10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

/x/
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter period ended February 28, 2001

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 February 28, 2001 - 5,168,495.

    This report, including all exhibits and attachments, contains 33 pages.

TAB PRODUCTS CO.
INDEX

		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1	Financial Statements:
	Consolidated Condensed Balance Sheets February 28, 2001 and May 31, 2000	3
	Consolidated Condensed Statements of Earnings Three months and Nine months ended February 28, 2001 and February 29, 2000	4
	Consolidated Condensed Statements of Cash Flows Nine months ended February 28, 2001 and February 29, 2000	5
	Supplemental Financial Data—Notes	6
ITEM 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 3	Quantitative and Qualitative Disclosure About Market Risks	18
PART II. OTHER INFORMATION
ITEM 4	Submission of Matters to a Vote of Security Holders	19
ITEM 6	Exhibits	19
	Signatures	20

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TAB PRODUCTS CO.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(000's omitted except share data)

			February 28, 2001			May 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	7,075		$	5,724
	Short-term investments			3,900			5,170
	Accounts receivable, less allowances of $1,045 and $1,095 for doubtful accounts,			22,101			29,685
	Inventories			5,765			6,842
	Prepaid income taxes and other expenses			6,537			3,837
		Total Current Assets		45,378			51,258
Property, plant and equipment, net of accumulated depreciation of $27,921 and $28,845				7,738			12,253
Goodwill, net				6,668			7,387
Other assets				2,627			2,395
Total Assets			$	62,411		$	73,293
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	8,843		$	10,024
	Compensation payable			2,335			2,911
	Other accrued liabilities			4,648			6,099
		Total Current Liabilities		15,826			19,034
Deferred taxes and other non-current liabilities				1,447			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—February 2001—7,704,464 shares and May 2000—7,611,116 shares				77			76
	Additional paid-in capital			15,098			15,286
	Deferred compensation			(397	)		(1,374	)
	Retained earnings			62,881			70,573
	Treasury stock: February 2001—2,535,969 shares and May 2000—2,404,027 shares			(31,597	)		(31,164	)
	Accumulated other comprehensive loss			(924	)		(717	)
		Total Stockholders' Equity		45,138			52,680
Total Liabilities and Stockholder's Equity			$	62,411		$	73,293

See Notes to Consolidated Condensed Financial Statements.

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TAB PRODUCTS CO.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)

(000's omitted except share data)

			Three Months Ended February 28/29,						Nine Months Ended February 28/29,
			2001			2000			2001			2000
Revenues			$	29,143		$	32,727		$	89,335		$	95,922
Costs and Expenses:
	Cost of revenues			17,917			20,169			55,955			57,974
	Selling, general and administrative			15,491			15,087			44,548			43,335
	Research and development			182			237			541			634
		Total Costs and Expenses		33,590			35,493			101,044			101,943
		Operating Loss		(4,447	)		(2,766	)		(11,709	)		(6,021	)
Gain on sale of Field Service Group				—			—			—			13,794
Gain on the sale of property				1,064			12,623			1,064			12,623
Interest, net, and other				28			85			13			(42	)
		(Loss) earnings before income taxes		(3,355	)		9,942			(10,632	)		20,354
(Benefit) provision for income taxes				(1,029	)		4,432			(3,788	)		8,805
Net (Loss) Earnings before cumulative effect of a change in an accounting principle			$	(2,326	)	$	5,510		$	(6,844	)	$	11,549
Cumulative effect of a change in accounting principle				—			—			(330	)		—
Net (Loss) Earnings			$	(2,326	)	$	5,510		$	(7,174	)	$	11,549
Basic net (loss) earnings per share before cumulative effect of a change in accounting principle			$	(0.45	)	$	1.06		$	(1.33	)	$	2.26
Cumulative effect on prior years of a change in accounting principle				—			—			(0.06	)
Basic net (loss) earnings per share			$	(0.45	)	$	1.06		$	(1.39	)	$	2.26
Shares used in computing basic net (loss) earnings per share				5,166,678			5,212,199			5,169,292			5,117,198
Diluted net (loss) earnings per share before cumulative effect of a change in accounting principle			$	(0.45	)	$	1.06		$	(1.33	)	$	2.25
Cumulative effect on prior years of a change in accounting principle				—			—			(0.06	)		—
Diluted net (loss) earnings per share			$	(0.45	)	$	1.06		$	(1.39	)	$	2.25
Shares used in computing diluted net (loss) earnings per share				5,166,678			5,215,060			5,169,292			5,124,806

See Notes to Consolidated Condensed Financial Statements.

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TAB PRODUCTS CO.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000's omitted)

			Nine Months Ended February 28/29
			2001			2000
OPERATING ACTIVITIES:
	Net (loss) earnings		$	(6,844	)	$	11,549
	Cumulative Effect of a change in accounting principle			(330	)
	Adjustments to Reconcile Net (Loss) Earnings to Net Cash
	Required by Operating Activities:
	Depreciation and amortization			4,294			3,160
	Gain on sale of Field Service Group			—			(13,794	)
	Gain on sale of Property			(1,119	)		(12,623	)
	Deferred income taxes and other			334			—
	Loss on sale of fixed assets			143			—
	Changes in operating assets and liabilities:
		Accounts receivable, net		6,923			(394	)
		Inventories		1,276			(759	)
		Prepaid income taxes and other expenses		(2,843	)		(484	)
		Other assets		(361	)		(391	)
		Accounts payable		(1,124	)		1,071
		Compensation payable		(575	)		359
		Other accrued liabilities		(1,335	)		3,782
Net Cash Required by Operating Activities				(1,561	)		(8,524	)
INVESTING ACTIVITIES:
	Sale of Field Service Group			—			13,405
	Sale of Property			2,725			17,505
	Purchase of property, plant and equipment, net			(715	)		(1,172	)
	Purchases of short-term investments			(5,445	)		(4,661	)
	Sales of short-term investments			6,715			4,028
Net Cash Provided By Investing Activities				3,280			29,105
FINANCING ACTIVITIES:
	Repayment of long-term debt			—			(1,664	)
	Cash restricted to collateralize loan			—			(6,000	)
	Proceeds from issuance of common stock			292			31
	Repurchase of Treasury Stock			62			(218	)
	Dividends paid			(516	)		(772	)
Net Cash Required by Financing Activities				(162	)		(8,623	)
Effect of exchange rate changes on cash				(206	)		(111	)
Decrease in cash and cash equivalents				1,351			11,847
Cash and cash equivalents at beginning of period				5,724			6,972
Cash and Cash Equivalents at End of Period			$	7,075		$	18,819

See Notes to Consolidated Condensed Financial Statements.

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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 nine-month period ended February 28, 2001 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):

	February 28, 2001		May 31, 2000
Finished goods	$	1,587	$	2,164
Work in process		274		273
Raw materials		3,904		4,405
	$	5,765	$	6,842

3.  DIVIDENDS

    Dividends declared for the nine-month periods ended February 28, 2001 and February 29, 2000 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
	February 25, 2000	5,207,089	$	.05

    On March 27, 2001, the Company's Board of Directors discontinued the dividend on common stock of the Company.

4.  Segment Reporting

    Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The Chief Executive Officer is the Company's chief decision maker. The Company operates and is managed internally by four geographic operating segments. The operating segments include United States,

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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 Chief Executive Officer.

Information about segments (in thousands):

		Three Months Ended February 28/29						Nine Months Ended February 28/29,
		2001			2000			2001			2000
Revenues:
	United States	$	21,248		$	25,199		$	67,365		$	75,695
	Canada		5,532			5,352			15,663			13,784
	Netherlands		1,349			1,434			3,286			3,669
	Australia		1,014			742			3,020			2,774
	Consolidated Total	$	29,143		$	32,727		$	89,335		$	95,922
Income (Loss) before income taxes:
	United States	$	(4,001	)	$	9,424		$	(11,817	)	$	20,334
	Canada		107			292			416			(356	)
	Netherlands		507			335			772			580
	Australia		32			(109	)		(3	)		(204	)
	Consolidated Total	$	(3,355	)	$	9,942		$	(10,632	)	$	20,354
Depreciation and amortization:
	United States	$	1,903		$	969		$	3,914		$	2,811
	Canada		160			35			288			256
	Netherlands		27			14			63			44
	Australia		6			17			29			49
	Consolidated Total	$	2,096		$	1,035		$	4,294		$	3,160

		February 28, 2000		May 31, 2000
Long-lived assets:
	United States	$	9,515	$	13,585
	Canada		528		733
	Netherlands		121		151
	Australia		201		179
	Consolidated Total	$	10,365	$	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.

5.  NET EARNINGS (LOSS) PER SHARE

    Basic earnings (loss) per share is computed by dividing net earnings by the weighted average common shares outstanding for the period while diluted earnings (loss) per share also includes the

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dilutive impact of stock options. Basic and diluted earnings (loss) per share for the quarters and nine-months ended February 28/29, 2001 and 2000, respectively, are calculated as follows (in thousands, except share data):

		Three Months Ended February 28/29,					Nine Months Ended February 28/29,
		2001			2000		2001			2000
Net (Loss) Earnings before cumulative effect of a change in accounting principle		$	(2,236	)	$	5,510	$	(6,844	)	$	11,549
Cumulative effect of a change in accounting principle			—			—		(330	)		—
Net (Loss) Earnings		$	(2,236	)	$	5,510	$	(7,174	)	$	11,549
Basic:
	Weighted average common shares outstanding used in computing basic net earnings (loss) per share		5,166,678			5,212,199		5,169,292			5,117,198
Basic Net (Loss) Earnings Per Share before cumulative effect of a change in accounting principle		$	(0.45	)	$	1.06	$	(1.33	)	$	2.26
Cumulative effect of a change in accounting principle			—			—		(0.06	)		—
Basic Net (Loss) Earnings Per Share		$	(0.45	)	$	1.06	$	(1.39	)	$	2.26
Diluted:
	Weighted average common shares Outstanding		5,166,678			5,212,199		5,169,292			5,117,198
	Dilutive options outstanding		—			2,861		—			7,608
	Shares used in computing diluted net earnings (loss) per share		5,166,678			5,215,060		5,169,292			5,124,806
Diluted Net (Loss) Earnings Per Share before cumulative effect of a change in accounting principle		$	(0.45	)	$	1.06	$	(1.33	)	$	2.25
Cumulative effect of a change in accounting principle			—			—		(0.06	)		—
Diluted Net (Loss) Per Share		$	(0.45	)	$	1.06	$	(1.39	)	$	2.25

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6.  COMPREHENSIVE INCOME (LOSS)

    The components of comprehensive income (loss), net of tax, are as follows (in thousands):

	Three Months Ended February 28/29						Nine Months Ended February 28/29,
	2001			2000			2001			2000
Net earnings (loss)	$	(2,236	)	$	5,510		$	(7,174	)	$	11,549
Foreign currency translation		48			(202	)		(207	)		(617	)
Comprehensive income (loss)	$	(2,188	)	$	5,308		$	(7,381	)	$	10,932

Accumulated other comprehensive income (loss), net of tax, presented on the accompanying consolidated condensed balance sheets consists of the following (in thousands):

	February 28, 2001			May 31, 2000
Foreign currency translation	$	(924	)	$	(717	)

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.

9.  CHANGE IN ACCOUNTING PRINCIPLE

    After evaluation of the Company's revenue recognition policies compared to the guidance in the Securities and Exchange Commission's Staff Accounting Bulletin No. 101B ("SAB No. 101") the

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Company has changed its accounting policy for revenue from the sale of mobile file storage equipment. Adoption of the change in accounting, in the third quarter of fiscal year 2001, resulted in revenue being recorded only after installation of the equipment on customer premises rather than upon shipment, thus postponing revenue recognition by an average of two months. The change in accounting necessitated the restatement of the first and second quarter 10Q filings to properly reflect the cumulative effect of a change in accounting principle. The effect on the Net Loss before cumulative effect of a change in accounting principle for the three and nine months ended February 28, 2001 was a decrease in the loss of $118,000 and $274,000, respectively. The Cumulative effect of the change in accounting principle was a charge of $330,000. The effect on the Net Loss for the third fiscal quarter was a $118,000 reduction in the loss. The effect on the Net Loss for the third fiscal quarter was a $118,000 reduction in the loss. The effect on the Net Loss for the nine months was an increase in the Net Loss of $56,000.

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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. These statements are only predictions.

    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 Company is not under any obligation (and expressly disclaims any such obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

    The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of the Company.

Financial Condition

    At February 28, 2001, the Company had cash and short-term investments of $11.0 million, an increase of $.1 million from the $10.9 million at May 31, 2000. The Company's working capital position at February 28, 2001 was $29.6 million as compared with $32.2 million at May 31, 2000. The current ratio of 2.9 at February 28, 2001 was higher than the current ratio of 2.7 reported for May 31, 2000. The increase in cash is the result of the proceeds from the sale of property offset by 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. A reduction in accounts receivable of $7.6 million from $29.7 million on May 31, 2000 to $22.1 million on February 28, 2001 and a decrease in inventories to $5.8 million at February 28, 2001 as compared to $6.8 million at May 31, 2000 also contributed to the improved cash position at February 28, 2001. The decrease in working capital is primarily the result of the above-mentioned decrease in accounts receivable and inventory. The Company has increased efforts to reduce both accounts receivable and inventory in order to reduce working capital requirements.

    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 &

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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 $3.2 million from $19.0 million at May 31, 2000 to $15.8 million at February 28, 2001. 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 $0.1 million and $0.7 million for the three months and nine months ended February 28, 2001. 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 nine-month period ended February 28, 2001 and 2000, the Company paid cash dividends of $516,000 and $772,000, respectively. On March 27, 2001, the Company's Board of Directors discontinued the dividend on common stock of the Company.

    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 current cash, future cash flows and borrowing capacity will provide sufficient working capital for the next twelve months. The Company's cash flow in its fiscal fourth quarter will be negatively impacted by the relocation of the corporate office from San Jose, Ca to Vernon Hills, IL. In the quarter payments will be made to employees for severance, to vendors for moving costs and the Company will have duplicate salary expense incurred during training of new employees. The Company intends on accelerating the filing of its tax return for fiscal 2001 in order to expedite a refund of prior year taxes due to operating loss carrybacks. The Company estimates this refund will be at least $3 million.

    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 $12.6 million for the Company.

    On February 16, 2001 the Company completed the sale of unutilized property and a building for $2.9 million. In connection with the sale the Company recorded a pre-tax gain on sale of $1.1 million in the third quarter of fiscal year 2001.

Results of Operations

    Revenues for the third quarter of fiscal 2001 amounted to $29.1 million, down $3.6 million or 11% from the $32.7 million revenue reported in the third quarter of fiscal 2000. Revenues for the nine months ended February 28, 2001 were $89.3 million, down $6.6 million or 6.9% from revenues of $95.9 million reported in the first nine months of the prior fiscal year. The Company experienced lower

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U.S. sales of file storage equipment, systems furniture, professional services and technology products partially offset by increases in revenues from filing supplies, imaging services and international operations. The decrease in sales in the third quarter of fiscal 2001 was primarily due to sales headcount reductions and sales management turnover.

    Backlog The Company's order booking to invoicing ratio ("book-to-bill ratio") was .89:1.0 for the third quarter of fiscal 2001, resulting in a reduction in backlog. The ratio was 1.09:1.0 in the second quarter of fiscal 2001 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 in coming quarters.

    Cost of Revenue, as a percentage of revenues, was 61.5% for the third quarter of fiscal 2001 as compared to the 61.6% cost of revenue reported in the third quarter of fiscal 2000. Cost of revenues for the third quarter was $17.9 million as compared to the $20.2 million reported in the comparable quarter of fiscal 2000. The decrease in cost of revenue in absolute dollars quarter to quarter was primarily due to the reduction in revenue. For the nine months ended February 28, 2001 cost of revenues was 62.6% as compared to 60.4% cost of revenue in the first nine months of the prior fiscal year. The increase in cost of revenues as a percentage of revenue for the nine months ended February 28, 2001 was primarily due to fixed costs not decreasing as sales volume decreased. In addition, in the third quarter of fiscal year 2001 the Company reversed certain accruals previously recorded related to the Company's Professional Services cost of sales in the amount of $1.1 million. The reversal of these accruals was based on a review of the Company's accrued services liabilities which were determined to be greater than that which was required.

    Operating Expenses were $15.7 million or 53.7% of total revenues for the third quarter of fiscal 2001 as compared to $15.3 million or 46.8% of total revenues for the third quarter of fiscal 2000. For the nine months ended February 28, 2001, operating expenses were $45.1 million or 50.4% of total revenues as compared to $44.0 million for the nine-month period or 45.9% 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, the charges related to the previously announced relocation of the Company's headquarters from San Jose, CA to Vernon Hills, IL, Also contributing to the increased year-over-year expense is the rent expense incurred for the San Jose corporate office which was not occupied in fiscal year 2000. In fiscal year 2000 the Company occupied an owned corporate office complex that was sold in February 2000. Offsetting these increase was reduced branch operating expenses, salaries and commission expense.

    Gain on Sale was $1.1 million in the third quarter of fiscal year 2001 as compared to $12.6 million in the third quarter of fiscal year 2000. On February 16, 2001 the Company completed the sale of unutilized property and a building for a gross sales price of $2.9 million. On February 23, 2000, the Company sold its corporate headquarters buildings and the associated land leases for a gross sales price of $18 million. For the nine months ended February 29, 2000, the Company also reported a gain on sale of $13.8 million related to the sale of its Field Services Group for a gross sales price of $19 million. There were no gains on sale in the first two quarters of fiscal 2001.

    Interest, net, and other expenses was a net expense of $27,000 in the third quarter of fiscal 2001 as compared to $85,000 in net revenue in the third quarter of fiscal 2000. For the nine months ended February 28, 2001 interest, net, and other was a net revenue of $13,000 as compared to a net expense of $42,000 in the prior fiscal year. The increased expense for the three months ended February 28, 2001 was primarily due to foreign exchange losses and lower interest earned on the cash balances. There was no debt related interest charge in the nine months ended February 28, 2001. Interest was being earned on higher cash balances in Fiscal 2000 due to proceeds from the sales of the Field Service Group and the Corporate headquarters buildings.

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    Income Tax Benefit Net losses for the nine months ended February 28, 2001 have been reduced by the amount of tax refunds available from the carryback of net operating losses to prior years. The effective rate of 35.6% for the nine month period ended February 28, 2001 is lower than the effective rate of 43.3% for the prior fiscal year due to limitation on loss carrybacks by certain states.

    Net Loss Per Share for the three months ended February 28, 2001 was $0.45 for both basic and diluted shares compared to earnings per share of $1.06 for both basic and diluted shares for the three months ended February 29, 2000. The net loss per share for the nine months ended February 28, 2001 was $1.39 for both basic and diluted shares, which contains a $.06 per share charge related to the cumulative effect of the change in accounting. For the nine months ended February 29, 2000 basic earnings per share were $2.26 and diluted earnings per share were $2.25, which included the gains on the sales of the Field Services Group and the corporate headquarters buildings.

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 the Securities and Exchange Commission's Staff Accounting Bulletin No. 101B ("SAB No. 101") the Company has changed its accounting policy for revenue from mobile file storage equipment. Adoption of the change in accounting, in the third quarter of fiscal year 2001, resulted in revenue being recorded only after installation of the equipment on customer premises rather than upon shipment, thus postponing revenue recognition by an average of two months. The change in accounting necessitated the restatement of the first and second quarter 10Q filings to properly reflect the beginning of the year recording of the cumulative effect on prior years (to May 31, 2000) of a change in accounting principle.

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 22 sales branches in the U.S. and Canada employing approximately 70 account managers who primarily call on large companies and government agencies. The Company currently also

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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's dual independent and direct distribution system may result in higher selling costs, additional training requirements, and possible channel conflict. The Company also maintains a call center to receive orders by telephone and has been expanding the call center operation to include outbound solicitation of orders. There can be no assurance that the Company's distribution system will obtain sufficient orders to return the Company to profitability.

Retaining and Attracting Qualified Personnel

    The Company's future performance depends in significant part upon attracting and retaining key management, sales, manufacturing, marketing and technical support personnel. Risk exists that competitors will attempt to attract the Company's currently high performing sales personnel. The Company is working on plans to ensure this risk is mitigated. The Company's current project of relocating its corporate offices from San Jose, CA to Vernon Hills, IL increases the risk as it requires the Company to attract new personnel at both the senior management and middle management levels. Competition for such personnel exists. In particular, the Company is in the process of replacing most senior management positions. The inability to attract, assimilate or retain 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.

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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.

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, except in the case of mobile filing products. 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.

Government Sales

    Government revenues primarily expose the Company to risks from reductions in budget allocations to support regulation and administrative offices. The current reinventing government initiative opens opportunities to help the government streamline workflow processes, reduce paperwork and increase customer service, which may provide short-term opportunities for the Company. However, the long-term effect of a government initiative to streamline processes could have a negative impact on the Company's business, financial condition and results of operations.

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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 27% and 23%, respectively of the Company's total revenues in the third quarter of fiscal 2001 and 2000. Fluctuations in currencies negatively impacted the Company in its third 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.

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Management of Growth

    The Company increased its expense levels in fiscal 1999 and 2000 to support planned growth. In fiscal 2001 the Company is 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 $3.9 million as of February 28, 2001. 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 February 28, 2001, a hypothetical 10% adverse change in Netherlands 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.

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PART II: OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS
	Not applicable.
ITEM 2.	CHANGES IN SECURITIES
	Not applicable.
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
	Not applicable.
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	None
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	Employment Agreement between the Company and Gary W. Ampulski1
		10.2	Change of Control Agreement between the Company and Gary W. Ampulski1
	(b)	Reports on Form 8-K

(1)

Compensatory Plan or Arrangement

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TAB PRODUCTS CO. (Registrant)
Date: April 16, 2001	/s/ DAVID J. DAVIS David J. Davis, Senior Vice President and Chief Financial Officer
Date: Apri1 16, 2001	/s/ ROBERT J. CRECCA Robert J. Crecca, Corporate Controller and Chief Accounting Officer

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QuickLinks

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

PART II: OTHER INFORMATION

EX-10.1

EXHIBIT 10.1

December 13, 2000

Mr. Gary W. Ampulski
405 St. Andrews Lane
Gurnee, IL 60031

     Dear Gary:

    Pursuant to our recent discussions, this letter sets forth the terms of your employment with TAB Products Co. (the "Company").

    1.  POSITION: You will be employed by the Company as its President and Chief Executive Officer, reporting to the Company's Board of Directors (the "Board"). The Company will undertake reasonable efforts to have you elected to the Board during your employment, and you agree that upon the termination of your employment for any reason you shall promptly resign from the Board. You accept employment with the Company on the terms and conditions set forth in this Agreement, and you agree to devote your full business time, energy and skill to your duties at the Company. However, you shall be entitled to engage in other professional activities, including, but not limited to, participating on other boards of directors (provided that you give advance written notice to the Board of your participation on such other boards), which activities do not materially interfere with the performance of your duties for the Company. Your duties shall include, but not be limited to, the overall general management of the Company, as well as other reasonable duties that may be assigned to you from time to time by the Board.

    2.  TERM OF EMPLOYMENT: Your employment with the Company shall start on January 1, 2001, will be for no specified term, and may be terminated by you or the Company at any time, with or without cause, subject to Paragraphs 4 and 5 below.

    3.  COMPENSATION: You will be compensated by the Company for your services as set forth below. All amounts paid to you by the Company or other compensation realized by you will be subject to applicable income and employment withholding taxes.

    (a) SALARY: During your employment you will be paid an annual base salary of $350,000 in accordance with the Company's normal payroll procedures. Your base salary may be increased from time to time at the discretion of the Board.

    (b) INCENTIVE BONUS: Commencing with the Company's fiscal year beginning on or about June 1, 2001, you will be eligible to receive annual bonuses based upon the Company's achievement of various financial and/or other goals established by the Board and you. For each Company fiscal year commencing with the fiscal year beginning on or about June 1, 2001, you will be eligible for a bonus of up to 100% of your annual base salary paid during that fiscal year, with a target bonus equal to 60% of your annual base salary paid during that fiscal year. The goals that govern your bonus eligibility for a fiscal year will be agreed upon by the Board and you and confirmed in writing no later than 30 days following the start of such Company fiscal year. To the extent earned, bonuses pursuant to this paragraph will be paid to you 45 days after the later of (i) the end of the applicable fiscal year or (ii) the date on which the financial or other data necessary to determine your entitlement to the bonus are provided to the Board.

    (c) HIRE-ON BONUS: In view of the fact that by leaving your immediate past employer before March 31, 2001, you will forfeit the bonus you will have earned in your position with such employer, the Company will pay you on March 1, 2001, an equivalent bonus but not to exceed $150,000, provided, however, that if you leave the Company voluntarily within a year of your date of employment you will repay to the Company one half of the hire-on bonus.

    (d) RETENTION BONUS: Provided that your employment with the Company has not terminated prior to December 1, 2001 other than by reason of your termination by the Company without Cause (as defined below) or your resignation for Good Reason (as defined below), the Company will pay to you on December 1, 2001 a retention bonus of $87,500.

    (e) BENEFITS: You will have the right, on the same basis as other executive employees of the Company, to participate in and to receive benefits under the Company's executive medical program and other group insurance plans, as well as under the Company's 401(k) plan and business expense reimbursement policy.

    (f)  VACATION: You will accrue four weeks' vacation per year which may be used at times that are mutually convenient and reasonable for both you and the Company.

    (g) STOCK OPTION: You will be granted the option (the "Option") to purchase 260,000 shares of the Company's common stock at an exercise price per share equal to the closing price per share as reported in The Wall Street Journal on the earlier of (i) the date of the start of your employment or (ii) the date of your initial election or appointment to the Board. The foregoing number of shares and exercise price will be subject to appropriate adjustments if there is any stock split, reverse stock split or other change in the Company's capital structure. The Option will expire ten years after its grant date. Subject to your continued employment with the Company, except as otherwise provided in the Change of Control Agreement of even date herewith between you and the Company (the "Change of Control Agreement"), on each respective vesting date, one quarter of the Option will vest on each of the first four anniversary dates of the start of your employment. Except as provided herein or in the Change of Control Agreement, the Option shall be governed by and subject to the terms and conditions of a stock option agreement (which you will be required to sign as a condition of the issuance of the Option) substantially in the form attached hereto as EXHIBIT A; provided, however, that in the event that you are initially elected or appointed to the Board prior to the date on which your employment with the Company commences, you shall be granted automatically on the date of such initial election or appointment an option in accordance with the terms of the Company's 1996 Outside Directors Stock Option Plan, and the number of shares subject to such option shall be credited toward the Option called for by this subparagraph 3(g).

    (h) TEMPORARY COMMUTING AND LIVING EXPENSES: The Company will reimburse you in accordance with its regular reimbursement procedures for your reasonable, temporary expenses of commuting between the San Jose area and your current home and reasonable, temporary living expenses in the San Jose area.

    (i)  LOAN: On or before the date sixty (60) days following the date of your termination of employment with Moore U.S.A. Inc. ("Moore"), the Company will lend you (the "Loan") an amount equal to the outstanding balance (as established by documentation satisfactory to the Company but not to exceed $150,000) of the loan you received from Moore, as described in the Letter of Understanding between you and Moore, dated February 4, 1997, a copy of which is attached hereto as EXHIBIT B (the "Moore Letter"), to enable you to repay such loan as required by the Moore Letter. The Loan shall be made and secured upon terms and conditions substantially equivalent to those set forth in the Moore Letter by substituting the Company in lieu of references to Moore therein and in the repayment schedule referred to in the Moore Letter; provided, however, that (i) the maximum repayment period of the Loan shall not extend beyond the end of the maximum seven (7) year repayment period called for in paragraph 1 of the Moore Letter and (ii) the lump sum payment requirement set forth in paragraph 1 of the Moore Letter shall be contingent upon your eligibility during the applicable year of the Loan to receive any one or more bonus payments from the Company at least equal to the amount of the lump sum payment. Notwithstanding the foregoing, the entire outstanding balance of Loan shall become immediately due and payable on the date sixty (60) days following your termination of employment with the Company for any reason. On and after such date, the Company shall have the unconditional right to reduce any payments owed to you pursuant to this Agreement or pursuant

to the Change of Control Agreement by the amount of the then outstanding balance of principal and interest under the Loan, and you hereby agree to consent to such right. As a condition to making the Loan to you, you shall execute a promissory note in favor of and in a form acceptable to the Company and any other applicable Loan documentation reasonably requested by the Company.

    4.  TERMINATION RESULTING FROM RESIGNATION, DEATH OR DISABILITY: In the event that you voluntarily resign from your employment with the Company, or in the event that your employment terminates as a result of your death or Disability (as defined below), you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination, except that you will not be entitled to any pro rated portion of your incentive bonus for that fiscal year. You agree that in the event you voluntarily terminate your employment with the Company for any reason, you will provide the Company with thirty days' written notice of your resignation. The Company may, in its sole discretion, elect to waive all or part of such notice period and accept your resignation at an earlier date. For the purposes of this Agreement, "Disability" means your inability to perform your duties as an employee of the Company as a result of your incapacity or mental impairment for any 120 days (not necessarily consecutive) in any one year period.

    5.  TERMINATION BY THE COMPANY

    (a) TERMINATION FOR CAUSE: Your employment may be terminated by the Company for Cause (as defined below). If your employment is terminated by the Company for Cause, you will be entitled to no compensation or benefits from the Company other than those earned under Paragraph 3 through the date of your termination, except that you will not be entitled to any pro rated portion of your incentive bonus for that fiscal year.

    For the purposes of this Agreement, a termination for "Cause" occurs if you are terminated for any of the following reasons:

    (i)  your theft, dishonesty, misconduct or intentional falsification of any employment or Company records;

    (ii) your intentional and improper disclosure or use of the Company's confidential or proprietary information;

    (iii) any action by you that has a material detrimental effect on the Company's reputation or business;

    (iv) your failure or inability to perform any assigned duty reasonably expected of a president or chief executive officer after written notice from the Board to you and a reasonable opportunity to cure such failure or inability; or

    (v) your conviction (including any plea of guilty or nolo contendere) for any criminal act that impairs your ability to perform your duties for the Company.

    (b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON: Except as otherwise provided by the Change of Control Agreement in circumstances governed by such agreement, if your employment is terminated by the Company without Cause (and not as a result of your death or Disability), or in the event that you resign for Good Reason (as defined below), you shall be entitled to receive the following:

    (i)  Severance payments equal to the sum of: (1) an amount equal to two times your annual base salary determined on the basis of your base salary rate in effect immediately prior to your termination of employment with the Company and (2) whichever of the following is applicable as of the date of your termination of employment with the Company:

    (A) provided that you have completed at least two full fiscal years of employment with the Company, an amount equal to two times the average of the annual incentive

bonuses pursuant to subparagraph 3(b) above actually earned by you for the two fiscal years of the Company preceding the fiscal year of your termination of employment; or

    (B) provided that you have completed at least one full fiscal year of employment with the Company but less than two full fiscal years of such employment, an amount equal to two times the annual incentive bonus pursuant to subparagraph 3(b) above actually earned by you for the fiscal year of the Company preceding the fiscal year of your termination of employment; or

    (C) provided that you have completed less than one full fiscal year of employment with the Company, an amount equal to $300,000.

The foregoing severance payments described in subparagraph 5(b)(i) shall be paid to you in accordance with the Company's normal payroll procedures pro rata over the period of 24 months following the date of your termination without Cause or resignation for Good Reason.

    (ii) Except in the event that subparagraph 5(b)(i)(C) is applicable, you shall also be entitled to receive as a severance payment that portion of the incentive bonus pursuant to subparagraph 3(b) above, if any, you will have earned for the fiscal year of your termination on the basis of the achievement of the agreed upon goals for the fiscal year of your termination, such portion to be pro rated to the date of your termination without Cause or resignation for Good Reason.

    (iii) In addition to the foregoing, in the event of your termination without Cause or resignation for Good Reason prior to December 1, 2001, you shall be entitled to receive as a severance payment the retention bonus pursuant to subparagraph 3(d).

    (iv) In addition to the foregoing, you shall be entitled to receive a portion of the compensation specified in subparagraphs 3(e) (BENEFITS) and 3(f) (VACATION), pro rated to the date of your termination without Cause or resignation for Good Reason.

Your right to receive the severance payments described in this subparagraph 5 (b) shall be conditioned upon your execution and delivery of a general release of claims in a form satisfactory to the Company. This subparagraph 5 (b) shall not apply in the event of your termination for Cause, your resignation other than for Good Reason, or the termination of your employment as a result of your death or Disability.

    (c) GOOD REASON: For purposes of this Agreement, "Good Reason" means any of the following conditions, which condition(s) remain(s) in effect ten (10) days after written notice to the Board from you of such condition(s):

    (i)  Without your express written consent, the assignment to you of any significant duties or the significant reduction of your duties, either of which is materially inconsistent with your position with the Company and responsibilities in effect immediately prior to such assignment or reduction, or your removal from such position and responsibilities, which is not effected for death, Disability or for Cause;

    (ii) Without your express written consent, any reduction by the Company in your base salary rate and/or maximum incentive bonus (subject, however, to satisfaction of applicable goals with respect to the actual amount of incentive bonus earned) as in effect immediately prior to such reduction; or

    (iii) Without the your express written consent, any reduction by the Company in the kind or level of employee benefits to which you are entitled immediately prior to such reduction, other than a reduction applied generally to executive officers of the Company.

    (d) COBRA: If you become entitled to severance payments pursuant to subparagraph 5 (b) (TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON) and you elect continued medical insurance coverage in accordance with the Consolidated Omnibus Budget

Reconciliation Act of 1985 ("COBRA"), the Company shall pay your COBRA premiums for eighteen (18) months or until you have medical insurance coverage from another employer, whichever is less. If your medical coverage immediately prior to the date of your termination included your dependents, the Company paid COBRA premiums shall include premiums for such dependents.

    6.  CONFIDENTIAL AND PROPRIETARY INFORMATION: As a condition of your employment, you agree to sign the Company's standard form of employee confidentiality and assignment of inventions agreement.

    7.  COVENANT REGARDING NONSOLICITATION: For a period of one (1) year following your termination of employment for any reason, you agree that you will not recruit, solicit, or invite the solicitation of any employees of the Company to terminate their employment with the Company.

    8.  DISPUTE RESOLUTION: In the event of any dispute or claim relating to or arising out of your employment relationship with the Company, this Agreement, or the termination of your employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination or age, disability or other discrimination), you and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in the County in which the principal executive offices of the Company are located. You and the Company hereby knowingly and willingly waive your respective rights to have any such disputes or claims tried to a judge or jury; provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by you or the Company.

    9.  INTERPRETATION: This Agreement shall be interpreted in accordance with and governed by the laws of the State in which the principal executive offices of the Company are located.

    10. SUCCESSORS AND ASSIGNMENT: Any successor (or parent thereof) to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor (or parent thereof) to the Company's business and/or assets which executes and delivers the assumption agreement described in this paragraph or which becomes bound by the terms of this Agreement by operation of law. In view of the personal nature of the services to be performed under this Agreement by you, you cannot assign or transfer any of your rights or obligations under this Agreement.

    11. ENTIRE AGREEMENT: This Agreement, the agreements referred to above and the Change of Control Agreement signed by you and an authorized member of the Board constitute the entire agreement between you and the Company regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and the Company regarding your employment, whether written or oral.

    12. MODIFICATION: This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized member of the Board.

Sincerely,

TAB Products Co.
By:	/s/ HANS A. WOLF Hans A. Wolf, Chairman of the Board	12/13/2000 Date
I agree and hereby accept employment with TAB Products Co. on the terms and conditions set forth in this Agreement.
/s/ GARY W. AMPULSKI Gary W. Ampulski		12/13/2000 Date

EX-10.2

EXHIBIT 10.2

CHANGE OF CONTROL AGREEMENT

    This Change of Control Agreement (the "Agreement") is effective as of             , 2000 (the "Effective Date"), by and between Gary Ampulski (the "Employee"), and TAB Products Co., a Delaware corporation (the "Company").

RECITALS

    A.  The Employee has entered into an employment agreement (the "Employment Agreement") with the Company, dated as of the Effective Date, and presently serves at the pleasure of the Board of Directors of the Company and performs significant strategic and management responsibilities necessary to the continued conduct of the Company's business and operations.

    B.  The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility or occurrence of a Change of Control (as defined below) of the Company.

    C.  The Board believes that it is imperative to provide the Employee with certain severance benefits upon the Employee's termination of employment under the circumstances described herein which provide the Employee with enhanced financial security and provide sufficient incentive and encouragement to the Employee to remain with the Company following a Change of Control.

    D.  Certain capitalized terms used in the Agreement are defined in Section 3 below.

    In consideration of the mutual covenants herein contained, and as an additional inducement to Employee to enter into the Employment Agreement, the parties agree as follows:

    1.  Terms of Employment. The Company and the Employee agree that the Employee's employment is at will, and that their employment relationship may be terminated by either party at any time, with or without cause. If the Employee's employment terminates for any reason within three (3) months prior to, upon or within twelve (12) months following a Change of Control, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement.

    2.  Severance Benefits. Subject to Section 2 (c) below:

    (a) Termination Upon A Change of Control. If the Employee's employment is terminated within three (3) months prior to, upon or within twelve (12) months following a Change of Control, then the Employee shall be entitled to receive the compensation and benefits earned by the Employee pursuant to Paragraph 3 of the Employment Agreement through the date of the Employee's termination of employment and in addition thereto the following severance benefits, as applicable:

     (i) Involuntary Termination. If the Employee's employment is terminated as a result of Involuntary Termination (as defined in Section 3(b) below), then the Employee shall be entitled to receive the following:

    (A) Severance payments equal to the sum of: (1) an amount equal to two times the Employee's annual base salary determined on the basis of the Employee's base salary rate

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in effect immediately prior to the Employee's Involuntary Termination and (2) whichever of the following is applicable as of the date of the Employee's Involuntary Termination:

    (I) provided that the Employee has completed at least two full fiscal years of employment with the Company, an amount equal to two times the average of the annual incentive bonuses pursuant to subparagraph 3(b) (INCENTIVE BONUS) of the Employment Agreement actually earned by the Employee for the two fiscal years of the Company preceding the fiscal year of such Involuntary Termination; or

    (II) provided that the Employee has completed at least one full fiscal year of employment with the Company but less than two full fiscal years of such employment, an amount equal to two times the annual incentive bonus pursuant to subparagraph 3(b) (INCENTIVE BONUS) of the Employment Agreement actually earned by the Employee for the fiscal year of the Company preceding the fiscal year of such Involuntary Termination; or

   (III) provided that the Employee has completed less than one full fiscal year of employment with the Company, an amount equal to $300,000.

    (B) Except in the event that Subsection 2(a)(i)(A)(III) is applicable, the Employee shall also be entitled to receive as a severance payment that portion of the incentive bonus provided under subparagraph 3(b) (INCENTIVE BONUS) of the Employment Agreement, if any, the Employee will have earned for the fiscal year of the Involuntary Termination on the basis of the achievement of the agreed upon goals for the fiscal year of the Involuntary Termination pro rated to the date of such termination.

    (C) In addition to the foregoing, in the event of the Employee's Involuntary Termination prior to December 1, 2001, the Employee shall be entitled to receive as a severance payment the retention bonus pursuant to subparagraph 3(d) (RETENTION BONUS) of the Employment Agreement.

    (D) In addition to the foregoing, Employee shall be entitled to receive a portion of the compensation specified in subparagraphs 3(e) (BENEFITS) and 3(f) (VACATION) of the Employment Agreement, pro rated to the date of the Involuntary Termination.

    (E) In addition to the foregoing, for a period of up to eighteen (18) months after any termination under this Subsection 2(a)(i), the Company shall reimburse the Employee for any COBRA premiums paid by the Employee for continued group health insurance coverage (the "Employment Benefits"). If the Employee's medical coverage immediately prior to the date of termination of employment included the Employee's dependents, the Company paid COBRA premiums shall include premiums for such dependents. Such Employment Benefits shall terminate upon the earlier of (1) eighteen (18) months from the date of the Employee's termination or (2) upon commencement of new employment by the Employee.

    The Employee's right to receive the severance benefits described in this Subsection 2(a)(i) shall be conditioned upon the Employee's execution and delivery of a general release of claims in a form satisfactory to the Company. Any severance payment to which the Employee is entitled pursuant to this Subsection 2(a)(i) shall be paid in a lump sum within thirty (30) days of the Employee's Involuntary Termination.

    (ii) Voluntary Resignation. If the Employee's employment terminates by reason of the Employee's voluntary resignation (but which is not an Involuntary Termination or a termination for Cause), then the Employee shall not be entitled to receive severance or other benefits following the date of such termination under the terms of this Agreement other than

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the compensation and benefits earned by the Employee pursuant to Paragraph 3 of the Employment Agreement through the date of the Employee's termination of employment, except that the Employee shall not be entitled to any pro rated portion of the incentive bonus for that fiscal year, and the Company shall have no obligation to provide for the continuation of any health and medical benefit or life insurance plans existing on the date of such termination except as otherwise required by applicable law.

    (iii) Disability; Death. If the Company terminates the Employee's employment as a result of the Employee's Disability, or such Employee's employment is terminated at any time due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits following the date of such termination under the terms of this Agreement other than the compensation and benefits earned by the Employee pursuant to Paragraph 3 of the Employment Agreement through the date of the Employee's termination of employment, except that the Employee shall not be entitled to any pro rated portion of the incentive bonus for that fiscal year, and the Company shall have no obligation to provide for the continuation of any health and medical benefit or life insurance plans existing on the date of such termination except as otherwise required by applicable law.

    (iv) Termination for Cause. If the Employee is terminated for Cause, then the Employee shall not be entitled to receive any severance or other benefits following the date of such termination under the terms of this Agreement other than the compensation and benefits earned by the Employee pursuant to Paragraph 3 of the Employment Agreement through the date of the Employee's termination of employment, except that the Employee shall not be entitled to any pro rated portion of the incentive bonus for that fiscal year and the Company shall have no obligation to provide for the continuation of any health and medical benefit or life insurance plans existing on the date of such termination except as otherwise required by applicable law.

    (b) Stock Option Acceleration. In the event of a Change of Control, the Option provided in subparagraph 3(g) (STOCK OPTION) of the Employment Agreement shall become immediately exercisable and vested in full as of the date that is ten (10) days prior to the Change of Control, provided that any exercise of the Option permissible as a result of the foregoing acceleration of vesting shall be conditioned upon the consummation of the Change of Control. In addition, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be, may, without the consent of the Employee, either assume the Company's rights and obligations under the Option or substitute a substantially equivalent option. The Option shall terminate effective as of the date of the Change of Control to that extent that the Option is neither assumed nor exercised as of the date of the Change of Control.

    (c) Excess Parachute Payments. In the event that any payment or benefit (including any acceleration of vesting or exercisability of the Option) received or to be received by the Employee pursuant to this Agreement or otherwise would subject the Employee to any excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), due to a characterization of such payment or benefit as an "excess parachute payment" under Section 280G of the Code, then the Employee may elect, in his sole discretion, to reduce the amount of any payments or benefits (including any acceleration of vesting or exercisability of the Option) otherwise called for under this Agreement in order to avoid such characterization.

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    3.  Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:

    (a) Change of Control. "Change of Control" shall mean the occurrence of either of the following events:

     (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total combined voting power represented by the Company's then outstanding voting securities; or

    (ii) (A) a merger or consolidation of the Company with any other corporation or other business entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or parent thereof) more than fifty percent (50%) of the total combined voting power represented by the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation; or (B) the complete liquidation of the Company; or (C) the sale or disposition by the Company of all or substantially all the Company's assets, unless the Company remains an operating business and a going concern, and, with respect to subsection 2(b), the Company continues the Option in effect.

    (b) Involuntary Termination. "Involuntary Termination" shall mean the Employee's resignation within 60 days after any of the following:

     (i) Without the Employee's express written consent, the assignment to the Employee of any significant duties or the significant reduction of the Employee's duties, either of which is materially inconsistent with the Employee's position with the Company and responsibilities in effect immediately prior to such assignment, or the removal of the Employee from such position and responsibilities, which is not effected for death, Disability or for Cause;

    (ii) Without the Employee's express written consent, any reduction by the Company in the Employee's base salary and/or or maximum incentive bonus (subject, however, to satisfaction of applicable goals with respect to the actual amount of incentive bonus earned) as in effect immediately prior to such reduction;

    (iii) Without the Employee's express written consent, any reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction, other than a reduction applied generally to executive officers of the Company;

    (iv) Without the Employee's express written consent, the relocation of the Employee to a facility or a location more than 40 miles from the Employee's then present location, without the Employee's express written consent; or

    (v) The failure of the Company to obtain the assumption of the terms of this Agreement by any successors contemplated in Section 4 below, provided, however, that the Employee's resignation as a result of any of the foregoing conditions shall be a voluntary resignation, and not an involuntary termination, unless the Employee gives written notice of any such condition(s) to the Board and allows the Company at least 10 days thereafter to correct such condition(s).

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    (c) Cause. For purposes of this Agreement, a termination for "Cause" occurs if the Employee is terminated for any of the following reasons:

     (i) The Employee's theft, dishonesty, misconduct or intentional falsification of any employment or Company records;

    (ii) The Employee's intentional and improper disclosure or use of the Company's confidential or proprietary information;

    (iii) Any action by the Employee that has a material detrimental effect on the Company's reputation or business;

    (iv) The Employee's failure or inability to perform any assigned duty reasonably expected of a person holding the Employee's position after written notice from the Board to the Employee of, and a reasonable opportunity to cure, such failure or inability; or

    (v) The Employee's conviction (including any plea of guilty or nolo contendere) for any criminal act that impairs the Employee's ability to perform his duties for the Company.

    (d) Disability. "Disability" shall mean that the Employee is unable to perform his duties as an employee of the Company as the result of his incapacity due to physical or mental impairment for 120 days (not necessarily consecutive) in any one year period. Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that the Employee resumes the performance of substantially all of his duties as an employee of the Company before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked.

    4.  Employee Covenant Regarding Nonsolicitation. For a period of one (1) year following termination of employment for any reason, the Employee shall not recruit, solicit, or invite the solicitation of any employees of the Company to terminate their employment with the Company.

    5.  Successors.

    (a) Company's Successors. Any successor (or parent thereof) to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) or to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor (or parent thereof) to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.

    (b) Employee's Successors. All rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. Employee shall have no right to assign any of his obligations or duties under this Agreement to any other person or entity.

    6.  Notice.

    (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices

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shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

    (b) Notice of Termination. Any termination by the Company for Cause or by the Employee as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 6 of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 15 days after the giving of such notice).

    7.  Miscellaneous Provisions.

    (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except with respect to the Employment Benefits as described in Section 2(a)(i), shall any such payment be reduced by any earnings that the Employee may receive from any other source.

    (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

    (c) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State in which the principal executive offices of the Company are located.

    (d) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

    (e) Arbitration. In the event of any dispute or claim relating to or arising out of the Employee's employment relationship with the Company, this Agreement, or the termination of the Employee's employment with the Company for any reason (including, but not limited to, any claims of breach of contract, wrongful termination, fraud or age, race, sex, national origin, disability or other discrimination or harassment), the Employee and the Company agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in the County in which the principal executive offices of the Company are located. The Employee and the Company hereby knowingly and willingly waive their respective rights to have any such disputes or claims tried to a judge or jury; provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by the Employee or the Company.

    (f)  No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void.

    (g) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.

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    (h) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee.

    (i)  Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

    (j)  Prior Agreements. This Agreement, together with the Employment Agreement, shall supersede all prior arrangements whether written or oral, and understandings, regarding the subject matter of this Agreement.

    IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

COMPANY	TAB PRODUCTS CO.
	By:	/s/ HANS A. WOLF
	Title:	Chairman
EMPLOYEE	By:	/s/ GARY W. AMPULSKI

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