AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WORKFLOW GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 2759 06-1507104
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
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276 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
(212) 539-0301
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL B. FELDMAN
CHIEF FINANCIAL OFFICER
WORKFLOW GRAPHICS, INC.
3701 EAST VIRGINIA BEACH BLVD.
NORFOLK, VIRGINIA 23502
(757) 455-8001
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------------
WITH A COPY TO:
GEORGE P. STAMAS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED TO BE REGISTERED PER SHARE (2) OFFERING PRICE FEE
Common Stock, par value $.001 per share, to
be distributed to holders of U.S. Office
Products Company common stock.............. 100,000,000(1) $.347 $34,719,000 $10,243
(1) Approximate number of shares of Workflow Graphics, Inc. common stock
expected to be distributed based upon an assumed distribution ratio of one
share of Workflow Graphics, Inc. common stock for every one share of U.S.
Office Products Company common stock held by each stockholder of U.S. Office
Products Company on the record date for the distribution. The actual
distribution ratio will be determined prior to effectiveness of this
Registration Statement, and is expected to be less than one share of
Workflow Graphics, Inc. common stock for every one share of U.S. Office
Products Company common stock.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act based on a book value
of $34,719,000 as of October 25, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED FEBRUARY 19, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE DISTRIBUTED NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS INFORMATION STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
INFORMATION STATEMENT/PROSPECTUS
WORKFLOW GRAPHICS, INC.
DISTRIBUTION OF UP TO SHARES OF COMMON STOCK OF
WORKFLOW GRAPHICS, INC. TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS COMPANY
This Information Statement/Prospectus is being furnished by U.S. Office
Products Company ("U.S. Office Products") in connection with the distribution to
its stockholders of the stock of Workflow Graphics, Inc. ("Workflow Graphics" or
the "Company"). Workflow Graphics is a Delaware corporation formed by U.S.
Office Products that will own substantially all the assets of, and will be
reponsible for substantially all the liabilities associated with, U.S. Office
Products' Print Management Division. Pursuant to this distribution (the
"Workflow Distribution" or the "Distribution"), all of the issued and
outstanding shares of the common stock, $.001 par value per share, of Workflow
Graphics (the "Company Common Stock") will be distributed to holders of record
as of the close of business on , 1998 (the "Record Date") of the
common stock, par value $.001 per share, of U.S. Office Products ("U.S. Office
Products Common Stock"). Each such holder will receive one share of Company
Common Stock for each shares of U.S. Office Products Common Stock held on
the Record Date. Fractional shares will be aggregated into whole shares of
Company Common Stock and sold on the open market by the Distribution Agent (as
defined herein). The proceeds of such sales will be distributed to holders who
otherwise would be entitled to receive fractional shares. See "The Workflow
Distribution--General."
Holders of U.S. Office Products Common Stock will not be required to pay any
consideration for the shares of Company Common Stock they receive in the
Workflow Distribution. There is no current public trading market for the Company
Common Stock. The Company intends to seek approval for quotation of the shares
of Company Common Stock under the symbol WORK on the National Market System of
the Nasdaq Stock Market upon issuance, but there is no assurance that such
approval will be obtained or that an active trading market will develop for the
Company Common Stock following the Workflow Distribution.
The Workflow Distribution is an element of a comprehensive restructuring
plan (the "Strategic Restructuring Plan") approved by the Board of Directors of
U.S. Office Products on January 12, 1998. The principal elements of the
Strategic Restructuring Plan are: (1) a self-tender offer by U.S. Office
Products (the "Tender Offer") to purchase 37,037,037 shares of U.S. Office
Products Common Stock at $27.00 per share and the incurrence of debt to pay a
portion of the purchase price in the Tender Offer; (2) after acceptance of
shares in the Tender Offer, the pro rata distribution to U.S. Office Products
stockholders of shares of four companies that will conduct U.S. Office Products'
current print management, technology solutions, educational supplies and
corporate travel services businesses (the "Distributions"); and (3) the sale to
an affiliate ("CD&R") of Clayton, Dubilier & Rice, Inc. of equity interests in
U.S. Office Products (the "Equity Investment") following acceptance of shares in
the Tender Offer and the Record Date for the Distributions. In addition to this
Information Statement/Prospectus, U.S. Office Products is distributing a Tender
Offer Statement regarding the Tender Offer and a Proxy Statement regarding
stockholder approval of the issuance of securities in the Equity Investment. See
"Additional Information."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, STOCKHOLDERS SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 6.
THIS INFORMATION STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
ABOUT BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND
OTHER MATTERS. IN ADDITION, WHEN USED IN THIS INFORMATION STATEMENT/PROSPECTUS,
THE WORDS "INTENDS TO," "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
INVOLVE MANY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND
UNCERTAINTIES DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 6.
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THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE
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THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES.
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THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS FEBRUARY , 1998
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (including exhibits, schedules and
amendments thereto, the "Company Form S-1") pursuant to the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Company Common
Stock. This Information Statement/Prospectus, while forming a part of the
Company Form S-1, does not contain all of the information set forth in the
Company Form S-1. Reference is hereby made to the Company Form S-1 for further
information with respect to the Company and the securities to be distributed to
the U.S. Office Products stockholders in the Workflow Distribution. Statements
contained herein concerning the provisions of documents filed as exhibits to the
Company Form S-1 are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
The Company Form S-1 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates, or on the Internet at http://www.sec.gov.
Following the Workflow Distribution, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the SEC that will be available for
inspection and copying at the SEC's public reference facilities referred to
above. Copies of such material can be obtained by mail at prescribed rates by
writing to the Public Reference Branch of the SEC at the address referred to
above.
Additional information regarding the Strategic Restructuring Plan and the
Company may be found in reports, proxy statements and other information filed by
U.S. Office Products with the SEC, including U.S. Office Products Tender Offer
Statement on Schedule 13E-4 filed on , 1998 and U.S. Office Products
Proxy Statement filed on , 1998.
The Company intends to furnish its stockholders annual reports containing
financial statements audited by its independent auditor. The Company does not
intend to furnish its stockholders quarterly reports.
Questions concerning the Workflow Distribution should be directed to Mark D.
Director, Chief Administrative Officer, Secretary and General Counsel of U.S.
Office Products, or Donald H. Platt, Senior Vice President, Chief Financial
Officer and Treasurer of U. S. Office Products, at (202) 339-6700. After the
Workflow Distribution, holders of Company Common Stock having inquiries related
to their investment in the Company should contact Michael B. Feldman, Chief
Financial Officer of Workflow Graphics, at (757) 455-8001.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
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Until , 1998 (the expiration of the twenty-fifth calendar day
following the Workflow Distribution), all dealers effecting transactions in
registered securities, whether or not participating in this distribution, may be
required to deliver an Information Statement/Prospectus.
TABLE OF CONTENTS
PAGE
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SUMMARY.................................................................................................... 1
RISK FACTORS............................................................................................... 6
THE WORKFLOW DISTRIBUTION.................................................................................. 15
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, WORKFLOW GRAPHICS
AND THE OTHER SPIN-OFF COMPANIES AFTER THE DISTRIBUTIONS................................................. 23
DIVIDEND POLICY............................................................................................ 25
CAPITALIZATION............................................................................................. 26
SELECTED FINANCIAL DATA.................................................................................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF WORKFLOW
GRAPHICS................................................................................................. 29
INDUSTRY OVERVIEW.......................................................................................... 35
BUSINESS................................................................................................... 36
MANAGEMENT OF WORKFLOW GRAPHICS............................................................................ 43
RELATED PARTY TRANSACTIONS................................................................................. 48
PRINCIPAL STOCKHOLDERS OF WORKFLOW GRAPHICS................................................................ 49
DESCRIPTION OF WORKFLOW GRAPHICS CAPITAL STOCK............................................................. 50
EXPERTS.................................................................................................... 52
LEGAL MATTERS.............................................................................................. 52
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD READ THE INFORMATION STATEMENT/
PROSPECTUS IN ITS ENTIRETY. UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO
(I) U.S. OFFICE PRODUCTS AND THE COMPANY (OR WORKFLOW GRAPHICS) SHALL INCLUDE
THEIR RESPECTIVE SUBSIDIARIES, AND (II) THE COMPANY (OR WORKFLOW GRAPHICS) PRIOR
TO THE DISTRIBUTION DATE SHALL REFER TO THE PRINT MANAGEMENT DIVISION OF U.S.
OFFICE PRODUCTS.
THE COMPANY
Workflow Graphics, Inc. (the "Company" or "Workflow Graphics") is an
integrated graphic arts company providing documents, envelopes and commercial
printing to more than 22,000 businesses in the United States and Canada. The
Company also offers various print and facilities management services which allow
customers to realize cost savings by outsourcing non-core operations, as well as
design services and workflow analysis. Drawing on its position in the industry
and its experience in completing acquisitions, the Company seeks to become a
leading consolidator in the highly fragmented graphic arts industry. The Company
has grown primarily as a result of acquisitions to $358 million in revenues for
the twelve months ended October 25, 1997, on a pro forma basis. Workflow
Graphics intends to continue to pursue an aggressive acquisition strategy to
extend its geographic scope and market penetration, and to increase sales to
existing customers by cross-marketing documents, envelopes and commercial
printing.
Workflow Graphics offers a full range of printed products which are either
produced by the Company or procured from one of the Company's more than 3,500
vendors. The Company's product line includes: (i) documents, such as custom
invoices, purchase orders, checks and labels; (ii) envelopes, for applications
such as credit card solicitations, annual reports, direct mail and airline
tickets; and (iii) commercial printing, such as product and corporate brochures,
personalized direct mail literature, catalogs, directories and digital imaging.
Approximately 56.2% of the Company's revenues are derived from products
purchased by the Company for distribution, and 43.8% are derived from products
manufactured by it. The Company's manufacturing base, combined with its
extensive vendor network and distribution capability, gives the Company broad
flexibility to meet businesses' demand for printed products.
The Company also provides customers with print management services that are
designed to control the costs of procuring, storing and using graphic arts in
their business operations. Many of the Company's customers are attempting to
reduce their overhead and direct costs by focusing on core competencies and by
outsourcing non-core operations to specialists. As an outsourcing specialist,
Workflow Graphics enables its customers to reduce costs and improve control by
soliciting competitive bids, establishing more efficient inventory levels and
order quantities, and consolidating requisitions, production and deliveries. The
Company also performs design and procurement services for its customers. The
Company does not charge a separate fee for its management services, but instead
tailors its product pricing to reflect the services provided. The Company has
developed its GetSmart-TM- and Informa-TM- transaction and information systems
to support these services and the Company's sales of printed products. In order
to meet growing demand, Workflow Graphics plans to continue to expand its
product lines and services, and to promote its print and facilities management
services, which allow customers to outsource the management of printed products.
The Company intends to capitalize on consolidation opportunities in three
segments of the North American graphic arts industry: United States printed
products, United States envelopes, and Canadian printed products. The Company
plans to expand into targeted markets, focusing on opportunities that complement
and complete its product line and service offerings. As part of this strategy,
Workflow Graphics intends to acquire established, high-quality local and
regional companies. The Company plans to leverage newly acquired companies'
customer relationships with GetSmart-TM- and Informa-TM- and its full offering
of print and facilities management services. Workflow Graphics also plans to
grow internally by developing new products, cross-marketing its products and
implementing its transaction and information systems throughout the Company.
Workflow Graphics was formed on February 13, 1998. U.S. Office Products
Company ("U.S. Office Products") acquired SFI Corp. ("SFI") and a related
company, Hano Document Printers, Inc. ("Hano"), on January 24, 1997. On April
25, 1997, U.S. Office Products acquired United Envelope Co., Inc. ("United"),
Rex Envelope Co., Inc. ("Rex"), Huxley Envelope Corporation ("Huxley") and
Pocono Envelope Corporation ("Pocono"). On April 26, 1997, U.S. Office Products
acquired Data Business Forms Limited ("DBF"). When U.S. Office Products
determined to separate non-core businesses from its core operations as part of
the Strategic Restructuring Plan (as defined herein), SFI and United were
converted into limited liability companies whose sole member and equity owner is
the Company, the shares of Rex, Huxley and Pocono were transferred to United,
and the shares of Hano and DBF were transferred to the Company. Workflow
Graphics has approximately 350 full-time salespeople, of whom approximately 50%
have been with the Company more than five years. Senior management averages more
than 20 years with the Company. The principal executive offices of the Company
are located at 276 Park Avenue South, New York, New York 10010, although the
Company intends to relocate these offices to Palm Beach, Florida. Workflow
Graphics' telephone number is (212) 539-0301.
BACKGROUND OF THE WORKFLOW DISTRIBUTION
THE DISTRIBUTION............. Shares of common stock, par value $.001 per share, of the Company (the
"Company Common Stock") will, subject to certain conditions, be
distributed to the stockholders of record of U.S. Office Products (the
"Workflow Distribution" or the "Distribution") on , 1998 (the
"Record Date"). The Workflow Distribution is part of a comprehensive
restructuring plan (the "Strategic Restructuring Plan") that U.S. Office
Products Board of Directors adopted on January 12, 1998. The principal
elements of the Strategic Restructuring Plan are:
- Pursuant to a self-tender offer, U.S. Office Products will
purchase 37,037,037 shares of its Common Stock, $.001 par value
("U.S. Office Products Common Stock"), or approximately 28% of
the outstanding shares of U.S. Office Products Common Stock, at
$27.00 per share (the "Tender Offer") and will incur additional
indebtedness to finance a substantial portion of the purchase
price of such shares.
- After acceptance of shares in the Tender Offer, U.S. Office
Products will distribute to U.S. Office Products stockholders
the shares of four separate companies: Paradigm Concepts, Inc.,
Workflow Graphics, School Specialty, Inc., and TDOP, Inc.
(collectively, the "Spin-Off Companies"). The distributions of
the shares of the Spin-Off Companies are referred to in this
Information Statement/Prospectus as the "Distributions." The
Spin-Off Companies will hold U.S. Office Products' current
techology solutions, print management, educational supplies and
corporate travel services businesses, respectively.
- Following the Record Date, an affiliate ("CD&R") of Clayton,
Dubilier & Rice, Inc., a private investment firm, will acquire
U.S. Office Products Common Stock and warrants to purchase
additional U.S. Office Products Common Stock for $270.0 million
(the "Equity Investment"). CD&R will not acquire any interests
in the Spin-Off Companies.
U.S. Office Products will retain its North American Office Products Group
(which includes the office supply, office furniture, and office coffee and
beverage services businesses), Mail Boxes, Etc., its New Zealand and
Australia operations and its 49% interest in Dudley Stationery Limited (a
U.K. contract stationer).
2
REASONS FOR THE The Distributions are intended to separate the Spin-Off Companies from
DISTRIBUTIONS................ U.S. Office Products' other businesses so that each can:
- adopt strategies and pursue objectives that are appropriate to
its respective industry;
- pursue an independent acquisition program that allows for a
more focused use of resources and, where stock is used as
consideration, provide stock of a public company that is in the
same industry as the businesses being acquired;
- be recognized by the financial community as a distinct business
that can be evaluated more readily and compared more easily to
industry peers; and
- implement more focused incentive compensation packages that
respond to specific industry and market conditions and enhance
employee retention objectives.
The Distributions are also integral to the objectives of the Equity
Investment, which is conditioned on completion of all of the
Distributions. See "The Workflow Distribution--Reasons for the
Distribution."
SHARES TO BE DISTRIBUTED..... Based on the number of shares of U.S. Office Products Common Stock
outstanding on , 1998, less 37,037,037 shares to be repurchased in
the Tender Offer, approximately shares of the Company Common Stock
will be distributed to stockholders of U.S. Office Products in the
Workflow Distribution. The number of shares to be distributed could be
greater if additional shares of U.S. Office Products Common Stock are
issued prior to the Record Date pursuant to outstanding convertible debt
securities or stock options of U.S. Office Products.
DISTRIBUTION RATIO........... Each U.S. Office Products stockholder will receive one share of Company
Common Stock for every shares of U.S. Office Products Common Stock
held on the Record Date.
FRACTIONAL SHARE INTERESTS... Fractional share interests will be aggregated and sold by the Distribution
Agent and the cash proceeds will be distributed to those U.S. Office
Products stockholders entitled to a fractional interest. See "The Workflow
Distribution-- General."
RECORD DATE.................. , 1998.
DISTRIBUTION DATE............ Certificates representing shares of the Company Common Stock will be
mailed to U.S. Office Products stockholders on or about , 1998.
DISTRIBUTION AGENT...........
TAX CONSEQUENCES............. U.S. Office Products will receive an opinion of counsel that for U.S.
federal income tax purposes the receipt of the Company Common Stock by
U.S. Office Products stockholders should be tax-free to U.S. Office
Products and the U.S. Office Products stockholders. See "The Workflow
Distribution--U.S. Federal Income Tax Consequences of the Workflow
Distribution."
3
ARRANGEMENTS AMONG U.S.
OFFICE PRODUCTS, WORKFLOW
GRAPHICS AND THE OTHER SPIN-
OFF COMPANIES AFTER THE
DISTRIBUTIONS................ Workflow Graphics, U.S. Office Products and the other Spin-Off Companies
will enter into an agreement (the "Distribution Agreement") in connection
with the Distribution pursuant to which, among other things, (i) equity
interests in the U.S. Office Products subsidiaries that engage in the
print management business will be transferred to Workflow Graphics, (ii)
liabilities will be allocated among Workflow Graphics, U.S. Office
Products and the other Spin-Off Companies, and (iii) Workflow Graphics,
U.S. Office Products and the other Spin-Off Companies will indemnify one
another for liabilities assumed under the Distribution Agreement and
certain other liabilities.
Workflow Graphics and U.S. Office Products will also enter into an
agreement (the "Tax Allocation Agreement") (i) allocating to Workflow
Graphics responsibility for its share of U.S. Office Products'
consolidated income tax liability for the years that it was included in
U.S. Office Products' consolidated federal income tax returns, (ii)
sharing certain state, local and foreign taxes, and (iii) providing (a)
for indemnification by Workflow Graphics for certain taxes if they are
assessed against U.S. Office Products as a result of the Distributions,
and (b) joint and several indemnification by Workflow Graphics and the
other Spin-Off Companies for such taxes resulting from certain acts taken
by Workflow Graphics or any of the other Spin-Off Companies. The liability
to U.S. Office Products for taxes resulting from such acts will be
allocated among the Spin-Off Companies pursuant to a separate agreement
(the "Tax Indemnification Agreement"). As a consequence, Workflow Graphics
will be primarily liable for taxes resulting from acts taken by Workflow
Graphics and liable (subject to indemnification by the other Spin-Off
Companies) for any taxes resulting from acts taken by the other Spin-Off
Companies.
Workflow Graphics, U.S. Office Products and the other Spin-Off Companies
will also enter into an agreement (the "Employee Benefits Agreement")
relating to the allocation of assets, liabilities and responsibilities
with respect to employee benefit plans and programs and certain related
matters. See "Arrangements Among U.S. Office Products, Workflow Graphics
and the Other Spin-Off Companies After the Distributions."
SUMMARY RISK FACTORS
In reviewing this Information Statement/Prospectus, stockholders should
carefully consider the matters described under the heading "Risk Factors"
beginning on p. 6, including, among others, risks associated with (i) the
absence of a prior trading market for shares of Company Common Stock, (ii) the
fact that the Company has not operated as a stand-alone entity, separate from
U.S. Office Products, (iii) dependence upon acquisitions for further growth,
(iv) integrating acquisitions and acquisition financing, (v) conflicts of
interest resulting from the fact that (a) the Distribution Agreement is not the
result of arms'-length negotiation and (b) stock options are being issued to
certain officers and directors of the Spin-Off Companies in connection with the
Distributions, (vi) the tax consequences of the Distributions and (vii)
limitations on equity offerings and the use of Workflow Graphics capital stock
in acquisitions.
4
SUMMARY FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL
YEAR ENDED
APRIL 26,
FOUR MONTHS ----------
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------- APRIL 30,
1992 1993 1994 1995(2) 1996 1997
--------- ---------- ---------- ---------- ------------ ----------
STATEMENT OF INCOME DATA:
Revenues........................................ $ 80,731 $ 118,965 $ 154,193 $ 309,426 $ 114,099 $ 334,220
Cost of revenues................................ 57,054 85,956 114,885 234,959 82,998 243,179
--------- ---------- ---------- ---------- ------------ ----------
Gross profit.................................... 23,677 33,009 39,308 74,467 31,101 91,041
Selling, general and administrative expenses.... 20,800 27,266 32,020 62,012 22,485 70,949
Non-recurring acquisition costs................. 5,006
--------- ---------- ---------- ---------- ------------ ----------
Operating income................................ 2,877 5,743 7,288 12,455 8,616 15,086
Interest expense................................ 904 1,267 2,048 5,370 1,676 4,827
Interest income................................. (81) (116) (18) (25)
Other (income) expense.......................... 366 461 186 62 (151) 632
--------- ---------- ---------- ---------- ------------ ----------
Income before provision for (benefit from)
income taxes and extraordinary items.......... 1,688 4,131 5,054 7,023 7,109 9,652
Provision for (benefit from) income taxes....... 153 259 379 (33) 1,351 3,591
--------- ---------- ---------- ---------- ------------ ----------
Income before extraordinary items............... 1,535 3,872 4,675 7,056 5,758 6,061
Extraordinary items(4).......................... 700 798
--------- ---------- ---------- ---------- ------------ ----------
Net income...................................... $ 1,535 $ 3,872 $ 4,675 $ 6,356 $ 5,758 $ 5,263
--------- ---------- ---------- ---------- ------------ ----------
--------- ---------- ---------- ---------- ------------ ----------
Pro forma net income per share(5)...............
Weighted average shares outstanding(6)..........
SIX MONTHS ENDED
--------------------------------------------------
PRO PRO
PRO FORMA FORMA
FORMA OCTOBER 26, OCTOBER 25, OCTOBER 26, OCTOBER 25,
1997(3) 1996 1997 1996(3) 1997(3)
---------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA:
Revenues........................................ $ 349,174 $ 161,798 $ 173,347 $ 169,179 $ 178,086
Cost of revenues................................ 251,314 117,563 127,547 121,584 129,712
---------- ----------- ----------- ----------- -----------
Gross profit.................................... 97,860 44,235 45,800 47,595 48,374
Selling, general and administrative expenses.... 75,508 33,500 35,983 36,007 37,471
Non-recurring acquisition costs.................
---------- ----------- ----------- ----------- -----------
Operating income................................ 22,352 10,735 9,817 11,588 10,903
Interest expense................................ 3,578 2,250 1,390 1,789 1,789
Interest income.................................
Other (income) expense.......................... 408 622 (166) 518 (294)
---------- ----------- ----------- ----------- -----------
Income before provision for (benefit from)
income taxes and extraordinary items.......... 18,366 7,863 8,593 9,281 9,408
Provision for (benefit from) income taxes....... 7,532 1,708 3,480 3,806 3,858
---------- ----------- ----------- ----------- -----------
Income before extraordinary items............... $ 10,834 6,155 5,113 $ 5,475 $ 5,550
---------- ----------- -----------
---------- ----------- -----------
Extraordinary items(4)..........................
----------- -----------
Net income...................................... $ 6,155 $ 5,113
----------- -----------
----------- -----------
Pro forma net income per share(5)............... $ 0.11 $ 0.06 $ 0.06
---------- ----------- -----------
---------- ----------- -----------
Weighted average shares outstanding(6).......... 95,963 95,963 95,963
DECEMBER 31,
------------------------------------------
1992 1993 1994 1995
--------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital......................................................................... $ 6,005 $ 7,264 $ 8,583 $ 20,127
Total assets............................................................................ 26,543 48,374 51,357 120,630
Long-term debt, less current portion.................................................... 4,632 9,632 7,355 28,812
Long-term payable to U.S. Office Products...............................................
Stockholder's equity.................................................................... 7,459 11,675 12,889 24,719
OCTOBER
25, 1997
----------
APRIL 30, APRIL 26,
1996 1997 ACTUAL
---------- ---------- ----------
BALANCE SHEET DATA:
Working capital......................................................................... $ 23,378 $ 17,009 $ 22,677
Total assets............................................................................ 117,949 125,108 129,703
Long-term debt, less current portion.................................................... 28,108 6,034 5,660
Long-term payable to U.S. Office Products............................................... 20,891 21,955
Stockholder's equity.................................................................... 29,120 27,549 34,719
PRO
FORMA(7)
----------
BALANCE SHEET DATA:
Working capital......................................................................... $ 46,735
Total assets............................................................................ 144,405
Long-term debt, less current portion.................................................... 40,463
Long-term payable to U.S. Office Products...............................................
Stockholder's equity.................................................................... 58,448
- ------------------------
(1) The historical financial information of the businesses that were acquired in
business combinations accounted for under the pooling-of-interests method
(the "Pooled Companies") has been combined on a historical cost basis in
accordance with generally accepted accounting principles ("GAAP") to present
this financial data as if the Pooled Companies had always been members of
the same operating group. The financial information of the businesses
acquired in the business combinations accounted for under the purchase
method (the "Purchased Companies") is included from the dates of their
respective acquisitions. The pro forma financial information reflects
completed and probable acquisitions through February 13, 1998.
(2) The results for the year ended December 31, 1995 include the results of DBF,
one of the Pooled Companies, from its date of incorporation on February 8,
1995.
(3) Gives effect to the Distribution and the purchase acquisitions completed by
the Company since May 1, 1996 and the probable purchase acquisition of
Astrid Offset Corporation, as if all such transactions had been made on May
1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities at one Pooled Company, net of the related
income tax benefits.
(5) Pro forma net income per share is pro forma income before extraordinary
items per share.
(6) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(j) of Notes to Pro Forma Combined
Financial Statements included herein.
(7) Gives effect to the Distribution and the probable purchase acquisition of
Astrid Offset Corporation as if such transactions had been made on October
25, 1997. The pro forma balance sheet data are not necessarily indicative of
the financial position that would have been achieved had these events
actually then occurred and should not be construed as representative of
future financial position.
5
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO OTHER INFORMATION
INCLUDED IN THIS INFORMATION STATEMENT/PROSPECTUS.
NO PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Workflow Distribution, there has been no public market for the
Company Common Stock, and there can be no assurance that an active trading
market will develop or, if one does develop, that it will continue. Until
Company Common Stock is fully distributed and an orderly market develops in
Company Common Stock, the price at which such stock trades may fluctuate
significantly and may be higher or lower than the price that would be expected
for a fully distributed issue. The price of Company Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for Company Common Stock, (ii)
developments affecting the Company's businesses generally, (iii) the Company's
dividend policy, (iv) investor perception of the Company's business and the
graphic arts industry generally, and (v) general economic and market conditions.
Although Workflow Graphics intends to apply for the Company Common Stock to
be quoted on the Nasdaq Stock Market National Market System ("Nasdaq Stock
Market") upon issuance, the Company cannot ensure that approval for such
quotation will be obtained. If such approval is granted, the Company cannot
ensure that it will continue to meet the requirements for quotation of the
Company Common Stock on the Nasdaq Stock Market. Regardless of whether the
Company Common Stock is quoted on the Nasdaq Stock Market or trades in the
over-the-counter market with quotations published in the OTC Bulletin Board and
the NQB Pink Sheets, the Company cannot ensure that an effective trading market
will develop or, if one does develop, that it will be maintained.
A "when-issued" trading market in the Company Common Stock may develop on or
about the effective date of the registration statement of which this Information
Statement/Prospectus is a part. The existence of such a market means that shares
can be traded prior to the time certificates are actually available or issued.
Whether or not there is a "when-issued" market prior to the availability of
certificates, until an orderly market for the Company Common Stock develops, the
prices at which shares of such stock will trade may be affected by an imbalance
of supply and demand.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company is the result of the consolidation by U.S. Office Products of
nine separate companies engaged in the graphic arts business. The operations of
Workflow Graphics as a stand-alone, consolidated entity may place significant
demands on the Company's management, operational and technical resources. Prior
to the Workflow Distribution, certain general and administrative functions
relating to the Company's business (such as legal and accounting) were handled
by U.S. Office Products. The Company's future performance will depend on its
ability to function as a stand-alone entity, to finance and manage expanding
operations, and to adapt its information systems to changes in its business. In
addition, Workflow Graphics will not be able to rely on the purchasing power of
U.S. Office Products and, therefore, may not be able to obtain the same volume
discounts for products and services that are available to U.S. Office Products.
As a result, the Company's expenses may be higher than when it was a part of
U.S. Office Products, and the Company may experience disruptions it would not
encounter as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect what the results of
operations and financial condition would have been had Workflow Graphics been a
separate, stand-alone entity during the periods presented or be indicative of
future results of operations and financial condition of the Company.
6
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
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. Prior to the Workflow Distribution, the Company's
acquisitions were completed with substantial business, legal and accounting
assistance from U.S. Office Products and the acquisitions were primarily paid
for with U.S. Office Products Common Stock. The pace of the Company's
acquisition program may be adversely affected by the absence of U.S. Office
Products' support for the acquisitions. In addition, Workflow Graphics intends
to use Company Common Stock to pay for certain of its acquisitions and,
therefore, if the owners of potential acquisition candidates are not willing to
receive shares of Company Common Stock in exchange for their businesses, the
Company's acquisition program could be adversely affected. Moreover, the
consolidation of the North American graphic arts industry has reduced the number
of larger companies available for sale, which could lead to higher prices being
paid for the acquisition of the remaining domestic, independent companies. In
addition, Workflow Graphics is subject to limitations on the number of shares it
can issue without jeopardizing the tax-free treatment of the Workflow
Distribution. Limitations on the Company's ability to issue shares could also
adversely affect the Company's acquisition strategy. See "Limitations on Equity
Offerings and the Use of Workflow Graphics Stock in Acquisitions" and "Tax
Matters."
RISKS RELATED TO INTEGRATION OF ACQUISITIONS
Integration of acquisitions 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 Graphics 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
Graphics.
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION
Workflow Graphics currently intends to finance its future acquisitions by
using shares of Company Common Stock, cash, borrowed funds or a combination
thereof. 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 Graphics
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 Graphics
does not have sufficient cash resources, its growth could be limited unless it
is able to obtain additional capital through debt or equity offerings. However,
the use of equity offerings in connection with the Workflow Distribution will
also be subject to certain limitations on the number of shares that Workflow
Graphics can issue without jeopardizing the tax-free treatment of the Workflow
Distribution. See "Limitations on Equity Offerings and the Use of Workflow
Graphics Stock in Acquisitions" and "Tax Matters." Prior to the Distributions,
Workflow Graphics was not responsible for obtaining external sources of funding.
There can be no assurance that Workflow Graphics, as a stand-alone company, will
be able to
7
obtain such financing if and when it is needed or that any such financing will
be available on terms it deems acceptable.
Upon completion of the Workflow Distribution, the Company will have
authorized but unissued and unreserved shares of Company Common Stock, which
(subject to the rules and regulations of federal and state securities laws,
limitations under U.S. federal income tax laws and rules and the rules of the
Nasdaq Stock Market) the Company will be able to issue in order to finance
acquisitions without obtaining stockholder approval for such issuance. Existing
stockholders may suffer dilution if Workflow Graphics uses Company Common Stock
as consideration for future acquisitions. Moreover, the issuance of additional
shares of Company Common Stock may have a negative impact on earnings per share
and may negatively impact the market price of the Company Common Stock.
LIMITATIONS ON EQUITY OFFERINGS AND THE USE OF WORKFLOW GRAPHICS STOCK IN
ACQUISITIONS
As a result of certain U.S. federal income tax limitations under Section 355
of the Internal Revenue Code of 1986, as amended (the "Code") on the number of
shares that Workflow Graphics can issue without jeopardizing the tax-free
treatment of the Workflow Distribution, the amount of Workflow Graphics capital
stock that is issued in connection with an acquisition by Workflow Graphics or
as part of an issuance of Workflow Graphics capital stock, if such acquisition
or issuance is deemed to be part of a plan that includes the Workflow
Distribution, when Workflow Graphics capital stock issuable upon the exercise of
options granted in connection with the Workflow Distribution, including the
options that will be issued to Jonathan J. Ledecky pursuant to the Ledecky
Services Agreement (as defined herein), may be limited to 20% of the amount of
Workflow Graphics capital stock that would be issued and outstanding after
giving effect to all such issuances. Depending upon the position that the IRS
takes on these issues in light of certain 1997 tax law changes, the 20%
limitation may not apply. However, in any event, a 50% limitation will apply to
the issuance of Workflow Graphics capital stock. There is a rebuttable
presumption that transactions occuring within two years of the Workflow
Distribution would be subject to the 50% limitation. See "Tax Matters" and "The
Workflow Distribution -- U.S. Federal Income Tax Consequences of the Workflow
Distribution." These limitations could adversely affect the pace of Workflow
Graphics' acquisition program and its ability to issue Company Common Stock for
other purposes, including equity offerings.
RISKS RELATED TO INABILITY TO USE POOLING-OF-INTERESTS METHOD TO ACCOUNT FOR
FUTURE ACQUISITIONS
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations under the pooling-of-interests method. As a result of the Company
being a wholly-owned subsidiary of U.S. Office Products prior to the Workflow
Distribution, the Company will be unable to satisfy this criteria for a period
of two years following the Workflow Distribution. Therefore, the Company will be
precluded from completing business combinations under the pooling-of-interests
method for a period of two years and any business combinations completed by the
Company during such period will be accounted for under the purchase method
resulting in the recording of goodwill. See "Material Amount of Intangible
Assets."
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS
The Company is currently a wholly-owned subsidiary of U.S. Office Products.
On or before the Distribution Date, the Company, U.S. Office Products and the
other Spin-Off Companies will enter into the Distribution Agreement, the Tax
Allocation Agreement and the Employee Benefits Agreement, the Spin-Off Companies
will enter into and the Tax Indemnification Agreement. See "Arrangements Among
U.S. Office Products, Workflow Graphics and the Other Spin-Off Companies After
the Distributions." These agreements are expected to provide, among other
things, for U.S. Office Products and the Company to indemnify each other from
tax and other liabilities relating to their respective businesses prior to and
following the Workflow Distribution.
8
Certain indemnification obligations of the Company and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations to
U.S. Office Products when such a loss occurs, the Company may be required to
reimburse U.S. Office Products for all or a portion of the losses that otherwise
would have been allocated to such other Spin-Off Company. In addition, the
agreements will allocate certain liabilities, including general corporate and
securities liabilities of U.S. Office Products not specifically related to the
specific business to be conducted by the Spin-Off Companies and
post-Distribution U.S. Office Products among U.S. Office Products and each of
the Spin-Off Companies. Adverse developments involving U.S. Office Products or a
Spin-Off Company (other than Workflow Graphics), or material disputes with U.S.
Office Products following the Distributions, could have a material adverse
effect on the Company.
The terms of the agreements that will govern the relationship among the
Company, U.S. Office Products and the other Spin-Off Companies will be
established by U.S. Office Products in consultation with the Company and the
other Spin-Off Companies prior to the Distribution and, while the Company and
the other Spin-Off Companies are wholly-owned subsidiaries of U.S. Office
Products. The terms of these agreements, including the allocation of general
corporate and securities liabilities among U.S. Office Products, the Company and
the other Spin-Off Companies, may not be the same as they would be if the
agreements were the result of arms'-length negotiations. In addition, the
agreements must contain certain terms specified in U.S. Office Products'
agreement with CD&R relative to the Equity Investment and must otherwise be
reasonably acceptable to CD&R. CD&R will not be a stockholder in any of the
Spin-Off Companies and its interests may be adverse to those of the Spin-Off
Companies. See "Arrangements Among U.S. Office Products, Workflow Graphics and
the Other Spin-Off Companies After the Distributions." Accordingly, there can be
no assurance that the terms and conditions of the agreements will not be more or
less favorable to the Company than those that might have been obtained from
unaffiliated third parties.
On the Distribution Date, Jonathan J. Ledecky, Chairman of the U.S. Office
Products Board of Directors, will receive options for shares of each of the
Spin-Off Companies exercisable for up to 7.5% of the common stock of each
Spin-Off Company. See "Management of Workflow Graphics--Director Compensation
and Other Arrangements." As a result, Mr. Ledecky has interests in the
Distributions that differ in certain respects from, and may conflict with, the
interests of other stockholders of U.S. Office Products and Workflow Graphics.
TAX MATTERS
U.S. Office Products will receive an opinion from Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes the Workflow Distribution should qualify as a tax-free spin-off under
Section 355 of the Code, and should not be subject to Section 355(e) of the
Code. The opinion of counsel will be based on certain assumptions and the
accuracy of factual representations made by U.S. Office Products and the
Spin-Off Companies. A ruling has not been, and will not be, sought from the
Internal Revenue Service (the "IRS") with respect to the U.S. federal income tax
consequences of the Workflow Distribution, and it is possible that the IRS may
take the position that the Workflow Distribution does not qualify as a tax-free
spin-off. Assuming the Workflow Distribution qualifies under Section 355 of the
Code as a tax-free spin-off, and is not subject to Section 355(e), no gain or
loss will be recognized by either U.S. Office Products or the holders of U.S.
Office Products Common Stock (except with respect to cash received in lieu of
fractional shares) solely as a result of the distribution or receipt of Company
Common Stock in connection with the Workflow Distribution.
If the Workflow Distribution fails to qualify under Section 355 of the Code
as a tax-free spin-off, each holder of U.S. Office Products Common Stock on the
Record Date will be treated as having received a taxable corporate distribution
in an amount equal to the fair market value (on the Distribution Date) of the
Company Common Stock distributed to such holder of U.S. Office Products Common
Stock including fractional shares. Neither U.S. Office Products nor any of the
Spin-Off Companies will be obligated to
9
indemnify U.S. Office Products stockholders for any such tax. In addition, U.S.
Office Products will be subject to a material corporate-level U.S. federal
income tax (discussed in the following paragraph).
Certain transactions involving U.S. Office Products or Company Common Stock
may jeopardize the tax-free treatment of the Workflow Distribution. Section
355(e) of the Code, which was added in 1997, provides generally that if 50% or
more of the capital stock of U.S. Office Products or Workflow Graphics is
acquired by one or more persons acting pursuant to a plan that is deemed to
include the Workflow Distribution, U.S. Office Products, but not the holders of
U.S. Office Products Common Stock, will incur a material U.S. federal income tax
liability as a result of the Workflow Distribution. For purposes of Section
355(e), any acquisition or issuance of shares of capital stock of U.S. Office
Products or Workflow Graphics pursuant to arrangements existing at the time of
the Workflow Distribution will generally be deemed to be part of a plan that
includes the Workflow Distribution and any such acquisition or issuance
occurring within two years of the Workflow Distribution will be rebuttably
presumed to be part of such a plan. In addition to the 50% limitation of Section
355(e), the IRS may take the position that any issuance or acquisition of
capital stock of Workflow Graphics that represents more than 20% of the capital
stock of Workflow Graphics, in one or more transactions deemed to be part of a
plan that includes the Workflow Distribution, will result in the Workflow
Distribution failing to qualify as a tax-free spin-off under Section 355 of the
Code. If the Workflow Distribution fails to qualify as a tax-free spin-off, both
U.S. Office Products and the U.S. Office Products stockholders that receive
Company Common Stock in the Workflow Distribution would incur a material U.S.
federal income tax liability. It is not clear whether the IRS will assert this
position following the adoption of Section 355(e). As a result of these
limitations, the number of shares of capital stock that Workflow Graphics can
issue following the Workflow Distribution may be limited. See "Limitations on
Equity Offerings and the Use of Workflow Graphics Stock in Acquisitions."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into
the Tax Allocation Agreement with the Spin-Off Companies, which will provide
that the Spin-Off Companies will jointly and severally indemnify U.S. Office
Products for any losses associated with taxes related to the Distributions
("Distribution Taxes") if an action or omission (an "Adverse Tax Act") of any of
the Spin-Off Companies materially contributes to a final determination that any
or all of the Distributions are taxable. Workflow Graphics will enter into the
Tax Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will be primarily
liable to indemnify U.S. Office Products under the Tax Allocation Agreement. As
a consequence, Workflow Graphics will be primarily liable for any Distribution
Taxes resulting from any Adverse Tax Act by Workflow Graphics. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, U.S. Office Products and each of the
Spin-Off Companies will be liable for its pro rata portion of the Distribution
Taxes based on the value of each company's common stock after the Distributions.
See "Arrangements Among U.S. Office Products, Workflow Graphics and the Other
Spin-Off Companies After the Distributions--Tax Allocation Agreement" for a
detailed discussion of the Tax Allocation Agreement.
MATERIAL AMOUNT OF INTANGIBLE ASSETS
Approximately $13.3 million, or 9.2% of the Company's pro forma total assets
as of October 25, 1997, 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
10
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Workflow Graphics 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.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT
The Company's success and ability to compete depends in part upon its
proprietary technology, trademarks and copyrights. Workflow Graphics regards the
software underlying its GetSmart-TM-, Imagenet-TM-and Informa-TM- systems as
proprietary, and relies primarily on trade secrets, copyright and trademark law
to protect these proprietary rights. The Company has registered some of its
trademarks, and has no patents issued nor applications pending. Existing trade
secrets and copyright laws afford the Company only limited protection.
Unauthorized parties may attempt to copy aspects of the Company' software or to
obtain and use information that Workflow Graphics regards as proprietary.
Policing unauthorized use of the Company's software is difficult. Workflow
Graphics generally enters into confidentiality and assignment agreements with
its employees, and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's services or technology without authorization, or to
develop similar services or technology independently. Workflow Graphics is not
aware that any of its software, trademarks or other proprietary rights infringe
the proprietary rights of third parties. However, there can be no assurance that
third parties will not assert infringement claims against Workflow Graphics in
the future. Any such claims, with or without merit, can be time consuming and
expensive to defend and may require the Company to enter into royalty or
licensing agreements or cease the alleged infringing activities. See
"Business--Print Management" and "--Intellectual Property."
EFFECTS OF CHANGES IN DEMAND FOR DOCUMENTS; CYCLICALITY
Historically, the Company's operating results have depended heavily on sales
of documents. For the year ended April 26, 1997, and for the six months ended
October 25, 1997, sales of documents accounted for approximately 56% and 51%,
respectively, of the Company's net sales. Workflow Graphics anticipates that
document sales will continue to account for a significant percentage of the
Company's sales for the foreseeable future. An important element of the
Company's business strategy is to continue its growth in document sales by
continuing to acquire other document companies, hiring experienced sales
representatives, attracting new customers and increasing sales to existing
customers. The overall document industry has not grown in the last few years,
although demand for certain products, such as laser forms, pressure-sensitive
labels, form/label combinations and single-part cut-sheet mailers has increased.
Accordingly, for Workflow Graphics to continue its growth in document sales, it
must increase its market share and respond to changes in demand in the overall
document industry. No assurance can be given that Workflow Graphics will be
successful in increasing its market share or responding to shifts in demand. The
failure by the Company to do so could have a material adverse effect on its
business, financial condition or results of operations.
Over the last several years, the document industry has undergone a
transition as a result of the increased usage of laser printer technology, which
has led to a decreased demand for certain forms products. The continuation of
such technological changes, or the development of other trends that decrease
demand for documents, could have a material adverse effect on the Company's
business, financial condition, or results of operations. In addition, electronic
forms and electronic data interchange technologies have recently been introduced
and while these technologies currently represent a small portion of the market
for the Company's products, no assurance can be given as to the potential impact
of such emerging technologies on the document industry.
In addition, the document industry historically has been affected by general
economic and industry cycles that have materially and adversely affected
distributors and manufacturers of documents. No
11
assurance can be given as to the effect of a continuation of, or change in, such
business cycles on the Company's business, financial condition or results of
operations. The delay or inability of Workflow Graphics to respond to changing
economic cycles could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Workflow Graphics,"
"Industry Overview" and "Business--Business Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Workflow Graphics has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 36% of the Company's
total net sales in the year ended April 26, 1997. As a result, Workflow Graphics
is subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Graphics 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 Graphics does not currently engage in currency hedging
transactions.
UNITED STATES POSTAL RATES; ALTERNATIVE DELIVERY MEDIA
The Company's operating results depend, to a significant extent, on sales of
envelopes. For example, sales of envelopes accounted for approximately 31% of
the Company's net sales for the fiscal year ended April 26, 1997. Because the
great majority of envelopes used in the United States are sent through the mail,
postal rates are a significant factor affecting the growth of envelope usage.
Historically, increases in postal rates, relative to changes in the cost of
alternative delivery means and/or advertising media, have resulted in temporary
reductions in the growth rate of mail sent. For example, third class postal
rates increased approximately 50% and 14% in 1991 and 1995, respectively,
contributing to a substantial leveling off in the growth rate of third class
mail sent during the periods following such increases. If postal rates increase,
mail volume could decline, which could reduce revenue from the Company's sale of
envelopes and reduce the Company's earnings and cash flow.
In addition, alternative delivery media may affect the demand for envelopes.
As the current trend towards usage of the Internet and other electronic media by
consumers for such purposes as paying utility and credit card bills grows,
Workflow Graphics expects the demand for envelopes for such purposes to decline.
Although management believes that overall demand for envelopes, particularly the
custom and specialty envelopes Workflow Graphics focuses on, will continue to
grow at rates comparable to recent historical levels, competition from
alternative media may reduce demand for envelopes, and the Company's revenues
from the sale of envelopes may decrease, which could reduce the Company's
earnings and cash flow.
IMPACT OF FLUCTUATIONS IN PAPER PRICES
Paper prices represent a substantial portion of the cost of producing
documents, envelopes and commercial printing distributed and manufactured by
Workflow Graphics. Accordingly, prevailing paper prices can have a significant
impact on the Company's sales. The timing of increases or decreases in paper
prices and any subsequent change in prices charged to the Company's customers
could have an adverse effect on the Company's revenues and gross margins.
Although Workflow Graphics has generally been able to pass increases in paper
costs on to its customers, for competitive or other reasons, the Company cannot
offer any assurance that it will be able to pass all or a portion of any future
paper price or other cost increases on to its customers. If Workflow Graphics
were unable to pass on these costs, profit margins would decrease, which could
reduce earnings and cash flow. Moreover, an increase in the Company's prices for
the products it distributes, resulting from a pass-through of increased paper
costs, could reduce the volume of units sold by the Company, and decrease the
Company's revenues.
12
Due to the significance of paper to most of the Company's products, Workflow
Graphics is dependent upon the availability of paper. During periods of tight
paper supply, many paper producers allocate shipments of paper based on the
historical purchase levels of customers. There can be no assurance that the
Company's document and envelope businesses would not be materially adversely
affected if either Workflow Graphics or its vendors experienced difficulty in
obtaining adequate quantities of paper in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Workflow Graphics."
COST AND RISKS OF LOSS RELATING TO ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to U.S. and Canadian federal, state,
provincial and local environmental laws and regulations relating to air
emissions, waste generation, handling, management and disposal, and at certain
facilities, wastewater treatment and discharge. Workflow Graphics utilizes
certain hazardous materials, such as washes, inks and alcohol products, in its
operations, and generates both hazardous and non-hazardous waste. While
management believes that the Company's current operations are in substantial
compliance with applicable environmental laws and regulations, there can be no
assurance that currently unknown matters, new laws and regulations, or stricter
interpretations of existing laws and regulations will not materially affect the
Company's business or operations in the future.
RELIANCE ON KEY PERSONNEL
The Company's operations depend on the continued efforts of Thomas B.
D'Agostino, its Chief Executive Officer, its other executive officers and the
senior management of certain of its subsidiaries. Furthermore, the Company's
operations will likely depend on the senior management of certain of the
companies that may be acquired in the future. If any of these people becomes
unable to continue in his or her present role, or if the Company is unable to
attract and retain other skilled employees, its business could be adversely
affected. The Company does not have key man life insurance covering any of its
executive officers or other members of senior management of its subsidiaries.
Timothy L. Tabor is expected to resign as Executive Vice President of U.S.
Office Products Print Management Division and Executive Vice President and Chief
Operating Officer of SFI and Hano prior to the Distribution Date, but will be a
Director of the Company following the Distribution. In addition, Jonathan J.
Ledecky will serve as a director of Workflow Graphics and is expected to provide
services to Workflow Graphics after the Workflow Distribution pursuant to an
agreement entered into between Mr. Ledecky and U.S. Office Products which
provides that the Company and the other Spin-Off Companies will succeed to
certain rights of, and obligations under, such agreement following the
Distribution. See "Management of Workflow Graphics--Director Compensation and
Other Arrangements." Mr. Ledecky will also serve as a director of each of the
other Spin-Off Companies, and is the director or an officer of other public
companies. Mr. Ledecky may be unable to devote substantial time to the
activities of Workflow Graphics.
NO DIVIDENDS
Workflow Graphics does not expect to pay cash dividends on Company Common
Stock in the foreseeable future. The decision whether to apply legally available
funds to the payment of dividends on Company Common Stock will be made by the
Board of Directors of Workflow Graphics (the "Company Board" or "Board") from
time to time in exercise of its business judgement, taking into account, among
other things, the Company's results of operations and financial condition, any
then existing or proposed commitments by Workflow Graphics for the use of
available funds, and the Company's obligations with respect to the holders of
any then outstanding indebtedness or preferred stock. The Company's ability to
pay dividends may be restricted from time to time by financial covenants in its
credit agreements. See "Dividend Policy."
13
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMPANY COMMON
STOCK
Sales of substantial amounts of Company Common Stock in the public market
following the Workflow Distribution could have an adverse effect on the market
price of the Company Common Stock. Upon completion of the Workflow Distribution,
Workflow Graphics will have shares of Company Common Stock outstanding.
Additional shares may be issued either in connection with acquisitions by the
Company or upon exercise of outstanding options and options that may be issued
in the future. See "Management of Workflow Graphics--Executive Compensation."
Upon completion of the Workflow Distribution, it is anticipated that Workflow
Graphics will have outstanding options to acquire approximately shares of
Company Common Stock, including options held by employees of the Company that
were converted from options to acquire U.S. Office Products Common Stock that
such employees had previously held. The exact number of shares that may be
issued upon exercise of such options cannot be determined until the Distribution
Date. In addition, options to acquire shares of Company Common Stock
representing up to 7.5% of the outstanding Company Common Stock determined as of
the Distribution Date will be issued pursuant to the Ledecky Services Agreement
(as defined herein). See "The Workflow Distribution--Effect on Outstanding U.S.
Office Products Options Held by Workflow Graphics Employees" and "Management of
Workflow Graphics--Director Compensation and Other Arrangements." If a
significant number of additional shares are issued at any one time that are not
subject to restrictions on sale and are sold on the market, the market price of
Company Common Stock could be adversely affected.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of the Company's acquisitions have not been
established by independent appraisals, but generally have been determined
through arms'-length negotiations between the Company's management and
representatives of such companies. The consideration paid for each such company
has been based primarily on the value of such company as a going concern and not
on the value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets would have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Workflow Graphics does not expect to value future acquisitions on the basis of
asset appraisals. Therefore, this risk will apply to future acquisitions as
well.
YEAR 2000
Workflow Graphics has numerous computer systems which were developed
employing six digit date structures. Where date logic requires the year 2000 or
beyond, such date structures may produce inaccurate results. Management has
implemented a program to comply with year 2000 requirements on a
system-by-system basis. Program costs are being expensed as incurred, but to
compensate for the diluting effect on results of operations, Workflow Graphics
has delayed other non-critical development and support initiatives. The
Company's plan includes extensive systems testing and is expected to be
completed by the first quarter of 1999. Each of the systems has a solution that
is potentially unique and often dependent on third-party software providers and
developers. A failure on the part of Workflow Graphics to ensure that its
computer systems are year 2000 compliant could have a material adverse effect on
the Company's operations. Additionally, failure of the Company's suppliers or,
more importantly, it customers to become year 2000 compliant might have a
material adverse impact on the Company's operations.
14
THE WORKFLOW DISTRIBUTION
GENERAL
Each holder of shares of U.S. Office Products Common Stock of record as of
the close of business on , 1998 (the "Record Date"), will receive one
share of Company Common Stock for each shares of U.S. Office Products
Common Stock held on the Record Date. The Company Common Stock will be
distributed on behalf of U.S. Office Products by
as the Distribution Agent. No certificates or
scrip representing fractional shares of Company Common Stock will be issued.
Fractional share interests will be aggregated and sold by the Distribution Agent
and the cash proceeds will be distributed to those stockholders entitled to a
fractional interest. Certificates representing shares of Company Common Stock
will be distributed on or about , 1998 (the "Distribution Date").
Workflow Graphics is a newly formed subsidiary of U.S. Office Products that
will, as of the Distribution Date, hold substantially all of the businesses and
assets of, and will be responsible for substantially all of the liabilities
associated with, U.S. Office Products Print Management Division. See
"Arrangements Among U.S. Office Products, Workflow Graphics and the Other
Spin-Off Companies After the Distributions--Distribution Agreement." Workflow
Graphics will include the businesses of the following wholly-owned subsidiaries
of U.S. Office Products: SFI, Hano, United, Huxley, Rex, Pocono and DBF.
Immediately prior to the Workflow Distribution, U.S. Office Products will hold
all the issued and outstanding shares of Company Common Stock. Based on the
number of shares of U.S. Office Products Common Stock outstanding on
, 1998, less 37,037,037 shares to be repurchased in the Tender Offer
and on a Distribution Ratio of one share of Company Common Stock distributed for
every shares of U.S. Office Products Common Stock, approximately
shares of the Company Common Stock will be distributed to stockholders of
U.S. Office Products in the Workflow Distribution. The number of shares to be
distributed could be greater if additional shares of U.S. Office Products Common
Stock are issued prior to the Workflow Distribution pursuant to outstanding
convertible debt securities or stock options of U.S. Office Products.
THE STRATEGIC RESTRUCTURING PLAN
The Workflow Distribution is part of the Strategic Restructuring Plan
adopted by the U.S. Office Products Board of Directors on January 12, 1998. The
principal elements of the Strategic Restructuring Plan are:
- Pursuant to the Tender Offer, U.S. Office Products will purchase
37,037,037 shares of U.S. Office Products Common Stock, or approximately
28% of the outstanding shares, at $27.00 per share and will incur
additional indebtedness to pay a substantial portion of the purchase price
for these shares.
- Pursuant to the Distributions, U.S. Office Products will distribute the
shares of the Spin-Off Companies to U.S. Office Products stockholders
based on the shares of U.S. Office Products Common Stock outstanding after
acceptance of shares in the Tender Offer. Each U.S. Office Products
stockholder will receive such stockholder's pro rata share of the stock of
each Spin-Off Company.
- Following the Record Date, CD&R will make the Equity Investment in U.S.
Office Products. CD&R will not acquire any interests in the Spin-Off
Companies.
Following completion of the Distributions, U.S. Office Products will retain
its North American Office Products Group (including its office supply, office
furniture, and office coffee and beverage services businesses), Mail Boxes,
Etc., its New Zealand and Australia operations and its 49% interest in Dudley
Stationery Limited (a U.K. contract stationer). U.S. Office Products print
management, technology solutions, educational supplies and corporate travel
services businesses will be operated by the Spin-Off Companies.
15
REASONS FOR THE DISTRIBUTIONS
The Board of Directors of U.S. Office Products approved the Strategic
Restructuring Plan, including the Distributions, on January 12, 1998. The U.S.
Office Products Board of Directors determined that separation of the businesses
of the Spin-Off Companies and the continuing business of U.S. Office Products as
part of the Strategic Restructuring Plan would have advantages for the Spin-Off
Companies and U.S. Office Products. The Distributions will allow U.S. Office
Products and the Spin-Off Companies to adopt strategies and pursue objectives
that are more appropriate to their respective industries and geographic
territories. After the Distributions, U.S. Office Products will be focused on a
more narrow group of businesses that involve primarily the distribution of
office products and business services. Each of the Spin-Off Companies will be
focused primarily on their individual businesses.
The Distributions will allow the Spin-Off Companies to pursue independent
acquisition programs with a more focused use of resources and, where stock is
used as consideration, provide stock of a public company that is in the same
industry as the businesses being acquired. Before the Distributions, U.S. Office
Products acquired companies in, for example, the graphic arts business using
U.S. Office Products Common Stock. Sellers were thus required to accept stock in
a business that included office products, corporate travel services, educational
supplies and technology solutions businesses. Following the Workflow
Distribution, the Company will be able to offer stock in its own business, which
will be substantially the same as the businesses Workflow Graphics expects to
acquire.
The Distributions will enable the financial community to evaluate U.S.
Office Products and the Spin-Off Companies as distinct businesses and compare
them more easily to industry peers. U.S. Office Products believes that this will
allow the financial community to better understand the businesses carried on by
U.S. Office Products and the Spin-Off Companies and more accurately value those
businesses.
The Distributions also will allow U.S. Office Products and the Spin-Off
Companies to offer their respective employees more focused incentive
compensation packages. The incentive compensation packages (which are expected
to consist primarily of stock options) will offer the officers and other key
employees of each Spin-Off Company equity interests in a company whose
performance is tied directly to the business in which they operate. The
Company's ability to issue stock options (as well as other equity) will be
subject to certain limitations in order to avoid triggering certain adverse
income tax consequences. See "U.S. Federal Income Tax Consequences of the
Workflow Distribution."
The Equity Investment is conditioned on completion of all of the
Distributions (as well as the Tender Offer). The U.S. Office Products Board of
Directors recognized that U.S. Office Products was making a transition from an
acquisition-oriented company to a business more focused on growth through
improvement and expansion of existing operations. The U.S. Office Products Board
of Directors concluded that the investment by CD&R in U.S. Office Products, and
support of the management of U.S. Office Products by Clayton, Dubilier & Rice,
Inc. ("CD&R Inc."), would contribute to U.S. Office Products' development. CD&R
Inc. has substantial experience in providing companies in which its affiliates
invest with financial and managerial advisory services aimed at building value
and improving operational, marketing and financial performance. CD&R Inc. is
also experienced in advising and assisting companies in managing high levels of
debt.
OTHER ELEMENTS OF THE STRATEGIC RESTRUCTURING PLAN
TENDER OFFER. Pursuant to the Tender Offer, U.S. Office Products will offer
to repurchase 37,037,037 shares of U.S. Office Products Common Stock at a price
of $27.00 per share. Acceptance of and payment for shares of U.S. Office
Products Common Stock under the Tender Offer will be subject to a number of
conditions. These conditions include: (i) a minimum of 37,037,037 shares of U.S.
Office Products Common Stock being validly tendered and not withdrawn; (ii) U.S.
Office Products having obtained financing sufficient to fund the purchase of
U.S. Office Products Common Stock pursuant to the Tender Offer, and U.S. Office
Products' lenders having consented to the Tender Offer or the debt to them
having been
16
refinanced; (iii) all conditions to the completion of the Equity Investment
having been satisfied or waived, except for consummation of the Tender Offer and
the Distributions; and (iv) registration statements relating to the
Distributions having become effective and all other conditions to the completion
of the Distributions having been satisfied.
The aggregate tender price for the shares to be purchased in the Tender
Offer is $1.0 billion. U.S. Office Products expects to finance the aggregate
tender price through a combination of the net proceeds of the Equity Investment,
additional senior secured bank debt, and issuance of subordinated debt
securities. U.S. Office Products anticipates that the foregoing borrowings will
increase its outstanding debt by approximately $800.0 million. In addition,
because elements of the Strategic Restructuring Plan would violate covenants in
U.S. Office Products' existing bank credit facility, that facility will either
have to be modified with the lenders' consent or refinanced. Approximately
$350.5 million was outstanding under the existing bank credit facility as of
February 12, 1998. U.S. Office Products is currently engaged in discussions with
potential lenders and investment banks regarding financing for the Tender Offer
and refinancing of its bank credit facility. U.S. Office Products expects that
it will be able to obtain the necessary financing on acceptable terms. However,
to date, no commitments have been obtained and there can be no assurance that
financing for the Tender Offer will be obtained on acceptable terms.
The Record Date for the Distributions will occur immediately after
acceptance of shares under the Tender Offer. Accordingly, U.S. Office Products
stockholders who tender their shares of U.S. Office Products Common Stock in the
Tender Offer will not receive the Distributions to the extent their U.S. Office
Products shares are accepted in the Tender Offer. Because the Tender Offer is
for only approximately 28% of the issued and outstanding shares of U.S. Office
Products Common Stock, only a portion of the shares tendered by any U.S. Office
Products stockholder is likely to be accepted. U.S. Office Products stockholders
who tender their shares are therefore likely to receive the Distributions with
respect to a portion of their shares of U.S. Office Products Common Stock.
EQUITY INVESTMENT. Pursuant to the Investment Agreement dated as of January
12, 1998, as amended, between U.S. Office Products and CD&R (the "Investment
Agreement"), U.S. Office Products will issue and sell U.S. Office Products
Common Stock and rights to purchase U.S. Office Products Common Stock to CD&R
for a purchase price of $270.0 million. As a result of the Equity Investment,
CD&R will acquire: (a) shares of U.S. Office Products Common Stock representing
24.9% of the outstanding shares of U.S. Office Products Common Stock after
giving effect to the issuance of such shares; (b) rights ("Special Warrants") to
receive for nominal consideration additional shares of U.S. Office Products
Common Stock equal to 24.9% (after giving effect to issuance of such additional
shares upon exercise of the Special Warrants) of the additional shares that are
issuable upon the conversion of certain outstanding convertible debentures of
U.S. Office Products and shares of U.S. Office Products Common Stock that are
actually issued pursuant to certain contingent rights under existing acquisition
agreements; and (c) warrants representing the right to purchase one share of
U.S. Office Products Common Stock for each share of U.S. Office Products Common
Stock purchased by CD&R at the date of closing under the Investment Agreement
(the "Closing Date") and for each share of U.S. Office Products Common Stock
into which the Special Warrants become exercisable. The Special Warrants are
exercisable from and after the Closing Date until the 12th anniversary thereof,
subject to certain limitations, and the warrants described in clause (c) above
are exercisable from and after the second anniversary of the Closing Date until
such 12th anniversary. The aggregate exercise price of the warrants described in
clause (c) above is $405.0 million. Because the Record Date for the
Distributions will be immediately before the closing of the Equity Investment,
CD&R will not receive any shares of the Spin-Off Companies in the Distributions.
Under the Investment Agreement, the U.S. Office Products Board of Directors
will consist of nine directors, including the Chief Executive Officer of U.S.
Office Products, three designees of CD&R, and five persons selected by the
current U.S. Office Products Board of Directors. CD&R's obligation to consummate
the Equity Investment is conditioned on two of the designees of the U.S. Office
Products Board of Directors being satisfactory to CD&R. Thereafter, for so long
as CD&R maintains certain levels
17
of ownership of U.S. Office Products Common Stock, CD&R will have the right to
nominate three members of the U.S. Office Products Board of Directors and to
designate the Chairman of the Board. Certain U.S. Office Products Board of
Directors' decisions will be subject to super-majority voting provisions that,
under certain circumstances, may require the concurrence of at least one
director nominated by CD&R. CD&R will be subject to certain restrictions and
limitations with respect to transactions in U.S. Office Products Common Stock.
CD&R's obligation to consummate the Equity Investment is subject to the
satisfaction or waiver of various conditions. These include, among others: (i)
receipt of necessary antitrust and other regulatory clearance; (ii) absence of
litigation; (iii) U.S. Office Products stockholder approval of the issuance of
shares in the Equity Investment; (iv) consummation of the Distributions in
accordance with the Distribution Agreement containing certain terms specified in
the Investment Agreement and otherwise as reasonably approved by CD&R; (v)
execution and delivery of the Tax Allocation Agreement containing certain terms
specified in the Investment Agreement and otherwise as reasonably approved by
CD&R; (vi) execution of documents relating to financing for the Tender Offer
satisfactory in form and substance to CD&R; (vii) execution of a consulting
agreement with CD&R Inc. providing for payment of an annual consulting fee of
$500,000 and a registration rights agreement with CD&R; (viii) absence of any
development since October 25, 1997 that would have a material adverse effect on
U.S. Office Products after giving effect to the Distributions; and (ix) U.S.
Office Products debt immediately following completion of the transactions
contemplated by the Strategic Restructuring Plan shall not exceed $1.4 billion
(assuming conversion of certain convertible debt) and the outstanding debt of
the Spin-Off Companies shall be at least $130.0 million plus expenditures by
such entities for acquisitions after the date of the Investment Agreement. See
"Arrangements Among U.S. Office Products, Workflow Graphics and the Other
Spin-Off Companies After the Distributions--Distribution Agreement," and "--Tax
Allocation Agreement." If U.S. Office Products does not proceed with the
Distributions, or if the Equity Investment does not occur for certain other
reasons, CD&R can terminate the Investment Agreement and receive a termination
fee of $25.0 million plus reasonable fees and expenses. If the Equity Investment
is completed, CD&R Inc. will receive a transaction fee of $15.0 million and
reimbursement for expenses it incurs in connection with the transaction. For
additional information concerning the Equity Investment, investors should refer
to U.S. Office Products Proxy Statement for its special meeting of stockholders
to be held to consider the issuance of shares in the Equity Investment. See
"Additional Information."
RELATED TRANSACTIONS. Jonathan J. Ledecky, the founder, Chairman of the
Board and former Chief Executive Officer of U.S. Office Products, will step down
as Chairman of U.S. Office Products upon consummation of the Distributions. In
connection with the adoption of the Strategic Restructuring Plan, the U.S.
Office Products Board of Directors concluded that it was important to the
achievement of the objectives of the plan that the Spin-Off Companies obtain the
benefit of Mr. Ledecky's skills and experience. Accordingly, U.S. Office
Products entered into a services agreement with Mr. Ledecky (the "Ledecky
Services Agreement"). Pursuant to this agreement, which is contingent on the
Distributions occurring, Mr. Ledecky has agreed to extend his existing
non-competition agreement with U.S. Office Products until the fourth anniversary
of the Distribution Date. Each Spin-Off Company will have the right to enforce
the non-competition provision with respect to its respective business. In
consideration of this agreement by Mr. Ledecky and his serving as a director of
and advisor to the Company following the Distribution, the Ledecky Services
Agreement provides that he will receive options to purchase up to 7.5% of the
outstanding shares of common stock of each Spin-Off Company as of the
Distribution Date. For additional information on the terms of the options to be
granted by the Company to Mr. Ledecky, see "Management of Workflow
Graphics--Director Compensation."
Workflow Graphics is also exploring the issuance of Company Common Stock in
a public offering concurrent with or soon after the Workflow Distribution, the
amount of which has not been determined. As a result of certain U.S. federal
income tax limitations under Section 355 of the Code on the number of
18
shares that Workflow Graphics can issue in connection with the Workflow
Distribution without jeopardizing the tax-free treatment of the Workflow
Distribution, the amount of Workflow Graphics capital stock that will be issued
in such a public offering has not been determined and will be limited by the
factors discussed in "Risk Factors--Tax Matters," "--Limitations on Equity
Offerings and the Use of Workflow Graphics Stock in Acquisitions," and "The
Workflow Distribution--U.S. Federal Income Tax Consequences of the Workflow
Distribution."
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE WORKFLOW DISTRIBUTION
The following summary describes the material U.S. federal income tax
consequences of the Workflow Distribution by U.S. Office Products to holders of
U.S. Office Products Common Stock on the Record Date. The summary is based on
the Code, and regulations, rulings, and judicial decisions as of the date
hereof, all of which may be repealed, revoked, or modified so as to result in
U.S. federal income tax consequences different from those described below. Such
changes could be applied retroactively in a manner that could adversely affect a
holder of U.S. Office Products Common Stock. In addition, the authorities on
which this summary is based are subject to various interpretations. It is
therefore possible that the U.S. federal income tax treatment of the Workflow
Distribution and of the holding and disposition of the Company Common Stock may
differ from the treatment described below.
This summary applies only to holders of U.S. Office Products Common Stock
who hold U.S. Office Products Common Stock as a capital asset, and does not deal
with special situations, such as those of dealers in securities or currencies,
financial institutions, insurance companies, persons holding U.S. Office
Products Common Stock as part of a hedging or conversion transaction or a
straddle, persons whose "functional currency" is not the U.S. dollar, and
certain U.S. expatriates.
This summary is for general information only. It does not address all
aspects of U.S. federal income taxation that may be relevant to holders of U.S.
Office Products Common Stock in light of their particular circumstances, nor
does it address any tax consequences arising under the laws of any state, local,
or foreign taxing jurisdiction. Holders of U.S. Office Products Common Stock
should consult their tax advisors about the particular U.S. federal income tax
consequences to them of the Workflow Distribution, or the holding and
disposition of the Company Common Stock, as well as any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdiction.
EFFECT ON U.S. OFFICE PRODUCTS AND HOLDERS OF U.S. OFFICE PRODUCTS COMMON
STOCK. U.S. Office Products will receive an opinion of Wilmer, Cutler &
Pickering, counsel to U.S. Office Products, that for U.S. federal income tax
purposes the Workflow Distribution should qualify as a tax-free spin-off under
Section 355 of the Code, and should not be subject to Section 355(e) of the
Code. The opinion of counsel will be based on certain assumptions and the
accuracy of factual representations made by U.S. Office Products and Workflow
Graphics. Neither U.S. Office Products nor Workflow Graphics is aware of any
present facts or circumstances which would cause such representations and
assumptions to be untrue. However, the opinion of counsel is not binding on
either the IRS or the courts. A ruling has not been, and will not be, sought
from the IRS with respect to the U.S. federal income tax consequences of the
Workflow Distribution.
Assuming the Workflow Distribution qualifies as a tax-free spin-off under
Section 355 of the Code and is not subject to Section 355(e) of the Code:
1. No gain or loss will be recognized by holders of U.S. Office
Products Common Stock as a result of their receipt of Company Common Stock
in the Workflow Distribution. Holders of U.S. Office Products Common Stock
will recognize gain or loss on the receipt of cash in lieu of fractional
shares (as discussed below).
2. No gain or loss will be recognized by U.S. Office Products as a
result of the Workflow Distribution.
19
3. A stockholder's tax basis in such stockholder's U.S. Office Products
Common Stock immediately before the Workflow Distribution will be allocated
among the U.S. Office Products Common Stock and the Spin-Off Companies'
common stock (including any fractional shares) received with respect to such
U.S. Office Products Common Stock in proportion to their relative fair
market values on the date of the Workflow Distribution. Such allocation must
be calculated separately for each block of U.S. Office Products Common Stock
(shares purchased at the same time and at the same cost) with respect to
which the Spin-Off Companies' common stock is received.
4. The holding period of the Company Common Stock (including any
fractional shares) received in the Workflow Distribution will include the
holding period of the U.S. Office Products Common Stock with respect to
which it was distributed.
Treasury regulations governing Section 355 of the Code require that each
holder of U.S. Office Products Common Stock who receives shares of Company
Common Stock pursuant to the Workflow Distribution attach a statement to the
U.S. federal income tax return that will be filed by such stockholder for the
taxable year in which the stockholder receives Company Common Stock in the
Workflow Distribution. The regulations require that the statement show the
applicability of Section 355 of the Code to the Workflow Distribution. U.S.
Office Products will provide each U.S. Office Products stockholder of record on
the Record Date with information necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, an opinion of counsel is not binding on the IRS or the courts. It is
therefore possible that the IRS may take the position that the Workflow
Distribution does not qualify as a tax-free spin-off.
If the Workflow Distribution fails to qualify as a tax-free spin-off under
Section 355 of the Code:
1. U.S. Office Products will recognize gain, if any, equal to the
difference between U.S. Office Products' tax basis in the Company Common
Stock on the date of the Workflow Distribution and the fair market value of
the Company Common Stock on the date of the Workflow Distribution.
2. Each holder of U.S. Office Products Common Stock will be treated as
having received a taxable corporate distribution in an amount equal to the
fair market value (on the Distribution Date) of the Company Common Stock
distributed to such stockholder, including fractional shares. The
distribution would generally be treated as ordinary dividend income to a
U.S. Office Products stockholder to the extent of such U.S. Office Products
stockholder's pro rata share of U.S. Office Products' accumulated and
current earnings and profits. To the extent the amount of the distribution
exceeds such U.S. Office Products stockholder's pro rata share of U.S.
Office Products' accumulated and current earnings and profits, such excess
would be treated first as a basis-reducing, tax-free return of capital to
the extent of the stockholder's tax basis in his or her U.S. Office Products
Common Stock and then as capital gain. For corporate stockholders, the
portion of the taxable distribution that constitutes a dividend would be
eligible for the dividends-received deduction (subject to certain
limitations in the Code) and could be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in a
corporate stockholder's basis in its U.S. Office Products Common Stock to
the extent of such deduction and the recognition of gain to the extent the
deduction exceeds the corporate stockholder's tax basis in the U.S. Office
Products Common Stock.
3. Each U.S. Office Products stockholder's tax basis in the Company
Common Stock would equal the fair market value on the date of the Workflow
Distribution of the Company Common Stock (including fractional shares)
distributed to such stockholder.
4. The holding period of the Company Common Stock (including fractional
shares) received in the Workflow Distribution would begin with, and include,
the day after the Distribution Date.
Whether or not the Workflow Distribution is taxable, cash received by a
holder of U.S. Office Products Common Stock in lieu of a fractional share of
Company Common Stock will be treated as
20
received in exchange for such fractional share and the stockholder will
recognize gain or loss for U.S. federal income tax purposes measured by the
difference between the amount of cash received and the stockholder's tax basis
in the fractional share. Such gain or loss will be capital gain or loss to the
stockholder if the U.S. Office Products Common Stock is held as a capital asset.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Certain transactions involving
U.S. Office Products or Company Common Stock may jeopardize the tax-free
treatment of the Workflow Distribution. Section 355(e) of the Code, which was
added in 1997, provides generally that if 50% or more of the capital stock of
U.S. Office Products or Workflow Graphics is acquired by one or more persons
acting pursuant to a plan that is deemed to include the Workflow Distribution,
U.S. Office Products, but not the holders of U.S. Office Products Common Stock,
will incur a material U.S. federal income tax liability as a result of the
Workflow Distribution. For purposes of Section 355(e), any acquisition or
issuance of shares of capital stock of U.S. Office Products or Workflow Graphics
pursuant to arrangements existing at the time of the Workflow Distribution will
generally be deemed to be part of a plan that includes the Workflow Distribution
and any such acquisition or issuance occurring within two years of the Workflow
Distribution will be rebuttably presumed to be part of such a plan. In addition
to the 50% limitation of Section 355(e), the IRS may take the position that any
issuance or acquisition of capital stock of Workflow Graphics that represents
more than 20% of the capital stock of Workflow Graphics, in one or more
transactions deemed to be part of a plan that includes the Workflow
Distribution, will result in the Workflow Distribution failing to qualify as a
tax-free spin-off under Section 355 of the Code. If the Workflow Distribution
fails to qualify as a tax-free spin-off, both U.S. Office Products and the U.S.
Office Products stockholders that receive Company Common Stock in the Workflow
Distribution would incur a material U.S. federal income tax liability. It is not
clear whether the IRS will assert this position following the adoption of
Section 355(e).
Workflow Graphics capital stock issuable upon exercise of options to be
granted to Jonathan J. Ledecky pursuant to the Ledecky Services Agreement (as
defined herein), Workflow Graphics capital stock issuable upon the exercise of
other options granted in connection with the Workflow Distribution, and Workflow
Graphics capital stock issued in connection with acquisitions or public
offerings contemplated at the time of the Workflow Distribution would likely be
included as stock issuances that are subject to the 50% (or 20%) limitations
described above. Moreover, as noted above, for purposes of the 50% limitation,
any issuance of shares of Workflow Graphics capital stock within two years of
the Workflow Distribution will be rebuttably presumed to be part of a plan that
includes the Workflow Distribution. Accordingly, the number of shares that may
be issued by Workflow Graphics following the Workflow Distribution may be
limited.
LIABILITY FOR DISTRIBUTION TAXES. Under the Tax Allocation Agreement,
Workflow Graphics and the other Spin-Off Companies will jointly and severally
indemnify U.S. Office Products for any Distribution Taxes assessed against U.S.
Office Products if an Adverse Tax Act of any of the Spin-Off Companies
materially contributes to a final determination that any of the Distributions is
taxable. Workflow Graphics will also enter into the Tax Indemnification
Agreement with the other Spin-Off Companies under which the Spin-Off Company
that is responsible for the Adverse Tax Act indemnify the other Spin-off
Companies for any liability to U.S. Office Products under the Tax Allocation
Agreement. As a consequence, Workflow Graphics will be primarily liable for any
Distribution Taxes resulting from any Adverse Tax Act by Workflow Graphics.
Additionally, U.S. Office Products and each of the Spin-Off Companies will be
liable for its pro rata portion of any Distribution Taxes, based on the value of
each company's common stock after the Distributions, if it is determined that
there has not been an Adverse Tax Act by either U.S. Office Products or any of
the Spin-Off Companies. See "Tax Allocation Agreement" for a detailed discussion
of the Tax Allocation Agreement.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK IS FOR GENERAL
INFORMATION ONLY AND DOES NOT PURPORT TO COVER ALL U.S. FEDERAL INCOME TAX
CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER OF U.S. OFFICE PRODUCTS COMMON
STOCK.
21
ALL HOLDERS OF U.S. OFFICE PRODUCTS COMMON STOCK SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE WORKFLOW DISTRIBUTION TO THEM.
EFFECT ON OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS HELD BY WORKFLOW GRAPHICS
EMPLOYEES
Workflow Graphics expects that all or substantially all vested and unvested
options to acquire the U.S. Office Products Common Stock that are held by
Workflow Graphics employees on the Distribution Date will be replaced with
options to acquire shares of Company Common Stock. Workflow Graphics anticipates
that the replacement options will be issued under a stock option plan to be
adopted on or prior to the Distribution Date. The number of shares of Company
Common Stock that each optionholder will receive, and the exercise price of the
options, will be determined by a formula designed to provide each optionholder
with options having an aggregate value after the Tender Offer and as of the
Distribution Date (equal to the excess or deficit of then-current trading prices
over the exercise price, times the number of shares subject to options)
equivalent to the aggregate value, immediately prior to the Distribution Date,
of the U.S. Office Products options they replace. It is anticipated that all
other terms of the stock options will be the same as the terms of the U.S.
Office Products options they replace. As a result of this, the options held by
the Workflow Graphics employees after the Workflow Distribution would represent
a greater percentage interest in Workflow Graphics than the percentage interest
in U.S. Office Products that such options represented before the Distribution.
At , 1998, persons who are expected to become Workflow Graphics
employees held options to purchase, in the aggregate, shares of U.S.
Office Products Common Stock.
RESTRICTIONS ON TRANSFER
Shares of the Company Common Stock distributed to the U.S. Office Products
stockholders pursuant to the Workflow Distribution will be freely transferable
under the Securities Act, except for shares received by any persons who may be
deemed to be "affiliates" of the Company as that term is defined in Rule 144
promulgated under the Securities Act. Persons who may be deemed to be affiliates
of Workflow Graphics after the Workflow Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with, Workflow Graphics and may include certain officers and directors
of the Company as well as principal stockholders of Workflow Graphics. Persons
who are affiliates of Workflow Graphics will be permitted to sell their shares
of the Company Common Stock only pursuant to an effective registration statement
under the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemptions provided for private transactions or
Rule 144 under the Securities Act.
EXPENSES OF THE DISTRIBUTIONS
U.S. Office Products estimates that legal, financial advisory, investment
banking, financing, accounting, printing, mailing and other expenses (including
the fees of U.S. Office Products' and Spin-Off Companies' transfer agents) of
the Strategic Restructuring Plan, including the Distributions, will total
approximately $ . Upon request, U.S. Office Products will pay the
reasonable expenses of brokerage firms, custodians, nominees and fiduciaries who
are record holders of U.S. Office Products Common Stock for forwarding this
Information Statement/Prospectus to the beneficial owners of such shares. The
foregoing expenses will be allocated among U.S. Office Products and the Spin-Off
Companies pursuant to a formula to be determined. See "Arrangements Among U.S.
Office Products, Workflow Graphics and the Other Spin-Off Companies After the
Distributions--Distribution Agreement."
22
ARRANGEMENTS AMONG U.S. OFFICE PRODUCTS, WORKFLOW GRAPHICS
AND THE OTHER SPIN-OFF COMPANIES AFTER THE DISTRIBUTIONS
Following the Workflow Distribution, U.S. Office Products and Workflow
Graphics will operate independently, and (except for interests U.S. Office
Products may retain pursuant to certain pledge agreements) neither will have any
stock ownership, beneficial or otherwise, in the other. For the purposes of
governing certain of the ongoing relationships among U.S. Office Products,
Workflow Graphics and the other Spin-Off Companies after the Distributions, and
to provide mechanisms for an orderly transition, on or before the Distribution
Date, U.S. Office Products, Workflow Graphics and the other Spin-Off Companies
will enter into the Distribution Agreement, Tax Allocation Agreement, and the
Employee Benefits Agreement, and the Spin-Off Companies will enter into the Tax
Indemnification Agreement. The terms of the Distribution Agreement, Tax
Allocation Agreement, Tax Indemnification Agreement and Employee Benefits
Agreement have not yet been finally determined. Those terms will be agreed to
while Workflow Graphics is a wholly-owned subsidiary of U.S. Office Products. In
addition, the Investment Agreement specifies certain terms of these agreements
and provides that they are subject to CD&R's reasonable approval. Therefore,
they will not be the result of arms'-length negotiations between independent
parties.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not been
finally determined, Workflow Graphics currently expects that the terms will
include those described below. There can be no assurance that the terms of the
Distribution Agreement, Tax Allocation Agreement, Tax Indemnification Agreement
and Employee Benefits Agreement will not be less favorable to the stockholders
of Workflow Graphics than the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement is expected
to provide for the transfer from U.S. Office Products to Workflow Graphics of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of Workflow Graphics. It is also
expected to provide that the recovery on any claims that U.S. Office Products
may have against the persons who sold businesses to U.S. Office Products that
will become part of Workflow Graphics in connection with the Workflow
Distribution pursuant to the relevant acquisition agreements (the "Workflow
Acquisition Indemnity Claims") will be allocated between U.S. Office Products
and the applicable Spin-Off Company under a formula to be determined. In
addition, to the extent that the Workflow Acquisition Indemnity Claims are
secured by the pledge of stock of U.S. Office Products and the Spin-Off
Companies that is owned by persons who sold businesses to U.S. Office Products
that will become part of Workflow Graphics (and no previous claims have been
made against such shares), the pledged shares will be used, subject to final
resolution of the claim, to reimburse U.S. Office Products and the applicable
Spin-Off Company for their respective damages and expenses in accordance with
the relative allocation of recovery rights which will be determined prior to the
Workflow Distribution.
DEBT. The Distribution Agreement is expected to provide that Workflow
Graphics will have, at the time of the Workflow Distribution, $30.0 million of
debt plus the amount of any additional debt incurred after the date of the
Investment Agreement by U.S. Office Products or Workflow Graphics in connection
with acquisitions that will become subsidiaries of Workflow Graphics. The
Company estimates that the additional debt will be approximately $14.7 million.
ASSUMPTION OF LIABILITIES. The Distribution Agreement is expected to
allocate and provide for the assumption of financial responsibility for
liabilities (other than taxes and employee benefit matters, which will be
governed by separate agreements) among U.S. Office Products, Workflow Graphics
and the other Spin-Off Companies. Workflow Graphics will be responsible for (i)
any liabilities arising out of or in connection with the businesses conducted by
Workflow Graphics and/or its subsidiaries, (ii) its liabilities
23
under the Distribution Agreement, Tax Allocation Agreement, Tax Indemnification
Agreement, Employee Benefits Agreement and related agreements, (iii) its
liabilities for the debt described above, (iv) certain securities liabilities
and (v) any liabilities of U.S. Office Products relating to earn-out or bonus
payments owed by U.S. Office Products in respect of Workflow Graphics or its
subsidiaries. In addition, the Distribution Agreement is expected to provide for
sharing of certain liabilities among some or all of the parties. First, each of
U.S. Office Products, Workflow Graphics and the other Spin-Off Companies will
bear a portion, on a basis to be determined, of (i) any liabilities of U.S.
Office Products under the securities laws arising from events prior to the
Distributions (other than claims relating solely to a specific Spin-Off Company
or relating specifically to the continuing businesses of U.S. Office Products),
(ii) U.S. Office Products' general corporate liabilities (other than debt,
except for that specifically allocated to the Spin-Off Companies) incurred prior
to the Distributions (I.E., liabilities not related to the conduct of a
particular distributed or retained subsidiary's business) and (iii) transactions
costs (including legal, accounting, investment banking and financial advisory)
and other fees incurred by U.S. Office Products in connection with the Strategic
Restructuring Plan. Second, if U.S. Office Products is entitled to an indemnity
from one of the other Spin-Off Companies and such claim proves to be
uncollectible, such liabilities will be shared on a basis to be determined.
The Distribution Agreement is expected to provide that each party will
indemnify and hold all of the other parties harmless from any and all
liabilities for which the former assumed liability under the Distribution
Agreement. All indemnity payments will be subject to adjustment upward or
downward to take account of tax costs or tax benefits as well as insurance
proceeds. If there are any claims made under U.S. Office Products' existing
insurance policies, the amount of any deductible or retention will be allocated
by U.S. Office Products among the claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement is expected to have other
customary provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
U.S. Office Products estimates that if all of the Distributions fail to
qualify as tax-free spin-offs under Section 355 of the Code or, if U.S. Office
Products recognizes taxable gain as a result of the application of Section
355(e) of the Code with respect to all of the Distributions, the aggregate
corporate U.S. federal income tax liability (before interest and penalties) that
would result would be approximately $ (based on an estimate of the value
of the Spin-Off Companies; the actual value of the Spin-Off Companies cannot be
determined until there is public trading of the Spin-Off Companies' common
stock). The Tax Allocation Agreement will provide that the Spin-Off Companies
will jointly and severally indemnify U.S. Office Products for any Distribution
Taxes assessed against U.S. Office Products if an Adverse Tax Act of any of the
Spin-Off Companies materially contributes to a final determination that any or
all of the Distributions are taxable. Workflow Graphics will also enter into the
Tax Indemnification Agreement with the other Spin-Off Companies under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to U.S. Office Products under the Tax
Allocation Agreement. As a consequence, Workflow Graphics will be primarily
liable for any Distribution Taxes resulting from any Adverse Tax Act by Workflow
Graphics and liable (subject to indemnification by the other Spin-Off Companies)
for any Distribution Taxes resulting from an Adverse Tax Act by the other
Spin-Off Companies. If there is a final determination that any or all of the
Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the
24
Spin-Off Companies, each of U.S. Office Products and the Spin-Off Companies will
be liable for its pro rata portion of such Distribution Taxes based on the value
of each company's common stock after the Distributions.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with the other Spin-Off Companies to
provide for an orderly transition of benefits coverage between U.S. Office
Products and the Spin-Off Companies. Pursuant to this agreement, the respective
Spin-Off Companies will retain or assume liability for employment-related claims
and severance for persons currently or previously employed by the respective
Spin-Off Companies and their subsidiaries, while U.S. Office Products and its
post-Distributions subsidiaries will retain or assume responsibility for their
current and previous employees.
The proposed Employee Benefits Agreement reflects U.S. Office Products'
expectation that each of the Spin-Off Companies will establish 401(k) plans for
their respective employees effective as of, or shortly after, the Distribution
Date and that U.S. Office Products will transfer 401(k) accounts to those plans
as soon as practicable. The proposed Employee Benefits Agreement also provides
for spinning off portions of the U.S. Office Products' cafeteria plan that
relate to employees of the Spin-Off Companies (and their subsidiaries) and
having those spun-off plans assume responsibilities for claims submitted on or
after the Distributions.
DIVIDEND POLICY
Workflow Graphics does not anticipate declaring and paying cash dividends on
the Company Common Stock in the foreseeable future. The decision whether to
apply any legally available funds to the payment of dividends on the Company
Common Stock will be made by the Company Board from time to time in the exercise
of its business judgment, taking into account the Company's financial condition,
results of operations, existing and proposed commitments for use of the
Company's funds and other relevant factors. The Company's ability to pay
dividends may be restricted from time to time by financial covenants in its
credit agreements.
25
CAPITALIZATION
The following table sets forth the capitalization of Workflow Grahics at
October 25, 1997 (i) on an actual basis and (ii) on a pro forma basis to reflect
the Workflow Distribution, the allocation of $30.0 million of debt plus $14.7
million of additional debt the Company or U.S. Office Products expects to incur
in connection with the probable purchase acquisition of Astrid Offset
Corporation. This table should be read in conjunction with the "Management's
Discussion and Analysis of Financial Position and Results of Operations of
Workflow Graphics," the historical consolidated financial statements and the pro
forma combined financial statements of the Company, and the related notes to
each thereof, included elsewhere in this Information Statement/Prospectus.
OCTOBER 25, 1997
----------------------
ACTUAL PRO FORMA
--------- -----------
(IN THOUSANDS)
Short-term debt........................................................ $ 4,259 $ 4,259
Short-term payable to U.S. Office Products............................. 22,239
--------- -----------
Total short-term debt.............................................. $ 26,498 $ 4,259
--------- -----------
--------- -----------
Long-term debt......................................................... $ 5,660 $ 40,463
Long-term payable to U.S. Office Products.............................. 21,955
Stockholder's equity:
Divisional equity.................................................... 13,425 37,154
Cumulative translation adjustment.................................... 42 42
Retained earnings.................................................... 21,252 21,252
--------- -----------
Total stockholder's equity......................................... 34,719 58,448
--------- -----------
Total capitalization............................................... $ 62,334 $ 98,911
--------- -----------
--------- -----------
26
SELECTED FINANCIAL DATA
The historical Selected Financial Data for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996 and the fiscal year ended April
26, 1997 (except pro forma amounts) have been derived from Workflow Graphics'
consolidated financial statements that have been audited and are included
elsewhere in this Information Statement/Prospectus. The historical Selected
Financial Data for the years ended December 31, 1992 and 1993 have been derived
from unaudited consolidated financial statements and are not included elsewhere
in this Information Statement/Prospectus or incorporated herein by reference.
The Selected Financial Data for the six months ended October 26, 1996 and
October 25, 1997 (except pro forma amounts) have been derived from unaudited
consolidated financial statements that appear elsewhere in this Information
Statement/Prospectus. These unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, contain all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented.
The pro forma financial data gives effect, as applicable, to the Workflow
Distribution and the acquisitions completed by Workflow Graphics and considered
probable between May 1, 1996 and February 13, 1998 as if all such transactions
had been consummated on May 1, 1996. In addition, the pro forma information is
based on available information and certain assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Workflow Graphics" that appear elsewhere in this Information
Statement/Prospectus.
27
SELECTED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SIX MONTHS
ENDED
APRIL 26, -----------
FOUR MONTHS --------------------
YEAR ENDED DECEMBER 31, ENDED PRO
------------------------------------------ APRIL 30, FORMA OCTOBER 26,
1992 1993 1994 1995(2) 1996 1997 1997(3) 1996
--------- --------- --------- --------- ------------- --------- --------- -----------
STATEMENT OF INCOME DATA:
Revenues.................. $ 80,731 $ 118,965 $ 154,193 $ 309,426 $ 114,099 $ 334,220 $ 349,174 $ 161,798
Cost of revenues.......... 57,054 85,956 114,885 234,959 82,998 243,179 251,314 117,563
--------- --------- --------- --------- ------------- --------- --------- -----------
Gross profit.............. 23,677 33,009 39,308 74,467 31,101 91,041 97,860 44,235
Selling, general and
administrative
expenses................ 20,800 27,266 32,020 62,012 22,485 70,949 75,508 33,500
Non-recurring acquisition
costs................... 5,006
--------- --------- --------- --------- ------------- --------- --------- -----------
Operating income.......... 2,877 5,743 7,288 12,455 8,616 15,086 22,352 10,735
Interest expense.......... 904 1,267 2,048 5,370 1,676 4,827 3,578 2,250
Interest income........... (81) (116) (18) (25)
Other (income) expense.... 366 461 186 62 (151) 632 408 622
--------- --------- --------- --------- ------------- --------- --------- -----------
Income before provision
for (benefit from)
income taxes and
extraordinary items..... 1,688 4,131 5,054 7,023 7,109 9,652 18,366 7,863
Provision for (benefit
from) income taxes...... 153 259 379 (33) 1,351 3,591 7,532 1,708
--------- --------- --------- --------- ------------- --------- --------- -----------
Income before
extraordinary items..... 1,535 3,872 4,675 7,056 5,758 6,061 $ 10,834 6,155
---------
---------
Extraordinary items(4).... 700 798
--------- --------- --------- --------- ------------- --------- -----------
Net income................ $ 1,535 $ 3,872 $ 4,675 $ 6,356 $ 5,758 $ 5,263 $ 6,155
--------- --------- --------- --------- ------------- --------- -----------
--------- --------- --------- --------- ------------- --------- -----------
Pro forma net income per
share(5)................ $ 0.11
---------
---------
Weighted average shares
outstanding(6).......... 95,963
PRO PRO
FORMA FORMA
OCTOBER 25, OCTOBER 26, OCTOBER 25,
1997 1996(3) 1997(3)
----------- ----------- -----------
STATEMENT OF INCOME DATA:
Revenues.................. $ 173,347 $ 169,179 $ 178,086
Cost of revenues.......... 127,547 121,584 129,712
----------- ----------- -----------
Gross profit.............. 45,800 47,595 48,374
Selling, general and
administrative
expenses................ 35,983 36,007 37,471
Non-recurring acquisition
costs...................
----------- ----------- -----------
Operating income.......... 9,817 11,588 10,903
Interest expense.......... 1,390 1,789 1,789
Interest income...........
Other (income) expense.... (166) 518 (294)
----------- ----------- -----------
Income before provision
for (benefit from)
income taxes and
extraordinary items..... 8,593 9,281 9,408
Provision for (benefit
from) income taxes...... 3,480 3,806 3,858
----------- ----------- -----------
Income before
extraordinary items..... 5,113 $ 5,475 $ 5,550
----------- -----------
----------- -----------
Extraordinary items(4)....
-----------
Net income................ $ 5,113
-----------
-----------
Pro forma net income per
share(5)................ $ 0.06 $ 0.06
----------- -----------
----------- -----------
Weighted average shares
outstanding(6).......... 95,963 95,963
DECEMBER 31,
------------------------------------------ APRIL 30,
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital.......................................................... $ 6,005 $ 7,264 $ 8,583 $ 20,127 $ 23,378
Total assets............................................................. 26,543 48,374 51,357 120,630 117,949
Long-term debt, less current portion..................................... 4,632 9,632 7,355 28,812 28,108
Long-term payable to U.S. Office Products................................
Stockholder's equity..................................................... 7,459 11,675 12,889 24,719 29,120
OCTOBER 25, 1997
----------------------
APRIL 26, PRO
1997 ACTUAL FORMA(7)
--------- --------- -----------
BALANCE SHEET DATA:
Working capital.......................................................... $ 17,009 $ 22,677 $ 46,735
Total assets............................................................. 125,108 129,703 144,405
Long-term debt, less current portion..................................... 6,034 5,660 40,463
Long-term payable to U.S. Office Products................................ 20,891 21,955
Stockholder's equity..................................................... 27,549 34,719 58,448
- ------------------------
(1) The historical financial information of the Pooled Companies has been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions. The pro forma
financial information reflects completed and probable acquisitions through
February 13, 1998.
(2) The results for the year ended December 31, 1995 include the results of DBF,
one of the Pooled Companies, from its date of incorporation on February 8,
1995.
(3) Gives effect to the Distribution and the acquisitions completed by the
Company since May 1, 1996 as if all such transactions had been made on May
1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities at one Pooled Company, net of the related
income tax benefits.
(5) Pro forma net income per share is pro forma income before extraordinary
items per share.
(6) For calculation of the pro forma weighted average shares outstanding for the
fiscal year ended April 26, 1997 and for the six months ended October 25,
1997 and October 26, 1996, see Note 2(j) of Notes to Pro Forma Combined
Financial Statements included herein.
(7) Gives effect to the Distribution and the probable purchase acquisition of
Astrid Offset Corporation as if such transactions had been made on October
25, 1997. The pro forma balance sheet data are not necessarily indicative of
the financial position that would have been achieved had these events
actually then occurred and should not be construed as representative of
future financial position.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF WORKFLOW GRAPHICS
INTRODUCTION
Workflow Graphics' consolidated financial statements give retroactive effect
to the seven business combinations accounted for under the pooling-of-interests
method during the period from January 1997 through April 1997 (the "Pooled
Companies") and include the results of the company acquired in a business
combination accounted for under the purchase method from its acquisition date.
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results for years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("Fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform with U.S. Office Products' fiscal year, which ends
on the last Saturday of April. The following discussion should be read in
conjunction with Workflow Graphics' consolidated financial statements and
related notes thereto and pro forma financial statements and related notes
thereto appearing elsewhere in this Information Statement/Prospectus.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the years ended December 31, 1994 and 1995, the fiscal year ended April 26, 1997
and for the six months ended October 26, 1996 and October 25, 1997, as well as
for the fiscal year ended April 26, 1997 and for the six months ended October
26, 1996 and October 25, 1997 on a pro forma basis reflecting the Workflow
Distribution and the results of the completed and probable business combinations
accounted for under the purchase method as if such transactions had occurred on
May 1, 1996.
FISCAL YEAR ENDED SIX MONTHS ENDED
YEAR ENDED -------------------------- ----------------------------
-------------------------------- PRO FORMA
DECEMBER 31, DECEMBER 31, APRIL 26, APRIL 26, OCTOBER 26, OCTOBER 25,
1994 1995 1997 1997 1996 1997
--------------- --------------- ----------- ------------- ------------- -------------
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 74.5 75.9 72.8 72.0 72.7 73.6
----- ----- ----- ----- ----- -----
Gross profit.......................... 25.5 24.1 27.2 28.0 27.3 26.4
Selling, general and administrative
expenses.............................. 20.8 20.1 21.2 21.6 20.7 20.7
Non-recurring acquisition costs......... 1.5
----- ----- ----- ----- ----- -----
Operating income...................... 4.7 4.0 4.5 6.4 6.6 5.7
Interest expense, net................... 1.3 1.7 1.4 1.0 1.3 0.8
Other (income).......................... 0.1 0.2 0.1 0.4 (0.1)
----- ----- ----- ----- ----- -----
Income before provision for income taxes
and extraordinary items............... 3.3 2.3 2.9 5.3 4.9 5.0
Provision for income taxes.............. 0.3 1.1 2.2 1.1 2.1
----- ----- ----- ----- ----- -----
Income before extraordinary items....... 3.0 2.3 1.8 3.1 3.8 2.9
Extraordinary items--loss on early
terminations of credit facilities, net
of income taxes....................... 0.2 0.2
----- ----- ----- ----- ----- -----
Net income.............................. 3.0% 2.1% 1.6% 3.1% 3.8% 2.9%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
PRO FORMA PRO FORMA
OCTOBER 26, OCTOBER 25,
1996 1997
------------- -------------
Revenues................................ 100.0% 100.0%
Cost of revenues........................ 71.9 72.8
----- -----
Gross profit.......................... 28.1 27.2
Selling, general and administrative
expenses.............................. 21.3 21.1
Non-recurring acquisition costs.........
----- -----
Operating income...................... 6.8 6.1
Interest expense, net................... 1.1 1.0
Other (income).......................... 0.2 (0.2)
----- -----
Income before provision for income taxes
and extraordinary items............... 5.5 5.3
Provision for income taxes.............. 2.3 2.2
----- -----
Income before extraordinary items....... 3.2 3.1
Extraordinary items--loss on early
terminations of credit facilities, net
of income taxes.......................
----- -----
Net income.............................. 3.2% 3.1%
----- -----
----- -----
29
PRO FORMA COMBINED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Pro forma revenues increased 5.3%, from $169.2 for the six months ended
October 26, 1996, to $178.1 million for the six months ended October 25, 1997.
This increase was primarily due to sales to new accounts, passing on increased
product costs to customers and increased sales to existing customers.
Pro forma gross profit increased 1.6%, from $47.6 million, or 28.1% of pro
forma revenues, for the six months ended October 26, 1996, to $48.4 million, or
27.2% of pro forma revenues, for the six months ended October 25, 1997. This
decrease in gross profit as a percentage of revenues was primarily due to a
shift in revenue mix and to inefficiencies related to the start-up period of
certain new accounts.
Pro forma selling, general and administrative expenses increased 4.1%, from
$36.0 million, or 21.3% of pro forma revenues for the six months ended October
26, 1996, to $37.5 million, or 21.1% of pro forma revenues for the six months
ended October 25, 1997. The decrease in selling, general and administrative
expenses as a percentage of revenues was primarily due to spreading fixed costs
over a larger revenue base during the six months ended October 25, 1997.
The provision for income taxes has been estimated using an effective income
tax rate of 41.0%, which represents anticipated federal and state income tax
rates.
CONSOLIDATED RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 25, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 26,
1996
Consolidated revenues increased 7.1%, from $161.8 million for the six months
ended October 26, 1996, to $173.3 million for the six months ended October 25,
1997. This increase was primarily due to sales to new accounts, passing on
increased product costs to customers and increased sales to existing customers.
Gross profit increased 3.5%, from $44.2 million, or 27.3% of revenues, for
the six months ended October 26, 1996 to $45.8 million, or 26.4% of revenues,
for the six months ended October 25, 1997. This decrease in gross profit as a
percentage of revenues was primarily due to a shift in revenue mix and to
inefficiencies related to the start-up period of certain new accounts.
Selling, general and administrative expenses increased 7.4%, from $33.5
million, or 20.7% of revenues, for the six months ended October 26, 1996 to
$36.0 million, or 20.7% of revenues, for the six months ended October 25, 1997.
Interest expense, net of interest income, decreased 38.2%, from $2.3 million
for the six months ended October 26, 1996 to $1.4 million for the six months
ended October 25, 1997. The decrease was due primarily to the fact that a
portion of the debt outstanding during the six months ended October 26, 1996 was
repaid by U.S. Office Products upon acquisition of the Pooled Companies and U.S.
Office Products did not charge the Company interest on the long-term portion of
the payable balance.
Other expense decreased $788,000 from other expense of $622,000 for the six
months ended October 26, 1996, to other income of $166,000 for the six months
ended October 25, 1997. The decrease is primarily the result of costs incurred
at one of the Pooled Companies, prior to October 26, 1996, relating to a
contemplated initial public offering that was aborted as a result of that
company's acquisition by U.S. Office Products.
Provision for income taxes increased from $1.7 million for the six months
ended October 26, 1996 to $3.5 million for the six months ended October 25,
1997, reflecting effective income tax rates of 21.7% and 40.5%, respectively.
The lower effective tax rate for the six months ended October 26, 1996, compared
to the federal statutory rate of 35.0% plus state taxes, is the result of
certain of the companies included in the results not being subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations.
30
FISCAL YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 8.0%, from $309.4 million in 1995, to $334.2
million in fiscal 1997. This increase was primarily due to sales to new
accounts, passing on increased product costs to customers and increased sales to
existing customers.
Gross profit increased 22.3%, from $74.5 million, or 24.1% of revenues, in
1995 to $91.0 million, or 27.2% of revenues, in fiscal 1997. The increase in
gross profit as a percentage of revenues was due primarily to cost reductions
resulting from an increased utilization of Company owned manufacturing
facilities and to increased rebates and purchase discounts from vendors.
Selling, general and administrative expenses increased 14.4%, from $62.0
million, or 20.1% of revenues, in 1995 to $70.9 million, or 21.2% of revenues,
in fiscal 1997. The increase in selling, general and administrative expenses as
a percentage of revenues was due primarily to an increase in fixed costs as a
result of expansions to Company facilities for anticipated future growth.
The Company incurred non-recurring acquisition costs of $5.0 million for the
fiscal year ended April 26, 1997 in conjunction with business combinations
accounted for under the pooling-of-interests method. These non-recurring
acquisitions costs included accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations. Generally accepted accounting
principles ("GAAP") require the Company to expense all acquisition costs (both
those paid by the Company and those paid by the sellers of the acquired
companies) related to business combinations accounted for under
pooling-of-interests method of accounting. The Company does not anticipate
incurring any additional such costs in the two-year period following the
Distribution since, as a result of the Distribution, the Company is precluded
from completing acquisitions under the pooling-of-interests method for two years
from the Distribution Date.
Interest expense, net of interest income, decreased 10.6%, from $5.4 million
in 1995 to $4.8 million in fiscal 1997. The decrease was due primarily to the
fact that a portion of the debt outstanding during 1995 was repaid by U.S.
Office Products upon acquisition of the Pooled Companies and U.S. Office
Products did not charge the Company interest on the long-term portion of the
payable balance.
Other expense increased $570,000, from $62,000 in 1995, to $632,000 in
fiscal 1997. Fiscal 1997 other expense consists primarily of costs incurred at
one of the Pooled Companies, prior to October 26, 1996, relating to a
contemplated initial public offering that was aborted as a result of that
company's acquisition by U.S. Office Products.
Provision for income taxes increased from a benefit of $33,000 in 1995 to an
expense of $3.6 million in fiscal 1997, reflecting effective income tax rates of
- -.5% and 37.2%, respectively. The benefit from income taxes in 1995 compared to
the federal statutory rate of 35.0% plus state taxes, is the result of certain
of the companies included in the results not being subject to federal income
taxes on a corporate level as they had elected to be treated as subchapter S
corporations. In fiscal 1997, this effect was partially offset by non-deductible
non-recurring acquisition costs.
During fiscal 1997, the Company incurred an extraordinary item totaling
$798,000, which represented the expenses, net of the expected income tax
benefit, associated with the early termination of the credit facility at one of
the Pooled Companies during fiscal 1997.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues increased 100.7%, from $154.2 million in 1994, to
$309.4 million in 1995. This increase was primarily due to a purchase
acquisition by one of the Pooled Companies in February 1995 (the "1995 Purchased
Company"), sales to new accounts and increased sales to existing customers.
Gross profit increased 89.4%, from $39.3 million, or 25.5% of revenues, in
1994 to $74.5 million, or 24.1% of revenues, in 1995. The increase in gross
profit was due primarily to the acquisition of the 1995
31
Purchased Company. The decrease in gross profit as a percentage of revenues was
due primarily to the acquisition of the 1995 Purchased Company, which
historically had lower gross margins.
Selling, general and administrative expenses increased 93.7%, from $32.0
million, or 20.8% of revenues, in 1994 to $62.0 million, or 20.1% of revenues,
in 1995. The increase in selling, general and administrative expenses was due
primarily to the acquisition of the 1995 Purchased Company. The increase in
selling, general and administrative expenses as a percentage of revenues was due
primarily to the acquisition of the 1995 Purchased Company, which historically
had higher selling, general and administrative expenses as a percentage of
revenues.
Interest expense, net of interest income, increased 162.2%, from $2.0
million in 1994 to $5.4 million in fiscal 1995. The increase is due primarily to
financing obtained by one of the Pooled Companies to acquire the 1995 Purchased
Company.
Provision for income taxes decreased from $379,000 in 1994 to a benefit of
$33,000 in 1995, reflecting effective income tax rates of 9.7% and -0.5%,
respectively. The lower effective income tax rate in 1994 and the benefit from
income taxes in 1995 compared to the federal statutory rate of 35.0% plus state
taxes, is the result of certain of the companies included in the results not
being subject to federal income taxes on a corporate level as they had elected
to be treated as subchapter S corporations.
LIQUIDITY AND CAPITAL RESOURCES
At October 25, 1997, the Company had cash of $385,000 and working capital of
$22.7 million. The Company's capitalization, defined as the sum of long-term
debt, long-term payable to U.S. Office Products and stockholder's equity, at
October 25, 1997 was approximately $62.3 million. On a pro forma basis at
October 25, 1997, the Company had working capital of $46.7 million and
capitalization of $98.9 million.
During the six months ended October 25, 1997, net cash provided by operating
activities was $1.6 million. Net cash used in investing activities was $3.2
million, including $2.5 million of capital expenditures and the payment of
non-recurring acquisition costs of $906,000. Net cash used by financing
activities totaled $123,000.
During the six months ended October 26, 1996, net cash provided by operating
activities was $13.5 million. Net cash used in investing activities was $4.9
million, including $5.5 million of capital expenditures. Net cash used in
financing activities totaled $9.2 million, including the net repayment of debt
of $6.3 million and the payment of dividends at Pooled Companies of $2.8
million.
During the fiscal year ended April 26, 1997, net cash provided by operating
activities was $21.4 million. Net cash used in investing activities was $15.8
million, including $4.1 million of net cash paid in acquisitions and $8.9
million of capital expenditures. Net cash used in financing activities totaled
$4.7 million, consisting primarily of the payment of dividends at Pooled
Companies of $6.1 million, partially offset by an increase in debt of $2.2
million.
During the year ended December 31, 1995, net cash provided by operating
activities was $11.1 million. Net cash used in investing activities was $42.4
million, including $37.9 million of net cash paid in acquisitions and $5.7
million of capital expenditures. Net cash provided by financing activities
totaled $31.4 million, consisting primarily of an increase in debt of $35.8
million and the payment of dividends at Pooled Companies of $3.9 million.
During the year ended December 31, 1994, net cash provided by operating
activities was $6.1 million. Net cash used in investing activities was $123,000.
Net cash used in financing activities totaled $5.3 million, consisting primarily
of the payment of debt of $4.2 million and the payment of dividends at Pooled
Companies of $2.3 million.
Workflow Graphics' anticipated capital expenditures budget for the next
twelve months is approximately $ million. The largest items include
32
Workflow Graphics expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $44.7 million of debt by U.S. Office
Products resulting in the forgiveness of $23.7 million of debt at October 25,
1997, which will be reflected in the financial statements as a contribution of
capital by U.S. Office Products. Workflow Graphics intends to enter into a
credit facility concurrently with the Distribution which will contain certain
financial and other covenants, including maintenance of certain financial tests
and ratios, limitations on capital expenditures and restrictions on the
incurrence of debt or liens, the sale of assets, the payment of dividends,
transactions with affiliates and other transactions. Workflow Graphics expects
that the credit facility will be adequate to repay the debt allocated by U.S.
Office Products and to fund working capital and capital expenditure needs.
Workflow Graphics expects that a portion of the credit facility will also be
available to fund the cash portion of future acquisitions, subject to the
maintenance of bank covenants.
Workflow Graphics is also exploring the issuance of Company Common Stock in
a public offering concurrent with or soon after the Workflow Distribution, the
amount of which has not been determined. As a result of certain U.S. federal
income tax limitations under Section 355 of the Code on the number of shares
that Workflow Graphics can issue in connection with the Workflow Distribution
without jeopardizing the tax-free treatment of the Workflow Distribution, the
amount of Workflow Graphics capital stock that will be issued in such a public
offering has not been determined and will be limited by the factors discussed in
"Risk Factors--Tax Matters," "--Limitations on Equity Offerings and the Use of
Workflow Graphics Stock in Acquisitions," and "The Workflow Distribution--U.S.
Federal Income Tax Consequences of the Workflow Distribution."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Workflow Graphics' business is not subject to seasonal influences. As
Workflow Graphics continues to complete acquisitions, it may become subject to
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 Graphics, which could
contribute to the further fluctuation in its quarterly operating results.
Therefore, results for any quarter are not necessarily indicative of the results
that Workflow Graphics may achieve for any subsequent fiscal quarter or for a
full fiscal year.
The following tables set forth certain unaudited quarterly financial data
for the year ended December 31, 1995 and the fiscal year ended April 26, 1997
(in thousands). The information has been derived from unaudited consolidated
financial statements, that in the opinion of management reflect adjustments,
33
consisting only of normal recurring accruals, necessary for a fair presentation
of such quarterly information.
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- -----------
Revenues.......................................................... $ 65,497 $ 80,595 $ 79,815 $ 83,519 $ 309,426
Gross profit...................................................... 15,770 19,361 19,229 20,107 74,467
Operating income.................................................. 2,681 3,296 3,306 3,172 12,455
Net income........................................................ 1,789 1,529 1,744 1,294 6,356
FISCAL YEAR ENDED APRIL 26, 1997
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- -----------
Revenues.......................................................... $ 79,798 $ 82,000 $ 82,966 $ 89,456 $ 334,220
Gross profit...................................................... 21,717 22,518 22,647 24,159 91,041
Operating income.................................................. 4,650 6,085 4,015 336 15,086
Net income (loss)................................................. 2,974 3,181 1,847 (2,739) 5,263
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during 1994, 1995 or fiscal 1997.
NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented. Workflow Graphics intends to adopt SFAS No. 128 in
the fiscal year ended April 25, 1998.
REPORTING COMPREHENSIVE INCOME. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Workflow Graphics intends to
adopt SFAS No. 130 in the fiscal year ending April 24, 1999.
34
INDUSTRY OVERVIEW
Businesses consume an array of printed products in their operations. These
products include a wide variety of documents, envelopes and commercial printing.
Businesses also require various specialized services in connection with
consuming these products, including management, distribution, workflow analysis
and graphic design. Traditionally, many providers of these products specialized
in a single segment of the market. Accordingly, companies purchased printed
products, particularly custom products, from several sources and often performed
the related services internally. However, technological changes and market
forces are reshaping the distribution channels for such products and related
services. The requirements of businesses for print-on-demand and high-quality
imaging, which are now available because of advances in printing technology, are
growing much faster than demand for stock printed products. Additionally, in an
attempt to focus and streamline their operations, many businesses are seeking to
outsource non-core operations. This has created significant opportunities for
integrated graphic arts companies such as Workflow Graphics.
The three primary product lines of the graphic arts industry in which the
Company operates are:
DOCUMENTS. According to the Document Management Industries Association, the
market for documents was approximately $12.7 billion in 1996, up from $11.1
billion in 1993. Direct manufacturers account for approximately 45% of sales of
documents in North America. These sales are highly concentrated among four
direct manufacturers. The remaining 55% of the industry's sales are made by a
large number of independent distributors. In recent years the distributor
channel of the market has grown faster than the direct manufacturing channel,
primarily because end-users are shifting their purchases of documents to
distributors capable of providing a wider variety of products and services than
those traditionally provided by manufacturers.
ENVELOPES. The U.S. market for envelopes, as measured by the Envelope
Manufacturers Association, was approximately $3.0 billion in 1996, compared to
$2.7 billion in 1993. This market has two segments: the direct-to-consumer
market for custom and specialty envelope products, which accounts for
approximately 60% of the industry's total sales, and the trade or wholesale
market for standard envelope products, which accounts for approximately 40% of
the total. Sales of custom and specialty envelope products are growing with the
continued expansion of direct mail marketing, while sales of standard envelope
products are comparatively stable. Management believes there are approximately
200 envelope manufacturers in the U.S., and a much larger number of custom and
specialty envelope printers and distributors. Custom and specialty envelope
companies typically serve regional and local markets because of the significant
freight costs associated with long-haul shipments of products.
COMMERCIAL PRINTING. According to the Printing Industries of America trade
association, the general commercial segment of the U.S. printing industry
shipped more than $88 billion of products in 1996, an increase of 8% over 1995.
Commercial printing, which includes printed products such as catalogs, brochures
and reports, is generally sold to end-users through manufacturers' direct sales
organizations, independent brokers, advertising agencies and design firms. The
general commercial printing market in the United States is highly fragmented
with more than 25,000 printing plants, 70% of which have fewer than 10
employees.
35
BUSINESS
COMPANY OVERVIEW
The Company is an integrated graphic arts company providing documents,
envelopes and commercial printing to more than 22,000 businesses in the United
States and Canada. The Company also offers various print and facilities
management services, which allow customers to realize cost savings by
outsourcing non-core operations, as well as graphic design services and workflow
analysis. Drawing on its position in the industry and its experience in
completing acquisitions, the Company seeks to become a leading consolidator in
the highly fragmented graphic arts industry. The Company has grown primarily as
a result of acquisitions to $358 million in revenues for the twelve months ended
October 25, 1997, on a pro forma basis. Workflow Graphics intends to continue to
pursue an aggressive acquisition strategy to extend its geographic scope and
market penetration, and to increase sales to existing customers by
cross-marketing documents, envelopes and commercial printing.
Workflow Graphics offers a full range of printed products which are either
produced by the Company or procured from one of the Company's more than 3,500
vendors. The Company's product line includes: (i) documents, such as custom
invoices, purchase orders, checks and labels; (ii) envelopes, for applications
such as credit card solicitations, annual reports, direct mail and airline
tickets; and (iii) commercial printing, such as product and corporate brochures,
personalized direct mail literature, catalogs, directories and digital imaging.
Approximately 56.2%% of the Company's revenues are derived from products
purchased by the Company for distribution, and 43.8% are derived from products
manufactured by it. The Company's manufacturing base, combined with its
extensive vendor network and distribution capability, gives the Company broad
flexibility to meet businesses' demand for printed products.
The Company also provides customers with print management services that are
designed to control the costs of procuring, storing and using graphic arts in
their business operations. Many of the Company's customers are attempting to
reduce their overhead and direct costs by focusing on core competencies and by
outsourcing non-core operations to specialists. As an outsourcing specialist,
Workflow Graphics enables its customers to reduce costs and improve control by
soliciting competitive bids, establishing more efficient inventory levels and
order quantities, and consolidating requisitions, production and deliveries. The
Company also performs design and procurement services for its customers. The
Company does not charge a separate fee for its management services, but instead
tailors its product pricing to reflect the services provided. The Company has
developed its GetSmart-TM- and Informa-TM- transaction and information systems
to support these services and the Company's sales of printed products. In order
to meet growing demand, the Company plans to continue to expand its product
lines and services, and to promote the Company's print and facilities management
services, which allow customers to outsource the management of printed products.
Workflow Graphics was formed on February 13, 1998. U.S. Office Products
acquired SFI and a related company, Hano, on January 24, 1997. On April 25,
1997, U.S. Office Products acquired United, Rex, Huxley and Pocono. On April 26,
1997, U.S. Office Products acquired DBF. When U.S. Office Products determined to
separate non-core businesses from its core operations as part of the Strategic
Restructuring Plan, SFI and United were converted into limited liability
companies whose sole member and equity owner is the Company, the shares of Rex,
Huxley and Pocono were transferred to United, and the shares of Hano and DBF
were transferred to the Company. The Company has approximately 350 full-time
salespeople, of whom approximately 50% have been with the Company more than five
years. Senior management averages more than 20 years with the Company. The
principal executive offices of Workflow Graphics are located at 276 Park Avenue
South, New York, New York 10010, although the Company expects to relocate such
offices to Palm Beach, Florida. The Company's telephone number is (212)
539-0301.
36
BUSINESS STRATEGY
The Company's objective is to become a leading single source provider of
printed products and related services to businesses of all sizes. To attain its
goals, Workflow Graphics plans to grow both externally, through strategic
acquisitions, and internally, through product development, cross-marketing and
cross-utilization of its proprietary computer systems.
Workflow Graphics intends to capitalize on consolidation opportunities in
three segments of the North American graphic arts industry: U.S. printed
products, U.S. envelopes and Canadian printed products. In the U.S. printed
products market, the acquisition strategy will focus on the large population of
independent distributors. Workflow Graphics is the third largest print
distributor in North America, and acquired sixteen smaller distributors prior to
its acquisition by U.S. Office Products. In the U.S. envelope market, Workflow
Graphics will seek to acquire high value-added producers of specialty envelope
and direct mail concerns. In furtherance of this strategy, Workflow Graphics
expects to acquire Astrid Offset Corporation, a New York envelope company. In
the Canadian printed products market, the Company plans to leverage its document
sales force and customer base with selective acquisitions of commercial print
manufacturers.
Workflow Graphics intends to grow internally through product development,
cross-marketing and cross-utilization of its proprietary GetSmart-TM-,
Informa-TM- and Imagenet-TM- computer systems. A substantial majority of the
Company's net sales are derived from custom documents and envelopes, and
commercial printing. The analysis, design work and print management services
performed by the Company with respect to these products enables the Company to
better understand customers' requirements, and fosters close business
relationships between the Company and its customers. Workflow Graphics believes
that its knowledge of customer requirements and these relationships enable the
Company to identify new product lines and services in response to emerging
customer opportunities and provide cross-marketing opportunities for the
Company's various product lines and services. The Company also believes that it
will be able to increase sales by implementing its GetSmart-TM-, Informa-TM- and
Imagenet-TM- systems on a Company-wide basis.
PRODUCT LINES
DOCUMENTS. Workflow Graphics offers a complete line of custom and stock
documents, such as invoices, purchase orders, money orders, bank drafts and
labels. These documents may be fan-folded, roll-fed, snap-apart or cut-sheet,
and manufactured to specification with respect to content, size, plies, paper
and inks. More than 85% of the Company's revenues from sales of documents are
from sales of custom products.
ENVELOPES. Workflow Graphics offers a complete line of conventional and
specialty envelopes for applications such as billing, credit card solicitations,
annual reports, proxy solicitations, direct mail, and airline tickets. These
envelopes may be of varying sizes and specialized materials, with constructions
including wallet flap, flat mailer, safety fold, peel and seal, clasp, button
and string, window, expansion, and continuous. The Company can customize
dimensions, materials, construction, and graphics to customers' specific
requirements.
COMMERCIAL PRINTING. The Company's commercial printing line includes
products such as corporate brochures, personalized direct mail, catalogs,
directories and promotional products. These products are designed and
manufactured to customers' requirements. Workflow Graphics provides a variety of
custom services, including art direction, digital and conventional design,
layout, illustration, photography and production.
37
The following table sets forth the amount of the Company's revenue derived
from each of its three product lines for the periods indicated.
FISCAL YEAR SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, APRIL 26, OCTOBER 25,
(IN THOUSANDS) 1995 1997 1997
------------ ----------- -----------
Documents............................................. $ 178,806 $ 186,787 $ 88,839
Envelopes............................................. 101,642 104,095 51,545
Commercial Printing................................... 24,850 37,426 21,384
PRINT MANAGEMENT
Workflow Graphics supports its product offering with a selection of
value-added services. For many businesses, the costs of managing, storing, and
using printed products exceed their purchase price. The Company seeks to control
these costs and improve efficiency throughout the workflow by providing systems
analysis, design, and facilities and inventory management services. Workflow
Graphics delivers its print management services through GetSmart-TM- and
Informa-TM-, its proprietary computerized transaction and information systems.
The Company does not charge a separate fee for its management services, but
instead tailors its product pricing to reflect the services provided.
GETSMART-TM- SYSTEM. The Company offers the GetSmart-TM- system in the
United States. GetSmart-TM- provides transaction, reporting, and control
capabilities to the Company and its customers. SFI introduced GetSmart-TM- in
1986, and it re-engineered the system in 1993 to incorporate advances in
hardware and software technologies. The Company is continually refining and
enhancing the system. The system's transaction database now includes more than
200,000 SKUs, 12,000 active customers, and 3,500 active vendors. Customers can
access GetSmart-TM- either off-line, through the Company's sales and customer
support personnel, or on-line, through wide area network, dial-up, leased-line,
and Internet connections. This array of delivery options makes GetSmart-TM-
available to customers of every size and complexity, and to customers at every
level of computer sophistication. The discussion below summarizes these support
functions.
A customer can initiate a distribution from inventory by issuing a
requisition through GetSmart-TM-. GetSmart-TM- then allocates the merchandise to
the cost center and routes the release to the appropriate distribution facility.
Customers can specify their minimum inventory requirements or can rely on
GetSmart-TM-'s ongoing analysis of usage patterns and lead times. GetSmart-TM-
notifies the Company's sales representative when a re-order point is reached,
and the representative negotiates a new purchase order with the customer. The
purchase order is entered into the system and GetSmart-TM- tracks the order to
the product's receipt at the Company's distribution center. At this point the
storage, shipment, usage and re-order cycle begins again. Throughout the cycle,
the system supports inventory transfers and write-offs, returns of items
requisitioned in error, and purchases that are shipped directly to customers by
the Company's vendors. GetSmart-TM- produces invoices when merchandise is
received at the Company's distribution centers, or when it is shipped to
customers, and tracks invoices through to remittance. All transactions can be
consummated in a number of electronic formats required by customers' data
processing operations. GetSmart-TM- also offers electronic catalogs of 375,000
promotional products and 30,000 office products. The catalogs provide product
images and descriptions, as well as powerful search engines enabling customers
to locate the products best suited to their requirements.
GetSmart-TM- can generate more than 100 real-time and periodic reports to
customers. These reports detail, summarize, and analyze purchases, inventory
level, utilization rates, and billing by cost center, product, and product line
to meet each customer's specific needs. Reports can be viewed on-screen in real
time, printed at the customer's premises, printed remotely and delivered to a
customer, or transmitted electronically for further processing by a customer's
internal management information system. The
38
Company maintains five years of historical data on-line for comparative reports
and analyses. In addition, GetSmart-TM-'s Base Line Pricing Report routinely
analyzes changes in prices charged to managed accounts, an analysis the Company
believes is unique in the industry.
GetSmart-TM- also provides customers with a system of management controls
for certain services. Customers may control cost center access with passwords,
allocate inventories to cost centers, limit the transacting and reporting
authority of each cost center by product or product line, constrain purchases
and requisitions to amounts budgeted for each cost center, and suspend
transactions until they are reviewed and approved. The Company can customize
GetSmart-TM- to create optimal programs for its customers.
INFORMA-TM- SYSTEM. Workflow Graphics offers the Informa-TM- system in
Canada. Informa-TM- supports requisition, distribution, and digital imaging
services with a central transaction database and a variety of customer
interfaces. In addition to sophisticated print-on-demand capabilities,
Informa-TM- provides much of the functionality of the GetSmart-TM- system:
inventory inquiries and releases; order tracking; usage analysis and
forecasting; detailed reporting for cost centers and products; and
procurement-card and X.12 EDI billing. Customer interfaces include terminal
access, a graphical user interface client, e-mail, World Wide Web browser,
touch-tone, and automated voice recognition. Informa-TM- is accessed through
leased lines, dial-up service, Internet and wide area networks.
Informa-TM-'s Electronic Job Ticket ("EJT") interface is a specialized
e-mail enabling customers to requisition documents and other products from the
Company's distribution centers, and to route attached documents to the Company's
network of Imagenet print-on-demand facilities. EJT's print on demand feature
supports a broad range of custom specifications, including quantities; fixed and
variable imaging; page orientation; paper size, weight, grade, and color;
drilling and binding; and cover page. EJT also provides fields for the
customer's budget code, billing information, and distribution instructions. EJT
originates jobs ranging from single impressions, to thousands of copies
delivered to a single location, to thousands of documents mailed to tens of
thousands of recipients.
Workflow Graphics provides customers with World Wide Web access to
Informa-TM- through its Imagenet Document Manager. This application provides a
browser interface to Informa-TM-'s transaction and reporting features for
managing and distributing inventories held for customers. The application also
offers a full-featured document librarian, with image storage, retrieval,
viewing, downloading, archiving, and version control. In addition, Imagenet
Document Manager provides estimation and requisition for digital print-on-demand
orders. Production images for these orders can be uploaded to the Web or
retrieved from the application's document library.
OPERATIONS
SALES. Workflow Graphics sells its products directly to end-users, as well
as to distributors and brokers who re-sell to end-users. The Company employs
more than 350 sales representatives and 175 customer service personnel in 63
sales offices throughout the United States and Canada. Sales representatives are
compensated through salaries and commissions. Commissioned sales representatives
are compensated based on either product sales or gross margins. In addition to
the Company's line of documents, commercial printing, envelopes and related
products, the sales force offers value-added services including workflow
analysis, design, document management, and print-on-demand. The Company's sales
force is supported by its GetSmart-TM- and Informa-TM- transaction and
information systems. See "--Print Management."
PURCHASING. Workflow Graphics purchases raw materials such as paper stock,
ink, stock envelopes, adhesives, plates, film, chemicals, and cartons from a
variety of manufacturers and resellers. These materials are purchased job-by-job
or under contracts with terms of up to two years. Longer-term supply contracts
generally specify services to be provided and may guarantee product
availability, but typically reserve to vendors the right to adjust prices as
required by market conditions. The largest suppliers of paper stock to the
Company are Rollsource, Appleton, Mead, Avenor and Domtar. Workflow Graphics
39
also purchases finished goods for resale to customers. These finished goods
include the Company's full line of documents, envelopes and commercial printing.
Workflow Graphics has more than 3,500 suppliers of finished goods, including,
among the largest, Ward Kraft Forms, United Computer Supplies, Gilman Sky,
Transkrit, and United Stationers, Inc.
MANUFACTURING. Workflow Graphics manufactures documents and envelopes.
Documents produced by the Company include continuous and snap-apart forms, roll
forms, cut sheets and label/form combinations, and checks and other security
documents. Workflow Graphics operates 13 document plants in Canada, and four in
the U.S. These plants employ more than 1,100 manufacturing personnel and utilize
over 250 presses and other machines. The Company also manufactures a broad line
of conventional and specialty envelopes in four plants located in New York, New
Jersey and Pennsylvania. The envelope plants currently operate more than 80
manufacturing and printing machines. Workflow Graphics operates a network of
eight Imagenet-TM- print-on-demand facilities, providing digital imaging and
litho quick printing. The Company also operates several conventional and digital
pre-press systems for converting text and graphics to film and plates prior to
printing. Among these pre-press capabilities are several state-of-the art
digital systems which enhance overall production efficiency and provide
high-process capabilities to customers.
DISTRIBUTION. Products manufactured by Workflow Graphics are either shipped
directly to customers or held in inventory and shipped as requisitioned by
customers. Finished goods purchased by the Company from manufacturers and
wholesalers are either shipped directly to customers by vendors, or shipped to,
stored in, and shipped from one of the Company's distribution centers. Workflow
Graphics owns or leases nine distribution centers in the United States and 17 in
Canada, and rents additional warehouse space as necessary. More than 120
distribution personnel are employed by Workflow Graphics. Products are
transported from the Company's suppliers and to its customers by short-haul,
regional, contract and custom carriers, as well as by air and ground courier
services.
CUSTOMERS
Workflow Graphics has more than 22,000 customers ranging in size from small
office/home office businesses to Fortune 500 companies in industries such as
healthcare, insurance, energy, advertising, travel and financial services.
Significant customers of the Company include: Automatic Data Processing, Aetna,
Inc., Bank of Montreal, Citibank N.A., Chase Manhattan Corp., Group Health
Incorporated, Health Insurance Plan of Greater New York, Inc., Heilig-Meyers
Company, Merrill Lynch & Co., Inc., Popular, Inc., Shell Canada and Salomon
Smith Barney Holdings, Inc.
The Company's five largest customers accounted for 8.7% of the Company's net
sales for the fiscal year ended April 26, 1997. The Company's single largest
customer accounted for 2.2% of net sales for the fiscal year ended April 26,
1997.
COMPETITION
Workflow Graphics competes for retail sales of documents and envelopes
against other independent distributors and against manufacturers' direct sales
organizations. In commercial printing, the Company also competes with
manufacturers' direct sales organizations, independent brokers, advertising
agencies and design firms. The principal competitive factors in the graphic arts
industry are price, quality, selection, services, production capacity, delivery
and customer support.
Although Workflow Graphics often competes with smaller businesses, it also
competes against the largest competitors in the North American documents
industry, such as Moore Corporation Ltd., Reynolds & Reynolds Company, Standard
Register Company and Wallace Computer Services, Inc., and the largest
competitors in the U.S. envelope industry, such as Mail-Well, Westvaco and
Tension Envelope Company. The largest competitors for commercial printing
include direct sales organizations of Graphic Industries, Inc., R. R. Donnelley
& Sons, Quebecor, Inc. and World Color Press, Inc.
40
Because of its large product line and vendor base, extensive services and
experienced sales force and management team, Workflow Graphics believes it is
well positioned to compete in the graphic arts industry, and become a leading
single source for graphic arts products and related services by consolidating
local and regional companies.
EMPLOYEES
As of December 31, 1997, Workflow Graphics had more than 2,000 full- and
part-time employees, including over 550 in sales and sales support, more than
1,200 in manufacturing and more than 200 in finance and administration.
Approximately 13% of the Company's employees are represented by labor unions in
the United States. The Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
Workflow Graphics has more than 40 registered trademarks in the U.S. and
Canada, including Informa-TM- and Imagenet-TM-. The Company believes that its
trademarks and other proprietary rights are material to the operations of its
business. Workflow Graphics regards its GetSmart-TM- and Informa-TM- software as
proprietary, and relies on a combination of copyright and trademark laws, trade
secrets, confidentiality agreement and contractual provisions to protect its
rights. Workflow Graphics is not aware that any of its software, trademarks or
other proprietary rights are being infringed by third parties, or that it
infringes proprietary rights of third parties. See "Risk Factors--Dependence on
Intellectual Property Rights; Risks of Infringement."
PROPERTIES
The following table sets forth certain information about the Company's
executive offices and manufacturing and printing facilities:
APPROXIMATE
SQUARE LEASE
FUNCTION AND LOCATION FOOTAGE TITLE EXPIRATION
- ---------------------------------------------------------------------- ------------ ---------- --------------------
EXECUTIVE OFFICE:
New York, New York.................................................. 12,000 Leased 2004
MANUFACTURING AND PRINTING:
Conyers, Georgia.................................................... 71,300 Leased 2006
Mt. Olive, Illinois................................................. 82,000 Leased 2004
Springfield, Massachusetts.......................................... 65,000 Leased 2004
Lyndhurst, New Jersey............................................... 16,000 Leased 2000
New York, New York.................................................. 160,000 Leased 2002
New York, New York.................................................. 53,000 Leased 2005
New York, New York.................................................. 60,000 Leased 2002
Mt. Pocono, Pennsylvania............................................ 140,000 Owned --
Norfolk, Virginia................................................... 26,400 Owned --
Calgary, Alberta.................................................... 48,000 Leased 1999
Calgary, Alberta.................................................... 30,000 Leased 1999
Edmonton, Alberta................................................... 81,000 Leased 2006
Victoria, British Columbia.......................................... 14,000 Leased 1999
41
APPROXIMATE
SQUARE LEASE
FUNCTION AND LOCATION FOOTAGE TITLE EXPIRATION
- ---------------------------------------------------------------------- ------------ ---------- --------------------
Winnipeg, Manitoba.................................................. 12,500 Leased 2002
Brampton, Ontario................................................... 174,500 Leased 1999
Brampton, Ontario................................................... 44,200 Leased 2000
London, Ontario..................................................... 17,500 Leased month-to-month
Mississauga, Ontario................................................ 60,000 Leased 2004
Mississauga, Ontario................................................ 7,200 Leased month-to-month
Toronto, Ontario.................................................... 10,000 Leased 2000
Regina, Saskatchewan................................................ 28,000 Leased 2006
Dorval, Quebec...................................................... 42,000 Owned --
Granby, Quebec...................................................... 100,000 Owned --
Pointe Claire, Quebec............................................... 30,000 Leased 1998
In addition to those facilities identified above, Workflow Graphics leases
other offices, warehouses and distribution centers across the United States and
Canada.
Workflow Graphics believes that its properties are adequate to support its
operations for the foreseeable future.
ENVIRONMENTAL
The Company's operations are subject to U.S. and Canadian federal, state,
provincial and local environmental laws and regulations relating to air
emissions, waste generation, handling, management and disposal, and at certain
facilities, wastewater treatment and discharge. Workflow Graphics utilizes
certain hazardous materials, such as washes, inks and alcohol products, in its
operations, and generates both hazardous and non-hazardous waste. Seven of the
Company's facilities are registered into the ISO 9002 Process Quality Program,
and management believes that the Company's current operations are in substantial
compliance with applicable environmental laws and regulations. See "Risk
Factors--Costs and Risks of Loss Relating to Environmental Compliance."
LEGAL MATTERS
Workflow Graphics is involved in various lawsuits arising in the ordinary
course of business. Workflow Graphics believes that the outcome of these matters
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
42
MANAGEMENT OF WORKFLOW GRAPHICS
DIRECTORS AND EXECUTIVE OFFICERS
Following the Workflow Distribution, it is anticipated that the directors
and executive officers of the Company will be as follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Thomas B. D'Agostino................................. 55 Chairman of the Board
Chief Executive Officer and Director
Michael B. Feldman................................... 37 Vice President of Finance and Chief Financial Officer
Thomas A. Brown, Sr.................................. 55 Director*
Gus J. James, II..................................... 59 Director*
Jonathan J. Ledecky.................................. 40 Director*
Timothy L. Tabor..................................... 44 Director*
- ------------------------
* Messrs. Brown, James, Ledecky and Tabor are expected to join the Board of
Directors of Workflow Graphics promply following the Distribution.
THOMAS B. D'AGOSTINO is Chairman of the Board and Chief Executive Officer of
the Company. Mr. D'Agostino has been President of SFI or its predecessor
company, Forms & Peripherals, Inc., since 1972, and was appointed President of
U.S. Office Products Print Management Division in January 1997 when U.S. Office
Products acquired SFI and Hano.
MICHAEL B. FELDMAN is Vice President of Finance and Chief Financial Officer
of the Company. Mr. Feldman was appointed Controller of SFI in 1987 and Vice
President of Finance and Chief Financial Officer in 1995. He has served as
Hano's Vice President of Finance and Chief Financial Officer since 1992.
THOMAS A. BROWN, SR. has served as the Vice
President-Purchasing/Sourcing/Logistics of Pfizer, Inc., a large pharmaceutical
company, since May 1996. From June 1991 until May 1996, Mr. Brown was Vice
President-Procurement of Aetna, Inc., a national insurance company.
GUS J. JAMES, II is the President, a director and shareholder of the law
firm of Kaufman & Canoles in Norfolk, Virginia. Mr. James has practiced law with
Kaufman & Canoles since 1967. See "Related Party Transactions."
JONATHAN J. LEDECKY will serve as a Director of the Company and each of the
other Spin-Off Companies as of the Distribution Date. He founded Consolidation
Capital Corporation in February 1997 and will serve as its Chairman and Chief
Executive Officer. Mr. Ledecky founded U.S. Office Products in October 1994 and
will serve as its Chairman of the Board until the Distribution Date and served
as its Chief Executive Officer until November 5, 1997. Mr. Ledecky has also
served as the Non-Executive Chairman of the Board of USA Floral Products, Inc.
since April 1997 and as the Non-Executive Chairman of the Board of UniCapital
Corporation since October 1997. Mr. Ledecky served from 1989 to 1991 as the
President of The Legacy Fund, Inc., and from 1991 to September 1994 as President
and Chief Executive Officer of Legacy Dealer Capital Fund, Inc., a wholly-owned
subsidiary of Steelcase Inc., the nation's largest manufacturer of office
furniture products. Prior to his tenure at The Legacy Fund, Inc., Mr. Ledecky
was a partner at Adler and Company and a Senior Vice President at Allied Capital
Corporation, an investment management company.
TIMOTHY L. TABOR has served as Executive Vice President of U.S. Office
Products Print Management Division and Executive Vice President and Chief
Operating Officer of SFI and Hano since May 1997. From 1996 until 1997, he
served as an executive officer of SFI and Hano. From 1993 to 1995, Mr. Tabor
managed his own investments. From 1987 to 1993, Mr. Tabor held various positions
with Tudor Investment
43
Corp., serving as Director of Technology from 1987 to 1990, Director of the
Securities Department from 1990 until 1992 and as a proprietary trader in 1993.
Directors are elected for a one-year term and hold office until their
successors have been elected and qualified or until such director's earlier
resignation or removal.
The Company Board intends to create an Audit Committee effective as of the
Workflow Distribution. The Audit Committee will be charged with reviewing
Workflow Graphics' annual audit and meeting with the Company's independent
accountants to review the Company's internal controls and financial management
practices.
The Company Board also intends to create a Compensation Committee effective
as of the Workflow Distribution. The Compensation Committee will be charged with
determining the compensation of Workflow Graphics' executive officers and
administering any stock option plan the Company may adopt.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by the Company for services rendered during the year ended April 26, 1997
to the Chief Executive Officer and to the other officers of the Company whose
combined compensation exceeded $100,000 during this period (collectively the
"Named Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM
---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- -------------------------------------------------------- ---------- ---------- ------------- -------------
Thomas B. D'Agostino
Chairman of the Board
Chief Executive
Officer and Director.................................. $ 400,000 $ 100,000 -- $ 11,014(1)
Michael B. Feldman
Vice President of Finance
and Chief Financial Officer........................... $ 119,020 $ 25,000 36,391 $ 6,337(2)
Timothy L. Tabor (3)
Executive Vice President-
U.S. Office Products Print
Management Division................................... $ 170,000 $ 15,000 48,522 $ 4,834(4)
- ------------------------
(1) Includes $6,536 of insurance premiums and $4,479 of 401(k) plan
contributions paid by the Company on Mr. D'Agostino's behalf.
(2) Includes $3,268 of insurance premiums and $3,069 of 401(k) plan
contributions paid by the Company on Mr. Feldman's behalf.
(3) The Company anticipates that Mr. Tabor will resign as an officer and
employee of U.S. Office Products, SFI and Hano prior to the Distribution
Date.
(4) Includes $4,834 of insurance premiums paid by the Company on Mr. Tabor's
behalf.
The following table sets forth certain information regarding options to
acquire U.S. Office Products Common Stock granted to the Named Officers during
the year ended April 26, 1997. As described above, all options were granted by
U.S. Office Products as options to acquire U.S. Office Products Common Stock and
are expected to be replaced with options to acquire Company Common Stock in
connection with the
44
Workflow Distribution. See "The Workflow Distribution--Effect on Outstanding
U.S. Office Products Options held by Workflow Graphics Employees."
OPTIONS GRANTED IN FISCAL YEAR 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM (3)
OPTIONS GRANTED IN EXERCISE EXPIRATION ----------------------
NAME GRANTED (1) FISCAL YEAR(2) PRICE DATE 5% 10%
- ------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
Thomas B. D'Agostino (4)....... -- 0.0% -- -- -- --
Timothy L. Tabor(5)(6)......... 48,522 12.1% $ 10.70 1/24/2007 $ 326,513 $ 827,448
Michael B. Feldman (5)(6)...... 36,391 9.0% $ 10.70 1/24/2007 $ 244,881 $ 620,577
- ------------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant. All of these options are fully
vested.
(2) Total options granted means all options granted to employees of SFI who, as
a result of U.S. Office Products' acquisition of SFI, had their SFI stock
options converted into U.S. Office Products stock options.
(3) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the SEC for illustration purposes only.
They are not intended to forecast possible future appreciation, if any, of
stock prices. No gain to the optionees is possible without an increase in
stock prices, which will benefit all stockholders.
(4) Thomas B. D'Agostino was granted 45,000 options at an exercise price of
$15.17 on April 28, 1997, which expire on April 28, 2007.
(5) The options granted to Michael B. Feldman and Timothy L. Tabor during fiscal
1997 are the result of the acquisition of SFI by U.S. Office Products. These
options represent the U.S. Office Products stock options into which SFI
options were converted.
(6) Michael B. Feldman and Timothy L. Tabor were each granted 15,000 options at
an exercise price of $15.17 on April 28, 1997, which expire on April 28,
2007. Mr. Feldman was also granted 22,500 options at an exercise price of
$21.13 on September 17, 1997, which expire on September 17, 2007.
The following table sets forth certain information regarding option
exercises and unexercised options held by the Named Officers at April 26, 1997.
As described above, all options were granted by U.S. Office Products as options
to acquire U.S. Office Products Common Stock and are expected to be replaced
with options to acquire shares of Company Common Stock in connection with the
Workflow Distribution. See "The Workflow Distribution--Effect on Outstanding
U.S. Office Products Options held by Workflow Graphics Employees."
45
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 26, 1997
AND FISCAL YEAR-END 1997 OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT APRIL 26, IN-THE- MONEY (1) OPTIONS
1997 AT FISCAL YEAR END ($) (2)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------------- ------------- ----------- ------------- ----------- -------------
Thomas B. D'Agostino........ -- -- -- -- -- --
Timothy L. Tabor............ -- -- 48,522 -- $ 212,526 $ --
Michael B. Feldman.......... -- -- 36,391 -- $ 159,502 --
- ------------------------
(1) Options are "in-the-money" if the closing market price of U.S. Office
Products Common Stock exceeds the exercise price of the options.
(2) The value of unexercised options represents the difference between the
exercise price of such options and $15.08, the closing market price of U.S.
Office Products Common Stock at April 26, 1997.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Jonathan J. Ledecky entered into the Ledecky Services Agreement with U.S.
Office Products on January 13, 1998, effective on the Distribution Date and
contingent on the consummation of the Distributions. The Ledecky Services
Agreement will expire on September 30, 1998 if none of the Distributions has
occurred by that date. If the Ledecky Services Agreement becomes effective, it
will replace his employment agreement with U.S. Office Products as amended
November 4, 1997.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products and also provides certain benefits and obligations with
respect to Workflow Graphics and the other Spin-Off Companies. Under the Ledecky
Services Agreement, Mr. Ledecky remains an employee of U.S. Office Products, at
an annual salary of $48,000, through June 30, 2001, with the contract terminable
by U.S. Office Products only if he violates the non-competition provision of the
agreement.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions until the fourth anniversary of the Distribution
Date. These provisions generally restrict Mr. Ledecky from, among other things,
investing in or working for or on behalf of any business selling any products or
services in direct competition with U.S. Office Products and the Spin-Off
Companies (collectively, the "U.S. Office Products Companies"), within 100 miles
of any location where any of the U.S. Office Products Companies conducts
business. (For this purpose, "products or services" are those in effect as of
January 13, 1998.) The Ledecky Services Agreement prohibits Mr. Ledecky from
calling upon managerial employees of the U.S. Office Products Companies to hire
them away and from calling upon customers of the U.S. Office Products Companies
to solicit or sell products or services in direct competition with the U.S.
Office Products Companies. Mr. Ledecky is also barred from hiring away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by the U.S. Office Products Companies. The Ledecky Services Agreement
includes Mr. Ledecky's agreement that four years is a reasonable period of time
for this provision and that U.S. Office Products will assign to Workflow
Graphics and the other Spin-Off Companies the ability to enforce the
non-competition provisions described above as to their own businesses.
Under the Ledecky Services Agreement, the Board of Directors of U.S. Office
Products has agreed that Mr. Ledecky will receive a stock option for Company
Common Stock from Workflow Graphics as of the Distribution Date. The Board of
Directors of U.S. Office Products intends the option to be compensation for Mr.
Ledecky's services to Workflow Graphics as a director, and certain services as
an employee. The option will cover up to 7.5% of the outstanding Company Common
Stock determined as of the Distribution Date, with no anti-dilution provisions
in the event of issuance of additional shares of
46
Company Common Stock (other than with respect to stock splits or reverse stock
splits). The option will have a per share exercise price equal to the price of
the first trade (the "Initial Trading Price") on the day the Company Common
Stock is first publicly traded (the "First Trade Date").
Mr. Ledecky's option will be fully exercisable as to two-thirds of the
shares it covers when granted. The remainder of the option will become
exercisable as follows: (i) as of the 18-month anniversary of the First Trade
Date if the average closing trading price over the 15 business days preceding
that anniversary date exceeds the Initial Trading Price (with the prices
adjusted for stock splits or reverse stock splits or other corporate events that
cause Workflow Graphics to adjust substantially all outstanding options) by at
least 25% or (ii) as of the sixth anniversary of the First Trade Date if the
clause (i) condition is not met and Mr. Ledecky is still employed by Workflow
Graphics at that anniversary. Option exercisability will accelerate if Mr.
Ledecky dies before the option expires or, if and to the extent that, Workflow
Graphics accelerates the exercise schedule of options for substantially all
management option holders. All unexercised portions of the option will expire
ten years after its date of grant or, if applicable, as of the date Mr. Ledecky
violates his non-competition agreement with Workflow Graphics.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
On January 23, 1997, SFI entered into an employment agreement with Thomas B.
D'Agostino, its President and Chief Executive Officer. The employment agreement
provides for a four-year term. Pursuant to this agreement, Mr. D'Agostino is
entitled to receive minimum annual compensation of $400,000, incentive bonuses
as determined by the compensation committee of the U.S. Office Products Board of
Directors and certain perquisites and benefits. In the event that Mr.
D'Agostino's employment is terminated for any reason other than cause, Mr.
D'Agostino's employment agreement provides that he is entitled to receive his
base salary and benefits for the longer of (i) six months from the date of
termination, or (ii) the remaining time under the term of the employment
agreement. The employment agreement also contains a non-competition covenant
which prohibits Mr. D'Agostino from engaging in certain activities during the
term of the employment agreement and for the longer of (i) a period of one year
thereafter, or (ii) as long as Mr. D'Agostino continues to receive severance
payments from SFI.
On January 23, 1997, Hano entered into an employment agreement with Timothy
L. Tabor in the capacity of Executive Vice President. The employment agreement
provides a one-year initial term and a one-year renewal term. Pursuant to this
agreement, Mr. Tabor is entitled to receive minimum annual compensation of
$260,000, incentive bonuses as determined by the compensation committee of the
U.S. Office Products Board of Directors and certain perquisites and benefits. In
the event that Mr. Tabor's employment is terminated for any reason other than
cause, Mr. Tabor's employment agreement provides that he is entitled to receive
his base salary and benefits for the longer of (i) three months from the date of
termination, or (ii) the remaining time under the term of the employment
agreement. The employment agreement also contains a non-competition covenant
which prohibits Mr. Tabor from engaging in certain activities during the term of
the employment agreement and for the longer of (i) a period of one year
thereafter, or (ii) as long as Mr. Tabor continues to receive severance payments
from Hano.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until a Compensation Committee of the Company Board is created, decisions
regarding the compensation of executive officers will be made by the Company
Board.
No member of the Board of Directors of Workflow Graphics has ever been an
officer of the Company or any of its subsidiaries, except that Mr. D'Agostino is
the President of U.S. Office Products Print Management Division, and President
and Chief Executive Officer of SFI and Mr. Tabor is the Executive Vice President
of U.S. Office Products Print Management Division and the Executive Vice
President and Chief Operating Officer of SFI and Hano. In addition, Mr. Ledecky
was the Chief Executive Officer of
47
U.S. Office Products until November 5, 1997 and will be Chairman of U.S. Office
Products until the Distribution Date.
RELATED PARTY TRANSACTIONS
On January 24, 1997, in separate, related transactions, U.S. Office Products
acquired SFI and Hano from Thomas B. D'Agostino, the Chairman and Chief
Executive Officer of Workflow Graphics, and other stockholders, including Thomas
B. D'Agostino, Jr., Mr. D'Agostino's son, for a total of 3,628,500 shares of
U.S. Office Products Common Stock valued at $18.00 per share. The transactions
were effected through mergers which were accounted for as pooling of interests.
At the time of the acquisitions, Mr. D'Agostino owned 98% of the issued and
outstanding securities of SFI, and 75% of the issued and outstanding securities
of Hano, and received 3,387,699 shares of U.S. Office Products Common Stock in
consideration for these transactions. Thomas B. D'Agostino, Jr. received 73,144
shares of U.S. Office Products Common Stock in consideration for these
transactions. In connection with the transaction, SFI entered into a four-year
employment agreement with Mr. D'Agostino which provided an annual salary of
$400,000 and a one-year employment agreement with Timothy L. Tabor, who is
expected to be named a director of the Company, which provided an annual salary
of $260,000. See "Management of Workflow Graphics-- Employment Contracts and
Related Matters."
The Company has from time to time retained the law firm of Kaufman & Canoles
in connection with certain legal representations. Gus J. James II, who is
expected to be named a director of the Company, is the president, a director and
a shareholder of Kaufman & Canoles.
Prior to December 1996, SFI leased warehouse space from a partnership in
which Mr. D'Agostino had a 50% interest. The total payments by SFI under this
lease were $81,000 in calendar years 1995 and 1996, respectively. This lease was
terminated in December 1996.
Prior to the Workflow Distribution, the Company expects to enter into a
lease with an entity owned or controlled by Mr. D'Agostino for office space in
Norfolk, Virginia. The terms of any such lease have not yet been determined. The
Company anticipates that lease payments will be based on the market value of the
office space and will be comparable to rents that would be charged to parties
not affiliated with Mr. D'Agostino.
SFI loaned Mr. D'Agostino $453,000 in 1995 and $382,000 in 1996. Interest
was accrued on amounts outstanding at prime plus 1%. All of Mr. D'Agostino's
outstanding indebtedness to SFI was offset against dividend distributions to Mr.
D'Agostino.
48
PRINCIPAL STOCKHOLDERS OF WORKFLOW GRAPHICS
The following table sets forth the number and percentage of outstanding
shares of the Company Common Stock that are expected to be beneficially owned by
(i) all persons known by Workflow Graphics to own beneficially more than 5% of
U.S. Office Products Common Stock, (ii) each director and each Named Officer who
is a stockholder, and (iii) all directors and executive officers as a group. The
table reflects shares of U.S. Office Products Common Stock owned as of February
12, 1998. Assuming a Distribution Ratio of one for one, the number and percent
of shares of Company Common Stock beneficially owned by the following
stockholders on the Distribution Date should be equal to the number of shares of
U.S. Office Products Common Stock owned by them on the Distribution Date (which
will exclude any shares purchased from these persons in the Tender Offer),
except that the number of shares beneficially owned with respect to options that
are exercisable within 60 days of the Distribution Date may be different
depending on the ratio at which options for U.S. Office Products Common Stock
are replaced with options for Company Common Stock. See "The Workflow
Distribution--Effect on Outstanding U.S. Office Products Options Held by
Workflow Graphic Employees."
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------------------------------------------- ------------ -----------
Thomas B. D'Agostino (1)................................................................... 747,206 *
301 Australian Ave.
Palm Beach, FL 33480
Thomas A. Brown, Sr........................................................................ 0 0%
165 Flanders Road
Bethlehem, CT 06751
Jonathan J. Ledecky (2).................................................................... 2,428,125 1.7%
Gus J. James, II........................................................................... 0 0%
One Commercial Place
Norfolk, VA 23514
Timothy L. Tabor (3)....................................................................... 52,272 *
276 Park Avenue South,
New York, NY 10010
Michael B. Feldman (4)..................................................................... 40,141 *
3701 E. Virginia Beach Blvd.,
Norfolk, VA 23502
All current executive officers and directors as a group (six persons)...................... 3,267,744 2.3%
5% STOCKHOLDERS
FMR Corp.(5)............................................................................... 15,754,406 11.2%
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services (5)....................................................... 8,262,886 5.9%
500 Boylston Street
Boston, MA 02116
- ------------------------
* Less than 1%.
(1) Includes 11,250 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution.
(2) In addition, Mr. Ledecky has an option that will become exercisable on the
Distribution Date for a number of shares of Company Common Stock equal to 5%
of the shares issued and outstanding on the Distribution Date. See
"Management of Workflow Graphics--Director Compensation and Other
Arrangements." Excludes options for U.S. Office Products Common Stock that
will not be converted into options for Company Common Stock at the time of
the Workflow Distribution.
(3) Includes 52,272 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution.
(4) Includes 40,141 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution.
(5) Based upon a Schedule 13G filed with the SEC.
49
DESCRIPTION OF WORKFLOW GRAPHICS CAPITAL STOCK
GENERAL
At the time of the Workflow Distribution, the Company's authorized capital
stock is expected to consist of shares of Company Common Stock and
shares of preferred stock, par value $.001 per share (the "Preferred
Stock"). At the time of the Workflow Distribution, the Company is expected to
have outstanding approximately shares of Company Common Stock and no
shares of Preferred Stock. Set forth below is a description of Workflow
Graphics' capital stock.
COMPANY COMMON STOCK
The holders of Company Common Stock are entitled to one vote for each share
on all matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock, the
holders of the Company Common Stock are entitled to such dividends as may be
declared in the discretion of the Company Board out of funds legally available
therefor. See "Dividend Policy." The holders of Company Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any Preferred Stock then outstanding. The holders of Company Common
Stock have no preemptive rights to purchase shares of stock of the Company.
Shares of Company Common Stock are not subject to any redemption provisions and
are not convertible into any other securities of the Company. All of the shares
of Company Common Stock to be distributed pursuant to the Workflow Distribution
will be fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Company Board as
shares of one or more classes or series. Subject to the provisions of the
Company's Certificate of Incorporation and limitations prescribed by law, the
Company Board is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares and to change the number of shares constituting any
series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Company Board to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the authority of the
Company Board described above may adversely affect the rights of the holders of
Company Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Company Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Company Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Company Common Stock or
may otherwise adversely affect the market price of the Company Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
50
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation if such affiliate or associate was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Certificate of Incorporation and under Delaware law,
directors of Workflow Graphics are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
Workflow Graphics has not yet appointed a Transfer Agent and Registrar for
the Company Common Stock but expects to do so prior to the Workflow
Distribution.
51
EXPERTS
The financial statements included in this Information Statement/Prospectus
(except as they relate to the unaudited interim periods) have been audited by
various independent accountants. The companies and periods covered by these
audits are indicated in the individual accountants' reports. Such financial
statements have been so included in reliance on the reports of the various
independent accountants given on the authority of such firms as experts in
auditing and accounting.
LEGAL MATTERS
The validity of shares of Company Common Stock and certain tax matters
relating to the Distributions will be passed upon on behalf of Workflow Graphics
and U.S. Office Products by Wilmer, Cutler & Pickering, Washington, D.C.
52
WORKFLOW GRAPHICS, INC.
INDEX TO FINANCIAL STATEMENTS
WORKFLOW GRAPHICS, INC.
Introduction to Pro Forma Financial Information
Pro Forma Combined Balance Sheet as of October 25, 1997 (unaudited)
Pro Forma Combined Statement of Income for the six months ended October 25, 1997
(unaudited)
Pro Forma Combined Statement of Income for the six months ended October 26, 1996
(unaudited)
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited)
Notes to Pro Forma Combined Financial Statements
Report of Price Waterhouse LLP, Independent Accountants
Report of KPMG Peat Marwick LLP, Independent Auditors
Report of KPMG Peat Marwick LLP, Independent Auditors
Report of Hertz, Herson & Company, LLP, Independent Auditors
Report of Hertz, Herson & Company, LLP, Independent Auditors
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and October 25, 1997
(unaudited)
Consolidated Statement of Income for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the six
months ended October 26, 1996 (unaudited) and October 25, 1997 (unaudited)
Consolidated Statement of Stockholder's Equity for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997
and the six months ended October 25, 1997 (unaudited)
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and 1995,
the four months ended April 30, 1996, the fiscal year ended April 26, 1997 and the
six months ended October 26, 1996 (unaudited) and October 25, 1997 (unaudited)
Notes to Consolidated Financial Statements
ASTRID OFFSET CORPORATION
Report of Price Waterhouse LLP, Independent Accountants
Balance Sheet as of July 31, 1997 and October 31, 1997 (unaudited)
Statement of Income for the year ended July 31, 1997 and the three months ended
October 31, 1996 (unaudited) and 1997 (unaudited)
Statement of Stockholder's Equity for the year ended July 31, 1997 and the three
months ended October 31, 1997 (unaudited)
Statement of Cash Flows for the year ended July 31, 1997 and the three months ended
October 31, 1996 (unaudited) and 1997 (unaudited)
Notes to Financial Statements
F-1
WORKFLOW GRAPHICS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
Workflow Graphics, Inc. (the "Company"), formerly the Print Management Division
of U.S. Office Products Company ("U.S. Office Products"), through the
distribution of shares of the Company to U.S. Office Products shareholders (the
"Distribution") and probable and completed acquisitions through February 13,
1998.
The pro forma combined balance sheet gives effect to the Distribution and
the probable acquisition of Astrid Offest Corporation as if both transactions
had occurred as of the Company's most recent balance sheet date, October 25,
1997. The pro forma combined statements of income for the fiscal year ended
April 26, 1997 and the six months ended October 25, 1997 and October 26, 1996
give effect to the Distribution and the acquisitions of Astrid Offset
Corporation and FMI Graphics, Inc., an individually insignificant company, in
business combinations accounted for under the purchase method which have been
completed or are probable during the fiscal year ending April 25, 1998 (the
"Fiscal 1998 Purchase Acquisition"), as if all such transactions had occurred on
May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes the audited financial information of the Company for the year ended
April 26, 1997 and the unaudited financial information of the Fiscal 1998
Purchase Acquisition for the period from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the six months ended October
25, 1997 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisition for the six months ended October 25, 1997.
The pro forma combined statement of income for the six months ended October
26, 1996 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisition for the six months ended October 26, 1996
The historical financial statements of the Company give retroactive effect
to the results of the seven companies acquired by the Company during the fiscal
year ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overheads have been allocated to the Company
using one of several factors, dependent on the nature of the costs being
allocated, including revenues, number and size of acquisitions and number of
employees.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Information Statement/Prospectus.
F-2
WORKFLOW GRAPHICS, INC.
PRO FORMA COMBINED BALANCE SHEET
OCTOBER 25, 1997
(IN THOUSANDS)
(UNAUDITED)
ASTRID
WORKFLOW OFFSET PRO FORMA PRO FORMA
GRAPHICS,INC. CORPORATION ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 385 $ 412 $ (797)(b) $
Accounts receivable, net............................... 55,334 1,180 56,514
Inventory.............................................. 28,216 237 28,453
Prepaid and other current assets....................... 2,454 1,006 3,460
------------ ----------- ----------- -----------
Total current assets................................. 86,389 2,835 (797) 88,427
Property and equipment, net.............................. 32,668 1,582 34,250
Intangible assets, net................................... 2,259 11,082(a) 13,341
Other assets............................................. 8,387 8,387
------------ ----------- ----------- -----------
Total assets......................................... $ 129,703 $ 4,417 $ 10,285 $ 144,405
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt........................................ $ 4,259 $ 329 $ (329)(b) $ 4,259
Short-term payable to U.S. Office Products............. 22,239 (22,239)(b)
Accounts payable....................................... 25,346 163 25,509
Accrued compensation................................... 3,742 3,742
Other accrued liabilities.............................. 8,126 56 8,182
------------ ----------- ----------- -----------
Total current liabilities............................ 63,712 548 (22,568) 41,692
Long-term debt........................................... 5,660 1,606 33,197(b) 40,463
Long-term payable to U.S. Office Products................ 21,955 13,200(a)
(35,155)(b)
Deferred income taxes.................................... 3,638 145 3,783
Other long-term liabilities.............................. 19 19
------------ ----------- ----------- -----------
Total liabilities.................................... 94,984 2,299 (11,326) 85,957
------------ ----------- ----------- -----------
Stockholder's equity:
Divisional equity...................................... 13,425 23,729(b) 37,154
Cumulative translation adjustment...................... 42 42
Retained earnings...................................... 21,252 21,252
Equity in purchased company............................ 2,118 (2,118)(a)
------------ ----------- ----------- -----------
Total stockholder's equity........................... 34,719 2,118 21,611 58,448
------------ ----------- ----------- -----------
Total liabilities and stockholder's equity........... $ 129,703 $ 4,417 $ 10,285 $ 144,405
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
See accompanying notes to pro forma combined financial statements.
F-3
WORKFLOW GRAPHICS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
WORKFLOW ASTRID
GRAPHICS, OFFSET FMI PRO FORMA PRO FORMA
INC. CORPORATION GRAPHICS, INC. ADJUSTMENTS COMBINED
------------- ------------- --------------- ------------- -----------
Revenues........................................ $ 173,347 $ 4,708 $ 1,914 $ (1,883)(c) $ 178,086
Cost of revenues................................ 127,547 2,790 1,258 (1,883)(c) 129,712
------------- ------ ------ ------------- -----------
Gross profit................................ 45,800 1,918 656 48,374
Selling, general and administrative expenses.... 35,884 920 499 (84)(d) 37,219
Amortization expense............................ 99 6 147(f) 252
------------- ------ ------ ------------- -----------
Operating income............................ 9,817 992 157 (63) 10,903
Other (income) expense:
Interest expense.............................. 1,390 2 397(h) 1,789
Interest income............................... (18) 18(h)
Other income.................................. (166) (128) (294)
------------- ------ ------ ------------- -----------
Income before provision for income taxes........ 8,593 1,138 155 (478) 9,408
Provision for income taxes...................... 3,480 4 374(i) 3,858
------------- ------ ------ ------------- -----------
Net income...................................... $ 5,113 $ 1,138 $ 151 $ (852) $ 5,550
------------- ------ ------ ------------- -----------
------------- ------ ------ ------------- -----------
Weighted average shares outstanding............. 95,963(j)
Net income per share............................ $ 0.06
-----------
-----------
See accompanying notes to pro forma combined financial statements.
F-4
WORKFLOW GRAPHICS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED OCTOBER 26, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
WORKFLOW ASTRID
GRAPHICS, OFFSET FMI PRO FORMA PRO FORMA
INC. CORPORATION GRAPHICS, INC. ADJUSTMENTS COMBINED
------------- ------------- --------------- ----------- -----------
Revenues........................................ $ 161,798 $ 4,851 $ 4,470 $ (1,940)(c) $ 169,179
Cost of revenues................................ 117,563 2,897 3,064 (1,940)(c) 121,584
------------- ------ ------ ----------- -----------
Gross profit................................ 44,235 1,954 1,406 47,595
Selling, general and administrative expenses.... 33,409 1,032 1,379 (529)(d) 35,753
462(e)
Amortization expense............................ 91 6 157(f) 254
------------- ------ ------ ----------- -----------
Operating income............................ 10,735 916 27 (90) 11,588
Other (income) expense:
Interest expense.............................. 2,250 10 (471)(h) 1,789
Interest income............................... (19) (7) 26(h)
Other......................................... 622 (81) (23) 518
------------- ------ ------ ----------- -----------
Income before provision for income taxes........ 7,863 1,016 47 355 9,281
Provision for income taxes...................... 1,708 2,098(i) 3,806
------------- ------ ------ ----------- -----------
Net income.................................. $ 6,155 $ 1,016 $ 47 $ (1,743) $ 5,475
------------- ------ ------ ----------- -----------
------------- ------ ------ ----------- -----------
Weighted average shares outstanding............. 95,963(j)
Net income per share............................ $ 0.06
-----------
-----------
See accompanying notes to pro forma combined financial statements.
F-5
WORKFLOW GRAPHICS, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
WORKFLOW ASTRID
GRAPHICS, OFFSET FMI PRO FORMA
INC. CORPORATE GRAPHICS, INC ADJUSTMENTS
------------- ----------- --------------- -------------
Revenues...................................................... $ 334,220 $ 9,963 $ 8,976 $ (3,985)(c)
Cost of revenues.............................................. 243,179 5,934 6,186 (3,985)(c)
------------- ----------- ------ -------------
Gross profit.............................................. 91,041 4,029 2,790
Selling, general and administrative expenses.................. 70,745 2,023 2,779 (1,057)(d)
490(e)
Amortization expense.......................................... 204 12 312(f)
Non-recurring acquisition costs............................... 5,006 (5,006)(g)
------------- ----------- ------ -------------
Operating income.......................................... 15,086 1,994 11 5,261
Other (income) expense:
Interest expense............................................ 4,827 10 (1,259)(h)
Interest income............................................. (25) (36) (15) 76(h)
Other....................................................... 632 (209) (15)
------------- ----------- ------ -------------
Income before provision for income taxes and extraordinary
items....................................................... 9,652 2,239 31 6,444
Provision for income taxes.................................... 3,591 3,941(i)
------------- ----------- ------ -------------
Income before extraordinary items............................. $ 6,061 $ 2,239 $ 31 $ 2,503
------------- ----------- ------ -------------
------------- ----------- ------ -------------
Weighted average shares outstanding...........................
Income before extraordinary items per share...................
PRO FORMA
COMBINED
-----------
Revenues...................................................... $ 349,174
Cost of revenues.............................................. 251,314
-----------
Gross profit.............................................. 97,860
Selling, general and administrative expenses.................. 74,980
Amortization expense.......................................... 528
Non-recurring acquisition costs...............................
-----------
Operating income.......................................... 22,352
Other (income) expense:
Interest expense............................................ 3,578
Interest income.............................................
Other....................................................... 408
-----------
Income before provision for income taxes and extraordinary
items....................................................... 18,366
Provision for income taxes.................................... 7,532
-----------
Income before extraordinary items............................. $ 10,834
-----------
-----------
Weighted average shares outstanding........................... 95,963(j)
Income before extraordinary items per share................... $ 0.11
-----------
-----------
See accompanying notes to pro forma combined financial statements.
F-6
WORKFLOW GRAPHICS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with the
acquisition of Astrid Offset Corporation ("Astrid"). The acquisition of Astrid
will be initially funded by U.S. Office Products, accordingly, an adjustment has
been made to increase the long-term payable to U.S. Office Products by $13,200.
The portion of the consideration assigned to goodwill ($11,082) in this
transaction, which was accounted for under the purchase method, represents the
excess of the cost over the fair market value of the net assets acquired. The
Company amortizes goodwill over a period of 40 years. The recoverability of the
unamortized goodwill will be assessed on an ongoing basis by comparing
anticipated undiscounted future cash flows from operations to net book value.
(b) Represents payment of debt of $797 and forgiveness of $23,729 of debt
due to U.S. Office Products as U.S. Office Products agreed to allocate only
$44,722 of the total debt payable to U.S. Office Products by the Company at the
date of the Distribution. The $23,729 of debt forgiven has been reflected as a
contribution of capital to the Company by U.S. Office Products.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(c) Adjustment to reflect the elimination of revenues and cost of revenues
on transactions between Astrid Offset and the Company.
(d) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions.
(e) Adjustment to reflect additional corporate overhead during the period
prior to the formation of the Print Management division by U.S. Office Products
as if the division had been formed on May 1, 1996.
(f) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 Purchase
Acquisitions for the periods prior to the respective dates of acquisition. The
Company has recorded goodwill amortization in the historical financial
statements from the respective dates of acquisition forward. The goodwill is
being amortized over an estimated life of 40 years.
(g) Adjustment to reflect the reduction in non-recurring acquisition costs
related to pooling-of-interests business combinations of $5,006 for the fiscal
year ended April 26, 1997.
(h) Adjustment to reflect the reduction in interest expense and interest
income resulting from the forgiveness of $23,729 of debt by U.S. Office
Products.
(i) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 41%. The
difference between the effective tax rate of 41% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill.
(j) The weighted average shares outstanding used to calculate pro forma
earnings per share is based upon 95,963 shares of common stock outstanding for
the periods. This is based upon the most current number of shares of common
stock of U.S. Office Products outstanding of 133,000 less 37,037 shares expected
to be repurchased by U.S. Office Products in the Tender Offer, and assumes a
distribution ratio of one share of Company Common Stock for each share of U.S.
Office Products Common Stock. The
F-7
WORKFLOW GRAPHICS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
actual distribution ratio will be determined prior to effectiveness of the
Registration Statement of which this Information Statement/Prospectus is a part,
and is expected to be less than one share of Company Common Stock for every one
share of U.S. Office Products Common Stock.
F-8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Workflow Graphics, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Workflow Graphics, Inc. (the
"Company") and its subsidiaries at April 30, 1996 and April 26, 1997, and the
results of their operations and their cash flows for the fiscal year ended
December 31, 1995, the four months ended April 30, 1996 and the fiscal year
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Hano Document Printers, Inc. ("Hano"), United Envelope Co., Inc. and its
affiliate, Rex Envelope Co. Inc. ("United") and Huxley Envelope Corporation
("Huxley"), wholly-owned subsidiaries, which statements reflect total revenues
for the year ended December 31, 1995 of $31,299,000, $81,917,000 and
$18,868,000, respectively. Those statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Hano, United and Huxley, is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 10, 1998
F-9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Workflow Graphics, Inc.:
We have audited the accompanying consolidated statements of income,
stockholder's equity and cash flows of Workflow Graphics, Inc. and subsidiaries
(the "Company") for the year ended December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
United Envelope Co., Inc. and its affiliate, Rex Envelope Co., Inc. ("United"),
and Huxley Envelope Corporation ("Huxley"), wholly owned subsidiaries, which
statements reflect total revenues constituting 46.3 percent of the consolidated
totals for the year ended December 31, 1994. Those statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for United and Huxley, is based solely on
the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Workflow
Graphics, Inc. and subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 17, 1998
F-10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Hano Document Printers, Inc.
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity and
cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-11
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliates as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-12
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Huxley Envelope Corporation
Industrial Park Blvd.
Mt. Pocono Industrial Park
Mt. Pocono, PA 18344
We have audited the accompanying balance sheets of Huxley Envelope
Corporation as at December 31, 1995 and 1994, and the related statements of
income and retained earnings (accumulated deficit) and cash flows for the years
then ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as at December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY LLP
New York, New York
March 4, 1996
F-13
WORKFLOW GRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
APRIL 30, APRIL 26, OCTOBER 25,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 1,324 $ 2,168 $ 385
Accounts receivable, less allowance for doubtful accounts of $1,993,
$1,831 and $2,808, respectively......................................... 50,942 50,917 55,334
Inventories............................................................... 23,815 26,990 28,216
Prepaid expenses and other current assets................................. 3,314 3,402 2,454
---------- ---------- -----------
Total current assets.................................................. 79,395 83,477 86,389
Property and equipment, net................................................. 31,647 33,119 32,668
Intangible assets, net...................................................... 879 913 2,259
Other assets................................................................ 6,028 7,599 8,387
---------- ---------- -----------
Total assets.......................................................... $ 117,949 $ 125,108 $ 129,703
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt........................................................... $ 23,515 $ 3,681 $ 4,259
Short-term payable to U.S. Office Products................................ 23,622 22,239
Accounts payable.......................................................... 22,163 27,031 25,346
Accrued compensation...................................................... 4,752 4,173 3,742
Other accrued liabilities................................................. 5,587 7,961 8,126
---------- ---------- -----------
Total current liabilities............................................. 56,017 66,468 63,712
Long-term debt.............................................................. 28,108 6,034 5,660
Long-term payable to U.S. Office Products................................... 20,891 21,955
Deferred income taxes....................................................... 4,704 4,045 3,638
Other long-term liabilities................................................. 121 19
---------- ---------- -----------
Total liabilities..................................................... 88,829 97,559 94,984
---------- ---------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity......................................................... 11,790 11,313 13,425
Cumulative translation adjustment......................................... 352 97 42
Retained earnings......................................................... 16,978 16,139 21,252
---------- ---------- -----------
Total stockholder's equity............................................ 29,120 27,549 34,719
---------- ---------- -----------
Total liabilities and stockholder's equity............................ $ 117,949 $ 125,108 $ 129,703
---------- ---------- -----------
---------- ---------- -----------
See accompanying notes to consolidated financial statements.
F-14
WORKFLOW GRAPHICS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
FOR THE
FOR THE FOR THE FOUR FISCAL FOR THE SIX
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------------------- ------------- ------------- ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26, OCTOBER 25,
1994 1995 1996 1997 1996 1997
------------ ------------ ------------- ------------- ----------- -----------
(UNAUDITED)
Revenues............................ $ 154,193 $ 309,426 $ 114,099 $ 334,220 $ 161,798 $ 173,347
Cost of revenues.................... 114,885 234,959 82,998 243,179 117,563 127,547
------------ ------------ ------------- ------------- ----------- -----------
Gross profit.................. 39,308 74,467 31,101 91,041 44,235 45,800
Selling, general and administrative
expenses.......................... 32,020 62,012 22,485 70,949 33,500 35,983
Non-recurring acquisition costs..... 5,006
------------ ------------ ------------- ------------- ----------- -----------
Operating income.............. 7,288 12,455 8,616 15,086 10,735 9,817
Other (income) expense:
Interest expense.................. 2,048 5,370 1,676 4,827 2,250 1,390
Interest income................... (18) (25)
Other............................. 186 62 (151) 632 622 (166)
------------ ------------ ------------- ------------- ----------- -----------
Income before provision for (benefit
from) income taxes and
extraordinary items............... 5,054 7,023 7,109 9,652 7,863 8,593
Provision for (benefit from) income
taxes............................. 379 (33) 1,351 3,591 1,708 3,480
------------ ------------ ------------- ------------- ----------- -----------
Income before extraordinary items... 4,675 7,056 5,758 6,061 6,155 5,113
Extraordinary items--losses on early
terminations of credit facilities,
net of income taxes............... 700 798
------------ ------------ ------------- ------------- ----------- -----------
Net income.......................... $ 4,675 $ 6,356 $ 5,758 $ 5,263 $ 6,155 $ 5,113
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Unaudited pro forma net income
before extraordinary items (see
Note 8)........................... $ 2,906 $ 5,111 $ 4,151 $ 3,687 $ 4,311 $ 5,113
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-15
WORKFLOW GRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
CUMULATIVE TOTAL
DIVISIONAL TRANSLATION RETAINED STOCKHOLDER'S
EQUITY ADJUSTMENT EARNINGS EQUITY
----------- ------------- ----------- -------------
Balance at December 31, 1993................................... $ 4,239 $ $ 7,436 $ 11,675
Cash dividends at Pooled Companies........................... (3,461) (3,461)
Net income................................................... 4,675 4,675
----------- ----- ----------- -------------
Balance at December 31, 1994................................... 4,239 8,650 12,889
Transactions of Pooled Companies:
Issuance of Pooled Company common stock in conjunction with
acquisition.............................................. 7,451 7,451
Capital contributions...................................... 100 100
Cash dividends............................................. (2,465) (2,465)
Cumulative translation adjustment............................ 388 388
Net income................................................... 6,356 6,356
----------- ----- ----------- -------------
Balance at December 31, 1995................................... 11,790 388 12,541 24,719
Cash dividends at Pooled Companies........................... (1,321) (1,321)
Cumulative translation adjustment............................ (36) (36)
Net income................................................... 5,758 5,758
----------- ----- ----------- -------------
Balance at April 30, 1996...................................... 11,790 352 16,978 29,120
Transactions of Pooled Companies:
Retirement of common stock................................. (477) (477)
Cash dividends............................................. (6,102) (6,102)
Cumulative translation adjustment............................ (255) (255)
Net income................................................... 5,263 5,263
----------- ----- ----------- -------------
Balance at April 26, 1997...................................... 11,313 97 16,139 27,549
Unaudited data:
Issuance of U.S. Office Products Company common stock in
conjunction with acquisition............................... 2,112 2,112
Cumulative translation adjustment............................ (55) (55)
Net income................................................... 5,113 5,113
----------- ----- ----------- -------------
Balance at October 25, 1997 (unaudited)........................ $ 13,425 $ 42 $ 21,252 $ 34,719
----------- ----- ----------- -------------
----------- ----- ----------- -------------
See accompanying notes to consolidated financial statements.
F-16
WORKFLOW GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE FOR THE SIX
FOR THE FOUR FISCAL MONTHS
FOR THE YEAR ENDED MONTHS ENDED YEAR ENDED ENDED
--------------------------- ------------- ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26,
1994 1995 1996 1997 1996
------------- ------------ ------------- ------------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income......................................... $ 4,675 $ 6,356 $ 5,758 $ 5,263 $ 6,155
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 1,921 5,890 3,583 8,147 3,972
Non-recurring acquisition costs.................. 5,006
Deferred income taxes............................ (660)
Extraordinary loss............................... 700 798
Other............................................ 92 122
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (4,607) (7,039) 3,098 25 649
Inventory...................................... 370 1,884 302 (3,175) (458)
Prepaid expenses and other current assets...... (720) (284) (354) 258 1,401
Accounts payable............................... 4,140 1,541 (339) 4,643 1,729
Accrued liabilities............................ 202 1,942 (930) 1,061 50
------------- ------------ ------------- ------------- -----------
Net cash provided by operating activities.... 6,073 11,112 11,118 21,366 13,498
------------- ------------ ------------- ------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.... (37,859)
Payments of non-recurring acquisition costs........ (4,100)
Additions to property and equipment, net of
disposals........................................ (1,716) (5,675) (4,423) (8,938) (5,485)
Cash received on the sale of property and
equipment........................................ 2,033
Other.............................................. (440) 1,147 (2,739) 541
------------- ------------ ------------- ------------- -----------
Net cash used in investing activities........ (123) (42,387) (4,423) (15,777) (4,944)
------------- ------------ ------------- ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........... 1,269 65,218 82 1,178 372
Payments of long-term debt......................... (4,194) (4,710) (23,135) (3,336)
Proceeds from (payments of) short-term debt, net... (134) (24,684) (5,844) (20,343) (3,378)
Payment to terminate credit facility............... (579) (311)
Payments of dividends at Pooled Companies.......... (2,266) (3,909) (1,321) (6,141) (2,847)
Retirement of common stock......................... (477)
Capital contributed by stockholders of Pooled
Company.......................................... 100
Advances from (to) U.S. Office Products............ 44,513
------------- ------------ ------------- ------------- -----------
Net cash provided by (used in) financing
activities................................. (5,325) 31,436 (7,083) (4,716) (9,189)
------------- ------------ ------------- ------------- -----------
Effect of exchange rates on cash and cash
equivalents........................................ 388 (29) (4)
------------- ------------ ------------- ------------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 625 549 (388) 844 (639)
Cash and cash equivalents at beginning of period..... 538 1,163 1,712 1,324 1,324
------------- ------------ ------------- ------------- -----------
Cash and cash equivalents at end of period........... $ 1,163 $ 1,712 $ 1,324 $ 2,168 $ 685
------------- ------------ ------------- ------------- -----------
------------- ------------ ------------- ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 2,349 $ 2,703 $ 794 $ 2,063 $ 558
Income taxes paid.................................. $ 437 $ 560 $ 674 $ 3,390 $ 1,078
OCTOBER 25,
1997
-----------
Cash flows from operating activities:
Net income......................................... $ 5,113
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 3,145
Non-recurring acquisition costs..................
Deferred income taxes............................
Extraordinary loss...............................
Other............................................
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (3,274)
Inventory...................................... (1,147)
Prepaid expenses and other current assets...... 197
Accounts payable............................... (1,682)
Accrued liabilities............................ (775)
-----------
Net cash provided by operating activities.... 1,577
-----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.... 114
Payments of non-recurring acquisition costs........ (906)
Additions to property and equipment, net of
disposals........................................ (2,456)
Cash received on the sale of property and
equipment........................................
Other..............................................
-----------
Net cash used in investing activities........ (3,248)
-----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........... 1,709
Payments of long-term debt......................... (1,802)
Proceeds from (payments of) short-term debt, net... 570
Payment to terminate credit facility...............
Payments of dividends at Pooled Companies..........
Retirement of common stock.........................
Capital contributed by stockholders of Pooled
Company..........................................
Advances from (to) U.S. Office Products............ (600)
-----------
Net cash provided by (used in) financing
activities................................. (123)
-----------
Effect of exchange rates on cash and cash
equivalents........................................ 11
-----------
Net increase (decrease) in cash and cash
equivalents........................................ (1,783)
Cash and cash equivalents at beginning of period..... 2,168
-----------
Cash and cash equivalents at end of period........... $ 385
-----------
-----------
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 364
Income taxes paid.................................. $ 2,063
F-17
WORKFLOW GRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method in the year ended December
31, 1995 and for the six months ended October 25, 1997. The fair values of the
assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
FOR THE FOR THE SIX
FOR THE FOUR FISCAL MONTHS
FOR THE YEAR ENDED MONTHS ENDED YEAR ENDED ENDED
---------------------------- ------------- ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, OCTOBER 26,
1994 1995 1996 1997 1996
------------- ------------- ------------- ------------- -----------
(UNAUDITED)
Accounts receivable.................................. $ $ 19,106 $ $ $
Inventories.......................................... 17,436
Prepaid expenses and other current assets............ 578
Property and equipment............................... 21,466
Intangible assets....................................
Other assets......................................... 4,499
Accounts payable..................................... (9,651)
Accrued liabilities.................................. (3,700)
Long-term debt.......................................
Other long-term liabilities and minority interest.... (4,424)
------------- ------------- ------------- ------------- -----------
Net assets acquired............................ $ $ 45,310 $ $ $
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
The acquisitions were funded as follows:
Common stock......................................... $ $ 7,451 $ $ $
Cash paid, net of cash received...................... 37,859
------------- ------------- ------------- ------------- -----------
Total............................................ $ $ 45,310 $ $ $
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
OCTOBER 25,
1997
-----------
Accounts receivable.................................. $ 1,109
Inventories.......................................... 41
Prepaid expenses and other current assets............ 26
Property and equipment............................... 84
Intangible assets.................................... 1,445
Other assets.........................................
Accounts payable..................................... (332)
Accrued liabilities.................................. (365)
Long-term debt....................................... (10)
Other long-term liabilities and minority interest....
-----------
Net assets acquired............................ $ 1,998
-----------
-----------
The acquisitions were funded as follows:
Common stock......................................... $ 2,112
Cash paid, net of cash received...................... (114)
-----------
Total............................................ $ 1,998
-----------
-----------
See accompanying notes to consolidated financial statements.
F-18
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
Workflow Graphics, Inc. (the "Company") is a Delaware corporation which is a
wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Print Management Division as an independent publicly owned company.
This transaction is expected to be effected through the distribution of shares
of the Company to U.S. Office Products shareholders effective on or about April
25, 1998 (the "Distribution"). Prior to the Distribution, U.S. Office Products
plans to contribute its equity interests in certain wholly-owned subsidiaries
associated with U.S. Office Products' Print Management Division to the Company.
U.S. Office Products and the Company will enter into a number of agreements to
facilitate the Distribution and the transition of the Company to an independent
business enterprise.
The Print Management Division was created by U.S. Office Products in January
1997 and completed seven business combinations accounted for under the
pooling-of-interests method during the period from January 1997 to April 1997
(the "Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. With the exception of interest
expense, 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 which were not directly related to these businesses
including certain corporate executives' salaries, accounting and legal fees,
departmental costs for accounting, finance, legal, purchasing, marketing, human
resources as well as other general overhead costs. These allocations were based
on a variety of factors, dependent upon the nature of the costs being allocated,
including revenues, number and size of acquisitions and number of employees.
Management believes these allocations were made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income does not
include an allocation of interest expense on all debt allocated to the Company.
See Note 7 for further discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-19
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April. A four month fiscal transition period from January
1, 1996 through April 30, 1996 has been presented for the Company to conform its
fiscal year-end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method, and non-compete agreements.
Substantially all goodwill is amortized on a straight line basis over an
estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Intangible assets associated with non-compete
agreements are being amortized over their respective terms.
F-20
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as Subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of the Company's
Canadian subsidiary company which the Company controls but does not include in
the consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings of this subsidiary.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial.
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals, various regulatory fees and
recognition of transaction related obligations. Generally accepted accounting
principles require the Company to expense all acquisition costs (both those paid
by the Company and those paid by the sellers of the acquired companies) related
to business combinations accounted for under the pooling-of-interests method.
F-21
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per share
("EPS"). SFAS 128 simplifies the standards for computing EPS and makes the
presentation comparable to international EPS standards by replacing the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement.
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 Company intends to adopt SFAS No. 128 in the fiscal year
ended April 25, 1998. The implementation of SFAS No. 128 is not expected to have
a material effect on the Company's earnings per share as determined under
current accounting rules. Historical earnings per share has not been presented
as such amounts are not deemed meaningful due to the significant change in the
Company's capital structure that will occur on the consummation of the
Distribution.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recgonized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of October 25, 1997 and the results
of operations and of cash flows for the six months ended October 26, 1996 and
October 25, 1997, as presented in the accompanying unaudited consolidated
financial data.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued U.S. Office Products common stock to
acquire the Pooled Companies. The Company's consolidated financial statements
give retroactive effect to the acquisitions of the Pooled Companies for all
periods presented. Prior to being acquired by U.S. Office Products, the Pooled
Companies all reported on years ending on December 31. Upon completion of the
acquisitions of the Pooled Companies, their year-ends were changed to U.S.
Office Products' year-end of the last Saturday in April.
F-22
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
WORKFLOW
GRAPHICS, POOLED
INC. COMPANIES COMBINED
------------- ----------- ----------
For the year ended December 31, 1994
Revenues................................................................ $ $ 154,193 $ 154,193
Net income.............................................................. $ $ 4,675 $ 4,675
For the year ended December 31, 1995
Revenues................................................................ $ $ 309,426 $ 309,426
Net income.............................................................. $ $ 6,356 $ 6,356
For the four months ended April 30, 1996
Revenues................................................................ $ $ 114,099 $ 114,099
Net income.............................................................. $ $ 5,758 $ 5,758
For the year ended April 26, 1997
Revenues................................................................ $ 29,373 $ 304,847 $ 334,220
Net income (loss)....................................................... $ (228) $ 5,491 $ 5,263
For the six months ended October 26, 1996 (unaudited):
Revenues................................................................ $ $ 161,798 $ 161,798
Net income.............................................................. $ $ 6,155 $ 6,155
For the six months ended October 25, 1997 (unaudited):
Revenues................................................................ $ 173,347 $ $ 173,347
Net income.............................................................. $ 5,113 $ $ 5,113
PURCHASE METHOD
In 1995, one of the Pooled Companies made an acquisition accounted for under
the purchase method for an aggregate purchase price of $45,310, consisting of
$37,859 of cash and common stock with a market value of $7,451. The results of
this acquisition have been included in the Company's results from its date of
acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and includes the Company's
consolidated financial statements, which give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented, and the results
of the purchase acquisition completed in 1995 as if it had been made at the
beginning of 1995. The results presented below include certain pro forma
adjustments to reflect the amortization of intangible assets, adjustments in
executive compensation and the inclusion of a federal income tax provision on
all earnings:
YEAR ENDED
DECEMBER 31, 1995
-----------------
Revenues................................................................... $ 319,527
Income before extraordinary items.......................................... 5,303
Net income................................................................. 4,603
F-23
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
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 occurred at the beginning of 1995 or the results
which may occur in the future.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
APRIL 30, APRIL 26,
1996 1997
---------- ----------
Land.................................................................. $ 1,589 $ 1,022
Buildings............................................................. 3,144 4,705
Furniture and fixtures................................................ 34,207 42,394
Warehouse equipment................................................... 3,624 1,013
Equipment under capital leases........................................ 589 916
Leasehold improvements................................................ 2,167 2,933
---------- ----------
45,320 52,983
Less: Accumulated depreciation........................................ (13,673) (19,864)
---------- ----------
Net property and equipment............................................ $ 31,647 $ 33,119
---------- ----------
---------- ----------
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, and the fiscal year ended April 26, 1997 was
$1,904, $4,720, $3,174 and $7,466, respectively.
NOTE 6--INTANGIBLE ASSETS
Intangible assets consist of the following:
APRIL 30, APRIL 26, OCTOBER 25,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
Goodwill.................................................... $ 496 $ 496 $ 1,930
Non-compete agreements...................................... 287 322 322
Other....................................................... 192 507 506
----- ----------- -----------
975 1,325 2,758
Less: Accumulated amortization.............................. (96) (412) (499)
----- ----------- -----------
Net intangible assets................................. $ 879 $ 913 $ 2,259
----- ----------- -----------
----- ----------- -----------
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, fiscal year ended April 26, 1997 and the six
months ended October 25, 1997 was $17, $74, $44, $204 and $99, respectively.
F-24
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
APRIL 30, APRIL 26,
1996 1997
--------- ---------
Credit facilities with banks, average interest rate of 8.4% at
April 30, 1996........................................................ $ 19,201 $
Current maturities of long-term debt.................................... 4,314 3,681
--------- ---------
Total short-term debt............................................. $ 23,515 $ 3,681
--------- ---------
--------- ---------
LONG-TERM DEBT
Long-term debt consists of the following:
APRIL 30, APRIL 26,
1996 1997
--------- ---------
Notes payable, secured by certain assets of the Company, interest rates
ranging from 7.5% to 13.4%............................................ $ 32,037 $ 9,283
Capital lease obligations............................................... 385 432
--------- ---------
32,422 9,715
Less: Current maturities of long-term debt.............................. (4,314) (3,681)
--------- ---------
Total long-term debt.............................................. $ 28,108 $ 6,034
--------- ---------
--------- ---------
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
1998............................................................... $ 3,681
1999............................................................... 5,953
2000............................................................... 36
2001............................................................... 26
2002............................................................... 19
Thereafter.........................................................
---------
Total maturities of long-term debt........................... $ 9,715
---------
---------
F-25
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--CREDIT FACILITIES (CONTINUED)
PAYABLE TO U.S. OFFICE PRODUCTS
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses. No
interest has been allocated to the Company on the outstanding payable. An
analysis of the activity in this account is as follows:
Balance at April 30, 1996.......................................... $
Payments of long-term debt of Pooled Companies upon acquisition.... 17,852
Payments of acquisition costs...................................... 2,636
Allocated corporate expenses....................................... 320
Normal operating costs paid by U.S. Office Products................ 83
---------
Balance at April 26, 1997.......................................... $ 20,891
---------
---------
The average outstanding long-term payable to U.S. Office Products during the
fiscal year ended April 26, 1997 was $1,775.
U.S. Office Products has charged the Company interest on the short-term
payable to U.S. Office Products at the prime rate in effect at the time. The
short-term payable to U.S. Office Products was incurred by the Company primarily
as a result of U.S. Office Products repaying short-term debt outstanding at the
businesses acquired by U.S. Office Products at or soon after the respective
dates of acquisition and through the centralized cash management system, which
involves daily advances or sweeps of cash to keep the cash balance at or near
zero on a daily basis. U.S. Office Products has not charged the Company interest
on the long-term payable to U.S. Office Products. The Company's financial
statements include allocations of interest expense from U.S. Office Products
totaling $266 during the year ended April 26, 1997. If the Company had been
charged interest on all debt allocated by U.S. Office Products during fiscal
1997, interest expense would have totaled $393.
The Company expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $44.7 million of debt by U.S. Office
Products resulting in the forgiveness of $23.7 million of debt at October 25,
1997, which would be reflected in the financial statements as a contribution of
capital by U.S. Office Products. The Company intends to enter into a credit
facility concurrently with the Distribution which will contain certain financial
and other covenants, including maintenance of certain financial tests and
ratios, limitations on capital expenditures and restrictions on the incurrence
of debt or liens, the sale of assets, the payment of dividends, transactions
with affiliates and other transactions.
F-26
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INCOME TAXES
Domestic and foreign income before provision for income taxes and
extraordinary items consist of the following:
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
---------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
------------- ------------- --------------- -------------
Domestic.............................................. $ 5,054 $ 5,582 $ 4,599 $ 3,740
Foreign............................................... 1,441 2,510 5,912
------ ------ ------ ------
Total............................................. $ 5,054 $ 7,023 $ 7,109 $ 9,652
------ ------ ------ ------
------ ------ ------ ------
The provision for income taxes consists of:
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- -------------
Income taxes currently payable:
Federal............................................. $ $ $ $ 97
State............................................... 379 376 460 628
Foreign............................................. (409) 891 3,526
----- --- ------ ------
379 (33) 1,351 4,251
----- --- ------ ------
Deferred income tax expense (benefit)................. (660)
----- --- ------ ------
Total provision for income taxes.................. $ 379 $ (33) $ 1,351 $ 3,591
----- --- ------ ------
----- --- ------ ------
Deferred taxes are comprised of the following:
APRIL 30, APRIL 26,
1996 1997
--------- ---------
Current deferred tax assets:
Inventory.................................................................................. $ $ 145
Allowance for doubtful accounts............................................................ 497
Accrued liabilities........................................................................ 168
--------- ---------
Total current deferred tax assets........................................................ 810
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (1,238)
Intangible assets.......................................................................... 36
Other...................................................................................... (4,704) (3,653)
--------- ---------
Total long-term deferred tax liabilities................................................. (4,704) (4,855)
--------- ---------
Net deferred tax liability............................................................... $ (4,704) $ (4,045)
--------- ---------
--------- ---------
F-27
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
U.S. federal statutory rate........................... 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit............................................. 7.5 5.4 6.5 6.8
Subchapter S corporation income not subject to
corporate level taxation............................ (35.0) (27.7) (22.6) (24.6)
Foreign earnings not subject to U.S. taxes............ (7.3) (12.4) (21.4)
Nondeductible acquisition costs....................... 11.8
Foreign taxes......................................... 12.5 25.6
Other................................................. (5.9) 4.0
----- ----- ----- -----
Effective income tax rate............................. 7.5% (0.5)% 19.0% 37.2%
----- ----- ----- -----
----- ----- ----- -----
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the entire periods presented.
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
---------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
------------- ------------- --------------- -------------
Income before extraordinary items per consolidated
statement of income................................. $ 4,675 $ 7,056 $ 5,758 $ 6,061
Pro forma income tax provision adjustment............. 1,769 1,945 1,607 2,374
------ ------ ------ ------
Pro forma income before extraordinary items........... $ 2,906 $ 5,111 $ 4,151 $ 3,687
------ ------ ------ ------
------ ------ ------ ------
F-28
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
CAPITAL OPERATING
LEASES LEASES
----------- -----------
1998......................................................................................... $ 216 $ 3,915
1999......................................................................................... 150 3,751
2000......................................................................................... 67 3,093
2001......................................................................................... 29 2,612
2002......................................................................................... 22 2,334
Thereafter................................................................................... 3,467
----- -----------
Total minimum lease payments................................................................. 484 $ 19,172
-----------
-----------
Less: Amounts representing interest.......................................................... (52)
-----
Present value of net minimum lease payments.................................................. $ 432
-----
-----
Rent expense for all operating leases for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996, and the fiscal year ended April
26, 1997 was $2,112, $6,137, $1,844, and $4,928, respectively.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility are expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
On or before the date of the Distribution, the Company, U.S. Office Products
and the other Spin-Off Companies will enter into the Distribution Agreement, the
Tax Allocation Agreement, and the Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement, and
F-29
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
may enter into other agreements, including agreements relating to referral of
customers to one another. These agreements are expected to provide, among other
things, for U.S. Office Products and the Company to indemnify each other from
tax and other liabilities relating to their respective businesses prior to and
following the Workflow Distribution. Certain of the obligations of the Company
and the other Spin-Off Companies to indemnify U.S. Office Products are joint and
several. Therefore, if one of the other Spin-Off Companies fails to satisfy its
indemnification obligations to U.S. Office Products when such a loss occurs, the
Company may be required to reimburse U.S. Office Products for all or a portion
of the losses that otherwise would have been allocated to other Spin-Off
Companies. In addition, the agreements will allocate liabilities, including
general corporate and securities liabilities of U.S. Office Products not
specifically related to the Company's business, between U.S. Office Products and
each Spin-Off Company.
NOTE 11--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For 1994, 1995, the four months ended
April 30, 1996 and fiscal 1997, the subsidiaries incurred expenses totaling
$444, $602, $179 and $481, respectively, related to these plans.
NOTE 12--STOCKHOLDER'S EQUITY
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive Plan covering employees of
U.S. Office Products. U.S. Office Products, as the sole stockholder of the
Company prior to distribution, has approved a new stock option plan for the
Company. Upon Distribution, the Company expects to replace the options to
purchase shares of common stock of U.S. Office Products held by employees with
options to purchase shares of common stock of the Company. At April 26, 1997,
there were approximately 402,290 options to purchase shares of U.S. Office
Products common stock held by Company employees.
Under the Ledecky Services Agreement, the Board of Directors of U.S. Office
Products has agreed that Mr. Ledecky will receive a stock option for Company
Common Stock from the Company as of the date of the Distribution. The Board
intends the option to be compensation for Mr. Ledecky's services as a director
of the Company, and certain services as an employee of the Company. The option
will cover up to 7.5% of the outstanding Company Common Stock determined as of
the date of the Distribution, with no anti-dilution provisions in the event of
issuance of additional shares of Common Stock (other than with respect to stock
splits or reverse stock splits). The option will have a per share exercise price
equal to the price of the first trade on the day the Company's Common Stock is
first publicly traded.
F-30
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
UNITED
STATES CANADA TOTAL
---------- ---------- ----------
For the year ended December 31, 1994:
Revenues................................................................... $ 154,193 $ $ 154,193
Operating income........................................................... 7,288 7,288
Identifiable assets at year-end............................................ 51,357 51,357
For the year ended December 31, 1995:
Revenues................................................................... $ 196,922 $ 112,504 $ 309,426
Operating income........................................................... 7,859 4,596 12,455
Identifiable assets at year-end............................................ 64,301 56,329 120,630
For the four months ended April 30, 1996:
Revenues................................................................... $ 73,047 $ 41,052 $ 114,099
Operating income........................................................... 3,435 5,181 8,616
Identifiable assets at period end.......................................... 66,255 51,694 117,949
For the fiscal year ended April 26, 1997:
Revenues................................................................... $ 212,749 $ 121,471 $ 334,220
Operating income........................................................... 7,010 8,076 15,086
Identifiable assets at year-end............................................ 72,854 52,254 125,108
F-31
WORKFLOW GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995 and the fiscal year ended April 26, 1997.
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
Revenues.................................................. $ 65,497 $ 80,595 $ 79,815 $ 83,519 $ 309,426
Gross profit.............................................. 15,770 19,361 19,229 20,107 74,467
Operating income.......................................... 2,681 3,296 3,306 3,172 12,455
Net income................................................ 1,789 1,529 1,744 1,294 6,356
Pro forma income before extraordinary item (see Note 8)... 1,439 1,229 1,402 1,041 5,111
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
Revenues.................................................. $ 79,798 $ 82,000 $ 82,966 $ 89,456 $ 334,220
Gross profit.............................................. 21,717 22,518 22,647 24,159 91,041
Operating income.......................................... 4,650 6,085 4,015 336 15,086
Net income (loss)......................................... 2,974 3,181 1,847 (2,739) 5,263
Pro forma income (loss) before extraordinary item
(see Note 8)............................................ 2,083 2,228 1,294 (1,918) 3,687
NOTE 15--SUBSEQUENT EVENTS
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed one business combination accounted for under
the purchase method in exchange for U.S. Office Products common stock with a
market value on the date of acquisition of approximately $2,112. The results of
operations for the six months ended October 25, 1997 include the results of the
acquired company from its date of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Distribution and acquisition described above
and one probable purchase acquisition had been consummated as of the beginning
of fiscal 1997. The results presented below include certain pro forma
adjustments to reflect the amortization of intangible assets, adjustments in
executive compensation and the inclusion of a federal income tax provision on
all earnings:
FISCAL YEAR
ENDED
APRIL 26, 1997
----------------
Revenues........................................................................................ $ 349,174
Income before extraordinary items............................................................... 10,834
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 occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
F-32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Astrid Offset Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Astrid Offset Corporation at July
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 6, 1998
F-33
ASTRID OFFSET CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31, OCTOBER 31,
1997 1997
--------- -----------
(UNAUDITED)
ASSETS
Cash....................................................................................... $ 481 $ 412
Marketable securities...................................................................... 916 904
Accounts receivable........................................................................ 954 1,180
Prepaid expenses and other assets.......................................................... 74 102
Inventory.................................................................................. 241 237
--------- -----------
Total current assets................................................................. 2,666 2,835
Property and equipment, net................................................................ 1,695 1,582
Other assets............................................................................... 22
--------- -----------
Total assets......................................................................... $ 4,383 $ 4,417
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities, long-term debt......................................................... $ 422 $ 271
Accounts payable........................................................................... 39 163
Accrued liabilities........................................................................ 149 56
Due to officer............................................................................. 55 58
--------- -----------
Total current liabilities............................................................ 665 548
Long-term debt............................................................................. 1,607 1,606
Deferred income taxes...................................................................... 140 145
--------- -----------
Total liabilities.................................................................... 2,412 2,299
Stockholder's equity:
Common stock, no par value, 10 shares authorized, issued and outstanding................. 14 14
Treasury stock........................................................................... (1,064) (1,064)
Retained earnings........................................................................ 3,021 3,168
--------- -----------
Total stockholder's equity........................................................... 1,971 2,118
--------- -----------
--------- -----------
Total liabilities and stockholder's equity........................................... $ 4,383 $ 4,417
--------- -----------
--------- -----------
The accompanying notes are an integral part of these financial statements.
F-34
ASTRID OFFSET CORPORATION
STATEMENT OF INCOME
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JULY 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
Sales............................................................................. $ 10,022 $ 2,400 $ 2,566
Cost of sales..................................................................... 5,850 1,306 1,378
----------- --------- ---------
Gross profit.................................................................... 4,172 1,094 1,188
Selling, general and administrative expenses...................................... 1,819 370 419
----------- --------- ---------
Operating income................................................................ 2,353 724 769
Other (income) expense:
Interest expense................................................................ 252 123 6
Interest income................................................................. (74) (10) (9)
Realized and unrealized (gains) losses.......................................... (257) (69) 13
----------- --------- ---------
Income before taxes on income..................................................... 2,432 680 759
Provision for city income taxes................................................... 87 11 19
----------- --------- ---------
Net income........................................................................ $ 2,345 $ 669 $ 740
----------- --------- ---------
----------- --------- ---------
Unaudited pro forma information (see Note 2):
Income before provision for income taxes........................................ $ 2,432 $ 680 $ 759
Pro forma Provision for income taxes............................................ 973 272 304
----------- --------- ---------
Pro forma net income.......................................................... $ 1,459 $ 408 $ 455
----------- --------- ---------
----------- --------- ---------
The accompanying notes are an integral part of these financial statements.
F-35
ASTRID OFFSET CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
TOTAL
COMMON TREASURY RETAINED STOCKHOLDER'S
STOCK STOCK EARNINGS EQUITY
--------- --------- --------- ------------
Balance, July 31, 1996............................................. $ 14 $ (1,064) $ 2,798 $ 1,748
Net income....................................................... 2,345 2,345
Distributions.................................................... (2,122) (2,122)
--------- --------- --------- ------------
Balance, July 31, 1997............................................. 14 (1,064) 3,021 1,971
Net income....................................................... 740 740
Distributions.................................................... (593) (593)
--------- --------- --------- ------------
Balance, October 31, 1997 (unaudited).............................. $ 14 $ (1,064) $ 3,168 $ 2,118
--------- --------- --------- ------------
--------- --------- --------- ------------
The accompanying notes are an integral part of these financial statements.
F-36
ASTRID OFFSET CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JULY 31, --------------------
1997 1996 1997
----------- --------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................................. $ 2,345 $ 669 $ 740
Adjustments to net income to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................ 475 76 135
Unrealized/realized (gain) loss on sale of marketable trading
securities............................................................. (257) (69) 13
Deferred income taxes.................................................. 32 4 5
Changes in operating assets and liabilities:
Marketable trading securities.......................................... 4 (1) (1)
Accounts receivable.................................................... (192) (506) (226)
Prepaid and other assets............................................... (54) (42) (28)
Inventory.............................................................. (26) (116) 4
Accounts payable and accrued liabilities............................... (155) (98) 31
Due to officer......................................................... (3) 3
----------- --------- ---------
Net cash provided by (used in) operating activities.................. 2,169 (83) 676
----------- --------- ---------
Cash flow from financing activities:
Principal payments on long-term debt....................................... (525) (85) (152)
Distributions to stockholder............................................... (2,122) (391) (593)
----------- --------- ---------
Net cash used in financing activities................................ (2,647) (476) (745)
----------- --------- ---------
Net decrease in cash......................................................... (478) (559) (69)
Cash and cash equivalents, beginning of year................................. 959 959 481
----------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 481 $ 400 $ 412
----------- --------- ---------
----------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................... $ 74 $ 24 $ 27
Cash paid for taxes........................................................ $ 54 $ 13 $ 11
Supplemental disclosure of non-cash transaction:
Purchase of machinery and equipment for Note Payable....................... $ 1,550 $ 1,550
The accompanying notes are an integral part of these financial statements.
F-37
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS AND ORGANIZATION
Astrid Offset Corporation (the "Company") is a manufacturer and wholesale
vendor of sheet-fed offset printing and envelopes. The Company's sales are to
trade customers primarily in the greater New York City area.
On February 2, 1998, the Company entered into a Letter of Intent with U.S.
Office Products Company ("U.S. Office Products") for the potential sale of
Astrid Offset Corporation to U.S. Office Products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's financial statements are prepared on the accrual basis of
accounting, whereby revenues and related assets are generally recognized when
products are completed and shipped and expenses and related liabilities are
recognized when the obligations are incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using straight-line and accelerated
methods over their estimated useful lives of three to seven years.
INCOME TAXES
The Company has elected S-Corporation status as defined by the Internal
Revenue Code and states whereby the stockholder is taxed on his proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the financial statements. The Company
is subject to New York City income tax which has been appropriately reflected in
the financial statements.
Deferred income taxes are provided in recognition of timing differences
between financial statements and tax reporting of income and expense items since
the Company files its New York City income tax returns on a cash basis.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for
F-38
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes", as if the Company had been subject to federal income taxes for
the entire periods presented.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities consist of investments in certain
equities and mutual funds and are classified as trading, accordingly, any
realized or unrelated gains and losses are recorded in the period incurred.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the three month periods ended October
31, 1996 and 1997 has been prepared from the unaudited financial records of the
Company and in the opinion of management, reflects all adjustments, consisting
only of normal recurring items, necessary for a fair presentation of the
financial position and results of operations and of cash flows for the interim
periods presented.
CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collateralized and accordingly, the Company performs ongoing credit
evaluations to reduce the risk of loss. At July 31, 1997, $515 of the accounts
receivable balance relates to one customer and its subsidiaries.
The Company maintains bank accounts at one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to $100. At
July 31, 1997, the Company has no uninsured cash balances.
3. INVENTORY
Inventory consists of the following:
JULY 31,
1997
-----------
Raw materials........................................................................ $ 159
Work-in-process...................................................................... 82
-----
241
-----
-----
F-39
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Machinery and equipment............................................. $ 4,699
Furniture and fixtures.............................................. 80
Computer equipment.................................................. 64
Leasehold improvements.............................................. 206
Delivery equipment.................................................. 31
---------
5,080
Accumulated depreciation............................................ (3,385)
---------
$ 1,695
---------
---------
Depreciation expense for the year ended July 31, 1997 was $304.
5. LONG-TERM DEBT
The long-term debt consists of the following:
JULY 31,
1997
---------
Instrument note to Summit Leasing Corp. payable in monthly installments of $9 including interest at 7.95%
per annum. Note is collateralized by Komori Lithrone two-color press, with note maturing March
1998. ................................................................................................. $ 70
Installment note to Komar Leasing Corp. payable in monthly installments of $25 including interest at 8.9%
per annum. Note is collateralized by Komori six-color press with the note maturing July 2004........... 1,385
Installment note to Emanuel Rosenbaum payable in monthly installments of $9 including interest at 10% per
annum. The note matures October 1997. ................................................................. 26
Note payable to Emanuel Rosenbaum due September 2000 with payment of interest only at 10% until September
1997, monthly payments of $17 thereafter. Note is secured by treasury stock. .......................... 548
---------
2,029
Current maturities....................................................................................... 422
---------
$ 1,607
---------
---------
F-40
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
Principal payments required under long-term debt obligations are as follows:
1998................................................................ $ 422
1999................................................................ 372
2000................................................................ 409
2001................................................................ 268
2002-2004........................................................... 558
---------
$ 2,029
---------
---------
6. LEASE COMMITMENTS
In June 1997, the Company entered into a lease agreement for its primary
office facility. The lease terms requires annual payments of $384 (or $32
monthly) through 2007.
7. RELATED PARTY TRANSACTIONS
The Company's stockholder is the trustee for the profit sharing plan
maintained by the Company.
The Company's largest customer, United Envelope, is a subsidiary of U.S.
Office Products Company and represents $515 of the Company's July 31, 1997
accounts receivable balance.
8. TREASURY STOCK
In September 1990, the Company purchased common stock in the amount of
$1,064 from its former stockholder. The Company has a note outstanding in
connection with this treasury stock purchase.
9. EMPLOYEE BENEFIT PLAN
In April 1991, the Company established a profit sharing plan. Contributions
by the Company are discretionary and cannot exceed 15% of the total plan
compensation of all participants.
10. SUBSEQUENT EVENTS
Shareholder distributions of $595 were made during the period of November 1,
1997, through January 31, 1998.
F-41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the securities. All of such
expenses except the Securities and Exchange Commission registration fee are
estimated:
SEC Registration................................................................... $ 10,243
Nasdaq Listing Fee................................................................. $ *
Legal Fees and Expenses............................................................ $ *
Accounting Fees and Expenses....................................................... $ *
Printing Fees and Expenses......................................................... $ *
Miscellaneous...................................................................... $ *
---------
Total........................................................................ $ *
- ------------------------
*To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of the Certificate of Incorporation provides that the Company
shall indemnify its directors and officers to the fullest extent permitted by
the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of the Certificate of Incorporation states that directors of
Workflow Graphics will not be liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the General Corporation Law of the State of Delaware, which makes
directors liable for unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit.
Article IV of the Bylaws provides that Workflow Graphics shall indemnify its
officers and directors (and those serving at the request of the Company as an
officer or director of another corporation,
II-1
partnership, joint venture, trust or other enterprise), and may indemnify its
employees and agents (and those serving at the request of the Company as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise), against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred, if such
officer, director, employee or agent acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of Workflow
Graphics, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In a derivative action,
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such officer, director, employee or agent in
the defense or settlement of such action or suit, and no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to Workflow Graphics unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Delaware
Court of Chancery or such other court shall deem proper.
Unless the Company Board otherwise determines in a specific case, expenses
incurred by an officer or director in defending a civil or criminal action, suit
or proceeding shall be paid by Workflow Graphics in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the officer or director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Palm Beach, State of
Florida, on February 13, 1998.
WORKFLOW GRAPHICS, INC.
By: /s/ THOMAS B. D'AGOSTINO
-----------------------------------------
Name: Thomas B. D'Agostino
TITLE: CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer
/s/ THOMAS B. D'AGOSTINO (Principal Executive 2/13/98
- ------------------------------ Officer); Director
Chief Financial Officer
/S/ MICHAEL B. FELDMAN (Principal Financial and 2/13/98
- ------------------------------ Accounting Officer)
II-3
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
3.1* Certificate of Incorporation
3.2* Bylaws
4.1* Form of certificate representing shares of Common Stock
5* Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8* Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.2* Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.3* Form of Tax Indemnification Agreement among Workflow Graphics, Inc., Paradigm Concepts, Inc., TDOP, Inc.
and School Specialty, Inc.
10.4* Form of Employee Benefits Agreement among U.S. Office Products Company, Workflow Graphics, Inc., Paradigm
Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.5 Agreement dated as of January 24, 1997 between SFI Corp. and Thomas B. D'Agostino
10.6 Agreement dated as of January 24, 1997 between Hano Document Printers, Inc. and Timothy L. Tabor
10.7* Agreement dated as of January 13, 1998 between U.S. Office Products Company and Jonathan J. Ledecky
21* Subsidiaries of Registrant
23.1* Consent of Wilmer, Cutler & Pickering contained in Exhibits 5 and 8 hereto
23.2 Consent of Price Waterhouse LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Hertz, Herson & Company LLP
23.5 Consent of KPMG Peat Marwick LLP
23.6 Consent of Jonathan J. Ledecky to be named as a director
23.7 Consent of Timothy L. Tabor to be named as a director
23.8 Consent of Gus J. James, II to be named as a director
23.9 Consent of Thomas A. Brown, Sr. to be named as a director
27 Financial data schedule
- ------------------------
* To be filed by amendment.
II-4