UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 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.)
240 Royal Palm Way
Palm Beach, FL 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___.
---
As of December 4, 2001, there were 13,054,452 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet............................................................... 3
October 31, 2001 (unaudited) and April 30, 2001
Consolidated Statement of Income (unaudited)............................................. 4
For the three and six months ended October 31, 2001 and October 31, 2000
Consolidated Statement of Cash Flows (unaudited)......................................... 5
For the three and six months ended October 31, 2001 and October 31, 2000
Notes to Consolidated Financial Statements (unaudited)................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................. 24
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................... 25
Item 6. Exhibits and Reports on Form 8-K...................................................... 25
Signatures..................................................................................... 26
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
October 31, April 30,
ASSETS 2001 2001
------ ---------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,788 $ 2,126
Accounts receivable, less allowance for doubtful
accounts of $4,929 and $4,027, respectively 101,141 99,576
Inventories 54,129 55,572
Prepaid expenses and other current assets 14,387 15,404
-------- --------
Total current assets 172,445 172,678
Property and equipment, net 50,744 56,423
Goodwill, net 119,726 111,457
Other intangible assets, net 1,743 2,081
Other assets 9,446 8,462
Net assets held for sale 900
-------- --------
Total assets $354,104 $352,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 621 $ 994
Accounts payable 47,022 33,295
Accrued compensation 10,778 13,053
Accrued additional purchase consideration 5,320 10,283
Accrued restructuring costs 1,554 3,586
Other accrued liabilities 21,676 19,476
-------- --------
Total current liabilities 86,971 80,687
Long-term credit facility 161,304 171,065
Other long-term debt 1,818 4,266
Deferred income taxes 5,091 4,902
Long-term swap contract liability 5,002
Other long-term liabilities 3,893 1,328
-------- --------
Total liabilities 264,079 262,248
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 13,052,786 and 12,993,730 issued and
outstanding, respectively 13 13
Additional paid-in capital 52,256 52,041
Notes receivable from officers (4,820) (4,820)
Accumulated other comprehensive loss (7,292) (3,627)
Retained earnings 49,868 46,146
-------- --------
Total stockholders' equity 90,025 89,753
-------- --------
Total liabilities and stockholders' equity $354,104 $352,001
======== ========
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $160,309 $149,226 $315,475 $291,055
Cost of revenues 116,313 105,110 227,526 205,739
-------- -------- -------- --------
Gross profit 43,996 44,116 87,949 85,316
Selling, general and administrative expenses 38,218 36,015 74,763 71,269
-------- -------- -------- --------
Operating income 5,778 8,101 13,186 14,047
Interest expense 3,292 3,651 6,995 7,194
Interest income (239) (146) (459) (269)
Other expense (income) 292 (129) 278 (195)
-------- -------- -------- --------
Income before provision for income taxes 2,433 4,725 6,372 7,317
Provision for income taxes 1,010 1,968 2,651 3,041
-------- -------- -------- --------
Net income $ 1,423 $ 2,757 $ 3,721 $ 4,276
======== ======== ======== ========
Income per share:
Basic $ 0.11 $ 0.21 $ 0.29 $ 0.33
Diluted $ 0.11 $ 0.21 $ 0.28 $ 0.32
Weighted average common
shares outstanding:
Basic 13,030 12,915 13,016 12,903
Diluted 13,072 12,925 13,071 13,244
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------
October 31, October 31,
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 3,721 $ 4,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 5,474 5,887
Cash paid for restructuring costs (1,197) (673)
Amortization of deferred financing costs 343 277
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable (1,329) 6,865
Inventories 1,128 (3,416)
Prepaid expenses and other current assets 2,165 (273)
Accounts payable 13,504 4,799
Accrued compensation and other accrued liabilities (959) (3,817)
-------- --------
Net cash provided by operating activities 22,850 13,925
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (3,871) (6,940)
Cash paid for additional purchase consideration (9,241) (6,478)
Additions to property and equipment (7,372) (5,121)
Cash received for net assets held for sale 6,909
Cash collection of note receivable issued with sale of subsidiary 854
Cash received on the sale of property and equipment 9,952 235
-------- --------
Net cash used in investing activities (9,678) (11,395)
-------- --------
Cash flows from financing activities:
Proceeds from credit facility borrowings 86,479 60,506
Payments of credit facility borrowings (96,495) (59,156)
Payments of other long-term debt (2,146) (423)
Payments of short-term debt, net (288) (2,466)
Payments of deferred financing costs (242) (39)
Issuance of notes receivable to officers (2,817)
Proceeds from common stock issued under employee benefit programs 206 475
Issuance of common stock to outside directors 10 55
-------- --------
Net cash used in financing activities (12,476) (3,865)
-------- --------
Effect of exchange rates on cash and cash equivalents (34) 5
-------- --------
Net increase (decrease) in cash and cash equivalents 662 (1,330)
Cash and cash equivalents at beginning of period 2,126 2,851
-------- --------
Cash and cash equivalents at end of period $ 2,788 $ 1,521
======== ========
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Six Months Ended
------------------------
October 31, October 31,
2001 2000
----------- -----------
Supplemental disclosures of cash flow information:
Interest paid $ 6,173 $ 6,898
Income taxes paid $ 4,210 $ 7,248
During the six months ended October 31, 2001 and October 31, 2000, the Company
paid a total of $13,112 and $13,418, 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 other acquisition costs are
presented as follows:
Six Months Ended
------------------------
October 31, October 31,
2001 2000
----------- -----------
Accounts receivable $ 739 $ 3,146
Inventories 31 514
Prepaid expenses and other current assets 384
Property and equipment 65 345
*Intangible assets 12,861 11,793
Other assets 158
Accounts payable (348) (1,481)
Accrued compensation and other accrued liabilities (236) (1,398)
Long-term debt (43)
--------- ---------
Net assets acquired $ 13,112 $ 13,418
========= =========
*Due to the accrual of earn-out provisions, cash paid for intangible assets
of $12,861 and $11,793 for the six months ended October 31, 2001 and October
31, 2000, respectively, represents only actual cash paid during the periods
presented and therefore does not equal the change in intangible assets from
period to period.
Non-cash transactions:
. During the six months ended October 31, 2001 and October 31, 2000, the
Company accrued $4,278 and $4,146, respectively, as additional purchase
consideration for earn-outs.
. During the six months ended October 31, 2000, the Company recorded additional
paid-in capital of $6 related to the tax benefit of stock options exercised.
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 provider of end-to-end solutions, providing a variety of custom print
products and office supplies and related management services to businesses in
the United States, Canada and Puerto Rico. The Company is comprised of two main
operating divisions: 1) the Workflow Solutions 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 2) the Workflow Printing Division, which
prints and produces envelopes, custom business documents, commercial print,
labels, packaging and direct mail literature. Workflow Management employs
approximately 3,100 persons and has 21 manufacturing facilities in 6 states and
4 Canadian provinces, 18 distribution centers, 7 print-on-demand centers and 73
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.
As used in the Notes to Consolidated Financial Statements, "Fiscal 2002",
"Fiscal 2001" and "Fiscal 2000" refer to the Company's fiscal years ending April
30, 2002, April 30, 2001 and April 30, 2000, respectively.
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, 2001.
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:
October 31, April 30,
2001 2001
----------- ---------
Raw materials $ 14,004 $ 15,480
Work-in-process 9,636 8,595
Finished goods 30,489 31,497
----------- ---------
Total inventories $ 54,129 $ 55,572
=========== =========
NOTE 4 - LONG-TERM DEBT
-----------------------
Revolving Credit Facility
The Company entered into a secured revolving credit facility (the "Credit
Facility") underwritten and agented by Fleet Bank with $239,250 available for
working capital and acquisition purposes. The Credit Facility, as amended, is
composed of a $190,000 revolver, including a $46,300 sublimit for Canadian
borrowings, and a $49,250 amortizing term note. Effective April 30, 2002, the
revolver portion of the Credit Facility will be reduced by $10,000 to $180,000.
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 pro forma EBITDA maximum ("Total Leverage Ratio")
of 3.75 to 1.0. Effective April 30, 2002, the Credit Facility provides an
additional covenant of senior, Credit Facility debt to pro forma EBITDA maximum
("Senior Leverage Ratio") of 3.5 to 1.0. At October 31, 2001, the Total Leverage
Ratio calculated under the Credit Facility was 3.63 to 1.0. The Company could
borrow an additional $5,343 under the Credit Facility for working capital
purposes and remain in compliance with the facility. Interest rate options are
available to the Company conditioned on certain leverage tests. The maximum
rate of interest is the prime rate from time to time in effect. The Credit
Facility is also available to fund the cash portion of future acquisitions,
subject to the maintenance of bank covenants and total availability under the
facility. At October 31, 2001, the Company had $161,304 outstanding under the
Credit Facility, at an annual interest rate of approximately 6.51%, and up to
$77,946 available under the Credit Facility for acquisitions and working capital
purposes subject to compliance with certain covenants as discussed above.
During the six months ended October 31, 2001, the Company incurred $6,671 in
interest expense relating to the Credit Facility.
Interest Rate Swap
The Company does not hold or issue derivative financial instruments for
trading purposes. On May 3, 2001, the Company entered into an interest rate
swap agreement (the "Swap") with various lending institutions at no cost to the
Company with an effective date of August 1, 2001 and an expiration date of March
10, 2004. The Company exchanged its variable interest rate on $100,000 in Credit
Facility debt for a fixed LIBOR of approximately 5.10% plus the Company's
interest rate spread under its Credit Facility. The Swap was entered into to
manage interest rate risk on the variable rate borrowings under the Company's
revolving credit portion of its debt. This interest rate swap has the effect of
locking in, for a specified period, the base interest rate the Company will pay
on the $100,000 notional principal amount established in the Swap. As a result,
while this hedging arrangement is structured to reduce the Company's exposure to
increases in interest rates, it also limits the benefit the Company might
otherwise have received from any decreases in interest rates. The Company
accounted for the Swap per the guidelines of the Financial Accounting Standards
Board ("FASB") newly issued
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Effective May 1, 2001, the
Company has implemented SFAS No. 133 as Amended. This standard requires
companies to record all derivative instruments as assets or liabilities on the
balance sheet, measured at fair value. The recognition of gains or losses
resulting from changes in the values of those derivative instruments is based on
the use of each derivative instrument and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. Per the guidelines of SFAS No. 133, the Company classified
the Swap as a cash flow hedge. This Swap will be cash settled quarterly
dependent upon the movement of 3-month LIBOR rates. In measuring the fair value
of the Swap at October 31, 2001, the Company recorded a long-term liability of
$5,002 and a loss in other comprehensive income, net of taxes, of $2,901. The
Company recognized in earnings, as additional interest expense, $365 for the
change in the prevailing LIBOR rate compared to the fixed rate under the Swap
agreement.
NOTE 5 - STOCKHOLDERS' EQUITY
-----------------------------
Changes in stockholders' equity during the six months ended October 31, 2001
were as follows:
Stockholders' equity balance at April 30, 2001 $ 89,753
Issuance of common stock in conjunction with:
Employee stock purchase program 206
Fees paid to outside members of the Company's Board of Directors 10
Comprehensive income 56
--------
Stockholders' equity balance at October 31, 2001 $ 90,025
========
Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 1,423 $ 2,757 $ 3,721 $ 4,276
Other comprehensive income:
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes (2,901) (2,901)
Foreign currency translation adjustment (962) (826) (764) (1,926)
------------ ----------- ----------- -----------
Comprehensive income $ (2,440) $ 1,931 $ 56 $ 2,350
============ =========== =========== ===========
Notes Receivable from Officers
During Fiscal 2001 and Fiscal 1999, the Company extended loans to certain
members of management and the Board of Directors ("Stock Loans") for the
purchase, in the open market, of the Company's common stock by those
individuals. The Stock Loans are full recourse promissory notes bearing
interest at 6.75% and 8.0% per annum, respectively, with principal and interest
payable at maturity on January 2, 2003. Upon a
Page 9
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
change of control of the Company prior to maturity of the notes, as the term
change of control is defined in the notes, the principal amount and accrued
interest outstanding under the Stock Loans will be forgiven. At October 31,
2001, $4,820 and $554 in principal and interest, respectively, were outstanding
on these notes.
NOTE 6 - EARNINGS PER SHARE ("EPS")
----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's computations
of basic and diluted EPS for the periods presented in the consolidated statement
of income:
Three Months Ended Six Months Ended
------------------------- ------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
----------- ---------- ----------- -----------
Earnings per share:
Net income $ 1,423 $ 2,757 $ 3,721 $ 4,276
======= ======= ======= =======
Weighted average number of
Common shares outstanding 13,030 12,915 13,016 12,903
Potentially dilutive shares* 42 10 55 341
------- ------- ------- -------
Total 13,072 12,925 13,071 13,244
======= ======= ======= =======
Basic earnings per share $ 0.11 $ 0.21 $ 0.29 $ 0.33
======= ======= ======= =======
Diluted earnings per share $ 0.11 $ 0.21 $ 0.28 $ 0.32
======= ======= ======= =======
* 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 4,772 and 4,815
shares of common stock were anti-dilutive and outstanding during the six months
ended October 31, 2001 and October 31, 2000, respectively.
Page 10
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 7 - BUSINESS COMBINATIONS
------------------------------
During the six months ended October 31, 2001, the Company completed two
business combinations, which were accounted for under the purchase method for an
aggregate purchase price of $3,871 consisting entirely of cash. The total
assets related to these acquisitions were $13,696, including goodwill and other
intangible assets of $12,861. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
During Fiscal 2001, the Company made eight acquisitions accounted for under
the purchase method for an aggregate purchase price of $25,200. The total
assets related to these acquisitions during Fiscal 2001 were $50,775, including
intangible assets of $31,626. The results of these acquisitions have been
included in the Company's results from their respective dates of acquisition.
The majority of the Company's historical 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. During Fiscal 2001, the Company paid $7,698
for additional purchase consideration. During the six months ended October 31,
2001, the Company paid another $9,241 for these earn-out provisions and has an
additional $5,320 accrued for these earn-outs at October 31, 2001. This
additional consideration, whether paid or accrued, has been reflected in the
accompanying balance sheet as goodwill at October 31, 2001.
Following the Company's Fiscal 2000 acquisition of Office Electronics, Inc.
("OEI"), the Company sold certain of OEI's manufacturing divisions and related
assets. Net cash proceeds from these divested assets and divisions totaled
$9,764 and $350 during Fiscal 2001 and the six months ended October 31, 2001,
respectively.
The following presents the unaudited pro forma results of operations of the
Company for the three and six months ended October 31, 2001 and October 31,
2000, as if the purchase acquisitions completed since the beginning of Fiscal
2001 had been consummated at the beginning of Fiscal 2001. The pro forma results
of operations include certain pro forma adjustments including the elimination of
goodwill amortization due to the implementation of SFAS No. 142, the additional
interest expense for the initial cash consideration and the reductions in
executive compensation at the acquired companies of $0, $41, $307 and $615 for
the three and six months ended October 31, 2001 and October 31, 2000,
respectively.
Three Months Ended Six Months Ended
------------------------- -------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $160,309 $168,444 $315,938 $324,993
Net income 1,423 3,620 3,774 5,351
Earnings per share:
Basic $ 0.11 $ 0.28 $ 0.29 $ 0.41
Diluted 0.11 0.28 0.29 0.40
Page 11
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 2001 or the results that may occur in the future.
NOTE 8 - RESTRUCTURING COSTS
----------------------------
During Fiscal 2001, the Company incurred expenses of $8,292 in connection
with its reorganization and integration plan. Under this restructuring plan, the
Company streamlined its operations by eliminating duplicate facilities and
employee functions and reducing corporate overhead. The Company paid $1,197 and
utilized an additional $835 for facility closures and consolidations, severance
and terminations and other asset write-downs and costs associated with this plan
during the six months ended October 31, 2001.
Under the restructuring plan implemented during Fiscal 2001, the Company
intended to terminate and provide severance benefits to 100 employees. During
the fiscal year ended April 30, 2001 and the six months ended October 31, 2001,
the Company terminated and provided severance benefits to 31 and 64 employees,
respectively. The Company anticipates that the remaining 5 out of 100 employees
will be terminated within Fiscal 2002. The majority of the workforce reductions
were within the production area and backroom functions such as accounting, human
resources and administration.
The following table sets forth the Company's accrued restructuring costs
for the six months ended October 31, 2001.
Facility Severance Other Asset
Closure and and Writedowns
Consolidation Terminations and Costs Total
-------------- ------------- ------------ --------
Balance at April 30, 2001 $ 1,622 $1,389 $575 $ 3,586
Utilizations.................................................. (1,271) (731) (30) (2,032)
------- ------ ---- -------
Balance at October 31, 2001...................................... $ 351 $ 658 $545 $ 1,554
======= ====== ==== =======
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
---------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that business combinations initiated subsequent to June 30, 2001, must
be accounted for by using the purchase method of accounting. SFAS No. 142
supersedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible
Assets," however, the new statement will carry forward provisions in APB Opinion
No. 17 related to internally developed intangible assets. SFAS No. 142 requires
that the Company discontinue the amortization of goodwill.
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Early adoption of SFAS No. 142 is allowed for those companies with fiscal
years beginning after March 15, 2001. The Company has adopted and applied SFAS
No. 142 as of May 1, 2001, the beginning of the Company's Fiscal Year 2002.
Pursuant to the transition provisions of SFAS No. 142, the Company has six
months from the date of adoption to perform an impairment test of goodwill as of
that date. If it is determined that goodwill was impaired at May 1, 2001, the
Company must immediately recognize the loss as a cumulative effect of a change
in accounting principle in accordance with APB Opinion No. 20 (retroactive to
the first quarter of Fiscal Year 2002). SFAS No. 142 further requires companies
to test goodwill and other indefinite lived intangible assets on an annual basis
for impairment. The following reconciliation illustrates the impact that the
adoption of SFAS No. 142 had on the Company's net income and earnings per share:
Three Months Ended Six Months Ended
------------------------ ------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
---- ---- ---- ----
Net income:
Reported net income $1,423 $2,757 $3,721 $4,276
Add: Goodwill amortization 388 758
------ ------ ------ ------
Adjusted net income $1,423 $3,145 $3,721 $5,034
====== ====== ====== ======
Basic earnings per share:
Reported net income $ 0.11 $ 0.21 $ 0.29 $ 0.33
Add: Goodwill amortization 0.03 0.06
------ ------ ------ ------
Adjusted net income $ 0.11 $ 0.24 $ 0.29 $ 0.39
====== ====== ====== ======
Diluted earnings per share:
Reported net income $ 0.11 $ 0.21 $ 0.28 $ 0.32
Add: Goodwill amortization 0.03 0.06
------ ------ ------ ------
Adjusted net income $ 0.11 $ 0.24 $ 0.28 $ 0.38
====== ====== ====== ======
Weighted average shares outstanding:
Basic 13,030 12,915 13,016 12,903
Diluted 13,072 12,925 13,071 13,244
Page 13
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 Executive Officer, the
Company's operating division Presidents and the Company's Chief Financial
Officer. 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 Workflow Solutions Division and the Company's Workflow Printing
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 results of
the Workflow Solutions Division also include transactions with customers
utilizing the Company's proprietary iGetSmart inventory and distribution system.
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. 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 Six Months Ended
------------------------ ------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Workflow Solutions Division $ 78,936 $ 69,139 $154,784 $135,617
Workflow Printing Division 84,870 83,881 168,148 162,597
Intersegment (3,497) (3,794) (7,457) (7,159)
-------- -------- -------- --------
Total $160,309 $149,226 $315,475 $291,055
======== ======== ======== ========
Operating income:
Workflow Solutions Division $ 4,133 $ 3,678 $ 8,315 $ 6,786
Workflow Printing Division 3,770 7,644 8,364 13,141
Corporate (2,125) (3,221) (3,493) (5,880)
-------- -------- -------- --------
Total $ 5,778 $ 8,101 $ 13,186 $ 14,047
======== ======== ======== ========
October 31, April 30,
2001 2001
---------- --------
Identifiable assets (at period end):
Workflow Solutions Division $144,008 $139,184
Workflow Printing Division 186,289 196,865
Corporate 23,807 15,952
-------- --------
Total $354,104 $352,001
======== ========
Page 14
Geographic Segments
The following table sets forth information as to the Company's operations
in its different geographic segments:
Three Months Ended Six Months Ended
------------------------- --------------------------
October 31, October 31, October 31, October 31,
2001 2000 2001 2000
------------ ----------- ----------- ------------
Revenues:
United States $124,505 $111,391 $243,512 $215,139
Canada 33,227 35,643 66,904 71,323
Puerto Rico 2,577 2,192 5,059 4,593
-------- -------- -------- --------
Total $160,309 $149,226 $315,475 $291,055
======== ======== ======== ========
Operating income:
United States $ 2,510 $ 4,590 $ 6,893 $ 7,383
Canada 3,252 3,358 6,192 6,382
Puerto Rico 16 153 101 282
-------- -------- -------- --------
Total $ 5,778 $ 8,101 $ 13,186 $ 14,047
======== ======== ======== ========
October 31, April 30,
2001 2001
----------- ---------
Identifiable assets (at period end):
United States $298,356 $292,373
Canada 53,165 56,573
Puerto Rico 2,583 3,055
-------- --------
Total $354,104 $352,001
======== ========
Page 15
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 provider of end-to-end solutions, providing a variety of custom print
products and office supplies and related management services to businesses in
the United States, Canada and Puerto Rico. The Company is comprised of two main
operating divisions: 1) the Workflow Solutions 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 2) the Workflow Printing Division, which
prints and produces envelopes, custom business documents, commercial print,
labels, packaging and direct mail literature. Workflow Management employs
approximately 3,100 persons and has 21 manufacturing facilities in 6 states and
4 Canadian provinces, 18 distribution centers, 7 print-on-demand centers and 73
sales offices.
As used in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Fiscal 2002", "Fiscal 2001" and "Fiscal 2000" refer
to the Company's fiscal years ending April 30, 2002 and ended April 30, 2001 and
April 30, 2000, 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, 2001 included in the Company's Annual Report on
Form 10-K.
Page 16
Consolidated Results of Operations
Three Months Ended October 31, 2001 Compared to Three Months Ended October 31,
2000
Consolidated revenues increased 7.4%, from $149.2 million for the three
months ended October 31, 2000, to $160.3 million for the three months ended
October 31, 2001. The Company's Workflow Solutions Division revenues increased
by $9.8 million or 14.2% and its Workflow Printing Division revenues increased
by $1.0 million or 1.2% when comparing the three months ended October 31, 2001
to the three months ended October 31, 2000. These increases were due to the
Company's business combinations consummated after October 31, 2000. Revenues
from identical operations or entities that were acquired prior to August 1, 2000
have decreased 6.2% or $9.5 million, for the three months ended October 31, 2001
when compared to the revenues for the three months ended October 31, 2000. The
internal decline in revenues by division was 3.0% for the Workflow Solutions
Division and 8.9% for the Workflow Printing Division. Revenues for the three
months ended October 31, 2001 and October 31, 2000, include revenues from ten
companies acquired in business combinations accounted for under the purchase
method after the beginning of the second quarter of Fiscal 2001 (the "Purchased
Companies").
International revenues decreased 6.8%, from $35.6 million, or 23.9% of
consolidated revenues, for the three months ended October 31, 2000, to $33.2
million, or 20.7% of consolidated revenues, for the three months ended October
31, 2001. The main reasons for the decline in international revenues was due to
the depressed economic conditions in Canada and a decline in the Canadian
exchange rate during the three months ended October 31, 2001. International
revenues consisted exclusively of revenues generated in Canada.
Gross profit decreased 0.3%, from $44.1 million, or 29.6% of revenues, for
the three months ended October 31, 2000, to $44.0 million, or 27.4% of revenues,
for the three months ended October 31, 2001. The decrease in gross profit was a
result of lower margins experienced in the Workflow Printing Division because of
pricing pressures, competition and lower than expected revenue volumes. The
product lines that suffered the most significant impact were the commercial
printing, direct mail and envelope product lines. Gross profit in the Workflow
Printing Division for the three months ended October 31, 2001 decreased $3.3
million or 14.0% when compared to the three months ended October 31, 2000.
Selling, general and administrative expenses increased 8.1%, from $36.0
million, or 24.1% of revenues, for the three months ended October 31, 2000, to
$38.2 million, or 23.8% of revenues, for the three months ended October 31,
2001. The increase in selling, general and administrative expenses was primarily
due to the Purchased Companies. As a percentage of revenues, selling, general
and administrative expenses decreased due to the cost savings realized in
connection with the Company's restructuring plan implemented during the fourth
quarter of Fiscal 2001. Also during the three months ended October 31, 2001, the
Company had a decrease in goodwill amortization expense of approximately $0.7
million as the Company adopted Financial Accounting Standards Statement ("FASB")
No. 142, accounting for "Goodwill and Other Intangible Assets", which provides
that goodwill and indefinite lived intangible assets will no longer be amortized
(See "Note 9 to the Company's Consolidated Financial Statements").
Interest expense, net of interest income, decreased 12.9%, from $3.5
million for the three months ended October 31, 2000, to $3.1 million for the
three months ended October 31, 2001. This decrease in net interest expense was
due to the reduction in overall market interest rates.
Page 17
Other expense, net of other income increased 326.4% from net other income
of $0.1 million for the three months ended October 31, 2000, to other expense of
$0.3 million for the three months ended October 31, 2001. 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 decreased 48.7% from $2.0 million for the three
months ended October 31, 2000 to $1.0 million for the three months ended October
31, 2001, reflecting effective income tax rates of 41.7% and 41.5%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 35.0%, 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.
Six Months Ended October 31, 2001 Compared to Six Months Ended October 31,
2000
Consolidated revenues increased 8.4%, from $291.1 million for the six
months ended October 31, 2000, to $315.5 million for the six months ended
October 31, 2001. The Company's Workflow Solutions Division revenues increased
by $19.2 million or 14.1% and its Workflow Printing Division revenues increased
by $5.6 million or 3.4% when comparing the six months ended October 31, 2001 to
the six months ended October 31, 2000. These increases were due to the
Company's business combinations consummated after October 31, 2000. Revenues
from identical operations or entities that were acquired prior to August 1, 2000
have decreased 5.0% or $14.7 million, for the six months ended October 31, 2001
when compared to the revenues for the six months ended October 31, 2000. The
internal decline in revenues by division was 2.6% for the Workflow Solutions
Division and 6.9% for the Workflow Printing Division. Revenues for the six
months ended October 31, 2001, include revenues from ten companies acquired in
business combinations accounted for under the purchase method after the
beginning of the second quarter of Fiscal 2001 (the "Purchased Companies").
International revenues decreased 6.2%, from $71.3 million, or 24.5% of
consolidated revenues, for the six months ended October 31, 2000, to $66.9
million, or 21.2% of consolidated revenues, for the six months ended October 31,
2001. The main reasons for the decline in international revenues was due to the
depressed economic conditions in Canada and a decline in the Canadian exchange
rate during the six months ended October 31, 2001. International revenues
consisted exclusively of revenues generated in Canada.
Gross profit increased 3.1%, from $85.3 million, or 29.3% of revenues, for
the six months ended October 31, 2000, to $88.0 million, or 27.9% of revenues,
for the six months ended October 31, 2001. The increase in gross profit was due
to the Purchased Companies. As a percentage of revenues, gross profit decreased
because the Workflow Printing Division experienced lower margins as a result of
pricing pressures, competition and an overall decrease in manufacturing volumes
within the commercial printing, direct mail and envelope operations. Gross
profit in the Workflow Printing Division for the six months ended October 31,
2001 decreased $3.2 million or 7.4% when compared to the six months ended
October 31, 2000.
Selling, general and administrative expenses increased 4.9%, from $71.3
million, or 24.5% of revenues, for the six months ended October 31, 2000, to
$74.8 million, or 23.7% of revenues, for the six months ended October 31, 2001.
The increase in selling, general and administrative expenses was primarily due
to the Purchased Companies. As a percentage of revenues, selling, general and
administrative expenses decreased due to the significant cost savings
associated with the Company's restructuring plan implemented during the fourth
quarter of Fiscal 2001. Also during the six months ended October 31, 2001, the
Company had a decrease in goodwill amortization of approximately $1.3 million
as the Company adopted Financial Accounting Standards Statement ("FASB") No.
142, accounting for "Goodwill and Other Intangible Assets", which provides that
goodwill and indefinite lived intangible assets will no longer be amortized (See
"Note 9 of the Company's Consolidated Financial Statements").
Page 18
Interest expense, net of interest income, decreased 5.6%, from $6.9 million
for the six months ended October 31, 2000, to $6.5 million for the six months
ended October 31, 2001. This decrease in net interest expense was due entirely
to the reduction in overall market interest rates.
Other expense, net of other income increased 242.6% from other income of
$0.2 million for the six months ended October 31, 2000, to other expense of $0.3
million for the six months ended October 31, 2001. 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 decreased 12.8% from $3.0 million for the six
months ended October 31, 2000 to $2.7 million for the six months ended October
31, 2001, reflecting effective income tax rates of 41.6% and 41.6%,
respectively. During both periods, the effective income tax rates reflect the
recording of tax provisions at the federal statutory rate of 35.0%, plus
appropriate state and local taxes.
Liquidity and Capital Resources
At October 31, 2001, the Company had working capital of $85.5 million. The
Company's capitalization, defined as the sum of long-term debt and stockholders'
equity, at October 31, 2001 was approximately $253.1 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 October 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 $10.0 million for new equipment and maintenance.
During the six months ended October 31, 2001, net cash provided by
operating activities was $22.9 million. Net cash used in investing activities
was $9.7 million, including $13.1 million used for acquisitions and additional
purchase consideration, $7.4 million used for capital expenditures which were
partially offset by the net proceeds of $10.0 million received on the sale of
property and equipment and $0.9 million received from the collection of a note
receivable. Net cash used by financing activities was $12.5 million, which was
mainly comprised of $10.0 million in net payments by the Company on its
revolving credit facility used primarily to fund acquisition activity and $2.1
million in payments of other long-term debt.
During the six months ended October 31, 2000, net cash provided by
operating activities was $13.9 million. Net cash used in investing activities
was $11.4 million, including $13.4 million used for acquisitions and additional
purchase consideration, $5.1 million used for capital expenditures which were
partially offset by the collection of $6.9 million for net assets held for sale.
Net cash used by financing activities was $3.9 million, which included $1.4
million in net borrowings by the Company on its revolving credit facility to
primarily pay for the acquisitions consummated during the quarter, additional
purchase considerations due under the earn-outs agreements and $2.5 million in
payments of other short-term debt.
Workflow Management has significant operations in Canada. Net sales from
the Company's Canadian operations accounted for approximately 21.2% of the
Company's total net sales for the six months ended October 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.
The Company entered into a secured revolving credit facility (the "Credit
Facility") underwritten and agented by Fleet Bank with $239.3 million available
for working capital and acquisition purposes. The Credit Facility as amended is
composed of a $190.0 million revolver, including a $46.3 million sublimit for
Canadian borrowings, and a $49.3 million amortizing term note. Effective April
30, 2002, the revolver portion of the
Page 19
Credit Facility will be reduced by $10.0 million to $180.0 million. 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. Included within
these financial covenants is a total debt to pro forma EBITDA maximum ("Total
Leverage Ratio") of 3.75 to 1.0. Effective April 30, 2002, the Credit Facility
provides an additional covenant of senior, Credit Facility debt to pro forma
EBITDA maximum ("Senior Leverage Ratio") of 3.5 to 1.0. At October 31, 2001, the
Total Leverage Ratio calculated under the Credit Facility was 3.63 to 1.0. The
Company could borrow an additional $5.3 million under the Credit Facility for
working capital purposes and remain in compliance with the facility. 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 maintenance of bank covenants and total availability
under the facility. At October 31, 2001, the Company had $161.3 million
outstanding under the Credit Facility, at an annual interest rate of
approximately 6.51%, and up to $78.0 million available under the Credit Facility
for acquisitions and working capital purposes subject to compliance with certain
covenants as discussed above. During the six months ended October 31, 2001, the
Company incurred $6.7 million in interest expense relating to the Credit
Facility.
Under the terms of a stock distribution agreement (the "Distribution
Agreement") entered into between the Company and U.S. Office Products in June
1998 when the Company was spun-off from U.S. Office Products (the "Workflow
Distribution"), 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 at the same time.
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 spin-off. 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) may
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. On March 5, 2001, U.S. Office
Products and most of its United States subsidiaries filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code. The Company cannot predict
whether U.S. Office Products' bankruptcy proceedings will increase the
likelihood that U.S. Office Products will pursue indemnification claims against
the Company for liabilities resulting from the various lawsuits described above.
The Company entered into a sale-leaseback transaction involving five
Company-owned buildings during the six months ended October 31, 2001 to reduce
its leverage. Net cash proceeds to the Company after taxes and fees associated
with this transaction are expected to be approximately $6.7 million. The entire
net proceeds were used to pay down debt.
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.
Page 20
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
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 quarter 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 and six month periods ended October
31, 2001 and October 31, 2000, respectively.
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," in June 2000 ("SFAS No.
133 as Amended"), effective for the Company's fiscal year beginning January 1,
2001. This standard requires companies to record all derivative instruments as
assets or liabilities on the balance sheet, measured at fair value. The
recognition of gains or losses resulting from changes in the values of those
derivative instruments is based on the use of each derivative instrument and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. Effective May 1,
2001, the Company has implemented SFAS No. 133 as Amended.
Factors Affecting the Company's Business
Adverse Effects of September 11 Terrorist Attacks and Anthrax Developments.
On September 11, 2001, the United States suffered terrorist attacks of
unprecedented scope in New York City and Washington, D.C. In response to these
attacks, the United States retaliated with large scale overseas military
operations. In the aftermath of the terrorist attacks and military response,
the U.S. economy has worsened and appears to be in recession. New York City,
where the Company generates a significant portion of its revenues, in particular
has suffered deteriorating economic conditions since September 11. The Company
believes that the general weakening of the U.S. economy, and the weakening of
the economy in New York City in particular, had an adverse effect on the
Company's financial results during the quarter ended October 31, 2001 and may
continue to have a similarly adverse effect in future periods. There can be no
assurance that the terrorist attacks, or any further retaliatory action by the
United States, will not continue to adversely affect the U.S. economy in
general, the New York City economy in particular and the Company's overall
financial results for a significant period of time.
In addition to the terrorist attacks and U.S. military response, a small
number of U.S. citizens have contracted anthrax disease since September 11. The
disease appears to be the result of an intentional effort by parties not yet
identified to infect the U.S. mail with anthrax. These anthrax cases have
created general public concern about the safety of U.S. mail, which in turn has
led to a decrease in the use of direct mail by businesses that historically have
relied upon direct mail solicitations for marketing and related purposes.
Historically, approximately 30% of the Company's revenues have been generated
from the envelope and direct mail industries. In addition to the adverse
effects to the Company's business as a result of overall economic conditions in
the U.S. since September 11, the Company's envelope and direct mail business has
suffered, and may continue to suffer in future periods, as a result of anthrax
concerns. In light of continuing uncertainty
Page 21
about anthrax and the safety of the U.S. mail, the Company intends to close
certain production facilities and the Company cannot give any assurances as to
when or whether its direct mail and envelope business will return to historical
levels.
Dependence Upon Acquisitions for Future Growth; Potential 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. Moreover, the consolidation of the North American
graphic arts industry has reduced the number of larger companies available for
sale, which could lead to higher prices being paid for the acquisition of the
remaining domestic, independent companies. In addition, 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. During the
first six months of Fiscal 2002, the Company has pursued and consummated far
fewer acquisitions than in prior periods and this trend is likely to continue
for the rest of Fiscal 2002.
Risks Related to Integration of Acquisitions. 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.
Risks Related to Acquisition Financing; Additional Dilution. Workflow
Management currently intends to finance its future acquisitions by using cash,
borrowed funds, shares of the Company's common stock ("Company Common Stock") or
a combination thereof. If the Company Common Stock does not maintain a
sufficient market value, if the price of Company Common Stock is highly
volatile, or if potential acquisition candidates are otherwise unwilling to
accept Company Common Stock as part of the consideration for the sale of their
businesses, Workflow Management may not be able to consummate acquisitions using
Company Common Stock as consideration. Since the Workflow Distribution, the
Company has completed all of its acquisitions using cash consideration. 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.
Material Amount of Goodwill. Approximately $121.5 million, or 34.3% of the
Company's total assets as of October 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. Due to the newly issued Financial
Accounting Standards Board Statement ("FASB") No. 142, the Company no longer
deducts goodwill amortization against earnings. The Company adopted Statement
No. 142 effective May 1, 2001, which is the first day of Fiscal 2002. For all
fiscal years prior to Fiscal 2002, the Company amortized goodwill using 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. Under the new FASB Statement No. 142 and as previously required, the
Company
Page 22
must 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 write down of goodwill
could have a material and adverse impact upon the Company's net income or the
market price of the Company Common Stock.
Risks Associated with Canadian Operations. Workflow Management has
significant operations in Canada. Revenues from the Company's Canadian
operations accounted for approximately 21.2% and 24.0% of the Company's total
revenues for the six months ended October 31, 2001 and the fiscal year ended
April 30, 2001, 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, 2001.
Page 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's financial instruments include cash, accounts receivable,
accounts payable and long-term debt. Market risks relating to the Company's
operations result primarily from changes in interest rates. The Company's
borrowings are primarily dependent upon LIBOR rates. The estimated fair value
of the Company's long-term debt approximated its carrying value at October 31,
2001.
The Company does not hold or issue derivative financial instruments for
trading purposes. On May 3, 2001, the Company entered into an interest rate
swap agreement (the "Swap") with various lending institutions at no cost to the
Company with an effective date of August 1, 2001 and a termination date of March
10, 2004. The Company exchanged its variable interest rate on $100.0 million in
Credit Facility debt for a fixed LIBOR of approximately 5.10% plus the Company's
interest rate spread under its Credit Facility. The Swap was entered into to
manage interest rate risk on the variable rate borrowings under the Company's
revolving credit portion of its debt. This interest rate swap has the effect of
locking in, for a specified period, the base interest rate the Company will pay
on the $100.0 million notional principal amount established in the Swap. 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. If 3-month LIBOR were to increase or decrease by 1.0%, the impact to
the Company would be a savings of $1.0 million in interest expense or an
additional interest expense of $1.0 million over the interest charged on $100.0
million in debt under the variable 3-month LIBOR.
Page 24
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
Workflow Management, Inc. held its 2001 Annual Meeting of Stockholders on
October 1, 2001. At the Annual Meeting, the following matters were acted upon by
the stockholders:
1. Election of Directors. The following persons were elected as directors to
serve a one year term, with the vote For and Withheld indicated below:
Director For Withheld
-------- --- --------
Thomas A. Brown, Sr. 11,885,199 217,617
Thomas B. D'Agostino, Sr. 11,280,419 822,397
Thomas B. D'Agostino, Jr. 11,885,220 217,596
Steve R. Gibson 11,815,779 287,037
Gus J. James, II. 11,873,609 229,207
James J. Maiwurm 11,873,629 229,187
Roger J. Pearson 11,885,162 217,654
F. Craig Wilson 11,873,616 229,200
2. Ratification of the appointment of PricewaterhouseCoopers LLP as independent
auditors for the 2002 fiscal year.
For Against Abstain
--- ------- -------
12,025,511 68,084 9,221
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None.
Page 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORKFLOW MANAGEMENT, INC.
December 14, 2001 By: /s/ Thomas B. D'Agostino, Sr.
-------------------------- -----------------------------
Date Thomas B. D'Agostino, Sr.
Chairman of the Board, Director, President and
Chief Executive Officer (Principal Executive
Officer)
December 14, 2001 By: /s/ Michael L. Schmickle
-------------------------- ------------------------
Date Michael L. Schmickle
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial Officer and Principal Accounting
Officer)
Page 26