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 31, 2001
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.)
241 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 March 13, 2001, there were 12,973,284 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet.................................................. 3
January 31, 2001 (unaudited) and April 30, 2000
Consolidated Statement of Income (unaudited)................................ 4
For the three and nine months ended January 31, 2001 and January 22, 2000
Consolidated Statement of Cash Flows (unaudited)............................ 5
For the three and nine months ended January 31, 2001 and January 22, 2000
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
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
January 31, April 30,
ASSETS 2001 2000
------ ---------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,545 $ 2,851
Accounts receivable, less allowance for doubtful
accounts of $3,888 and $4,191, respectively 93,170 100,366
Inventories 53,330 46,223
Prepaid expenses and other current assets 13,642 11,405
-------- --------
Total current assets 161,687 160,845
Property and equipment, net 54,887 55,859
Intangible assets, net 105,727 92,650
Other assets 12,186 12,346
Net assets held for sale 900 10,012
-------- --------
Total assets $335,387 $331,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 921 $ 1,139
Note payable for acquisition 8,000 10,337
Accounts payable 32,324 33,950
Accrued compensation 10,646 15,824
Accrued additional purchase consideration 9,164 9,581
Accrued income taxes 4,654
Other accrued liabilities 19,821 15,388
-------- --------
Total current liabilities 80,876 90,873
Long-term credit facility 149,879 135,695
Subordinated related party debt 4,174
Other long-term debt 4,354 5,005
Deferred income taxes 5,359 4,557
Other long-term liabilities 1,380 1,486
-------- --------
Total liabilities 241,848 241,790
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 12,972,557 and 12,880,895 issued and
outstanding, respectively 13 13
Additional paid-in capital 51,936 51,981
Notes receivable from officers (4,947) (1,958)
Accumulated other comprehensive loss (2,964) (2,631)
Retained earnings 49,501 42,517
-------- --------
Total stockholders' equity 93,539 89,922
-------- --------
Total liabilities and stockholders' equity $335,387 $331,712
======== ========
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- -------------------------
January 31, January 22, January 31, January 22,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $155,188 $138,478 $446,243 $388,700
Cost of revenues 110,969 98,400 316,708 275,327
-------- -------- -------- --------
Gross profit 44,219 40,078 129,535 113,373
Selling, general and
administrative expenses 35,402 29,623 105,337 84,021
Amortization expense 679 535 2,013 1,554
-------- -------- -------- --------
Operating income 8,138 9,920 22,185 27,798
Interest expense 3,739 2,746 10,933 7,655
Interest income (194) (116) (463) (226)
Gain on sale of securities (4,156) (7,126)
Loss on sale of subsidiary 318
Other income (155) (20) (350) (41)
-------- -------- -------- --------
Income before provision for
income taxes and extraordinary
item 4,748 11,466 12,065 27,218
Provision for income taxes 1,976 4,598 5,017 11,192
-------- -------- -------- --------
Income before extraordinary
item 2,772 6,868 7,048 16,026
Extraordinary item - loss on
early termination of
subordinated debt, net of
income taxes 64 64
-------- -------- -------- --------
Net income $ 2,708 $ 6,868 $ 6,984 $ 16,026
======== ======== ======== ========
Income per share:
Basic:
Income before
extraordinary item $ 0.21 $ 0.54 $ 0.55 $ 1.27
Extraordinary item 0.01
-------- -------- -------- --------
Net income $ 0.21 $ 0.54 $ 0.54 $ 1.27
======== ======== ======== ========
Diluted:
Income before
extraordinary item $ 0.21 $ 0.48 $ 0.54 $ 1.16
Extraordinary item 0.01
-------- -------- -------- --------
Net income $ 0.21 $ 0.48 $ 0.53 $ 1.16
======== ======== ======== ========
Weighted average common
shares outstanding:
Basic 12,956 12,708 12,921 12,644
Diluted 13,005 14,410 13,164 13,772
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------
January 31, January 22,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 6,984 $ 16,026
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 9,013 7,696
Amortization of deferred financing costs 430 549
Loss on sale of subsidiary 318
Gain on sale of securities (7,126)
Cash paid for restructuring costs (843) (95)
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable 11,252 (2,161)
Inventories (6,303) (7,896)
Prepaid expenses and other current assets (607) (2,993)
Accounts payable (2,600) (4,734)
Accrued compensation and other accrued liabilities (7,330) 6,190
-------- --------
Net cash provided by operating activities 9,996 5,774
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (11,914) (23,990)
Additions to property and equipment (6,625) (10,053)
Purchase of securities (2,400)
Cash paid for additional purchase consideration (6,700) (1,289)
Cash received for net assets held for sale 9,764
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 541 502
Other (28)
-------- --------
Net cash used in investing activities (14,962) (26,804)
-------- --------
Cash flows from financing activities:
Proceeds from credit facility borrowings 112,470 81,950
Payments of credit facility borrowings (98,023) (62,139)
Payments of other long-term debt (622) (578)
Payment of subordinated debt and repurchase of attached warrants (4,878)
Proceeds from issuance of other long-term debt 1,518
Payments of short-term debt, net (2,694) (765)
Payments of deferred financing costs (181) (304)
Proceeds from common stock issued under employee benefit programs 566 2,088
Issuance of notes receivable to officers (2,989)
Issuance of common stock to outside directors 60 79
-------- --------
Net cash provided by financing activities 3,709 21,849
-------- --------
Effect of exchange rates on cash and cash equivalents (49) 45
-------- --------
Net (decrease) increase in cash and cash equivalents (1,306) 864
Cash and cash equivalents at beginning of period 2,851 607
-------- --------
Cash and cash equivalents at end of period $ 1,545 $ 1,471
======== ========
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Nine Months Ended
------------------------
January 31, January 22,
2001 2000
------ -------
Supplemental disclosures of cash flow information:
Interest paid $9,555 $ 6,536
Income taxes paid $9,330 $11,036
During the nine months ended January 31, 2001 and January 22, 2000, the Company
paid $11,914 and $23,990, respectively, which represents the aggregate of: 1)
the initial fixed consideration for purchase acquisitions and other purchase
price adjustments relating to certain acquisitions and 2) 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 acquisition
costs are presented as follows:
Nine Months Ended
--------------------------
January 31, January 22,
2001 2000
------- -------
Accounts receivable $ 4,318 $ 5,038
Inventories 1,038 943
Prepaid expenses and other current assets 691 616
Property and equipment 425 6,057
Intangible assets 9,281 25,411
Other assets 158 99
Short-term debt (128) (601)
Accounts payable (1,108) (3,386)
Accrued compensation and other accrued liabilities (2,718) (9,121)
Long-term debt (986)
Deferred income taxes (43) (80)
------- -------
Net assets acquired $11,914 $23,990
======= =======
Non-cash transactions:
o During the nine months ended January 31, 2001 and January 22, 2000, the
Company accrued $6,296 and $9,476, respectively, as additional purchase
consideration for earn-outs.
o During the nine months ended January 31, 2001 and January 22, 2000, the
Company recorded additional paid-in capital of $8 and $850, respectively,
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.
See accompanying notes to consolidated financial statements.
Page 6
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - NATURE OF BUSINESS
---------------------------
Workflow Management, Inc. (the "Company" or "Workflow Management") is a
leading integrator of graphic arts companies, providing a variety of custom
print products and office supplies and related management services to more than
44,000 businesses in the United States and Canada. The Company is comprised of
three main operating divisions: 1) the Workflow Solutions Division, formerly
known as 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, 2) the Workflow Printing Division, formerly known
as the Fulfillment Division, which prints and produces envelopes, custom
business documents, commercial print, labels, packaging and direct mail
literature and 3) the iGetSmart.com Division which owns the iGetSmart software
source code, licenses the right to use the software to other entities, including
subsidiaries of the Company, and provides warehousing services through a
nationwide network of distribution centers. Workflow Management employs
approximately 3,000 persons and has 20 manufacturing facilities in 6 states and
4 Canadian provinces, 12 distribution centers, 11 print-on-demand centers and 58
sales offices.
NOTE 2 - BASIS OF PRESENTATION
-------------------------------
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of Workflow Management
and the companies acquired in business combinations accounted for under the
purchase method from their respective dates of acquisition.
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 30, 2000.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "Fiscal 2001", "Fiscal 2000" and "Fiscal
1999" refer to the Company's fiscal years ending April 30, 2001 and ended April
30, 2000 and April 24, 1999, respectively. During Fiscal 2000, the Company's
Board of Directors approved a change in the definition of the Company's fiscal
year-end date from the last Saturday in April to April 30th of each year. As a
result of this change, the three months ended January 31, 2001 and January 22,
2000 and the nine months ended January 31, 2001 and January 22, 2000 consisted
of 92, 91, 276 and 273 days, respectively.
Page 7
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 3 - INVENTORIES
--------------------
Inventories consist of the following:
January 31, April 30,
2001 2000
------- -------
Raw materials $14,587 $15,130
Work-in-process 3,364 3,287
Finished goods 35,379 27,806
------- -------
Total inventories $53,330 $46,223
======= =======
NOTE 4 - LONG-TERM DEBT
-----------------------
Revolving Credit Facility
During Fiscal 2000, the Company entered into a secured $250,000 revolving
credit facility (the "Credit Facility") underwritten and agented by Fleet Bank.
The Credit Facility is composed of a $200,000 revolver, including a $50,000
sublimit for Canadian borrowings and a $50,000 amortizing term note. The Credit
Facility matures on March 10, 2004 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, which include a
total debt to proforma EBITDA maximum of 3.75 to 1.0. 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 31, 2001, the Company had approximately $149,879
outstanding under the Credit Facility, at an annual interest rate of
approximately 9.0%, and $100,121 available under the Credit Facility for
acquisitions and working capital purposes. During the nine months ended January
31, 2001, the Company incurred $10,193 in interest expense relating to the
Credit Facility.
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 were to mature on
January 18, 2009, and had a stated coupon of 12% payable semi-annually in
arrears. On December 8, 2000, the Company repaid in full the Subordinated Notes
and repurchased the attached warrants for $4,878. As required under the terms
the Subordinated Notes, warrants previously issued to the note holders were
returned to the Company and reissued in an amount sufficient to provide a 15.0%
total annual return to each holder. The Company issued 42 warrants, which are
exercisable into shares of Company Common Stock at a nominal cost. Debt issue
costs of $111 were written-off upon termination of the Subordinated Notes and
the after tax impact of $64 was recorded as an extraordinary loss. Interest
expense for the nine months ended January 31, 2001 relating to the Subordinated
Notes was $394.
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 5 - STOCKHOLDERS' EQUITY
-----------------------------
Changes in stockholders' equity during the nine months ended January 31, 2001
were as follows:
Stockholders' equity balance at April 30, 2000 $89,922
Issuance of common stock in conjunction with:
Exercise of stock options, including tax benefits 65
Employee stock purchase program 509
Fees paid to outside members of the Company's Board of Directors 60
Issuance of notes receivable from officers (2,989)
Repurchase of stock warrants issued with subordinated debt (678)
Comprehensive income 6,650
-------
Stockholders' equity balance at January 31, 2001 $93,539
=======
Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
January 31, January 22, January 31, January 22,
2001 2000 2001 2000
---------- ---------- ----------- -----------
Net income $ 2,708 $ 6,868 $6,984 $16,026
Other comprehensive income:
Foreign currency translation adjustment 1,592 385 (334) 159
Unrealized gain on available-for-sale securities 4,173 4,894
------- ------- ------ -------
Comprehensive income $ 4,300 $11,426 $6,650 $21,079
======= ======= ====== =======
Notes Receivable from Officers
During Fiscal 1999 and Fiscal 2001, the Company extended loans to certain
members of management and the Board of Directors for the purchase, in the open
market, of the Company's common stock ("Company Common Stock") by those
individuals. The notes are full recourse promissory notes bearing interest at
6.75% and 8.0% per annum. Principal and interest on the notes issued in Fiscal
1999 and Fiscal 2001 are payable at maturity on August 31, 2001 and on demand,
no later than January 2, 2003, respectively. At January 31, 2001, $4,947 and
$376 in principal and interest, respectively, were outstanding.
Page 9
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 $3,800 and recorded a pre-tax
loss on the sale of $318. Sale proceeds consisted of a $1,246, 8% note due on
November 30, 1999 ("Short Term Note") and a $2,544, 8.0% note payable in
interest only installments until October 1, 2002 when principal and interest
payments will be made until the maturity date of September 1, 2009. The
purchaser of Hano's stock has paid off the Short Term Note. The notes are
secured by all of the assets of Hano and are subject to a limited guarantee with
a third party up to a maximum of $2,000. The Company also entered into an
agreement with Hano to sublease building space from Hano for $32 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 - SALE OF INVESTMENT IN CORTEZ III SERVICE CORPORATION
-------------------------------------------------------------
On April 21, 2000, the Company purchased 20% of the outstanding common
stock of Cortez III Service Corporation ("Cortez"), a New Mexico corporation, in
exchange for $1,550. Cortez provides logistics and technical services to
various governmental agencies. F. Craig Wilson, a Director of the Company, is
President, Chief Executive Officer and a member of the board of directors of
Cortez. The investment was accounted for under the equity method of accounting.
On January 2, 2001, the Company sold its 20% ownership in Cortez to F. Craig
Wilson in exchange for a note receivable in the amount of $1,789. The note
bears simple interest at 18% per annum with a maturity date of December 31,
2005. The note is a full recourse note and is secured by the shares of stock
sold to F. Craig Wilson. Interest payments of 9% of the principal amount are
payable quarterly with the remaining principal and interest due at maturity.
The Company recorded a gain on the sale of the investment of $200 as other
income during the three months ending January 31, 2001.
NOTE 8 - INVESTMENT IN COMMON STOCK
-----------------------------------
In September 1999, the Company purchased shares of a corporation's common
stock in one transaction for $2,400. The Company sold shares during the nine
months ended January 22, 2000 and recorded a realized gain of $5,318 and an
unrealized gain of $1,808 for the shares held as trading securities. The
remaining shares held by the Company at January 22, 2000 were classified as
available-for-sale based on the Company's intent and ability to retain the
shares and resulted in an unrealized holding gain of $4,894 which was included
in other comprehensive income at January 22, 2000. At January 31, 2001, all
shares of this corporation's common stock have been sold.
Page 10
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 9 - EARNINGS PER SHARE ("EPS")
----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's
computations of basic and diluted EPS for the periods presented in the
consolidated statement of income:
Three Months Ended Nine Months Ended
---------------------------- ------------------------
January 31, January 22, January 31, January 22,
2001 2000 2001 2000
--------- --------- ---------- ----------
Earnings per share:
Income before
extraordinary item $ 2,772 $ 6,868 $ 7,048 $16,026
Extraordinary item 64 64
------- ------- ------- -------
Net Income $ 2,708 $ 6,868 $ 6,984 $16,026
======= ======= ======= =======
Weighted average number of
common shares outstanding 12,956 12,708 12,921 12,644
======= ======= ======= =======
Basic:
Income before
extraordinary item $ 0.21 $ 0.54 $ 0.55 $ 1.27
Extraordinary item 0.01
------- ------- ------- -------
Net Income $ 0.21 $ 0.54 $ 0.54 $ 1.27
======= ======= ======= =======
Diluted earnings per share:
Income before
extraordinary item $ 2,772 $ 6,868 $ 7,048 $16,026
Extraordinary item 64 64
------- ------- ------- -------
Net Income $ 2,708 $ 6,868 $ 6,984 $16,026
======= ======= ======= =======
Weighted average number of:
Common shares outstanding 12,956 12,708 12,921 12,644
Effect of dilutive employee
stock options* 22 1,702 231 1,128
Effect of dilutive stock
warrants 27 12
------- ------- ------- -------
Total 13,005 14,410 13,164 13,772
======= ======= ======= =======
Diluted:
Income before
extraordinary item $ 0.21 $ 0.48 $ 0.54 $ 1.16
Extraordinary item 0.01
------- ------- ------- -------
Net Income $ 0.21 $ 0.48 $ 0.53 $ 1.16
======= ======= ======= =======
* 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. Options to purchase 4,372 and 38
shares of common stock were anti-dilutive and outstanding during the nine months
ended January 31, 2001 and January 22, 2000, respectively.
Page 11
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 10 - BUSINESS COMBINATIONS
-------------------------------
During the nine month period ended January 31, 2001, the Company completed
three business combinations, which were accounted for under the purchase method
for an aggregate purchase price of $11,914 consisting entirely of cash. The
total assets related to these acquisitions were $15,911, including goodwill and
other intangible assets of $9,281. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
During Fiscal 2000, the Company made six acquisitions accounted for under
the purchase method for an aggregate purchase price of $46,807, consisting of
$36,470 in cash and notes payable of $10,337. The total assets related to these
acquisitions were $69,584, including intangible assets of $30,916. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
Following the acquisition of Office Electronics, Inc. ("OEI") during Fiscal
2000, the Company decided to sell certain of OEI's manufacturing divisions and
the related assets. As of January 31, 2001 all manufacturing divisions and
assets except for the St. Louis division and the real estate upon which one
other former OEI facility was located, have been sold. At January 31, 2001 the
carrying value of these net assets held for sale is based upon the net
realizable value of the facilities.
Most 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 $6,700 and $1,289 was paid by
the Company in connection with these earn-out provisions during the nine months
ended January 31, 2001 and January 22, 2000, respectively, and another $9,164 is
accrued for these earn-out provisions at January 31, 2001. This additional
consideration, whether paid or accrued, has been reflected in the accompanying
balance sheet as goodwill at January 31, 2001.
The following presents the unaudited pro forma results of operations of the
Company for the three and nine month periods ended January 31, 2001 and January
22, 2000, as if the divestiture of a subsidiary and the purchase acquisitions
completed since the beginning of Fiscal 2000 had been consummated at the
beginning of Fiscal 2000. 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 $5, $208, $58
and $729 for the three months ended January 31, 2001 and January 22, 2000, and
the nine months ended January 31, 2001 and January 22, 2000, respectively.
Three Months Ended Nine Months Ended
------------------------ ----------------------------
January 31, January 22, January 31, January 22,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $155,966 $161,707 $459,575 $458,030
Net income 2,690 6,630 7,479 17,232
Earnings per share:
Basic $ 0.21 $ 0.52 $ 0.58 $ 1.36
Diluted 0.21 0.46 0.57 1.25
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions and the divestiture occurred at the beginning of
Fiscal 2000 or the results that may occur in the future.
NOTE 11 - SEGMENT REPORTING
---------------------------
The Company's operating segments prepare separate financial information
that is evaluated regularly by the Company's Executive 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, b) the sale of an internally
manufactured product to the customer or c) the license of software source code
and provision of warehousing services to other entities. The Company has
determined that its operating activities consist of three reportable operating
segments: the Company's Workflow Solutions Division, the Company's Workflow
Printing Division and the Company's iGetSmart.com Division.
The Company's Workflow Solutions 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 Company's
Workflow Printing Division represents those subsidiaries primarily engaged in
the sale of products internally manufactured at the Company. The Workflow
Printing 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 Workflow Printing
Division also provides product to the Company's Workflow Solutions Division for
distribution to customers. The iGetSmart.com Division owns the proprietary
iGetSmart electronic inventory and distribution system. The iGetSmart.com
Division licenses the use of the iGetSmart source code to other entities,
including subsidiaries of the Company, and provides warehousing services.
Corporate expenses include the costs of maintaining a corporate office. The
Company does not allocate corporate overhead 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 31, January 22, January 31, January 22,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Workflow Solutions Division $ 75,081 $ 59,196 $208,449 $154,377
Workflow Printing Division 80,297 80,319 242,893 239,873
iGetSmart.com Division 5,623 11,866
Intersegment (5,813) (1,037) (16,965) (5,550)
-------- -------- -------- --------
Total $155,188 $138,478 $446,243 $388,700
======== ======== ======== ========
Operating income:
Workflow Solutions Division $ 4,225 $ 5,264 $ 11,351 $ 13,900
Workflow Printing Division 6,088 7,426 19,230 20,465
iGetSmart.com Division 96 (245)
Corporate (2,271) (2,770) (8,151) (6,567)
-------- -------- -------- --------
Total $ 8,138 $ 9,920 $ 22,185 $ 27,798
======== ======== ======== ========
Page 13
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
January 31, April 30,
2001 2000
-------- --------
Identifiable assets (at period end):
Workflow Solutions Division $127,810 $134,673
Workflow Printing Division 183,383 181,461
iGetSmart.com Division 8,553
Corporate 15,641 15,578
-------- --------
Total $335,387 $331,712
======== ========
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 31, January 22, January 31, January 22,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
United States $118,373 $101,313 $338,105 $282,295
Canada 36,815 37,165 108,138 106,405
-------- -------- -------- --------
Total $155,188 $138,478 $446,243 $388,700
======== ======== ======== ========
Operating income:
United States $ 4,763 $ 6,265 $ 13,339 $ 18,560
Canada 3,375 3,655 8,846 9,238
-------- -------- -------- --------
Total $ 8,138 $ 9,920 $ 22,185 $ 27,798
======== ======== ======== ========
January 31, April 30,
2001 2000
-------- --------
Identifiable assets (at period end):
United States $275,375 $267,398
Canada 60,012 64,314
-------- --------
Total $335,387 $331,712
======== ========
Page 14
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. 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
leading integrator of graphic arts companies, providing a variety of custom
print products and office supplies and related management services to more than
44,000 businesses in the United States and Canada. The Company is comprised of
three main operating divisions: 1) the Workflow Solutions Division, formerly
known as 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, 2) the Workflow Printing Division, formerly known
as the Fulfillment Division, which prints and produces envelopes, custom
business documents, commercial print, labels, packaging and direct mail
literature and 3) the iGetSmart.com Division which owns the proprietary
iGetSmart inventory and distribution system. The iGetSmart.com Division
licenses the use of the source code to other entities for a fee, including
subsidiaries of the Company. Workflow Management employs approximately 3,000
persons and has 20 manufacturing facilities in 6 states and 4 Canadian
provinces, 12 distribution centers, 11 print-on-demand centers and 58 sales
offices.
As used in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Fiscal 2001" and "Fiscal 2000" refer to the
Company's fiscal years ending April 30, 2001 and ended April 30, 2000,
respectively. During Fiscal 2000, the Company's Board of Directors approved a
change in the definition of the Company's fiscal year-end date from the last
Saturday in April to April 30th of each year. As a result of this change, the
three months ended January 31, 2001 and January 22, 2000 and the nine months
ended January 31, 2001 and January 22, 2000 consisted of 92, 91, 276 and 273
days, 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 30, 2000 included in the Company's Annual Report on
Form 10-K.
Page 15
Consolidated Results of Operations
Three Months Ended January 31, 2001 Compared to Three Months Ended
January 22, 2000
Consolidated revenues increased 12.1%, from $138.5 million for the three
months ended January 22, 2000, to $155.2 million for the three months ended
January 31, 2001. The Company's Workflow Solutions Division revenues increased
by $15.9 million or 26.8% and its Workflow Printing Division revenues decreased
by $22,000 or 0.03% when comparing the three months ended January 31, 2001 to
the three months ended January 22, 2000. The increase in the Workflow Solutions
Division was primarily due to the Company's business combinations consummated
after January 22, 2000. The decrease in the Company's Workflow Printing
Division was primarily due to the lower than expected revenues from the direct
mail and envelope operations. Revenues for the three months ended January 31,
2001, include revenues from four companies acquired in business combinations
accounted for under the purchase method after the beginning of the fourth
quarter of Fiscal 2000 (the "Purchased Companies"). The Company's iGetSmart.com
Division had total revenues of $5.6 million for three months ended January 31,
2001. Total revenues at iGetSmart.com consisted of $3.5 million in
interdivisional revenues from the Company's other subsidiaries. These
interdivisional revenues were eliminated upon consolidation.
International revenues decreased 0.9%, from $37.2 million, or 26.8% of
consolidated revenues, for the three months ended January 22, 2000, to $36.8
million, or 23.7% of consolidated revenues, for the three months ended January
31, 2001. International revenues consisted exclusively of revenues generated in
Canada. This decrease was entirely due to a decline in the Canadian exchange
rate during the three months ended January 31, 2001. International revenues,
when stated in the local currency, increased $2.2 million (Canadian) or 4.0% for
the three months ended January 31, 2001 when compared to the three months ended
January 22, 2000.
Gross profit increased 10.3%, from $40.1 million, or 28.9% of revenues, for
the three months ended January 22, 2000, to $44.2 million, or 28.5% of revenues,
for the three months ended January 31, 2001. 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 the Workflow Printing Division's envelope
printing and Canadian forms businesses as each of these product lines have
experienced pressure to their gross margins as a result of competition and a
slowing economy.
Selling, general and administrative expenses increased 19.5%, from $29.6
million, or 21.4% of revenues, for the three months ended January 22, 2000, to
$35.4 million, or 22.8% of revenues, for the three months ended January 31,
2001. The increase in selling, general and administrative expenses was primarily
due to the Purchased Companies and the spending in the Company's iGetSmart.com
Division. During the quarter, the Company incurred approximately $1.7 million
in additional expenses to further develop and market the iGetSmart technology
and to hire additional personnel. As a percentage of revenues, selling, general
and administrative expenses increased due to the depressed economy which slowed
revenue growth at a greater rate than the Company was able to institute cost
saving measures and workforce reductions.
Amortization expense increased 26.9% from $535,000 or 0.4% of revenues for
the three months ended January 22, 2000, to $679,000 or 0.4% of revenues for the
three months ended January 31, 2001. 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 31,
2001 versus the three months ended January 22, 2000.
Interest expense, net of interest income, increased 34.8%, from $2.6
million for the three months ended January 22, 2000, to $3.5 million for the
three months ended January 31, 2001. This increase in net interest expense was
due to the increased level of debt outstanding during the three months ended
January 31, 2001 and the increase in overall market interest rates, including
the interest rate associated with the Company's secured credit facility.
Page 16
In September 1999, the Company purchased shares of a corporation's common
stock in one transaction for $2.4 million. The Company sold shares during three
months ended January 22, 2000 and recorded a realized gain of $4.2 million. The
remaining shares held by the Company at January 22, 2000 were classified as
available-for-sale based on the Company's intent and ability to retain the
shares and resulted in an unrealized holding gain of $4.2 million which was
included in other comprehensive income at January 22, 2000. At January 31,
2001, all shares of this corporation's common stock have been sold.
Other income increased 675.0% from $20 for the three months ended January
22, 2000, to $155 for the three months ended January 31, 2001. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items. During the three months ended
January 31, 2001, the Company sold its 20% interest in Cortez III Service
Corporation and recorded a gain of $200,000 as other income.
Provision for income taxes decreased 57.0% from $4.6 million for the three
months ended January 22, 2000 to $2.0 million for the three months ended January
31, 2001, reflecting effective income tax rates of 40.1% and 41.6%,
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
adjusted 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 31, 2001 Compared to Nine Months Ended January 22,
2000
Consolidated revenues increased 14.8%, from $388.7 million for the nine
months ended January 22, 2000, to $446.2 million for the nine months ended
January 31, 2001. The Company's Workflow Solutions Division revenues increased
by $54.1 million or 35.0% and its Workflow Printing Division revenues increased
by $3.0 million or 1.3% when comparing the nine months ended January 31, 2001 to
the nine months ended January 22, 2000. These increases were primarily due to
the Purchased Companies. The Company's iGetSmart.com Division had total revenues
of $11.9 million for nine months ended January 31, 2001. Total revenues at
iGetSmart.com consisted of $9.5 million in interdivisional revenues from the
Company's other subsidiaries. These interdivisional revenues were eliminated
upon consolidation.
International revenues increased 1.6%, from $106.4 million, or 27.4% of
consolidated revenues, for the nine months ended January 22, 2000, to $108.1
million, or 24.2% of consolidated revenues, for the nine months ended January
31, 2001. International revenues, when stated in the local currency, increased
$6.1 million (Canadian) or 4.0% for the three months ended January 31, 2001 when
compared to the three months ended January 22, 2000.
Gross profit increased 14.3%, from $113.3 million, or 29.2% of revenues,
for the nine months ended January 22, 2000, to $129.5 million, or 29.0% of
revenues, for the nine months ended January 31, 2001. 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 the Workflow Printing Division's
envelope printing and Canadian forms businesses as each of these product lines
have experienced pressure to their gross margins as a result of competition and
a slowing economy.
Selling, general and administrative expenses increased 25.4%, from $84.0
million, or 21.6% of revenues, for the nine months ended January 22, 2000, to
$105.3 million, or 23.6% of revenues, for the nine months ended January 31,
2001. The increase in selling, general and administrative expenses was
primarily due to the Purchased Companies and the spending in the Company's
iGetSmart.com Division. During the nine months ended January 31, 2001, the
Company incurred approximately $4.7 million in additional expenses to further
develop and market the iGetSmart technology. As a percentage of revenues,
selling, general and administrative expenses increased due to the depressed
economy which slowed revenue growth at a greater rate than the Company was able
to institute cost saving measures and workforce reductions.
Page 17
Amortization expense increased 29.5%, from $1.5 million, or 0.4% of
revenues, for the nine months ended January 22, 2000, to $2.0 million, or 0.5%
of revenues, for the nine months ended January 31, 2001. 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 31, 2001 versus the nine months ended January 22, 2000.
Interest expense, net of interest income, increased 40.9%, from $7.4
million for the nine months ended January 22, 2000, to $10.5 million for the
nine months ended January 31, 2001. This increase in net interest expense was
due to the increased level of debt outstanding during the nine months ended
January 31, 2001 and the increase in overall market interest rates, including
the interest rate associated with the Company's secured credit facility.
On September 24, 1999, the Company sold all of the outstanding capital
stock of Hano Document Printers, Inc. ("Hano") for $3.8 million and recorded a
pre-tax loss on the sale of $318,000. Sale proceeds consisted of a $1.3 million
8% note due on November 30, 1999 ("Short Term Note") and a $2.5 million 8% note
payable in interest only installments until October 1, 2002 when principal and
interest payments will be made until the maturity date of September 1, 2009.
The purchaser of Hano's stock has paid off the Short Term Note. The 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 $2.0 million. The Company also
entered into an agreement with Hano to sublease building space from Hano for
$32,000 per month through December 2004.
The limited guarantee on the sale of Hano is solely enforceable through
foreclosure on a warehouse, which the Company sold to the third party guarantor
concurrent with the Hano sale. Sale proceeds consisted of a $900,000, 7.5% note
payable in interest only installments until September 24, 2005 when principal
and interest payments will be made until the maturity date of August 31, 2009.
The note is collateralized by a first mortgage on the warehouse. The Company
entered into a lease for the warehouse for $10,000 per month through August
2004, then increasing to $15,000 per month through August 2009.
Other income increased 754.0% from $41 for the nine months ended January
22, 2000, to $350 for the nine months ended January 31, 2001. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items. During the nine months ended
January 31, 2001, the Company sold its 20% interest in Cortez III Service
Corporation and recorded a gain of $200,000 as other income.
Provision for income taxes decreased 55.2% from $11.2 million for the nine
months ended January 22, 2000 to $5.0 million for the nine months ended January
31, 2001, reflecting effective income tax rates of 41.1% and 41.6%,
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
adjusted 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 security gains were taxed at a 38.0% rate.
Page 18
Liquidity and Capital Resources
At January 31, 2001, the Company had working capital of $80.8 million. The
Company's capitalization, defined as the sum of long-term debt and stockholders'
equity, at January 31, 2001 was approximately $247.8 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 31, 2001, 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 31, 2001, net cash provided by
operating activities was $10.0 million. Net cash used in investing activities
was $15.0 million, including $18.6 million used for acquisitions and additional
purchase consideration and $6.6 million used for capital expenditures which were
partially offset by the collection of $9.8 million for net assets held for sale.
Net cash provided by financing activities was $3.7 million, which included $14.4
million in net borrowings by the Company on its revolving credit facility to
primarily pay for the acquisitions consummated during the quarter, $6.7 million
for additional purchase considerations due under the earn-outs agreements, $4.9
million in payment for termination of subordinated notes with attached warrants
and $2.7 million in payments of other short-term debt.
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.
Workflow Management has significant operations in Canada. Net sales from
the Company's Canadian operations accounted for approximately 24.2% of the
Company's total net sales for the nine months ended January 31, 2001. 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.
During Fiscal 2000, the Company entered into a secured $250.0 million
revolving credit facility (the "Credit Facility") underwritten and agented by
Fleet Bank. The Credit Facility is composed of a $200.0 million revolver,
including a $50.0 million sublimit for Canadian borrowings, and a $50.0 million
amortizing term note. The Credit Facility matures on March 10, 2004 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. The financial covenants include a total debt to proforma
EBITDA maximum of 3.75 to 1.0. 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
March 13, 2001, the Company had approximately $156.8 million outstanding under
the Credit Facility, at an annual interest rate of approximately 8.8%, and $93.2
million available under the Credit Facility for acquisitions and working capital
purposes.
During Fiscal 1999, the Company issued $4.1 million in subordinated
unsecured notes including attached warrants with a value of $751,000 at the
time of the debt issuance (the "Subordinated Notes") to certain members of the
Company's management for $4.9 million. The proceeds from the Subordinated Notes
were used to repurchase the Company's common stock. The Subordinated Notes were
Page 19
to mature on January 18, 2009, and had a stated coupon of 12% payable semi-
annually in arrears. On December 8, 2000, the Company repaid in full the
Subordinated Notes and repurchased the attached warrants for $4.9 million. As
required under the terms of the Subordinated Notes, warrants previously issued
to the note holders were returned to the Company and reissued in an amount
sufficient to provide a 15.0% total annual return to each holder. The Company
issued 42,104 warrants, which are exercisable into shares of Company Common
Stock at a nominal cost. Debt issue costs of $111,000 were written-off upon
termination of the Subordinated Notes and the after tax impact of $64,000 was
recorded as an extraordinary loss. Interest expense for the nine months ended
January 31, 2001 relating to the Subordinated Notes was $394,000.
The Company was spun-off from U.S Office Products Company ("U.S. Office
Products") on June 9, 1998, pursuant to the terms and conditions of a
distribution agreement ("Distribution Agreement") between the Company, U.S.
Office Products and certain other entities that were also spun-off by U.S.
Office Products. Under the terms of the Distribution Agreement, 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 spin-off, 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.
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 transaction consummated pursuant to the Distribution Agreement. 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 Workflow Solutions Division and its
Workflow Printing 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.
Page 20
Inflation
The Company does not believe that inflation has had a material impact on
its results of operations during the three and nine month periods ended January
31, 2001 and January 22, 2000, respectively.
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 $105.7 million, or 31.5% of the Company's total assets at
January 31, 2001, 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.
Page 21
Risks Associated with Canadian Operations
Workflow Management has significant operations in Canada. Net sales from
the Company's Canadian operations accounted for approximately 24.2% and 27.0% of
the Company's total net sales in the nine months ended January 31, 2001 and the
fiscal year ended April 30, 2000, 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 30, 2000.
Page 22
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 31,
2001.
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 enters into, from time to time, interest
rate collar agreements to mitigate fluctuations in the Credit Facility's
variable base interest rate. At January 31, 2001, the Company had no
outstanding derivatives, swaps, collars or similar type agreements to mitigate
such fluctuating interest rates.
Page 23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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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 16, 2001 By: /s/ Thomas B. D'Agostino, Sr.
----------------------- ------------------------------
Date Thomas B. D'Agostino, Sr.
Chairman of the Board,
Chief Executive Officer, Director
(Principal Executive Officer)
March 16, 2001 By: /s/ Michael L. Schmickle
------------------------ -----------------------------------------
Date Michael L. Schmickle
Chief Financial Officer, Executive Vice
President and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
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