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, 1999
[ ] 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 12, 1999, Open Plan Systems, Inc. had
4,672,433 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, 1999 (unaudited) 1
and December 31, 1998
Consolidated Statements of Operations- Three months 2
ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows - Three months 3
months ended March 31, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements - March 31, 1999 5
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of 15
Security Holders
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
OPEN PLAN SYSTEMS, INC.
PART I
FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
(amounts in thousands)
March 31 December 31
1999 1998
------------------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 34 $ 2
Accounts receivable, net 5,684 6,289
Inventories 7,102 6,908
Prepaids and other 957 672
Refundable income taxes 305 305
------------------------------------
Total current assets 14,082 14,176
Property and equipment, net 2,179 2,288
Goodwill, net 3,032 3,075
Other 438 466
------------------------------------
Total assets $19,731 $20,005
====================================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit $1,023 $952
Trade accounts payable 2,057 1,995
Accrued compensation 236 263
Other accrued liabilities 278 429
Customer deposits 748 1,000
Notes payable 17 20
------------------------------------
Total current liabilities 4,359 4,659
Commitments and contingencies - -
------------------------------------
Total liabilities 4,359 4,659
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 5,000
Issued and outstanding shares - none - -
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,672 19,324 19,324
Additional capital 137 137
Accumulated deficit (4,089) (4,115)
------------------------------------
Total shareholders' equity 15,372 15,346
------------------------------------
Total liabilities and shareholders' equity $19,731 $20,005
====================================
See accompanying notes.
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Operations (Unaudited)
(amounts in thousands, except per share)
Three Months ended March 31
1999 1998
------------------------------------
Net sales $ 7,509 $ 7,900
Cost of sales 5,388 6,256
------------------------------------
Gross profit 2,121 1,644
Operating expenses:
Amortization of intangibles 53 69
Selling and marketing 1,525 1,972
General and administrative 480 744
------------------------------------
2,058 2,785
------------------------------------
Operating income (loss) 63 (1,141)
Other (income) expense:
Interest expense 45 66
Other, net (8) -
------------------------------------
37 66
------------------------------------
Income (loss) before income taxes 26 (1,207)
Income taxes - -
------------------------------------
Net income (loss) $ 26 $ (1,207)
====================================
Basic and diluted income (loss) per common share
$ .01 $ (.27)
====================================
Weighted average common shares outstanding 4,673 4,472
====================================
See accompanying notes.
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows (Unaudited)
(amounts in thousands)
Three Months ended
March 31
1999 1998
--------------------------------
Operating activities
Net income (loss) $ 26 $ (1,207)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for losses on receivables 9 -
Depreciation and amortization 243 277
Loss on sale of property 3 15
Deferred income taxes - 4
Changes in operating assets and liabilities:
Accounts receivable 596 389
Inventories (194) 1,034
Prepaids and other (267) (11)
Trade accounts payable 62 (588)
Customer deposits (252) (100)
Accrued and other liabilities (178) (22)
----------------------------------
Net cash provided by (used in) operating activities 48 (217)
Investing activities
Purchases of property and equipment (84) (330)
----------------------------------
Net cash used in investing activities (84) (330)
Financing activities
Net borrowings on revolving line of credit 71 616
Principal payments on long-term debt, and capital
lease obligations (3) (31)
----------------------------------
Net cash provided by financing activities 68 585
----------------------------------
----------------------------------
Increase in cash and cash equivalents 32 38
Cash and cash equivalents at beginning of period 2 73
----------------------------------
Cash and cash equivalents at end of period $ 34 $ 111
==================================
Supplemental disclosures
Interest paid $ 45 $ 66
==================================
Income taxes paid $ - $ 12
==================================
See accompanying notes.
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1999
1. Principles of Presentation
The accompanying unaudited consolidated financial statements of Open Plan
Systems, Inc. and subsidiaries (the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information.
The interim financial statements included herein are unaudited. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany balances and transactions are eliminated in
consolidation. In the opinion of management, these financial statements reflect
all adjustments of a normal recurring nature which the Company considers
necessary for a fair presentation. The results for the three month period ending
March 31, 1999 are not necessarily indicative of the results that may be
achieved for the entire year ending December 31, 1999 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-KSB for the year ended
December 31, 1998.
2. Inventories
Inventories are in two main stages of completion and consisted of the following
(amounts in thousands):
March 31 December 31
1999 1998
-------------------------------------
(Unaudited)
Components and fabric $4,170 $4,221
Jobs in process and finished goods 2,932 2,687
-------------------------------------
$7,102 $6,908
=====================================
3. Income Taxes
The Company recorded no income tax benefit for the first quarter of 1998 due to
the uncertainty of realization of potential tax benefits associated with recent
operating losses. Utilization of net operating loss carryforwards resulted in no
income tax expenses for the first quarter of 1999. Related deferred income tax
assets have been offset by a valuation allowance. The Company will reevaluate
the potential realizability of the deferred tax assets on a quarterly basis.
4. Indebtedness
At March 31, 1999, the Company had outstanding borrowings of $1,023,000 on its
$5,000,000 line of credit.
5. Commitments and Contingencies
A portion of the potential consideration for the 1996 acquisition of Immaculate
Eagle, Inc. (d/b/a TFM Remanufactured Office Furniture)("TFM") was 87,500 shares
of common stock of the Company, which has been held in escrow, with an agreed
upon value of $1.3 million, as security for indemnification obligations of the
former shareholders of TFM. In addition, under the terms of the TFM purchase
agreement, if the closing sales price of the Company's common stock on October
1, 1998 was less than $15 per share, the Company was to make a cash payment to
the former shareholders of TFM equal to the difference between the closing sales
price on that date and $15, multiplied by the 87,500 shares of common stock,
(subject to certain adjustments, including claims by the Company for
indemnification). The Company's stock traded at $2.25 per share on October 1,
1998 and accordingly the amount potentially payable to the former TFM
shareholders would be $1,115,625.
Management of the Company has reviewed the circumstances of the TFM acquisition
and determined that the indemnification obligations of the former TFM
shareholders exceed the $1.3 million agreed value of the stock in escrow. The
Company has requested the escrow agent retain all of the stock and served notice
of the indemnification claims to the former TFM shareholders. As a result, no
cash payment is due on any of the stock in escrow. The former shareholders of
TFM have disputed the indemnification claims and pursuant to the purchase
agreement, the matter has gone to arbitration.
If the Company prevails on all of its claims in arbitration, the escrowed shares
will be returned to the Company. Should the Company not prevail on all its
claims, the Company may be required to make cash payments to the shareholders in
amounts designated by the arbitrator. The aggregate $1,115,625 difference
between the stock's market price on October 1, 1998 and the $15 value assumed in
the TFM purchase agreement has been recorded as a reduction in goodwill and
shareholders' equity.
Two former officers of the Company have filed suit against the Company
asserting, among other things, non-compliance with the contractual terms of
certain employment agreements, claiming damages of approximately $400,000. The
Company believes these claims are without merit and is contesting them. The
Company filed suit against the two former officers claiming, among other things,
improper use of Company assets. The Company is unable to predict the ultimate
outcome of these actions.
OPEN PLAN SYSTEMS, INC.
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH 1998
Results of Operations
Sales. Sales for the three months ended March 31, 1999 were $7,509,000, a
decrease of approximately $391,000 or 4.9% versus the same period in 1998. The
decrease in the first quarter sales was principally due to several large jobs
that were ordered in the latter part of 1997 through the Company's National
Accounts group, but not shipped until early 1998. In the branch office network,
revenue increased by approximately $400,000.
The Company also increased its sales order volume during the first quarter
of 1999. The Company received orders of $7.7 million in the first quarter of
1999 which compares favorably with the $6.3 million in orders booked during the
first quarter of 1998. Additionally, the Company's order backlog at the end of
March 1999 of $2.7 million was almost double the backlog at the end of the first
quarter of 1998.
The Company was subject to less discounting pressure in the first quarter
of 1999. This was the result of sales office initiatives as well as reduced
sales to dealers and large national companies served by the National Accounts
Group. The Company is in the process of implementing new marketing initiatives
around its traditional core customer market of small to medium-size end users
where, historically, there has been less discounting pressure. However, the
Company believes that the National Accounts Group can contribute significantly
to operating results of the Company and has also implemented initiatives aimed
at increasing sales in this market group.
Cost of Sales. The Company's cost of sales includes costs of raw materials,
labor, supplies, freight, utilities, and other manufacturing related expenses.
Cost of sales decreased by $868,000 in the first quarter of 1999 to $5,388,000
from the $6,256,000 reported in the first quarter of 1998. The decrease in cost
of sales is primarily attributable to reduced manufacturing costs as well the
decrease in sales volume.
The gross margin increased to 28.2% in the first quarter of 1999 from 20.8%
reported in the first quarter of 1998. The Company's gross margin during the
first quarter of 1999 benefited from the operational restructuring which
occurred in the second quarter of 1998 which reduced the amount of warehouse
space and eliminated certain inefficient production capacity. During the first
quarter of 1998, the Company began reducing inventory levels and reduced
production volumes which resulted in higher per unit production costs due to
spreading fixed costs over fewer production units.
The Company believes that it has set in place the structure to increase its
margin to pre-1997 levels of 30%+. The Company looks forward to further
increases in gross margin percentages as its sales volume increases and
operational improvement programs continue to produce results.
Operating Expenses. The Company's most significant operating expense is
selling and marketing expense. These costs are primarily related to salesperson
compensation, advertising and other marketing expenses and rents. The Company
compensates its salespeople through a combination of salaries and commissions.
While most of these expenses are directly related to the current year's sales,
certain other marketing expenses are incurred to build brand recognition and
generate sales leads that may contribute to sales in later periods.
Selling and marketing expenses for the first quarter of 1999 decreased to
$1,525,000 from the $1,972,000 reported in the first quarter of 1998. The
decreases were primarily related to the reduction in sales offices and sales
trainee staffing that occurred in the second quarter of 1998 as well as
increased focus on cost controls and reductions in marketing overhead.
The Company anticipates that it will add sales people in certain branch
offices consistent with its plan to manage sales growth and productivity.
Additionally, the Company recently completed a new marketing brochure, direct
mail advertisements and price lists. These marketing pieces are being positively
received by both the sales staff and customers as the Company continues to
further professionalize its sales efforts. However, the Company anticipates that
selling expenses will increase somewhat as the Company amortizes these expenses
over the period to which they relate.
General and administrative expenses decreased to $480,000 in the first
quarter of 1999 from the $744,000 reported in the first quarter of 1998. The
primary reasons for the decrease were reduced expenses resulting from the
operational restructuring that occurred in the second quarter of 1998 as well as
cost controls instituted over the past six to nine months. The Company
anticipates that these expenses may increase moderately during the next several
periods due to the litigation with the former officers of the Company. For a
discussion of such litigation, see Part II, Item 1 of this report.
Other Non-Operating Income and Expense. Total other expense decreased from
$66,000 for the first quarter of 1998 to $37,000 for the first quarter of 1999.
The primary reason for the decrease is due to the Company reducing its
borrowings on the line of credit facility.
Income Taxes. The Company recorded no income tax benefit for the first
quarter of 1998 due to the uncertainty of realization of potential tax benefits
associated with recent operating losses. Utilization of net operating loss
carryforwards resulted in no income tax expenses for the first quarter of 1999.
Related deferred income tax assets have been offset by a valuation allowance.
The Company will reevaluate the potential realizability of the deferred tax
assets on a quarterly basis.
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by (used in)
operating activities was $48,000 for the three months ended March 31, 1999 as
compared to ($217,000) for the three months ended March 31, 1998. The increase
in cash provided by operating activities for the first quarter of 1999 was
primarily due to the Company's net income for the quarter. The Company's
inventory increased at the end of the first quarter of 1999 due primarily to
several orders being prepared for shipment in the early part of the second
quarter. In 1998, the Company decreased inventories as part of its program to
reduce its stock of raw materials and finished goods to more closely match sales
volumes. Trade accounts receivable decreased by approximately $605,000 during
the first quarter of 1999 as the Company continues to make progress in the
collection of its past due accounts. The Company continues to focus on
decreasing the number of days sales outstanding and would expect that future
changes in sales volume will not have a direct correlation to changes in
accounts receivable.
Cash Flows from Investing Activities. Net cash used in investing activities
was $84,000 for the three months ended March 31, 1999 as compared to $330,000
for the three months ended March 31, 1998. The cash used during the first
quarter of 1999 is due to the purchase of certain capital equipment related to
improving the productivity of its remanufacturing activities. These purchases
are consistent with the Company's focus on producing high-quality, affordable
office systems. The Company anticipates that capital spending for 1999 will be
less than $500,000. The source of funds for anticipated capital spending will be
funds from operations as well as borrowings on the Company's line of credit. At
March 31, 1999, the Company had borrowings of $1,023,000 under its line of
credit.
Cash Flows from Financing Activities. Net cash provided by financing
activities was $68,000 during the first quarter of 1999 as compared to $585,000
in the first quarter of 1998. This decrease in cash flows provided by financing
activities for the first quarter of 1999 represented reduced principal payments
on outstanding long-term debt and capital leases offset by a reduced need for
short-term borrowings on the Company's line of credit due to the increased
profitability of the Company and an improved working capital position.
Expected Future Cash Flows. The Company expects that cash flow from
operating activities will increase over the next several quarters as the Company
continues to reduce its past due receivables and inventories and improves its
financial performance.
Seasonality and Impact of Inflation
In prior years, the Company noted a seasonal trend of lower sales volumes
in the second and third quarters but for the past two years the Company has had
no discernable pattern of seasonality. Because the Company recognizes revenues
upon shipment and typically ships Work Stations within three 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 1999 and any interim period to differ materially from those
expressed or implied in any forward-looking statements made by, or on behalf of,
the Company. These factors are set forth under the caption "Forward-Looking
Statements" in Item 6 of the Company's Form 10-KSB for the fiscal year ended
December 31, 1998, 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.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
The Company believes that its exposure to market risk associated with
transactions involving derivative and other financial instruments is not
material.
OPEN PLAN SYSTEMS, INC.
Item 1. Legal Proceedings
A portion of the potential consideration for the 1996 acquisition of
Immaculate Eagle, Inc. (d/b/a TFM Remanufactured Office
Furniture)("TFM") was 87,500 shares of common stock of the Company,
which has been held in escrow, with an agreed upon value of $1.3
million, as security for indemnification obligations of the former
shareholders of TFM. In addition, under the terms of the TFM purchase
agreement, if the closing sales price of the Company's common stock on
October 1, 1998 was less than $15 per share, the Company was to make a
cash payment to the former shareholders of TFM equal to the difference
between the closing sales price on that date and $15, multiplied by
the 87,500 shares of common stock, (subject to certain adjustments,
including claims by the Company for indemnification). The Company's
stock traded at $2.25 per share on October 1, 1998 and accordingly the
amount potentially payable to the former TFM shareholders would be
$1,115,625.
Management of the Company has reviewed the circumstances of the TFM
acquisition and determined that the indemnification obligations of the
former TFM shareholders exceed the $1.3 million agreed value of the
stock in escrow. The Company has requested the escrow agent retain all
of the stock and served notice of the indemnification claims to the
former TFM shareholders. As a result, no cash payment is due on any of
the stock in escrow. The former shareholders of TFM have disputed the
indemnification claims and pursuant to the purchase agreement, the
matter has gone to arbitration.
If the Company prevails on all of its claims in arbitration, the
escrowed shares will be returned to the Company. Should the Company
not prevail on all its claims, the Company may be required to make
cash payments to the shareholders in amounts designated by the
arbitrator. The aggregate $1,115,625 difference between the stock's
market price on October 1, 1998 and the $15 value assumed in the TFM
purchase agreement has been recorded as a reduction in goodwill and
shareholders' equity.
On November 6, 1998, two former officers of the Company filed a
lawsuit in the State of Michigan, 30th Judicial Court, asserting among
other things, non-compliance with the contractual terms of certain
employment agreements. The plaintiffs assert damages of approximately
$400,000 in the aggregate. The Company believes that these claims are
without merit. On the November 9, 1998, the Company filed suit against
the two former officers in the United States District Court for the
Eastern District of Virginia, claiming among other things, improper
use of Company assets. Due to the recent nature of these actions, the
Company is unable to predict the ultimate outcome of these actions.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
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
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 12, 1999 /s/ John L. Hobey
--------------------------------------------------
John L. Hobey
Chief Executive Officer
Date: May 12, 1999 /s/ William F. Crabtree
--------------------------------------------------
William F. Crabtree
Chief Financial Officer
Date: May 12, 1999 /s/ Neil F. Suffa
--------------------------------------------------
Neil F. Suffa
Corporate Controller
OPEN PLAN SYSTEMS, INC.
EXHIBIT INDEX
Exhibit No. Description
----------------- ------------------------------------------------------------------------
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule (filed electronically only)
OPEN PLAN SYSTEMS, INC.
EXHIBIT 11 - Statement Re: Computation of Per Share Earnings
Three Months Ended
March 31
1999 1998
---------------------------------------
Weighted average shares outstanding during the
period 4,672 4,472
Assumed exercise of options less assumed 1 -
acquisition of shares
---------------------------------------
Total 4,673 4,472
=======================================
Net income (loss) used in computation $ 26 $ (1,207)
=======================================
Income (loss) per common share $ .01 $ (.27)
=======================================