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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
[ ] 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: 0-20743
OPEN PLAN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1515256
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4299 Carolina Avenue, 23222
Building C, Richmond, Virginia (Zip Code)
(Address of principal executive office)
(804) 228-5600
(Telephone number of registrant)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
As of the close of business on June 14, 2001, Open Plan Systems, Inc. had
4,337,391 shares of Common Stock, no par value, outstanding.
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OPEN PLAN SYSTEMS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 (unaudited) 1
and December 31, 2000
Consolidated Statements of Operations - Three months 2
ended March 31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows - Three months 3
ended March 31, 2001 and 2000 (unaudited)
Notes to Consolidated Financial Statements - March 31, 2001 4
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of 17
Security Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
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OPEN PLAN SYSTEMS, INC.
PART I
FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
(amounts in thousands)
March 31, December 31,
2001 2000
------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19 $ 244
Cash and cash equivalents externally restricted under
bond indenture agreement 2,220 2,190
Accounts receivable, net 6,954 7,834
Inventories 6,004 6,278
Prepaids and other 568 458
Refundable income taxes 62 -
------------------------------------
TOTAL CURRENT ASSETS 15,827 17,004
Property and equipment, net 2,206 2,393
Goodwill, net 3,606 3,664
Other 236 271
------------------------------------
TOTAL ASSETS $ 21,875 $ 23,332
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,595 $ 2,595
Revolving line of credit 4,476 3,366
Trade accounts payable 2,813 3,709
Accrued compensation and related costs 460 1,121
Other 735 631
Customer deposits 734 860
------------------------------------
TOTAL CURRENT LIABILITIES 11,813 12,282
Long-term debt 204 227
Other long-term liabilities 62 20
------------------------------------
TOTAL LIABILITIES 12,079 12,529
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,337 at 3/31/01 18,537 18,561
- 4,352 at 12/31/00
Additional capital 137 137
Accumulated deficit (8,821) (7,840)
Accumulated other comprehensive income 2 4
Notes receivable from employees for sale of stock (59) (59)
------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,796 10,803
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,875 $ 23,332
====================================
See accompanying notes.
1
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Operations (Unaudited)
(amounts in thousands, except per share data)
Three Months ended
March 31,
2001 2000
------------------------------------
Net sales $ 9,962 $ 9,333
Cost of sales 7,449 6,420
------------------------------------
Gross profit 2,513 2,913
Operating expenses:
Amortization of intangibles 68 68
Selling and marketing 2,402 1,927
General and administrative 910 594
------------------------------------
3,380 2,589
------------------------------------
Operating (loss) income (867) 324
Other (income) expense:
Interest expense 79 98
Other, net 35 (2)
------------------------------------
114 96
------------------------------------
(Loss) income before income taxes (981) 228
Income taxes - 104
------------------------------------
Net (loss) income $ (981) $ 124
====================================
Basic and diluted (loss) income per common share $ (.23) $ .03
====================================
Diluted weighted average common shares
outstanding 4,339 4,405
====================================
See accompanying notes.
2
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
Three Months ended
March 31,
2001 2000
------------------------------------
Operating activities
Net (loss) income $ (981) $ 124
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Provision for losses on receivables 30 29
Depreciation and amortization 300 301
Deferred income taxes - 102
Changes in operating assets and liabilities:
Accounts receivable 850 (541)
Inventories 274 (276)
Prepaids and other (147) (88)
Trade accounts payable (896) (162)
Customer deposits (126) 1
Accrued and other liabilities (517) (71)
------------------------------------
Net cash used in operating activities (1,213) (581)
Investing activities
Increase in cash and cash equivalents externally restricted
under bond indenture agreement (30) -
Purchases of property and equipment (45) (163)
------------------------------------
Net cash used in investing activities (75) (163)
Financing activities
Net borrowings on revolving line of credit 1,110 826
Purchase of common stock (24) -
Principal payments on long-term debt, and capital lease
obligations (23) (16)
------------------------------------
Net cash provided by financing activities 1,063 810
------------------------------------
Change in cash and cash equivalents (225) 66
Cash and cash equivalents at beginning of period 244 13
------------------------------------
Cash and cash equivalents at end of period $ 19 $ 79
====================================
Supplemental disclosures
Interest paid $ 104 $ 87
====================================
Income taxes paid $ 79 $ 42
====================================
See accompanying notes.
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OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
1. Principles of Presentation
The accompanying unaudited consolidated financial statements of Open
Plan Systems, Inc. (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. All significant intercompany balances
and transactions are eliminated in consolidation. In the opinion of management,
the March 31, 2001 financial statements reflect all adjustments of a normal
recurring nature which the Company considers necessary for a fair presentation.
The results for the three month period ended March 31, 2001 are not necessarily
indicative of the results that may be achieved for the entire year ending
December 31, 2001 or for any other interim period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Form 10-K for the year ended December 31, 2000.
During the fourth quarter of the year ended December 31, 2000, the
Company recorded significant fourth quarter adjustments (see Note 13 to the
Company's Form 10-K for the year ended December 31, 2000). As more fully
described in that note, these adjustments were recorded in the fourth quarter of
2000, as the Company could not determine the amount of charges applicable to
proceeding interim periods. Therefore, information presented for the quarter
ended March 31, 2000 reflects amounts previously reported and may contain
balances that were not adjusted until the fourth quarter of 2000.
2. Subsequent Events
On June 20, 2001, the Company began the implementation of a
restructuring plan that will close its remanufacturing facility in Lansing,
Michigan and consolidate remanufacturing operations in Richmond, Virginia; close
five unprofitable sales offices located in Cincinnati, Indianapolis, Nashville,
Lansing and Boston; reduce the size of sales offices in Philadelphia, Atlanta
and Washington, D.C.; and restructure back office operations at the Company's
headquarters in Richmond, Virginia. Approximately 65 employees are expected to
be affected by the restructuring initiatives. The restructuring initiatives are
expected to be fully implemented within 30 days. Severance will be offered to
employees affected by the restructuring initiatives. The Company expects to hire
additional employees in Richmond as necessary to meet production requirements.
As a result of the restructuring, the Company expects to write off
approximately $3.6 million of goodwill associated with the Lansing facility. The
Company also anticipates a yet to be determined restructuring charge in the
second and third quarters of 2001.
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OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
3. Mexican Subsidiaries
In January 2000, the Company entered into a Joint Venture Agreement to
open a new sales office in Mexico City, Mexico. The Company contributed
approximately $50,000, for an 80% interest in the venture. The Joint Venture
Agreement created two new companies, Open Plan Systems, S. de R.L. de C.V. and
Open Plan Servicios, S. de R.L. de C.V., each of which is 80% owned by the
Company. The Company has reported minority interest related to the earnings and
the equity of the minority partner in the accompanying consolidated financial
statements.
4. Inventories
Inventories were in two main stages of completion and consisted of the
following (amounts in thousands):
March 31, December 31,
2001 2000
---------------------------------
(Unaudited)
Components and fabric $ 4,652 $ 4,494
Jobs in process and finished goods 1,352 1,784
---------------------------------
$ 6,004 $ 6,278
=================================
5. Income Taxes
The Company did not record any tax benefit associated with the net loss
for the quarter ended March 31, 2001 due to the uncertainty of the realization
of potential benefits of future deductions. The Company will re-evaluate the
realizability of potential net deferred tax assets in future periods.
6. Indebtedness
In June 2000, the Company borrowed $2.5 million from the Michigan
Strategic Fund following the issuance and sale by the Fund of certain Industrial
Revenue Bonds ("Industrial Revenue Bonds") for construction of a new production
facility in Lansing, Michigan. The proceeds were placed into an escrow account
with the trustee for use in connection with the building of the facility. At the
same time, the Company entered into a letter of credit facility with a bank to
support the financing on the facility. At March 31, 2001, the Company had $2.2
million of cash and cash equivalents externally restricted under the bond
indenture, which is reflected in the consolidated balance sheets.
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OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
Borrowings associated with the Industrial Revenue Bonds totaled $2.5 million at
March 31, 2001 and bore interest at a weekly variable tax exempt rate of
interest based upon the credit worthiness of the underlying letter of credit
(3.60% at March 31, 2001). The obligations are secured by substantially all of
the assets of the Company. The bond indenture and related agreements require the
Company to meet certain restrictive covenants, including defined tangible net
worth, an interest coverage ratio and certain other covenants. The Company was
not in compliance at December 31, 2000 and thereafter with certain of the
covenants, and therefore this debt is included in the current portion of
long-term debt in the accompanying balance sheets.
During April 2000, the Company negotiated a revolving line of credit
with a financial institution, which is secured by substantially all the assets
of the Company. This credit facility provided for borrowings up to 80% of
eligible accounts receivable plus the lesser of 50% of eligible inventory or
$2,000,000, with a maximum borrowing amount of $5,000,000. The maximum borrowing
amount was increased, pursuant to an amendment by the parties dated August 1,
2000, to $5,250,000. Borrowings under the line of credit bear interest at a
floating rate, which is linked to either LIBOR or prime. Outstanding borrowings
under the line of credit amounted to $4,476,000 at March 31, 2001 and bore
interest at a rate of 7.33%.
The letter of credit and revolving line of credit facilities are with
the same financial institution and are cross-collateralized. The financial
institution requires the Company to meet certain restrictive covenants,
including a defined tangible net worth, an interest coverage ratio and certain
other covenants.
At December 31, 2000 and thereafter, the Company was not in compliance
with certain of the covenants contained in the letter of credit and revolving
line of credit facilities. The Company's independent auditors, in its report on
the Company's financial statements for December 31, 2000, have expressed
substantial doubt as to the Company's ability to continue as a going concern.
See Note 1 to the consolidated financial statements contained in the Company's
Form 10-K for the fiscal year ended December 31, 2000 (the "Form 10-K").
In May 2001, the Company entered into a forbearance agreement whereby
its bank agreed to temporarily waive its existing right to declare defaults
relating to the Company's failure to comply with certain loan covenants through
June 30, 2001. The forbearance agreement provides that the bank will refrain
from exercising any rights based on such a default, including accelerating the
maturity of the loans under the two credit facilities, until after June 30,
2001. Conditions to the forbearance agreement include a limitation on borrowings
under the line of credit of $4,650,000. Also, any disbursements by the Company
of the approximately $2.2 million at March 31, 2001 in
6
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
remaining proceeds from the Industrial Revenue Bonds held as restricted cash by
the Company are subject to the approval of the bank in its sole discretion (see
Note 10 for additional information). Pursuant to the forbearance agreement, the
bank maintains the right to declare a default and accelerate the loans under the
two facilities after June 30, 2001 if the parties have not entered into
amendments to the existing loan arrangements.
As of June 27, 2001, the Company has been unable to negotiate a
permanent waiver of the Company's loan covenant violations, as well as revised
loan covenants, or an extension of the forbearance agreement. However,
discussions with the bank are continuing. Any agreement reached with the bank
could result in new terms which are less favorable than current terms under
existing loan agreements and could involve a reduction in availability of funds,
an increase in interest rates and shorter maturities, among other things. If the
Company is not successful in securing an extension of the forbearance agreement
or permanent waivers and loan covenant amendments, it will need to seek new
financing arrangements from other lenders. Such alternative financing
arrangements may be unavailable to the Company or available on terms
substantially less favorable to the Company than its existing credit facilities.
If the Company is unable to either procure an extension of the forbearance
agreement, permanent covenant violation waivers and covenant amendments with
respect to existing facilities or acceptable alternative financing, such
failures could have a material adverse effect on the Company's financial
condition and results of operations. No assurance can be given that the Company
will be able to obtain an extension of the forbearance agreement, permanent
covenant violation waivers and revised loan covenants or refinance its existing
obligations.
7. Comprehensive Income (Loss)
Comprehensive loss for the quarter ended March 31, 2001 was $983,000,
as compared to a net loss of $981,000. The difference between net loss and
comprehensive loss is due to foreign currency translation gains and losses.
8. Repurchases of Common Stock
In 2000, the Company's Board of Directors approved the repurchase of up
to 100,000 shares of the Company's Common Stock. During the quarter ended March
31, 2001, the Company repurchased 15,000 shares of its Common Stock at an
aggregate cost of approximately $24,000.
9. Impact of Recently Issued Standards
The Company adopted the provisions of Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, effective
January 1, 2001. The
7
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
implementation of this new standard did not have a material effect on the
Company's consolidated results of operations or financial position.
10. Other
On April 30, 2000, the Company signed a contract for the construction
of a new production facility in Lansing, Michigan. The Company purchased a
5-acre building site and is in the process of constructing an approximately
70,000 square-foot facility. The cost of completing the project is approximately
$1.9 million. The Company has been unable to make two progress payments totaling
approximately $938,000. The contractor has declared a default under the
construction agreement. The forbearance agreement with the bank prohibits the
Company from utilizing the approximately $2.2 million of remaining cash proceeds
from the Company's Industrial Revenue Bonds. At this time, the Company is unable
to determine whether the bank will permit such payments in the future. The
Company is presently unable to determine what impact these actions may have on
the Company's financial position or results of operations.
8
OPEN PLAN SYSTEMS, INC.
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH 2000
Delay in Filing of Form 10-Q for the Quarter Ended March 31, 2001
Reasons for the Delay. As previously disclosed in the Form 10-K for the
fiscal year ended December 31, 2000 (the "Form 10-K"), the Company experienced
delays in completing its 2000 financial statements and filing the Form 10-K and
this Form 10-Q. In the process of preparing the Company's financial statements
for the year ended December 31, 2000, the Company's management and its
independent auditors determined that certain balance sheet accounts, including,
but not limited to, inventory, accounts receivable and cash, had not been
periodically reconciled to subsidiary records so as to permit the timely
preparation of year end financial statements. The fiscal 2000 year end closing
process and the subsequent time consuming task of reconciling these accounts
were further complicated by the unexpected departures of the Company's Chief
Financial Officer and Controller in December 2000 and its Assistant Controller
in March 2001.
As a result of the Chief Financial Officer and Controller's departure,
the Company was left at year end 2000 without the continuity customarily
provided by a key member of its financial management team. The departure of the
Company's Assistant Controller during the process of resolving the recordkeeping
issues and preparing financial statements caused further delay as the Company
then had to recruit and hire two outside experienced financial consultants to
assist in the year end closing process and the preparation of the Company's Form
10-K and Form 10-Q. The absence of employees familiar with the Company's
operations, information systems, banking arrangements and accounting
transactions for the year severely hampered the Company's ability to quickly
address the accounting deficiencies and to complete customary year end and
quarter-end closing procedures.
The various delays caused by the time consuming task of resolving the
recordkeeping issues and by the turnover in financial personnel during the year
end closing and audit process led to the filing of the Form 10-K and Form 10-Q
after their respective due dates. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Form 10-K.
Accounting Deficiencies. The Company's senior management and the Audit
Committee of the Board of Directors have been advised by the Company's
independent auditors that because of the lack of experienced financial and
accounting personnel as a result of the turnover at the Company and the
Company's inability to reconcile accounts
9
OPEN PLAN SYSTEMS, INC.
in a timely manner, there existed a material weakness in the Company's internal
controls and procedures during 2000 and for the quarter ended March 31, 2001.
Certain weaknesses in the Company's inventory cost accounting and management
information systems and inventory procedures also contributed to the accounting
difficulties.
No evidence of misappropriation of funds or other malfeasance has been
discovered by senior management or financial consultants retained by the
Company.
In connection with the fiscal 2000 year end closing process, certain
weaknesses were discovered in the Company's inventory systems and related
procedures that may require replacement or upgrading of the Company's inventory
cost accounting and management information systems and additional training of
personnel. These system and procedural weaknesses led to the Company performing
an additional physical inventory count at March 31, 2001 to assist in
determining year end and quarter-end inventory balances.
Remedial Actions. The Board of Directors of the Company has taken and
intends to take appropriate remedial actions to assure that the accounting
difficulties encountered during 2000 and first quarter 2001 are resolved. In the
short term, two experienced financial consultants were retained by senior
management and the Board of Directors to provide full time interim financial
assistance, including assisting in the completion of the financial statements
for the first quarter of 2001. At the direction of the Audit Committee, these
consultants have begun to institute proper accounting reconciliation procedures.
Continued enforcement of such procedures should prevent a reoccurrence of the
recordkeeping problems experienced in 2000 and the first quarter of 2001. In
addition, with respect to inventory, the Audit Committee expects to review and
evaluate the inventory cost accounting and management information systems, as
well as related procedures, and make recommendations to the Board of Directors.
The Board of Directors intends to effect any necessary improvements to such
systems and procedures as soon as practicable. In the interim, in order to
mitigate additional problems, quarterly physical inventory counts have been
implemented, beginning with the quarter ended March 31, 2001. Finally, the
Company is actively searching for a permanent chief financial officer and
controller to fill current vacancies.
Management Reorganization
The Company's Board of Directors accepted the resignation of Mr. John
L. Hobey as Chief Executive Officer and a director of the Company effective May
25, 2001. Following Mr. Hobey's resignation, the Board appointed an interim
Operating Committee to manage the day-to-day operations of the Company until a
replacement can be found. The members of the Operating Committee are David E.
Green, Vice President, Stephen P. Hindle, Vice President-Sales and Marketing,
Robert E. O'Neil, Jr., Vice President-National Accounts and Thomas M. Mishoe,
Jr., the former Chief Financial
10
OPEN PLAN SYSTEMS, INC.
Officer of Eskimo Pie Corporation and currently a consultant to the Company. The
Operating Committee also has been tasked with the responsibility of formulating
plans to address current issues facing the Company, including the exploration of
all available strategic alternatives to enhance financial performance and
shareholder value. The Board of Directors is actively engaged in recruiting a
chief executive officer.
Restructuring
As a result of analysis performed by the Operating Committee, on June
20, 2001, the Company began the implementation of a restructuring plan that will
close its remanufacturing facility in Lansing, Michigan and consolidate
remanufacturing operations in Richmond, Virginia; close five unprofitable sales
offices located in Cincinnati, Indianapolis, Nashville, Lansing and Boston;
reduce the size of sales offices in Philadelphia, Atlanta and Washington, D.C.;
and restructure back office operations at the Company's headquarters in
Richmond, Virginia. Approximately 65 employees are expected to be affected by
the restructuring initiatives. The restructuring initiatives are expected to be
fully implemented within 30 days. Severance will be offered to employees
affected by the restructuring initiatives. The Company expects to hire
additional employees in Richmond as necessary to meet production requirements.
As a result of the restructuring, the Company expects to write off
approximately $3.6 million of goodwill associated with the Lansing facility. The
Company also anticipates a yet to be determined restructuring charge in the
second and third quarters of 2001.
Results of Operations
During the fourth quarter of the year ended December 31, 2000, the
Company recorded significant fourth quarter adjustments (see Note 13 to the
Company's Form 10-K for the year ended December 31, 2000). As more fully
described in that note, these adjustments were recorded in the fourth quarter of
2000, as the Company could not determine the amount of charges applicable to
proceeding interim periods. Therefore, information presented for the quarter
ended March 31, 2000 reflects amounts previously reported and may contain
balances that were not adjusted until the fourth quarter of 2000.
Net Sales. Sales for the three months ended March 31, 2001 were
$9,962,000, an increase of approximately $629,000 or 6.7% versus the same period
in 2000. The increase in first quarter 2001 sales was due primarily to sales
generated by the Company's 80% owned joint venture in Mexico City, Mexico.
Exclusive of approximately $970,000 of sales generated by the joint venture,
sales by the Company's domestic sales offices and National Accounts group
decreased by approximately 3.7% versus the same period in 2000.
Gross Margin. The gross margin decreased to 25.2% in the first quarter
of 2001 from 31.2% in the first quarter of 2000. The Company's gross margin
during the first quarter of 2001 was impacted negatively by increased sales with
lower margins generated by the
11
OPEN PLAN SYSTEMS, INC.
Company's joint venture in Mexico City, as discussed above. Higher than
anticipated costs were incurred with shipping product across the border to
Mexico. The Company is in the process of developing procedures that management
believes will minimize these costs in the future. Additionally, the gross margin
was impacted by increased discounting pressure in several markets. The Company
anticipates that discounting pressure will continue due to the slowing of the
economy. The Company is pursuing avenues to improve its production and shipping
activities to reduce costs and to continue to improve quality.
Operating Expenses. The Company's selling and marketing expenses
increased by $475,000 to $2,402,000 from the $1,927,000 reported in the first
quarter of 2000. This increase was due to the opening of two domestic sales
offices after the first quarter of 2000 and the office in Mexico City, Mexico.
General and administrative expenses increased by $316,000 to $910,000
in the first quarter of 2001 from the $594,000 reported in the first quarter of
2000. This increase was primarily due to increased accounting, legal and
computer-consulting fees associated with the delay in filing the Company's Form
10-K and first quarter 2001 Form 10-Q, as previously discussed.
Other Non-Operating Income and Expense. Total other expense increased
to $114,000 for the first quarter of 2001 versus $96,000 for the first quarter
of 2000. The minority interest in the Mexico City joint venture accounts for
$37,000 of the $114,000 in the first quarter of 2001.
Income Taxes. In the first quarter of 2001, the Company did not record
any tax benefit associated with the net loss due to the uncertainty of the
realization of potential tax benefits of future deductions. The Company will
re-evaluate the realizablity of potential net deferred tax assets in future
periods.
Net Income (Loss). The net loss for the quarter ended March 31, 2001
was $981,000 versus net income of $124,000 for the quarter ended March 31, 2000.
The net loss in 2001 was due principally to lower margins, costs associated with
the opening of new sales offices and an increase in accounting, legal and
computer consulting fees associated with the delay in filing the Company's Form
10-K and first quarter Form 10-Q, as previously discussed.
Liquidity and Capital Resources
Violations of Loan Covenants. The Company maintains two bank credit
facilities consisting of a letter of credit facility associated with the
issuance of $2.5 million of Industrial Revenue Bonds to finance the construction
of a new production facility and a revolving line of credit. At December 31,
2000, the revolving line of credit provided for a maximum borrowing amount of
$5,250,000 at variable interest rates. The letter of credit facility and
revolving line of credit agreements require the Company to meet various
restrictive covenants, including a defined tangible net worth, an interest
coverage ratio and
12
OPEN PLAN SYSTEMS, INC.
certain other covenants. At December 31, 2000 and thereafter, the Company was
not in compliance with certain of the covenants contained in the letter of
credit facility and the revolving line of credit agreements. As a result of the
covenant violations as well as the significant net loss in fiscal year 2000, the
Company's auditors, in its report filed as part of the Form 10-K, have expressed
substantial doubt as to the Company's ability to continue as a going concern.
See "Forward Looking Statements" below and Note 1 to the December 31, 2000
consolidated financial statements contained in the Form 10-K.
In May 2001, the Company entered into a forbearance agreement whereby
the bank agreed to temporarily waive its existing right to declare defaults
relating to the Company's failure to comply with certain loan covenants through
June 30, 2001. The forbearance agreement provides that the bank will refrain
from exercising any rights based on such a default, including accelerating the
maturity of the loans under the two credit facilities, until after June 30,
2001. Conditions to the forbearance agreement include a limitation on borrowings
under the line of credit of $4,650,000. As of June 27, 2001, approximately $4.0
million was outstanding under the line of credit. Also, any disbursements by the
Company of the approximately $2.2 million at March 31, 2001 in remaining
proceeds from the Industrial Revenue Bonds held as restricted cash by the
Company are subject to the approval of the bank in its sole discretion. Finally,
the Company has paid the bank a forbearance fee of $89,368, which may be
credited against any fees associated with any subsequent credit arrangements.
Pursuant to the forbearance agreement, the bank maintains the right to declare a
default and accelerate the loans under the two facilities after June 30, 2001 if
the parties have not entered into amendments to the existing loan arrangements.
As of June 27, 2001, the Company has been unable to negotiate a
permanent waiver of the Company's loan covenant violations, as well as revised
loan covenants, or an extension of the forbearance agreement. However,
discussions with the bank are continuing. Any agreement reached with the bank
could result in new terms which are less favorable than current terms under
existing loan agreements and could involve a reduction in availability of funds,
an increase in interest rates and shorter maturities, among other things. If the
Company is not successful in securing an extension of the forbearance agreement
or permanent waivers and loan covenant amendments, it will need to seek new
financing arrangements from other lenders. Such alternative financing
arrangements may be unavailable to the Company or available on terms
substantially less favorable to the Company than its existing credit facilities.
If the Company is unable to either procure an extension of the forbearance
agreement, permanent covenant violation waivers and covenant amendments with
respect to existing facilities or acceptable alternative financing, such
failures could have a material adverse effect on the Company's financial
condition and results of operations. No assurance can be given that the Company
will be able to obtain an extension of the forbearance agreement, permanent
covenant violation waivers and revised loan covenants or refinance its existing
obligations.
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OPEN PLAN SYSTEMS, INC.
Expected Future Cash Flows. The Company can give no assurance that its
current cash balances plus cash flows from operations, if any, and borrowings
available under its line of credit will be adequate to fund its expected
operating and capital needs for the next twelve months. The adequacy of the
Company's cash resources is primarily dependent on the Company's operating
results over the next twelve months and its ability to renegotiate its credit
arrangements with its existing bank or procure alternate financing, all of which
are subject to substantial uncertainties.
Cash flow from operations for the 2001 year will be dependent, among
other things, upon the effect of the current economic slowdown on the Company's
sales, and new management's ability to implement plans to reduce expenses and
improve the Company's operating performance and financial position.
Under the May 2001 forbearance agreement between the Company and the
bank, the Company's maximum line of credit was reduced from $5,250,000 to
$4,650,000. As of June 27, 2001, the Company had no availability under the
facility. In addition, the forbearance agreement prohibits the Company from
utilizing the approximately $2.2 million of remaining cash proceeds from the
Company's Industrial Revenue Bonds related to the new Lansing, Michigan
production facility now under construction without the prior approval of the
bank. The cost of completing the project is approximately $1.9 million. The
Company has been unable to make two progress payments totaling approximately
$938,000 due on the project in June 2001. The contractor has declared a default
under the construction agreement. The Company is unable to determine at this
time whether the bank will permit such payments in the future. The failure to
return to profitability and optimize operating cash flow in the short term,
obtain the bank's permission to utilize the bond proceeds for progress payments
on the Lansing facility, and successfully renegotiate its credit agreements with
the bank or procure alternate financing, could have a material adverse effect on
the Company's liquidity position and capital resources.
Seasonality and Impact of Inflation
The Company has no discernable pattern of seasonality. Because the
Company typically ships Work Stations within four weeks of an order, a
substantial portion of the Company's revenues in each quarter results from
orders placed by customers during that quarter. As a result, the Company's sales
may vary from quarter to quarter.
Inflation has not had a material impact on the Company's net sales or
income to date. However, there can be no assurances that the Company's business
will not be affected by inflation in the future.
Forward-Looking Statements
The foregoing discussion contains certain forward-looking statements,
which may be identified by phrases such as "the Company expects" or words of
similar effect. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. The Company has identified certain
important factors that in some cases have
14
OPEN PLAN SYSTEMS, INC.
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual results for fiscal 2001 and any interim period to
differ materially from those expressed or implied in any forward-looking
statements made by, or on behalf of, the Company. These factors are set forth
under the caption "Forward-Looking Statements" in Item 7 of the Company's Form
10-K for the fiscal year ended December 31, 2000, a copy of which is on file
with the Securities and Exchange Commission. The Company assumes no duty to
update any of the forward-looking statements of this report.
15
OPEN PLAN SYSTEMS, INC.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to changes in interest rates primarily from its
revolving line of credit arrangement and from the letter of credit facility
related to the Industrial Revenue Bonds issued to fund the construction of the
new production facility in Lansing, Michigan. The Company's interest expense is
affected by changes in short-term interest on the debt outstanding under the
revolving line of credit and Industrial Revenue Bonds. These borrowings bear
interest at variable rates (the "Borrowing Rates"). Assuming: (i) the Borrowing
Rates vary by 100 basis points from their current levels in any given month and
(ii) the Company maintains an aggregate outstanding debt balance subject to
these Borrowing Rates of $5.7 million during the month of variance, interest
expense would vary by approximately $5,000 for that month. The Company does not
use derivative instruments.
16
OPEN PLAN SYSTEMS, INC.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
The Company is not in compliance with certain loan covenants under
its bank credit facilities. See Part I, Item 2 and Note 5 to the
Consolidated Financial Statements for additional information.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
As noted in Part I, Item 2, the Company's Form 10-K and Form 10-Q
filings were delayed due to unanticipated turnover in financial
personnel, including the departure of the Company's Chief
Financial Officer in December 2000, and unresolved issues
regarding inventory balances and certain other items. As a result,
the Company postponed its annual meeting of shareholders, which
was originally expected to be held in May, 2001. The Company has
rescheduled its annual meeting of shareholders for August 7, 2001.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
---------
The registrant has included the following exhibits pursuant to
Item 601 of Regulation S-K.
Exhibit No. Description
------------------------------------------------------------------
11 Statement Re: Computation of Per Share Earnings
17
OPEN PLAN SYSTEMS, INC.
(b) Reports on Form 8-K
-------------------
Not applicable.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
OPEN PLAN SYSTEMS, INC.
(Registrant)
Date: June 27, 2001 By: /s/ Anthony F. Markel
-----------------------------------
Anthony F. Markel
Chairman of the Board
Date: June 27, 2001 By: /s/ Anthony F. Markel
-----------------------------------
Anthony F. Markel
(Principal Financial Officer)
19
EXHIBIT INDEX
No. Description
- --- -----------
11 Statement Re: Computation of Per Share Earnings