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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 June 30, 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 August 9, 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
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2001 (unaudited) 1
and December 31, 2000
Consolidated Statements of Operations - Three and six months 2
ended June 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows - Six months 3
ended June 30, 2001 and 2000 (unaudited)
Notes to Consolidated Financial Statements - June 30, 2001 4
(unaudited)
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
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OPEN PLAN SYSTEMS, INC.
PART I
FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
(amounts in thousands)
June 30, December 31,
2001 2000
-----------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 280 $ 244
Cash and cash equivalents externally restricted under
bond indenture agreement 2,098 2,190
Accounts receivable, net 5,626 7,834
Inventories 3,609 6,278
Assets held for sale 571 -
Prepaids and other 484 458
Refundable income taxes 57 -
-----------------------------------
TOTAL CURRENT ASSETS 12,725 17,004
Property and equipment, net 1,431 2,393
Goodwill, net - 3,664
Other 101 271
-----------------------------------
TOTAL ASSETS $ 14,257 $ 23,332
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,495 $ 2,595
Revolving line of credit 4,007 3,366
Trade accounts payable 3,343 3,709
Restructuring liabilities 420 -
Accrued compensation and related costs 467 1,121
Other liabilities 858 631
Customer deposits 964 860
-----------------------------------
TOTAL CURRENT LIABILITIES 12,554 12,282
Long-term debt 181 227
Other long-term liabilities 20 20
-----------------------------------
TOTAL LIABILITIES 12,755 12,529
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,337 at 6/30/01 18,537 18,561
- 4,352 at 12/31/00
Additional capital 137 137
Accumulated deficit (17,154) (7,840)
Accumulated other comprehensive income 22 4
Notes receivable from employees for sale of stock (40) (59)
-----------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,502 10,803
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,257 $ 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 Six months ended
June 30, June 30,
2001 2000 2001 2000
Net sales $ 8,040 $ 10,459 $ 18,002 $ 19,792
Cost of sales 8,114 7,688 15,563 14,108
Gross profit (74) 2,771 2,439 5,684
----------------------------------- -----------------------------------
Operating expenses:
Amortization of intangibles 46 69 114 137
Selling and marketing 2,237 2,015 4,639 3,942
General and administrative 1,376 887 2,286 1,481
Operational restructuring 4,725 - 4,725 -
Arbitration cost - 142 - 142
----------------------------------- -----------------------------------
8,384 3,113 11,764 5,702
----------------------------------- -----------------------------------
Operating loss (8,458) (342) (9,325) (18)
Other (income) expense:
Interest expense 177 140 256 238
Gain on disposal of fixed assets (260) - (260) -
Other, net (42) (16) (7) (18)
(125) 124 (11) 220
----------------------------------- -----------------------------------
Loss before income taxes (8,333) (466) (9,314) (238)
Income taxes - (199) - (95)
----------------------------------- -----------------------------------
Net loss $ (8,333) $ (267) $ (9,314) $ (143)
=================================== ===================================
Basic and diluted loss per common share $ (1.92) $ (.06) $ (2.15) $ (.03)
Diluted weighted average common shares
outstanding 4,337 4,403 4,338 4,403
=================================== ===================================
See accompanying notes.
2
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
Six Months ended
June 30,
2001 2000
---------------------------------
Operating activities
Net loss $ (9,314) $ (143)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for losses on receivables 49 159
Depreciation and amortization 548 604
Operational restructuring 4,725 -
Write-down of inventory 1,722 -
Gain on sale of property and equipment (260) -
Deferred income taxes - (76)
Changes in operating assets and liabilities:
Accounts receivable 2,029 (137)
Inventories 947 (321)
Prepaids and other (45) (89)
Trade accounts payable (366) (828)
Customer deposits 104 (62)
Accrued and other liabilities (409) 192
---------------------------------
Net cash used in operating activities (270) (701)
Investing activities
Decrease (increase) in cash and cash equivalents externally
restricted under bond indenture agreement 92 (2,450)
Proceeds from sale of property and equipment 300 -
Purchases of property and equipment, including construction
in progress (557) (620)
----------------------------------
Net cash used in investing activities (165) (3,070)
Financing activities
Net borrowings on revolving line of credit 641 1,395
Proceeds from borrowing on long-term debt - 2,500
Purchase of common stock (24) -
Principal payments on long-term debt and capital lease
obligations (146) (35)
----------------------------------
Net cash provided by financing activities 471 3,860
----------------------------------
Change in cash and cash equivalents 36 89
Cash and cash equivalents at beginning of period 244 13
----------------------------------
Cash and cash equivalents at end of period $ 280 $ 102
==================================
Supplemental disclosures
Interest paid $ 281 $ 238
==================================
Income taxes paid $ 79 $ 42
==================================
See accompanying notes
3
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 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 June 30, 2001 financial statements reflect all adjustments of a normal
recurring nature and restructuring adjustments which the Company considers
necessary for a fair presentation. The results for the quarter and six month
period ended June 30, 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 and
six months ended June 30, 2000 reflects amounts previously reported and may
contain balances that were not adjusted until the fourth quarter of 2000.
2. Operational Restructuring
On June 20, 2001, the Company approved and began the implementation of
a restructuring plan that closed its remanufacturing facility in Lansing,
Michigan and consolidated remanufacturing operations in Richmond, Virginia;
closed five under performing sales offices located in Cincinnati, Indianapolis,
Nashville, Lansing and Boston; reduced the size of sales offices in
Philadelphia, Atlanta and Washington, D.C.; and restructured back office
operations at the Company's headquarters in Richmond, Virginia. This plan
returns the Company's focus to the remanufacturing of Herman Miller products and
discontinues the Haworth and Steelcase product lines. In the second quarter, the
Company recorded a restructuring charge of approximately $4.7 million which
includes an estimate for the disposal of the existing leased manufacturing
facility in Michigan and related assets, as well as the new facility that is
under construction. The largest component of the charge was $3,580,000 related
to the write-off of remaining goodwill associated with the purchase of the
Michigan operations in 1996. Other significant components of the operational
restructuring were estimated losses of $404,000 related to the disposal of
property and equipment, $105,000 for severance costs, $125,000 related to
expected costs under lease arrangements, $119,000 for shortening the
amortization period of debt
4
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001
issuance costs related to Industrial Revenue Bond proceeds associated with the
new facility under construction to be repaid as part of the operational
restructuring, and $156,000 for professional fees associated with the
restructuring plan. In connection with this plan, the Company terminated
approximately 65 personnel, primarily sales personnel in offices being closed or
personnel associated with the manufacturing facility in Michigan.
Prior to the end of the quarter, most of the affected employees had
been terminated, and in July 2001 the Company disposed of the leased
manufacturing facility in Michigan and the related assets. The Company
anticipates completing the asset sales prior to the end of 2001 and the lease
termination costs are anticipated to extend into the year 2002. Under this plan
the Company intends to dispose of the new facility currently under construction
in Michigan, and repay bondholders for Industrial Revenue Bond debt issued to
build the new facility. In addition to asset balances that have been written
down or reserved as part of this plan, approximately $420,000 remains accrued in
other liabilities relating to the operational restructuring and is estimated to
approximate the remaining costs to be incurred, which are principally lease
termination costs, severance, and professional fees.
Along with the operational restructuring the Company recorded
approximately $1.7 million for losses on inventory write-downs, which has been
classified as a component of cost of goods sold. These losses relate to
inventory sold in July 2001 associated with the existing leased manufacturing
facility in Michigan, and showroom inventory located at closed sales offices.
During the third quarter of 2001, the Company intends to sell or
dissolve the joint venture in Mexico. As a result, the Company anticipates a yet
to be determined charge in the third quarter of 2001 related to closing the
Mexico City, Mexico sales office. The Company's interest in the carrying amount
of the net assets of the Mexican operation approximates $470,000.
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):
5
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001
June 30, December 31,
2001 2000
------------------------------
(Unaudited)
Components and fabric $ 2,296 $ 4,494
Jobs in process and finished goods 1,313 1,784
------------------------------
$ 3,609 $ 6,278
==============================
5. Income Taxes
The Company did not record any tax benefit associated with the net loss
for the quarter and six months ended June 30, 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 June 30, 2001, the Company had
approximately $2.1 million of cash and cash equivalents externally restricted
under the bond indenture, which is reflected in the consolidated balance sheets.
Borrowings associated with the Industrial Revenue Bonds totaled $2.4 million at
June 30, 2001 and bore interest at a weekly variable tax exempt rate of interest
based upon the credit worthiness of the underlying letter of credit (2.85% at
June 30, 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.
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 in
Lansing, Michigan 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
6
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001
revolving line of credit agreements require the Company to meet various
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 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 temporary forbearance agreement
with the bank in which the bank agreed to waive its existing right to declare
defaults relating to the Company's failure to comply with certain loan covenants
through June 30, 2001. Thereafter, on August 10, 2001, the Company and the bank
entered into a new short term forbearance agreement that expires on October 30,
2001. The new forbearance agreement provides that the bank will refrain from
exercising any rights or remedies based on existing or continuing defaults,
including accelerating the maturity of the loans under the two credit
facilities, until after the October 30, 2001 expiration date. Under the new
forbearance agreement, the line of credit was reduced from $4.65 million under
the May forbearance agreement to $4.55 million and will be further reduced to
$4.4 million beginning August 15, 2001 and to $4.25 million beginning August 31,
2001. As of August 13, 2001, approximately $4.1 million was outstanding under
the line of credit. In addition, the interest rate on the line of credit was
increased to LIBOR plus 6.0%. Finally, the Company is required to pay the bank a
forbearance fee of $50,000 upon the earlier of a refinancing of the Company's
credit obligations to the bank or October 30, 2001. Pursuant to the forbearance
agreement, the bank reserves the right to declare a default and accelerate the
loans under the two facilities after October 30, 2001 if the parties have not
entered into amendments to the existing loan arrangements or a subsequent
forbearance agreement.
The cost of completing the new Lansing, Michigan production facility is
approximately $1.7 million. However, the new forbearance agreement prohibits the
Company from utilizing the approximately $2.1 million of remaining cash proceeds
from the Company's Industrial Revenue Bonds to complete the new Lansing facility
without the prior approval of the bank. The Company was unable to make two
progress payments totaling approximately $940,000 due on the project in June
2001 under the May 2001 forbearance agreement. Subsequently, the contractor
ceased construction on the project and filed a construction lien suit against
the Company alleging, among other things, a breach of the construction
agreement. The Company is unable to determine at this time whether the bank will
permit such payments in the future. Under the new forbearance agreement, the
Company intends to sell the new Lansing facility subject to the consent of the
bank and use a portion of the proceeds from the sale to satisfy amounts that may
be owed to the contractor. However, there can be no assurances that the Company
will be able to consummate a sale of the new Lansing facility. In addition, the
Company has agreed in the new forbearance
7
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001
agreement to redeem the Industrial Revenue Bonds in connection with any sale of
the new Lansing facility unless the Bonds are assumed by a third party with the
consent of the bank. The bank has agreed upon any such redemption to seek
reimbursement for draws on the letter of credit relating to the redemption from
the $2.1 million of escrowed proceeds remaining from the sale of the Bonds plus
the sum of $328,000 being held in a separate account at the bank.
As of August 14, 2001, the Company has been unable to negotiate a
permanent waiver of the Company's loan covenant violations, as well as revised
loan covenants. Any agreement reached with the bank could result in new terms
which are less favorable than current terms under existing 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 six-month period ended June 30, 2001 was
$9,296,000 as compared to a net loss of $9,314,000. Comprehensive loss for the
quarter ended June 30, 2001 was $8,313,000 as compared to a net loss of
$8,333,000. 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
8
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2001
implementation of this new standard did not have a material effect on the
Company's consolidated results of operations or financial position.
10. Contingencies
On July 13, 2001, the Company was served with a complaint filed in the
Circuit Court for the County of Eaton, Michigan, entitled L.D. Clark Building
Co. v. Open Plan Systems, Inc. and Wachovia Bank, N.A. (File No. 01-913-CZ). The
complaint alleges that the plaintiff provided labor and materials for
improvement to real property located in Eaton County, Michigan and that the
Company failed to pay for such labor and materials in breach of a certain
construction contract between the plaintiff and the Company dated August 2000.
The construction contract was for the construction of a new remanufacturing
facility in Lansing, Michigan. The plaintiff also alleges that it is entitled to
a construction lien on the property under Michigan law. The plaintiff seeks
approximately $1.5 million in labor and materials plus costs, judgment interest
and attorneys' fees. On August 2, 2001, the Company filed a Motion to Compel
Arbitration and to Stay Proceedings in the case. The Company has also made a
related filing with the American Arbitration Association to initiate arbitration
proceedings. The hearing date on the Company's motion is set for August 30,
2001. The Company expects to vigorously defend the suit.
9
OPEN PLAN SYSTEMS, INC.
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH 2000
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 Operating Committee included Dave 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 Officer of Eskimo Pie Corporation, who is currently a
consultant to the Company. Mr. O'Neil left the Company in July 2001. 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.
Restructuring
As a result of analysis performed by the Operating Committee, on June
20, 2001, the Company approved and began the implementation of a restructuring
plan that closed its remanufacturing facility in Lansing, Michigan and
consolidated remanufacturing operations in Richmond, Virginia; closed five under
performing sales offices located in Cincinnati, Indianapolis, Nashville, Lansing
and Boston; reduced the size of sales offices in Philadelphia, Atlanta and
Washington, D.C.; and restructured back office operations at the Company's
headquarters in Richmond, Virginia. This plan returns the Company's focus to the
remanufacturing of Herman Miller products, and discontinues the Haworth and
Steelcase product lines. In the second quarter, the Company recorded a
restructuring charge of approximately $4.7 million which includes an estimate
for the disposal of the existing leased manufacturing facility in Michigan and
related assets, as well as the new facility that is under construction. The
largest component of the charge was $3,580,000 related to the write-off of
remaining goodwill associated with the purchase of the Michigan operations in
1996. Other significant components of the operational restructuring were
estimated losses of $404,000 related to the disposal of property and equipment,
$105,000 for severance costs, $125,000 related to expected costs under lease
arrangements, $119,000 for shortening the amortization period of debt issuance
costs related to Industrial Revenue Bond proceeds associated with the new
facility under construction to be repaid as part of the operational
restructuring, and $156,000 for professional fees associated with the
restructuring plan. In connection with this plan, the Company terminated
approximately 65 personnel, primarily sales personnel in offices being closed or
personnel associated with the manufacturing facility in Michigan.
10
OPEN PLAN SYSTEMS, INC.
Prior to the end of the quarter, most of the affected employees had
been terminated, and in July 2001 the Company disposed of the leased
manufacturing facility in Michigan and the related assets. The Company
anticipates completing the asset sales prior to the end of 2001 and the lease
termination costs are anticipated to extend into the year 2002. Under this plan
the Company intends to dispose of the new facility currently under construction
in Michigan, and repay bondholders for Industrial Revenue Bond debt issued to
build the new facility. In addition to asset balances that have been written
down or reserved as part of this plan, approximately $420,000 remains accrued in
other liabilities relating to the operational restructuring and is estimated to
approximate the remaining costs to be incurred, which are principally lease
termination costs, severance, and professional fees.
Along with the operational restructuring the Company recorded
approximately $1.7 million for losses on inventory write-downs, which has been
classified as a component of cost of goods sold. These losses relate to
inventory sold in July 2001 associated with the existing leased manufacturing
facility in Michigan, and showroom inventory located at closed sales offices.
Assuming the Company obtains ongoing financing on viable terms, the
Company hopes to achieve annual decreases in expenses of approximately $3.5
million as a result of the restructuring. The improvements are expected to come
in the way of decreased plant manufacturing expenses of approximately $1.8
million, and decreased selling, general and administrative costs of
approximately $1.7 million. The Company does expect to see a decrease in sales
due to the closing of under performing sales offices, but expects this decrease
to be offset by an increase in gross margin as a result of the reduced
manufacturing expenses. It is the Company's belief that the manufacturing volume
of Herman Miller products previously handled by the Michigan operations can be
absorbed in Richmond.
During the third quarter of 2001, the Company intends to sell or
dissolve the joint venture in Mexico. As a result, the Company anticipates a yet
to be determined charge in the third quarter of 2001 related to closing the
Mexico City, Mexico sales office. The Company's interest in the carrying amount
of the net assets of the Mexican operation approximates $470,000.
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 and
six months ended June 30, 2000 reflects amounts previously reported and may
contain balances that were not adjusted until the fourth quarter of 2000.
Net Sales. Sales for the six months ended June 30, 2001 were $18.0
million, a decrease of approximately $1.8 million or 9% versus the same period
in 2000. Sales for the three months ended June 30, 2001 were $8.0 million, a
decrease of approximately $2.5 million or 23.8% versus the same period in 2000.
This decrease can be attributed to a decline
11
OPEN PLAN SYSTEMS, INC.
in sales generated by the under performing sales offices that were subsequently
closed as part of the restructuring discussed above; a decrease in National
Accounts sales over last year; and a general softening of the economy which is
impacting sales across the industry.
Gross Margin. Gross margin for the quarter and six month period ended
June 30, 2001 was ($74,000) and $2,439,000 respectively. Exclusive of the $1.7
million write-down of inventory in the second quarter of 2001 as discussed
above, gross margin was $1.6 million or 20.6% and $4.2 million or 23.1% for the
quarter and six months ended June 30, 2001, respectively. This compares to a
margin for the quarter and six month period ended June 30, 2000 of 26.5% and
28.7% respectively. The decrease in margin in 2001 as compared to comparable
periods in 2000 was in part due to running two production facilities at levels
well below capacity in 2001. The Company believes that gross margin will improve
as a percent of sales in the future, as a result of closing the production
operations in Lansing, Michigan and consolidating all production in the plant in
Richmond, Virginia.
Operating Expenses. The selling and marketing expenses for the six
months ended June 30, 2001 increased $697,000 or 17.7% to $4,639,000 over the
same period in 2000. For the quarter ended June 30, 2001, these expenses
increased 11% over the same period in 2000, from $2,015,000 to $2,237,000. This
increase was due to additional expenses associated with two domestic sales
offices and the sales office in Mexico City, Mexico, which were opened after
January 1, 2000. In the second quarter of 2001, these expenses were partially
offset by a reduction in marketing and advertising and a reduction in under
performing sales personnel, prior to the restructuring.
General and administrative expenses increased to $1,376,000 in the
second quarter of 2001 from $887,000 reported in the second quarter of 2000. For
the six month period ended June 30, 2001, these expenses increased $805,000 over
the comparable period in 2000 to $2,286,000. This increase was primarily due to
increased accounting, legal and computer consulting fees incurred during 2001.
These fees were associated with the delay in filing the Company's 2000 Form 10-K
and first quarter 2001 Form 10-Q as discussed in Part I, Item 2 of those
documents. In addition, professional fees were incurred in resolving the
Company's delisting from NASDAQ and subsequent acceptance on the NASD OTC
Bulletin Board. Legal, accounting and computer consulting fees increased by
approximately $760,000 for the six months ended June 30, 2001, as compared to
the same period in 2000.
During the second quarter of 2001 the Company implemented a
restructuring plan and recorded a restructuring charge of $4.7 million as
discussed above.
Other Non-Operating Income and Expense. Other non-operating income was
$125,000 and $11,000 for the quarter and six month period ending June 30, 2001
respectively. This compares to an expense of $124,000 and $220,000 in the
comparable periods of 2000. Second quarter 2001 includes a gain on disposal of
fixed assets of $260,000. This gain was a result of the sale of leasehold
improvements by the Mexico City,
12
OPEN PLAN SYSTEMS, INC.
Mexico sales office, upon relocating their facility. Interest expense for the
second quarter of 2001 includes the payment of approximately $90,000 related to
the forbearance agreement between the Company and its financial institution
entered into in May of 2001. A similar fee was also paid in the second quarter
of 2000 to terminate a banking agreement with a different institution in order
to switch to a commercial banking relationship with the Company's current
financial institution.
Income Taxes. In the quarter and six month period ended June 30, 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 realizability of potential net
deferred tax assets in future periods.
Net Loss. The net loss for the quarter ended June 30, 2001 was
$8,333,000 versus a net loss of $267,000 for the same period in 2000. For the
six months ended June 30, 2001, the net loss was $9,314,000 versus a net loss of
$143,000 in 2000. The net loss for both the quarter and six months ended June
30, 2001 was due to several factors including the restructuring charge of $4.7
million, an inventory valuation charge of $1.7 million, an increase in legal,
accounting and other professional fees, and decreased sales and decreased
margins due to under performing sales offices and under utilized manufacturing
facilities.
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 in Lansing, Michigan 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 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 temporary forbearance agreement
with the bank in which the bank agreed to waive its existing right to declare
defaults relating to the Company's failure to comply with certain loan covenants
through June 30, 2001. Thereafter, on August 10, 2001, the Company and the bank
entered into a new short term forbearance agreement that expires on October 30,
2001. The new forbearance agreement provides that the bank will refrain from
exercising any rights or remedies based on existing or continuing
13
OPEN PLAN SYSTEMS, INC.
defaults, including accelerating the maturity of the loans under the two credit
facilities, until after the October 30, 2001 expiration date. Under the new
forbearance agreement, the line of credit was reduced from $4.65 million under
the May forbearance agreement to $4.55 million and will be further reduced to
$4.4 million beginning August 15, 2001 and to $4.25 million beginning August 31,
2001. As of August 13, 2001, approximately $4.1 million was outstanding under
the line of credit. In addition, the interest rate on the line of credit was
increased to LIBOR plus 6.0%. Finally, the Company is required to pay the bank a
forbearance fee of $50,000 upon the earlier of a refinancing of the Company's
credit obligations to the bank or October 30, 2001. Pursuant to the forbearance
agreement, the bank reserves the right to declare a default and accelerate the
loans under the two facilities after October 30, 2001 if the parties have not
entered into amendments to the existing loan arrangements or a subsequent
forbearance agreement.
The cost of completing the new Lansing, Michigan production facility is
approximately $1.7 million. However, the new forbearance agreement prohibits the
Company from utilizing the approximately $2.1 million of remaining cash proceeds
from the Company's Industrial Revenue Bonds to complete the new Lansing facility
without the prior approval of the bank. The Company was unable to make two
progress payments totaling approximately $940,000 due on the project in June
2001 under the May 2001 forbearance agreement. Subsequently, the contractor
ceased construction on the project and filed a construction lien suit against
the Company alleging, among other things, a breach of the construction
agreement. See Part II, Item 1 - Legal Proceedings. The Company is unable to
determine at this time whether the bank will permit such payments in the future.
Under the new forbearance agreement, the Company intends to sell the new Lansing
facility subject to the consent of the bank and use a portion of the proceeds
from the sale to satisfy amounts that may be owed to the contractor. However,
there can be no assurances that the Company will be able to consummate a sale of
the new Lansing facility. In addition, the Company has agreed in the new
forbearance agreement to redeem the Industrial Revenue Bonds in connection with
any sale of the new Lansing facility unless the Bonds are assumed by a third
party with the consent of the bank. The bank has agreed upon any such redemption
to seek reimbursement for draws on the letter of credit relating to the
redemption from the $2.1 million of escrowed proceeds remaining from the sale of
the Bonds plus the sum of $328,000 being held in a separate account at the bank.
As of August 14, 2001, the Company has been unable to negotiate a
permanent waiver of the Company's loan covenant violations, as well as revised
loan covenants. Any agreement reached with the bank could result in new terms
which are less favorable than current terms under existing 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
14
OPEN PLAN SYSTEMS, INC.
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.
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 over the next twelve months is primarily dependent on
the Company's operating results 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, the impact of the restructuring plan and new management's ability to
reduce expenses and improve the Company's operating performance and financial
position.
The failure to return to profitability and optimize operating cash flow
in the short term, consummate the sale of the partially completed Lansing
facility or obtain the bank's permission to utilize the bond proceeds to
complete 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 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
15
OPEN PLAN SYSTEMS, INC.
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.
16
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 $6.5 million during the month of variance, interest
expense would vary by approximately $7,000 for that month. The Company does not
use derivative instruments.
17
OPEN PLAN SYSTEMS, INC.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On July 13, 2001, the Company was served with a complaint filed in the
Circuit Court for the County of Eaton, Michigan, entitled L.D. Clark
Building Co. v. Open Plan Systems, Inc. and Wachovia Bank, N.A. (File
No. 01-913-CZ). The complaint alleges that the plaintiff provided
labor and materials for improvement to real property located in Eaton
County, Michigan and that the Company failed to pay for such labor and
materials in breach of a certain construction contract between the
plaintiff and the Company dated August 2000. The construction contract
was for the construction of a new remanufacturing facility in Lansing,
Michigan. The plaintiff also alleges that it is entitled to a
construction lien on the property under Michigan law. The plaintiff
seeks approximately $1.5 million in labor and materials plus costs,
judgment interest and attorneys' fees. On August 2, 2001, the Company
filed a Motion to Compel Arbitration and to Stay Proceedings in the
case. The Company has also made a related filing with the American
Arbitration Association to initiate arbitration proceedings. The
hearing date on the Company's motion is set for August 30, 2001. The
Company expects to vigorously defend the suit.
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 6 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
-----------------
Not applicable.
18
OPEN PLAN SYSTEMS, INC.
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
----------------------------------------------------------------------
10.1 Forbearance Agreement dated August 10, 2001,
between the Company and Wachovia Bank, N.A.
11 Statement Re: Computation of Per Share Earnings
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on May 25, 2001
reporting under Items 5 and 7 that the Company had issued press
releases dated April 30, 2001, April 30, 2001 and May 24, 2001,
respectively, that announced the Company's receipt of a Nasdaq Staff
Determination, the hiring of an executive search firm and the filing
of the Company's Form 10-K for the fiscal year ended December 31,
2000.
19
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: August 14, 2001 By: /s/ Anthony F. Markel
---------------------------------
Anthony F. Markel
Chairman of the Board
Date: August 14, 2001 By: /s/ Anthony F. Markel
---------------------------------
Anthony F. Markel
(Principal Financial Officer)
OPEN PLAN SYSTEMS, INC.
EXHIBIT INDEX
No. Description
- --- -----------
10.1 Forbearance Agreement dated August 10, 2001, between the Company
and Wachovia Bank, N.A.
11 Statement Re: Computation of Per Share Earning