth of internal knowledge regarding the individual legal and regulatory requirements of four major industry segments: insurance, government, finance and health care. The Company capitalizes on this knowledge by developing client solutions in those industries.
PRINCIPAL PRODUCTS AND SERVICES
The Company provides solutions--in the form of both services and products--that are designed to help its clients organize, control and find their critical documents. By leveraging its 50 years of expertise in managing paper records and files, the Company effectively supports those clients who wish to integrate their paper-based systems into emerging technologies.
The Company's principal products and services are:
- Multimedia Storage & Furniture
- Records Management Supplies
- Document Management Services
- Document Management Software
- OEM Products
1. MULTIMEDIA STORAGE & FURNITURE
The Company provides both stationary and mobile records storage systems. Mobile shelving systems, combined with expertise in design and implementation, provide the most efficient system for filing and use of storage space. Mobile Products include:
SIDE-TRAC-REGISTERED TRADEMARK---A high-density, custom storage solution with cabinets arranged in two compact rows. The front cabinets glide from side to side on wheels, creating access to the cabinets in back.
TAB-TRAC-REGISTERED TRADEMARK-, POWER-TRAC-TM-, POWER-TRAC IR-TM---High-density, custom storage solutions that place any shelving on tracks to create aisles only where and when they are needed. This eliminates the need for fixed aisles and yields up to 100% greater storage capacity. Based on the client's needs, stored materials are moved either manually or mechanically with TAB-TRAC or electrically with POWER-TRAC. POWER-TRAC IR provides enhanced user safety through the use of infrared technology.
UNISTOR-TM---A cost effective "capsule concept" filing solution designed for the storage of letter and legal size files.
Stationary Products include:
SPACEFINDER-REGISTERED TRADEMARK- CABINETS--Slim, durable and mobile-ready cabinets, appropriate for use when floor space, strength and economy are the key determinants.
HARMONY-TM- CABINETS--A complete line of durable, maximum-capacity, pre-configured cabinets that blend harmoniously into any office environment and can be color-coordinated perfectly with other TAB equipment and furniture.
DESIGNER SERIES-TM- CABINETS--A high-quality, fully customizable cabinet solution that can accept any combination of components, thus offering unlimited flexibility and potential for growth. Designer cabinets are also mobile-ready, making it possible to quickly and easily increase storage density.
TWINFILE-REGISTERED TRADEMARK---A compact, modular, rotating filing unit that provides more linear filing inches per square foot than almost any other filing system.
UNIT SPACEFINDER--A filing system using TAB's "capsule concept," whereby the identification of records is in plain view from any position. Unit Spacefinder requires very little floor space and allows multiple users to access files simultaneously.
OPEN SHELF FILING--An economical, easy-to-assemble shelving system for facilities with limited floor space. Units are available in letter and legal size, with single- or double-faced sections, and are designed to grow with an organization's storage needs.
MODULAR OFFICE FURNITURE--The Company markets a line of modular office furniture components that may be put together in a limitless number of productive configurations. They include office panel systems and clustered workcenters with related components. This product line is directed at the established market for the open office environment.
2. RECORDS MANAGEMENT SUPPLIES
The Company provides a complete line of customizable filing supplies, tailored to fit clients' specific needs, each of which can be used alone or integrated with other TAB products, systems and services. These products include:
CompuColor customized labels based on electronic submission of client data, FilePak, a cost-effective folder-labeling solution when a high degree of customization is not required, end tab folders, roll labels, classification folders, expansion pockets, filing system guides, x-ray jackets, small document pockets, pressure-sensitive pockets and fasteners, oversized pockets with flap, 2-tab folders and mylar-strip folders.
3. DOCUMENT MANAGEMENT SERVICES
The Company's Professional Services organization provides a broad range of integrated service and support programs to fit the specific needs of its clients. These services are offered through the Company's own technical personnel and through its direct management of specialized service suppliers. Services include:
CONSULTING SERVICES--Using a thorough needs-assessment analysis, the Company's consultants work closely with clients to standardize their file structures, retention schedules and workflow processes by analyzing, designing and implementing an efficient records-classification and data-storage system. This increases the clients' productivity and provides significant space savings. TAB's consulting services also help clients design a strategy for implementing imaging systems in their organizations.
FILE-CONVERSION SERVICES--TAB provides full planning and implementation of the process by which clients transform their documents from one medium to another, such as changing from top-tab vertical drawers to side-tab color-code, or from paper to optical-image format. This change is designed to produce a system that is more appropriate for the client's current needs, thus providing a greater degree of efficiency in both storing and locating critical records and documents.
IMAGING SERVICES--Imaging conversions involve the use of integrated technology with an emphasis on the critical documents within the files, a higher level of indexing and access of documents at the desktop. In addition to handling all phases of integration into the chosen technology, it is also necessary to archive the original documents into a traditional hard copy system.
On May 25, 2000 TAB purchased substantially all of the imaging conversion operating assets of Docucon, Inc. (see Financial Condition in the Management's Discussion and Analysis section). This acquisition provides the Company with in-house capabilities and technology to provide imaging conversion services to its customers.
ELECTRONIC DOCUMENT MANAGEMENT SOFTWARE--In April 2000 TAB announced a partnership with Liberty IMS to serve as a value-added reseller (VAR) of the LibertyNet family of software products. The Company will be offering consulting and integration services in addition to the sale of this software.
4. DOCUMENT MANAGEMENT SOFTWARE
The Company's technology-based automated tracking solutions are designed to provide clients full control of all their paper-based records, from the time those records are created through the time they are destroyed. These products include:
FILE TRACKER-REGISTERED TRADEMARK---A barcode-based software system that provides users with information regarding all current location of files. The system consists of File Tracker software, barcode labels and barcode readers, all integrated to provide an easy-to-use, powerful system.
All File Tracker software systems include on-site consultation, customization and training from an experienced document management specialist. A fully-staffed support organization is available through a toll-free number to provide expert advice on all File Tracker issues.
TABQUIK-REGISTERED TRADEMARK- COMPUTERIZED COLOR LABELING SYSTEM--Automated labeling software and a patented application system that provides easy, on-site production and application of custom-printed color labels and barcoding for folders or other media. TABQUIK is a customizable filing solution available in a Windows environment, appropriate for organizations of all sizes, from the small office to the large corporation.
The Company believes that its business is not seasonal.
5. OEM PRODUCTS
FORMS HANDLING EQUIPMENT--The Company manufactures a line of forms handling equipment, including continuous forms bursters, decollators and mergers. The distribution rights for these products have been granted to Bescorp-Registered Trademark- Inc.
The Company also manufactures a full range of high speed mailing systems, including InfoSeal-Registered Trademark-, a high speed mailing system developed in conjunction with Transkrit-Registered Trademark- Corp., which uses a proprietary technique for folding and sealing computer generated mailing pieces. These products are directly marketed and sold by Transkrit Corp.
COMPETITION
Primary competitive factors in these markets are product quality, product design, service and price. The Company believes that its products' quality, high level of service and systems approach to its products and services give it a strong competitive position.
Although no single competitor offers all the same products and services as the Company, TAB faces substantial competition for each of its product lines from nation-wide and regional firms.
MARKETING AND SALES
The Company's products are marketed in the United States, Canada, Europe and Australia through its sales branches, telesales, independent sales offices and distributors. In other geographic areas, products are sold exclusively through independent distributors. The Company is currently pursuing a strategy to refine and expand its distribution channels. The Company has reoriented its direct channel from local distribution centers to sales execution centers and focused them on major accounts. The Company is continuing to expand its call center operations and direct reorder business through this efficient distribution method. The Company has also added new channels of distribution through systems integrators and resellers with the acquisition of the Docucon imaging conversion services operations.
In June 1998, the Company notified its existing independent distributors (indirect channel) that effective June 1, 1999 the existing distributor contract would be canceled. A new contract was offered that eliminated the exclusive territory rights in the existing contract with other material terms and conditions remaining substantially the same. By February 1999, approximately one third of the current independent distributors adopted the new contract. In March 1999, the Company proposed an alternative contract that allowed the independent distributors exclusivity on designated customers, but eliminated exclusivity on a territory basis. The Company believes the removal of exclusivity is crucial to the Company's ability to serve its larger nationwide customers where an independent distributor's resources cannot support the customer's professional services, technology and project management needs. As of May 31, 1999 approximately 96% of the current independent distributors had signed the revised contract. The signed distributors represented approximately 99% of the total sales for this channel. The Company is also seeking to expand its indirect distribution with the addition of independent distributors in Branch territories to focus on small to mid-size customers. To this end the Company grew its independent distributor base from 65 to 82 between June 1, 1999 and May 31, 2000.
The Company has three foreign subsidiaries, which market their products and services in Canada, Australia and Europe, while foreign sales in the remainder of the world are conducted through a Foreign Sales Corporation. Foreign revenues were $28,833,000, $29,351,000 and $30,349,000 for the years ended May 31, 2000, 1999 and 1998, respectively. Foreign operating income was $1,203,000, $1,550,000 and $1,703,000 for the years ended May 31, 2000, 1999 and 1998, respectively. Total identifiable assets (excluding cash) and liabilities in foreign countries were $11,009,000 and $3,184,000, respectively, at May 31, 2000 compared with $11,042,000 and $2,811,000 at May 31, 1999. Transaction and exchange losses included in earnings, amounted to approximately $122,000, $89,000 and $102,000 in fiscal 2000, 1999 and 1998, respectively.
CUSTOMERS
The Company focuses on customers that have a high volume of paper-based documents where access to those documents is critical to their business operations. The Company's primary customers include government agencies, health care, insurance, financial services and industrial companies. The Company's largest customer is the U.S. Government (including its agencies and GSA subcontractors). No single customer accounted for greater than 10% of consolidated revenues in fiscal years 2000, 1999 and 1998.
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. Additionally, the professional services component of project sales is recognized as revenue when the project is completed, resulting in a longer order-to-revenue cycle. Due to this shift in branch sales strategy, the Company may experience the need for additional working capital to support the longer order-to-collection cycle being experienced.
INTELLECTUAL PROPERTY
The Company holds several patents and trademarks in the United States, Canada, Europe and Australia. The Company does not consider any of its patents to be material to its business.
The Company relies on a combination of patents, contractual rights, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect its intellectual property rights. The Company has been notified in the past and the Company may be notified in the future of claims that they may be infringing upon patents or other intellectual property rights owned by third parties. There can be no assurance that in the future any patents held by the Company will not be invalidated, that patents will be issued for any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents.
MANUFACTURING
Products are manufactured through the use of in-house production facilities in Mayville, Wisconsin and Turlock, California and contractor production facilities. Raw materials for the Company's manufacturing are purchased directly by the Company; whereas, contract manufacturers purchase raw materials for production. The majority of raw materials is purchased domestically and is considered to be widely available. It is not anticipated that the availability of raw materials will be a significant factor in the Company's business. In September 1999 the Company closed its facility in Turlock, California, which manufactured paper products and transferred the equipment and inventory to its facility in Mayville, Wisconsin.
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 could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company purchases several critical components from single or sole source vendors for which alternative sources are not currently developed. Development of alternative suppliers would require a significant amount of time to qualify in the case of certain of the Company's components. The Company does not maintain long-term supply agreements with any of these vendors. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments, which could adversely affect the Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are primarily related to the development of new products and services in the document management area and the improvement of existing products in the mobile storage, high speed mailing and forms handling equipment areas. Expenditures for research and development were $.9 million, $1.0 million and $.9 million in fiscal years 2000, 1999 and 1998, respectively.
EMPLOYEES
At May 31, 2000, the Company employed approximately 850 full-time employees. None of the Company's employees is represented by a collective bargaining unit.
EXECUTIVE OFFICERS
At July 31, 2000 the following individuals were executive officers of the Company:
The executive officers of the Company are elected each year at the Annual Organizational Meeting of the Board of Directors, which will be held this year on September 21, 2000.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 2130 Gold Street, San Jose, California. The first floor of this two-story building is being leased by the Company (approximately 26,000 square feet). The lease will expire in May 2005.
The Company owns a 356,000 square foot building located on 14 acres of land in Mayville, Wisconsin. The Mayville facility serves as a central warehousing, manufacturing and distribution center. Approximately 200,000 square feet of the facility are used as warehouse space. Approximately 60,000 square feet of the facility are used for the production of paper products (primarily file folders) and the attachment of color-coded labeling systems. Approximately 60,000 square feet are used for the production of panel systems furniture. The Company also owns 16 acres of undeveloped land near the Mayville facility.
The Company owns a 45,000 square foot building located on 4 acres of land in Lomira, Wisconsin. The facility is used for the manufacture of TAB-TRAC-Registered Trademark- mobile filing storage units and other light manufacturing and assembly operations.
The Company owns two manufacturing buildings located on 16 acres of land in Turlock, California. One building is 67,000 square feet and formerly housed a paper products plant which was used for the manufacture of file folders. These operations were relocated to Mayville in September 1999. The other building consists of 104,000 square feet and is used for the manufacture of the Company's high-speed mailing systems product line and forms handling equipment. While the Company intends to continue to use the existing facility, the Company is seeking to sell the 104,000 square foot building. If the facility is sold, the Company will relocate the forms handling equipment manufacturing operations to the smaller building.
The Company leases office space for its sales branches in numerous cities throughout the United States, Canada, Europe and Australia, most of which are in major metropolitan areas. Tab Products of
Canada, Limited leases 60,000 square feet of office space in a building in North York, Ontario, Canada, which expires in May 2005. Tab Products (Europa) B.V. leases a 9,000 square foot building in Amsterdam, Netherlands, which expires in August 2001. Tab Products Pty Ltd leases a 22,000 square foot building in St. Leonards, Australia, which expired in June 2000. Tab Products Pty Ltd is currently renting on a month to month basis. These buildings serve as general office, sales and warehouse facilities.
In management's opinion, all buildings, machinery and equipment are in good condition and are maintained and repaired on a basis consistent with sound operations. The properties and equipment are deemed adequate and suitable for their purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the American Stock Exchange (AMEX) and its trading symbol is TBP. Information with respect to per share common stock dividends paid by the Company and the price ranges per share for each quarter during the fiscal years ended May 31, 2000 and 1999 are set forth below.
TAB PER SHARE COMMON STOCK DIVIDENDS AND PRICE RANGES
At May 31, 2000, the Company had approximately 1,000 holders of record and approximately 5,000 beneficial owners of Tab Products Co. common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
TAB PRODUCTS CO.
CONSOLIDATED SELECTED FINANCIAL DATA, FIVE YEARS ENDED MAY 31
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report, including without limitation the following section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "foreseeable," "estimates," and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as the development of new products, capital expenditure levels, liquidity, 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. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of the Company.
FINANCIAL CONDITION
At May 31, 2000 the Company had cash and short-term investments of $10.9 million, an increase of $1.0 million from $9.9 million at May 31, 1999. Working capital at May 31, 2000 was $32.2 million, an increase of $5.2 million from the working capital of $27.0 million reported a year earlier. The current ratio of 2.7 at May 31, 2000 increased from the current ratio of 2.1 at May 31, 1999. The increase in cash and working capital is primarily due to the sale of the Company's Field Services Group in June 1999 and the sale of the Company's headquarters buildings in February 2000 offset by operating losses incurred during fiscal year 2000. The Company believes that the cash and cash equivalents, operational cash flows and borrowing capacity will adequately finance anticipated operations and capital expenditures for the foreseeable future. The Company intends to invest cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities.
During fiscal 2000 net cash required for operating activities was $13.3 million, versus net cash provided by operations of $7.8 million in fiscal 1999, a reduction of cash from operations of $21.1 million year over year.
During fiscal 2000, the Company invested approximately $2.9 million in property, plant and equipment, which primarily represented investments in manufacturing equipment, furniture and leasehold improvements for the new corporate offices and management information systems. Capital expenditures for fiscal 2001, which will consist primarily of investments in manufacturing equipment and management information systems, are expected to be approximately $1.0 million.
At May 31, 2000, the Company had no long-term or short-term debt outstanding. In fiscal 2000 the Company made $4.1 million in scheduled debt repayments and paid $3.3 million to prepay the remaining portion of debt that had been collateralized at the time of the Field Services Group sale.
The Company does not currently maintain a line of credit. An unsecured revolving line of credit of $5.0 million was terminated as of June 22, 2000. The Company was out of compliance with two covenants under the line of credit at May 31, 2000. The Company is currently negotiating with several banks for a replacement line of credit.
Pursuant to the Agreement for Purchase and Sale of Assets (the "Agreement"), by and between the Company and Bell & Howell Document Management Products Company, a wholly-owned subsidiary of Bell & Howell Company ("Bell & Howell"), the Company has sold its Field Services 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, consists 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 order for the Company to obtain consent for the sale from one of its lenders, the Company chose to place a portion of the cash payment received from Bell & Howell in a restricted bank account and pledge the funds as collateral for the existing loan. In exchange for the pledge of collateral the lender modified the covenants of the loan and approved the sale transaction. In connection with the sale the Company recorded a pre-tax gain on sale of $13.8 million in 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. In the second quarter of fiscal year 2000, the Company closed its paper products 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 fiscal year 2000.
On February 23, 2000, the Company sold its corporate headquarters buildings and the associated land leases at Stanford Research Park to Eagle Ridge Partners, a real estate investment group. The gross sales price was $18 million and resulted in a pre-tax gain of $12.9 million for the Company.
On May 25, 2000, the Company purchased substantially all of the operating assets of Docucon for approximately $5.1 million which was a combination of cash and assumed liabilities. The purchase price is subject to certain post-closing adjustments payable to TAB in the approximate amount of $204,000 that has been agreed to as of August 10, 2000. The Docucon purchase gave TAB the capacity to convert customers' documents to digital format for desktop access. Approximately 85 employees, including operations, software engineers and sales personnel, transferred to TAB.
In July 1998, the Company authorized a stock repurchase program for 300,000 shares of Common Stock. The authorization was effective until July 1999. During fiscal 1999, the Company purchased 146,200 shares of Common Stock under the Company's repurchase program at a cost of $955,000. The remaining unused portion of this authorization of 153,800 shares expired in July 1999. Subsequently the Company's Board of Directors approved a new authorization to repurchase 300,000 shares of Common Stock that was effective until July 2000. During fiscal 2000 the Company repurchased 33,100 shares for $218,000. The Company has not extended the authorization of the stock repurchase program.
At May 31, 1998, the Company's additional minimum liability for its defined benefit plan was in excess of the net transition obligation and was recorded as a non-cash charge of $2.4 million to stockholders' equity, net of tax benefits of $1.6 million, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." As of May 31, 1999 there had been no significant change in this liability. As of May 2000 the Company's net transition obligation for its defined benefit plan was in excess of the additional minimum liability and the non-cash charge to stockholders' equity of $2.4 million as of May 31, 1999 was reversed.
RESULTS OF OPERATIONS
TOTAL REVENUES--Total revenues for fiscal 2000 of $130.6 million were $25.0 million or 16.1% lower than the $155.6 million in fiscal 1999. Of the $25.0 million decrease in fiscal 2000 revenues as compared to the prior year, $15.0 million was due to the sale of the Field Services Group. The balance was primarily due to a decline in U.S. sales of manufactured products only partially offset by increased revenue for professional services, imaging and technology products. The Company's international operations also experienced decreased revenues of $3.3 million as a result of changes in distribution in our European operations associated with the Company's transformation partially offset by a $1.4 million increase in the revenues of TAB Canada as its transformation has begun to show improved results. In fiscal year 2000 the Company also changed the financial statement presentation for sales to certain distributors which reduced revenue by $2.3 million compared to the previous year and reduced commission expense by the same amount. Revenues in fiscal 1999 of $155.6 million were $10.3 million or 6.2% lower than the $165.9 million recorded in fiscal 1998. The fiscal 1999 decreased revenues were attributable to lower sales of information and records management supplies, records storage solution products and professional services offset partially by increased sales of technology-based software solutions. The decline resulted from changes in the company branch strategy to focus on Fortune 1000 customers and issues related to the independent distributor contract negotiations. International revenues were 22%, 19% and 18% of consolidated revenues in fiscal 2000, 1999 and 1998, respectively.
COST OF REVENUES--Cost of revenues, as a percentage of revenues, for fiscal 2000, 1999 and 1998 was 61.7%, 61.6% and 59.6%, respectively. The increase in the percentage for fiscal 2000 as compared to fiscal 1999 was due primarily to a decrease in manufacturing efficiencies due to lower than planned volume. The increase in the percentage for fiscal 1999 as compared to fiscal 1998 was due primarily to a decrease in manufacturing efficiencies due to lower than planned volume.
OPERATING EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND DEVELOPMENT)--Operating expenses, as a percentage of revenues, for fiscal 2000, 1999 and 1998 were 47.2%, 37.8% and 37.2%, respectively. Total operating expenses for fiscal 2000 were $61.7 million, an increase of $2.9 million as compared to total operating expenses of $58.8 million in fiscal 1999. The increase in operating expenses was primarily attributable to increased sales salaries and bonuses, recruiting costs, information systems consulting costs and increased rent expense due to the new leased corporate offices offset partially by reduced branch operating costs and temporary employee costs.
Operating expenses for fiscal 1999 of $58.8 million represented a decrease of $3.0 million as compared to total operating expenses of $61.8 million in fiscal 1998. The decrease in operating expenses was primarily attributable to decreased commission compensation due to lower revenues offset partially by increased retirement benefit costs, recruiting and training costs.
INTEREST EXPENSE--Interest expense, net for fiscal 2000 was $0.2 million, which was $0.1 million lower than the net interest expense for fiscal 1999. Net interest expense for fiscal 1999 was $0.3 million, which was $0.3 million lower than the net interest expense of $0.6 million for fiscal 1998. The decrease in interest expense in both years was primarily because of decreased levels of long-term debt due to scheduled and unscheduled debt repayments.
INCOME TAXES--Income taxes, as a percentage of pre-tax earnings, for fiscal 2000 was 42.2%, a decrease of 30.4 percentage points as compared to the effective tax rate of 72.6% in fiscal 1999. The decrease in the effective tax rate was primarily due to the pre-tax income generated by the sale of the Field Services Group and the sale of property in the current year. For fiscal 1999, income taxes increased 25.7 percentage points as compared to the effective tax rate of 46.9% in fiscal 1998. The increase in the effective tax rate was primarily due to the increase in foreign taxes, which are at a higher rate, as well as the proportionately greater impact of goodwill expense, which is not deductible for U.S. tax purposes.
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 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.
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.
TRENDS--Recent market research indicates there may be an accelerated move to digital technologies, such as imaging, by large paper intensive organizations. This trend could result in a weakening of demand for the Company's paper-based records management supplies and records storage products. Failure of the Company to match the changing market with new document management products and services in the digital arena could materially adversely affect the Company's business, results of operations, financial condition and prospects.
DISTRIBUTION CHANNELS--The Company is continuing its strategy to refine and expand its distribution channels. The Branch direct sales strategy has been shifted to focus on projects with larger customers, including those that bundle products and services as a way of providing value-added solutions to the Company's customers. With the addition of the imaging operations of Docucon the Company adds systems integrators and resellers as another distribution channel.
The Company is also continuing to expand its call center operations and direct replenishment business through this efficient distribution method. In conjunction with handling inbound sales activity an initiative is underway to generate sales through the use of outbound telemarketing.
In June 1998, the Company notified its existing independent distributors (indirect channel) that effective June 1, 1999 the existing distributor contract would be canceled. A new contract was offered that eliminated the exclusive territory rights in the existing contract with other material terms and conditions remaining substantially the same. By February 1999, approximately one third of the current independent distributors adopted the new contract. In March 1999, the Company proposed an alternative contract that allowed the independent distributors exclusivity on designated customers, but eliminated exclusivity on a territory basis. The Company believes the removal of territorial 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 May 31, 1999 approximately 96% of the current independent distributors have signed the revised contract. The signed distributors represent approximately 99% of the total sales for this channel. The Company is also seeking to expand its indirect distribution with the addition of independent distributors in Branch territories to focus on small to mid-size customers.
These changes in distribution disrupted the selling process of the Company in fiscal 2000 resulting in lower sales. Additionally, the sales cycle for larger scale projects is substantially longer than the Company's historical sales-to-delivery cycle resulting in additional working capital requirements. Market penetration of larger customers may not happen as quickly as anticipated and may result in higher selling costs.
RETAINING AND ATTRACTING QUALIFIED PERSONNEL--The Company's future performance may depend in significant part upon attracting and retaining key senior management, sales, manufacturing, marketing and technical support personnel. Competition for such personnel is intense and the inability to retain its current key personnel or to attract, assimilate or retain other highly qualified personnel in the future on a timely basis could have a material adverse effect on the Company's business, results of operations and financial condition.
FLUCTUATIONS IN OPERATING RESULTS--Factors affecting the Company's operating results and gross margins include the volume of product sales, competitive pricing pressures, the ability of the Company to match supply with demand, changes in product and customer mix, market acceptance of new or enhanced versions of the Company's products and services, changes in the channels through which the Company's products and services are distributed, timing of new product announcements and introductions by the Company and its competitors, fluctuations in product costs, variations in manufacturing cycle times, fluctuations in manufacturing utilization, the ability of the Company to achieve manufacturing volumes with its new and existing products, increased research and development expenses, exchange rate fluctuations, a change in the Company's effective tax rate and changes in general economic conditions. All of these factors are difficult to forecast and these or other factors can materially affect the Company's quarterly or annual operating results or gross margins.
CASH FLOWS--Factors affecting the Company's cash flows include net income or losses, the timely collection of accounts receivable from customers, the willingness of suppliers to extend normal credit terms to the Company, the purchase and sale of assets, the willingness of financial institutions to lend to the Company and the payment of dividends. Although the Company's projections of these factors indicate that its operational cash flows, together with its existing cash and cash equivalent balances and its borrowing capacity will adequately finance anticipated operations and capital expenditures for the foreseeable future, investors are cautioned that such projections inherently involve risks and uncertainties.
COMPETITION--The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative document management solutions that may be less costly or provide additional features. Such competition could result in lower gross margins in the future, if the Company's average selling prices decrease faster than its costs and could result in lost sales.
DEPENDENCE ON SOLE SOURCE SUPPLIERS--The Company purchases several critical components from single or sole source vendors for which alternative sources are not currently developed. Development of alternative suppliers would require a significant amount of time to qualify in the case of certain of the Company's components. The Company does not maintain long-term supply agreements with any of these vendors. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments, which could adversely affect the Company's business, financial condition and results of operations.
NEW PROCESSES AND PRODUCTS AND MANUFACTURING VOLUMES--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 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 lengthened order-to-execution period. Additionally, the professional services component of project sales is recognized as revenue when the project is completed resulting in a longer order-to-revenue cycle. Due to this shift in Branch sales strategy the Company may experience the need for additional working capital to support the longer order-to-collection cycle being experienced.
GOVERNMENT SALES--Government revenues primarily expose the Company to risks from reductions in budget allocations to support regulation and administrative offices. The current reinventing government initiative opens opportunities to help the government streamline workflow processes, reduce paperwork and increase customer service, which may provide short-term opportunities for the Company. However, the long-term effect of a government initiative to streamline processes could have a negative impact on the Company's business, financial condition and results of operations.
PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION--The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company has been notified in the past and the Company may be notified in the future of claims that they may be infringing upon patents or other intellectual property rights owned by third parties. There can be no assurance that in the future any patents held by the Company will not be invalidated, that patents will be issued for any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents.
EURO CONVERSION--In January 1999, certain member countries of the European Union established permanent, fixed conversion rates between their existing currencies and the European Union's common currency (the Euro). The transition period for the introduction of the Euro is scheduled to phase in over a period ending January 1, 2002, with the existing currency being completely removed from circulation on July 1, 2002. The timing of phasing out all uses of the existing currencies will comply with the legal requirements and also be scheduled to facilitate optimal coordination with the plans of our vendors, distributors and customers. Work related to the introduction of the Euro and the phasing out of the other currencies includes converting information technology systems; recalculating currency risk; and taking action, if needed, regarding continuity of contracts; and modifying our processes for preparing tax, accounting, payroll and customer records. Management believes the introduction of the Euro and the phasing out of the other currencies will not have a material impact on the Company's Consolidated Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL SALES--International sales accounted for approximately 22% and 19%, respectively of the Company's total revenues in fiscal 2000 and 1999. Fluctuations in currencies could adversely affect the Company's business, financial condition and results of operations. In addition, gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Because sales of the Company's products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local
currency of a particular country, leading to a reduction in sales and profitability in that country. The Company is subject to the risks of conducting business internationally, including foreign government regulation and general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships. Manufacturing and sales of the Company's products may also be materially adversely affected by factors such as unexpected changes in, 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 over the last two years. Currently the Company is working to bring its expense levels in line with current revenue levels. If the Company does not achieve reduced levels of operating expenses commensurate with current revenue, or if the Company's revenue levels decrease or do not meet the Company's expectations for a particular period, the Company's business, financial condition and results of operations will be materially adversely affected.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial 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 $5.2 million as of May 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 May 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 Canadian subsidiary. Although the Company transacts business with various foreign countries, settlement amounts are usually based on local currency. Transaction gains or losses have not been significant in the past and there is no hedging activity on Canadian dollars or other currencies. Based on the intercompany balance of $.4 million at May 31, 2000, a hypothetical 10% adverse change in Canadian dollars against U.S. dollars would not result in a material foreign exchange loss. Consequently, the Company does not expect that reductions in the value of such intercompany balances or of other accounts denominated in foreign currencies, resulting from even a sudden or significant fluctuation in foreign exchange rates, would have a direct material impact on the Company's financial position, results of operations or cash flows.
Notwithstanding the foregoing analysis of the direct effects of interest rate and foreign currency exchange rate fluctuations on the value of certain of the Company's investments and accounts, the indirect effects of such fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. For example, international demand for the Company's products could be affected by foreign currency exchange rates. In addition, interest rate fluctuations may affect the buying patterns of the Company's customers. Furthermore, interest rate and currency exchange rate fluctuations have broad influence on the general condition of the U.S., foreign and global economies, which could materially and adversely affect the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are set forth under Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The section entitled "Election of Directors," which appears in the Company's Proxy Statement for the Company's 2000 Annual Meeting of Stockholders is incorporated herein by reference. For information with respect to the executive officers of the Company, see "Executive Officers" in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information related to executive compensation, which appears in the Company's Proxy Statement for the Company's 2000 Annual Meeting of Stockholders in the section entitled "Executive Compensation and Other Matters" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Stock Ownership of Certain Beneficial Owners and Management" which appears in the Company's Proxy Statement for the Company's 2000 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" which appears in the Company's Proxy Statement for the Company's 2000 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. EXHIBITS
See Index to Exhibits on pages 21 and 22. The Exhibits listed in the accompanying Index are referenced as part of this report.
B. Reports on Form 8-K:
The Company filed one report on Form 8-K on June 8, 2000 related to the Agreement for Purchase of Assets with Docucon, Inc. and filed an amendment thereto under Item 7 dated August 8, 2000.
EXHIBITS:
- ------------------------
(1) Compensatory Plan or Arrangement
(2) Incorporated by reference from the noted previously filed document.
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, and State of California, on this eighteenth day of August, 2000.
TAB PRODUCTS CO.
/s/ HANS A. WOLF -------------------------------------- Hans A. Wolf INTERIM CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
TAB PRODUCTS CO. CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE FORM 10-K ITEM 14 FISCAL YEARS ENDED MAY 31, 2000, 1999 AND 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Tab Products Co.:
We have audited the accompanying consolidated balance sheets of Tab Products Co. and its subsidiaries as of May 31, 2000 and 1999 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Tab Products Co. and its subsidiaries as of May 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California June 28, 2000 (August 10, 2000 as to Notes 8 and 16)
TAB PRODUCTS CO.
CONSOLIDATED STATEMENTS OF EARNINGS
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements.
TAB PRODUCTS CO.
CONSOLIDATED BALANCE SHEETS
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements.
TAB PRODUCTS CO. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements.
TAB PRODUCTS CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements.
TAB PRODUCTS CO. STATEMENT OF ACCOUNTING POLICIES
The Company's significant accounting policies are summarized below to assist the reader in reviewing the financial statements and other data contained in this report.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions have been eliminated in consolidation.
ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as of the dates and for the periods presented. Such estimates include the allowance for doubtful accounts, inventory valuation and obligations for postretirement health care and pension benefits. Actual results could differ from those estimates.
TRANSLATION OF FOREIGN CURRENCIES--Operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency for each subsidiary. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect as of the balance sheet dates, and results of operations for each subsidiary are translated using the average rates in effect for the periods presented. Translation adjustments are reported as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in net earnings.
CASH AND CASH EQUIVALENTS are highly liquid investments purchased with an original maturity of three months or less.
SHORT-TERM INVESTMENTS represent debt securities, which are stated at fair value. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments to interest income) and fair value representing unrealized holding gains or losses, if material, are recorded as a separate component of stockholders' equity until realized. While the Company's intent is to hold debt securities to maturity, they are classified as available-for-sale because the sale of such securities may be required prior to maturity. Any gains and losses on the sale of debt securities are determined on a specific identification basis. Unrealized holding gains and losses were not material for any periods presented.
INVENTORIES are valued at the lower of cost or market. Cost of merchandise inventories purchased for resale is determined on the last-in, first-out (LIFO) method for domestic inventories, which was approximately $975,000 at May 31, 2000 ($843,000 at May 31, 1999). Cost of the remainder of the inventories is determined on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT, including significant improvements to existing facilities are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are as follows: Land improvements 10-30 years; buildings 20-50 years; machinery and equipment 3-15 years; furniture and fixtures 3-10 years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
GOODWILL represents the excess of the purchase price over the estimated fair value of net assets of acquired businesses. Goodwill is being amortized on a straight-line basis over periods not exceeding 25 years. Goodwill amortization amounted to $259,000, $496,000 and $598,000 in fiscal years 2000, 1999 and 1998, respectively. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
REVENUE RECOGNITION--Revenues on product sales are recognized upon product shipment. Installation related to products and services revenues are recognized when complete. Imaging services revenues are
recognized on a percentage of completion method. Equipment service and software support contract revenues are recognized ratably over the contractual period or as the services are performed.
EARNINGS PER SHARE (EPS) are computed as basic EPS using the average number of common shares outstanding and diluted EPS using the average number of common and dilutive common equivalent shares outstanding, in accordance with SFAS 128 (see Note 12).
STOCKHOLDERS' EQUITY--Shares of the Company, which are repurchased, are treated as Treasury stock and are accounted for under the cost method.
INCOME TAXES--Deferred income taxes are provided for temporary differences between financial statements and income tax reporting, in accordance with SFAS 109.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees.
COMPREHENSIVE INCOME--Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss, adjustments to the minimum defined benefit retirement obligation and the change in the cumulative foreign currency translation adjustment during a period.
SEGMENT REPORTING--The Company reports certain financial and descriptive information about operating segments profit or loss, certain specific revenue and expense items and segment assets as required by Financial Accounting Standards Board Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information."
CONCENTRATIONS OF CREDIT RISK--Financial instruments, which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, short-term investments and trade accounts receivable. The Company places its cash and cash equivalents and short-term investments with what it believes are high credit quality financial institutions. The Company sells its products primarily to companies in North America, Europe and Australia. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1999 and 1998 financial statements to conform to the 2000 presentation.
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 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.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SHORT-TERM INVESTMENTS
The Company's short-term investments have been classified as available-for-sale securities. The amortized cost of available-for-sale securities at May 31, 2000 and May 31, 1999 are presented in the table which follows. Available-for-sale securities are classified as current assets and generally mature within six months. For each category of investment securities the amortized cost approximates fair market value.
2. INVENTORIES
If the inventories for which the LIFO method is used were valued under the FIFO method, such inventories would have been higher by $518,000 at May 31, 2000 and $476,000 at May 31, 1999. The change in certain LIFO inventory decreased earnings before income tax by $42,000 in 2000 and increased earnings before income tax by $287,000 in 1999 and $427,000 in 1998.
3. PROPERTY, PLANT AND EQUIPMENT
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
During fiscal year 2000 the Company paid off its long-term debt in the amount of $7,390,000 and had no long-term debt outstanding as of May 31, 2000.
The Company had an unsecured revolving line of credit of $5 million with a bank as of May 31, 2000, which terminated on June 22, 2000. Borrowings were available at the bank's reference rate (9.5% at May 31, 2000) or at certain rate options, such as fixed rate, long-term rate and offshore rate options which may be lower. The Company had no borrowings outstanding under this line as of May 31, 2000 or through June 22, 2000. The revolving line of credit contained restrictions with respect to additional debt, creation of liens and guarantees, maintenance of minimum quick asset ratio, unencumbered cash and stockholders' equity and limitations on losses and capital expenditures. The Company was not in compliance with two of its covenants at May 31, 2000.
Cash paid for interest which approximates interest expense was $615,000, $967,000 and $1,190,000 for fiscal years 2000, 1999 and 1998, respectively.
5. OTHER ACCRUED LIABILITIES
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for income taxes is comprised of the following:
The reconciliation between the Federal statutory rate and the Company's effective tax rate is as follows:
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED) purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities are as follows:
The Company has not provided for income taxes on undistributed earnings of certain foreign subsidiaries, which the Company intends to reinvest indefinitely. Cash payments for income taxes were: $6,997,000, $50,000 and $2,984,000 in 2000, 1999 and 1998, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit pension plan for substantially all domestic employees. Plan benefits are based on compensation and length of service and provides for normal retirement at age 65. The Company's policy is to make annual contributions to the pension plan between the ERISA minimum and the maximum tax deductible amount allowed.
In fiscal 1999 the Company suspended its defined benefit pension plan to limit both new participation and further pension credit for current participants. The result of the suspension is that after March 31, 1999 no new participants have been eligible to join the plan. Also, after March 31, 1999 active participants
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED) in the plan do not receive any further pension benefit credits. Active participants in the plan as of March 31, 1999 will be eligible, upon retirement, to receive a pension based upon the pension credits they have earned through March 31, 1999. Other than these changes, the pension plan remains the same.
The plan's assets are invested in short-term money market instruments, fixed income securities and common stock.
The following table sets forth the plans funded status:
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED) Net pension (benefit) cost was $(152,000), $1,133,000 and $450,000 for fiscal years 2000, 1999 and 1998, respectively, and included the following components.
On May 31, 1998, the Company's additional minimum liability for its defined benefit plan was in excess of the net transition obligation and was recorded as a non-cash charge of $2.4 million to stockholders' equity, net of tax benefits of $1.6 million, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." As of May 31, 1999 there had been no significant change in this liability. As of May 31, 2000 the Company's net transition obligation for its defined benefit plan was in excess of the additional minimum liability and the non-cash charge to stockholders' equity of $2,381,000 as of May 31, 1999 was reversed.
The Company also provides a 401(k) Plan (tax deferred savings plan) for its domestic employees. The plan provides that the Company make contributions in either cash or common stock, at its option, equal to 50% of minimum contributions made by participating employees up to a maximum of 3% of employee's salary. The plan also provides for additional Company contributions up to a maximum of 75% of participating employees' minimum contributions, for each fiscal year in which net earnings are 5% or more of revenues. Company contributions charged to earnings were $820,000, $449,000 and $460,000 for fiscal years 2000, 1999 and 1998, respectively. The plan was enhanced effective June 1, 1999 to provide for an increase in the Company match to a maximum of 3% of employee's salary from 2%. Certain additional transitional contributions were made to employee accounts during fiscal 2000 in the amount of $130,000 with additional payments due in fiscal 2001 and 2002 for eligible plan participants as of March 31, 1999.
The Company has a plan that provides certain health care benefits for all of its retired employees who meet certain age and service requirements while working for the Company. Generally, Company-provided health care coverage is coordinated with Medicare upon the retiree reaching the age of 65.
Net postretirement benefit costs were $301,000, $270,000 and $233,000 for fiscal years 2000, 1999 and 1998, respectively. The Company's postretirement health care plans are not funded.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Accumulated postretirement benefit obligation:
Net post-retirement benefit costs consisted of the following components:
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of June 1, 1999 was 8% decreasing linearly each successive year until it reaches 5% in 2003, after which it will remain constant. A one-percentage-point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation, service cost and interest cost components of the net periodic postretirement benefit cost by approximately 12%, 21% and 12%, respectively. The impact of a 1% decrease in the trend rates would decrease these components 11%, 16% and 10%, respectively. The assumed discount rate used in determining the accumulated post-retirement benefit obligation was 7.75% for fiscal 2000 and 7% for fiscal 1999.
8. STOCK OPTION PLANS, STOCK PURCHASE RIGHT PLAN, LEVERAGED STOCK PURCHASE PLAN AND STOCK REPURCHASE PLAN
Under the 1991 Employee Stock Option Plan (the Option Plan), the Company may grant options to purchase shares of common stock to employees at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. These options generally expire 10 years from the date of grant. They generally become exercisable 25% per year over a 4-year period for options granted prior to fiscal 1999 and, for those options granted thereafter, 37 1/2% of grant becomes exercisable 18 months after the date of grant with the remainder of the grant becoming exercisable ratably by quarter so as to be fully exercisable 5 years from the date of grant.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS, STOCK PURCHASE RIGHT PLAN, LEVERAGED STOCK PURCHASE PLAN AND STOCK REPURCHASE PLAN (CONTINUED) Under the 1996 Outside Directors' Option Plan, (the Directors' Plan) 10,000 shares are automatically granted to all outside directors at the date they are appointed as directors. The options are granted at the fair market value at date of grant, expire 10 years from the date of grant and become exercisable 25% per year over a 4-year period.
Under the Directors' Plan outside directors of the Company are automatically granted additional options annually, to purchase 2,000 shares of common stock of the Company at the fair market value at the date of grant for each year that such person remains a director of the Company. The grant date will be the date of the Annual Stockholders' Meeting. Annual options granted under the plan are immediately exercisable and expire 10 years from the date of grant. All options issued under the Directors' Plan are non-qualified options.
On January 27, 1997, 250,000 shares of common stock were granted to the Company's President and Chief Executive Officer, of which 242,000 shares were granted under Non-qualified Option Agreements. These shares were granted separate from the Company's 1991 Employee Stock Option Plan. The shares were granted at the fair market value at the date of grant ($9.25). These options generally expire 10 years from the date of grant and become exercisable in twelve quarterly installments from the grant date, except for 100,000 shares that become exercisable in 50,000 share increments four and five years from the grant date or sooner upon the achievement of certain business milestones. On July 11, 2000, the Company's President and Chief Executive Officer retired from the Company.
Option activity under the plans is as follows:
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS, STOCK PURCHASE RIGHT PLAN, LEVERAGED STOCK PURCHASE PLAN AND STOCK REPURCHASE PLAN (CONTINUED) Additional information regarding options outstanding as of May 31, 2000 is as follows:
At May 31, 2000, 337,343 and 76,000 shares were available for future grants under the Option Plan and Directors' Plan, respectively.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in the Statement of Accounting Policies, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 12 months following vesting; stock volatility, 40.9% in fiscal 2000, 36.4% in fiscal 1999 and 32.9% in fiscal 1998; risk free interest rates, 7.44% in fiscal 2000, 5.29% in fiscal 1999 and 5.66% in fiscal 1998 and a dividend rate of 2.5% in fiscal years 2000, 1999 and 1998. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards had been amortized to expense over the vesting period of the awards, pro forma net income (loss) would have been $8,347,000 ($1.62 basic and diluted income per share) in fiscal 2000, ($55,000) ($.01 basic and diluted loss per share) in fiscal 1999 and $2,242,000 ($.44 basic and $.42 diluted income per share) in fiscal 1998. The impact of outstanding non-vested stock options granted prior to fiscal 1996 has been excluded from the pro forma calculation; accordingly, the fiscal 2000, 1999 and 1998 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS, STOCK PURCHASE RIGHT PLAN, LEVERAGED STOCK PURCHASE PLAN AND STOCK REPURCHASE PLAN (CONTINUED) In October 1996, the Company declared a dividend of one Preferred Stock Purchase Right (Right) for each outstanding share of common stock. The Right entitles a stockholder to purchase one one-hundredth of a share of preferred stock at $35 per Right exercisable after a person acquires 15% or more of TAB's common stock or announces a tender offer which could result in such person owning 15% or more of the common stock. Each one one-hundredth of a share of preferred stock has terms designed to make it substantially the economic equivalent of one share of common stock. Under certain circumstances, if a person acquires 15% or more of the common stock, the Rights permit the holders to purchase TAB common stock having a market value of twice the exercise price of the Rights, in lieu of the preferred stock. In addition, in the event of certain business combinations, the Rights permit purchase of the common stock of an acquiring person at a 50% discount. Rights held by an acquiring person will become null and void in both cases. The Rights are subject to redemption by the Company's Board of Directors for $.001 for each Right. The Rights expire on October 23, 2006.
In October 1999, the Company implemented a Stock Purchase and Stock Bonus Plan (Plan) with certain executive officers and key employees of the Company. The Plan allows an employee to borrow funds from the Company to acquire a specified number of common shares. An equivalent number of shares of common stock was also granted to each individual. The stock grant vests after three years. All of the certificates are held by the Company as collateral against the note receivable. The note and accrued interest will be forgiven after three years, if the employee continues employment with the Company during that period. The Company used 207,500 shares of Treasury Stock to implement the Plan. The stock subscriptions-notes receivable related to the stock grants are offset in Stockholders' Equity.
In July 1998, the Company authorized a stock repurchase program for 300,000 shares of Common Stock. The authorization was effective until July 1999. During fiscal 1999, the Company purchased 146,200 shares of Common Stock under the Company's repurchase program at a cost of $955,000. The remaining unused portion of this authorization of 153,800 shares expired in July 1999. Subsequently the Company's Board of Directors approved a new authorization to repurchase 300,000 shares of Common Stock that was effective until July 2000. During fiscal 2000 the Company repurchased 33,100 shares for $218,000. The Company did not renew the stock repurchase program, which expired in July 2000.
9. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are obligated under leases of certain office and warehouse facilities expiring at various dates through 2005. The future minimum rental payments under these lease agreements at May 31, 2000 are as follows:
Total rentals charged to expense amounted to $3,083,000 in 2000, $2,869,000 in 1999 and $2,620,000 in 1998.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. MAJOR CUSTOMER
No single customer accounted for greater than 10% of consolidated revenues in fiscal years 2000, 1999 and 1998.
11. SEGMENT REPORTING
The Company operates and is managed internally by four geographic operating segments. The geographic operating segments include United States, Canada, the Netherlands and Australia. Outside the United States, each operating segment has a general manager that reports to the Chief Executive Officer. Within the United States, the Vice Presidents of Operations, Marketing and Sales report directly to the Chief Executive Officer.
Information about segments for the years ended May 31:
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.
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PER SHARE INFORMATION
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period while diluted earnings per share also includes the dilutive impact of stock options. Basic and diluted earnings per share for the fiscal years ended May 31, 2000, 1999 and 1998, respectively, are calculated as follows (in thousands, except per share data):
13. SELECTED QUARTERLY DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------
(1) Revenues less cost of revenues.
14. ASSET SALES
Pursuant to an 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 Services Group to Bell & Howell on June 1, 1999. The price of the Purchased Assets, as defined in the Agreement, consists of an initial cash
TAB PRODUCTS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ASSET SALES (CONTINUED) payment of $11,200,000, the assumption of certain 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 for changes in certain accounts attributable to the Field Service Group. In order for the Company to obtain consent for the sale from one of its lenders, the Company chose to place a portion of the cash payment received from Bell & Howell in a restricted bank account and pledge the funds as collateral for the existing loan. In exchange for the pledge of collateral the lender modified the covenants of the loan and approved the sale transaction.
On February 23, 2000, the Company sold its corporate headquarters buildings and the associated land leases at Stanford Research Park to Eagle Ridge Partners, a real estate investment group. The gross sales price was $18 million and resulted in a pre-tax gain of $12.9 million for the Company.
15. CONSOLIDATION ACTIVITIES
On June 22, 1999, the Company announced the consolidation of its paper manufacturing operations to its main plant located in Mayville, Wisconsin. In September 1999 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.
16. ACQUISITIONS
On May 25, 2000, the Company purchased substantially all of the operating assets of Docucon for approximately $5.1 million, which was a combination of cash and assumed liabilities. Approximately $4.5 million of the purchase price was allocated to goodwill with the remainder allocated to the gross assets and liabilities acquired. The purchase price is subject to certain post-closing adjustments payable to TAB in the approximate amount of $204,000 that has been agreed to as of August 10, 2000. The Docucon purchase gave TAB the capacity to convert customers' documents to digital format for desktop access. Approximately 85 employees, including operations, software engineers and sales personnel, transferred to TAB.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Tab Products Co.:
We have audited the consolidated financial statements of Tab Products Co. and its subsidiaries as of May 31, 2000 and 1999, and for each of the three years in the period ended May 31, 2000, and have issued our report thereon dated June 28, 2000; such financial statements and report are included in your fiscal 2000 Annual report to Stockholders. Our audits also included the financial statements schedule of Tab Products Co., for the years ended May 31, 2000, 1999 and 1998, listed in Item 14(A)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein.
DELOITTE & TOUCHE LLP San Jose, California June 28, 2000
TAB PRODUCTS CO. AND SUBSIDIARY COMPANIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS