**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

**(Markone)**

 

|   | **ý** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|--------|------------|----------------------------------------------------------------------------------------------|
|   |       | **For the quarterly period ended February 28,  2002**                                        |

 

**OR**

 

|   | **o**  | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   | **For the transition period from                to** |

 

**Commissionfile number: 1-7736**

 

**TAB PRODUCTS CO.**

(Exact name of Registrant as specified in itscharter)

 

| **DELAWARE**             |   | **94-1190862**                    |
|--------------------------|--------|-----------------------------------|
| (State of Incorporation) |   | (IRS Employer Identification No.) |

 

**935Lakeview Parkway, Suite 195**

**VernonHills, IL  60061**

(Address of principal executive offices)

 

**(847)968-5400**

(Registrant’s telephone number — including areacode)

 

 

**NOTAPPLICABLE**

Former name, former address and former fiscal year,

if changed since last report.

 

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý    No o

 

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.  Common sharesoutstanding as of March 31, 2002 —5,123,915

 

 

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**TABPRODUCTS CO.**

 

**INDEX**

 

**PARTI.  FINANCIAL INFORMATION**

 

 
| **ITEM 1**                     | **Financial Statements (Unaudited):**                          |
|--------------------------------|----------------------------------------------------------------|
|                           |                                                           |
|                           | Consolidated  Condensed Balance Sheets                         |
|                           | February  28, 2002 and May 31, 2001                            |
|                           |                                                           |
|                           | Consolidated Condensed  Statements of Earnings                 |
|                           | Three months and Nine  months ended February 28, 2002 and 2001 |
|                           |                                                           |
|                           | Consolidated  Condensed Statements of Cash Flows               |
|                           | Nine months ended  February 28, 2002 and 2001                  |
|                           |                                                           |
|                           | Notes  to Consolidated Condensed Financial Statements          |
|                           |                                                           |
| **ITEM 2**                     | Management’s Discussion and Analysis of  Financial        |
|                           | Condition and Results of Operations                            |
|                           |                                                           |
| **ITEM 3**                     | Quantitative and Qualitative Disclosure About                  |
|                           | Market Risks                                                   |
|                           |                                                           |
| **PART II. OTHER INFORMATION** |
|                           |                                                           |
| **ITEM 6**                     | Exhibits and Reports on Form 8-K                               |
|                           |                                                           |
|                           | Signatures                                                     |

 

2

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**TAB PRODUCTS CO.**

**CONSOLIDATEDCONDENSED BALANCE SHEETS (UNAUDITED)**

**(000’somitted except share and per share data)**

 
|                                                                                                                                                              |   | **February  28,  2002** |   | **May 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------|--------|
| **ASSETS**                                                                                                                                                        |   |                    |   |              |   |
| **Current Assets:**                                                                                                                                               |   |                    |   |              |   |
| Cash and cash  equivalents                                                                                                                                        |   | $                       | 9,748  |              | $      | 5,872 |   |
| Short-term  investments                                                                                                                                           |   | 1,818                   |   | 2,965             |   |
| Accounts  receivable, less allowances of $1,151 and $889 for doubtful accounts                                                                                    |   | 15,048                  |   | 23,507            |   |
| Inventories                                                                                                                                                       |   | 5,011                   |   | 5,104             |   |
| Income tax  receivable                                                                                                                                            |   | 221                     |   | 4,764             |   |
| Deferred income  taxes                                                                                                                                            |   | 1,930                   |   | 3,002             |   |
| Prepaid expenses                                                                                                                                                  |   | 1,092                   |   | 1,548             |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **Total  Current Assets**                                                                                                                                         |   | 34,868                  |   | 46,762            |   |
|                                                                                                                                                              |   |                    |   |              |   |
| Property, plant  and equipment, net of accumulated depreciation of $28,133 and $26,916                                                                            |   | 6,236                   |   | 7,516             |   |
| Goodwill, net                                                                                                                                                     |   | 2,431                   |   | 2,643             |   |
| Deferred pension  asset                                                                                                                                           |   | 3,814                   |   | 3,134             |   |
| Deferred income  taxes and other assets                                                                                                                           |   | 4,565                   |   | 2,102             |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **Total Assets**                                                                                                                                                  |   | $                       | 51,914 |              | $      | 62,157 |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                    |   |                    |   |              |   |
| **Current  Liabilities:**                                                                                                                                         |   |                    |   |              |   |
| Accounts payable                                                                                                                                                  |   | $                       | 6,521  |              | $      | 10,816 |   |
| Compensation payable                                                                                                                                              |   | 1,795                   |   | 2,290             |   |
| Other accrued  liabilities                                                                                                                                        |   | 4,758                   |   | 7,277             |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **Total Current Liabilities**                                                                                                                                     |   | 13,074                  |   | 20,383            |   |
|                                                                                                                                                              |   |                    |   |              |   |
| Non-current  liabilities                                                                                                                                          |   | 1,271                   |   | 1,271             |   |
|                                                                                                                                                              |   |                    |   |              |   |
| Commitments and  contingencies                                                                                                                                    |   | —                  |   | —            |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                    |   |                    |   |              |   |
| **Preferred stock:** $.01 par value, authorized 500,000  shares, issued-none                                                                                      |   | —                  |   | —            |   |
| **Common stock:** $.01 par value, authorized 25,000,000  shares, issued —  February 2002 — 7,802,384 shares and  May 2001 —  7,742,137 shares |   | 78                      |   | 77                |   |
| Additional  paid-in capital                                                                                                                                       |   | 15,662                  |   | 15,236            |   |
| Stock  subscription — notes receivable                                                                                                                       |   | (198                    | )      | (397              | )      |
| Retained  earnings                                                                                                                                                |   | 55,361                  |   | 57,974            |   |
| **Treasury stock:** February 2002 — 2,678,469 shares and  May 2001 — 2,535,969 shares                                                                   |   | (32,452                 | )      | (31,597           | )      |
| Accumulated  other comprehensive loss                                                                                                                             |   | (882                    | )      | (790              | )      |
|                                                                                                                                                              |   |                    |   |              |   |
| **Total Stockholders’ Equity**                                                                                                                               |   | 37,569                  |   | 40,503            |   |
|                                                                                                                                                              |   |                    |   |              |   |
| **Total Liabilities and Stockholders’  Equity**                                                                                                              |   | $                       | 51,914 |              | $      | 62,157 |   |

 

**See Notes to Unaudited Consolidated Condensed FinancialStatements.**

 

3

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**TABPRODUCTS CO.**

**CONSOLIDATEDCONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

**(000’somitted except share and per share data)**

 
| ** **                                                                               |   | **Three  Months Ended  February 28,** |   | **Nine  Months Ended  February 28,** |   |
|------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                     |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
| **Revenues**                                                                             |   | $                                     | 23,096 |                                 | $      | 29,143 |   | $ | 78,073 |   | $ | 89,335 |   |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| **Costs and Expenses:**                                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Cost of revenues                                                                         |   | 14,553                                |   | 17,917                               |   | 48,303 |   | 55,955 |   |
| Selling, general  and administrative                                                     |   | 10,293                                |   | 15,673                               |   | 33,920 |   | 45,089 |   |
| **Total Costs and Expenses**                                                             |   | 24,846                                |   | 33,590                               |   | 82,223 |   | 101,044 |   |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| **Operating Loss**                                                                       |   | (1,750                                | )      | (4,447                               | )      | (4,150 | ) | (11,709 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Gain on sale of  property, plant and equipment, net                                      |   | 5                                     |   | 1,064                                |   | 11 |   | 1,064 |   |
| Interest, net,  and other                                                                |   | (29                                   | )      | 28                                   |   | 79 |   | 13 |   |
| Loss before  income taxes                                                                |   | (1,774                                | )      | (3,355                               | )      | (4,060 | ) | (10,632 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Income tax  benefit                                                                      |   | (618                                  | )      | (1,029                               | )      | (1,447 | ) | (3,788 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Net loss before cumulative change in accounting principle                                |   | (1,156                                | )      | (2,326                               | )      | (2,613 | ) | (6,844 | ) |
| Cumulative  effect of a change in accounting principle                                   |   | —                                |   | —                               |   | — |   | (330 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| **Net  Loss**                                                                            |   | $                                     | (1,156 | )                                    | $      | (2,326 | ) | $ | (2,613 | ) | $ | (7,174 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Basic net loss  per share before cumulative effect of a change in accounting principle   |   | $                                     | (0.23  | )                                    | $      | (0.45 | ) | $ | (0.51 | ) | $ | (1.33 | ) |
| Cumulative  effect of a change in accounting principle                                   |   | —                                |   | —                               |   | — |   | (0.06 | ) |
| **Basic net loss per share**                                                             |   | $                                     | (0.23  | )                                    | $      | (0.45 | ) | $ | (0.51 | ) | $ | (1.39 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Shares used in  computing basic net loss per share                                       |   | 5,122,564                             |   | 5,166,678                            |   | 5,156,218 |   | 5,169,292 |   |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Diluted net loss  per share before cumulative effect of a change in accounting principle |   | $                                     | (0.23  | )                                    | $      | (0.45 | ) | $ | (0.51 | ) | $ | (1.33 | ) |
| Cumulative  effect of a change in accounting principle                                   |   | —                                |   | —                               |   | — |   | (0.06 | ) |
| **Diluted net loss per share**                                                           |   | $                                     | (0.23  | )                                    | $      | (0.45 | ) | $ | (0.51 | ) | $ | (1.39 | ) |
|                                                                                     |   |                                  |   |                                 |   |   |   |   |   |
| Shares used in  computing diluted net loss per share                                     |   | 5,122,564                             |   | 5,166,678                            |   | 5,156,218 |   | 5,169,292 |   |

 

**See Notes to Unaudited Consolidated Condensed FinancialStatements.**

 

4

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**TABPRODUCTS CO.**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**(000’somitted)**

** **
| ** **                                                                             |   | **Nine  Months Ended  February 28,** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                   |   | **2002**                             |   | **2001** |   |
| **OPERATING ACTIVITIES:**                                                              |   |                                 |   |   |   |
|                                                                                   |   |                                 |   |   |   |
| Net loss                                                                               |   | $                                    | (2,613 | ) | $ | (7,174 | ) |
| Cumulative  effect of a change in accounting principle                                 |   | —                               |   | 330 |   |
| **Adjustments to Reconcile Net Loss  to Net Cash Flows From****Operating Activities:** |   |                                 |   |   |   |
| Depreciation and  amortization                                                         |   | 2,118                                |   | 4,294 |   |
| Deferred income  tax (benefit) provision                                               |   | (1,569                               | )      | 334 |   |
| Issuance of  common stock to 401(k) plan                                               |   | 252                                  |   | 354 |   |
| Gain on sale of  property, plant and equipment, net                                    |   | (11                                  | )      | (1,064 | ) |
| Changes in  operating assets and liabilities:                                          |   |                                 |   |   |   |
| Accounts  receivable, net                                                              |   | 8,459                                |   | 5,680 |   |
| Inventories                                                                            |   | 93                                   |   | 1,854 |   |
| Income tax  receivable                                                                 |   | 4,543                                |   | (487 | ) |
| Deferred taxes  and other prepaid expenses                                             |   | 3,097                                |   | (2,134 | ) |
| Deferred pension  asset                                                                |   | (680                                 | )      | — |   |
| Other assets                                                                           |   | (2,463                               | )      | (361 | ) |
| Accounts payable                                                                       |   | (4,295                               | )      | (1,124 | ) |
| Compensation  payable                                                                  |   | (495                                 | )      | (462 | ) |
| Other accrued  liabilities                                                             |   | (2,371                               | )      | (1,247 | ) |
| **Net Cash Flows From Operating  Activities**                                          |   | 4,065                                |   | (1,207 | ) |
|                                                                                   |   |                                 |   |   |   |
| **INVESTING ACTIVITIES:**                                                              |   |                                 |   |   |   |
| Purchase of  property, plant and equipment, net                                        |   | (787                                 | )      | (715 | ) |
| Sale of  property, plant and equipment                                                 |   | 24                                   |   | 2,725 |   |
| Purchases of short-term  investments                                                   |   | (1,838                               | )      | (5,445 | ) |
| Sales of  short-term investments                                                       |   | 2,985                                |   | 6,715 |   |
| **Net Cash Flows From Investing  Activities**                                          |   | 384                                  |   | 3,280 |   |
|                                                                                   |   |                                 |   |   |   |
| **FINANCING ACTIVITIES:**                                                              |   |                                 |   |   |   |
| Dividends paid                                                                         |   | —                               |   | (516 | ) |
| Purchase of  treasury stock                                                            |   | (481                                 | )      | — |   |
| **Net  Cash Flows From Financing Activities**                                          |   | (481                                 | )      | (516 | ) |
|                                                                                   |   |                                 |   |   |   |
| Effect of  exchange rate changes on cash                                               |   | (92                                  | )      | (206 | ) |
|                                                                                   |   |                                 |   |   |   |
| Increase in cash  and cash equivalents                                                 |   | 3,876                                |   | 1,351 |   |
|                                                                                   |   |                                 |   |   |   |
| Cash and cash  equivalents at beginning of period                                      |   | 5,872                                |   | 5,724 |   |
|                                                                                   |   |                                 |   |   |   |
| **Cash and Cash Equivalents at End of  Period**                                        |   | $                                    | 9,748  |   | $ | 7,075 |   |
|                                                                                   |   |                                 |   |   |   |
| Cash paid for:                                                                         |   |                                 |   |   |   |
| Interest                                                                               |   | $                                    | 14     |   | $ | 17 |   |
| Income taxes, net of refunds received                                                  |   | $                                    | (4,198 | ) | $ | (633 | ) |

 

**See Notes to Unaudited Consolidated Condensed FinancialStatements.**

 

5

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**TABPRODUCTS CO.**

 

**NOTES TO CONSOLIDATED****CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

 

**1.**         **BASIS OF PRESENTATION**

 

            The Company’s unaudited consolidatedcondensed financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America and, in theopinion of management, reflect all adjustments (consisting only of normalrecurring adjustments) considered necessary to fairly state the Company’sfinancial position, results of operations, and cash flows for the periodspresented.  These unaudited consolidatedcondensed financial statements should be read in conjunction with the Company’saudited consolidated financial statements included in the Company’s AnnualReport on Form 10-K for the fiscal year ended May 31, 2001.  The results of operations for thethree-month and nine-month periods ended February 28, 2002 are not necessarilyindicative of the results to be expected for any subsequent period or for theentire fiscal year ending May 31, 2002. The May 31, 2001 balance sheet was derived from audited consolidatedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States of America.

 

            Reclassification — Certain priorperiod amounts have been reclassified to conform to the current periodpresentation.

 

**2.         INVENTORY**

 

            Inventoriesconsisted of the following (in thousands):

 
|            |   | **February  28, 2002** |   | **May 31,  2001** |   |
|-----------------|--------|------------------------|--------|-------------------|--------|
| Finished goods  |   | $                      | 1,416  |              | $      | 1,443 |   |
| Work in process |   | 361                    |   | 272               |   |
| Raw materials   |   | 3,234                  |   | 3,389             |   |
|            |   | $                      | 5,011  |              | $      | 5,104 |   |

 

**3.         DIVIDENDS**

 

**           **Dividends declared for the nine-month period ended February 28, 2001 wereas follows:

 
| **Record Date**    |   | **Shares Outstanding** |   | **Dividend Per Share** |   |
|--------------------|--------|------------------------|--------|------------------------|--------|
| Fiscal  2001:      |   |                   |   |                   |   |
| August  25, 2000   |   | 5,120,147              |   | $                      | .05    |   |
| November  24, 2000 |   | 5,147,148              |   | $                      | .05    |   |

 

OnMarch 27, 2001, the Company’s Board of Directors discontinued the cash dividendon the common stock of the Company for quarters ending February 28, 2001 andlater.

 

6

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**4.             SEGMENTREPORTING**

Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or chief operatingdecision making group, in deciding how to allocate resources and in assessingperformance.  The Chief ExecutiveOfficer is the Company’s chief operating decision maker. The Company operatesand is managed internally by four geographic operating segments. The operatingsegments consist of the United States, Canada, the Netherlands and Australia.Outside the United States, each operating segment has a general manager whoreports to the Vice President, International, who reports to the Chief ExecutiveOfficer.  Within the United States, theindividuals responsible for operations, marketing and sales report directly tothe Chief Executive Officer.

 

Information about segments (in thousands):

 
| ** **                          |   | **Three  Months Ended  February 28,** |   | **Nine  Months Ended  February 28,** |   |
|-------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
| Revenues:                           |   |                                  |   |                                 |   |   |   |   |   |
| United States                       |   | $                                     | 17,113 |                                 | $      | 21,248 |   | $ | 59,657 |   | $ | 67,365 |   |
| Canada                              |   | 4,494                                 |   | 5,532                                |   | 13,589 |   | 15,663 |   |
| Netherlands                         |   | 885                                   |   | 1,349                                |   | 2,371 |   | 3,286 |   |
| Australia                           |   | 604                                   |   | 1,014                                |   | 2,456 |   | 3,021 |   |
| Consolidated  Total                 |   | $                                     | 23,096 |                                 | $      | 29,143 |   | $ | 78,073 |   | $ | 89,335 |   |
|                                |   |                                  |   |                                 |   |   |   |   |   |
| (Loss) income  before income taxes: |   |                                  |   |                                 |   |   |   |   |   |
| United States                       |   | $                                     | (1,677 | )                                    | $      | (4,001 | ) | $ | (4,333 | ) | $ | (11,817 | ) |
| Canada                              |   | (99                                   | )      | 107                                  |   | 160 |   | 416 |   |
| Netherlands                         |   | 67                                    |   | 507                                  |   | 200 |   | 772 |   |
| Australia                           |   | (65                                   | )      | 32                                   |   | (87 | ) | (3 | ) |
| Consolidated  Total                 |   | $                                     | (1,774 | )                                    | $      | (3,355 | ) | $ | (4,060 | ) | $ | (10,632 | ) |
|                                |   |                                  |   |                                 |   |   |   |   |   |
| Depreciation and  amortization:     |   |                                  |   |                                 |   |   |   |   |   |
| United States                       |   | $                                     | 564    |                                 | $      | 1,903 |   | $ | 1,802 |   | $ | 3,914 |   |
| Canada                              |   | 80                                    |   | 160                                  |   | 245 |   | 288 |   |
| Netherlands                         |   | 13                                    |   | 27                                   |   | 41 |   | 63 |   |
| Australia                           |   | 11                                    |   | 6                                    |   | 30 |   | 29 |   |
| Consolidated Total                  |   | $                                     | 668    |                                 | $      | 2,096 |   | $ | 2,118 |   | $ | 4,294 |   |
|                                |   |                                  |   |                                 |   |   |   |   |   |

 
|                                                             |   | **February  28, 2002** |   | **May 31,  2001** |   |
|------------------------------------------------------------------|--------|------------------------|--------|-------------------|--------|
| Property, plant  and equipment, net of accumulated depreciation: |   |                   |   |              |   |
| United States                                                    |   | $                      | 5,599  |              | $      | 6,814 |   |
| Canada                                                           |   | 304                    |   | 359               |   |
| Netherlands                                                      |   | 113                    |   | 123               |   |
| Australia                                                        |   | 220                    |   | 220               |   |
| Consolidated  Total                                              |   | $                      | 6,236  |              | $      | 7,516 |   |
|                                                             |   |                   |   |              |   |
| Total assets:                                                    |   |                   |   |              |   |
| United States                                                    |   | $                      | 42,563 |              | $      | 51,273 |   |
| Canada                                                           |   | 6,533                  |   | 7,570             |   |
| Netherlands                                                      |   | 1,702                  |   | 1,680             |   |
| Australia                                                        |   | 1,116                  |   | 1,634             |   |
| Consolidated  Total                                              |   | $                      | 51,914 |              | $      | 62,157 |   |

 

7

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Geographicrevenues are based on the country from which customers are invoiced.  Income before income taxes is net sales lessoperating expenses, interest or other expenses, but prior to income taxes.

 

**5.             COMPREHENSIVELOSS**

 

Thecomponents of comprehensive loss, net of tax, are as follows (in thousands):

 
| ** **                    |   | **Three  Months Ended  February 28,** |   | **Nine  Months Ended  February 28,** |   |
|-------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                          |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
| Net loss                      |   | $                                     | (1,156 | )                                    | $      | (2,236 | ) | $ | (2,613 | ) | $ | (7,174 | ) |
| Foreign currency  translation |   | (32                                   | )      | 48                                   |   | (92 | ) | (207 | ) |
|                          |   |                                  |   |                                 |   |   |   |   |   |
| Comprehensive  loss           |   | $                                     | (1,188 | )                                    | $      | (2,188 | ) | $ | (2,705 | ) | $ | (7,381 | ) |

 

Accumulatedother comprehensive loss, net of tax, presented in the accompanying unauditedconsolidated condensed balance sheets consists of the following (in thousands):
|                          |   | **February  28,  2002** |   | **May 31,****2001** |   |
|-------------------------------|--------|-------------------------|--------|---------------------|--------|
| Foreign currency  translation |   | $                       | (882   | )                   | $      | (790 | ) |
|                               |        |                         |        |                     |        |  |  |

 

 

**6.             STOCKREPURCHASE PROGRAM**

 

                On September 17,2001, the Company announced that its Board of Directors authorized managementto make discretionary repurchases of up to 10% of the Company’s common stockduring the following twelve months at market prices.  From September 17, 2001 to February 28, 2002, the Companyrepurchased 112,500 shares of stock at a total cost of $481,000 ($4.28 pershare average).  Repurchases were madein open market transactions. 

 

**7.****                                     ****RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 141 (“SFAS No.141”), “Business Combinations,” which eliminates the pooling of interestsmethod of accounting for all business combinations initiated after June 30,2001 and addresses the initial recognition and measurement of goodwill andother intangible assets acquired in a business combination.  The Company will adopt SFAS No. 141 forbusiness combinations initiated after June 30, 2001.

 

In June 2001, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards No. 142 (“SFAS No.142”), “Goodwill and Other Intangible Assets,” which addresses the initialrecognition and measurement of intangible assets acquired outside of a businesscombination and the accounting for goodwill and other intangible assetssubsequent to their acquisition.  SFASNo. 142 provides that intangible assets with finite useful lives be amortizedand that goodwill and intangible assets with indefinite lives will not beamortized, but will rather be tested at least annually for impairment.  The Company will adopt SFAS No. 142 on June1, 2002.  Upon adoption of SFAS No. 142,the Company will stop the amortization of goodwill that resulted from priorbusiness combinations.  The Company willevaluate goodwill under the SFAS No. 142 transitional impairment test and hasnot yet determined whether or not there is an impairment loss.  Any transitional impairment loss will berecognized as a change in accounting principle.

 

The Company will adopt Statement of FinancialAccounting Standards No. 144, (“SFAS No. 144”), “Accounting for the Impairmentor Disposal of Long-Lived Assets,” effective June 1, 2002.  SFAS No. 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets.  SFAS No. 144 supersedes SFAS No. 121,

 

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“Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,” and the accounting and reporting provisions ofAccounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results ofOperations — Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,” forthe disposal of a segment of a business (as previously defined in thatOpinion).  Although the Company has notcompleted its assessment, it does not expect the adoption of SFAS No. 144 tohave a material effect on the consolidated financial position or results ofoperations of the Company.

 

**8.             CHANGES IN ACCOUNTING PRINCIPLE**

 

InJune 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting forDerivative Instruments and Hedging Activities*.*”* *This statementrequires companies to record derivatives on the balance sheet as assets orliabilities, measured at fair value. Gains or losses resulting from changes in the values of thosederivatives would be accounted for depending on the use of the derivative andwhether it qualifies for hedge accounting. The Company adopted SFAS No. 133 on June 1, 2001.  The adoption of SFAS No. 133 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

In December 1999, the Securities and ExchangeCommission (SEC) issued Staff Accounting Bulletin No. 101 (“SAB No. 101”),“Revenue Recognition in Financial Statements,” which provides guidance relatedto revenue recognition based on interpretations and practices followed by theSEC and was effective the first fiscal quarter of fiscal years beginning afterDecember 15, 1999.  SAB No. 101 requirescompanies to report any changes in revenue recognition as a cumulative changein accounting principle at the time of implementation in accordance withAccounting Principles Board Opinion No. 20, "AccountingChanges."  Subsequently, SAB Nos.101A and 101B were issued to delay the implementation of SAB No. 101.

After evaluation of the Company’s revenuerecognition policies compared to the guidance in SAB No. 101, the Companychanged its accounting policy for recognizing revenue from the sale of mobilefile storage equipment.   Adoption ofthe change in accounting, in the third quarter of fiscal year 2001, resulted inrevenue being recorded only after installation of the equipment on customerpremises rather than upon shipment, thus postponing revenue recognition by anaverage of two months.  The change inaccounting necessitated the restatement of the first and second quarterfinancial statements and 10Q filings to properly reflect the beginning of theyear recording of the cumulative effect on prior years (to May 31, 2000) of achange in accounting principle.  Thecumulative effect of the change in accounting principle was a charge of$330,000 in the first quarter of fiscal year 2001.

 

**9.             SUBSEQUENT EVENT**

 

On March 9, 2002, President Bush signed into law H.R.3090, the “Job Creation and Worker Assistance Act of 2002.”  The Act allows for additional federaldepreciation expense for specific asset acquisitions purchased by the Companyafter September 10, 2001.  Additionally,the Act increases the carryback period to five years of federal net operatinglosses generated in tax years ending in 2002. The Company is evaluating whether it will elect to carryback any currentyear federal losses that may exist at year-end and the amount of the relatedpotential refund the Company would receive due to H.R. 3090.

 

 

**ITEM 2.****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This report, including without limitation thefollowing section regarding Management’s Discussion and Analysis of FinancialCondition and Results of Operations, contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, regarding theCompany and its business, financial condition, results of operations andprospects.   Words such as “expects,”“may,” “will,” “should,” “forecasts,” “potential,” “continue,” “anticipates,”“intends,” “plans,” “projections,” “believes,” “seeks,” “foreseeable,”“break-even,” “estimates,” and similar expressions or variations of such wordsare intended to identify forward-looking statements.  Additionally, statements concerning future matters such as thedevelopment of new products, enhancements or technologies, possible changes inlegislation and other statements regarding matters that are not historical areforward-looking statements.  Thesestatements are only predictions.

 

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Although forward-lookingstatements in this report reflect the good faith judgment of the Company’smanagement, such statements can only be based on facts and factors currentlyknown by the Company.  Consequently,forward-looking statements are inherently subject to risks and uncertaintiesand actual results and outcomes may differ materially from the results andoutcomes discussed in the forward-looking statements.  Factors that could cause or contribute to such differences inresults and outcomes include without limitation those discussed in “BusinessEnvironment and Risk Factors” as well as those discussed elsewhere in thisreport.  Readers are urged not to placeundue reliance on these forward-looking statements, which speak only as of thedate of this report.  Readers are urgedto carefully review and consider the various disclosures made by the Company inthis report, which attempt to advise interested parties of the risks andfactors that may affect the Company’s business, financial condition, results ofoperations and prospects.  The Companyis not under any obligation (and expressly disclaims any such obligation) toupdate or alter its forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

The following discussionof the Company’s financial condition and results of operations should be readin conjunction with the Unaudited Consolidated Condensed Financial Statementsof the Company.

 

**CapitalResources and Liquidity**

 

                AtFebruary 28, 2002, the Company had cash, cash equivalents and short-terminvestments of $11.6 million, an increase of $2.7 million from the $8.8 millionat May 31, 2001.  The increase in cashwas primarily the result of a reduction in accounts receivable of $8.5 millionfrom $23.5 million at May 31, 2001 to $15.0 million at February 28, 2002 and a$4.5 million tax refund received in July 2001. Such increases to cash were partially offset by the operating lossduring the period, the repurchase of common stock during the period,investments in property, plant and equipment and the payment of certain liabilitiesaccrued in the prior year.  TheCompany’s working capital position at February 28, 2002 was $21.8 million ascompared with $26.4 million at May 31, 2001. The current ratio of 2.7 at February 28, 2002 was higher than thecurrent ratio of 2.3 reported for May 31, 2001.

 

                Investments inproperty, plant and equipment, which were primarily focused on company-widemanagement information systems and production equipment, were $0.8 million forthe nine months ended February 28, 2002. Capital expenditures to support operations for fiscal 2002 are expectedto total approximately $1.3 million.

 

The Company paid no cashdividends in the nine-month period ended February 28, 2002 and $0.5 million incash dividends in the nine-month period ended February 28, 2001.  On March 27, 2001, the Company’s Board ofDirectors discontinued the cash dividend for quarters ending February 28, 2001and later.

 

                TheCompany maintains a $5.0 million secured line of credit with a bank.  As of February 28, 2002, the Company has notborrowed on the line of credit.  Theline of credit contains covenants related to cash flow and tangible net worththat the Company must maintain.  TheCompany was in compliance with all of its covenants as of February 28,2002.  The Company believes that itscurrent cash, future cash flows and borrowing capacity will provide sufficientworking capital for the next twelve months.

 

##### **Results ofOperations**

 

**Revenues** for the third quarter offiscal 2002 were $23.1 million, a decline of $6.0 million or 20.7% from the$29.1 million of revenue reported in the third quarter of fiscal 2001.  Revenues for the nine months ended February28, 2002 were $78.1 million, a decline of $11.3 million or 12.6% from the $89.3million of revenue reported for the nine months ended February 28, 2001.  The decrease in revenues was primarilyattributable to weak economic conditions in the current fiscal year in bothdomestic and international markets.

 

**Cost of Revenues**, as a percentage ofrevenues, was 63.0% for the third quarter of fiscal 2002, an increase of 1.5percentage points from the 61.5% for the third quarter of fiscal 2001.  In the third quarter of fiscal 2001, theCompany reversed certain accruals previously recorded related to the Company’sprofessional services cost of revenues in the amount of $1.1 million.  The reversal of these accruals was based ona review of the Company’s accrued services liabilities that were determined tobe greater than was required.  Thisresulted in a decrease of 3.6 percentage points in the third quarter of fiscal2001 cost of revenues as a percentage of revenues.  Prior to this reversal of accruals, the third quarter of fiscal2001 cost of revenues as a percentage of revenues was 65.1%.  For the nine months ended February 28, 2002,cost of revenues as a percentage of revenues was 61.9% as compared to 62.6% inthe first nine months of the prior fiscal year (63.8% before the accrualreversal mentioned above).  The decreasein the cost of revenues percentage was primarily due to an improved mix of productscombined with lower manufacturing costs and slightly higher selling prices infiscal 2002.

 

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**Selling, General and Administrative**expenses were $10.3 million or 44.6% of totalrevenues for the third quarter of fiscal 2002 as compared to $15.7 million or53.8% of total revenues for the third quarter of fiscal 2001.  Expenses in the third quarter of fiscal2002, as compared to the third quarter of fiscal 2001, were lower primarily dueto decreased employee headcount, decreased branch office expenses due to lowerdiscretionary expenditures and the closure of certain branch office locations,lower variable sales compensation due to lower sales volume, lower bad debtexpense, lower employee benefit costs, lower marketing costs, reduceddepreciation and reduced amortization of goodwill due to the write-off in itsentirety as of May 31, 2001, of the Company’s imaging services facilitygoodwill.  The third quarter of fiscal2001 also included a $1.1 million charge related to the relocation of thecorporate headquarters to Vernon Hills, Illinois.

 

Selling, General andAdministrative expenses were $33.9 million or 43.4% of total revenues for thenine months ended February 28, 2002 as compared to $45.1 million or 50.5% oftotal revenues for the nine months ended February 28, 2001.  Expenses for the nine months ended February28, 2002, as compared to the nine months ended February 28, 2001, were lowerprimarily due to a first quarter fiscal 2001 charge of $1.4 million related tothe retirement of the Company’s former CEO, a third quarter fiscal 2001 chargeof $1.1 million associated with relocation of the corporate office to VernonHills, Illinois, decreased employee headcount, decreased branch office expensesdue to lower discretionary expenditures and the closure of certain branchoffice locations, lower employee benefit costs, lower variable salescompensation due to lower sales volume, reduced depreciation and reducedamortization of goodwill due to the write-off in its entirety as of May 31,2001, of the Company’s imaging services facility goodwill.  The Company has also lowered otherdiscretionary costs such as travel, consulting, training and other selling,general and administrative expenses. The lower expenses for the nine months ended February 28, 2002 werepartially offset by $0.7 million of costs related to the proxy contest thatended in October 2001.  There was nocomparable expense related to the proxy contest in the nine months endedFebruary 28, 2001.  As a direct resultof the above-mentioned cost reductions, the Company has lowered its operatingincome break-even point on revenues by approximately 25% compared to the priorfiscal year.

 

**Gain onSale of Property, Plant and Equipment, net** was $5,000 for the three months ended February 28,2002 compared to $1.1 million in the third quarter of fiscal 2001.  On February 16, 2001, the Company completedthe sale of unutilized property and a building for a gross sales price of $2.9million.  For the nine months endedFebruary 28, 2002, gain on sale of property, plant and equipment, net was$11,000 compared to $1.1 million for the nine months ended February 28, 2001.

 

**Interest, net**, **and other**was an expense of $29,000 inthe third quarter of fiscal 2002 as compared to income of  $28,000 in the third quarter of fiscal2001.  The reduced income for the threemonths ended February 28, 2002 was primarily due to foreign exchange losses andlower interest earned on the Company’s cash balances.  For the nine months ended February 28, 2002, interest, net andother was income of $79,000 and for the nine months ended February 28, 2001 itwas income of $13,000.  The increasedincome for the nine months ended February 28, 2002 was primarily due to foreignexchange gains partially offset by lower interest earned on the Company’s cashbalances.

 

**Income Tax Benefit. **Net losses for the third quarter of fiscal 2002 andfor the nine months ended February 28, 2002 have been reduced by the amount ofthe tax benefit available from the carryforward of net operating losses tofuture periods.  The effective tax ratewas 34.8% for the third quarter of fiscal 2002 and 30.7% for the third quarterof fiscal 2001.   The effective tax ratewas 35.6% for the nine months ended February 28, 2002 and February 28, 2001.

 

**Net Loss Per Share** for the third quarter of fiscal 2002 was $0.23 forboth basic and diluted shares compared to a net loss per share of $0.45 forboth basic and diluted shares for the third quarter of fiscal 2001.  Net loss for both basic and diluted shareswas $0.51 for the nine months ended February 28, 2002 and $1.39 for the ninemonths ended February 28, 2001.

 

**Cumulative Effect of a Changein Accounting Principle.**Adoption of a change in accounting for the recognition of revenue relatedto mobile filing systems resulted in a charge of $0.3 million as of thebeginning of the first quarter of fiscal year 2001.

 

**Recently Issued Accounting Standards**

 

In June 2001, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 141 (“SFAS No. 141”), “Business Combinations,” which eliminates the poolingof interests method of accounting for all business combinations initiated afterJune 30, 2001 and addresses the initial recognition and measurement of goodwilland 

 

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other intangible assets acquired in abusiness combination.  The Company willadopt SFAS No. 141 for business combinations initiated after June 30, 2001.

 

InJune 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard No. 142 (“SFAS No. 142”), “Goodwill and OtherIntangible Assets,” which addresses the initial recognition and measurement ofintangible assets acquired outside of a business combination and the accountingfor goodwill and other intangible assets subsequent to their acquisition.  SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill and intangible assetswith indefinite lives will not be amortized, but will rather be tested at leastannually for impairment.  The Companywill adopt SFAS No. 142 on June 1, 2002. Upon adoption of SFAS No. 142, the Company will stop the amortization ofgoodwill that resulted from prior business combinations.  The Company will evaluate goodwill under theSFAS No. 142 transitional impairment test and has not yet determined whether ornot there is an impairment loss.  Anytransitional impairment loss will be recognized as a change in accountingprinciple.

 

The Company will adopt Statement of FinancialAccounting Standards No. 144, (“SFAS No. 144”), “Accounting for the Impairmentor Disposal of Long-Lived Assets,” effective June 1, 2002.  SFAS No. 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets.  SFAS No. 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of,” and the accounting and reporting provisions of AccountingPrinciples Board (“APB”) Opinion No. 30, “Reporting the Results of Operations —Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,” forthe disposal of a segment of a business (as previously defined in thatOpinion).  Although the Company has notcompleted its assessment, it does not expect the adoption of SFAS No. 144 tohave a material effect on the consolidated financial position or results ofoperations of the Company.

 

**Business Environment And Risk Factors**

** **

                The Company’s future operatingresults may be affected by various trends and factors, which we mustsuccessfully manage in order to achieve favorable operating results. Inaddition, there are trends and factors beyond our control, which affect ouroperations.  Such trends and factorsinclude, but are not limited to, possible adverse changes in general economicconditions or conditions in the specific markets for our products, governmentalregulation, fluctuations in foreign exchange rates, force majeure, and otherfactors, including, but not limited to, those listed below.

*                Failureto manage expenses in alignment with revenues could adversely impact ourresults of operations and financial condition.*  Weincurred significant costs in fiscal 2001 to restructure our expense levels inline with expected revenues.  If thisrestructuring does not prove to be sufficient or if we fail to take additionalactions that may become necessary to align future expenses with future revenuelevels, our results of operations and financial condition could be adverselyimpacted.

*An accelerated move to digital technology by our customerscould weaken demand for our products and services.*  Although the use of paper by business hascontinued to increase, the use of digital records by large document intensiveindustries may accelerate.  This couldweaken the demand for our paper-based supplies and storage products.  If we fail to respond with new digitalproducts and services to such a potential market change, our revenues, resultsof operations, financial condition and prospects could be adversely affected.

*The impact of the recent terrorist attacks in the UnitedStates may have both short-term and long-term adverse effects on our revenues,results of operations, financial condition and prospects.  *Whileit is likely that the terrorist attacks of September 11, 2001 have had animmediate impact on our business as a result of business disruption generally,including transportation disruption, deferral of customer purchasing decisionsand supply chain disruption, the long-term effects are not known at this time.

 

*We may not be able to achievehigher market penetration for sales of large document management solutionprojects. *Althoughfrom fiscal 2001 onward we have focused our selling efforts on obtaining abalanced mix of orders of varying sizes and types, large projects may beimportant to achieving revenue growth. While the Company does not know of a single large competitor with thecapability to handle these large projects, if we fail to achieve significantmarket penetration for such projects, revenue growth may be limited and ourresults of operations may be adversely impacted.

*If we cannot attract or retain keyqualified personnel, our business, results of operations and financialcondition may be adversely impacted***. **Our future performancedepends in significant part upon attracting and retaining key management,sales, manufacturing, marketing and technical support personnel.  The inability to attract, assimilate or retain

 

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highly qualifiedpersonnel in the future on a timely basis could have a material adverse effecton our business, results of operations and financial condition.

 

*Ouroperating results may fluctuate from period to period.* Factors affecting our operating results and gross margins include thevolume of product sales, competitive pricing pressures, the ability to matchsupply with demand, changes in product and customer mix, changes in thechannels through which our products and services are distributed, timing of newproduct announcements and introductions by us and our competitors, fluctuationsin product costs, variations in manufacturing cycle times, fluctuations inmanufacturing utilization, our ability to achieve manufacturing volumes withour new and existing products, exchange rate fluctuations, a change in oureffective tax rate and changes in general economic conditions.  All of these factors are difficult toforecast and these or other factors can materially affect our quarterly orannual operating results.

* *

*Ourliquidity could be adversely impacted by unexpected events. *Although we believe that we have sufficient cash onhand and expected cash from operations to satisfy our working capital needs forthe next twelve months, any significant unexpected cash requirements couldadversely impact our liquidity.  Inthose circumstances, we would be required to seek third party financing and wecannot be certain that financing will be available on acceptable terms or atall.  Factors affecting our cash flowsinclude net income or losses, the timely collection of accounts receivable fromcustomers, the willingness of suppliers to extend normal credit terms, the purchaseand sale of assets, the willingness of financial institutions to lend to us,and the payment of dividends.  Althoughour projections of these factors indicate that our operational cash flows,together with our existing cash and cash equivalent balances and our borrowingcapacity will adequately finance anticipated operations and capitalexpenditures for the next twelve months, investors are cautioned that suchprojections inherently involve risks and uncertainties.

 

*Failureto compete effectively could have a material adverse impact on our results ofoperations. * Competition may increase in the future from existing competitors,new competitors and/or from other companies offering products and services thatmay be less costly or provide additional features.  Unless we respond effectively, such competition could result inlost sales and lower operating results.

 

*Failure to obtain sufficientquantities of critical components could adversely impact our business,financial condition and results of operations. *We purchase several critical components from single or sole sourcevendors for which alternative sources are not currently in place.  We do not maintain long-term supplyagreements with any of these vendors. Development of alternative supply sources would require a significantamount of time to qualify in the case of certain of our components.    The inability to develop alternativesources for these single or sole source components or to obtain sufficientquantities of these components could result in delays or reductions in productshipments, which could adversely affect our business, financial condition andresults of operations.

*Failure to achieve plannedmanufacturing volumes could adversely impact our business, financial conditionand results of operations. *There can be no assurance that our manufacturingfacilities will achieve or maintain acceptable manufacturing volumes in thefuture.  The inability to achieveplanned volumes from our manufacturing facilities could have an adverse effecton our business, financial condition and results of operations.  Any problems experienced by us in ourcurrent or future transitions to new processes and products or theconsolidation of manufacturing operations could have a material adverse effecton our business, financial condition and results of operations.

*Sales to the U.S. Government mayresult in fluctuations due to their budget constraints and new initiatives.*

Government revenues primarily expose us to risks from reductions inbudget allocations to support regulation and administrative offices.  The government may periodically undertakeinitiatives that create opportunities to help them streamline workflowprocesses, reduce paperwork and increase customer service, which may provideshort-term opportunities for us. However, the long-term effect of a government initiative to streamlineprocesses could eventually have a negative impact on our business, financialcondition and results of operations.

 

*Unfavorable intellectual propertydevelopments could adversely impact our business and results of operations. *We rely on a combination of patents, trademarks,copyright and trade secret laws, confidentiality procedures and licensingarrangements to protect our intellectual property rights.  We have been notified in the past and may benotified in the future of claims that they may be infringing upon patents orother intellectual property rights owned by third parties.  There can be no assurance that in the futureany patents held by us will not be invalidated, that patents will be issued forany of our pending applications or that any claims allowed from existing orpending patents will be of sufficient scope or strength or be issued in theprimary countries where our products can be sold to provide meaningfulprotection or any commercial advantage to us.  Additionally, our competitors may be able to design around ourpatents.

 

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*A negative impact to our international operations couldadversely impact our business, financial condition and results of operations.*  For the nine months ended February 28, 2002and 2001, international sales accountedfor approximately 24% and 25%, respectively, of our consolidated totalrevenues.  Fluctuations in currenciesnegatively impacted us in fiscal 2001 and could adversely affect our business,financial condition and results of operations in the future.  Because sales of our products have beendenominated to date primarily in United States dollars, increases in the valueof the United States dollar could increase the price of our products so thatthey become relatively more expensive to customers in the local currency of aparticular country, leading to a reduction in sales and profitability in thatcountry.  We are subject to the risks ofconducting business internationally, including foreign government regulationand general geopolitical risks such as political and economic instability,potential hostilities and changes in diplomatic and trade relationships.  Manufacturing and sales of our products mayalso be materially adversely affected by factors such as unexpected changes in,or imposition of, regulatory requirements, tariffs, import and exportrestrictions and other barriers and restrictions, longer payment cycles,greater difficulty in accounts receivable collection, potentially adverse taxconsequences, the burdens of complying with a variety of foreign laws and otherfactors beyond our control.  Inaddition, the laws of certain foreign countries in which our products are or maybe developed, manufactured or sold, may not protect our intellectual propertyrights to the same extent as do the laws of the United States and thus makepiracy of our products a more likely possibility.  There can be no assurance that these factors will not have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**

TheCompany is exposed to market risk related to fluctuations in interest rates andin foreign currency exchange rates.

TheCompany’s exposure to market risk due to fluctuations in interest rates relatesprimarily to its short-term investment portfolio, which consists of corporatedebt securities, which are classified as available-for-sale and were reportedat an aggregate fair value of $1.8 million as of February 28, 2002.  These available-for-sale securities aresubject to interest rate risk inasmuch as their fair value will fall, if marketinterest rates increase.  If marketinterest rates were to increase immediately and uniformly by 10% from thelevels prevailing at February 28, 2002, the fair value of the portfolio wouldnot decline by a material amount.  TheCompany does not use derivative financial instruments to mitigate the risksinherent in these securities.  However,the Company does attempt to reduce such risks by typically limiting thematurity date of such securities to no more than nine months, placing itsinvestments with high credit quality issuers and limiting the amount of creditexposure with any one issuer.  In addition,the Company believes that it currently has the ability to hold theseinvestments until maturity, and therefore, believes that reductions in thevalue of such securities attributable to short-term fluctuations in interestrates would not materially affect the financial position, results of operationsor cash flows of the Company.

The Company’s exposure tomarket risk due to fluctuations in foreign currency exchange rates relatesprimarily to the intercompany receivable balance with its Netherlands subsidiary.  Such intercompany receivable balance atFebruary 28, 2002 was zero; therefore, a hypothetical 10% adverse change in theEuro against the U.S. dollars would not result in a material foreign exchangeloss.  Although the Company transactsbusiness with various foreign countries, settlement amounts are usually basedon local currency.  Transaction gains orlosses have not been significant in the past and there is no hedging activityon Euro or other currencies. Consequently, the Company does not expect that reductions in the valueof such intercompany receivable balances or of other accounts denominated inforeign currencies resulting from even a sudden or significant fluctuation inforeign exchange rates, would have a material impact on the Company’s financialposition, results of operations or cash flows.

 

In January 1999, certainmember countries of the European Union established permanent, fixed conversionrates between their existing currencies and the European Union’s commoncurrency (the Euro). The transition period for conversion to the Euro wasJanuary 1, 1999 through January 1, 2002, at which time all legal tender withinthe participating member countries converted to the Euro.  The timing of phasing out all uses ofexisting currencies will comply with the legal requirements and also bescheduled to facilitate optimal coordination with the plans of our vendors,distributors and customers. Work related to the introduction of the Euro andthe phasing out of the other currencies includes converting informationtechnology systems; recalculating currency risk; and taking action, if needed,regarding continuity of contracts; and modifying our processes for preparingtax, accounting, payroll and customer records. The introduction of the Euro and the phasing out of the other currenciesdid not have a material impact on the Company’s financial condition, results ofoperations or cash flows.

 

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Notwithstanding theforegoing analysis of the direct effects of interest rate and foreign currencyexchange rate fluctuations on the value of certain of the Company’s investmentsand accounts, the indirect effects of such fluctuations could have a materialadverse effect on the Company’s business, financial condition and results ofoperations.  For example, internationaldemand for the Company’s products could be affected by foreign currencyexchange rates.  In addition, interestrate fluctuations may affect the buying patterns of the Company’scustomers.  Furthermore, interest rateand currency exchange rate fluctuations have broad influence on the generalcondition of the U.S., foreign and global economies, which could materially andadversely affect the Company’s financial condition, results of operations andcash flows.

 

 

 

**PART II****: OTHERINFORMATION**

 

 

**ITEM 6****.  EXHIBITS AND REPORTSON FORM 8-K**

 

(a)                                  Exhibits.

     None

 

(b)                                 Reportson Form 8-K.

     None

 

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Pursuant to therequirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      | TAB  PRODUCTS CO.                                                     |
|---------------------------|-----------------------------------------------------------------------|
|                      | (Registrant)                                                          |
|                      |                                                                  |
| Date:  April 9, 2002 | /s/ Donald J. Hotz                                                    |
|                      | Donald J. Hotz,                                                       |
|                      | Vice President, Chief  Financial Officer & Treasurer              |
|                      |                                                                  |
| Date:  April 9, 2002 | /s/ Robert J. Crecca                                                  |
|                      | Robert J. Crecca                                                      |
|                      | Corporate Controller,  Chief Accounting Officer & Asst. Secretary |

 

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