-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhtMEoxyWAEswaLcAA5KO+oqEl3Pr7IqTXNPcvB3z6nou5c6ZF2uETPNdyojboDW zYVvVpY1kgWcPIf1iOFUWQ== 0000912057-01-001289.txt : 20010123 0000912057-01-001289.hdr.sgml : 20010123 ACCESSION NUMBER: 0000912057-01-001289 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAB PRODUCTS CO CENTRAL INDEX KEY: 0000096116 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 941190862 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07736 FILM NUMBER: 1507811 BUSINESS ADDRESS: STREET 1: 2130 GOLD STREET STREET 2: PO BOX 649061 CITY: SAN JOSE STATE: CA ZIP: 95164 BUSINESS PHONE: 4158522400 MAIL ADDRESS: STREET 1: 2130 GOLD STREET STREET 2: PO BOX 649061 CITY: SAN JOSE STATE: CA ZIP: 95164 10-Q 1 a2035062z10-q.txt 10-Q - -------------------------------------------------------------------------------- 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 November 30, 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 November 30, 2000 - 5,163,780. This report, including all exhibits and attachments, contains 26 pages. - -------------------------------------------------------------------------------- TAB PRODUCTS CO. INDEX PART I. FINANCIAL INFORMATION
PAGE NO. ITEM 1 FINANCIAL STATEMENTS: Consolidated Condensed Balance Sheets November 30, 2000 and May 31, 2000 3 Consolidated Condensed Statements of Earnings Three months and Six months ended November 30, 2000 and 1999 4 Consolidated Condensed Statements of Cash Flows Six months ended November 30, 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 15 PART II. OTHER INFORMATION ITEM 4 Submission of Matters to a Vote of Security Holders 16 ITEM 6 Exhibits 17 Signatures 18
2 TAB PRODUCTS CO. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (000'S OMITTED EXCEPT SHARE DATA)
NOVEMBER 30, MAY 31, 2000 2000 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,648 $ 5,724 Short-term investments 4,475 5,170 Accounts receivable, less allowances of $1,163 and $1,095 for doubtful accounts, 27,003 29,685 Inventories 6,403 6,842 Prepaid income taxes and other expenses 6,554 3,837 -------- -------- TOTAL CURRENT ASSETS 47,083 51,258 -------- -------- Property, plant and equipment, net of accumulated depreciation of $29,922 and $28,845 10,890 12,253 Goodwill, net 6,790 7,387 Other assets 2,514 2,395 -------- -------- TOTAL ASSETS $ 67,277 $ 73,293 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 10,094 $ 10,024 Compensation payable 2,061 2,911 Other accrued liabilities 6,341 6,099 -------- -------- TOTAL CURRENT LIABILITIES 18,496 19,034 -------- -------- Deferred taxes and other non-current liabilities 1,376 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-November 2000- 7,654,749 shares and May 2000-7,611,116 shares 77 76 Additional paid-in capital 14,681 15,286 Deferred compensation (695) (1,374) Retained earnings 65,350 70,573 TREASURY STOCK: November 2000-2,490,969 shares and May 2000-2,404,027 shares (31,036) (31,164) Accumulated other comprehensive loss (972) (717) -------- ------- TOTAL STOCKHOLDERS' EQUITY 47,405 52,680 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 67,277 $ 73,293 ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 3 TAB PRODUCTS CO. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) (000'S OMITTED EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- REVENUES $ 29,765 $ 31,201 $ 59,490 $ 63,195 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Cost of revenues 18,459 18,561 37,732 37,805 Selling, general and administrative 13,984 14,591 28,977 28,248 Research and development 162 204 359 397 ----------- ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 32,605 33,356 67,068 66,450 ----------- ----------- ----------- ----------- OPERATING LOSS (2,840) (2,155) (7,578) (3,255) Gain on sale of Field Service Group - - - 13,794 Interest, net, and other (128) 16 (15) (127) ----------- ----------- ----------- ----------- (Loss) earnings before income taxes (2,968) (2,139) (7,593) 10,412 (Benefit) provision for income taxes (1,192) (898) (2,886) 4,373 ----------- ----------- ----------- ----------- NET (LOSS) EARNINGS $ (1,776) $ (1,241) $ (4.707) $ 6,039 =========== =========== =========== =========== Basic net (loss) earnings per share $ (0.35) $ (0.24) $ (0.91) $ 1.19 =========== =========== =========== =========== Shares used in computing basic net (loss) earnings per share 5,134,450 5,113,919 5,170,578 5,069,957 =========== =========== =========== =========== Diluted net (loss) earnings per share $ (0.35) $ (0.24) $ (0.91) $ 1.19 =========== =========== =========== =========== Shares used in computing diluted net (loss) earnings per share 5,134,450 5,113,919 5,170,578 5,087,374 =========== =========== =========== ===========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 4 TAB PRODUCTS CO. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (000'S OMITTED)
SIX MONTHS ENDED NOVEMBER 30, 2000 1999 --------- --------- OPERATING ACTIVITIES: Net (loss) earnings $ (4,707) $ 6,039 ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO NET CASH REQUIRED BY OPERATING ACTIVITIES: Depreciation and amortization 2,198 2,125 Gain on sale of Field Service Group - (13,794) Deferred income taxes and other 242 - Loss on sale of fixed assets 181 - Changes in operating assets and liabilities: Accounts receivable, net 2,516 (1,052) Inventories 342 (870) Prepaid income taxes and other expenses (2,975) (1,720) Other assets (120) 570 Accounts payable 131 1,091 Compensation payable (827) (6) Other accrued liabilities 181 (412) -------- -------- NET CASH REQUIRED BY OPERATING ACTIVITIES (2,838) (8,029) -------- -------- INVESTING ACTIVITIES: Sale of Field Service Group - 13,405 Purchase of property, plant and equipment, net (668) (878) Purchases of short-term investments (2,997) (3,811) Sales of short-term investments 3,692 2,490 -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 27 11,206 -------- -------- FINANCING ACTIVITIES: Repayment of long-term debt - (790) Cash restricted to collateralize loan - (6,000) Proceeds from issuance of common stock 140 27 Repurchase of Treasury Stock 62 (218) Dividends paid (516) (511) -------- -------- NET CASH REQUIRED BY FINANCING ACTIVITIES (314) (7,492) -------- -------- Effect of exchange rate changes on cash 49 (70) -------- -------- Decrease in cash and cash equivalents (3,076) (4,385) Cash and cash equivalents at beginning of period 5,724 6,972 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,648 $ 2,587 ======== ========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. 5 TAB PRODUCTS CO. SUPPLEMENTAL FINANCIAL DATA - NOTES (UNAUDITED) 1. BASIS OF PRESENTATION The Company's unaudited consolidated condensed 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 Annual Report Form 10-K for the fiscal year ended May 31, 2000. The results of operations for the six-month period ended November 30, 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):
NOVEMBER 30, 2000 MAY 31, 2000 ------------------------ ----------------------- Finished goods $ 1,844 $ 2,164 Work in process 329 273 Raw materials 4,230 4,405 ------------------------ ----------------------- $ 6,403 $ 6,842 ======================== =======================
3. DIVIDENDS Dividends declared for the six-month periods ended November 30, 2000 and 1999 were as follows:
RECORD DATE SHARES OUTSTANDING DIVIDEND PER SHARE ----------- ------------------ ------------------ Fiscal 2001: August 25, 2000 5,120,147 $ .05 November 24, 2000 5,147,148 $ .05 Fiscal 2000: August 25, 1999 5,024,589 $ .05 November 24, 1999 5,214,589 $ .05
6 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 Interim Chief Executive Officer is the Company's chief decision maker. The Company operates and is managed internally by four geographic operating segments. The operating segments include United States, Canada, the Netherlands and Australia. Outside the United States, each operating segment has a general manager that reports to the Chief Executive Officer. Within the United States, the individuals responsible for operations, marketing and sales report directly to the Interim Chief Executive Officer. Information about segments (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenues: United States $ 22,643 $ 24,736 $ 45,415 $ 50,496 Canada 5,171 4,288 10,132 8,432 Netherlands 965 1,258 1,937 2,235 Australia 986 919 2,006 2,032 -------- -------- -------- -------- Consolidated Total $ 29,765 $ 31,201 $ 59,490 $ 63,195 ======== ======== ======== ======== Income (Loss) before income taxes: United States $ (3,210) $ (1,812) $ (8,132) $ 10,910 Canada 121 (432) 309 (648) Netherlands 173 190 265 245 Australia (52) (85) (35) (95) -------- -------- -------- -------- Consolidated Total $ (2,968) $ (2,139) $ (7,593) $ 10,412 ======== ======= ======== ======== Depreciation and amortization: United States $ 1,024 $ 862 $ 2,011 $ 1,842 Canada 56 112 128 221 Netherlands 21 13 36 30 Australia 11 20 23 32 -------- -------- -------- -------- Consolidated Total $ 1,112 $ 1,007 $ 2,198 $ 2,125 ======== ======== ======== ======== NOVEMBER 30, 2000 MAY 31, 2000 ----------------- ------------ Long-lived assets: United States $ 12,525 $ 13,585 Canada 546 733 Netherlands 121 151 Australia 212 179 -------- -------- Consolidated Total $ 13,404 $ 14,648 ======== ========
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 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 5. NET EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net earnings (loss) 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 (loss) per share for the quarters and six-months ended November 30, 2000 and 1999, respectively, are calculated as follows (in thousands, except share data):
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- NET EARNINGS (LOSS) $ (1,776) $ (1,241) $ (4,707) $ 6,039 ----------- ----------- ----------- ----------- BASIC: Weighted average common shares outstanding used in computing basic net earnings (loss) per share 5,134,450 5,113,919 5,170,578 5,069,957 ----------- ----------- ----------- ----------- BASIC NET EARNINGS (LOSS) PER SHARE $ (.35) $ (0.24) $ (.91) $ 1.19 =========== =========== =========== =========== DILUTED: Weighted average common shares outstanding 5,134,450 5,113,919 5,170,578 5,069,957 Dilutive options outstanding - - - 17,417 ----------- ----------- ----------- ----------- Shares used in computing diluted net earnings (loss) per share 5,134,450 5,113,919 5,170,578 5,087,374 ----------- ----------- ----------- ----------- DILUTED NET EARNINGS (LOSS) PER SHARE $ (.35) $ (0.24) $ (.91) $ 1.19 =========== =========== =========== ===========
6. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ------------------ ----------------- 2000 1999 2000 1999 ------- ------- ------- ------- Net earnings (loss) $(1,776) $(1,241) $(4,707) $6,039 Foreign currency translation (168) (442) (255) (415) ------- ------- ------- ------- Comprehensive income (loss) $(1,944) $(1,683) $(4,962) $5,624 ======= ======= ======= =======
Accumulated other comprehensive income (loss), net of tax, presented on the accompanying consolidated condensed balance sheets consists of the following (in thousands):
NOVEMBER 30, MAY 31, 2000 2000 Foreign currency translation $ (972) $ (717) ================= =================
8 ITEM 1. FINANCIAL STATEMENTS (CONTINUED) TAB PRODUCTS CO., NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (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 fiscal 2002 first quarter. 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. After evaluation of the Company's revenue recognition policies compared to the guidance in SAB No. 101, the Company will change its accounting policy for the recognition of revenue from mobile file storage equipment and potentially certain imaging services. Adoption of the change in accounting related to mobile filing storage equipment will result in revenue being recorded only after installation of such equipment on customer premises rather than upon shipment, thus postponing revenue recognition by an average of two months. In the third quarter of fiscal 2001, the Company intends to adopt this accounting change through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year 2001, with a restatement of the first two interim quarters to apply the new accounting policy consistently throughout the year. The change in accounting as of the beginning of the year will result in a separately identified charge to the first quarter between $.07 and $.11 per share. 9 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. 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 November 30, 2000, the Company had cash and short-term investments of $7.1 million, a decrease of $3.8 million from the $10.9 million at May 31, 2000. The Company's working capital position at November 30, 2000 was $28.6 million as compared with $32.2 million at May 31, 2000. The current ratio of 2.5 at November 30, 2000 was lower than the current ratio of 2.7 reported for May 31, 2000. The decrease in cash and working capital are the result of operational losses, the payment of liabilities assumed as a result of the Docucon asset 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 $2.7 million from $29.7 million on May 31, 2000 to $27.0 million on November 30, 2000 and a decrease in inventories to $6.4 million at November 30, 2000 as compared to $6.8 million at May 31, 2000. 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. Current liabilities decreased $0.5 million from $19.0 million at May 31, 2000 to $18.5 million at November 30, 2000. The decrease is primarily related to the payment of liabilities assumed as a result of the Docucon asset acquistion. Investments in property, plant and equipment, which were primarily focused on company-wide management information systems and associated infrastructure investments, were $0.6 million and $0.7 million for the three months 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) and six months ended November 30, 2000. Capital expenditures to support operations for fiscal 2001 are expected to total approximately $1.0 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 repurchase program at a cost of $218,000. The Company has not extended the authorization of the stock repurchase program. For the six-month period ended November 30, 2000 and 1999, the Company paid cash dividends of $516,000 and $511,000, respectively. The Company currently has no outstanding debt. The Company has entered into a new $5 million secured line of credit with a bank. The line of credit contains covenants related to cash flow and tangible net worth that the Company must maintain. The Company believes that its cash and borrowing capacity will provide sufficient working capital for the next twelve months. The Company has completed the definitive agreement for the sale of unutilized property and a building for $2.9 million. The Company is in the process of preparing closing documents at this time. Closing is projected for late January 2001. RESULTS OF OPERATIONS REVENUES for the second quarter of fiscal 2001 amounted to $29.8 million, down $1.4 million or 4.5% from the $31.2 million revenue reported in the second quarter of fiscal 2000. Revenues for the six months ended November 30, 2000 were $59.5 million, down $3.7 million or 5.9% from revenues of $63.2 million reported in the first six months of the prior fiscal year. The Company experienced lower U.S. sales of file storage equipment, professional services and technology products partially offset by increases in revenues from filing supplies and imaging services. Revenues for TAB's Canadian operations increased. BACKLOG The Company's order booking to invoicing ratio ("book-to-bill ratio") was 1:10:1.0 for the second quarter of fiscal 2001, resulting in a small increase in backlog. The ratio was .94:1.0 in the fourth quarter of fiscal 2000 and .98:1.0 in the first quarter of fiscal 2001. There can be no assurance that the Company's book-to-bill ratio will continue to improve. COST OF REVENUE, as a percentage of revenues, was 62.0% for the second quarter of fiscal 2001 as compared to the 59.5% cost of revenue reported in the second quarter of fiscal 2000. Cost of revenues for the second quarter was $18.5 million as compared to the $18.6 million reported in the comparable quarter of fiscal 2000. For the six months ended November 30, 2000 cost of revenues was 63.4% as compared to 59.8% cost of revenue in the first six months of the prior fiscal year. The increase in cost of revenues as a percentage of revenue was primarily due to fixed costs not decreasing as sales volume decreased. OPERATING EXPENSES were $14.1 million or 47.5% of total revenues for the second quarter of fiscal 2001 as compared to $14.8 million or 47.4% of total revenues for the second quarter of fiscal 2000. For the six months ended November 30, 2000, operating expenses were $29.3 million or 49.3% of total revenues as compared to $28.6 million for the six month period or 45.3% of total revenues for the prior fiscal year. The increase in operating expenses as a percentage of revenues was primarily driven by lower revenues, the one-time charge of $1.4 million due to the retirement of the Company's Chief Executive Officer, and increased rent expense for the corporate office due to the sale of the previously owned corporate office partially offset by reduced branch operating expenses and salaries. INTEREST, NET, and other expenses was a net expense of $128,000 in the second quarter of fiscal 2001 as compared to $16,000 in net income in the second quarter of fiscal 2000. For the six months ended November 30, 2000 interest, net, and other was a net expense of $15,000 as compared to $127,000 in the prior fiscal year. The increased expense for the three and six months ended November 30, 2000 was primarily due to foreign exchange losses and lower interest earned on the cash balances. There was no debt related interest charge in the six months ended November 30, 2000. Fiscal 2000 contained higher cash balances due to proceeds from the sale of the Field Service Group. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX BENEFIT Net losses for the six months ended November 30, 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 38.0% for the six month period ended November 30, 2000 is lower than the effective rate of 42.2% for the prior fiscal year due to limitation on carrybacks by certain states. NET LOSS PER SHARE for the three months ended November 30, 2000 was $0.35 for both basic and diluted shares compared to a loss per share of $0.24 for both basic and diluted shares for the three months ended November 30, 1999. The net loss per share for the six months ended November 30, 2000 was $.91 for both basic and diluted shares compared to earnings per share of $1.19 for both basic and diluted shares for the prior year comparable period. 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 fiscal 2002 first quarter. 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. After evaluation of the Company's revenue recognition policies compared to the guidance in SAB No. 101, the Company will change its accounting policy for the recognition of revenue from mobile file storage equipment and potentially certain imaging services. Adoption of the change in accounting related to mobile filing storage equipment will result in revenue being recorded only after installation of such equipment on customer premises rather than upon shipment, thus postponing revenue recognition by an average of two months. In the third quarter of fiscal 2001, the Company intends to adopt this accounting change through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year 2001, with a restatement of the first two interim quarters to apply the new accounting policy consistently throughout the year. The change in accounting as of the beginning of the year will result in a separately identified charge to the first quarter of between $.07 and $.11 per share. 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 120 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. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED 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 cost controls and management oversight to produce better estimates and project execution. There can be no assurance that these improvements will be successful. 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. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DEMAND FOR PAPER-BASED RECORDS MANAGEMENT MAY DECLINE 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 1:10:1.0 for the second quarter of fiscal 2001, resulting in a small increase in backlog. The ratio was .94:1.0 in the fourth quarter of fiscal 2000 and .98:1.0 in the first quarter of fiscal 2001. 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. 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. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RISKS ASSOCIATED WITH INTERNATIONAL SALES International sales accounted for approximately 24% and 21%, respectively of the Company's total revenues in the second quarter of fiscal 2001 and 2000. Fluctuations in currencies negatively impacted the Company in its second quarter and could adversely affect the Company's business, financial condition and results of operations in the future. 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 increased its expense levels in fiscal 1999 and 2000 to support planned growth. In fiscal 2001 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 $4.5 million as of November 30, 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 European 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 Netherlands Guilders or other currencies. Based on the intercompany balance of $0.1 million at November 30, 2000, a hypothetical 10% adverse change in Netherlands 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Guilders 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. 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 (a) The company held its annual meeting of stockholders on September 21, 2000. (b) All of management's nominees as listed in the proxy statement were elected. The names of the directors elected are listed and represent the entire Board of Directors as of the annual meeting. (c) The votes for each Director are indicated below:
Director For Withheld Authority --------------- --------------- -------------------- K. S. Hanson 4,339,855 283,706 J.A. Heimbuck 4,337,346 286,215 J. K. Myers 4,344,519 279,042 H. A. Wolf 4,298,088 325,473
(d) The company's appointment of Deloitte & Touche LLP as the independent accountants for the fiscal year ending May 31, 2001 was approved. The vote is indicated below: For 4,352,320 Against 244,776 Abstain 26,465 Non-Vote 0
16 ITEM 5. OTHER INFORMATION Gary Ampulski was appointed as a director of the Company on December 14, 2000 and as President and Chief Executive Officer of the Company January 1, 2001. ITEM 6. EXHIBITS (a) 10.1 Business Loan Agreement between Comerica Bank-California and Tab Products Co. dated November 21, 2000 (b) Reports on Form 8-K Form 8-K filed September 22, 2000 ------------------------------------- (1) Compensatory Plan or Arrangement 17 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TAB PRODUCTS CO. (Registrant) Date: January 12, 2001 /s/ David J. Davis --------------------------- David J. Davis, Senior Vice President and Chief Financial Officer Date: January 12, 2001 /s/ William R. Kinzie ---------------------------- William R. Kinzie, Corporate Controller and Chief Accounting Officer 18 EX-10.1 2 a2035062zex-10_1.txt EX-10.1 [LOGO] BUSINESS LOAN AGREEMENT This Business Loan Agreement (this "Agreement") is entered into by and between Comerica Bank-California ("Bank") and TAB PRODUCTS CO., a DELAWARE CORPORATION ("Borrower") as of this 21ST day of NOVEMBER, 2000, at Bank's headquarters office at 333 West Santa Clara Street, San Jose, California 95113. 1. LOANS TO BORROWER. Bank and Borrower agree that any loans which Bank in its sole discretion has made or may now or hereafter make to Borrower (sometimes hereinafter collectively referred to as the "Loan") shall be subject to the terms and conditions of this Agreement unless otherwise agreed to in writing by Bank and Borrower. In the event there are contradictions between the provisions of this Agreement and any other written agreement with the Bank, this Agreement shall prevail. Loan shall be subject to the terms and conditions of this Agreement, promissory note(s) executed in connection herewith and/or previously or subsequently executed, and all amendments, renewals and extensions thereof (singularly or collectively, the "Note"), and all those certain security agreements and/or such other security or other documents as Bank has required or may now or hereafter require in connection with the Loan (collectively, the "Loan Documents"). 2. LEGAL EFFECT. This Agreement supplements the terms and conditions of the Loan Documents. Except as otherwise specified herein, all terms used in this Agreement shall have the same meaning as given in the Note and/or Loan Documents which are incorporated herein by this reference. Any and all terms used in this Agreement, the Note and/or the Loan Documents shall be construed and defined in accordance with the meaning and definition of such term under and pursuant to the California Uniform Commercial Code, as amended. Except as specifically modified hereby, all of the terms and conditions of the Note and/or the Loan Documents shall remain in full force and effect. 3. INTEREST RATE; PAYMENT TERMS; LOAN FEES. The principal and interest on the Loan shall be payable on the terms set forth in the Note and/or the Loan Documents. If applicable, a loan fee in the sum of TWELVE THOUSAND FIVE HUNDRED AND 00/100 Dollars ($12,500.00) shall be paid concurrently with the execution of this Agreement. In addition, Borrower shall pay such additional loan fees from time to time in the future as agreed between Bank and Borrower. 4. SECURITY. As security for Borrower's obligations to Bank under this Agreement, the Note and/or the Loan Documents and all other indebtedness and liabilities whatsoever of Borrower to Bank, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, evidenced by the Note and/or the Loan Documents (collectively, the "Indebtedness"), Borrower hereby grants to Bank, prior to or simultaneously with the borrowing hereunder, a continuing security interest of first priority in all accounts receivable, inventory, equipment and intangibles and all proceeds thereof, and in all collateral provided to Bank pursuant to any security agreement and/or all collateral that is delivered to Bank and/or which Bank possesses and all proceeds thereof, (collectively, the "Collateral"). 5. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants to Bank that as of the date of acceptance of this Agreement, the Note and/or the Loan Documents, as of the date of borrowing hereunder and at all times the Loan or any other Indebtedness are outstanding hereunder: (a) If Borrower is a corporation, Borrower is duly organized, validly existing and in good standing under the laws of the state of its incorporation; if a partnership, Borrower is duly organized and validly existing under the partnership agreement and the applicable laws of the state in which the partnership is formed or exists or if a limited liability company, Borrower is duly organized and validly existing under the operating agreement and the applicable laws of the state in which the limited liability company is formed; (b) Borrower has the legal power and authority, to own its properties and assets and to carry out its business as now being conducted; it is qualified to do business in every jurisdiction wherein such qualification is necessary; it has the legal power and authority to execute and perform this Agreement, the Note and/or the Loan Documents to borrow money in accordance with its terms, to execute and deliver this Agreement, the Note and the Loan Documents, and to do any and all other things required of it hereunder; and this Agreement, the Note and all the Loan Documents, when executed on behalf of Borrower by its duly authorized officers, partners or members, as the case may be, shall be its valid and binding obligations legally enforceable in accordance with their terms; (c) The execution, delivery and performance of this Agreement, the Note and/or the Loan Documents and the borrowings hereunder and thereunder (i) have been duly authorized by all requisite corporate, partnership or company action; (ii) do not require governmental approval; (iii) will not result (with or without notice and/or the passage of time) in any conflict with or breach or violation of or default under, any provision of law, the articles of incorporation, articles of organization, operating agreement, bylaws or partnership agreement of Borrower, any provision of any indenture, agreement or other instrument to which Borrower is a party, or by which it or any of its properties or assets are bound; and (iv) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of Borrower; (d) The balance sheet of Borrower as provided to Bank in connection herewith and the related statement of income of Borrower provided to Bank for the period ended OCTOBER 31, 2000, fairly present the financial condition of Borrower in accordance with generally accepted accounting principles ("GAAP") consistently applied; and from the date thereof to the date hereof, there has been no material adverse change in such condition or operations; and 1 (e) There is not pending nor, to the best of Borrower's knowledge, threatened, any litigation, proceeding or governmental investigation which could materially and adversely affect its business or its ability to perform its obligations, pay the Indebtedness and/or comply with the covenants set forth herein and/or in the Note and/or the other Loan Documents. 6. AFFIRMATIVE COVENANTS. Until the Indebtedness is paid in full, Borrower covenants and agrees to do the following: (a) Furnish to Bank within thirty (30) days after the end of each MONTH, a company prepared unaudited balance sheet and statement of income covering Borrower's operations. Within ninety (90) days of the end of each of Borrower's fiscal years, furnish to Bank statements of the financial condition of Borrower for each such fiscal year, including but not limited to, a balance sheet, profit and loss statement, and statement of cash flow. Said annual statements shall be prepared by an independent certified public accountant selected by Borrower and acceptable to Bank on a(an) N/A basis; (b) In addition to the financial statements requested above, Borrower agrees to provide Bank with the following schedules in a form acceptable to Bank: N/A Accounts Receivable Aging Reports on a _____________ basis N/A Accounts Payable Aging Reports on a _____________ basis N/A Job Progress Reports on a _____________ basis; and N/A Inventory Reports on a _____________ basis X Annual 10-K statement due within 90 days of fiscal year end. X Quarterly 10-Q statement due within 45 days of quarter end. - --------- (c) Promptly inform Bank of the occurrence of any default or event of default as defined in the Note and/or the Loan Documents (hereinafter referred to as "Default") or of any event which could have a materially adverse effect upon Borrower's business, properties, financial condition or ability to comply with its obligations hereunder, including without limitation its ability to pay the Indebtedness; (d) Furnish such other information as Bank may reasonably request; (e) Keep in full force and effect its own corporate, company or partnership existence in good standing; continue to conduct and operate its business substantially as presently conducted and operated and maintain and protect all franchises and trade names and preserve all the remainder of its property used or useful in the conduct of its business and keep the same in good repair and condition; (f) Comply with the financial covenants set forth in Addendum A, attached hereto and made a part hereof; (g) Maintain a standard and modern system of accounting in accordance with GAAP consistently applied with ledger and account cards and/or computer tapes and computer disks, computer printouts and computer records pertaining to the Collateral which contain information as may from time to time be requested by Bank, not modify or change its method of accounting without the written consent of Bank first obtained, permit Bank and any of its employees, officers, or agents, upon demand, during Borrower's usual business hours, or the usual business hours of any third person having control thereof, to have access to and examine all of Borrower's records relating to the Collateral, Borrower's financial condition and the results of Borrower's operations and in connection therewith, permit Bank or any of its agents, employees, or officer to copy and make extracts therefrom; (h) Provide personal financial statement in a form satisfactory to Bank on an annual basis dated as of N/A and tax returns, within _______________(____) days of the filing of such tax returns, of any Guarantor; (i) Maintain Borrower's same place of business or chief executive office or residence as indicated below, and not relocate said address without giving Bank 30 days prior written notice; (j) Maintain insurance with such insurers in such amounts and of a type satisfactory to Bank, with Bank to be designated as the payee of any such insurance policies under a payee/secured lender clause acceptable to Bank; and (k) On a continuing basis from the date of this Agreement until the Indebtedness is paid in full and the Borrower has performed all of its other obligations hereunder, the Borrower represents and agrees that: (1) There are not and will not be Hazardous Materials (as later defined) on, in or under any real or personal property ("Property") now or at any time owned, occupied or operated by the Borrower which in any manner violate any Environmental Law (as later defined). (2) The Borrower shall promptly conduct all investigations, testing and other actions necessary to clean up and remove all Hazardous Materials on or affecting the Property in accordance with every Environmental Law. (3) The Borrower shall defend, indemnify and hold harmless the Bank, its employees, agents, officers, shareholders and directors from and against any and all claims, damages, fines, expenses, liabilities or causes of 2 action of whatever kind, including without limit consultant fees, legal expenses and reasonable attorneys' fees, suffered by any of them as a direct or indirect result of any actual or asserted violation of any Environmental Law. (4) Upon ten days notice to the Borrower (except in an emergency), the Bank may (but is not obligated to) enter on the Property or take such other actions as it deems appropriate to inspect, test for, clean up, remove or minimize the impact of any Hazardous Materials upon the Bank's receipt of any notice from any source asserting the existence of any Hazardous Materials in violation of any Environmental Law. All costs and expenses so incurred by the Bank, including without limit consultant fees, legal expenses and reasonable attorneys' fees, shall be payable by the Borrower upon demand. (5) The provisions of this section shall survive the repayment of the Indebtedness, the satisfaction of all other obligations of Borrower to the Bank, the discharge or termination by the Bank of any lien or security interest from Borrower, and the foreclosure of or exercise of rights as to any collateral given to the Bank. (6) "Hazardous Materials" mean all of the following: any asbestos, petroleum, petroleum by-products, flammable explosives, or radioactive materials or any hazardous or toxic materials as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.) or in any other Environmental Law. (7) "Environmental Law" means any federal, state, local or other law, ordinance, statute, directive, rule, order or regulation on object of which is to regulate or improve health, safety or the environment. 7. NEGATIVE COVENANTS. Borrower shall not, without Bank's prior written consent, do any of the following: (a) Grant a security interest in or permit a lien, claim or encumbrance upon any of the Collateral to any person, association, firm, corporation, entity, governmental agency or instrumentality; (b) Permit any levy, attachment or restraint to be made affecting any of Borrower's assets; (c) Permit any judicial officer or assignee to be appointed or to take possession of any or all of Borrower's assets; (d) Other than sales of inventory in the ordinary course of Borrower's business, to sell, lease or otherwise dispose of, move, or transfer, whether by sale or otherwise, any of Borrower's assets; (e) Change its name, business structure, corporate identity or structure; add any new fictitious name, liquidate, merge or consolidate with or into any other business organization; (f) Move or relocate any collateral except in the ordinary course of Borrower's business; (g) Acquire any other business organization; (h) Enter into any transaction not in the usual course of Borrower's business; (i) Make any investment in securities of any person, association, firm, entity or corporation other than securities of the United States of America; (j) Make any change in Borrower's financial structure or in any of its business objects, purposes or operations which would adversely affect the ability of Borrower to pay its obligations; (k) Incur any debt outside the ordinary course of Borrower's business; (l) Make any advance or loan except in the ordinary course of Borrower's business; (m) Make loans, advances or extensions of credit to any person, except for sales on open account and otherwise in the ordinary course of business; (n) Guaranty or otherwise, directly or indirectly, in any way be or become responsible for obligations of any other person, whether by agreement to purchase the indebtedness of any other person, agreement for the furnishing of funds to any other person through the furnishing of goods, supplies or services, by way of stock purchase, capital contribution, advance or loan, for the purpose of paying and discharging (or causing the payment or discharge of) the indebtedness of any other person, or otherwise, except for the endorsement of negotiable instruments by Borrower in the ordinary course of business for deposit or collection; (o) Sell, lease, transfer or otherwise dispose of properties and assets having an aggregate book value of more than N/A Dollars ($________) (whether in one transaction or in a series of transactions) except as to the sale of the inventory in the ordinary course of business; change its name, consolidate with or merge into any corporation, permit another corporation to merge into it, acquire all or substantially all of the properties or assets of any other person, enter into any reorganization or recapitalization or reclassify its capital stock, or enter into any sale-lease back transaction; (p) Purchase or hold beneficially any stock or other securities of, or make any investment or acquire any interest whatsoever in, any other person, except for the common stock of the subsidiaries owned by Borrower on the date of this Agreement or other applicable date and except for certificates of deposit with maturities of one year or less of a United 3 States commercial bank with capital, surplus and undivided profits in excess of N/A Dollars ($________________), and direct obligations of the United States government maturing within one (1) year from the date of acquisition thereof; (q) Allow any fact, condition or event to occur or exist with respect to any employee, pension or profit sharing plan established or maintained by it which might constitute grounds for termination of any such plan or for the court appointment of a trustee to administer any such plan; (r) Without Bank's prior written consent, acquire or expend for or commit itself to acquire or expend for fixed assets by lease, purchase or otherwise in an aggregate amount that exceeds N/A Dollars ($_________) in any fiscal year; or (s) Without Bank's prior written consent, pledge or otherwise hypothecate any of its assets except for N/A or become liable for borrowed money or finance loans in excess of N/A Dollars ($_________) during any fiscal year. 8. DEFAULT. The terms "Default" or "Event of Default", as used herein, shall have the meaning given in the Note and/or the Loan Documents. In addition, the parties agree that any one or more of the following events shall constitute a default by Borrower under this Agreement, the Note and/or the Loan Documents: (a) If Borrower fails or neglects to perform, keep or observe any term, provision, condition, covenant, agreement, warranty or representation contained in this Agreement, the Note, the Loan Documents or any other present or future agreement between Borrower and Bank; (b) If any material representation, statement, report or certificate made or delivered by Borrower, or any of its officers, employees or agents to Bank is not true and correct; (c) If Borrower fails to pay when due and payable or declared due and payable, all or any portion of the Indebtedness (whether or principal, interest, taxes, reimbursement of Bank expenses, or otherwise); (d) If there is a material impairment of the prospect of repayment of all or any portion of Borrower's obligations, including without limitation the Indebtedness or a material impairment of the value or priority of Bank's security interest in the collateral; (e) If all or any of Borrower's assets are affected, become subject to a writ or distress warrant, or are levied upon, or come into the possession of any judicial officer or assignee and the same are not released, discharged or bonded against within ten (10) days thereafter; (f) If any insolvency proceeding is filed or commenced by or against Borrower without being dismissed within ten (10) days thereafter; (g) If any bankruptcy or other proceeding is filed or commenced by or against Borrower for its reorganization, dissolution or liquidation without being dismissed within ten (10) days of its commencement; (h) If Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (i) If a notice of lien, levy or assessment is filed of record with respect to any or all of Borrower's assets by the United States Government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other government agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether inchoate or otherwise, upon any or all of the Borrower's assets and the same is not paid on the payment date thereof; (j) If a judgment or other claim becomes a lien or encumbrance upon any or all of Borrower's assets and the same is not satisfied, dismissed or bonded against within ten (10) days thereafter; (k) If Borrower's records are prepared and kept by an outside computer service bureau at the time this Agreement, the Note and/or the Loan Documents are entered into or during the term of this Agreement, the Note and/or the Loan Documents, such an agreement with an outside service bureau is entered into, and at any time thereafter, without first obtaining the written consent of Bank, Borrower terminates, modifies, amends or changes its contractual relationship with said computer service bureau or said computer service bureau fails to provide Bank with any requested information or financial data pertaining to Bank's Collateral, Borrower's financial condition or the results of Borrower's operations; (l) If Borrower permits a default in any material agreement to which Borrower is a party with third parties so as to result in an acceleration of the maturity of Borrower's indebtedness to others, whether under any indenture, agreement or otherwise; (m) If Borrower makes any payment on account of indebtedness which has been subordinated to Borrower's obligations to Bank, including without limitation the Indebtedness; (n) If any material misrepresentation exists now or thereafter in any warranty or representation made to Bank by any officer or director of Borrower, or if any such warranty or representation is withdrawn by any officer or director; 4 (o) If any party subordinating its claims to that of Bank's or any guarantor of Borrower's obligations terminates its subordination or guaranty, becomes insolvent or an insolvency proceeding is commenced by or against any such subordinating party or guarantor; (p) If Borrower is an individual and Borrower dies; (q) If there is a change of ownership or control of N/A percent (___%) or more of the issued and outstanding stock of Borrower; or (r) If any reportable event, which the Bank determines constitutes grounds for the termination of any deferred compensation plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any such plan, shall have occurred and be continuing thirty (30) days after written notice of such determination shall have been given to Borrower by Bank, or any such Plan shall be terminated within the meaning of Title IV of the Employment Retirement Income Security Act ("ERISA"), or a trustee shall be appointed by the appropriate United States District Court to administer any such plan, or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any plan and in case of any event described in this Section 8, the aggregate amount of the Borrower's liability to the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of Borrower's Tangible Effective Net Worth. Bank shall not be obligated to make advances to Borrower during any cure period provided for in Sections 8(e), 8(f), 8(j), and 8(r) above. 9. RIGHTS AND REMEDIES. The parties have agreed as follows with respect to Bank's rights and remedies upon Default. (a) Bank shall have all rights and remedies available hereunder and under the Note and the Loan Documents and under applicable law; (b) Bank may at its option without notice, accelerate the Indebtedness and declare all Indebtedness to be due, owing and payable in full; (c) Bank may at its option without notice, cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or any other agreement between Borrower and Bank. (d) No Default (as defined in this Agreement, the Note and/or the Loan Documents) shall be waived by Bank except in writing and a waiver of any Default shall not be a waiver of any other default or of the same default on a future occasion; (e) No single or partial exercise of any right, power or privilege hereunder, or any delay in the exercise hereof, shall preclude other or further exercise of the rights of the parties under this Agreement, the Note and/or the Loan Documents; and (f) No forbearance on the part of Bank in enforcing any of its rights under this Agreement, the Note and/or the Loan Documents nor any renewal, extension or rearrangement of any payment or covenant to be made or performed by Borrower hereunder shall constitute a waiver of any of the terms of this Agreement, the Note, and/or the Loan Documents, or of any such right. 10. CROSS-DEFAULT. A Default under this Agreement shall also be a Default under the Note and the Loan Documents, and vice versa. A Default under this Agreement, the Note and/or the Loan Documents shall also be a Default under every other note and other agreement between Bank and Borrower, and vice versa. 11. CROSS-COLLATERAL. Any Collateral for this Agreement, the Note and/or the Loan Documents shall also be Collateral for any other obligations owing by Borrower to Bank. Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in any of the undersigned's principal dwelling or in any of the undersigned's real property which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if the undersigned (or any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. 12. SURVIVAL OF COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES. All covenants, agreements, representations and warranties (a) previously made (except as specifically subsequently modified); (b) made in connection herewith or with the Note and/or the Loan Documents and/or any document contemplated hereby; or (c) executed hereafter (unless such document expressly states that this Agreement does not apply thereto) shall survive the borrowing hereunder and thereunder and the repayment in full of the Note and/or the Loan Documents and any amendments, renewals or extensions thereof and shall be deemed to have been relied upon by Bank. All statements contained in any certificate or other document delivered to Bank at any time by or on behalf of Borrower shall constitute representations and warranties by Borrower. 13. MISCELLANEOUS. The parties agree to the following miscellaneous terms: (a) This Agreement, the Note and the Loan Documents shall be governed by California law, without regard for the effect of conflict of laws; 5 (b) Borrower agrees that it will pay all out of pocket costs of Bank and expenses (including, without limitation, Bank's attorneys' fees and costs and/or fees, transfer charges and costs of Bank's in-house counsel) in connection with the preparation of this Agreement, the Note and/or the Loan Documents and/or the documents contemplated hereby and the closing of the Loan; (c) This Agreement, the Note and/or the Loan Documents shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that Borrower shall not assign or transfer its right or obligations under this Agreement, the Note and/or the Loan Documents without the prior written consent of Bank; (d) Borrower acknowledges that Bank may provide information regarding Borrower and the Loan to Bank's parent, subsidiaries and affiliates and service providers, and (e) This Agreement is an integrated agreement and supersedes all prior negotiations and agreements regarding the subject matter hereof. Any amendments hereto shall be in writing and be signed by all parties hereto. 14. JURY WAIVER. THE BORROWER AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. IN WITNESS WHEREOF, the parties have executed this Business Loan Agreement as of the date first set forth above. Address of Borrower: Borrower: 2130 Gold Street, Suite 100 Tab Products Co. - ----------------------------------- ----------------------------------- San Jose, California 95164 - ----------------------------------- By: /s/ David J. Davis ------------------------------- Title: SVP & CFO ---------------------------- By: /s/ Robert J. Sutton ------------------------------- Title: Treasurer & Secretary ---------------------------- Comerica Bank-California ("Bank") By: /s/ Carl S. Saba ------------------------------- Carl S. Saba Title: Assistant Vice President ---------------------------- 6 ADDENDUM A TO BUSINESS LOAN AGREEMENT (FINANCIAL COVENANTS) 1. DEFINITIONS RELATING TO FINANCIAL COVENANTS. CASH FLOW as used in this Agreement means for any applicable period of determination, the net income (as later defined) (after deduction for income taxes and other taxes of Borrower or its subsidiaries, determined by reference to income or profits of Borrower or its subsidiaries) for such period, plus, to the extent deducted in computation of such net income, the amount of depreciation and amortization expense and the amount of deferred tax liability during such period, all as determined in accordance with GAAP. For Borrower and its subsidiaries, the applicable period of determination will be N/A, beginning with the period from ______________ to ______________. CASH FLOW COVERAGE RATIO means the ratio, as of any applicable period of determination, the numerator of which is net income plus depreciation plus amortization plus (or minus) the increase (or decrease) in the deferred tax liability minus dividends and S-Draws, if an S-Corp, at the greater of actual draws or net income times the highest prevailing personal tax rate, and the denominator of which is the current portion of long term debt plus the current portion of capital lease payments for the same period of determination. CURRENT ASSETS as used in this Agreement means, as of any applicable date of determination, all unrestricted cash, CD's or marketable securities, non-affiliated accounts receivable, United States Government securities and/or claims against the United States Government, and inventories (held for sale in the ordinary course of business) of Borrower and its subsidiaries. CURRENT LIABILITIES as used in this Agreement means, as of any applicable date of determination, (i) all liabilities of Borrower or its subsidiaries that should be classified as current in accordance with GAAP, including, without limitation, any portion of the principal of the Indebtedness under this Agreement, the Note and/or the Loan Documents classified as current, plus (ii) to the extent not otherwise included, all liabilities of Borrower to any of its affiliates (including officers, directors, shareholders, subsidiaries and commonly held companies), whether or not classified as current in accordance with GAAP unless same shall be the long term portion of Subordinated Debt (as defined below). CURRENT RATIO as used in this Agreement means, as of an applicable date of determination, Current Assets divided by Current Liabilities. DEBT shall mean, as of any applicable date of determination, all items of indebtedness, obligation or liability of a person, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, that should be classified as liabilities in accordance with GAAP excepting such liabilities as shall be Subordinated Debt (as defined below). FIXED CHARGES as used in this Agreement means, as of any applicable period of determination, with respect to Borrower and its subsidiaries, the sum, without duplication, of (a) all interest paid or payable during such period by Borrower or its subsidiaries on debt of such person; PLUS (b) all payments of principal or other sums paid or payable during such period by such person with respect to Debt having a final maturity more than one year from the date of creation of such debt; PLUS (c) all debt discount and expense amortized or required to be amortized during such period by such person; PLUS (d) the maximum amount of all rents and other payments paid or required to be paid by such person during such period under any lease or other contract or arrangement providing for use of real or personal property in respect of which such person is obligated as a lessee, user or obligor, PLUS (e) all dividends and other distributions paid or payable by Borrower (including S-Draws, if applicable, as per the Cash Flow Coverage Ratio above) or its subsidiaries or otherwise accumulating during such period on any capital stock of Borrower or its subsidiaries; PLUS (f) all loans or other advances made by Borrower or its subsidiaries during such period to any affiliate of such person. The applicable period of determination will be N/A, beginning with the period from ______________ to ______________. NET INCOME shall mean the net income (or loss) of a person for any period determined in accordance with GAAP but, however, excluding: (a) any gains or losses on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and any taxes on the excluded gains and any tax deductions or credits on account on any excluded losses, and (b) in the case of the Borrower, net earnings of any person in which Borrower has an ownership interest, unless such net earnings shall have actually been received by Borrower in the form of cash distributions. QUICK ASSETS as used in this Agreement means, as of any applicable date of determination, unrestricted cash, CD's or marketable securities and net accounts receivable arising from the sale of goods and services, and United States Government securities and/or claims against the United States Government of Borrower and its subsidiaries. QUICK RATIO as used in this Agreement means, as of an applicable date of determination, Quick Assets divided by Current Liabilities, excluding subordinated debt. 7 TANGIBLE EFFECTIVE NET WORTH as used in this Agreement means Tangible Net Worth as of any applicable date of determination, increased by the long term portion of Subordinated Debt (as defined below), if any, of Borrower or its subsidiaries and decreased by the following: Subscription lists, organization expenses, trade accounts receivable converted to notes, and money due to Borrower or its subsidiaries from affiliates (including officers, directors, subsidiaries and commonly held companies). TANGIBLE NET WORTH as used in this Agreement means, as of any applicable date of determination, the excess of: (a) the net book value of all assets of Borrower and its subsidiaries (other than patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, goodwill, and similar intangible assets) after all appropriate deductions in accordance with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation and amortization), minus (b) all Total Liabilities of Borrower and its subsidiaries. TOTAL LIABILITIES as used in this Agreement means, as of any applicable date, the total of all items of indebtedness, obligation or liability which, in accordance with GAAP consistently applied, would be included in determining the total liabilities of Borrower or its subsidiaries, including, without limitation, (a) all obligations secured by any mortgage, pledge, security interest or other lien on property owned or acquired, whether or not the obligations secured thereby shall have been assumed; (b) all obligations which are capitalized lease obligations; and (c) all guaranties, endorsements or other contingent or surety obligations with respect to the indebtedness of others, whether or not reflected on the balance sheets of Borrower or its subsidiaries, including, without limitation, any obligation to furnish funds, directly or indirectly through the purchase of goods, supplies, services, or by way of stock purchase, capital contribution, advance or loan or any obligation to enter into a contract for any of the foregoing. TOTAL LIABILITIES TO TANGIBLE EFFECTIVE NET WORTH RATIO means, as of any applicable date, Total Liabilities dividend by Tangible Effective Net Worth. SUBORDINATED DEBT as used in this Agreement means indebtedness of Borrower to third parties which has been subordinated to all Indebtedness owing by Borrower to Bank pursuant to a subordination agreement in form and content satisfactory to Bank. WORKING CAPITAL as used in this Agreement means, as of any applicable date of determination, Current Assets less Current Liabilities. OTHER. N/A _____________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 2. FINANCIAL COVENANTS. Borrower shall maintain the following financial ratios and covenants on a consolidated and non-consolidated basis, which shall be monitored on a QUARTERLY basis, except as noted below. (a) Working Capital in an amount not less than N/A; (b) Tangible Effective Net Worth in an amount not less than $40,000,000.00; (c) A ratio of Current Assets to Current Liabilities of not less than N/A; (d) A ratio of Quick Assets to Current Liabilities of not less than 1.50:1.00; (e) A ratio of Total Liabilities (less Subordinated Debt as defined herein) to Tangible Effective Net Worth of less than 0.70:1.00; (f) A Cash Flow Coverage Ratio of not less than N/A; (g) Net income after taxes or S-Draws as per Cash Flow Coverage Ratio above of N/A; (h) Profitability on a N/A basis; (i) Fixed Charge Ratio of N/A; (j) Other applicable terms: DURING THE TERM OF THIS AGREEMENT, BORROWER SHALL MAINTAIN WITH BANK AVERAGE DAILY NET FREE COLLECTED DEMAND DEPOSITS IN AN AMOUNT NOT LESS THAN THREE MILLION DOLLARS ($3,000,000). NET FREE DEMAND DEPOSITS SHALL BE COMPUTED ON A CALENDAR MONTH BASIS. FOR PURPOSES OF THIS AGREEMENT, "NET FREE COLLECTED DEMAND DEPOSITS" MEANS BALANCES IN DEMAND DEPOSIT ACCOUNTS AFTER DEDUCTING PROVISIONAL CREDITS FOR ITEMS IN THE PROCESS OF COLLECTION AND BALANCES REQUIRED BY BANK UNDER ITS NORMAL PRACTICES TO COMPENSATE BANK FOR MAINTENANCE OF SUCH DEPOSIT ACCOUNTS. All financial covenants shall be computed in accordance with GAAP consistently applied except as otherwise specifically set forth in this Agreement. All monies due from affiliates (including officers, directors and shareholders) shall be excluded from Borrower's assets for all purposes hereunder. /s/ DJD --------------- INITIAL HERE 8 -----END PRIVACY-ENHANCED MESSAGE-----