UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 22, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________________ to
Commission File Number 0-24383
WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1507104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
240 Royal Palm Way
Palm Beach, FL 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____.
---
As of February 28, 2000, there were 12,840,941 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet............................................. 3
January 22, 2000 (unaudited) and April 24, 1999
Consolidated Statement of Income (unaudited)........................... 4
For the three months ended January 22, 2000 and January 23, 1999 and
for the nine months ended January 22, 2000 and January 23, 1999
Consolidated Statement of Cash Flows (unaudited)....................... 5
For the nine months ended January 22, 2000 and January 23, 1999
Notes to Consolidated Financial Statements (unaudited)................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
PART II -OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 24
Signatures...................................................................... 25
January 22, April 24,
ASSETS 2000 1999
------ ------------ -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,471 $ 607
Accounts receivable, less allowance for doubtful
accounts of $3,881 and $4,481, respectively 83,399 78,807
Inventories 43,667 36,152
Prepaid expenses and other current assets 10,066 6,921
------------ ------------
Total current assets 138,603 122,487
Property and equipment, net 51,322 43,138
Intangible assets, net 89,745 64,488
Other assets 17,680 6,501
------------ ------------
Total assets $ 297,350 $ 236,614
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term debt $ 922 $ 1,079
Accounts payable 32,357 34,712
Accrued compensation 11,632 9,391
Accrued additional purchase consideration 9,476 1,188
Other accrued liabilities 14,280 10,892
------------ ------------
Total current liabilities 68,667 57,262
Long-term debt 129,223 107,223
Subordinated related party debt 4,164 4,136
Deferred income taxes 7,816 4,749
Other long-term liabilities 158 18
------------ ------------
Total liabilities 210,028 173,388
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 12,792,314 and 12,585,598 issued and
outstanding, respectively 13 13
Additional paid-in capital 50,701 47,685
Notes receivable from officers (1,958) (1,958)
Accumulated other comprehensive income (loss) 3,174 (1,880)
Retained earnings 35,392 19,366
------------ ------------
Total stockholders' equity 87,322 63,226
------------ ------------
Total liabilities and stockholders' equity $ 297,350 $ 236,614
============ ============
See accompanying notes to consolidated financial statements.
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues $ 138,478 $ 95,542 $ 388,700 $ 276,128
Cost of revenues 98,400 67,539 275,327 198,460
------------ ------------ ------------ -----------
Gross profit 40,078 28,003 113,373 77,668
Selling, general and administrative expenses 29,623 21,356 84,021 59,900
Amortization expense 535 220 1,554 486
Strategic restructuring plan costs 3,818
------------ ------------ ------------ -----------
Operating income 9,920 6,427 27,798 13,464
Interest expense 2,746 1,287 7,655 3,242
Interest income (116) (39) (226) (125)
Gain on the sale of securities (4,156) (7,126)
Loss on the sale of subsidiary 318
Other income (20) (72) (41) (119)
------------ ------------ ------------ -----------
Income before provision for income taxes 11,466 5,251 27,218 10,466
Provision for income taxes 4,598 2,310 11,192 4,605
------------ ------------ ------------ -----------
Net income $ 6,868 $ 2,941 $ 16,026 $ 5,861
============ ============ ============ ===========
Income per share:
Basic $ 0.54 $ 0.23 $ 1.27 $ 0.40
Diluted $ 0.48 $ 0.23 $ 1.16 $ 0.40
Weighted average common shares outstanding:
Basic 12,708 13,065 12,644 14,575
Diluted 14,410 13,069 13,772 14,646
See accompanying notes to consolidated financial statements.
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
January 22, January 23,
2000 1999
------------ -------------
Cash flows from operating activities:
Net income $ 16,026 $ 5,861
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 7,696 5,009
Gain on sale of securities (7,126)
Loss on sale of subsidiary 318
Compensation charge for options tendered in the strategic restructuring 2,956
Other strategic restructuring plan costs, net of cash paid (1,565)
Cash paid for restructuring costs (95) (208)
Amortization of deferred financing costs 549 369
Changes in assets and liabilities (net of assets acquired and liabilities
assumed in business combinations):
Accounts receivable (2,161) 3,165
Inventories (7,896) 2,490
Prepaid expenses and other current assets (2,993) (687)
Accounts payable (4,734) (6,371)
Accrued compensation and other accrued liabilities 6,190 6,941
----------- -----------
Net cash provided by operating activities 5,774 17,960
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (25,279) (21,355)
Additions to property and equipment (10,053) (6,769)
Purchase of securities (2,400)
Proceeds on sale of securities 8,926
Cash collection of note receivable issued with sale of subsidiary 1,500
Cash received on the sale of property and equipment 502 154
Cash collection of notes receivable from employees 3,703
----------- -----------
Net cash used in investing activities (26,804) (24,267)
----------- -----------
Cash flows from financing activities:
Proceeds from credit facility borrowings 81,950 96,984
Payments of credit facility borrowings (62,139) (38,934)
Proceeds from issuance of subordinated related party debt 4,878
Payments of other long-term debt (578) (6,242)
Proceeds from issuance of other long-term debt 1,518
Payments of short-term debt, net (765) (4,371)
Retirement of common stock (12,419)
Issuance of notes receivable from officers (1,951)
Payments of deferred financing costs (304) (3,491)
Proceeds from issuance of common stock 2,167
Payments to U.S. Office Products (36,096)
Capital contributed by U.S. Office Products 8,510
----------- -----------
Net cash provided by financing activities 21,849 6,868
----------- -----------
Effect of exchange rates on cash and cash equivalents 45 (20)
---------- -----------
Net increase in cash and cash equivalents 864 541
Cash and cash equivalents at beginning of period 607 234
----------- -----------
Cash and cash equivalents at end of period $ 1,471 $ 775
=========== ===========
(Continued)
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Nine Months Ended
January 22, January 23,
2000 1999
------------ ----------
Supplemental disclosures of cash flow information:
Interest paid $ 6,536 $ 1,849
Income taxes paid $ 11,036 $ 5,564
During the nine months ended January 22, 2000 and January 23, 1999, the Company
paid a total of $25,279 and $21,355 respectively, in cash representing the
aggregate of: 1) the initial fixed consideration for purchase acquisitions, 2)
earn-out provisions and other purchase price adjustments relating to certain
acquisitions and 3) acquisition costs such as legal and accounting fees
associated with certain business combinations all of which related to business
combinations that were accounted for under the purchase method of accounting.
The fair value of the assets and liabilities at the date of acquisition and the
impact of recording the various earn-outs and acquisition costs are presented as
follows:
Nine Months Ended
------------------------
January 22, January 23,
2000 1999
---------- ----------
Accounts receivable $ 5,038 $ 6,718
Inventories 943 495
Prepaid expenses and other current assets 616 218
Property and equipment 6,057 1,799
Intangible assets 26,700 16,868
Other assets 99
Short-term debt (601) (16)
Accounts payable (3,386) (3,113)
Accrued compensation and other accrued liabilities (9,121) (1,573)
Long-term debt (986) (41)
Deferred income taxes (80)
---------- ----------
Net assets acquired $25,279 $21,355
========== ==========
Noncash transactions:
o During the nine months ended January 22, 2000, the Company accrued $9,476 as
additional purchase consideration for earn-outs.
o During the nine months ended January 22, 2000, the Company recorded
additional paid-in capital of $850 related to the tax benefit of stock
options exercised.
o During the nine months ended January 22, 2000, the Company sold one of its
subsidiaries and an associated building in exchange for notes receivable
totaling $4,690.
o During the nine months ended January 22, 2000, the Company increased the
investment carrying value of its securities available-for-sale by recording
an unrealized holding gain in comprehensive income of $4,894.
See accompanying notes to consolidated financial statements.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - NATURE OF BUSINESS
- ---------------------------
Workflow Management, Inc. (the "Company" or "Workflow Management") is a Delaware
corporation formed by U.S. Office Products Company, also a Delaware corporation
("U.S. Office Products" or "USOP"), in connection with U.S. Office Products'
strategic restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,643 shares (the
"Distribution" or "Workflow Distribution") of the Company's common stock, par
value $.001 per share ("Company Common Stock"). Holders of U.S. Office Products'
common stock were not required to pay any consideration for the shares of the
Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date").
Workflow Management is a leading acquirer and integrator of graphic arts
companies, providing a variety of custom print products and office supplies and
related management services to more than 30,000 businesses in the United States
and Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, iGetSmart, designed to
minimize the costs of procuring, storing and using custom print products and
office supplies, and the Fulfillment Division, which prints and produces
envelopes, custom business documents, commercial print, labels, packaging and
direct mail literature. Workflow Management employs approximately 2,800 persons
and has 24 manufacturing facilities in 10 states and 5 Canadian provinces, 27
distribution centers, 8 print-on-demand centers and 64 sales offices.
NOTE 2 - BASIS OF PRESENTATION
- -------------------------------
For periods prior to the Distribution Date, the consolidated financial
statements reflect the revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. The Company's statement
of income includes all of the related costs of doing business including an
allocation of certain general corporate expenses of U.S. Office Products
incurred prior to the Distribution Date which were not directly related to these
businesses. These allocations were based on a variety of factors, dependent
upon the nature of the costs being allocated. Management believes these
allocations were made on a reasonable basis.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. The
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 24, 1999.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "Fiscal 2000" and "Fiscal 1999" refer to the
Company's fiscal years ending April 30, 2000 and ended April 24, 1999,
respectively. Certain reclassifications have been made to the prior period
financial statements to conform to the presentation for the three months and
nine months ended January 22, 2000.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
January 22, April 24,
2000 1999
------- -------
Raw materials $13,950 $10,309
Work-in-process 4,179 2,123
Finished goods 25,538 23,720
------- -------
Total inventories $43,667 $36,152
======= =======
NOTE 4 - LONG-TERM DEBT
- -----------------------
Revolving Credit Facility
The Company entered into a secured $200,000 revolving credit facility (the
"Credit Facility") underwritten and agented by Deutsche Bank during Fiscal 1999.
The Credit Facility matures on June 10, 2003 and is secured by substantially all
assets of the Company and is subject to terms and conditions typical of a credit
facility of such type and size, including certain financial covenants. Interest
rate options are available to the Company conditioned on certain leverage tests.
The maximum rate of interest is the prime rate from time to time in effect. The
Credit Facility is also available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants and total
availability under the facility. At January 22, 2000, the Company had $124,675
drawn against the Credit Facility at an average interest rate of 7.73%.
Subordinated Related Party Debt
During Fiscal 1999, the Company issued $4,127 in subordinated unsecured notes
including attached warrants with a value of $751 at the time of the debt
issuance (the "Subordinated Notes") to certain members of the Company's
management for $4,878. The proceeds from the Subordinated Notes were used to
repurchase the Company's Common Stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. The indebtedness evidenced by the Subordinated Notes is
subordinate to all amounts outstanding under the Credit Facility.
Interest Rate Protection
On May 17, 1999, the Company entered into a three-year interest rate swap
agreement (the "Swap") with Wachovia Bank, N.A. at no cost to the Company
whereby the Company exchanged its variable interest rate on $10,000 in Credit
Facility debt for a fixed LIBOR of 5.605%. Due to changes in market conditions
and increases in interest rates, the Swap increased in value and was sold by the
Company back to Wachovia Bank for $75 on July 22, 1999.
On July 22, 1999, the Company entered into an interest rate collar agreement
with Bank Boston, N.A. (the "Bank Boston Collar") for a $75 premium whereby the
Company established a LIBOR floor of 5.1% and a LIBOR cap of 7.0% on $25,000 of
its variable interest rate Credit Facility debt. The Bank Boston Collar became
effective on August 17, 1999 and will terminate on May 17, 2002.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
On September 27, 1999, the Company entered into an interest rate collar
agreement with Bank of America (the "B of A Collar") at no cost to the Company
whereby the Company established a LIBOR floor of 5.5% and a LIBOR cap of 6.74%
on $25,000 of its variable interest rate Credit Facility debt. The B of A
Collar became effective on October 13, 1999 and will terminate on October 13,
2000.
NOTE 5 - STOCKHOLDERS' EQUITY
- -----------------------------
Changes in stockholders' equity during the nine months ended January 22, 2000
were as follows:
Stockholders' equity balance at April 24, 1999 $ 63,226
Issuance of common stock in conjunction with:
Exercise of stock options, including tax benefits 2,938
Fees paid to outside members of the Company's board of directors 79
Comprehensive income 21,079
---------
Stockholders' equity balance at January 22, 2000 $87,322
=========
Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
------- ------- ------- -------
Net income $ 6,868 $ 2,941 $16,026 $ 5,861
Other comprehensive income:
Foreign currency translation
adjustment, net of tax 385 398 159 (1,787)
Unrealized gain on available-for-sale
securities, net of tax 4,173 4,894
------- ------- ------- -------
Comprehensive income $11,426 $ 3,339 $21,079 $ 4,074
======= ======= ======= =======
Notes Receivable from Officers
The Company extended secured loans to certain members of management for the
purchase, in the open market, of Company Common Stock by those individuals. The
notes are full recourse promissory notes bearing interest at 6.75% per annum and
are collateralized and secured with properly margined Company Common Stock
personally owned by those management members participating in the program.
Principal and interest are payable at maturity, September 1, 2000.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 6 - SALE OF SUBSIDIARY
- ---------------------------
On September 24, 1999, the Company sold all of the outstanding capital stock of
Hano Document Printers, Inc. ("Hano") for $3,790 and recorded a pre-tax loss on
the sale of $318. Sale proceeds consisted of a $1,500 8% note due on November
30, 1999 ("Short Term Note") and a $2,290 8% note payable in interest only
installments until October 1, 2002 when principal and interest payments will be
made until the maturity date of September 1, 2009. The purchaser of Hano's
capital stock paid off the Short Term Note in full on November 30, 1999. The
remaining note is collateralized by all of the assets of Hano and is subject to
a limited guarantee with a third party up to a maximum of $2,000. The Company
also entered into an agreement with Hano to sublease building space from Hano
for $23 per month through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10 per month through August 2004,
then increasing to $15 per month through August 2009.
NOTE 7 - INVESTMENT IN COMMON STOCK
- -----------------------------------
In September 1999, the Company purchased 300 shares of PurchasePro.com, Inc.
common stock in one transaction at $8 per share. The Company sold 150 shares
during the three months ended October 23, 1999 and recorded a realized pre-tax
gain of $1,808. The Company sold an additional 75 shares in November 1999 for a
realized pre-tax gain of $5,318. As these shares sold in November 1999 were
classified as trading securities and recorded at their fair value at October 23,
1999, $1,162 and $4,156 of the $5,318 total pre-tax gain was recorded in other
income during the three months ended October 23, 1999 and January 22, 2000,
respectively. The remaining 75 shares have been classified as available-for-
sale securities based on the Company's intent and ability to retain the shares
and are included in other assets at their fair value of $8,494. The resulting
net of tax unrealized holding gain of $4,894 is included in other comprehensive
income. All share and per share amounts of the investment in common stock have
been adjusted to reflect the three-for-two stock dividend received by the
Company subsequent to its investment.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 8 - EARNINGS PER SHARE ("EPS")
- ----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's
computations of basic and diluted EPS for the periods presented in the
consolidated statement of income:
Three Months Ended Nine Months Ended
------------------------ -----------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
--------- ---------- ---------- ----------
Basic earnings per share:
Net income $ 6,868 $ 2,941 $16,026 $ 5,861
======= ======= ======= =======
Weighted average number of
common shares outstanding 12,708 13,065 12,644 14,575
======= ======= ======= =======
Basic earnings per share $ 0.54 $ 0.23 $ 1.27 $ 0.40
======= ======= ======= =======
Diluted earnings per share:
Net income $ 6,868 $ 2,941 $16,026 $ 5,861
======= ======= ======= =======
Weighted average number of:
Common shares outstanding 12,708 13,065 12,644 14,575
Effect of dilutive employee stock options* 1,702 4 1,128 71
------- ------- ------- -------
Total 14,410 13,069 13,772 14,646
======= ======= ======= =======
Diluted earnings per share $ 0.48 $ 0.23 $ 1.16 $ 0.40
======= ======= ======= =======
* The Company had additional employee stock options outstanding during the
periods presented that were not included in the computation of diluted earnings
per share because they were anti-dilutive.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 9 - BUSINESS COMBINATIONS
- ------------------------------
During the nine month period ended January 22, 2000, the Company completed five
business combinations which were accounted for under the purchase method for an
aggregate purchase price of $25,279 consisting entirely of cash. The total
assets related to these acquisitions were $39,453, including goodwill and other
intangible assets of $26,700. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
During Fiscal 1999, the Company made twelve acquisitions accounted for under the
purchase method for an aggregate purchase price of $70,125, consisting entirely
of cash. The total assets related to these acquisitions were $88,379, including
intangible assets of $50,074. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
All of the Company's acquisitions have earn-out provisions that could result in
additional purchase consideration payable in subsequent periods, ranging from
three to five years, dependent upon the future earnings of the acquired
companies. Additional purchase consideration of $1,289 was paid by the Company
in connection with these earn-out provisions during the nine months ended
January 22, 2000, and another $9,476 is accrued for these earn-out provisions at
January 22, 2000. This additional consideration, whether paid or accrued, has
been reflected in the accompanying balance sheet as goodwill at January 22,
2000.
The following presents the unaudited pro forma results of operations of the
Company for the three and nine month periods ended January 22, 2000 and January
23, 1999, as if the Strategic Restructuring Plan, the divestiture of a
subsidiary and the purchase acquisitions completed since the beginning of Fiscal
1999 had been consummated at the beginning of Fiscal 1999. The pro forma
results of operations include certain pro forma adjustments including the
amortization of intangible assets and reductions in executive compensation at
the acquired companies of $152, $1,940, $515 and $5,495 for the three months
ended January 22, 2000 and January 23, 1999, and the nine months ended January
22, 2000 and January 23, 1999, respectively:
Three Months Ended Nine Months Ended
------------------------ --------------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
----------- ----------- ---------- ----------
Revenues $140,838 $133,961 $398,601 $393,447
Net income 6,932 3,400 17,053 12,506
Earnings per share:
Basic $ 0.55 $ 0.26 $ 1.35 $ 0.86
Diluted 0.48 0.26 1.24 0.85
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, the divestiture and the Strategic Restructuring
Plan occurred at the beginning of Fiscal 1999 or the results that may occur in
the future.
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 10 - SEGMENT REPORTING
- ---------------------------
The Company's operating segments prepare separate financial information that is
evaluated regularly by the Company's Chief Financial Officer and the Company's
Chief Operating Officers. Operating segments of the Company are defined
primarily by the segment operation's core business function whether it is: a)
the procurement and subsequent distribution of product to the customer or b) the
sale of an internally manufactured product to the customer. The Company has
determined that its operating activities consist of two reportable operating
segments: the Company's Integrated Business Services Division and the Company's
Fulfillment Division.
The Company's Integrated Business Services Division represents those
subsidiaries of the Company that procure product, primarily custom print
products and office supplies, and distribute it to customers through one of the
Company's distribution centers or directly from the product's manufacturer. The
results of the Integrated Business Services Division also include transactions
with customers utilizing the Company's proprietary iGetSmart inventory and
distribution system. The Company's Fulfillment Division represents those
subsidiaries primarily engaged in the sale of products internally manufactured
at the Company. The Fulfillment Division provides envelopes, commercial print
products, custom forms and documents, annual reports, direct mail pieces,
specialty packaging, labels and advertising specialty products to its customers.
The Fulfillment Division also provides product to the Company's Integrated
Business Services Division for distribution to customers. Corporate expenses
include the costs of maintaining a corporate office. The Company does not
allocate corporate overhead or strategic restructuring plan costs by segment in
assessing performance.
Operating Segments
The following table sets forth information as to the Company's reportable
operating segments:
Three Months Ended Nine Months Ended
---------------------- -----------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
-------- ------- -------- --------
Revenues:
Integrated Business Services Division $ 59,196 $30,523 $154,377 $ 88,789
Fulfillment Division 80,319 67,586 239,873 194,424
Intersegment (1,037) (2,567) (5,550) (7,085)
-------- ------- -------- --------
Total $138,478 $95,542 $388,700 $276,128
======== ======= ======== ========
Operating income:
Integrated Business Services Division $ 5,264 $ 2,211 $ 13,900 $ 5,920
Fulfillment Division 7,426 5,772 20,465 15,453
Corporate (2,770) (1,556) (6,567) (7,909)
-------- ------- -------- --------
Total $ 9,920 $ 6,427 $ 27,798 $ 13,464
======== ======= ======== ========
January 22, April 24,
2000 1999
-------- --------
Identifiable assets (at period end):
Integrated Business Services Division $ 98,857 $ 64,190
Fulfillment Division 179,316 165,007
Corporate 19,177 7,417
-------- --------
Total $297,350 $236,614
======== ========
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Geographic Segments
The following table sets forth information as to the Company's operations in
its different geographic segments:
Three Months Ended Nine Months Ended
--------------------- -----------------------
January 22, January 23, January 22, January 23,
2000 1999 2000 1999
-------- ------- -------- --------
Revenues:
United States $101,313 $66,561 $282,295 $186,102
Canada 37,165 28,981 106,405 90,026
-------- ------- -------- --------
Total $138,478 $95,542 $388,700 $276,128
======== ======= ======== ========
Operating income:
United States $ 6,265 $ 4,122 $ 18,560 $ 6,165
Canada 3,655 2,305 9,238 7,299
-------- ------- -------- --------
Total $ 9,920 $ 6,427 $ 27,798 $ 13,464
======== ======= ======== ========
January 22, April 24,
2000 1999
-------- --------
Identifiable assets (at period end):
United States $235,005 $178,621
Canada 62,345 57,993
-------- --------
Total $297,350 $236,614
======== ========
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
Change in Fiscal Year End
Subsequent to January 22, 2000, the Company's Board of Directors passed a
resolution approving a change in the Company's fiscal year-end from the last
Saturday in April to April 30th of each year. This resolution will have the
effect of changing the Fiscal 2000 year-end date from April 29, 2000 to April
30, 2000.
Sale of the Bank Boston Collar
Subsequent to January 22, 2000, the Company sold the Bank Boston Collar. Due to
changes in market conditions and increases in interest rates, the Bank Boston
Collar increased in value and was sold by the Company back to Bank Boston for
$220. The resulting gain of $160 will be recorded in other income during the
fourth quarter of Fiscal 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to Workflow Management, Inc. (the "Company"
or "Workflow Management") or its management are intended to identify such
forward-looking statements. Such forward looking statements include, but are
not limited to, statements regarding the Company's expectations of the impact of
the year 2000 issue on results of operations. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements, which are made only as of
the date hereof.
Introduction
Workflow Management, Inc. (the "Company" or "Workflow Management") is a Delaware
corporation formed by U.S. Office Products Company, also a Delaware corporation
("U.S. Office Products"), in connection with U.S. Office Products' strategic
restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,642,981 shares
(the "Distribution" or "Workflow Distribution") of the Company's common stock,
par value $.001 per share ("Company Common Stock"). Holders of U.S. Office
Products' common stock were not required to pay any consideration for the shares
of the Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date").
Workflow Management is a leading acquirer and integrator of graphic arts
companies, providing a variety of custom print products and office supplies and
related management services to more than 30,000 businesses in the United States
and Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, iGetSmart, designed to
minimize the costs of procuring, storing and using custom print products and
office supplies, and the Fulfillment Division, which prints and produces
envelopes, custom business documents, commercial print, labels, packaging and
direct mail literature. Workflow Management employs approximately 2,800 persons
and has 24 manufacturing facilities in 10 states and 5 Canadian provinces, 27
distribution centers, 8 print-on-demand centers and 64 sales offices.
As used in this Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Fiscal 2000" and "Fiscal 1999" refer to the Company's
fiscal years ending April 30, 2000 and ended April 24, 1999, respectively. The
following discussion should be read in conjunction with the consolidated
historical financial statements, including the related notes thereto, appearing
elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's
audited consolidated financial statements, and notes thereto, for the fiscal
year ended April 24, 1999 included in the Company's Annual Report on Form 10-K.
Consolidated Results of Operations
Three Months Ended January 22, 2000 Compared to Three Months Ended January 23,
1999
Consolidated revenues increased 44.9%, from $95.5 million for the three months
ended January 23, 1999, to $138.5 million for the three months ended January 22,
2000. The Company's Integrated Business Services Division revenues increased by
$28.7 million or 93.9% and its Fulfillment Division revenues increased by $12.7
million or 18.8% when comparing the three months ended January 22, 2000 to the
three months ended January 23, 1999. These increases were primarily due to the
Company's business combinations consummated after January 23, 1999. Revenues for
the three months ended January 22, 2000, include revenues from seventeen
companies acquired in business combinations accounted for under the purchase
method after the beginning of the first quarter of Fiscal 1999 (the "Purchased
Companies"). Revenues for the three months ended January 23, 1999, include
revenues from four of the Purchased Companies.
International revenues increased 28.2%, from $29.0 million, or 30.3% of
consolidated revenues, for the three months ended January 23, 1999, to $37.2
million, or 26.8% of consolidated revenues, for the three months ended January
22, 2000. International revenues consisted exclusively of revenues generated in
Canada and increased primarily due to one Canadian purchase acquisition
consummated during the fourth quarter of Fiscal 1999.
Gross profit increased 43.1%, from $28.0 million, or 29.3% of revenues, for the
three months ended January 23, 1999, to $40.1 million, or 28.9% of revenues, for
the three months ended January 22, 2000. The increase in gross profit was
primarily due to the Purchased Companies. The decrease in gross profit as a
percentage of revenues was due to a change in the product mix resulting from the
Purchased Companies and seasonality at certain of those Purchased Companies.
During the three months ended January 22, 2000, the Company had significant
commercial printing revenue from two subsidiaries that were acquired subsequent
to the three-month period ended January 23, 1999. Commercial printing revenues
typically have lower gross margins than those gross margin percentages
historically recorded by the Company.
Selling, general and administrative expenses increased 38.7%, from $21.4
million, or 22.4% of revenues, for the three months ended January 23, 1999, to
$29.6 million, or 21.4% of revenues, for the three months ended January 22,
2000. The increase in selling, general and administrative expenses was
primarily due to the Purchased Companies. This increase was partially offset by
the benefits resulting from headcount reductions and cost saving measures
commenced by the Company during Fiscal 1999. The decrease in selling, general
and administrative expenses, as a percentage of revenues, during the three
months ended January 22, 2000, was primarily due to the above mentioned
headcount reductions and cost saving measures coupled with the Purchased
Companies expensing selling, general and administrative costs at a lower
percentage of revenue than historically recognized by the Company, due to the
elimination of overhead and duplication of duties at certain Purchased Companies
upon their acquisition by the Company.
Amortization expense increased 143.2%, from $220,000, or 0.2% of revenues, for
the three months ended January 23, 1999, to $535,000, or 0.4% of revenues, for
the three months ended January 22, 2000. This increase was due exclusively to
the increased number of acquisitions accounted for under the purchase method
that are included in the Company's results for the three months ended January
22, 2000 versus the three months ended January 23, 1999.
Interest expense, net of interest income, increased 110.7%, from $1.2 million
for the three months ended January 23, 1999, to $2.6 million for the three
months ended January 22, 2000. This increase in net interest expense was due to
the increased level of debt outstanding during the three months ended January
22, 2000 as a result of the Company using funds available under its Credit
Facility for acquisition purposes.
On September 24, 1999, the Company sold all of the outstanding capital stock of
Hano Document Printers, Inc. ("Hano") for $3.8 million and recorded a pre-tax
loss on the sale of $318,000.
In September 1999, the Company purchased 300,000 shares of PurchasePro.com, Inc.
common stock in one transaction at $8.00 per share. The Company sold 150,000
shares during the three months ended October 23, 1999 and recorded a realized
pre-tax gain of $1.8 million. The Company sold an additional 75,000 shares in
November 1999 for a realized pre-tax gain of $5.3 million. As these shares sold
in November 1999 were classified as trading securities and recorded at their
fair value at October 23, 1999, $1.2 million and $4.1 million of the $5.3
million total pre-tax gain was recorded in other income during the three months
ended October 23, 1999 and January 22, 2000, respectively. The remaining 75,000
shares have been classified as available-for-sale securities based on the
Company's intent and ability to retain the shares and are included in other
assets at their fair value of $8.5 million. The resulting net of tax unrealized
holding gain of $4.9 million is included in other comprehensive income. All
share and per share amounts of the investment in common stock have been adjusted
to reflect the three-for-two stock dividend received by the Company subsequent
to its investment.
Other income decreased 72.2% from $72,000 for the three months ended January 23,
1999, to $20,000 for the three months ended January 22, 2000. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items.
Provision for income taxes increased 99.0% from $2.3 million for the three
months ended January 23, 1999 to $4.6 million for the three months ended January
22, 2000, reflecting effective income tax rates of 44.0% and 40.1%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 34.0%, plus
appropriate state and local taxes. In addition, the effective tax rates were
increased to reflect the incurrence of non-deductible goodwill amortization
expense resulting from the acquisitions of certain Purchased Companies. During
the three months ended January 22, 2000, the effective income tax rate was
reduced due to the fact that the marketable securities gains were taxed at a
38.0% rate.
Nine Months Ended January 22, 2000 Compared to Nine Months Ended January 23,
1999
Consolidated revenues increased 40.8%, from $276.1 million for the nine
months ended January 23, 1999, to $388.7 million for the nine months ended
January 22, 2000. The Company's Integrated Business Services Division revenues
increased by $65.6 million or 73.9% and its Fulfillment Division revenues
increased by $45.4 million or 23.4% when comparing the nine months ended January
22, 2000 to the nine months ended January 23, 1999. These increases were
primarily due to the Company's business combinations consummated after January
23, 1999. Revenues for the nine months ended January 22, 2000, include revenues
from seventeen of the Purchased Companies. Revenues for the nine months ended
January 23, 1999 include revenues from four of the Purchased Companies.
International revenues increased 18.2%, from $90.0 million, or 32.6% of
consolidated revenues, for the nine months ended January 23, 1999, to $106.4
million, or 27.4% of consolidated revenues, for the nine months ended January
22, 2000. International revenues consisted exclusively of revenues generated in
Canada and increased primarily due to one Canadian purchase acquisition
consummated during the fourth quarter of Fiscal 1999.
Gross profit increased 46.0%, from $77.7 million, or 28.1% of revenues, for the
nine months ended January 23, 1999, to $113.4 million, or 29.2% of revenues, for
the nine months ended January 22, 2000. The increase in gross profit was
primarily due to the Purchased Companies. The increase in gross profit as a
percentage of revenues was due to the Purchased Companies generating gross
profit at a higher percentage of revenues than historically has been recognized
by the Company.
Selling, general and administrative expenses increased 40.3%, from $59.9
million, or 21.7% of revenues, for the nine months ended January 23, 1999, to
$84.0 million, or 21.6% of revenues, for the nine months ended January 22, 2000.
The increase in selling, general and administrative expenses was primarily due
to the Purchased Companies. This increase was partially offset by the benefits
resulting from headcount reductions and cost saving measures commenced by the
Company during Fiscal 1999. The decrease in selling, general and administrative
expenses, as a percentage of revenues, during the nine months ended January 22,
2000, was primarily due to the above mentioned headcount reductions and cost
saving measures coupled with the Purchased Companies expensing selling, general
and administrative costs at a lower percentage of revenue than historically
recognized by the Company, due to the elimination of overhead and duplication of
duties at certain Purchased Companies upon their acquisition by the Company.
Amortization expense increased 219.8%, from $486,000, or 0.2% of revenues, for
the nine months ended January 23, 1999, to $1.6 million, or 0.4% of revenues,
for the nine months ended January 22, 2000. This increase was due exclusively
to the increased number of acquisitions accounted for under the purchase method
that are included in the Company's results for the nine months ended January 22,
2000 versus the nine months ended January 23, 1999.
The Company incurred expenses of approximately $3.8 million during the nine
months ended January 23, 1999 associated with U.S. Office Products' Strategic
Restructuring Plan. Under generally accepted accounting principles, the Company
was required to record a one-time, non-cash expense of approximately $3.0
million with a corresponding contribution to capital relating to the tender of
stock options by Workflow Management employees in U.S. Office Products' equity
tender offer at the Distribution Date. As a result of the Distribution, the
Company also incurred an additional $750,000 in transaction costs during the
nine months ended January 23, 1999 relating to the Strategic Restructuring Plan
for legal, accounting and financial advisory services and various other fees.
Interest expense, net of interest income, increased 138.3%, from $3.1 million
for the nine months ended January 23, 1999, to $7.4 million for the nine months
ended January 22, 2000. This increase in net interest expense was due to the
increased level of debt outstanding during the nine months ended January 22,
2000 as a result of the Company using funds available under its Credit Facility
for acquisition purposes.
As discussed above, on September 24, 1999, the Company sold all of the
outstanding capital stock of Hano for $3.8 million and recorded a pre-tax loss
on the sale of $318,000.
As also discussed above, in September 1999, the Company sold 225,000 shares of
an investment during the nine months ended January 22, 2000 and recognized the
realized gains.
Other income decreased 65.5% from $119,000 for the nine months ended January 23,
1999, to $41,000 for the nine months ended January 22, 2000. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items.
Provision for income taxes increased 143.0%, from $4.6 million for the nine
months ended January 23, 1999, to $11.2 million for the nine months ended
January 22, 2000, reflecting effective income tax rates of 44.0% and 41.1%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 34.0%, plus
appropriate state and local taxes. In addition, the effective tax rates were
increased to reflect the incurrence of non-deductible goodwill amortization
expense resulting from the acquisitions of certain Purchased Companies. During
the nine months ended January 22, 2000 the effective income tax rate was reduced
due to the fact that the marketable securities gains were taxed at a 38.0% rate.
Liquidity and Capital Resources
At January 22, 2000, the Company had working capital of $69.9 million. The
Company's capitalization, defined as the sum of long-term debt, subordinated
related party debt and stockholders' equity, at January 22, 2000 was
approximately $220.7 million.
Workflow Management uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents are typically on hand as any excess cash would be used to pay down
the Company's revolving credit facility. Cash at January 22, 2000, primarily
represented customer collections and in-transit cash sweeps from the Company's
subsidiaries at the end of the quarter.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $12.0 million for new equipment and maintenance.
During the nine months ended January 22, 2000, net cash provided by operating
activities was $5.8 million. Net cash used in investing activities was $26.8
million, including $25.3 million used for acquisitions, $10.1 million used for
capital expenditures and $2.4 million used for the purchase of marketable
securities which were partially offset by $8.9 million generated from the sale
of certain securities and the collection of a $1.5 million note receivable
issued in conjunction with the divestiture of a subsidiary. Net cash provided
by financing activities was $21.8 million, which included $19.8 million in net
borrowings by the Company on its revolving credit facility to primarily pay for
acquisitions and $2.2 million in proceeds from the issuance of common stock.
During the nine months ended January 23, 1999, net cash provided by operating
activities was $18.0 million. Net cash used in investing activities was $24.3
million, including $21.4 million used for acquisitions, $6.8 million used for
additions to property and equipment which were partially offset by the
collection of $3.7 million in notes receivable from employees. Net cash
provided by financing activities was $6.9 million, which included $52.3 million
in net borrowings by the Company and an $8.5 million capital contribution by
U.S. Office Products which were partially offset by $36.1 million of cash paid
to U.S. Office Products under its Strategic Restructuring Plan, $12.4 million
paid to retire the Company's common stock, $3.5 million paid in deferred
financing fees and $2.0 million used for the issuance of notes receivable from
officers.
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 27.4% of the Company's
total net sales for the nine months ended January 22, 2000. As a result,
Workflow Management is subject to certain risks inherent in conducting business
internationally, including fluctuations in currency exchange rates. Changes in
exchange rates may have a significant effect on the Company's business,
financial condition and results of operations.
As a result of the provisions of Section 355 of the Internal Revenue Code of
1986, as amended, and certain tax contribution agreements entered into by the
Company in connection with the Distribution, the Company may be subject to
constraints on its ability to issue additional shares of the Company's common
stock in certain transactions for two years following the Distribution Date. In
particular, if 50% or more, by vote or value, of the capital stock of Workflow
Management is acquired by one or more persons acting pursuant to a plan or
series of transactions that includes the Distribution, Workflow Management will
suffer significant tax liability. The Company will evaluate any significant
future issuance of capital stock to avoid the imposition of such tax liability.
The Company entered into a secured $200.0 million revolving credit facility (the
"Credit Facility") underwritten and agented by Deutsche Bank during Fiscal 1999.
The Credit Facility matures on June 10, 2003 and is secured by substantially all
assets of the Company and is subject to terms and conditions typical of a credit
facility of such type and size, including certain financial covenants. Interest
rate options are available to the Company conditioned on certain leverage tests.
The maximum rate of interest is the prime rate from time to time in effect. The
Credit Facility is also available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants and total
availability under the facility. At February 28, 2000, the Company had $128.3
million drawn against the Credit Facility at an average interest rate of 7.39%.
During Fiscal 1999, the Company issued $4.1 million in subordinated unsecured
notes with attached warrants (the "Subordinated Notes") to certain members of
the Company's management. The proceeds from the Subordinated Notes were used to
repurchase the Company's Common Stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. The indebtedness evidenced by the Subordinated Notes is
subordinate to all amounts outstanding under the Credit Facility.
On September 27, 1999, the Company entered into an interest rate collar
agreement with Bank of America (the "B of A Collar") at no cost to the Company
whereby the Company established a LIBOR floor of 5.5% and a LIBOR cap of 6.74%
on $25.0 million of its variable interest rate Credit Facility debt. The B of A
Collar became effective on October 13, 1999 and will terminate on October 13,
2000.
Under the terms of the Distribution Agreement entered into between the Company
and U.S. Office Products in connection with the Strategic Restructuring Plan,
the Company is obligated, subject to a maximum obligation of $1.75 million, to
indemnify U.S. Office Products for certain liabilities incurred by U.S. Office
Products prior to the Distribution, including liabilities under federal
securities laws (the "Indemnification Obligation"). This Indemnification
Obligation is reduced by any insurance proceeds actually recovered in respect of
the Indemnification Obligation and is shared on a pro rata basis with the other
three divisions of U.S. Office Products which were spun-off from U.S. Office
Products in connection with the Strategic Restructuring Plan.
U.S. Office Products has been named a defendant in various class action
lawsuits. These lawsuits generally allege violations of federal securities laws
by U.S. Office Products and other named defendants during the months preceding
the Strategic Restructuring Plan. The Company has not received any notice or
claim from U.S. Office Products alleging that these lawsuits are within the
scope of the Indemnification Obligation, but the Company believes that certain
liabilities and costs associated with these lawsuits (up to a maximum of $1.75
million) are likely to be subject to the Company's Indemnification Obligation.
Nevertheless, the Company does not presently anticipate that the Indemnification
Obligation will have a material adverse effect on the Company.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the Credit Facility will be sufficient
to meet the Company's liquidity requirements for its operations and acquisition
purposes for the next twelve months. The Company expects that additional
financing under the Credit Facility will be sufficient to meet its long-term
liquidity requirements for operations. However, the Company intends to pursue
acquisitions in the next twelve months and thereafter which are expected to be
funded through cash, stock or a combination thereof. The Company may have to
seek additional funding for its long-term liquidity from the issuance of
additional bank debt, the issuance of public debt or the issuance of additional
common stock in the public markets. There can be no assurance that additional
sources of financing will not be required during the next twelve months or
thereafter.
Fluctuations in Quarterly Results of Operations
Workflow Management's envelope business is subject to seasonal influences from
year-end mailings. Both the Company's Integrated Business Services Division and
its Fulfillment Division are subject to seasonal influences of the potential
lower demand for office consumables during the summer months which coincide with
Workflow Management's fiscal quarters ending in July. As the Company continues
to complete acquisitions, it may become subject to other seasonal influences if
the businesses it acquires are seasonal.
Quarterly results also may be materially affected by the timing of acquisitions,
the timing and magnitude of costs related to such acquisitions, variations in
the prices paid by the Company for the products it sells, the mix of products
sold and general economic conditions. Moreover, the operating margins of
companies acquired may differ substantially from those of Workflow Management,
which could contribute to further fluctuation in its quarterly operating
results. Therefore, results for any quarter are not necessarily indicative of
the results that the Company may achieve for any subsequent fiscal quarter or
for a full fiscal year.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations during the three-month and nine-month periods ended
January 22, 2000 and January 23, 1999, respectively.
Year 2000 Issue
Many existing computer programs were designed and developed without considering
the impact of the change in the century and consequently used only two digits to
identify a year in the date field. If not corrected, many computer applications
could have failed or created erroneous results by or at the year 2000 (the "Year
2000 Issue" or "Year 2000"). The Company created an internal task force to
identify, assess and remediate potential Year 2000 computer problems (the "Year
2000 Project").
Prior to January 1, 2000, the Company completed its testing and remediation of
both information technology (IT) and non-IT systems that required attention and
resources to be Year 2000 compliant. As a result of the Year 2000 Project
efforts, the Company experienced no significant disruptions in operations and
believes all of its systems successfully responded to the Year 2000 Issue.
However, although the change in date has occurred, it is not possible to
conclude that all aspects of the Year 2000 Issue that may affect the Company,
including those relating to third parties with whom the Company has material
business relations have been resolved. The Company has a contingency plan in
place to mitigate the potential effects, if any, that may arise. The Company
incurred approximately $6.0 million of incremental expenses in connection with
the Year 2000 Issue.
Recent Developments
Change in Fiscal Year End
On February 15, 2000, the Company's Board of Directors passed a resolution
approving a change in the Company's fiscal year-end from the last Saturday in
April to April 30th of each year. This resolution will have the effect of
changing the Fiscal 2000 year-end date from April 29, 2000 to April 30, 2000.
Factors Affecting the Company's Business
Risks Associated with Acquisitions and Divestitures
One of the Company's strategies is to increase its revenues and the markets it
serves through the acquisition of additional graphic arts businesses. There can
be no assurance that suitable candidates for acquisitions can be identified or,
if suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all. In addition, the Company may determine that its
business interests would be best served by selling certain subsidiaries, assets
or operations to third parties. Accordingly, the Company has in the past
considered, and will continue to consider in the future, divestitures of certain
operations or assets to the extent management believes that such transactions
could improve the Company's overall financial condition and/or future prospects.
Any such divestitures would reduce the Company's revenues. Divestitures could
also (i) eliminate certain products or product lines that the Company has
historically offered to its customers and (ii) reduce or eliminate the Company's
presence in certain geographic markets.
Integration of acquired companies may involve a number of special risks that
could have a material adverse effect on the Company's operations and financial
performance, including adverse short-term effects on its reported operating
results (including those adverse short-term effects caused by severance payments
to employees of acquired companies, restructuring charges associated with the
acquisitions and other expenses associated with a change of control, as well as
non-recurring acquisition costs including accounting and legal fees, investment
banking fees, recognition of transaction-related obligations and various other
acquisition-related costs); diversion of management's attention; difficulties
with retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. Furthermore, although Workflow Management conducts due
diligence and generally requires representations, warranties and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of Workflow
Management.
Workflow Management may in the future seek to finance its acquisitions by using
shares of Company Common Stock. If the Company Common Stock does not maintain a
sufficient market value, if the price of Company Common Stock is highly
volatile, or if potential acquisition candidates are otherwise unwilling to
accept Company Common Stock as part of the consideration for the sale of their
businesses, Workflow Management may be required to use more of its cash
resources or more borrowed funds in order to initiate and maintain its
acquisition program. If Workflow Management does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. The Company does not anticipate
utilizing Company Common Stock for acquisition purposes during the current
fiscal year.
Approximately $89.7 million, or 30.2% of the Company's total assets at January
22, 2000, represents intangible assets, the significant majority of which is
goodwill. Goodwill represents the excess of cost over the fair market value of
net assets acquired in business combinations accounted for under the purchase
method. The Company amortizes goodwill on a straight-line method over a period
of 40 years with the amount amortized in a particular period constituting a non-
cash expense that reduces the Company's net income. The Company will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Workflow Management would be required to
write down the carrying value of the goodwill and incur a related charge to its
income. A reduction in net income resulting from the amortization or write down
of goodwill could have a material and adverse impact upon the market price of
the Company Common Stock.
Risks Associated with Canadian Operations
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 27.4% and 32.2% of the
Company's total net sales in the nine months ended January 22, 2000 and the
fiscal year ended April 24, 1999, respectively. As a result, Workflow Management
is subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Management is also
subject to risks associated with the imposition of protective legislation and
regulations, including those resulting from trade or foreign policy. In
addition, because of the Company's Canadian operations, significant revenues and
expenses are denominated in Canadian dollars. Changes in exchange rates may have
a significant effect on the Company's business, financial condition and results
of operations. Workflow Management does not currently engage in currency hedging
transactions.
For additional risk factors, refer to the Company's Annual Report on Form 10-K
for the year ended April 24, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's financial instruments include cash, accounts receivable, accounts
payable and long-term debt. Market risks relating to the Company's operations
result primarily from changes in interest rates. The Company's borrowings are
primarily dependent upon LIBOR rates. The estimated fair value of the Company's
long-term debt approximated its carrying value at January 22, 2000.
The Company does not hold or issue derivative financial instruments for trading
purposes. To manage interest rate risk on the variable rate borrowings under
the Credit Facility, the Company entered into an interest rate collar agreement
on September 27, 1999. For a specified period, this interest rate collar has
the effect of mitigating fluctuations in the Credit Facility's variable base
interest rate by establishing an interest rate floor and an interest rate cap
the Company will pay on $25.0 million notional principal amount established in
the collar. As a result, while this hedging arrangement is structured to reduce
the Company's exposure to interest rate increases, it also limits the benefit
the Company might otherwise have received from any interest rate decreases. This
swap will be cash settled quarterly, with interest expense adjusted for amounts
paid or received.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Statement regarding computation of net income per share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORKFLOW MANAGEMENT, INC.
March 7, 2000 By: /s/ Thomas B. D'Agostino
------------------ -------------------------
Date Thomas B. D'Agostino
Chairman of the Board, Chief Executive
Officer, President, Director (Principal
Executive Officer)
March 7, 2000 By: /s/ Steve R. Gibson
------------------ ---------------------------
Date Steve R. Gibson
Director, Executive Vice President,
Chief Financial Officer,
Treasurer, Secretary (Principal Financial
Officer and Principal Accounting Officer)