UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 23, 1999
OR
[ ] 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 0-24383
WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1507104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
240 Royal Palm Way
Palm Beach, FL 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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 December 1, 1999, there were 12,671,414 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet..............................................................................3
October 23, 1999 (unaudited) and April 24, 1999
Consolidated Statement of Income (unaudited)............................................................4
For the three months ended October 23, 1999 and October 24, 1998 and
for the six months ended October 23, 1999 and October 24, 1998
Consolidated Statement of Cash Flows (unaudited)........................................................5
For the six months ended October 23, 1999 and October 24, 1998
Notes to Consolidated Financial Statements (unaudited)..................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................15
Item 3. Quantitative and Qualitative Disclosure About Market Risk..............................................25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....................................................26
Item 5. Other Information......................................................................................26
Item 6. Exhibits and Reports on Form 8-K.......................................................................26
Signatures........................................................................................................27
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
October 23, April 24,
ASSETS 1999 1999
------ ------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ $ 607
Accounts receivable, less allowance for doubtful
accounts of $3,882 and $4,481, respectively 90,599 78,807
Inventories 37,066 36,152
Notes receivable from officers 1,938 1,958
Prepaid expenses and other current assets 13,388 6,921
------------ ------------
Total current assets 142,991 124,445
Property and equipment, net 45,117 43,138
Intangible assets, net 87,529 64,488
Other assets 11,158 6,501
------------ ------------
Total assets $ 286,795 $ 238,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 912 $ 1,079
Accounts payable 35,252 34,712
Accrued compensation 9,242 9,391
Other accrued liabilities 20,930 12,089
------------ ------------
Total current liabilities 66,336 57,271
Long-term debt 135,707 107,223
Subordinated related party debt 4,878 4,878
Deferred income taxes 4,738 4,749
Other long-term liabilities 195 18
------------ ------------
Total liabilities 211,854 174,139
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
Authorized, 12,624,726 and 12,585,598 issued and
outstanding, respectively 13 13
Additional paid-in capital 47,348 46,934
Accumulated other comprehensive loss (944) (1,880)
Retained earnings 28,524 19,366
------------ ------------
Total stockholders' equity 74,941 64,433
------------ ------------
Total liabilities and stockholders' equity $ 286,795 $ 238,572
============ ============
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ------------ -----------
Revenues $ 131,760 $ 90,100 $ 250,221 $ 180,586
Cost of revenues 93,330 64,973 176,926 130,921
------------ ------------ ------------ -----------
Gross profit 38,430 25,127 73,295 49,665
Selling, general and administrative expenses 28,175 19,475 54,398 38,544
Amortization expense 572 133 1,019 266
Strategic restructuring plan costs 3,818
------------ ------------ ------------ -----------
Operating income 9,683 5,519 17,878 7,037
Interest expense 2,692 801 4,909 1,955
Interest income (66) (60) (109) (85)
Gain on the sale of securitities (1,808) (1,808)
Unrealized holding gain on trading securities (1,163) (1,163)
Loss on the sale of subsidiary 318 318
Other (income) expense 31 (65) (21) (47)
------------ ------------ ------------- -----------
Income before provision for income taxes 9,679 4,843 15,752 5,214
Provision for income taxes 3,958 2,131 6,594 2,294
------------ ------------ ------------ -----------
Net income $ 5,721 $ 2,712 $ 9,158 $ 2,920
============ ============ ============ ===========
Income per share:
Basic $ 0.45 $ 0.19 $ 0.73 $ 0.19
Diluted $ 0.43 $ 0.19 $ 0.68 $ 0.19
Weighted average common shares outstanding:
Basic 12,622 14,396 12,612 15,330
Diluted 13,443 14,396 13,453 15,435
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
---------------------------
October 23, October 24,
1999 1998
------------ -----------
Cash flows from operating activities:
Net income $ 9,158 $ 2,920
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 5,221 3,245
Gain on sale of securities (1,808)
Unrealized holding gain on trading securities (1,163)
Loss on sale of subsidiary 318
Compensation charge for options tendered in the strategic restructuring 2,956
Other strategic restructuring plan costs, net of cash paid (1,364)
Cash paid for restructuring costs (95) (208)
Amortization of deferred financing costs 370 203
Changes in assets and liabilities (net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (9,869) (615)
Inventories (1,648) 1,595
Prepaid expenses and other current assets (3,277) (756)
Accounts payable (1,310) (2,582)
Accrued compensation and other accrued liabilities 3,559 7593
----------- -----------
Net cash provided by (used in) operating activities (544) 12,987
------------ -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (22,117) (13,238)
Additions to property and equipment (6,295) (3,349)
Purchase of securities (2,400)
Proceeds on sale of securities 3,008
Issuance of notes receivable from officers (1,951)
Cash received on the sale of property and equipment 537 138
Cash collection of notes receivable from employees 3,703
Deposits (paid) received 178 (1,000)
------------ ------------
Net cash used in investing activities (27,089) (15,697)
------------ ------------
Cash flows from financing activities:
Proceeds from credit facility borrowings 52,350 74,934
Payments of credit facility borrowings (25,825) (22,934)
Payments of other long-term debt (376) (6,201)
Proceeds from issuance of other long-term debt 1,362
Payments of short-term debt, net (639) (5,180)
Retirement of common stock (6,419)
Payments of deferred financing costs (186) (3,042)
Proceeds from issuance of common stock 340
Payments to U.S. Office Products (36,096)
Capital contributed by U.S. Office Products 8,518
----------- -----------
Net cash provided by financing activities 27,026 3,580
----------- -----------
Effect of exchange rates on cash and cash equivalents -- (20)
----------- ------------
Net increase (decrease) in cash and cash equivalents (607) 850
Cash and cash equivalents at beginning of period 607 234
----------- -----------
Cash and cash equivalents at end of period $ -- $ 1,084
=========== ===========
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
Six Months Ended
---------------------------
October 23, October 24,
1999 1998
------------ -----------
Supplemental disclosures of cash flow information:
Interest paid $ 4,165 $ 1,235
Income taxes paid $ 6,325 $ 2,803
During the six months ended October 23, 1999 and October 24, 1998, the Company
paid a total of $22,117 and $13,238, respectively, in cash representing the
aggregate of: 1) the initial down payment for purchase acquisitions, 2) earn-out
provisions and other purchase price adjustments relating to certain acquisitions
and 3) acquisition costs such as legal and accounting fees associated with
certain business combinations all of which related to business combinations that
were accounted for under the purchase method of accounting. The fair value of
the assets and liabilities at the date of acquisition and the impact of
recording the various earn-outs and acquisition costs are presented as follows:
Six Months Ended
---------------------------
October 23, October 24,
1999 1998
------------ -----------
Accounts receivable $ 5,021 $ 3,712
Inventories 943 1,764
Prepaid expenses and other current assets 633 87
Property and equipment 1,679 1,621
Intangible assets 19,627 9,043
Other assets 99
Short-term debt (601)
Accounts payable (3,386) (2,320)
Accrued compensation and other accrued liabilities (832) (669)
Long-term debt (1,066)
------------- -----------
Net assets acquired $ 22,117 $ 13,238
============= ===========
Noncash transactions:
o During the six months ended October 23, 1999, the Company accrued $4,833 as
additional purchase consideration for earn-outs.
o During the six months ended October 23, 1999, the Company recorded
additional paid-in capital of $74 related to the tax benefit of stock
options exercised.
o During the six months ended October 23, 1999, the Company sold one of its
subsidiaries and an associated building in exchange for notes receivable
totaling $4,690.
o During the six months ended October 23, 1999, the Company increased the
investment carrying value of its securities available for sale by recording
an unrealized holding gain in comprehensive income of $1,162.
o The accumulated other comprehensive loss was increased by $226 and $2,185
during the six months ended October 23, 1999 and October 24, 1998,
respectively, due to foreign currency translation adjustments resulting
from a devaluation in the Canadian dollar.
See accompanying notes to consolidated financial statements.
Page 6
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
- ---------------------------
Workflow Management, Inc. (the "Company" or "Workflow Management") is a Delaware
corporation formed by U.S. Office Products Company, also a Delaware corporation
("U.S. Office Products" or "USOP"), in connection with U.S. Office Products'
strategic restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,643 shares (the
"Distribution" or "Workflow Distribution") of the Company's common stock, par
value $.001 per share ("Company Common Stock"). Holders of U.S. Office Products'
common stock were not required to pay any consideration for the shares of the
Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date").
Workflow Management is a leading acquirer and integrator of graphic arts
companies, providing a variety of print and office consumables and related
management services to more than 30,000 businesses in the United States and
Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, GetSmart, designed to
minimize the costs of procuring, storing and using office consumables, and the
Fulfillment Division, which prints and produces envelopes, custom business
documents, commercial print, labels, packaging and direct mail LITERATURE.
Workflow Management employs approximately 2,800 persons and has 24 manufacturing
facilities in 10 states and 5 Canadian provinces, 27 distribution centers, 8
print-on-demand centers and 63 sales offices.
NOTE 2 - BASIS OF PRESENTATION
- -------------------------------
For periods prior to the Distribution Date, the consolidated financial
statements reflect the revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. The Company's statement
of income includes all of the related costs of doing business including an
allocation of certain general corporate expenses of U.S. Office Products
incurred prior to the Distribution Date which were not directly related to these
businesses. These allocations were based on a variety of factors, dependent upon
the nature of the costs being allocated. Management believes these allocations
were made on a reasonable basis.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. The
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 24, 1999.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "Fiscal 2000" and "Fiscal 1999" refer to the
Company's fiscal years ending April 29, 2000 and ended April 24, 1999,
respectively. The Company's fiscal year-end is defined as the last Saturday in
April. Certain reclassifications have been made to the prior period financial
statements to conform to the presentation for the three months and six months
ended October 23, 1999.
Page 7
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 3 - NOTES RECEIVABLE FROM OFFICERS
- ---------------------------------------
The Company extended secured loans to certain members of management for the
purchase, in the open market, of Company Common Stock by those individuals. The
notes are full recourse promissory notes bearing interest at 6.75% per annum and
are collateralized and secured with properly margined Company Common Stock
personally owned by those management members participating in the program.
Principal and interest are payable at maturity, September 1, 2000.
NOTE 4 - INVENTORIES
- --------------------
Inventories consist of the following:
October 23, April 24,
1999 1998
------------ -----------
Raw materials $ 12,011 $ 10,309
Work-in-process 4,139 2,123
Finished goods 20,916 23,720
------------ -----------
Total inventories $ 37,066 $ 36,152
============ ===========
NOTE 5 - LONG-TERM DEBT
- -----------------------
REVOLVING CREDIT FACILITY
The Company entered into a secured $200,000 revolving credit facility (the
"Credit Facility") underwritten and agented by Deutsche Bank during Fiscal 1999.
The Credit Facility matures on June 10, 2003 and is secured by substantially all
assets of the Company and is subject to terms and conditions typical of a credit
facility of such type and size, including certain financial covenants. Interest
rate options are available to the Company conditioned on certain leverage tests.
The maximum rate of interest is the prime rate from time to time in effect. The
Credit Facility is also available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants and total
availability under the facility. At October 23, 1999, the Company had $131,125
drawn against the Credit Facility at an average interest rate of 7.01%.
SUBORDINATED RELATED PARTY DEBT
During Fiscal 1999, the Company issued $4,878 in subordinated unsecured notes
with attached warrants (the "Subordinated Notes") to certain members of the
Company's management. The proceeds from the Subordinated Notes were used to
repurchase the Company's Common Stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. The indebtedness evidenced by the Subordinated Notes is
subordinate to all amounts outstanding under the Credit Facility. At October 23,
1999, no warrants had been issued on the Subordinated Notes.
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
INTEREST RATE PROTECTION
On May 17, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with Wachovia Bank, N.A. at no cost to the Company
whereby the Company exchanged its variable interest rate on $10,000 in Credit
Facility debt for a fixed LIBOR of 5.605%. Due to changes in market conditions
and increases in interest rates, the Swap increased in value and was sold by the
Company back to Wachovia Bank for $75 on July 22, 1999.
On July 22, 1999, the Company entered into an interest rate collar agreement
with Bank Boston, N.A. (the "Bank Boston Collar") for a $75 premium whereby the
Company established a LIBOR floor of 5.1% and a LIBOR cap of 7.0% on $25,000 of
its variable interest rate Credit Facility debt. The Bank Boston Collar became
effective on August 17, 1999 and will terminate on May 17, 2002.
On September 27, 1999, the Company entered into an interest rate collar
agreement with Bank of America (the "B of A Collar") at no cost to the Company
whereby the Company established a LIBOR floor of 5.5% and a LIBOR cap of 6.74%
on $25,000 of its variable interest rate Credit Facility debt. The B of A Collar
became effective on October 13, 1999 and will terminate on October 13, 2000.
NOTE 6 - STOCKHOLDERS' EQUITY
- -----------------------------
Changes in stockholders' equity during the six months ended October 23, 1999
were as follows:
Stockholders' equity balance at April 24, 1999 $ 64,433
Issuance of common stock in conjunction with:
Exercise of stock options, including tax benefits 360
Fees paid to outside members of the Company's board of directors 54
Comprehensive income 10,094
-------------
Stockholders' equity balance at October 23, 1999 $ 74,941
=============
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ------------ -----------
Net income $ 5,721 $ 2,712 $ 9,158 $ 2,920
Other comprehensive income:
Foreign currency translation adjustment 628 (766) (226) (2,185)
Unrealized gain on available-for-sale securities 1,162 1,162
------------ ------------ ------------ -----------
Comprehensive income $ 7,511 $ 1,946 $ 10,094 $ 735
============ ============ ============ ===========
Page 9
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 7 - SALE OF SUBSIDIARY
- ---------------------------
On September 24, 1999, the Company sold all of the outstanding capital stock of
Hano Document Printers, Inc. ("Hano") for $3,800 and recorded a pre-tax loss on
the sale of $318. Sale proceeds consisted of a $1,500 8% note due on November
30, 1999 ("Short Term Note") and a $2,300 8% note payable in interest only
installments until October 1, 2002 when principal and interest payments will be
made until the maturity date of September 1, 2009. The purchaser of Hano's stock
has paid off the Short Term Note. The notes are collateralized by all of the
assets of Hano and are subject to a limited guarantee with a third party up to a
maximum of $2,000. The Company also entered into an agreement with Hano to
sublease building space from Hano for $23 per month through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10 per month through August 2004,
then increasing to $15 per month through August 2009.
NOTE 8 - INVESTMENT IN COMMON STOCK
- -----------------------------------
In September 1999, the Company purchased 200 shares of a corporation's common
stock in one transaction at $12 per share. The Company sold 100 shares during
the three months ended October 23, 1999 and recorded a gain of $1,800. The
Company sold an additional 50 shares in November 1999. These shares have been
classified as trading securities. They are included in prepaid and other current
assets at their fair value of $1,800 on October 23, 1999, which resulted in the
Company reporting an unrealized holding gain of $1,200 as other income for the
three months ended October 23, 1999. The remaining 50 shares have been
classified as available-for-sale based on the Company's intent and ability to
retain the shares which are included in other assets at their fair value of
$1,800. The resulting unrealized holding gain of $1,200 is included in other
comprehensive income.
NOTE 9 - EARNINGS PER SHARE ("EPS")
- -----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's computations
of basic and diluted EPS for the periods presented in the consolidated statement
of income:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ------------ -----------
BASIC EARNINGS PER SHARE:
Net income $ 5,721 $ 2,712 $ 9,158 $ 2,920
============ ============ ============ ============
Weighted average number of
common shares outstanding 12,622 14,396 12,612 15,330
============ ============ ============ ============
Basic earnings per share $ 0.45 $ 0.19 $ 0.73 $ 0.19
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Net income $ 5,721 $ 2,712 $ 9,158 $ 2,920
============ ============ ============ ============
Weighted average number of:
Common shares outstanding 12,622 14,396 12,612 15,330
Effect of dilutive employee stock options* 821 841 105
------------ ------------ ------------ ------------
Total 13,443 14,396 13,453 15,435
============ ============ ============ ============
Diluted earnings per share $ 0.43 $ 0.19 $ 0.68 $ 0.19
============ ============ ============ ============
* The Company had additional employee stock options outstanding during the
periods presented that were not included in the computation of diluted earnings
per share because they were anti-dilutive.
NOTE 10 - BUSINESS COMBINATIONS
- -------------------------------
During the six month period ended October 23, 1999, the Company completed four
business combinations which were accounted for under the purchase method for an
aggregate purchase price of $22,117 consisting entirely of cash. The total
assets related to these acquisitions were $28,002, including goodwill and other
intangible assets of $19,627. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
During Fiscal 1999, the Company made twelve acquisitions accounted for under the
purchase method for an aggregate purchase price of $70,125, consisting entirely
of cash. The total assets related to these acquisitions were $88,379, including
intangible assets of $50,074. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
Page 10
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
All of the Company's acquisitions have earn-out provisions that could result in
additional purchase consideration payable in subsequent periods, ranging from
three to five years, dependent upon the future earnings of the acquired
companies. Additional purchase consideration of $1,095 was paid by the Company
in connection with these earn-out provisions during the six months ended October
23, 1999, and another $4,883 is accrued for these earn-out provisions at October
23, 1999. This additional consideration, whether paid or accrued, has been
reflected in the accompanying balance sheet as goodwill at October 23, 1999.
The following presents the unaudited pro forma results of operations of the
Company for the three and six month periods ended October 23, 1999 and October
24, 1998, as if the Strategic Restructuring Plan and the purchase acquisitions
completed since the beginning of Fiscal 1999 had been consummated at the
beginning of Fiscal 1999. The pro forma results of operations include certain
pro forma adjustments including the amortization of intangible assets and
reductions in executive compensation at the acquired companies of $20, $59, $381
and $1,739 for the three months ended October 23, 1999 and October 24, 1998, and
the six months ended October 23, 1999 and October 24, 1998, respectively:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ------------ -----------
Revenues $ 134,115 $ 131,956 $ 258,021 $ 262,223
Net income 5,704 4,612 9,205 8,508
Earnings per share:
Basic $ 0.45 $ 0.32 $ 0.73 $ 0.55
Diluted 0.42 0.32 0.68 0.55
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions and the Strategic Restructuring Plan occurred at
the beginning of Fiscal 1999 or the results that may occur in the future.
NOTE 11 - SEGMENT REPORTING
- ---------------------------
The Company's operating segments prepare separate financial information that is
evaluated regularly by the Company's Chief Financial Officer and the Company's
Chief Operating Officers. Operating segments of the Company are defined
primarily by the segment operation's core business function whether it is: a)
the procurement and subsequent distribution of product to the customer or b) the
sale of an internally manufactured product to the customer. The Company has
determined that its operating activities consist of two reportable operating
segments: the Company's Integrated Business Services Division and the Company's
Fulfillment Division.
Page 11
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company's Integrated Business Services Division represents those
subsidiaries of the Company that procure product, primarily print and office
consumables, and distribute it to customers through one of the Company's
distribution centers or directly from the product's manufacturer. The results of
the Integrated Business Services Division also include transactions with
customers utilizing the Company's proprietary GetSmart inventory and
distribution system. The Company's Fulfillment Division represents those
subsidiaries primarily engaged in the sale of products internally manufactured
at the Company. The Fulfillment Division provides envelopes, commercial print
products, custom forms and documents, annual reports, direct mail pieces,
specialty packaging, labels and advertising specialty products to its customers.
The Fulfillment Division also provides product to the Company's Integrated
Business Services Division for distribution to customers. Corporate expenses
include the costs of maintaining a corporate office. The Company does not
allocate corporate overhead or strategic restructuring plan costs by segment in
assessing performance.
OPERATING SEGMENTS
The following table sets forth information as to the Company's
reportable operating segments:
Three Months Ended Six Months Ended
---------------------------- --------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ----------- -----------
REVENUES:
Integrated Business Services Division $ 51,305 $ 29,298 $ 95,180 $ 58,266
Fulfillment Division 82,360 63,555 159,554 126,837
Intersegment (1,905) (2,753) (4,513) (4,517)
------------- ------------- ------------- ------------
Total $ 131,760 $ 90,100 $ 250,221 $ 180,586
============ ============ ============ ===========
OPERATING INCOME:
Integrated Business Services Division $ 5,045 $ 1,871 $ 8,636 $ 3,709
Fulfillment Division 6,829 5,213 13,039 9,682
Corporate (2,191) (1,565) (3,797) (6,354)
------------- ------------- ------------- ------------
Total $ 9,683 $ 5,519 $ 17,878 $ 7,037
============ ============ ============ ===========
October 23, April 24,
1999 1999
IDENTIFIABLE ASSETS (AT PERIOD END): ------------ -----------
Integrated Business Services Division $ 94,597 $ 64,190
Fulfillment Division 175,564 165,007
Corporate 16,634 9,375
------------ -----------
Total $ 286,795 $ 238,572
============ ===========
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's
operations in its different geographic segments:
Three Months Ended Six Months Ended
---------------------------- --------------------------
October 23, October 24, October 23, October 24,
1999 1998 1999 1998
------------ ------------ ----------- -----------
REVENUES:
United States $ 96,530 $ 59,759 $ 180,981 $ 119,541
Canada 35,230 30,341 69,240 61,045
------------ ------------ ------------ -----------
Total $ 131,760 $ 90,100 $ 250,221 $ 180,586
============ ============ ============ ===========
OPERATING INCOME:
United States $ 6,728 $ 2,837 $ 12,294 $ 2,043
Canada 2,955 2,682 5,584 4,994
------------ ------------ ------------ -----------
Total $ 9,683 $ 5,519 $ 17,878 $ 7,037
============ ============ ============ ===========
October 23, April 24,
1999 1999
IDENTIFIABLE ASSETS (AT PERIOD END): ------------ -----------
United States $ 227,740 $ 180,579
Canada 59,055 57,993
------------ -----------
Total $ 286,795 $ 238,572
============ ===========
NOTE 12 - SUBSEQUENT EVENTS
- ---------------------------
Subsequent to October 23, 1999, the Company's Board of Directors directed
management to (i) capitalize one of the Company's newly formed wholly-owned
subsidiaries, iGetSmart.com, Inc. ("iGetSmart"), with the assets necessary to
execute iGetSmart's e-commerce business plan, and (ii) proceed with an initial
public offering of iGetSmart common stock and subsequent tax free spin-off of
iGetSmart shares to the Company's stockholders.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "INTEND," "MAY," "WILL," "EXPECT" AND
SIMILAR EXPRESSIONS AS THEY RELATE TO WORKFLOW MANAGEMENT, INC. (THE "COMPANY"
OR "WORKFLOW MANAGEMENT") OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS OF THE IMPACT OF THE
YEAR 2000 ISSUE ON RESULTS OF OPERATIONS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS, WHICH ARE MADE ONLY AS OF
THE DATE HEREOF.
INTRODUCTION
Workflow Management, Inc. (the "Company" or "Workflow Management") is a Delaware
corporation formed by U.S. Office Products Company, also a Delaware corporation
("U.S. Office Products"), in connection with U.S. Office Products' strategic
restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,642,981 shares
(the "Distribution" or "Workflow Distribution") of the Company's common stock,
par value $.001 per share ("Company Common Stock"). Holders of U.S. Office
Products' common stock were not required to pay any consideration for the shares
of the Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date").
Workflow Management is a leading acquirer and integrator of graphic arts
companies, providing a variety of print and office consumables and related
management services to more than 30,000 businesses in the United States and
Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, GetSmart, designed to
minimize the costs of procuring, storing and using office consumables, and the
Fulfillment Division, which prints and produces envelopes, custom business
documents, commercial print, labels, packaging and direct mail LITERATURE.
Workflow Management employs approximately 2,800 persons and has 24 manufacturing
facilities in 10 states and 5 Canadian provinces, 27 distribution centers, 8
print-on-demand centers and 63 sales offices.
As used in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Fiscal 2000" and "Fiscal 1999" refer to the Company's
fiscal years ending April 29, 2000 and ended April 24, 1999, respectively. The
following discussion should be read in conjunction with the consolidated
historical financial statements, including the related notes thereto, appearing
elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's
audited consolidated financial statements, and notes thereto, for the fiscal
year ended April 24, 1999 included in the Company's Annual Report on Form 10-K.
Page 14
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 23, 1999 COMPARED TO THREE MONTHS ENDED
OCTOBER 24, 1998
Consolidated revenues increased 46.2%, from $90.1 million for the three months
ended October 24, 1998, to $131.8 million for the three months ended October 23,
1999. The Company's Integrated Business Services Division revenues increased by
$22.0 million or 75.1% and its Fulfillment Division revenues increased by $18.8
million or 29.6% when comparing the three months ended October 23, 1999 to the
three months ended October 24, 1998. These increases were primarily due to the
Company's business combinations consummated after October 24, 1998. Revenues for
the three months ended October 23, 1999, include revenues from sixteen companies
acquired in business combinations accounted for under the purchase method after
the beginning of the first quarter of Fiscal 1999 (the "Purchased Companies").
Revenues for the three months ended October 24, 1998, include revenues from one
of the Purchased Companies.
International revenues increased 16.1%, from $30.3 million, or 33.7% of
consolidated revenues, for the three months ended October 24, 1998, to $35.2
million, or 26.7% of consolidated revenues, for the three months ended October
23, 1999. International revenues consisted exclusively of revenues generated in
Canada and increased primarily due to one Canadian purchase acquisition
consummated during the fourth quarter of Fiscal 1999.
Gross profit increased 52.9%, from $25.1 million, or 27.9% of revenues, for the
three months ended October 24, 1998, to $38.4 million, or 29.2% of revenues, for
the three months ended October 23, 1999. The increase in gross profit was
primarily due to the Purchased Companies. The increase in gross profit as a
percentage of revenues was due to the Purchased Companies generating gross
profit at a higher percentage of revenues than historically recognized by the
Company.
Selling, general and administrative expenses increased 44.7%, from $19.5
million, or 21.6% of revenues, for the three months ended October 24, 1998, to
$28.2 million, or 21.4% of revenues, for the three months ended October 23,
1999. The increase in selling, general and administrative expenses was primarily
due to the Purchased Companies and the additional corporate overhead that was
incurred during the three months ended October 23, 1999. This increase was
partially offset by the benefits resulting from headcount reductions and cost
saving measures commenced by the Company during Fiscal 1999. The decrease in
selling, general and administrative expenses, as a percentage of revenues,
during the three months ended October 23, 1999, was primarily due to the above
mentioned headcount reductions and cost saving measures coupled with the
Purchased Companies expensing selling, general and administrative costs at a
lower percentage of revenue than historically recognized by the Company, due to
the elimination of overhead and duplication of duties at certain Purchased
Companies upon their acquisition by the Company.
Amortization expense increased $439,000 from $133,000 for the three months ended
October 24, 1998, to $572,000 for the three months ended October 23, 1999. This
increase was due exclusively to the increased number of acquisitions accounted
for under the purchase method that are included in the Company's results for the
three months ended October 23, 1999 versus the three months ended October 24,
1998.
Interest expense, net of interest income, increased 254.4%, from $741,000 for
the three months ended October 24, 1998, to $2.6 million for the three months
ended October 23, 1999. This increase in net interest expense was due to the
increased level of debt outstanding during the three months ended October 23,
1999 as a result of the Company using funds available under its Credit Facility
for acquisition purposes.
Page 15
On September 24, 1999, the Company sold all of the outstanding capital stock of
Hano Document Printers, Inc. ("Hano") for $3.8 million and recorded a pre-tax
loss on the sale of $318,000. Sale proceeds consisted of a $1.5 million 8% note
due on November 30, 1999 ("Short Term Note") and a $2.3 million 8% note payable
in interest only installments until October 1, 2002 when principal and interest
payments will be made until the maturity date of September 1, 2009. The
purchaser of Hano's stock has paid off the Short Term Note. The notes are
collateralized by all of the assets of Hano and are subject to a limited
guarantee with a third party up to a maximum of $2.0 million. The Company also
entered into an agreement with Hano to sublease building space from Hano for
$23,000 per month through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900,000 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10,000 per month through August
2004, then increasing to $15,000 per month through August 2009.
In September 1999, the Company purchased 200,000 shares of a corporation's
common stock in one transaction at $12 per share. The Company sold 100,000
shares during the three months ended October 23, 1999 and recorded a gain of
$1.8 million. The Company sold an additional 50,000 shares in November 1999.
These shares have been classified as trading securities. They are included in
prepaid and other current assets at their fair value of $1.8 million on October
23, 1999, which resulted in the Company reporting an unrealized holding gain of
$1.2 million as other income for the three months ended October 23, 1999. The
remaining 50,000 shares have been classified as available-for-sale based on the
Company's intent and ability to retain the shares which are included in other
assets at their fair value of $1.8 million. The resulting unrealized holding
gain of $1.2 million is included in other comprehensive income.
Other expense, net of other income, increased from $65,000 of net other income
for the three months ended October 24, 1998, to $31,000 of net other expense for
the three months ended October 23, 1999. Other income primarily represents the
net of gains and/or losses on sales of equipment and miscellaneous other income
and expense items.
Provision for income taxes increased from $2.1 million for the three months
ended October 24, 1998 to $4.0 million for the three months ended October 23,
1999, reflecting effective income tax rates of 44.0% and 40.9%, respectively.
During both periods, the effective income tax rates reflect the recording of tax
provisions at the federal statutory rate of 34.0%, plus appropriate state and
local taxes. In addition, the effective tax rates were increased to reflect the
incurrence of non-deductible goodwill amortization expense resulting from the
acquisitions of certain Purchased Companies. During the three months ended
October 23, 1999, the effective income tax rate was reduced due to the fact that
the marketable securities gains were taxed at a 35.0% rate.
SIX MONTHS ENDED OCTOBER 23, 1999 COMPARED TO SIX MONTHS ENDED
OCTOBER 24, 1998
Consolidated revenues increased 38.6%, from $180.6 million for the six months
ended October 24, 1998, to $250.2 million for the six months ended October 23,
1999. The Company's Integrated Business Services Division revenues increased by
$36.9 million or 63.4% and its Fulfillment Division revenues increased by $32.7
million or 25.8% when comparing the six months ended October 23, 1999 to the six
months ended October 24, 1998. These increases were primarily due to the
Company's business combinations consummated after October 24, 1998. Revenues for
the six months ended October 23, 1999, include revenues from sixteen of the
Purchased Companies. Revenues for the six months ended October 24, 1998 include
revenues from one of the Purchased Companies.
International revenues increased 13.4%, from $61.0 million, or 33.8% of
consolidated revenues, for the six months ended October 24, 1998, to $69.2
million, or 27.7% of consolidated revenues, for the six months ended October 23,
1999. International revenues consisted exclusively of revenues generated in
Canada and increased primarily due to one Canadian purchase acquisition
consummated during the fourth quarter of Fiscal 1999.
Page 16
Gross profit increased 47.6%, from $49.7 million, or 27.5% of revenues, for the
six months ended October 24, 1998, to $73.3 million, or 29.3% of revenues, for
the six months ended October 23, 1999. The increase in gross profit was
primarily due to the Purchased Companies. The increase in gross profit as a
percentage of revenues was due to the Purchased Companies generating gross
profit at a higher percentage of revenues than historically has been recognized
by the Company.
Selling, general and administrative expenses increased 41.1%, from $38.5
million, or 21.3% of revenues, for the six months ended October 24, 1998, to
$54.4 million, or 21.7% of revenues, for the six months ended October 23, 1999.
The increase in selling, general and administrative expenses was primarily due
to the Purchased Companies and the additional corporate overhead that was
incurred during the six months ended October 23, 1999. The additional overhead
was the result of the Company operating as a stand-alone public entity following
its spin-off from U.S. Office Products for the entire six months ended October
23, 1999, compared to only a portion of the six months ended October 24, 1998.
This increase was partially offset by the benefits resulting from headcount
reductions and cost saving measures commenced by the Company during Fiscal 1999.
The increase in selling, general and administrative expenses as a percentage of
revenues during the six months ended October 23, 1999 was primarily due to the
additional corporate overhead incurred during the period.
Amortization expense increased $753,000 from $266,000 for the six months ended
October 24, 1998, to $1.0 million for the six months ended October 23, 1999.
This increase was due exclusively to the increased number of acquisitions
accounted for under the purchase method that are included in the Company's
results for the six months ended October 23, 1999 versus the six months ended
October 24, 1998.
The Company incurred expenses of approximately $3.8 million during the six
months ended October 24, 1998 associated with U.S. Office Products' Strategic
Restructuring Plan. Under Generally Accepted Accounting Principles, the Company
was required to record a one-time, non-cash expense of approximately $3.0
million with a corresponding contribution to capital relating to the tender of
stock options by Workflow Management employees in U.S. Office Products' equity
tender offer at the Distribution Date. As a result of the Distribution, the
Company also incurred an additional $750,000 in transaction costs during the six
months ended October 24, 1998 relating to the Strategic Restructuring Plan for
legal, accounting and financial advisory services and various other fees.
Interest expense, net of interest income, increased 156.7%, from $1.9 million
for the six months ended October 24, 1998, to $4.8 million for the six months
ended October 23, 1999. This increase in net interest expense was due to the
increased level of debt outstanding during the six months ended October 23, 1999
as a result of the Company securing a revolving Credit Facility. Funds available
under the Credit Facility were used primarily to pay off the Company's debt to
U.S. Office Products at the Distribution Date and for acquisition purposes.
As discussed in the three months ended October 23, 1999 as compared to the three
months ended October 24, 1998 section, on September 24, 1999, the Company sold
all of the outstanding capital stock of Hano for $3.8 million and recorded a
pre-tax loss on the sale of $318,000.
Page 17
As discussed in the three months ended October 23, 1999 as compared to the three
months ended October 24, 1998 section, in September 1999, the Company sold
100,000 shares of an investment during the six months ended October 23, 1999 and
recognized realized gains and unrealized holding gains.
Other income, net of other expense, decreased from $47,000 of net other income
for the six months ended October 24, 1998, to $21,000 of net other income for
the six months ended October 23, 1999. Other income primarily represents the net
of gains and/or losses on sales of equipment and miscellaneous other income and
expense items.
Provision for income taxes increased from $2.3 million for the six months ended
October 24, 1998, to $6.6 million for the six months ended October 23, 1999,
reflecting effective income tax rates of 44.0% and 41.9%, respectively. During
both periods, the effective income tax rates reflect the recording of tax
provisions at the federal statutory rate of 34.0%, plus appropriate state and
local taxes. In addition, the effective tax rates were increased to reflect the
incurrence of non-deductible goodwill amortization expense resulting from the
acquisitions of certain Purchased Companies. During the six months ended October
23, 1999 the effective income tax rate was reduced due to the fact that the
marketable security gains were taxed at a 35.0% rate.
LIQUIDITY AND CAPITAL RESOURCES
At October 23, 1999, the Company had working capital of $76.7 million. The
Company's capitalization, defined as the sum of long-term debt, subordinated
related party debt and stockholders' equity, at October 23, 1999 was
approximately $215.5 million.
Workflow Management uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents are typically on hand as any excess cash would be used to pay down
the Company's revolving credit facility.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $10.0 million for new equipment and maintenance,
including any costs associated with compliance testing and technical upgrades to
ensure that the Company's computer systems are Year 2000 compliant. See "--Year
2000 Issue" below.
During the six months ended October 23, 1999, net cash used in operating
activities was $0.5 million. Net cash used in investing activities was $27.1
million, including $22.1 million used for acquisitions, $6.3 million used for
capital expenditures and $2.4 million used for the purchase of marketable
securities which were partially offset by $3.0 million generated from the sale
of certain securities. Net cash provided by financing activities was $27.0
million, which included $26.5 million in net borrowings by the Company on its
revolving credit facility to primarily pay for acquisitions.
During the six months ended October 24, 1998, net cash provided by operating
activities was $13.0 million. Net cash used in investing activities was $15.7
million, including $13.2 million used for acquisitions, $3.3 million used for
additions to property and equipment, $2.0 million used for the issuance of notes
receivable from officers, and $1.0 million used for a deposit on machinery which
were all partially offset by the collection of $3.7 million in notes receivable
from employees. Net cash used in financing activities was $3.6 million, which
included $36.1 million of cash paid to U.S. Office Products under its Strategic
Restructuring Plan which was partially offset by the Company's net borrowings of
$40.6 million and an $8.5 million capital contribution by U.S. Office Products.
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 27.7% of the Company's
total net sales for the six months ended October 23, 1999. As a result, Workflow
Management is subject to certain risks inherent in conducting business
internationally, including fluctuations in currency exchange rates. Changes in
exchange rates may have a significant effect on the Company's business,
financial condition and results of operations.
Page 18
As a result of the provisions of Section 355 of the Internal Revenue Code of
1986, as amended, and certain tax contribution agreements entered into by the
Company in connection with the Distribution, the Company may be subject to
constraints on its ability to issue additional shares of the Company's common
stock in certain transactions for two years following the Distribution Date. In
particular, if 50% or more, by vote or value, of the capital stock of Workflow
Management is acquired by one or more persons acting pursuant to a plan or
series of transactions that includes the Distribution, Workflow Management will
suffer significant tax liability. The Company will evaluate any significant
future issuance of capital stock to avoid the imposition of such tax liability.
The Company entered into a secured $200.0 million revolving credit facility (the
"Credit Facility") underwritten and agented by Deutsche Bank during Fiscal 1999.
The Credit Facility matures on June 10, 2003 and is secured by substantially all
assets of the Company and is subject to terms and conditions typical of a credit
facility of such type and size, including certain financial covenants. Interest
rate options are available to the Company conditioned on certain leverage tests.
The maximum rate of interest is the prime rate from time to time in effect. The
Credit Facility is also available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants and total
availability under the facility. At December 1, 1999, the Company had $125.0
million drawn against the Credit Facility at an average interest rate of 6.90%.
During Fiscal 1999, the Company issued $4.9 million in subordinated unsecured
notes with attached warrants (the "Subordinated Notes") to certain members of
the Company's management. The proceeds from the Subordinated Notes were used to
repurchase the Company's Common Stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. The indebtedness evidenced by the Subordinated Notes is
subordinate to all amounts outstanding under the Credit Facility. As of
December 1, 1999, no warrants had been issued on the Subordinated Notes.
Page 19
On May 17, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with Wachovia Bank, N.A. at no cost to the Company
whereby the Company exchanged its variable interest rate on $10.0 million in
Credit Facility debt for a fixed LIBOR of 5.605%. Due to changes in market
conditions and increases in interest rates, the Swap increased in value and was
sold by the Company back to Wachovia Bank for $75,000 on July 22, 1999.
On July 22, 1999, the Company entered into an interest rate collar agreement
with Bank Boston, N.A. (the "Bank Boston Collar") for a $75,000 premium whereby
the Company established a LIBOR floor of 5.1% and a LIBOR cap of 7.0% on $25.0
million of its variable interest rate Credit Facility debt. The Bank Boston
Collar became effective on August 17, 1999 and will terminate on May 17, 2002.
On September 27, 1999, the Company entered into an interest rate collar
agreement with Bank of America (the B of A Collar") at no cost to the Company
whereby the Company established a LIBOR floor of 5.5% and a LIBOR cap of 6.74%
on $25.0 million of its variable interest rate Credit Facility debt. The B of A
Collar became effective on October 13, 1999 and will terminate on October 13,
2000.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the Credit Facility will be sufficient
to meet the Company's liquidity requirements for its operations for the next
twelve months. However, the Company intends to pursue acquisitions, which are
expected to be funded through cash, stock or a combination thereof. There can be
no assurance that additional sources of financing will not be required during
the next twelve months or thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Workflow Management's envelope business is subject to seasonal influences from
year-end mailings. Both the Company's Integrated Business Services Division and
its Fulfillment Division are subject to seasonal influences of the potential
lower demand for office consumables during the summer months which coincide with
Workflow Management's fiscal quarters ending in July. As the Company continues
to complete acquisitions, it may become subject to other seasonal influences if
the businesses it acquires are seasonal.
Quarterly results also may be materially affected by the timing of acquisitions,
the timing and magnitude of costs related to such acquisitions, variations in
the prices paid by the Company for the products it sells, the mix of products
sold and general economic conditions. Moreover, the operating margins of
companies acquired may differ substantially from those of Workflow Management,
which could contribute to further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during the three-month and six-month periods ended October
23, 1999 and October 24, 1998, respectively.
Page 20
YEAR 2000 ISSUE
Many existing computer programs were designed and developed without considering
the impact of the upcoming change in the century and consequently use only two
digits to identify a year in the date field. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000 (the
"Year 2000 Issue" or "Year 2000").
The Company has assessed the potential impact of the Year 2000 Issue on its
systems and the systems of major vendors, major customers and third party
service providers, and has commenced a process to remediate any non-compliance
of its systems. With respect to its internal systems, the potential Year 2000
effects extend beyond the Company's information technology systems to its
manufacturing systems and physical facilities. The Company has implemented a
three-step approach to address Year 2000 which involves the following phases:
(i) Identification, (ii) Assessment and (iii) Remediation and Testing. The
Company created a committee chaired by the Company's Chief Financial Officer and
made up of its internal audit staff, Company key management and in-house
management information systems (MIS) personnel to monitor progress of the Year
2000 Issue, including particularly assessment and remediation. The Year 2000
committee reports results of the assessment and remediation phases directly to
the Company's audit committee which is comprised of two outside members from the
Company's board of directors.
The Company completed the identification phase of the Year 2000 Issue and has
inventoried all internal systems, including information technology (IT) and
non-IT systems, hardware, software and its proprietary software systems and
services material to its operations that are potentially susceptible to Year
2000 problems. The Company also assessed compliance and prepared plans for
completing remediation. In addition, the Company prepared and distributed
vendor, supplier and customer compliance surveys to ascertain the Year 2000
readiness of its key suppliers and business partners.
The assessment phase involves analyzing the internal systems, vendors, suppliers
and customers recognized in the identification phase, assessing which of the
Company's systems and key business partners are Year 2000 compliant, and
planning for remediation of non-compliant systems. The Company has evaluated its
internal systems and has received a majority of the third-party compliance
surveys distributed in the identification phase.
Based upon the assessment phase, the Company believes that the majority of its
non-IT systems, including the Company's printing presses, security systems, time
clocks and manufacturing facilities, are Year 2000 compliant. The Company
believes that there are no significant uses of micro-processing oriented
equipment within its manufacturing systems and that the cost to address any
components deemed to be non-compliant is not material. Based on information
provided by vendors and suppliers in the compliance surveys, the Company also
believes that the vast majority of its vendors and customers who have responded
to the Company's compliance surveys are Year 2000 compliant. The Company intends
to work directly with its key vendors, suppliers and distributors to avoid any
business interruptions due to the Year 2000 Issue. For major third-parties with
known Year 2000 compliance issues, contingency plans have been developed and
were fully implemented by the end of November 1999.
Page 21
In the remediation and testing phase, the Company deployed plans for
elimination, upgrade, replacement or modification of non-compliant systems and
test compliance. The Company completed the Year 2000 conversion and testing of
its proprietary distribution software system (known as GetSmart) in November
1998 and completed the Year 2000 conversion and testing of its other proprietary
software system and related services (known as Informa) in December 1998. The
Company is in the final stages of completion regarding the remediation and
testing phase for its other systems and believes that substantially all of its
systems are Year 2000 compliant.
If the Company and its customers, suppliers and vendors were not Year 2000
compliant by January 1, 2000, the most reasonably likely worst case scenario
would be a temporary shutdown or cessation of distribution or manufacturing
operations at one or more of the Company's facilities and a temporary inability
of the Company to timely process customer orders and deliver products to
customers. Any such shutdown could have a material adverse effect on the
Company's results of operations, liquidity and financial position. The Company's
systems are not currently uniform across all operations and the Company does not
expect uniformity by the end of 1999. Therefore, the Company does not anticipate
system wide failures as a result of the Year 2000 Issue. The Company's
individual business units and Year 2000 committees have identified and
considered various contingency options, including identification of alternate
suppliers, vendors and service providers, and manual alternatives to systems
operations, which would allow the Company to minimize the risks of any
unresolved Year 2000 problems on their operations and to minimize the effect of
any unforeseen Year 2000 failures.
The Company estimates that it will incur approximately $6.0 million of
incremental expenses in connection with the Year 2000 Issue, of which
substantially all of the $6.0 million has been incurred to date.
While costs associated with the Year 2000 Issue may be material in one or more
of the Company's fiscal quarters, the Company does not believe that the Year
2000 Issue will have a material adverse effect on the long-term results of
operations, liquidity or financial position of the Company. However, no
assurance can be given that unforeseen circumstances will not arise as the
Company addresses the Year 2000 Issue. Specific factors that may cause the
Company to experience unanticipated problems with respect to the Year 2000 Issue
include the availability and cost of adequately trained personnel, the ability
to locate and correct all affected computer code, and the timing and success of
Year 2000 efforts by the Company's customers, suppliers and vendors.
Page 22
FACTORS AFFECTING THE COMPANY'S BUSINESS
RISKS ASSOCIATED WITH ACQUISITIONS AND DIVESTITURES
One of the Company's strategies is to increase its revenues and the markets it
serves through the acquisition of additional graphic arts businesses. There can
be no assurance that suitable candidates for acquisitions can be identified or,
if suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all. In addition, the Company may determine that its
business interests would be best served by selling certain subsidiaries, assets
or operations to third parties. Accordingly, the Company has in the past
considered, and will continue to consider in the future, divestitures of certain
operations or assets to the extent management believes that such transactions
could improve the Company's overall financial condition and/or future prospects.
Any such divestitures would reduce the Company's revenues. Divestitures could
also (i) eliminate certain products or product lines that the Company has
historically offered to its customers and (ii) reduce or eliminate the Company's
presence in certain geographic markets.
Integration of acquired companies may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on its reported operating
results (including those adverse short-term effects caused by severance payments
to employees of acquired companies, restructuring charges associated with the
acquisitions and other expenses associated with a change of control, as well as
non-recurring acquisition costs including accounting and legal fees, investment
banking fees, recognition of transaction-related obligations and various other
acquisition-related costs); diversion of management's attention; difficulties
with retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. Furthermore, although Workflow Management conducts due
diligence and generally requires representations, warranties and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of Workflow
Management.
Workflow Management may in the future seek to finance its acquisitions by using
shares of Company Common Stock. If the Company Common Stock does not maintain a
sufficient market value, if the price of Company Common Stock is highly
volatile, or if potential acquisition candidates are otherwise unwilling to
accept Company Common Stock as part of the consideration for the sale of their
businesses, Workflow Management may be required to use more of its cash
resources or more borrowed funds in order to initiate and maintain its
acquisition program. If Workflow Management does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. The Company does not anticipate
utilizing Company Common Stock for acquisition purposes during the current
fiscal year.
Page 23
Approximately $87.5 million, or 30.5% of the Company's total assets at October
23, 1999, represents intangible assets, the significant majority of which is
goodwill. Goodwill represents the excess of cost over the fair market value of
net assets acquired in business combinations accounted for under the purchase
method. The Company amortizes goodwill on a straight line method over a period
of 40 years with the amount amortized in a particular period constituting a
non-cash expense that reduces the Company's net income. The Company will be
required to periodically evaluate the recoverability of goodwill by reviewing
the anticipated undiscounted future cash flows from the operations of the
acquired companies and comparing such cash flows to the carrying value of the
associated goodwill. If goodwill becomes impaired, Workflow Management would be
required to write down the carrying value of the goodwill and incur a related
charge to its income. A reduction in net income resulting from the amortization
or write down of goodwill could have a material and adverse impact upon the
market price of the Company Common Stock.
RISKS ASSOCIATED WITH CANADIAN OPERATIONS
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 27.7% and 32.2% of the
Company's total net sales in the six months ended October 23, 1999 and the
fiscal year ended April 24, 1999, respectively. As a result, Workflow Management
is subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Management is also
subject to risks associated with the imposition of protective legislation and
regulations, including those resulting from trade or foreign policy. In
addition, because of the Company's Canadian operations, significant revenues and
expenses are denominated in Canadian dollars. Changes in exchange rates may have
a significant effect on the Company's business, financial condition and results
of operations. Workflow Management does not currently engage in currency hedging
transactions.
For additional risk factors, refer to the Company's Annual Report on Form 10-K
for the year ended April 24, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial instruments include cash, accounts receivable, accounts
payable and long-term debt. Market risks relating to the Company's operations
result primarily from changes in interest rates. The Company's borrowings are
primarily dependent upon LIBOR rates. The estimated fair value of the Company's
long-term debt approximated its carrying value at October 23, 1999.
The Company does not hold or issue derivative financial instruments for trading
purposes. To manage interest rate risk on the variable rate borrowings under the
Credit Facility, the Company entered into interest rate collar agreements on
July 22, 1999 and September 27, 1999. For a specified period, these interest
rate collars have the effect of mitigating fluctuations in the Credit Facility's
variable base interest rate by establishing an interest rate floor and an
interest rate cap the Company will pay interest on the aggregate $50.0 million
notional principal amount established in the collars. As a result, while these
hedging arrangements are structured to reduce the Company's exposure to interest
rate increases, they also limit the benefit the Company might otherwise have
received from any interest rate decreases. These swaps will be cash settled
quarterly, with interest expense adjusted for amounts paid or received.
Page 24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Workflow Management, Inc. held its 1999 Annual Meeting of Stockholders on
September 9, 1999. At the Annual Meeting, the following matters were acted upon
by the stockholders:
1. Election of Directors. The following persons were elected as directors to
serve a one year term, with the vote For and Withheld indicated below:
Director For Withheld
- -------- --- --------
Thomas A. Brown, Sr. 11,201,050 17,287
Thomas B. D'Agostino, Sr. 11,201,051 17,286
Thomas B. D'Agostino, Jr. 11,201,044 17,293
Steve R. Gibson 11,201,050 17,287
Gus J. James, II. 11,201,045 17,292
James J. Maiwurm 11,199,947 18,390
Roger J. Pearson 11,201,050 17,287
F. Craig Wilson 11,201,025 17,312
2. Approval of the Workflow Management, Inc. 1999 Employee Stock Purchase
Plan.
For Against Abstain
- --- ------- -------
10,779,669 419,716 18,952
3. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the 2000 fiscal year.
For Against Abstain
- --- ------- -------
10,925,983 280,303 12,051
ITEM 5. OTHER INFORMATION.
The Company has formed a wholly owned subsidiary named iGetSmart.com,
Inc. ("iGetSmart"). Through the use of the Company's iGetSmart electronic
inventory management system, iGetSmart will conduct e-commerce business that is
currently conducted within the Company's Integrated Business Services Division.
The Company's Board of Directors has directed management to (i) capitalize
iGetSmart with the assets necessary to execute iGetSmart's business plan, and
(ii) proceed with an initial public offering of iGetSmart common stock and
subsequent tax free spin-off of iGetSmart shares to the Company's stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
11.1 Statement regarding computation of net income per share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
NONE.
Page 25
SIGNATURES
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.
WORKFLOW MANAGEMENT, INC.
December 7, 1999 By: /s/ Thomas B. D'Agostino
----------------------- --------------------------
Date Thomas B. D'Agostino
Chairman of the Board, Chief Executive
Officer, President, Director (Principal
Executive Officer)
December 7, 1999 By: /s/ Steve R. Gibson
----------------------- -------------------
Date Steve R. Gibson
Executive Vice President, Chief Financial
Officer, Treasurer, Secretary (Principal
Financial Officer and Principal
Accounting Officer)
Page 26