-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtddH95GnOHLw/hrsfb1mTR0Ch4ODBShiz8lxLIhMqio2vWUI6BGMutSf5xuGjVK 345slTY03FACqNWDsx1+Tw== 0001047469-98-033046.txt : 19981002 0001047469-98-033046.hdr.sgml : 19981002 ACCESSION NUMBER: 0001047469-98-033046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980828 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAB PRODUCTS CO CENTRAL INDEX KEY: 0000096116 STANDARD INDUSTRIAL CLASSIFICATION: 7389 IRS NUMBER: 941190862 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07736 FILM NUMBER: 98699918 BUSINESS ADDRESS: STREET 1: 1400 PAGE MILL RD CITY: PALO ALTO STATE: CA ZIP: 94304 BUSINESS PHONE: 4158522400 MAIL ADDRESS: STREET 1: 1400 PAGE MILL ROAD CITY: PALO ALTO STATE: CA ZIP: 94304 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended MAY 31, 1998 -------------- 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 Company as specified in its charter) DELAWARE 94-1190862 -------- ----------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 1400 PAGE MILL RD., PALO ALTO, CALIFORNIA 94304 - - ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) Company's telephone number - including area code (650) 852-2400 --------------- Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE - - ---------------------------- ----------------------- (Title of Each Class) (Name of Exchange On Which Registered) Securities registered pursuant to Section 12(g) of the Act: NONE ---- Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[ X ] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Company as of June 30, 1998 was approximately $28,093,275. Shares of common stock held by each officer and director and by each person or group who owns 5% or more of the outstanding common stock have been excluded in that such persons or groups may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the Company's Common Stock outstanding as of July 31, 1998 was 5,171,514. DOCUMENTS INCORPORATED BY REFERENCE To the extent stated herein, portions of the Definitive Proxy Statement, which will be filed within 120 days after the end of the Company's fiscal year, for the Annual Meeting of Stockholders ("Proxy Statement") to be held on October 29, 1998, are incorporated by reference into Part III. 2 PART I Item 1. BUSINESS GENERAL Tab Products Co. (the "Company") is engaged in a single industry segment that manufactures and markets records management solutions, including professional services and products. The Company sells its offerings into multiple industries, including government agencies and the insurance, finance and health care industries. The Company was incorporated in February, 1954, and subsequently reorganized as a corporation under Delaware law in September, 1986. BUSINESS STRATEGY The Company's primary business strategy is to address each client's unique needs in managing internal documentation utilizing a consultative approach that integrates all services and products into a total systems solution. The Company believes that its extensive knowledge of paper-based systems and document management requirements give it a significant advantage over its competition. Additionally, it possesses a wealth of internal knowledge regarding the individual legal and regulatory requirements of four major industry segments: insurance, government, finance and health care. The Company capitalizes on this knowledge in developing client solutions in those industries. PRINCIPAL PRODUCTS AND SERVICES The Company provides solutions - in the form of both professional services and products - that are designed to help its clients organize, control and find their critical documents. By leveraging its 50 years of expertise in managing paper records and files, the Company effectively supports those clients who wish to integrate their paper-based systems into emerging technologies. The Company's principal products and services are: - - - Information & Records Management Supplies - - - Modular Office Furniture - - - Professional Services - - - Records Storage Solutions - - - Technology-based Automated Tracking Solutions 3 1. INFORMATION AND RECORDS-MANAGEMENT SUPPLIES The Company provides a complete line of filing supplies, each of which can be used alone or integrated with other TAB products, systems and services. Products include: End Tab Folders, Roll Labels, Classification Folders, Expansion Pockets, Filing System Guides, X-Ray Jackets, Small Document Pockets, Pressure-sensitive Pockets and Fasteners, Oversized Pockets with flap, 2-tab Folders and Mylar-strip Folders. The Company will also provide custom-made supplies tailored to fit a client's specific needs. The Company believes that its products' quality, high level of service and systems approach to its products and services give it a strong competitive position. 2. MODULAR OFFICE FURNITURE The Company markets a line of modular office furniture components that may be put together in a limitless number of productive configurations. They include office panel systems and clustered workcenters with related components. This product line is directed at the established market for the open office environment. Primary areas of competition in this market are product design, quality and price. 3. PROFESSIONAL SERVICES The Company's Professional Services organization provides a broad range of integrated service and support programs to fit the specific needs of its clients. These services are offered through the Company's own technical personnel and through its direct management of specialized service suppliers. Services include: Consulting Services - Using a thorough needs-assessment analysis, the Company's consultants work closely with clients to standardize their file structures and reduce duplicate files by designing and implementing an efficient records-classification and data-storage system. This increases the clients' productivity and provides significant space savings. TAB's Consulting Services also help clients design a strategy for implementing imaging systems in their organizations. File-Conversion Services - TAB provides full planning and implementation of the process by which clients transform their documents from one medium to another, such as changing from top-tab vertical drawers to side-tab color code, or from paper to optical-image format. This change is designed to produce a system that is more appropriate for the client's current needs, thus providing a greater degree of efficiency in both storing and locating critical records and documents. 4 Imaging Services - Imaging conversions involve the use of integrated technology with an emphasis on the documents with the files as well as a higher level of indexing, often including a conversion to color code or archive. In addition to handling all phases of integration into the chosen technology, it is also necessary to archive the original documents into a traditional hard copy system. Field Services - TAB provides comprehensive, nationwide, on-site support for the imaging technology systems used to store critical documents (CD-ROM, Optical Disks and tape). The Field Services program is designed to ensure that clients will enjoy maximum equipment operability and minimum down-time. TAB also provides service for Forms Handling Equipment. The high level of service and systems approach in this market give it a strong competitive position. 4. RECORDS STORAGE SOLUTIONS The Company provides both stationary and mobile records storage systems. Mobile shelving systems, combined with expertise in design and implementation, provide the most efficient system for filing and use of storage space. Mobile Products include: Side-Trac-Registered Trademark- - A high-density, custom storage solution with cabinets arranged in two compact rows. The front cabinets glide from side to side on wheels, creating access to the cabinets in back. Tab-Trac-Registered Trademark- - A high-density, custom storage solution that uses carriages on tracks to create aisles only where and when they are needed. This eliminates the need for fixed aisles and yields up to 100% greater storage capacity. Based on the client's needs, stored materials are moved either by mechanical-assist systems or electric motors. Stationary Products include: Spacefinder Cabinets - Slim, durable and mobile-ready cabinets, appropriate for use when floor space, strength and economy are the key determinants. Harmony-TM- Cabinets - A complete line of durable, maximum-capacity, pre-configured cabinets that blend harmoniously into any office environment and can be color-coordinated perfectly with other TAB equipment and furniture. Designer Series-TM- Cabinets - A high-quality, fully customizable cabinet solution that can accept any combination of components, thus offering unlimited flexibility and potential for growth. Designer cabinets are also mobile-ready, making it possible to quickly and easily increase storage density. TwinFile-Registered Trademark- - A compact, modular, rotating filing unit that provides more linear filing inches per square foot than almost any other filing system. Unit Spacefinder - A filing system using TAB's "capsule concept," whereby the identification of records is in plain view from any position. Unit 5 Spacefinder requires very little floor space and allows multiple users to access files simultaneously. Open Shelf Filing - An economical, easy-to-assemble shelving system for facilities with limited floor space. Units are available in letter and legal size, with single- or double-faced sections, and are designed to grow with an organization's storage needs. Forms Handling Equipment - The Company manufactures a line of Forms Handling Equipment, including continuous forms bursters, decollators and mergers. The distribution rights for these products have been granted to Bescorp-Registered Trademark- Inc. The Company also manufactures a full range of high speed mailing systems, including InfoSeal-Registered Trademark-, a high speed mailing system developed in conjunction with Transkrit-Registered Trademark- Corp., which uses a proprietary technique for folding and sealing computer-generated mailing pieces. These products are directly marketed and sold by Transkrit Corp. Primary areas of competition in this market are product design, quality and price. 5. TECHNOLOGY-BASED AUTOMATED TRACKING SOLUTIONS The Company's Technology-Based Automated Tracking Solutions are designed to provide clients full control of all their paper-based records, from the time those records are created through the time they are destroyed. Products include: File Tracker-TM- for Windows-Registered Trademark- - A barcode-based software system that provides users with information regarding all current location of files. The system consists of File Tracker software, barcode labels and barcode readers, all integrated to provide an easy-to-use, powerful system. All File Tracker software systems include on-site consultation, customization and training from an experienced document management specialist. A fully-staffed support organization is available through a toll-free number to provide expert advice on all File Tracker issues. TABQUIK-Registered Trademark- Computerized Color Labeling System - Automated labeling software and a patented application system that provides easy, on-site production and application of custom-printed color labels and barcoding for folders or other media. TABQUIK is a customizable filing solution available in a Windows environment, appropriate for organizations of all sizes, from the small office to the large corporation. The Company also offers customized labels provided directly to the client from TAB, based on electronic submission of client data; and FilePak, a cost-effective folder-labeling solution when a high degree of customization is not required. The Company believes that its products' quality and high level of service give it a strong competitive position. 6 The Company believes that its business is not seasonal. COMPETITION Primary competitive factors in this market are product quality, service and price. The Company believes that its products' quality, high level of service and systems approach to its products and services give it a strong competitive position. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative document management solutions that may be less costly or provide additional features. Such competition could result in lower gross margins in the future, if the Company's average selling prices decrease faster than its costs, and could result in lost sales. MARKETING AND SALES The Company's products are marketed in the United States, Canada, Europe and Australia through its sales branches and independent sales offices, distributors and telesales. In other geographic areas, products are sold exclusively through independent distributors. The Company is currently pursuing a strategy to refine and expand its distribution channels. It is seeking to reorient its direct channel from local distribution centers to sales execution centers and focus them on major accounts. The Company is also seeking to expand its call center operations and to direct reorder business through this efficient distribution method. In conjunction with handling inbound sales activity a new initiative is underway to generate sales through the use of outbound telemarketing. Additionally, the Company is seeking to remove exclusivity from its independent distributors. This will allow the Company to institute electronic commerce as part of its distribution channel fabric. These changes may result in temporary or permanent loss of sales people and independent distributors and the resultant loss of revenue they currently generate. This result could have a material adverse effect on the Company's business, results of operations and financial condition. The Company has three foreign subsidiaries which market their products and services in Canada, Australia and Europe, while foreign sales in the remainder of the world are conducted through a Foreign Sales Corporation. Foreign revenues were $32,533,000, $32,214,000 and $30,132,000 for the years ended May 31, 1998, 1997 and 1996, respectively. Foreign operating income was $1,703,000, $2,240,000 and $1,045,000 for the years ended May 31, 1998, 1997 and 1996, respectively. Total identifiable assets (excluding cash) and liabilities in foreign countries were $9,141,000 and $2,905,000, respectively, at May 31, 1998 compared with $9,216,000 and $3,151,000 at May 31, 1997. Transaction and exchange losses included in earnings, amounted to approximately $102,000, $18,000 and $225,000 in fiscal 1998, 1997 and 1996, respectively. 7 CUSTOMERS The Company focuses on customers that have a high volume of paper-based documents where access to those documents is critical to their business operations. The Company's primary customers include government agencies, health care companies, insurance companies, financial services companies and industrial companies. The Company's largest customer is the U.S. Government (including its agencies and GSA subcontractors). No single customer accounted for greater than 10% of consolidated revenues in fiscal 1998 and 1997. Sales to the U.S. Government, as a percentage of total revenues, was 10% for fiscal year 1996. BACKLOG The backlog of orders at May 31, 1998 and 1997 is not a significant factor in understanding the business of the Company. The nature of the Company's business is such that the value of backlog represents only a small portion of the on-going revenues of the business. No one order would normally account for a significant value of backlog. INTELLECTUAL PROPERTY The Company holds several patents and trademarks in the United States, Canada, Europe and Australia. The Company does not consider any of its patents to be material to its business. The Company relies on a combination of patents, contractual rights, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect its intellectual property rights. The Company has been notified in the past and the Company may be notified in the future of claims that they may be infringing upon patents or other intellectual property rights owned by third parties. There can be no assurance that in the future any patents held by the Company will not be invalidated, that patents will be issued for any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents. MANUFACTURING Products are manufactured through the use of in-house production facilities in Mayville, Wisconsin and Turlock, California and contractors. Raw materials for the Company's manufacturing are purchased directly by the Company; whereas, contract manufacturers purchase raw materials for production. The majority of raw material is purchased domestically and is considered to be widely available. It is not anticipated that the availability of raw material will be a significant factor in the Company's business. 8 There can be no assurance that the Company's manufacturing facilities will achieve or maintain acceptable manufacturing efficiencies in the future. The inability of the Company to achieve planned efficiencies from its manufacturing facilities could have an adverse effect on the Company's business, financial condition and results of operations. Any problems experienced by the Company in its current or future transitions to new processes and products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company purchases several critical components from single or sole source vendors for which alternative sources are not currently developed. Development of alternative suppliers would require a significant amount of time to qualify in the case of certain of the Company's components. The Company does not maintain long-term supply agreements with any of these vendors. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which could adversely affect the Company's business, financial condition and results of operations. RESEARCH AND DEVELOPMENT The Company's research and development activities are primarily related to the development of new products and the improvement of existing products in the mobile storage, high speed mailing and Forms Handling Equipment areas. Expenditures for research and development were $.9 million, $.8 million and $.5 million in fiscal years 1998, 1997 and 1996, respectively. EMPLOYEES At May 31, 1998, the Company employed approximately 1,050 full-time employees. None of the Company's employees are represented by a collective bargaining unit. EXECUTIVE OFFICERS At July 31, 1998 the following individuals were executive officers of the Company: NAME AGE TITLE - - ---- --- ----- Philip C. Kantz 54 Director; President and Chief Executive Officer Mr. Kantz has been Director, President and Chief Executive Officer since January 27, 1997. Previously, he was President and Chief Executive Officer of The Sandros Enterprise from February 1995 to January 1997; Chief Executive Officer and a director of Transcisco Industries, Inc. from February 1994 to January 1995; President and Chief Executive Officer of Genetrix, Inc. from October 1992 to September 1993 and President and Chief Executive Officer of Itel 9 Containers International Corporation from 1988 through 1991. Mr. Kantz is a member of 3COM Corporation's Board of Directors. David J. Davis 42(1) Senior Vice President, Operations and Chief Financial Officer Mr. Davis became Chief Financial Officer in May, 1998 and was appointed Senior Vice President, Operations in June, 1997. Previously, he was Vice President and Corporate Controller at PLM International, Inc. from January 1994 to June 1997. Before that he was a consultant for PLM International, Inc. and Itel Corporation from June 1993 to December 1993 and Chief Financial Officer of LB Credit Corp. from July 1991 to May 1993. Wendi A. Hill 40 Vice President, Human Resources Ms. Hill became Vice President, Human Resources in June 1995. Previously, she was Director, Human Resources at The Upper Deck Co. from August 1993 to March 1995 and Vice President, Corporate Outplacement at Career Focus from August 1991 to July 1993. Joanne P. Grba 38 (2) Vice President, Marketing Ms. Grba was appointed Vice President, Marketing for the Company in July 1997. Previously, she was an independent marketing consultant from January 1997 to July 1997. Before that she was Director of Business Development of Cisco Systems, Inc. from January 1996 to December 1996; Vice President, Marketing of TGV, Inc. from October 1995 to January 1996; Director of Marketing of FTP Software, Inc. from February 1993 to October 1995 and Product Line Manager of The Wollongong Group, Inc. from February 1991 to February 1993. Thomas J. Rauscher 43 Vice President, Manufacturing and Distribution Mr. Rauscher became Vice President, Manufacturing and Distribution in January 1996. Previously, he was Vice President, Operations at Fisher Hamilton from October 1980 to January 1996. Joel L. Sitak 30 (3) Vice President, North American Sales Mr. Sitak was appointed Vice President, North American Sales for the Company in May 1998. Previously, he was President and General Manager, Tab Products of Canada, Limited from June 1997 to May 1998, Vice President, Sales, Tab Products of Canada, Limited from July 1995 - - --------------------- (1) Effective June 1997 appointed an executive officer. (2) Effective July 1997 appointed an executive officer. (3) Effective May 1998 appointed an executive officer. 10 to June 1997, Regional Manager, Tab Products of Canada, Limited from November 1993 to July 1995 and Branch Manager, Tab Products of Canada, Limited from May 1993 to November 1993. Robert J. Sexton 64 Treasurer and Secretary Mr. Sexton has acted as Secretary since March 1991 and Treasurer since July 1982. William R. Kinzie 52(4) Chief Accounting Officer and Controller Mr. Kinzie became Chief Accounting Officer and Controller in June 1998. Previously, he served in the position of Controller at One Touch Systems from October 1995 to June 1998 and was self-employed as a consultant in the area of finance and accounting from June 1995 to October 1995. He served as Controller at Photonics Corporation from June 1994 to June 1995. He was also self-employed as a consultant in the area of finance and accounting from January 1993 to June 1994. Nancy R. Green 48 Assistant Treasurer and Assistant Secretary Ms. Green became Assistant Treasurer and Assistant Secretary in July 1991 and previously served the Company as Director of Treasury from October 1990 to July 1991. The executive officers of the Company are elected each year at the Annual Organizational Meeting of the Board of Directors, which will be held this year on October 29, 1998. Item 2. PROPERTIES The Company's Corporate Headquarters are located at 1400 Page Mill Road, Palo Alto, California. The facility comprises three buildings which total 105,000 square feet. The Company is currently leasing one of these buildings (approximately 50,000 square feet) to a tenant until January 2004. The buildings are owned by the Company but are subject to land leases from Stanford University. The land leases expire in 2011 and 2012, at which time both the land and improvements will revert to Stanford University. The Company owns a 356,000 square foot building located on 14 acres of land in Mayville, Wisconsin. The Mayville facility serves as a central warehousing, manufacturing and distribution center. Approximately 200,000 square feet of the facility is used as warehouse space. Approximately 50,000 square feet of the facility is used for the production of paper products (primarily file folders) and the attachment of color-coded labeling systems. Approximately 60,000 square feet is used for the production of panel systems furniture. The Company also owns 16 acres of undeveloped land near the current facility. - - ---------------------- (4) Effective June 1998 appointed an executive officer. 11 The Company owns a 45,000 square foot building located on 4 acres of land in Lomira, Wisconsin. The facility is used for the manufacture of TAB-TRAC-Registered Trademark- mobile filing storage units, plastic injection molded parts and other light manufacturing and assembly operations. The Company also owns a 45,000 square foot building in Horicon, Wisconsin. The Company owns two manufacturing buildings located on 16 acres of land in Turlock, California. One building is a 67,000 square foot paper products plant which is used for the manufacture of file folders. The other building consists of 104,000 square feet and is used for the manufacture of the Company's high-speed mailing systems product line and Forms Handling Equipment and as the headquarters for the Company's national field service operations. The Company leases office space for its sales and service branches in numerous cities throughout the United States, Canada, Europe and Australia, most of which are in major metropolitan areas. Tab Products of Canada, Limited leases 60,000 square feet of office space in a building in North York, Canada which expires in October 2000. Tab Products (Europa) B.V. leases a 9,000 square foot building in Amsterdam, Netherlands which expires in August 2001. Tab Products Pty Ltd leases a 22,000 square foot building in St. Leonards, Australia which expires in June 2000. These buildings serve as general office, sales and warehouse facilities. In management's opinion, all buildings, machinery and equipment are in good condition and are maintained and repaired on a basis consistent with sound operations. The properties and equipment are deemed adequate and suitable for their purposes. Item 3. LEGAL PROCEEDINGS The Company is not involved in any material legal proceeding. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended May 31, 1998. 12 PART II Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock is traded on the American Stock Exchange (AMEX) and its trading symbol is TBP. Information with respect to per share common stock dividends paid by the Company and the price ranges per share for each quarter during the fiscal years ended May 31, 1998 and 1997 are set forth below. TAB PER SHARE COMMON STOCK DIVIDENDS AND PRICE RANGES
DIVIDENDS PRICE RANGE PER SHARE -------------- ------------------------------------------------------ 1998 1997 1998 1997 ------ ------- ------------------------- ----------------------- HIGH LOW HIGH LOW ----------- ----------- --------- --------- Fiscal Quarter Ended AUGUST 31 $.05 $.05 $ 12 3/8 $ 9 1/8 $ 7 5/8 $ 6 1/2 NOVEMBER 30 .05 .05 $ 14 7/8 $ 11 1/8 $ 8 $ 6 1/4 FEBRUARY 28 .05 .05 $ 14 5/8 $ 11 3/16 $ 9 13/16 $ 7 3/8 MAY 31 .05 .05 $ 15 7/16 $ 12 1/2 $11 $ 8 5/8
At May 31, 1998, the company had approximately 1,000 holders of record and approximately 5,000 beneficial owners of Tab Products Co. stock. The company's loan covenants contain certain restrictions on the payment of dividends -see Note 4 of Notes to Consolidated Financial Statements. 13 Item 6. SELECTED FINANCIAL DATA TAB PRODUCTS CO. CONSOLIDATED SELECTED FINANCIAL DATA, FIVE YEARS ENDED MAY 31
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND RATIO DATA) ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Revenues $165,943 $154,451 $152,698 $149,951 $140,122 Earnings before income taxes 4,590 6,657 4,887 2,157 3,796 Net earnings 2,435 3,761 2,761 1,219 2,176 Net earnings per share Basic .48 .77 .57 .25 .45 Diluted .46 .75 .57 .25 .45 Book value per share 8.69 9.03 8.55 8.21 8.01 Dividends per share .20 .20 .20 .20 .20 Current assets 53,778 51,405 48,715 51,333 53,577 Working capital 31,785 28,463 27,424 30,082 30,879 Net cash provided by operating activities 7,673 8,167 11,344 8,109 4,257 Purchase of property, plant and equipment, net 4,927 3,309 2,825 1,946 2,678 Depreciation and amortization 7,018 4,001 4,065 4,215 3,668 Long-term debt, non-current 7,391 10,828 14,141 18,733 23,041 Stockholders' equity 44,897 44,527 41,462 39,828 38,652 Total assets $77,488 $80,699 $79,127 $81,649 $86,161 Current Ratio 2.4 2.2 2.3 2.4 2.4 Return on equity 5% 9% 7% 3% 6%
14 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report, including without limitation the following section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the Company and its business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "foreseeable," "estimates," and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this Report reflect the good faith judgment of the Company's management, such statements can only be based on facts and factors currently known by the Company. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed in "Business Environment and Risk Factors" as well as those discussed elsewhere in this Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made by the Company in this Report, which attempt to advise interested parties of the risks and factors that may affect the Company's business, financial condition, results of operations and prospects. The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of the Company. FINANCIAL CONDITION At May 31, 1998 the Company had cash and short-term investments of $12.1 million, a decrease of $.1 million from $12.2 million at May 31, 1997. Working capital at May 31, 1998 was $31.8 million, an increase of $3.3 million from the working capital of $28.5 million reported a year earlier. The current ratio of 2.4 at May 31, 1998 increased from the current ratio of 2.2 at May 31, 1997. Management believes that the Company's cash and cash equivalents, available credit facilities and operational cash flows will adequately finance anticipated growth, capital expenditures and repayment of debt obligations for the foreseeable future. Management intends to invest the Company's cash in excess of current operating requirements in short-term, interest-bearing, investment-grade securities. During fiscal 1998 net cash provided from operating activities was $7.7 million, a decrease of $.5 million compared to the $8.2 million generated in 15 fiscal 1997. The decrease was caused by lower liabilities due to the timing of purchases offset by decreased accounts receivable due to improvements in collections. During fiscal 1998, the Company invested approximately $4.9 million in property, plant and equipment which primarily represented investments in manufacturing equipment and management information systems. Capital expenditures for fiscal 1999, which will consist primarily of investments in manufacturing equipment and management information systems are expected to be in the range of $6.0 million to $6.5 million. At May 31, 1998 the Company had committed $.7 million for the purchase of new business system software and in June 1998 the Company committed to another $.3 million related to the hardware for the new system. The cost of the systems upgrade project and general improvements to the infrastructure related to this upgrade is estimated to be $1.6 to $2.0 million. At May 31, 1998, the Company had $7.4 million of long-term debt outstanding which bears interest at rates ranging from 6.9% to 9.0%. In fiscal 1998 the Company made $3.3 million in scheduled debt repayments. The Company also has available an unsecured revolving line of credit of $10 million as of May 31, 1998, which expires October 31, 1998. The credit line does not require compensating balances and there were no borrowings under the line at May 31, 1998. The Company intends to renew the line of credit and believes it can do so on terms substantially similar to the current terms. The Company believes its stock is undervalued and recently announced its intention to begin a repurchase program. The Company intends to finance such purchases from the Company's internally-generated funds. At May 31, 1998, the Company's additional minimum liability for its defined benefit plan was in excess of the unrecognized prior service costs and net transition obligation and was recorded as a non-cash charge of $2,418,000 to stockholders' equity, net of tax benefits of $1,612,000, in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." RESULTS OF OPERATIONS TOTAL REVENUES - Total revenues for fiscal 1998 of $165.9 million were $11.4 million or 7% higher than the $154.5 million in fiscal 1997. The increased revenues were attributable to increased volume in professional services, technology-based automated tracking solutions, information & records management supplies and records storage solution products. Revenues in fiscal 1997 of $154.5 million were $1.8 million or 1% higher than the $152.7 million recorded in fiscal 1996. The fiscal 1997 increased revenues were attributable to price increases and higher unit volumes. International revenues were 20%, 21% and 20% of consolidated revenues in fiscal 1998, 1997 and 1996, respectively. COST OF REVENUES - Cost of revenues, as a percentage of revenues, for fiscal 1998, 1997 and 1996 was 59.6%, 59.7% and 60.9%, respectively. The decrease in the percentage for fiscal 1998 as compared to fiscal 1997 was due primarily to an increase in manufacturing efficiencies offset by a one-time $1.3 million pre-tax charge for a reduction in branch office inventories. The reduction in branch inventories was consistent with the Company's shift 16 in strategy to have its branches operate as sales execution centers rather than local distribution centers. The decrease in the percentage for fiscal 1997 as compared to fiscal 1996 was due primarily to increased list prices and continued efforts in reducing product costs. OPERATING EXPENSES (SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND DEVELOPMENT) - Operating expenses, as a percentage of revenues, for fiscal 1998, 1997 and 1996 were 37.2%, 35.3% and 34.9%, respectively. Total operating expenses for fiscal 1998 were $61.8 million, an increase of $7.2 million as compared to total operating expenses of $54.6 million in fiscal 1997. The increase in operating expenses was primarily attributable to increased salaries and related expenses to support the Company's revenue growth and the Company's decision to replace its current technology infrastructure to align with its strategic focus, improve operational performance and achieve year 2000 compliance. The pre-tax charge in fiscal 1998 was $2.7 million related to technology infrastructure. Operating expenses for fiscal 1997 of $54.6 million represented an increase of $1.4 million as compared to total operating expenses of $53.2 million in fiscal 1996. The increase in operating expenses between the two fiscal years was attributable to the implementation of telesales to all the Company's branch sales operations, increased support and marketing costs for the Company's technology products, increased support costs for the Company's independent distribution channel and costs with respect to the search and replacement of the Company's Chief Executive Officer. INTEREST EXPENSE - Interest expense, net for fiscal 1998 was $335,000 lower than the net interest expense for fiscal 1997. Net interest expense for fiscal 1997 was $584,000 lower than the net interest expense for fiscal 1996. The decrease in interest expense in both years was primarily because of decreased levels of long-term debt due to scheduled debt repayments. INCOME TAXES - Income taxes, as a percentage of pre-tax earnings, for fiscal 1998 was 46.9%, an increase of 3.4 percentage points as compared to the effective tax rate of 43.5% in fiscal 1997. The increase in the effective tax rate was primarily due to an increase in foreign taxes as well as the proportionately greater impact of state taxes, goodwill and foreign taxes due to lower pre-tax income in the current year. The effective tax rate of 43.5% was unchanged for fiscal 1997 and 1996. COMPETITION The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative document management solutions that may be less costly or provide additional features. Such competition could result in lower gross margins in the future, if the Company's average selling prices decrease faster than its costs, and could result in lost sales. CURRENT DEVELOPMENTS The Company recently announced an agreement granting Bescorp-Registered Trademark-Inc. exclusive distribution rights to several products in the Company's Forms Handling Equipment line, including continuous forms bursters, decollators and mergers. 17 The Company also announced an agreement allowing Transkrit-Registered Trademark-Corp. to directly market and sell high speed mailing systems, including InfoSeal-Registered Trademark- folding and sealing equipment manufactured by the Company. MANAGEMENT SYSTEM UPGRADES AND YEAR 2000 COMPLIANCE The Company is aware of problems associated with computer systems as the year 2000 approaches. The Company's initiative to upgrade its systems to better support its strategic direction and improve operational efficiencies will also mitigate current year 2000 compliance issues with internal systems. The cost of the systems upgrade project and general improvements to the infrastructure related to this upgrade is estimated to be $1.6 to $2.0 million. Since the upgrade project costs are related to an overall systems project, the year 2000 compliance costs cannot be reasonably determined. The costs and time schedule for the systems upgrade are based on management's best estimates for the implementation of this new management information system and infrastructure upgrades. The Company has initiated programs to identify, and mitigate to the best of its ability, any remaining internal and external risks associated with the year 2000 problem. The risk of not meeting its timeline or problems with suppliers or customers could materially adversely affect the Company's business, results of operations, financial condition and prospects. TRENDS Recent market research indicates there may be an accelerated move to digital technologies, such as imaging, by large paper intensive organizations. This trend could result in a weakening of demand for the Company's paper-based records management supplies and records storage products. Failure of the Company to match the changing market with new document management products and services could materially adversely affect the Company's business, results of operations, financial condition and prospects. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," which the Company is required to adopt for fiscal 1999. This statement will require the Company to report in the financial statements, in addition to net income, comprehensive income and its components including foreign currency items and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption of FAS 130, the Company is also required to reclassify financial statements for earlier periods provided for comparative purposes. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures. In June 1997, FASB issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which the Company is required to adopt for its fiscal 1999 annual financial statements. This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under FAS 131, operating segments are to be 18 determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures. In November 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition," which the Company is required to adopt for agreements entered into with customers beginning in 1998. This statement provides guidance for recognizing revenue related to sales by software vendors. The adoption of SOP 97-2 did not have a significant impact on the timing of the Company's revenue recognition. In February 1998, FASB issued Statement of Financial Accounting Standards No. 132 ("FAS 132"), "Employers' Disclosures about Pensions and Other Postretirement Benefits," which the Company is required to adopt for its fiscal 1999 annual financial statements. This statement revises existing disclosure requirements for pension and other postretirement benefit plans thereby intending to improve the understandability of benefit disclosures, eliminate certain requirements that the FASB believes are no longer necessary, and standardize footnote disclosures. This statement requires comparative information for earlier years to be restated. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures. BUSINESS ENVIRONMENT AND RISK FACTORS The Company's future operating results may be affected by various trends and factors which the Company must successfully manage in order to achieve favorable operating results. In addition, there are trends and factors beyond the Company's control which affect its operations. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, the cautionary statements set forth below identify important factors that could cause actual results to differ materially from those in any forward-looking statements contained in this report. Such trends and factors include, but are not limited to, adverse changes in general economic conditions or conditions in the specific markets for the Company's products, governmental regulation, fluctuations in foreign exchange rates, and other factors, including those listed below. Focus on Services The shift in the Company's strategy to focus on its professional services as a way of providing value-added solutions to its customers has risk. The risk is that the Company may not be able to generate the product sales along with the service sales or that the level of product drag-along related to service sales has been overestimated. In either situation, the loss of product sales could have a material adverse effect on the Company's business, results of operations and financial condition. Distribution Channels The Company is currently pursuing a strategy to refine and expand its distribution channels. It is seeking to reorient its direct channel from local distribution centers to sales execution centers and focus them on major accounts. The Company is also seeking to expand its call center 19 operations and to direct reorder business through this efficient distribution method. In conjunction with handling inbound sales activity a new initiative is underway to generate sales through the use of outbound telemarketing. Additionally, the Company is seeking to remove exclusivity from its independent distributors. This will allow the Company to institute electronic commerce as part of its distribution channel fabric. These changes may result in temporary or permanent loss of sales people and independent distributors and the resultant loss of revenue they currently generate. This result could have a material adverse effect on the Company's business, results of operations and financial condition. Retaining and Attracting Qualified Personnel The Company's future performance may depend in significant part upon attracting and retaining key senior management, manufacturing, sales and marketing personnel. Competition for such personnel is intense and the inability to retain its current key personnel or to attract, assimilate or retain other highly qualified personnel in the future on a timely basis could have a material adverse effect on the Company's business, results of operations and financial condition. Fluctuations in Operating Results Factors affecting the Company's operating results and gross margins include the volume of product sales, competitive pricing pressures, the ability of the Company to match supply with demand, changes in product and customer mix, market acceptance of new or enhanced versions of the Company's products and services, changes in the channels through which the Company's products and services are distributed, timing of new product announcements and introductions by the Company and its competitors, fluctuations in product costs, variations in manufacturing cycle time, fluctuations in manufacturing utilization, the ability of the Company to achieve manufacturing efficiencies with its new and existing products, increased research and development expenses, exchange rate fluctuations, a change in the Company's effective tax rate and changes in general economic conditions. All of these factors are difficult to forecast and these or other factors can materially affect the Company's quarterly or annual operating results or gross margins. Competition The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with similar or alternative document management solutions that may be less costly or provide additional features. Such competition could result in lower gross margins in the future, if the Company's average selling prices decrease faster than its costs and could result in lost sales. Management System Upgrades and Year 2000 Compliance The Company is aware of problems associated with computer systems as the year 2000 approaches. The Company's initiative to upgrade its systems to better support its strategic direction and improve operational efficiencies will also mitigate current year 2000 compliance issues with internal systems. The cost of the systems upgrade project and general improvements to the infrastructure related to this upgrade is estimated to be $1.6 to $2.0 million. Since the upgrade project costs are related to an overall 20 systems initiative, the year 2000 compliance costs cannot be reasonably determined. The costs and time schedule for the systems upgrade are based on management's best estimates for the implementation of this new management information system and infrastructure upgrades. The Company has initiated programs to identify, and mitigate to the best of its ability, any remaining internal and external risks associated with the year 2000 problem. The risk of not meeting its timeline or problems with suppliers or customers could materially adversely affect the Company's business, results of operations, financial condition and prospects. Dependence on Sole Source Suppliers The Company purchases several critical components from single or sole source vendors for which alternative sources are not currently developed. Development of alternative suppliers would require a significant amount of time to qualify in the case of certain of the Company's components. The Company does not maintain long-term supply agreements with any of these vendors. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which could adversely affect the Company's business, financial condition and results of operations. New Processes and Products and Manufacturing Efficiencies There can be no assurance that the Company's manufacturing facilities will achieve or maintain acceptable manufacturing efficiencies in the future. The inability of the Company to achieve planned efficiencies from its manufacturing facilities could have an adverse effect on the Company's business, financial condition and results of operations. Any problems experienced by the Company in its current or future transitions to new processes and products could have a material adverse effect on the Company's business, financial condition and results of operations. Backlog The backlog of orders is not a significant factor in understanding the business of the Company. The nature of the Company's business is such that the value of backlog represents only a small portion of the on-going revenues of the business. No one order would normally account for a significant value of backlog. Government Sales With the government, both Federal and State/Local comprising 8-10% of the Company's revenues, the Company is primarily exposed to risks from reductions in budget allocations to support regulation and administrative offices. The current reinventing government initiative opens opportunities to help government streamline workflow processes, reduce paperwork and increase customer service, which may provide short-term opportunities for the Company. However, the long-term effect of a government initiative to streamline processes could have a negative impact on the Company's business, financial condition and results of operations. Patents, Proprietary Rights and Related Litigation The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. The Company has been notified in the past and the Company may be notified in the future of claims that they may be infringing upon patents or other intellectual property rights owned by third parties. There can be no assurance that in the future any patents held by the Company will not be invalidated, that patents will be issued for any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company's products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company's patents. 21 Risks Associated with International Sales In fiscal 1998, international sales accounted for approximately 20% of the Company's total revenues. Fluctuations in currencies could adversely affect the Company's business, financial condition and results of operations. In addition, gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Because sales of the Company's products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. The Company is subject to the risks of conducting business internationally, including foreign government regulation and general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships. Manufacturing and sales of the Company's products may also be materially adversely affected by factors such as unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws and other factors beyond the Company's control. In addition, the laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold, may not protect the Company's intellectual property rights to the same extent as do the laws of the United States and thus make piracy of the Company's products a more likely possibility. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. Management of Growth The Company has increased its expense levels to support its recent growth. The Company expects to continue to increase its operating expenses by hiring additional personnel to support expected growth, increased marketing efforts and additional research and development activities. If the Company does not achieve increased levels of revenues commensurate with these increased levels of operating expenses, or if the Company's revenues decrease or do not meet the Company's expectations for a particular period, the Company's business, financial condition and results of operations will be materially adversely affected. Effect of Anti-Takeover Provisions The Company has taken a number of actions that could have the effect of discouraging a takeover attempt that might be beneficial to stockholders who wish to receive a premium for their shares from a potential bidder. The Company has adopted a Shareholder Rights Plan that would cause substantial dilution to a person who attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Shareholder Rights Plan may therefore have the effect of delaying or preventing any change in control and deterring any prospective acquisition of the Company. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("Section 203"), which 22 prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Item 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements included with this Form 10-K are set forth under Item 14. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The section entitled "Election of Directors," which appears in the Company's Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference. For information with respect to the executive officers of the Company, see "Executive Officers" in Part I of this report. Item 11. EXECUTIVE COMPENSATION The information related to executive compensation which appears in the Company's Proxy Statement for the Company's 1998 Annual Meeting of Stockholders in the section entitled "Executive Compensation and Other Matters" is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Stock Ownership of Certain Beneficial Owners and Management" which appears in the Company's Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Relationships and Related Transactions" which appears in the Company's Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference. 23 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are filed as part of this report:
Page Number ----------- 1. CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report 29 Consolidated Statements of Earnings for the three years ended May 31, 1998 30 Consolidated Balance Sheets at May 31, 1998 and 1997 31 Consolidated Statements of Stockholders' Equity for the three years ended May 31, 1998 32 Consolidated Statements of Cash Flows for the three years ended May 31, 1998 33 Statement of Accounting Policies 34-36 Notes to Consolidated Financial Statements 37-44 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE Independent Auditors' Report 45 Schedule for the three years ended May 31, 1998: II Valuation and Qualifying Accounts 46 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits: See Index to Exhibits on page 25. The Exhibits listed in the accompanying Index are referenced as part of this report. B. Reports on Form 8-K: None
24 3. EXHIBITS: 3.1 Certificate of Incorporation (Exhibit 3.1 of 1993 Form 10-K)(2) 3.2 Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock (Exhibit 3.2 filed with Form 10-Q for the quarter ended November 30, 1996)(2) 3.3 Second Amended and Restated Bylaws of the Company dated October 17, 1996 (Exhibit 4 of Form 8-K dated October 17, 1996)(2) 4.1 Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (including as Exhibit A the form of Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right Certificate, and as Exhibit C the Summary of Terms of Rights Agreement)(Exhibit 1 of Form 8-K dated October 17, 1996)(2) 10.1 Tab Products Co. 1981 Incentive Stock Option Plan (Exhibit 10 of the 1983 Form 10-K)(1), (2) 10.2 Amended 1981 Incentive Stock Option Plan (Exhibit 10 of the 1987 Form 10-K)(1), (2) 10.3 1991 Stock Option Plan (Exhibit 10.1 of the 1991 Form 10-K)(1), (2) 10.4 Note Agreement of Tab Products Co. dated as of March 20, 1992 in the aggregate principal amount of $15,000,000 (Exhibit 10.5 of the 1992 Form 10-K)(2) 10.5 Amendment dated July 27, 1993 to Note Agreement of Tab Products Co. dated as of March 20, 1992 (Exhibit 10.16 filed with the 1993 Form 10-K)(2) 10.6 Note Agreement of Tab Products Co. dated October 7, 1993 (Exhibit 10.20 filed with Form 10-Q for the quarter ended August 31, 1993)(2) 10.7 Letter dated October 7, 1993 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.21 filed with Form 10-Q for the quarter ended August 31, 1993)(2) 10.8 Letter dated October 27, 1993 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.27 filed with the 1994 Form 10-K)(2) 10.9 Letter dated June 15, 1995 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.32 filed with the 1995 Form 10-K)(2) 10.10 Letter dated July 21, 1995 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.33 filed with the 1995 Form 10-K)(2) 10.11 Letter dated December 13, 1995 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.35 filed with Form 10-Q for the quarter ended November 30, 1995)(2)
25 10.12 Bank of America Business Loan Agreement dated August 26, 1996 (Exhibit 10.36 filed with the 1996 Form 10-K)(2) 10.13 Letter dated August 20, 1996 amending the Prudential Note Agreement dated March 20, 1992 (Exhibit 10.37 filed with the 1996 Form 10-K)(2) 10.14 Form of Indemnity Agreement between the Company and each of its Executive Officers and Directors (Exhibit 10.38 filed with Form 10-Q for the quarter ended November 30, 1996)(1), (2) 10.15 Form of Change of Control Agreement between the Company and named Executive Officers (Exhibit 10.40 filed with Form 10-Q for the quarter ended November 30, 1996)(1), (2) 10.16 Outside Directors' Option Plan and Agreement (Exhibit 10.41 filed with Form 10-Q for the quarter ended November 30, 1996)(1), (2) 10.17 Employment Agreement between the Company and Philip C. Kantz (Exhibit 10.42 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2) 10.18 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit 10.43 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2) 10.19 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit 10.44 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2) 10.20 Non-qualified Stock Option Agreement between the Company and Philip C. Kantz (Exhibit 10.45 filed with Form 10-Q for the quarter ended February 28, 1997)(1), (2) 10.21 Bank of America Amendment No. 1 dated November 4, 1997 to Business Loan Agreement dated August 26, 1996 (Exhibit 10 filed with Form 10-Q for the quarter ended November 30, 1997)(2) 23.1 Independent Auditors' Consent 27 Financial Data Schedule (1) Compensatory Plan or Arrangement (2) Incorporated by reference from the noted previously filed document.
26 Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, and State of California, on this twenty-eighth day of August, 1998. TAB PRODUCTS CO. /S/ PHILIP C. KANTZ ----------------------------- Philip C. Kantz President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
NAME AND TITLE DATE - - -------------- ---- /s/ Hans A. Wolf August 28, 1998 - - ------------------------------------------------- --------------- Hans A. Wolf, Chairman of the Board /s/ Philip C. Kantz August 28, 1998 - - ------------------------------------------------- --------------- Philip C. Kantz, Director; President and Chief Executive Officer /s/ David J. Davis August 28, 1998 - - ------------------------------------------------- --------------- David J. Davis, Senior Vice President, Operations and Chief Financial Officer /s/ William R. Kinzie August 28, 1998 - - ------------------------------------------------- --------------- William R. Kinzie, Controller and Chief Accounting Officer /s/ Robert R. Augsburger August 28, 1998 - - ------------------------------------------------- --------------- Robert R. Augsburger, Director /s/ Robert S. Cecil August 28, 1998 - - ------------------------------------------------- --------------- Robert S. Cecil, Director /s/ Kathryn S. Hanson August 28, 1998 - - ------------------------------------------------- --------------- Dr. Kathryn S. Hanson, Director /s/ Jerry K. Myers August 28, 1998 - - ------------------------------------------------- --------------- Jerry K. Myers, Director
27 TAB PRODUCTS CO. CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE FORM 10-K ITEM 14 FISCAL YEARS ENDED MAY 31, 1998, 1997 AND 1996 28 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Tab Products Co.: We have audited the accompanying consolidated balance sheets of Tab Products Co. and its subsidiaries as of May 31, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended May 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Tab Products Co. and its subsidiaries as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1998 in conformity with generally accepted accounting principles. San Jose, California June 25, 1998 29 TAB PRODUCTS CO. CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended May 31 --------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ----------------- Revenues $ 165,943,000 $ 154,451,000 $ 152,698,000 Costs and expenses: Cost of revenues 98,913,000 92,270,000 93,025,000 Selling, general and administrative 60,912,000 53,765,000 52,726,000 Research and development 889,000 785,000 502,000 ---------------- ---------------- ----------------- Total costs and expenses 160,714,000 146,820,000 146,253,000 ---------------- ---------------- ----------------- Operating income 5,229,000 7,631,000 6,445,000 Interest, net (639,000) (974,000) (1,558,000) ---------------- ---------------- ----------------- Earnings before income taxes 4,590,000 6,657,000 4,887,000 Provision for income taxes 2,155,000 2,896,000 2,126,000 ---------------- ---------------- ----------------- Net earnings $ 2,435,000 $ 3,761,000 $ 2,761,000 ---------------- ---------------- ----------------- ---------------- ---------------- ----------------- Earnings per share Basic $ .48 $ .77 $ .57 Diluted $ .46 $ .75 $ .57 Shares used in computation Basic 5,101,565 4,879,131 4,851,951 Diluted 5,286,363 5,017,075 4,877,131
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements. 30 TAB PRODUCTS CO. CONSOLIDATED BALANCE SHEETS
May 31 ---------------------------------- ASSETS 1998 1997 -------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 7,199,000 $ 8,568,000 Short-term investments 4,896,000 3,586,000 Accounts receivable, less allowances for doubtful accounts of $947,000 and $769,000 24,943,000 25,550,000 Inventories 11,015,000 11,381,000 Prepaid income taxes and other expenses 5,725,000 2,320,000 -------------- ---------------- Total current assets 53,778,000 51,405,000 Property, plant and equipment, net 19,063,000 20,567,000 Goodwill, net 3,683,000 4,281,000 Other assets 964,000 4,446,000 -------------- ---------------- $77,488,000 $80,699,000 -------------- ---------------- -------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 3,437,000 $ 3,313,000 Accounts payable 6,257,000 6,677,000 Compensation payable 3,910,000 4,347,000 Other accrued liabilities 8,389,000 8,605,000 -------------- ---------------- Total current liabilities 21,993,000 22,942,000 -------------- ---------------- Long-term debt 7,391,000 10,828,000 -------------- ---------------- Deferred taxes and other noncurrent liabilities 3,207,000 2,402,000 -------------- ---------------- Commitments and contingencies (Note 9) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized - 500,000 shares, issued - none Common stock, $.01 par value, authorized - 25,000,000 shares, issued -1998- 7,601,616 shares, 1997 - 7,365,803 shares 76,000 74,000 Additional paid-in capital 15,219,000 13,309,000 Retained earnings 63,885,000 62,473,000 Minimum pension liability adjustment (2,418,000) - Treasury stock, 1998 and 1997 - 2,432,227 shares (31,365,000) (31,365,000) Cumulative translation adjustment (500,000) 36,000 -------------- ---------------- Total stockholders' equity 44,897,000 44,527,000 -------------- ---------------- $77,488,000 $80,699,000 -------------- ---------------- -------------- ----------------
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements. 31 TAB PRODUCTS CO. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Number of Additional Minimum Cumulative Shares Paid-in Retained Pension Treasury Translation Outstanding Amount Capital Earnings Liability Stock Adjustment ------------- --------- ------------ ------------ ---------- -------------- ----------- BALANCES, JUNE 1, 1995 4,851,951 $ 73,000 $ 12,705,000 $ 57,898,000 $(31,365,000) $ 517,000 Net earnings 2,761,000 Dividends, $.20 per share (970,000) Translation adjustment (157,000) ------------- --------- ------------ ------------ ----------- -------------- ----------- BALANCES, MAY 31, 1996 4,851,951 73,000 12,705,000 59,689,000 (31,365,000) 360,000 Net earnings 3,761,000 Dividends, $.20 per share (977,000) Translation adjustment (324,000) Stock options exercised and tax benefit on disqualified common stock dispositions 81,625 1,000 604,000 ------------- --------- ------------ ------------ ----------- -------------- ----------- BALANCES, MAY 31, 1997 4,933,576 74,000 13,309,000 62,473,000 (31,365,000) 36,000 Net earnings 2,435,000 Dividends, $.20 per share (1,023,000) Translation adjustment (536,000) Stock options exercised and tax benefit on disqualified common 235,813 2,000 1,910,000 stock dispositions Minimum pension liability changes $(2,418,000) ------------- --------- ------------ ------------ ----------- -------------- ----------- BALANCES, MAY 31, 1998 5,169,389 $ 76,000 $15,219,000 $63,885,000 $(2,418,000) $(31,365,000) $ (500,000) ------------- --------- ------------ ------------ ----------- -------------- ----------- ------------- --------- ------------ ------------ ----------- -------------- -----------
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements. 32 TAB PRODUCTS CO. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31 ----------------------------------------------------- 1998 1997 1996 -------------- --------------- -------------- OPERATING ACTIVITIES Net earnings $ 2,435,000 $ 3,761,000 $ 2,761,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 7,018,000 4,001,000 4,065,000 Deferred income taxes and other liabilities (410,000) 113,000 396,000 Other 381,000 200,000 (12,000) Changes in operating assets and liabilities: Accounts receivable, net 237,000 (2,029,000) 882,000 Inventories 122,000 (205,000) 3,271,000 Prepaid income taxes and other expenses (1,815,000) (490,000) 1,853,000 Other assets 551,000 361,000 (1,412,000) Accounts payable (302,000) 895,000 (1,469,000) Compensation payable (407,000) 811,000 635,000 Other accrued liabilities (137,000) 749,000 374,000 -------------- --------------- -------------- Net cash provided by operating activities 7,673,000 8,167,000 11,344,000 -------------- --------------- -------------- INVESTING ACTIVITIES Purchases of property, plant and equipment, net (4,927,000) (3,309,000) (2,825,000) Purchases of short-term investments (9,282,000) (7,198,000) (5,998,000) Sales of short-term investments 7,972,000 5,934,000 5,276,000 -------------- --------------- -------------- Net cash required by investing activities (6,237,000) (4,573,000) (3,547,000) -------------- --------------- -------------- FINANCING ACTIVITIES Repayment of debt (3,313,000) (3,813,000) (4,092,000) Proceeds from issuance of common stock 1,910,000 491,000 Dividends paid (1,023,000) (977,000) (970,000) -------------- --------------- -------------- Net cash required by financing activities (2,426,000) (4,299,000) (5,062,000) -------------- --------------- -------------- Effect of exchange rate changes on cash (379,000) (58,000) (157,000) -------------- --------------- -------------- Increase (decrease) in cash and cash equivalents (1,369,000) (763,000) 2,578,000 Cash and cash equivalents at beginning of year 8,568,000 9,331,000 6,753,000 -------------- --------------- -------------- Cash and cash equivalents at end of year $ 7,199,000 $ 8,568,000 $ 9,331,000 -------------- --------------- -------------- -------------- --------------- --------------
See accompanying Statement of Accounting Policies and Notes to Consolidated Financial Statements. 33 TAB PRODUCTS CO. STATEMENT OF ACCOUNTING POLICIES The Company's significant accounting policies are summarized below to assist the reader in reviewing the financial statements and other data contained in this report. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. InterCompany transactions have been eliminated in consolidation. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as of the dates and for the periods presented. Such estimates include the allowance for doubtful accounts, warranty and obligations for post-retirement health care and pension benefits. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCIES The current assets and liabilities of the Company's Canadian, Australian and European subsidiaries are translated into U.S. dollars at current exchange rates, long-term assets are translated at historical rates, and revenue and expense items are translated at average rates of exchange prevailing during the year. Resulting translation adjustments are accumulated in a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in net earnings. CASH AND CASH EQUIVALENTS are highly liquid investments purchased with an original maturity of three months or less. SHORT-TERM INVESTMENTS represent debt securities which are stated at fair value. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments to interest income) and fair value representing unrealized holding gains or losses, if material, are recorded as a separate component of stockholders' equity until realized. While the Company's intent is to hold debt securities to maturity, they are classified as available-for-sale because the sale of such securities may be required prior to maturity. Any gains and losses on the sale of debt securities are determined on a specific identification basis. Unrealized holding gains and losses were not material for any periods presented. INVENTORIES are valued at the lower of cost or market. Cost of merchandise inventories purchased for resale is determined on the last-in, first-out (LIFO) method for domestic inventories, which was approximately $1,424,000 at May 31, 1998 ($2,003,000 at May 31, 1997). Cost of the remainder of the inventories is determined on the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT, including significant improvements to existing facilities are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are as follows: Field service parts 3-5 years; land improvements 10-30 years; buildings 20-50 years; machinery and equipment 3-15 years; furniture and fixtures 3-10 years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. 34 GOODWILL represents the excess of the purchase price over the estimated fair value of net assets of acquired businesses. Goodwill is being amortized on a straight-line basis over periods not exceeding 25 years. Goodwill amortization amounted to $598,000, $496,000 and $464,000 in fiscal years 1998, 1997 and 1996, respectively. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") adopted Statements of Financial Accounting Standards ("SFAS") 130 (Reporting Comprehensive Income), which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources; and SFAS 131 (Disclosures about Segments of an Enterprise and Related Information), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. The Company has not determined the impact of the adoption of these new accounting standards on its consolidated financial statement disclosures. In November 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition," which the Company is required to adopt for agreements entered into with customers beginning in 1998. This statement provides guidance for recognizing revenue related to sales by software vendors. The adoption of SOP 97-2 will not have a significant impact on the timing of the Company's revenue recognition. In February 1998, the FASB issued Statement of Financial Accounting Standards SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which the Company is required to adopt for its fiscal 1999 annual financial statements. This statement revises existing disclosure requirements for pension and other postretirement benefit plans thereby intending to improve the understandability of benefit disclosures, eliminate certain requirements that the FASB believes are no longer necessary, and standardize footnote disclosures. This statement requires comparative information for earlier years to be restated. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures. All of these statements became effective for the fiscal year beginning June 1, 1998. REVENUE RECOGNITION Revenues on product sales are recognized upon product shipment. Related installation revenues are recognized when installation is complete. Equipment service revenues are recognized ratably over the contractual period or as the services are performed. EARNINGS PER SHARE (EPS) are computed as basic EPS using the average number of common shares outstanding and diluted EPS using the average number of common and dilutive common equivalent shares outstanding, in accordance with SFAS 128 (see Note 12). STOCKHOLDERS' EQUITY Shares of the Company which are repurchased are treated as Treasury stock and are accounted for under the cost method. INCOME TAXES Deferred income taxes are provided for temporary differences between financial statements and income tax reporting, in accordance with SFAS 109. STOCK-BASED COMPENSATION The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees. 35 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company believes that the carrying amount for cash and cash equivalents, short-term investments, accounts receivables, accounts payable and long-term debt approximated fair value as of May 31, 1998. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, short-term investments and trade accounts receivable. The Company places its cash and cash equivalents and short-term investments with what it believes are high credit quality financial institutions. The Company sells its products primarily to companies in North America, Europe and Australia. The Company maintains reserves for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. 36 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Short-Term Investments The Company's short-term investments have been classified as available-for-sale securities. The amortized cost of available-for-sale securities at May 31, 1998 and May 31, 1997 are presented in the table which follows. Available-for-sale securities are classified as current assets and mature generally within six months. For each category of investment securities the fair market value approximates amortized cost.
May 31 --------------------------------- 1998 1997 ------------ ------------ Corporate obligations $ 3,923,000 $ 3,320,000 U.S. Government obligations 973,000 266,000 ------------ ------------ $ 4,896,000 $ 3,586,000 ------------ ------------ ------------ ------------ 2. Inventories May 31 --------------------------------- 1998 1997 ------------ ------------ Finished goods $ 4,265,000 $ 6,669,000 Work in process 2,704,000 1,319,000 Raw material 4,046,000 3,393,000 ------------ ------------ $ 11,015,000 $ 11,381,000 ------------ ------------ ------------ ------------
If the inventories for which the LIFO method is used were valued under the FIFO method, such inventories would have been higher by $763,000 at May 31, 1998 and $1,190,000 at May 31, 1997. The liquidation of certain LIFO inventory increased earnings before income tax by $427,000 in 1998, by $220,000 in 1997 and had no significant impact on earnings in 1996.
3. Property, Plant and Equipment May 31 --------------------------------- 1998 1997 ------------ ------------ Land and improvements $ 990,000 $ 990,000 Buildings and improvements 19,486,000 18,667,000 Machinery and equipment 17,572,000 16,589,000 Furniture and fixtures 17,031,000 16,109,000 Leasehold improvements 332,000 276,000 Field service spare parts 3,814,000 2,867,000 ------------ ------------ 59,225,000 55,498,000 Less accumulated depreciation and amortization (40,162,000) (34,931,000) ------------ ------------ $ 19,063,000 $ 20,567,000 ------------ ------------ ------------ ------------ 4. Long-Term Debt and Credit Line May 31 --------------------------------- 1998 1997 ------------ ------------ Unsecured term loans $ 9,500,000 $ 12,500,000 Unsecured term loan from bank 1,328,000 1,641,000 ------------ ------------ Total debt 10,828,000 14,141,000 Less current portion (3,437,000) (3,313,000) ------------ ------------ Long-term debt $ 7,391,000 $ 10,828,000 ------------ ------------ ------------ ------------
The Company has $9,500,000 of unsecured term loans outstanding: $6,000,000 at 8.7% with principal payments through fiscal 2001 and $3,500,000 at 6.9% with principal payments through fiscal 2003. The Company also has a $1,328,000 unsecured term loan outstanding from a bank with principal payments through fiscal 2003. Interest on the bank loan is at the bank's reference rate (8.50% at May 31, 1998) plus .50%. The Company, at its discretion, can select other interest rate methods for this bank loan. These interest rate methods include a fixed rate option, long-term rate option and an offshore rate option. The term loans contain restrictions with respect to certain payments (including dividends), additional debt, creation of liens and guarantees and maintenance of minimum quick assets and stockholders' equity. The Company has an unsecured revolving line of credit of $10 million with a bank, as of May 31, 1998 which expires October 31, 1998. Borrowings are available at the bank's reference rate (8.50% at May 31, 1998) or at certain rate options, such as fixed rate, long-term rate and offshore rate options which may be lower. The Company had no borrowings outstanding under this line as of May 31, 1998. Required principal payments of long-term debt are payable as follows: Year ending May 31, 1999-$3,437,000; 2000-$3,437,000; 2001-$1,937,000; 2002-$1,062,000 and 2003-$955,000. Cash paid for interest which approximates interest expense was $1,190,000, $1,515,000 and $1,850,000 for fiscal 1998, 1997 and 1996, respectively. 37 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Other Accrued Liabilities May 31 --------------------------------- 1998 1997 ------------ ------------ Payroll and related benefits $ 2,416,000 $ 2,138,000 Deferred service contract income 3,105,000 2,819,000 Dividends 258,000 247,000 Amount due to independent sales reps 750,000 943,000 Other 1,860,000 2,458,000 ------------ ------------ $ 8,389,000 $ 8,605,000 ------------ ------------ ------------ ------------
6. Income Taxes Earnings before income taxes and the provision for income taxes are comprised of the following for the years ended May 31:
1998 1997 1996 ------------ ------------ ----------- Earnings before income taxes: Domestic $ 3,008,000 $ 4,648,000 $ 3,785,000 Foreign 1,582,000 2,009,000 1,102,000 ------------ ------------ ----------- $ 4,590,000 $ 6,657,000 $ 4,887,000 ------------ ------------ ----------- ------------ ------------ ----------- Provision (credit) for income taxes: Current: Federal $ 2,372,000 $ 1,685,000 $ 942,000 State 621,000 398,000 229,000 Foreign 668,000 740,000 568,000 ------------ ------------ ----------- 3,661,000 2,823,000 1,739,000 ------------ ------------ ----------- ------------ ------------ ----------- Deferred: Federal (1,167,000) 13,000 354,000 State (325,000) 32,000 31,000 Foreign (14,000) 28,000 2,000 ------------ ------------ ----------- (1,506,000) 73,000 387,000 ------------ ------------ ----------- $ 2,155,000 $ 2,896,000 $ 2,126,000 ------------ ------------ ----------- ------------ ------------ -----------
The following is a reconciliation of the effective income tax rates, for financial statement purposes.
Percentage of Pre-Tax Earnings --------------------------------- 1998 1997 1996 ----- ----- ----- United States statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 4.2 4.3 3.5 Non-deductible goodwill 4.2 2.6 3.6 Foreign taxes 1.8 - - Other 1.7 1.6 1.4 Effective tax rate 46.9% 43.5% 43.5%
38 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities are as follows:
May 31 --------------------------------- 1998 1997 ------------ ------------ DEFERRED TAX ASSETS Post-retirement benefit obligation $ 527,000 $ 524,000 Reserves not currently deductible 2,490,000 1,081,000 Vacation accrual 438,000 452,000 Allowance for doubtful accounts 305,000 228,000 Operating loss carry forwards - 46,000 Pension obligation 460,000 - Cumulative translation adjustments 442,000 - Other 136,000 119,000 ------------ ------------ 4,798,000 2,450,000 ------------ ------------ DEFERRED TAX LIABILITIES Differences between book and tax basis of property (1,921,000) (1,891,000) Pension contribution - (1,336,000) Other (241,000) (147,000) ------------ ------------ (2,162,000) (3,374,000) ------------ ------------ Net deferred tax assets (liabilities) $ 2,636,000 $ (924,000) ------------ ------------ ------------ ------------ May 31 --------------------------------- 1998 1997 ------------ ------------ NET DEFERRED TAX ASSETS (LIABILITIES) WERE COMPRISED OF THE FOLLOWING: Current assets $ 3,076,000 $ 410,000 Non-current liabilities (440,000) (1,334,000) ------------ ------------ Net deferred tax assets (liabilities) $ 2,636,000 $ (924,000) ------------ ------------ ------------ ------------
The Company has not provided for income taxes on undistributed earnings of certain foreign subsidiaries which the Company intends to reinvest indefinitely. Cash payments for income taxes were: $2,984,000, $2,581,000 and $700,000 in 1998, 1997 and 1996, respectively. 7. Employee Benefit Plans The Company maintains a defined benefit pension plan for substantially all domestic employees. Plan benefits are based on compensation and length of service and provide for normal retirement at age 65. The Company's policy is to make annual contributions to the pension plan between the ERISA minimum and the maximum tax deductible amount allowed. The plan's assets are invested in short-term money market instruments, fixed income securities and common stock. Net pension cost was $450,000, $395,000 and $782,000 for fiscal 1998, 1997 and 1996, respectively, and included the following components.
1998 1997 1996 ------------ ------------ ------------ Cost of benefits earned $ 758,000 $ 729,000 $ 641,000 Interest cost on projected benefit obligation 1,665,000 1,537,000 1,378,000 Actual return on plan assets (2,386,000) (1,694,000) (4,579,000) Amortization of initial unrecognized net obligation 22,000 22,000 22,000 Unrecognized prior service cost 19,000 19,000 19,000 Deferred gain (loss) 372,000 (218,000) 3,301,000 ------------ ------------ ------------ Net pension cost $ 450,000 $ 395,000 $ 782,000 ------------ ------------ ------------ ------------ ------------ ------------
39 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the plans funded status:
May 31 ------------------------------- 1998 1997 ------------ ------------- Pension plan assets at market value $ 23,313,000 $ 21,444,000 ------------ ------------- Less present value of projected benefit obligation: Vested 24,242,000 17,657,000 Non-vested 743,000 915,000 Effect of projected future compensation levels 3,463,000 2,743,000 ------------ ------------- Projected benefit obligation 28,448,000 21,315,000 ------------ ------------- Excess/(deficiency) of plan assets over projected benefit obligation (5,135,000) 129,000 Prior service cost 210,000 229,000 Unrecognized net obligation at date of initial application, amortized over 20 years 201,000 223,000 Unrecognized net loss 7,493,000 2,638,000 Adjustment to recognize minimum liability (4,441,000) - ------------ ------------- Prepaid pension assets (liabilities) $ (1,672,000) $ 3,219,000 ------------ ------------- ------------ -------------
At May 31, 1998, the Company's additional minimum liability for its defined benefit plan was in excess of the unrecognized prior service costs and net transition obligation and was recorded as a non-cash charge of $2,418,000 to stockholders' equity, net of tax benefits of $1,612,000, in accordance with SFAS No. 87, "Employers'" Accounting for Pensions. The weighted average discount rate and long-term rate of compensation increase used in determining the actuarial present value of the projected benefit obligations were 6.75% and 5%, respectively, at year end 1998 and 8% and 5%, respectively, at year end 1997. The expected long-term rate of return on plan assets for fiscal 1999 is 9.5%, the same as fiscal 1998. The Company also provides a 401(k) Plan (tax deferred savings plan) for its domestic employees. The plan provides that the Company make contributions in either cash or common stock, at its option, equal to 50% of minimum contributions made by participating employees. The plan also provides for additional Company contributions up to a maximum of 75% of participating employees' minimum contributions, for each fiscal year in which net earnings are 5% or more of revenues. Company contributions charged to earnings were $460,000, $445,000 and $419,000 for fiscal 1998, 1997 and 1996, respectively. The Company has a plan that provides certain health care benefits for all of its retired employees who meet certain age and service requirements while working for the Company. Generally, Company-provided health care coverage is coordinated with Medicare upon the retiree reaching the age of 65. Net post-retirement benefit cost was $233,000, $172,000 and $178,000 for fiscal years 1998, 1997 and 1996, respectively. The Company's post-retirement health care plans are not funded. Accumulated post-retirement benefit obligation:
May 31 --------------------------------- 1998 1997 ------------ ------------ Retirees $ 837,000 $ 1,078,000 Fully eligible active plan participants 239,000 146,000 Other active plan participants 889,000 332,000 ------------ ------------ Total accumulated post-retirement benefit obligation 1,965,000 1,556,000 Unrecognized prior service costs 67,000 77,000 Unrecognized net loss (788,000) (366,000) ------------ ------------ Accrued post-retirement benefit cost $ 1,244,000 $ 1,267,000 ------------ ------------ ------------ ------------
Net post-retirement benefit costs consisted of the following components:
1998 1997 1996 ------------ ------------ ----------- Service cost $ 85,000 $ 38,000 $ 33,000 Interest cost on accumulated post-retirement benefit obligation 132,000 123,000 132,000 Net amortization and deferrals 16,000 11,000 13,000 ------------ ------------ ----------- Net post-retirement benefit costs $ 233,000 $ 172,000 $ 178,000 ------------ ------------ ----------- ------------ ------------ -----------
The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation as of June 1, 1997 was 10% decreasing linearly each successive year until it reaches 5% in fiscal year 2003, after which it will 40 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS remain constant. A one-percentage-point increase in the assumed health care cost trend rates would increase the accumulated post-retirement benefit obligation, service cost and interest cost components of the net periodic post-retirement benefit cost by approximately 12%, 19% and 11%, respectively. The impact of a 1% decrease in the trend rates would decrease these components 10%, 15% and 8%, respectively. The assumed discount rate used in determining the accumulated post-retirement benefit obligation was 6.75% for fiscal 1998 and 8% for fiscal 1997. 8. Stock Option Plans and Stock Purchase Right Plan Under the 1991 Employee Stock Option Plan (the Option Plan) the Company may grant options to purchase shares of common stock to employees at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory stock options. These options generally expire 10 years from the date of grant and become exercisable ratably over a 4-year period. In June, 1995 the Company canceled stock options to purchase 776,500 shares of the Company's common stock at prices ranging from $6.38 to $13.50 and exchanged them for options to purchase 576,500 shares of the Company's common stock at the then current market value of $6.00 per share with new vesting periods. The vesting for exchanged options was 50% on the first anniversary of the grant, and 25% on each of the second and third anniversaries. The Tab Products Co. 1996 Outside Directors' Option Plan (the Directors' Plan) was adopted by the Company in fiscal 1996 and approved by stockholders at the Annual Stockholders' Meeting on October 17, 1996. Under the Directors' Plan, an initial grant of 10,000 shares was automatically granted to all existing outside directors at the date of stockholder approval and to all future new outside directors at the date they are appointed as directors. The options are granted at the fair market value at date of grant, expire 10 years from the date of grant and become exercisable ratably over a 4-year period. Under the Directors' Plan outside directors of the Company are automatically granted additional options annually, to purchase 2,000 shares of common stock of the Company at the fair market value at the date of grant for each year that such person remains a director of the Company. The grant date will be the date of the Annual Stockholders' Meeting. Annual options granted under the plan are immediately exercisable and expire 10 years from the date of grant. The total shares authorized under the plan is 150,000 of which 10,000 shares were granted in fiscal 1998 and 50,000 shares were granted in fiscal 1997. All options issued under the Directors' Plan are non-qualified options. On January 27, 1997 250,000 shares of common stock were granted to the Company's President and Chief Executive Officer, of which 242,000 shares were granted under Non-qualified Option Agreements. These shares were granted separate from the Company's 1991 Employee Stock Option Plan. The shares were granted at the fair market value at the date of grant ($9.25). These options generally expire 10 years from the date of grant and become exercisable in twelve quarterly installments from the grant date, except for 100,000 shares that become exercisable in 50,000 share increments four and five years from the grant date or sooner upon the achievement of certain business milestones. In October 1996, the Company declared a dividend of one Preferred Stock Purchase Right (Right) for each outstanding share of common stock. The Right entitles a stockholder to purchase one one-hundredth of a share of preferred stock at $35 per Right exercisable after a person acquires 15% or more of TAB's common stock or announces a tender offer which could result in such person owning 15% or more of the common stock. Each one one-hundredth of a share of preferred stock has terms designed to make it substantially the economic equivalent of one share of common stock. Under certain circumstances, if a person acquires 15% or more of the common stock, the Rights permit the holders to purchase TAB common stock having a market value of twice the exercise price of the Rights, in lieu of the preferred stock. In addition, in the event of certain business combinations, the Rights permit purchase of the common stock of an acquiring person at a 50% discount. Rights held by an acquiring person will become null and void in both cases. The Rights are subject to redemption by the Company's Board of Directors for $.001 for each Right. The Rights expire on October 23, 2006. 41 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Option activity under the plans is as follows:
Weighted Average Number of Exercise Shares Price ----------- ------------ Outstanding, June 1, 1995 (620,500 exercisable at a weighted average price of $10.38) 858,500 $10.12 Granted (weighted average fair value of $1.33) 722,000 6.08 Canceled (894,250) 9.96 ----------- ------------ Outstanding, May 31, 1996 (3,750 exercisable at a weighted average price of $6.38) 686,250 6.08 Granted (weighted average fair value of $2.26) 343,500 8.69 Exercised (81,625) 6.03 Canceled (171,750) 6.00 ----------- ------------ Outstanding, May 31, 1997 (207,125 exercisable at weighted average price of $6.26) 776,375 7.26 Granted (weighted average fair value of $2.82) 70,000 10.25 Exercised (235,813) 6.09 Canceled (98,812) 6.98 ----------- ------------ Outstanding, May 31, 1998 (149,125 exercisable at weighted average price of $7.58) 511,750 $8.26 ----------- -----------
Additional information regarding options outstanding as of May 31, 1998 is as follows:
Options Outstanding Options Exercisable -------------------------------- --------------------------------- Weighted Avg. Remaining Range of Number Contractual Weighted Avg. Number Weighted Avg. Exercise Prices Outstanding Life (yrs.) Exercise Price Exercisable Exercise Price - - ---------------- ----------- ------------- -------------- ----------- -------------- $6.00 - $6.38 79,875 7.0 $6.05 44,125 $6.03 $6.50 - $7.63 123,125 8.0 6.84 42,500 6.74 $9.13 - $12.00 308,750 8.7 9.39 62,500 9.25 ----------- ----------- $6.00 - $12.00 511,750 8.3 $8.26 149,125 $7.58 ----------- ----------- ----------- -----------
At May 31, 1998 494,843 and 90,000 shares were available for future grants under the Option Plan and Directors' Plan, respectively. Additional Stock Plan Information As discussed in the Statement of Accounting Policies, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 12 months following vesting; stock volatility, 32.9% in fiscal 1998 and 30.8% in fiscal 1997 and 1996; risk free interest rates, 5.66% in fiscal 1998 and 6.25% in fiscal 1997 and 1996 and a dividend rate of 2.5% in fiscal years 1998, 1997 and 1996. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $2,242,000 ($.44 basic and $.42 diluted per share) in fiscal 1998, $3,541,000 ($.73 basic and $.71 diluted per share) in fiscal 1997 and $2,286,000 ($.47 basic and diluted per share) in fiscal 1996. The impact of outstanding non-vested stock options granted prior to fiscal 1996 has been excluded from the pro forma calculation; accordingly, the fiscal 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. 42 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Commitments and Contingencies The Company and its subsidiaries are obligated under leases of certain office nad warehouse facilities expiring at various dates through 2012. The future minimum rental payments under these lease agreements at May 31, 1998 are as follows: 1999 $1,758,000 2000 1,369,000 2001 704,000 2002 337,000 2003 149,000 Thereafter 200,000 ----------- $4,517,000 ----------- -----------
Total rentals charged to expense amounted to $2,620,000 in 1998, $2,632,000 in 1997 and $2,802,000 in 1996. 10. Major Customer No single customer accounted for greater than 10% of consolidated revenues in fiscal 1998 and 1997. Revenues derived from the U.S. Government were 10% of total revenues in fiscal year 1996. 11. Foreign Subsidiaries The Company has three foreign subsidiaries which market their products in Canada, Australia and Europe, while foreign sales in the remainder of the world are conducted through a Foreign Sales Corporation. Foreign revenues were $32,533,000, $32,214,000 and $30,132,000 for the years ended May 31, 1998, 1997 and 1996, respectively. Foreign operating income was $1,703,000, $2,240,000 and $1,045,000 for the years ended May 31, 1998, 1997 and 1996, respectively. Total identifiable assets (excluding cash) and liabilities in foreign countries were $9,141,000 and $2,905,000, respectively, at May 31, 1998 compared with $9,216,000 and $3,151,000 at May 31, 1997. Transaction and exchange losses included in earnings, amounted to approximately $102,000, $18,000 and $225,000 in fiscal 1998, 1997 and 1996, respectively. 12. Per Share Information Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period while diluted earnings per share also includes the dilutive impact of stock options. Basic and diluted earnings per share for the fiscal years ended May 31, 1998, 1997 and 1996, respectively, are calculated as follows (in thousands, except per share data):
May 31 ------------------------------------- 1998 1997 1996 -------- -------- -------- Weighted average shares outstanding 5,102 4,879 4,852 Net earnings $2,435 $3,761 $2,761 Basic earnings per share $ .48 $ .77 $ .57 -------- -------- -------- -------- -------- -------- Weighted average shares outstanding 5,102 4,879 4,852 Dilutive effect of options 184 138 25 -------- -------- -------- Total 5,286 5,017 4,877 Net earnings $2,435 $3,761 $2,761 Diluted earnings per share $ .46 $ .75 $ .57 -------- -------- -------- -------- -------- --------
43 TAB PRODUCTS CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Selected Quarterly Data (Unaudited) (In thousands, except per share data)
Earnings (Loss) Per Share Gross Net ------------------------- Fiscal Quarter Ended Revenues Profit (1) Earnings (Loss) Basic Diluted - - -------------------- ------------ ---------- --------------- ----------- ----------- 1998 AUGUST 31 $ 39,443 $15,922 $ 886 $ .18 $ .17 NOVEMBER 30 41,573 17,516 1,404 .28 .27 FEBRUARY 28 41,096 17,289 1,402 .27 .26 MAY 31 43,831 16,303 (1,257) (.24) (.24) ------------ ---------- --------------- $ 165,943 $67,030 $ 2,435 .48 .46 ------------ ---------- --------------- ------------ ---------- --------------- 1997 AUGUST 31 $ 35,012 $14,105 $ 679 $ .14 $ .14 NOVEMBER 30 40,255 16,185 1,183 .24 .24 FEBRUARY 28 38,761 15,939 1,092 .22 .22 MAY 31 40,423 15,952 807 .16 .16 ------------ ---------- --------------- $ 154,451 $62,181 $ 3,761 .77 .75 ------------ ---------- --------------- ------------ ---------- ---------------
(1) Revenues less cost of revenues. 44 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Tab Products Co.: We have audited the consolidated financial statements of Tab Products Co. and its subsidiaries as of May 31, 1998 and 1997, and for each of the three years in the period ended May 31, 1998, and have issued our report thereon dated June 25, 1998; such financial statements and report are included in your fiscal 1998 Annual Report to Stockholders. Our audits also included the financial statements schedule of Tab Products Co., for the years ended May 31, 1998, 1997 and 1996, listed in Item 14(A)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. DELOITTE & TOUCHE LLP San Jose, California June 25, 1998 45 TAB PRODUCTS CO. AND SUBSIDIARY COMPANIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions Uncollectible Balance at Charged to Accounts Balance at Allowance for Doubtful Beginning Costs and Charged to End of Accounts Receivable of Period Expenses Reserve Period - - ----------------------- ---------- ---------- ------------- ---------- Year ended May 31, 1998 $769,000 $462,000 $284,000 $947,000 Year ended May 31, 1997 $620,000 $400,000 $251,000 $769,000 Year ended May 31, 1996 $708,000 $187,000 $275,000 $620,000
46 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-11914, 33-11838, 33-45071, 33-62357, 333-20693 and 333-25403 of Tab Products Co. on Form S-8 of our reports dated June 25, 1998, appearing and incorporated by reference in this Annual Report on Form 10-K of Tab Products Co. for the fiscal year ended May 31, 1998. DELOITTE & TOUCHE LLP San Jose, California August 28, 1998 EX-27 3 EXHIBIT 27
5 1,000 12-MOS MAY-31-1998 JUN-1-1997 MAY-31-1998 7,199 4,896 25,890 947 11,015 53,778 59,225 40,162 77,488 21,993 7,391 45,397 0 0 (500) 77,488 153,179 165,943 87,901 98,913 61,801 462 639 4,590 2,155 2,435 0 0 0 2,435 .48 .46 INVENTOR DETAIL AT MAY 31, 1998 WAS FINISHED GOODS $4,265, WORK IN PROCESS $2,704, AND RAW MATERIAL $4,046.
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