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, 2002
[ ] 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 May 10, 2002, the registrant had 4,337,391
shares of Common Stock, no par value, outstanding.
Open Plan Systems, inc.
Table of Contents
PART I. FINANCIAL INFORMATION Page
- --------------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002 (unaudited) 1
and December 31, 2001
Consolidated Statements of Operations - Three months 2
ended March 31, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows - Three months 3
ended March 31, 2002 and 2001 (unaudited)
Notes to Consolidated Financial Statements - March 31, 2002 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 18
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of 19
Security Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
- ----------
Open Plan Systems, Inc.
Part I
Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets
(amounts in thousands)
March 31, December 31,
2002 2001
---------------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 594 $ 324
Accounts receivable, net 1,988 3,400
Inventories 2,231 2,558
Assets held for sale 88 88
Prepaids and other 604 414
---------------------------------------
TOTAL CURRENT ASSETS 5,505 6,784
Property and equipment, net 988 1,115
Other 79 86
---------------------------------------
TOTAL ASSETS $ 6,572 $ 7,985
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Revolving line of credit $ 3,217 $ 3,217
Trade accounts payable 1,770 2,058
Restructuring liabilities 254 315
Accrued compensation and related costs 113 282
Current portion of long-term debt 95 95
Other liabilities 622 657
Customer deposits 349 351
---------------------------------------
TOTAL CURRENT LIABILITIES 6,420 6,975
Long-term debt 116 138
---------------------------------------
TOTAL LIABILITIES 6,536 7,113
Shareholders' equity:
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,337 at 3/31/02 18,537 18,537
- 4,337 at 12/31/01
Additional capital 137 137
Accumulated deficit (18,600) (17,762)
Notes receivable from employees for sale of stock (38) (40)
---------------------------------------
TOTAL SHAREHOLDERS' EQUITY 36 872
---------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,572 $ 7,985
=======================================
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,
2002 2001
Net sales $ 2,656 $ 9,962
Cost of sales 2,197 7,449
----------------------------------------
Gross profit 459 2,513
Operating expenses:
Amortization of intangibles - 68
Selling and marketing 720 2,402
General and administrative 525 910
----------------------------------------
1,245 3,380
----------------------------------------
Operating loss (786) (867)
Other expense:
Interest expense 52 79
Other, net - 35
----------------------------------------
52 114
----------------------------------------
Loss before income taxes (838) (981)
Income taxes - -
----------------------------------------
Net loss $ (838) $ (981)
========================================
Basic and diluted loss per common share $ (.19) $ (.23)
Diluted weighted average common shares outstanding 4,337 4,339
========================================
See accompanying notes.
2
Open Plan Systems, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
Three months ended
March 31,
2002 2001
----------------------------------
Operating activities
Net loss $ (838) $ (981)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for losses on receivables - 30
Depreciation and amortization 119 300
Changes in operating assets and liabilities:
Accounts receivable 1,412 850
Inventories 327 274
Prepaids and other (183) (147)
Trade accounts payable (288) (896)
Customer deposits (2) (126)
Accrued and other liabilities (265) (517)
----------------------------------
Net cash provided by (used in) operating activities 282 (1,213)
Investing activities
Increase in cash and cash equivalents externally
restricted under bond indenture agreement - (30)
Net decrease in notes receivable from employees for
sale of stock 2 -
Proceeds from sale of property and equipment 11 -
Purchases of property and equipment, including
construction in progress (3) (45)
----------------------------------
Net cash provided by (used in) investing activities 10 (75)
Financing activities
Net borrowings on revolving line of credit - 1,110
Purchase of common stock - (24)
Principal payments on long-term debt and capital lease
obligations (22) (23)
----------------------------------
Net cash (used in) provided by financing activities (22) 1,063
----------------------------------
Change in cash and cash equivalents 270 (225)
Cash and cash equivalents at beginning of period 324 244
----------------------------------
Cash and cash equivalents at end of period $ 594 $ 19
==================================
Supplemental disclosures
Interest paid $ 52 $ 104
==================================
Income taxes paid $ 9 $ 79
==================================
See accompanying notes.
3
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
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, 2002 financial statements reflect all known material 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, 2002 are
not necessarily indicative of the results that may be achieved for the entire
year ending December 31, 2002 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 fiscal year ended December
31, 2001 (the "Form 10-K").
The Company's financial statements for the three months ended March 31,
2002 do not include the results of operations of the Company's consolidated
Mexican subsidiaries. See Note 6 - 2001 Operational Restructuring for further
discussion.
2. Inventories
Inventories were in two main stages of completion and consisted of the
following (amounts in thousands):
March 31, December 31,
2002 2001
----------------------------------
(Unaudited)
Components and fabric $ 1,349 $ 1,552
Jobs in process and finished goods 882 1,006
----------------------------------
$ 2,231 $ 2,558
==================================
4
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
3. Income Taxes
The Company did not record any tax benefit associated with the net loss
for the quarters ended March 31, 2002 and 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.
4. Indebtedness
As of December 31, 2000 the Company maintained 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 remanufacturing 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 $5.25 million at variable interest rates (5.05% at
December 31, 2000). The letter of credit facility and revolving line of credit
agreements required 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. The obligations are
secured by substantially all of the assets of the Company. As a result of the
covenant violations as well as the significant net losses in fiscal years 2001
and 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" in Part I, Item 2 below and Note
1 to the December 31, 2001 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. Under the forbearance agreement, the line of credit was
reduced from $5.25 million to $4.65 million. Thereafter, on August 10, 2001, the
Company and the bank entered into a new short-term forbearance agreement that
expired on October 30, 2001, which was later amended to extend the expiration
date to January 31, 2002. The new forbearance agreement provided that the bank
would 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 January 31, 2002 expiration date. Under
the August forbearance agreement, the line of credit was reduced from $4.65
million to $4.25 million. In addition, the interest rate on the line of credit
was increased to LIBOR plus 6.0%. Finally, the Company was required to pay the
bank a forbearance fee of $50,000. Pursuant to the forbearance agreement, the
bank reserved the right to declare a default and accelerate the loans under the
revolving line of credit after January 31, 2002 if the parties had not entered
into amendments to the existing loan arrangements or a subsequent forbearance
agreement. As of March 31, 2002, approximately $3.2 million was outstanding
under the line of credit. No additional
5
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
borrowing was available based on the Company's borrowing base formula under the
line of credit as of March 31, 2002. The forbearance agreement expired on
January 31, 2002, and the Company is currently engaged in discussions regarding
an extension of the forbearance agreement.
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
remanufacturing 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. The bond indenture and
related agreements required 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. In accordance with the Company's
previously announced restructuring plan, on September 20, 2001, the Company
redeemed the Industrial Revenue Bonds and paid off the outstanding debt of $2.4
million using in part the remaining cash that was held in escrow. Shortly
thereafter, the Company sold the partially constructed remanufacturing facility
in Lansing, Michigan. As a result, the letter of credit facility with the bank
terminated.
Although negotiations with the bank are continuing, the bank has not
agreed to extend the forbearance agreement beyond January 31, 2002. On March 5,
2002, the bank gave the Company written demand for the immediate payment of all
amounts outstanding under the line of credit. As of March 5, 2002, the amount
due and owing under the line of credit was $3.2 million. As of May 14, 2002, the
bank has not exercised any rights or remedies and has not provided the Company
with any further notifications regarding the line of credit, nor has the Company
received a further extension of the forbearance agreement, a permanent waiver of
the Company's loan covenant violations or revised loan covenants relating to the
revolving line of credit. 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 line of credit facility. If the Company is unable
to either procure an extension of the forbearance agreement, permanent covenant
violation waivers and covenant amendments with respect to the existing line of
credit facility 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.
6
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
5. 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.
6. 2001 Operational Restructuring
During the years ended December 31, 2001 and 2000, the Company
experienced significant losses from operations, declining margins, loan covenant
defaults, management turnover and significant expenses to correct accounting
deficiencies from fiscal year 2000. In an effort to address these issues, the
Company took steps during 2001 to restructure its operations. On June 20, 2001,
the Company 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 also shifted the Company's focus to the remanufacturing of
Herman Miller products, and discontinued the Haworth and Steelcase product
lines. The goal of the restructuring plan was to enhance profitability by
downsizing the Company to a smaller business platform and restoring gross
margins.
In the second quarter of 2001, the Company recorded a restructuring
charge of approximately $4.7 million which included an estimate for the disposal
of the existing leased remanufacturing facility in Michigan and related assets,
as well as the new remanufacturing facility that was under construction. The
largest component of the charge was approximately $3.6 million 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 the employment of approximately 65 employees, primarily sales
personnel in offices being closed or production personnel associated with the
remanufacturing facility in Michigan. Prior to the end of the second quarter,
the employment of most of the affected employees had been terminated.
7
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
During the third quarter, the Company disposed of the leased
remanufacturing facility in Michigan and the related assets, and completed the
sale of its remanufacturing facility under construction in Lansing, Michigan. As
a result of the sale, the Company incurred an additional $91,000 of
restructuring expenses. These expenses primarily consisted of interest and legal
fees due to the contractor in accordance with the construction agreement, and
customary closing costs associated with the sale of the property. In addition,
the Company repaid bondholders for Industrial Revenue Bond debt of approximately
$2.4 million that was incurred to build the new facility.
During November of 2001, the Company implemented a restructuring plan
to more appropriately align the Company's infrastructure with anticipated sales
levels. The restructuring included the elimination of approximately 25 sales,
production and administrative positions. Severance was provided to employees
affected by the restructuring initiatives. The Company recorded a restructuring
charge of approximately $102,000 consisting of severance and professional
services.
During the third quarter of 2001, the Company determined that it would
be in its best interests to discontinue its Mexico operations due primarily to
issues relating to the profitability of the Mexican subsidiaries and its lack of
control over the subsidiaries' operations. In 2001, the Company requested that
its Mexican partner produce financial information on the operations of the
Mexican subsidiaries for the third and fourth quarters of 2001. The Mexican
joint venture partner refused, and the Company was unable to obtain such
financial information on its own. Certain actions taken by the Mexican joint
venture partner blocked the Company's access to the Mexican subsidiaries' books
and records. In response, the Company initiated certain legal proceedings in
Mexico seeking to obtain the requested information from the Mexican joint
venture partner. Upon completion of negotiations with its joint venture partner
on February 18, 2002, the Company entered into an agreement with its Mexican
joint venture partner to liquidate the Company's two Mexican subsidiaries
pursuant to Mexican law. The liquidation agreement names an independent Mexican
accountant who will liquidate the Mexican subsidiaries and, upon the completion
of the liquidation, distribute to the Company and its Mexican partner any
residual assets or funds of the Mexican subsidiaries. Residual assets, if any,
will be distributed to the Company and the joint venture partner in accordance
with their respective ownership interests in the Mexican subsidiaries.
The Company has been advised by its Mexican legal counsel that, should
the subsidiaries' liabilities exceed their assets, the Company would be liable
to the extent of its initial capital contribution of approximately $50,000. In
addition, the Company could be liable for Mexican taxes and any wages and
severance obligations owed by the subsidiaries which remain unpaid. The
liquidator is not aware of any unpaid wages or severance obligations and has
preliminarily determined that there could be approximately $40,000 of unpaid
taxes attributable to the subsidiaries. Further, under the liquidation
agreement, the Company's joint venture partner assumed full responsibility for
unpaid wages and severance
8
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2002
obligations owed by the Mexican subsidiaries, and is obligated to hold the
Company harmless against such liabilities.
The Company guaranteed obligations owed by the subsidiaries to certain
vendors. At the time the Company recorded its restructuring charge in the third
quarter of 2001 with respect to the Mexican operations, the Company included all
known payment guarantees to such vendors. The Company is not aware of any other
vendor obligations arising before or since the third quarter restructuring
charge that were guaranteed by the Company.
The liquidation has not been completed and it is not certain how long
the liquidation process will continue. Although the Company has taken steps to
discontinue the operations of its Mexican subsidiaries and limit its future
exposure to expenses related to the Mexican operations, it is possible that the
Company may incur additional legal, accounting and other liquidation and
professional expenses in order to complete the liquidation process.
In regard to its 2001 restructuring activities, the Company anticipates
that the sale of the remaining assets will be completed during 2002 and the
Company's lease termination costs may extend into the year 2003. At March 31,
2002, approximately $254,000 remained accrued in other liabilities relating to
the Company's restructuring and is expected to approximate the remaining costs
to be incurred, which are principally lease termination costs and professional
fees.
7. Subsequent Events
In April 2002, the Company decided to not renew its lease obligations for
its sales offices located in Detroit, Michigan and Chicago, Illinois and to
close such offices. The Company expects to write-off approximately $50,000 of
showroom inventory associated with closing of these offices. Sales for the
Detroit and Chicago offices were $77,000 and $13,000, respectively, for the
quarter ended March 31, 2002. In addition, in May 2002, the Company terminated
the employment of approximately 20 production and administrative personnel in
order to more appropriately align the Company's expense structure with
anticipated sales levels. The Company will continue to review all variable and
fixed expenses and adjust them when appropriate to improve the Company's
financial performance. As a result of the recurring losses, the lack of adequate
bank credit and continued difficulty in achieving sales volumes necessary to
return to profitability, the Company's Board of Directors on May 14, 2002
considered the options available to it, including whether the Company should
file for protection under Chapter 11 of the United States Bankruptcy Code.
Although the Board of Directors of the Company has not determined to seek
bankruptcy protection at this time, the Board has authorized management to make
necessary preparations for a possible Chapter 11 filing should the Board make
such a determination.
9
OPEN PLAN SYSTEMS, INC.
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH 2001
2001 Operational Restructuring
During the years ended December 31, 2001 and 2000, the Company
experienced significant losses from operations, declining margins, loan covenant
defaults, management turnover and significant expenses to correct accounting
deficiencies from fiscal year 2000. In an effort to address these issues, the
Company took steps during 2001 to restructure its operations. On June 20, 2001,
the Company 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 also shifted the Company's focus to the remanufacturing of
Herman Miller products, and discontinued the Haworth and Steelcase product
lines. The goal of the restructuring plan was to enhance profitability by
downsizing the Company to a smaller business platform and restoring gross
margins.
In the second quarter of 2001, the Company recorded a restructuring
charge of approximately $4.7 million which included an estimate for the disposal
of the existing leased remanufacturing facility in Michigan and related assets,
as well as the new remanufacturing facility that was under construction. The
largest component of the charge was approximately $3.6 million 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 the employment of approximately 65 employees, primarily sales
personnel in offices being closed or production personnel associated with the
remanufacturing facility in Michigan. Prior to the end of the second quarter,
the employment of most of the affected employees had been terminated.
During the third quarter, the Company disposed of the leased
remanufacturing facility in Michigan and the related assets, and completed the
sale of its remanufacturing facility under construction in Lansing, Michigan. As
a result of the sale, the Company incurred an additional $91,000 of
restructuring expenses. These expenses primarily consisted of interest and legal
fees due to the contractor in accordance with the construction agreement, and
customary closing costs associated with the sale of the property. In addition,
the Company
10
OPEN PLAN SYSTEMS, INC.
repaid bondholders for Industrial Revenue Bond debt of approximately $2.4
million that was incurred to build the new facility.
During November of 2001, the Company implemented a restructuring plan
to more appropriately align the Company's infrastructure with anticipated sales
levels. The restructuring included the elimination of approximately 25 sales,
production and administrative positions. Severance was provided to employees
affected by the restructuring initiatives. The Company recorded a restructuring
charge of approximately $102,000 consisting of severance and professional
services.
During the third quarter of 2001, the Company determined that it would
be in its best interests to discontinue the Mexico operations due primarily to
issues relating to the profitability of the Mexican subsidiaries and its lack of
control over the subsidiaries' operations. In 2001, the Company requested that
its Mexican partner produce financial information on the operations of the
Mexican subsidiaries for the third and fourth quarters of 2001. The Mexican
joint venture partner refused, and the Company was unable to obtain such
financial information on its own. Certain actions taken by the Mexican joint
venture partner blocked the Company's access to the Mexican subsidiaries' books
and records. In response, the Company initiated certain legal proceedings in
Mexico seeking to obtain the requested information from the Mexican joint
venture partner. Upon completion of negotiations with its joint venture partner
on February 18, 2002, the Company entered into an agreement with its Mexican
joint venture partner to liquidate the Company's two Mexican subsidiaries
pursuant to Mexican law. The liquidation agreement names an independent Mexican
accountant who will liquidate the Mexican subsidiaries and, upon the completion
of the liquidation, distribute to the Company and its Mexican partner any
residual assets or funds of the Mexican subsidiaries. Residual assets, if any,
will be distributed to the Company and the joint venture partner in accordance
with their respective ownership interests in the Mexican subsidiaries.
The Company has been advised by its Mexican legal counsel that, should
the subsidiaries' liabilities exceed their assets, the Company would be liable
to the extent of its initial capital contribution of approximately $50,000. In
addition, the Company could be liable for Mexican taxes and any wages and
severance obligations owed by the subsidiaries which remain unpaid. The
liquidator is not aware of any unpaid wages or severance obligations and has
preliminarily determined that there could be approximately $40,000 of unpaid
taxes attributable to the subsidiaries. Further, under the liquidation
agreement, the Company's joint venture partner assumed full responsibility for
unpaid wages and severance obligations owed by the Mexican subsidiaries, and is
obligated to hold the Company harmless against such liabilities.
The Company guaranteed obligations owed by the subsidiaries to certain
vendors. At the time the Company recorded its restructuring charge in the third
quarter of 2001 with respect to the Mexican operations, the Company included all
known payment guarantees to such vendors. The Company is not aware of any other
vendor obligations arising before or since the third quarter restructuring
charge that were guaranteed by the Company.
11
OPEN PLAN SYSTEMS, INC.
The liquidation has not been completed and it is not certain how long
the liquidation process will continue. Although the Company has taken steps to
discontinue the operations of its Mexican subsidiaries and limit its future
exposure to expenses related to the Mexican operations, it is possible that the
Company may incur additional legal, accounting and other liquidation and
professional expenses in order to complete the liquidation process.
In regard to its 2001 restructuring activities, the Company anticipates
that the sale of the remaining assets will be completed during 2002 and the
Company's lease termination costs may extend into the year 2003. At March 31,
2002, approximately $254,000 remained accrued in other liabilities relating to
the Company's restructuring and is expected to approximate the remaining costs
to be incurred, which are principally lease termination costs and professional
fees.
In April 2002, the Company decided to not renew its lease obligations for
its sales offices located in Detroit, Michigan and Chicago, Illinois and to
close such offices. The Company expects to write-off approximately $50,000 of
showroom inventory associated with closing of these offices. Sales for the
Detroit and Chicago offices were $77,000 and $13,000, respectively, for the
quarter ended March 31, 2002. In addition, in May 2002, the Company terminated
the employment of approximately 20 production and administrative personnel in
order to more appropriately align the Company's expense structure with
anticipated sales levels. The Company will continue to review all variable and
fixed expenses and adjust them when appropriate to improve the Company's
financial performance. As a result of the recurring losses, the lack of adequate
bank credit and continued difficulty in achieving sales volumes necessary to
return to profitability, the Company's Board of Directors on May 14, 2002
considered the options available to it, including whether the Company should
file for protection under Chapter 11 of the United States Bankruptcy Code.
Although the Board of Directors of the Company has not determined to seek
bankruptcy protection at this time, the Board has authorized management to make
necessary preparations for a possible Chapter 11 filing should the Board make
such a determination.
Results of Operations
The Company's financial statements for the quarter ended March 31, 2002
do not include the results of operations of the Company's Mexican subsidiaries
(see discussion above).
Net Sales. Sales for the quarter ended March 31, 2002 were $2.7 million
as compared to $10.0 million for the same period in 2001. This decrease in sales
can be attributed to a decline in sales generated by the under-performing sales
offices that were closed and sales personnel whose employment was terminated in
2001 as part of the Company's restructuring efforts; and a general softening of
the economy, particularly following the terrorist attacks on September 11, 2001.
The Company's booked orders decreased dramatically immediately following the
September 11th terrorist attacks, and have not yet returned to pre-September
11th levels. In addition, sales by the joint venture in Mexico
12
OPEN PLAN SYSTEMS, INC.
have not been consolidated into the Company's Statement of Operations since June
30, 2001, as the Company determined to discontinue the operations of the Mexican
subsidiaries due to the Company's concerns regarding the profitability of the
subsidiaries and its lack of control over the subsidiaries' operations. The
Company's sales strategy remains focused on a direct sales force in the
Company's current existing markets, supplemented by dealer sales in other
markets. The Company's current and expected short-term efforts remain primarily
focused on the General Services Administration, New York City, Commonwealth of
Pennsylvania and other government related customers.
Gross Profit. Gross profit for the quarter ended March 31, 2002 was
$459,000 or 17.3% as compared to $2.5 million or 25.2% for the same period in
2001. The decrease in gross profit is primarily due to the lower than
anticipated sales levels during the first quarter of 2002. The gross margin
decreased due to the Company's fixed cost structure associated with the
remanufacturing facility in Richmond, Virginia, which was under-utilized in the
first quarter of 2002 due to the decrease in sales. In addition, the Company has
experienced increased pricing pressure in order to obtain sales to commercial
businesses given the downturn in the economy and its impact on the contract
furniture industry.
Operating Expenses. Selling and marketing expenses for the three months
ended March 31, 2002 decreased $1.7 million to $720,000 versus $2.4 million for
the same period in 2001. This 70% decrease was due to the closing of under
performing sales offices in June of 2001, the termination of under performing
sales personnel in offices that remained open, and management's efforts to
tightly control marketing and advertising spending beginning in May of 2001.
General and administrative expenses decreased $385,000 to $525,000 for
the three months ended March 31, 2002 versus $910,000 for the same period in
2001. This 42% decrease as compared to the first quarter of 2001 was due to
management's efforts to tightly control spending, as well as decreases in
accounting and computer consulting fees related to the Company's delay in filing
its Form 10-K for the year ended December 31, 2000 and Form 10-Q for the quarter
ended March 31, 2001.
For the first three months of 2001, the Company recorded amortization
of goodwill in the amount of $68,000. This goodwill was written off in June of
2001 in connection with the Company's 2001 restructuring plan discussed above.
Other Expense. Net other expense was $52,000 for the quarter ended
March 31, 2002 versus $114,00 for the same period in 2001. For 2001, other
expense included the minority interest in the Mexican joint venture of $37,000.
Interest expense decreased from $79,000 in 2001 to $52,000 in 2002, due to the
decrease in debt balances outstanding, and the decrease in interest rates.
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OPEN PLAN SYSTEMS, INC.
Income Taxes. For the quarters ended March 31, 2002 and 2001, the
Company did not record any tax benefit associated with the loss before income
taxes 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 March 31, 2002 was
$838,000 as compared to a net loss of $981,000 for the same period in 2001. The
net loss for the quarter ended March 31, 2002 was due to lower than anticipated
sales and decreased margins due to an under utilized remanufacturing facility.
The net loss in 2001 was due to lower margins, cost associated with supporting
under-performing sales offices, and significant accounting, legal and computer
consulting fees associated with the delay in filing its Form 10-K for the year
ended December 31, 2000 and Form 10-Q for the quarter ended March 31, 2001.
Liquidity and Capital Resources
Violations of Loan Covenants. As of December 31, 2000 the Company
maintained 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 remanufacturing 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 $5.25 million at variable
interest rates (5.05% at December 31, 2000). The letter of credit facility and
revolving line of credit agreements required 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. The
obligations are secured by substantially all of the assets of the Company. As a
result of the covenant violations as well as the significant net losses in
fiscal years 2001 and 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" in Item 7 of
the Form 10-K and Note 1 to the December 31, 2001 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. Under the forbearance agreement, the line of credit was
reduced from $5.25 million to $4.65 million. Thereafter, on August 10, 2001, the
Company and the bank entered into a new short-term forbearance agreement that
expired on October 30, 2001, which was later amended to extend the expiration
date to January 31, 2002. The new forbearance agreement provided that the bank
would 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 January 31, 2002 expiration date. Under
the August forbearance agreement, the line of credit was reduced from $4.65
million to $4.25 million. In addition, the interest rate on the line of credit
was increased to LIBOR plus 6.0%. Finally, the Company was required to pay the
bank a forbearance fee of $50,000. Pursuant to the forbearance agreement, the
bank
14
OPEN PLAN SYSTEMS, INC.
reserved the right to declare a default and accelerate the loans under the
revolving line of credit after January 31, 2002 if the parties had not entered
into amendments to the existing loan arrangements or a subsequent forbearance
agreement. As of March 31, 2002, approximately $3.2 million was outstanding
under the line of credit. No additional borrowing was available based on the
Company's borrowing base formula under the line of credit as of March 31, 2002.
The forbearance agreement expired on January 31, 2002, and the Company is
currently engaged in discussions regarding an extension of the forbearance
agreement.
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 for construction of a new remanufacturing 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. The bond indenture and related agreements required
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. In accordance with the Company's previously announced restructuring
plan, on September 20, 2001, the Company redeemed the Industrial Revenue Bonds
and paid off the outstanding debt of $2.4 million using in part the remaining
cash that was held in escrow. Shortly thereafter, the Company sold the partially
constructed remanufacturing facility in Lansing, Michigan. As a result, the
letter of credit facility with the bank terminated.
Although negotiations with the bank are continuing, the bank has not
agreed to extend the forbearance agreement beyond January 31, 2002. On March 5,
2002, the bank gave the Company written demand for the immediate payment of all
amounts outstanding under the line of credit. As of March 5, 2002, the amount
due and owing under the line of credit was $3.2 million. As of May 14, 2002,
such amount due and outstanding was approximately $3.2 million, and the bank has
not exercised any rights or remedies and has not provided the Company with any
further notifications regarding the line of credit. Also, the Company has not
received a further extension of the forbearance agreement, a permanent waiver of
the Company's loan covenant violations or revised loan covenants relating to the
revolving line of credit. 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 line of credit facility. If the Company is unable
to either procure an extension of the forbearance agreement, permanent covenant
violation waivers and covenant amendments with respect to the existing line of
credit facility 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
15
OPEN PLAN SYSTEMS, INC.
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 2002 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, and to successfully renegotiate its credit agreement 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
results 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 in the future by inflation.
Forward-Looking Statements
The foregoing discussion contains certain forward-looking statements,
which may be identified by phrases such as the Company "expects," "anticipates,"
"estimates," "projects" or words of similar effect. In addition, from time to
time, the Company may make forward-looking statements relating to the Company's
anticipated financial performance, business prospects and similar matters.
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 2002 and any interim period to differ materially from those
expressed or implied in any forward-looking statements made by, or on behalf of,
16
OPEN PLAN SYSTEMS, INC.
the Company. These factors are set forth under the caption "Forward-Looking
Statements" in Item 7 of the Form 10-K, 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.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In 2002, the Company has been exposed to changes in interest rates
primarily from its revolving line of credit arrangement. The Company's interest
expense continues to be affected by changes in short-term interest on the debt
outstanding under the revolving line of credit. These borrowings bear interest
at a variable rate (the "Borrowing Rate"). Assuming: (i) the Borrowing Rate
varies by 100 basis points from its current level in any given month and (ii)
the Company maintains an aggregate outstanding debt balance subject to this
Borrowing Rate of $3.2 million during the month of variance, interest expense
would vary by approximately $2,700 for that month. The Company does not use
derivative instruments.
18
OPEN PLAN SYSTEMS, INC.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See matters previously disclosed in Item 3 of the Form 10-K.
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 line of credit facility. See Note 5 to the Consolidated
Financial Statements, which is hereby incorporated herein by this
reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
first quarter of the fiscal year covered by this report.
Item 5. Other Information
In April 2002, the Company decided to not renew its lease
obligations for its sales offices located in Detroit, Michigan and
Chicago, Illinois and to close such offices. The Company expects
to write-off approximately $50,000 of showroom inventory
associated with closing of these offices. Sales for the Detroit
and Chicago offices were $77,000 and $13,000, respectively, for
the quarter ended March 31, 2002. In addition, in May 2002, the
Company terminated the employment of approximately 20 production
and administrative personnel in order to more appropriately align
the Company's expense structure with anticipated sales levels. The
Company will continue to review all variable and fixed expenses
and adjust them when appropriate to improve the Company's
financial performance. As a result of the recurring losses, the
lack of adequate bank credit and continued difficulty in achieving
sales volumes necessary to return to profitability, the Company's
Board of Directors on May 14, 2002 considered the options
available to it, including whether the Company should file for
protection under Chapter 11 of the United States Bankruptcy Code.
Although the Board of Directors of the Company has not determined
to seek bankruptcy protection at this time, the Board has
authorized management to make necessary preparations for a
possible Chapter 11 filing should the Board make such a
determination.
19
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
------------------------------------------------------------------
11 Statement Re: Computation of Per Share Earnings
(b) Reports on Form 8-K
None.
20
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: May 15, 2002 By: /s/ Thomas M. Mishoe, Jr.
--------------------------------------
Thomas M. Mishoe, Jr.
President and Chief Executive Officer
Date: May 15, 2002 By: /s/ Kathryn L. Tyler
--------------------------------------
Kathryn L. Tyler
Chief Financial Officer
OPEN PLAN SYSTEMS, INC.
EXHIBIT INDEX
No. Description
- --- -----------
11 Statement Re: Computation of Per Share Earnings