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 July 25, 1998
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 of other jurisdiction (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 September 8, 1998, there were 14,625,268 shares of common stock
outstanding.
<PAGE>
WORKFLOW MANAGEMENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet..............................................................................3
July 25, 1998 (unaudited) and April 25, 1998
Consolidated Statement of Income........................................................................4
For the three months ended July 25, 1998 (unaudited) and
July 26, 1997 (unaudited)
Consolidated Statement of Cash Flows....................................................................5
For the three months ended July 25, 1998 (unaudited) and
July 26, 1997 (unaudited)
Notes to Consolidated Financial Statements..............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................18
Signatures........................................................................................................19
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 25, April 25,
ASSETS 1998 1998
------ ------------ -------------
(Unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 4,203 $ 234
Accounts receivable, less allowance for doubtful
accounts of $2,898 and $2,859, respectively 51,215 56,328
Inventories 30,770 32,655
Notes receivable from employees 3,703
Prepaid expenses and other current assets 2,822 1,978
------------ ------------
Total current assets 92,713 91,195
Property and equipment, net 33,536 33,210
Notes receivable from employees 3,703
Intangible assets, net 13,881 14,014
Other assets 7,515 4,556
------------ ------------
Total assets $ 147,645 $ 146,678
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,378 $ 5,855
Short-term payable to U.S. Office Products 13,536
Accounts payable 20,140 25,370
Accrued compensation 5,926 4,916
Other accrued liabilities 8,580 7,893
------------ ------------
Total current liabilities 36,024 57,570
Long-term debt 37,723 7,065
Long-term payable to U.S. Office Products 19,221
Deferred income taxes 4,165 3,314
Other long-term liabilities 9 17
------------ ------------
Total liabilities 77,921 87,187
------------ ------------
Commitments and contingencies
Stockholders' equity:
Divisional equity 50,270
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 14,625,268 and no shares issued and
outstanding, respectively 15
Additional paid-in capital 61,699
Accumulated other comprehensive loss (2,475) (1,056)
Retained earnings 10,485 10,277
------------ ------------
Total stockholders' equity 69,724 59,491
------------ ------------
Total liabilities and stockholders' equity $ 147,645 $ 146,678
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 25, July 26,
1998 1997
------------ ----------
<S> <C>
Revenues $ 90,485 $ 82,163
Cost of revenues 65,948 60,268
------------ -----------
Gross profit 24,537 21,895
Selling, general and administrative expenses 19,069 16,871
Amortization expense 133 49
Strategic restructuring plan costs 3,818
------------ ------------
Operating income 1,517 4,975
Interest expense 1,154 543
Interest income (25)
Other (income) expense 17 (100)
------------ ------------
Income before provision for income taxes 371 4,532
Provision for income taxes 163 1,829
------------ -----------
Net income $ 208 $ 2,703
============ ===========
Income per share:
Basic $ 0.01 $ 0.19
Diluted $ 0.01 $ 0.19
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 25, July 26,
1998 1997
------------ ------------
<S> <C>
Cash flows from operating activities:
Net income $ 208 $ 2,703
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 1,646 1,509
Strategic restructuring plan costs 3,818
Cash paid for strategic restructuring plan costs (1,378)
Changes in assets and liabilities (net of assets acquired and
liabilities assumed in business combinations):
Accounts receivable 4,458 (742)
Inventory 1,341 (120)
Prepaid expenses and other current assets (621) (466)
Accounts payable (5,090) (3,692)
Accrued liabilities 3,748 (1,241)
----------- -----------
Net cash provided by (used in) operating activities 8,130 (2,049)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (2,596) (979)
Cash received on the sale of property and equipment 122
Deposits (1,000)
Cash paid in acquisitions, net of cash received 114
Payments of non-recurring acquisition costs (434)
----------- -----------
Net cash used in investing activities (3,474) (1,299)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 50,000
Payments on long-term debt (19,343) (236)
Proceeds from (payments of) short-term debt, net (4,466) 466
Cash paid for deferred financing costs (2,363)
Advances from (payments to) U.S. Office Products (32,991) 1,313
Capital contributed by U.S. Office Products 8,488
----------- -----------
Net cash (used in) provided by financing activities (675) 1,543
----------- -----------
Effect of exchange rates on cash and cash equivalents (12) 11
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,969 (1,794)
Cash and cash equivalents at beginning of period 234 2,168
----------- -----------
Cash and cash equivalents at end of period $ 4,203 $ 374
=========== ===========
</TABLE>
(Continued)
Page 5
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended
------------------
July 25, July 26,
1998 1997
----------- -----------
<S> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 149 $ 183
Income taxes paid $ 1,082 $ 599
</TABLE>
The Company issued common stock in connection with one business combination
accounted for under the purchase method during the three months ended July 26,
1997. The fair values of the assets and liabilities at the date of the
acquisition are presented as follows:
Three
Months Ended
July 26, 1997
-------------
Accounts receivable $ 1,109
Inventory 41
Prepaid expenses and other current assets 26
Property and equipment 84
Intangible assets 1,445
Accounts payable (332)
Accrued liabilities (365)
Long-term debt (10)
---------------
Net assets acquired $ 1,998
===============
The acquisition accounted for under the purchase method was funded as follows:
Three
Months Ended
July 26, 1997
-------------
Common stock $ 2,112
Cash paid, net of cash received (114)
---------------
Total $ 1,998
===============
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - NATURE OF BUSINESS
Workflow Management, Inc. (the "Company" or "Workflow Management") is a Delaware
corporation formed by U.S. Office Products Company, also a Delaware corporation
("U.S. Office Products" or "USOP") in connection with U.S. Office Products'
strategic restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,625,268 shares
(the "Distribution" or "Workflow Distribution") of the Company's common stock,
par value $.001 per share ("Company Common Stock"). Holders of U.S. Office
Products' common stock were not required to pay any consideration for the shares
of the Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date").
Workflow Management is an integrated graphic arts company providing documents,
envelopes and commercial printing to more than 22,000 businesses in the United
States and Canada. The Company also offers various print and facilities
management services, which allow customers to realize cost savings by
outsourcing non-core operations, as well as graphic design services and workflow
analysis. Drawing on its position in the industry and its experience in
completing acquisitions, the Company seeks to become a consolidator in the
highly fragmented graphic arts industry. The Company currently has over 2,100
employees and has 17 manufacturing facilities in seven states and five Canadian
Provinces, 26 distribution centers, eight print-on-demand centers and 59 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.
For periods prior to the Distribution Date, the consolidated financial
statements reflect the assets, liabilities, divisional equity, revenues and
expenses that were directly related to the Company as it was operated within
U.S. Office Products. Upon the Distribution, divisional equity was reclassified
to common stock and additional paid-in-capital. In cases involving assets and
liabilities not specifically identifiable to any particular business of U.S.
Office Products, only those assets and liabilities transferred to the Company
prior to the Distribution were included in the Company's separate consolidated
balance sheet. The Company's statement of income includes all of the related
costs of doing business including an allocation of certain general corporate
expenses of U.S. Office Products which were not directly related to these
businesses. These allocations were based on a variety of factors, dependent upon
the nature of the costs being allocated. Management believes these allocations
were made on a reasonable basis.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. The
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 25, 1998 ("Fiscal 1998").
Page 7
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NOTE 3 - LONG-TERM DEBT
The Company entered into a secured $150.0 million revolving credit facility (the
"Credit Facility") underwritten and agented by Bankers Trust Company on June 9,
1998. The Credit Facility matures on June 10, 2003 and is secured by
substantially all assets of the Company. The Credit Facility is subject to terms
and conditions typical of a credit facility of such type and size, including
certain financial covenants. Interest rate options are available to the Company
conditioned on certain leverage tests. The maximum rate of interest is the prime
rate from time to time in effect. The Credit Facility is also available to fund
the cash portion of future acquisitions, subject to the maintenance of bank
covenants.
NOTE 4 - STOCKHOLDERS' EQUITY
Changes in stockholders' equity during the three months ended July 25, 1998 were
as follows:
<TABLE>
<S> <C>
Stockholders' equity balance at April 25, 1998 $ 59,491
Capital contributions:
Contribution by U.S. Office Products 8,488
Stock options tendered in the USOP equity tender offer by the Company's employees 2,956
Comprehensive income (loss) (1,211)
-------------
Stockholders' equity balance at July 25, 1998 $ 69,724
=============
</TABLE>
Effective April 26, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" which establishes standards for reporting and display of
changes in equity from non-owner sources in the financial statements. The
statement requires minimum pension liability adjustments, unrealized gains or
losses on available-for-sale securities and foreign currency translation
adjustment, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income.
The components of comprehensive income are as follows:
Three Months Ended
July 25, July 26,
1998 1997
----------- -----------
Net income $ 208 $ 2,703
Other comprehensive income:
Foreign currency translation adjustment (1,419) 231
----------- -----------
Comprehensive (loss) income $ (1,211) $ 2,934
=========== ===========
At the Distribution Date, U.S. Office Products distributed to its shareholders
one share of Company Common Stock for every 7.5 shares of U.S. Office
Products common stock held by each respective shareholder. The share data
reflected in the accompanying financial statements represents the historical
share data for U.S. Office Products for the period or as of the date indicated,
and retroactively adjusted to give effect to the one for 7.5 distribution ratio.
Page 8
<PAGE>
NOTE 5 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS"). SFAS No. 128 requires the dual
presentation of basic and diluted EPS on the face of the statement of income.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company adopted SFAS No. 128 during Fiscal 1998 and has
restated all prior period EPS data. The following information presents the
Company's computations of basic and diluted EPS for the periods presented in the
consolidated statement of income.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C>
Three months ended July 25, 1998:
Basic EPS $ 208 16,265 $ 0.01
=========
Effect of dilutive employee stock options 210
--------- -------------
Diluted EPS $ 208 16,475 $ 0.01
========= ============= =========
Three months ended July 26, 1997:
Basic EPS $ 2,703 14,171 $ 0.19
=========
Effect of dilutive employee stock options 245
--------- -------------
Diluted EPS $ 2,703 14,416 $ 0.19
========= ============= ========
</TABLE>
The Company had additional employee stock options outstanding during the periods
presented that were not included in the computation of diluted EPS because they
were anti-dilutive.
NOTE 6 - BUSINESS COMBINATIONS
During Fiscal 1998, the Company completed two business combinations which were
both accounted for under the purchase method (the "Purchased Companies").
The following presents the unaudited pro forma results of operations of the
Company for the three month periods ended July 25, 1998 and July 26, 1997, as if
the Strategic Restructuring Plan and the purchase acquisitions completed since
the beginning of Fiscal 1998 had been consummated at the beginning of Fiscal
1998. The pro forma results of operations include certain pro forma adjustments
including the amortization of intangible assets, reductions in executive
compensation at the Purchased Companies and an increase in corporate overhead
expenses as if the Company was a stand-alone entity for the entire period:
Three Months Ended
July 25, July 26,
1998 1997
------------- --------------
Revenues $ 90,485 $ 85,460
Net income 2,346 2,182
Earnings per share:
Basic 0.16 0.15
Diluted 0.16 0.15
The pro forma results of operations are prepared for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisitions and the Strategic Restructuring Plan occurred at the beginning of
Fiscal 1998 or the results that may occur in the future.
Page 9
<PAGE>
NOTE 7 - SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 for
the year ending April 24, 1999. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to July 25, 1998, the Company announced that it had signed letters of
intent to purchase four companies for an aggregate purchase price of $13.5
million consisting entirely of cash. The transactions include three document
distribution companies based in Puerto Rico, New York City and Los Angeles and
one envelope manufacturer in New York City. The acquisitions are expected to
close in September 1998.
In addition to the signed letters of intent, the Company also announced that its
Board of Directors approved a share repurchase program of up to two million
shares of Company Common Stock.
Page 10
<PAGE>
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 dates
hereof.
Introduction
Workflow Management is an integrated graphic arts company providing documents,
envelopes and commercial printing to more than 22,000 businesses in the United
States and Canada. Prior to the consummation of the U.S. Office Products Company
("U.S. Office Products") strategic restructuring plan (the "Strategic
Restructuring Plan") the Company's subsidiaries comprised the Print Management
Division of U.S. Office Products, which acquired such companies on the following
dates: SFI Corp., the predecessor to SFI of Delaware, LLC, and a related
company, Hano Document Printers, Inc., on January 24, 1997; United Envelope,
Co., the predecessor to United Envelope, LLC, and the related companies, Rex
Envelope Co., Huxley Envelope Corp. and Pocono Envelope Corp. on April 25, 1997;
Data Business Forms Limited on April 26, 1997; FMI Graphics, Inc. ("FMI") on
July 17, 1997, which was subsequently merged into SFI Corp.; and Astrid Offset
Corp. ("Astrid") on February 26, 1998. As part of the Company's spin-off from
U.S. Office Products, these companies became direct or indirect wholly-owned
subsidiaries of Workflow Management.
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 25, 1998 ("Fiscal 1998") included in the Company's Annual
Report on Form 10-K.
Consolidated Results of Operations
Three Months Ended July 25, 1998 Compared to Three Months Ended
July 26, 1997
Consolidated revenues increased 10.1%, from $82.2 million for the three months
ended July 26, 1997, to $90.5 million for the three months ended July 25, 1998.
This increase was primarily due to the inclusion of FMI and Astrid (the "Fiscal
1998 Purchased Companies") in the consolidated results of the Company for the
entire three months ended July 25, 1998 and increased envelope and document
sales resulting from sales to two large new customer accounts that were secured
during Fiscal 1998.
International revenues decreased 4.5%, from $30.8 million, or 37.5% of
consolidated revenues, for the three months ended July 26, 1997, to $29.4
million, or 32.5% of consolidated revenues, for the three months ended July 25,
1998. 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 July 25, 1998. International revenues, when
stated in the local currency, increased $478,000 (Canadian) or 1.1% for the
three months ended July 25, 1998 when compared to the three months ended July
26, 1997.
Gross profit increased 12.1%, from $21.9 million, or 26.6% of revenues, for the
three months ended July 26, 1997, to $24.5 million, or 27.1% of revenues, for
the three months ended July 25, 1998. The increase in gross profit was primarily
due to the inclusion of the Fiscal 1998 Purchased Companies in the consolidated
results of the Company for the entire period and the additional gross profit
generated from the two new customer accounts. The increase in gross profit as a
percentage of revenues was due to the Fiscal 1998 Purchased Companies generating
gross profit at a higher percentage of revenues than was historically recognized
by the Company.
Page 11
<PAGE>
Selling, general and administrative expenses increased 13.0%, from $16.9
million, or 20.5% of revenues, for the three months ended July 26, 1997, to
$19.1 million, or 21.1% of revenues, for the three months ended July 25, 1998.
The increase in selling, general and administrative expenses was primarily due
to the inclusion of the Fiscal 1998 Purchased Companies in the results of the
Company for the entire period and the additional corporate overhead that was
incurred during the three months ended July 25, 1998 as a result of the Company
operating as a stand-alone public entity following its spin-off under U.S.
Office Products' Strategic Restructuring Plan. This increase was partially
offset by the benefits resulting from significant headcount reductions and cost
saving measures employed by the Company's Canadian operations during the end of
Fiscal 1998. The increase in selling, general and administrative expenses as a
percentage of sales during the three months ended July 25, 1998 was primarily
due to the additional corporate overhead incurred during the period.
Amortization expense increased $84,000 from $49,000 for the three months ended
July 26, 1997, to $133,000 for the three months ended July 25, 1998. This
increase was due exclusively to the inclusion of the Fiscal 1998 Purchased
Companies for the entire three month period ended July 25, 1998.
The Company incurred expenses of approximately $3.8 million during the three
months ended July 25, 1998 associated with U.S. Office Products' Strategic
Restructuring Plan. Under Generally Accepted Accounting Principles, the Company
was required to record a one-time, non-cash expense of approximately $3.0
million with a corresponding contribution to capital relating to the tender of
stock options by Workflow Management employees in U.S. Office Products' equity
tender offer at June 9, 1998 (the "Distribution Date"). As a result of the
Distribution, the Company also incurred an additional $750,000 in transaction
costs during the three months ended July 25, 1998 relating to the Strategic
Restructuring Plan for legal, accounting and financial advisory services and
various other fees.
Interest expense, net of interest income, increased 107.9%, from $543,000 for
the three months ended July 26, 1997, to $1.1 million for the three months ended
July 25 1998. This increase in net interest expense was due to the increased
level of debt outstanding during the three months ended July 25, 1998 as a
result of the Company securing a $150.0 million revolving credit facility to pay
off its debt to U.S. Office Products at the Distribution Date.
Other (income) expense decreased from $100,000 of other income, for the three
months ended July 26, 1997, to $17,000 of other expense, for the three months
ended July 25, 1998. Other income primarily represents gains and/or losses on
sales of equipment and miscellaneous other income and expense items.
Provision for income taxes decreased from $1.8 million for the three months
ended July 26, 1997 to $163,000 for the three months ended July 25, 1998,
reflecting effective income tax rates of 40.4% and 43.9%, 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 increased to reflect the
incurrence of non-deductible goodwill amortization expense resulting from
acquisition of the Fiscal 1998 Purchased Companies.
Page 12
<PAGE>
Liquidity and Capital Resources
At July 25, 1998, the Company had cash of $4.2 million and working capital of
$56.7 million. The Company's capitalization, defined as the sum of long-term
debt and stockholders' equity, at July 25, 1998, was approximately $107.4
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 July 25, 1998, 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 three months ended July 25, 1998, net cash provided by operating
activities was $8.1 million. Net cash used in investing activities was $3.5
million, including $2.6 million used for additions to property and equipment and
$1.0 million used for a deposit on machinery. Net cash used in financing
activities was $675,000, which included $33.0 million of cash paid to U.S.
Office Products under its Strategic Restructuring Plan which was partially
offset by the Company's net borrowings of $23.8 million and an $8.5 million
capital contribution by U.S. Office Products.
During the three months ended July 26, 1997, net cash used in operating
activities was $2.0 million. Net cash used in investing activities was $1.3
million, including $1.0 million used for additions to property and equipment.
Net borrowings increased $1.5 million during the three months ended July 26,
1997, which consisted primarily of $1.3 million in net working capital advances
from U.S. Office Products.
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 32.5% of the Company's
total net sales for the three months ended July 25, 1998. 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 the three months ended July 25, 1998, the Canadian dollar weakened
against the U.S. dollar ("USD"). The Canadian exchange rate declined from
approximately $0.70 USD at April 25, 1998 to $0.67 USD at July 25, 1998. This
resulted in a reduction in stockholders' equity, through a foreign currency
translation adjustment, of approximately $1.4 million, reflecting the impact of
the declining exchange rate on the Company's investments in its Canadian
subsidiary. The Company is currently reviewing certain hedge transaction options
to mitigate the effect of currency fluctuations.
As a result of the provisions of Section 355 of the Internal Revenue Code of
1986, as amended, and certain tax contribution agreements entered into by the
Company in connection with the Distribution, the Company may be subject to
constraints on its ability to issue additional shares of the Company's common
stock in certain transactions for two years following the Distribution Date. In
particular, if 50% or more, by vote or value, of the capital stock of Workflow
Management is acquired by one or more persons acting pursuant to a plan or
series of transactions that includes the Distribution, Workflow Management will
suffer significant tax liability. The Company will evaluate any significant
future issuance of capital stock to avoid the imposition of such tax liability.
The Strategic Restructuring Plan called for an allocation of $45.6 million of
debt by U.S. Office Products to Workflow Management at the Distribution Date.
This allocation resulted in the forgiveness of $8.5 million of debt during the
three months ended July 25, 1998, which was reflected in the Company's financial
statements as a contribution of capital by U.S. Office Products.
Page 13
<PAGE>
The Company entered into a secured $150.0 million revolving credit facility (the
"Credit Facility") underwritten and agented by Bankers Trust Company on June 9,
1998. The Credit Facility matures on June 10, 2003 and is secured by
substantially all assets of the Company. The Credit Facility is subject to terms
and conditions typical of a credit facility of such type and size, including
certain financial covenants. Interest rate options are available to the Company
conditioned on certain leverage tests. The maximum rate of interest is the prime
rate from time to time in effect. Workflow Management expects that the Credit
Facility is adequate to fund working capital and capital expenditure needs. The
Credit Facility is also available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants.
The Company repaid its debt owed to U.S. Office Products with funds available
under the Credit Facility during the three months ended July 25, 1998. At
September 1, 1998, the Company had approximately $30.3 million
outstanding under the Credit Facility, at an annual interest rate of
approximately 6.96%, and $119.7 million available under the Credit Facility for
acquisitions and working capital purposes.
The Company anticipates that its current cash on hand, cash flow from operations
and additional financing available under the Credit Facility will be sufficient
to meet the Company's liquidity requirements for its operations for the next 12
months. However, the Company intends to pursue acquisitions, which are expected
to be funded through cash, stock or a combination thereof. There can be no
assurance that additional sources of financing will not be required during the
next 12 months or thereafter.
Fluctuations in Quarterly Results of Operations
Workflow Management's envelope business is subject to seasonal influences from
year-end mailings. As the Company continues to complete acquisitions, it may
become subject to other seasonal influences if the businesses it acquires are
seasonal. Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired may differ substantially from those of Workflow
Management, which could contribute to further fluctuation in its quarterly
operating results. Therefore, results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
Inflation
The Company does not believe that inflation has had a material impact on its
results of operations during the three month periods ended July 25, 1998 and
July 26, 1997, respectively.
New Accounting Pronouncements
Reporting Comprehensive Income. In June 1997, FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Workflow Management has adopted
SFAS No. 130 for the fiscal year ending April 24, 1999.
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Disclosures about Segments of an Enterprise and Related Information. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for reporting
information about operating segments in annual and interim financial statements.
Operating segments are determined consistent with the way management organizes
and evaluates financial information internally for making decisions and
assessing performance. It also requires related disclosures about products,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS No. 131 for
the year ending April 24, 1999. Implementation of this disclosure standard will
not affect the Company's financial position or results of operations.
Year 2000 Issue
Many existing computer programs were designed and developed without considering
the impact of the upcoming change in the century and consequently use only two
digits to identify a year in the date field. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000 (the
"Year 2000 Issue" or "Year 2000").
If the Company and its customers, suppliers and vendors were not Year 2000
compliant by January 1, 2000, the most reasonably likely worst case scenario
would be a temporary shutdown or cessation of distribution or manufacturing
operations at one or more of the Company's facilities and a temporary inability
of the Company to timely process customer orders and deliver products to
customers. Any such shutdown could have a material adverse effect on the
Company's results of operations, liquidity and financial position. The Company's
individual business units are currently identifying and considering various
contingency options, including identification of alternate suppliers, vendors
and service providers, and manual alternatives to systems operations, which
allow them to minimize the risks of any unresolved Year 2000 problems on their
operations and to minimize the effect of any unforeseen Year 2000 failures.
The Company estimates that it will incur approximately $6.0 million of
incremental cost in connection with the Year 2000 Issue, of which approximately
$4.5 million has been incurred to date. The Company anticipates funding future
Year 2000 Issue costs with funds available from operations and the Company's
credit facility with its principal lender.
While costs associated with the Year 2000 Issue may be material in one or more
of the Company's fiscal quarters, the Company does not believe that the Year
2000 Issue will have a material adverse effect on the long-term results of
operations, liquidity or financial position of the Company. However, no
assurance can be given that unforeseen circumstances will not arise as the
Company addresses the Year 2000 Issue. Specific factors that may cause the
Company to experience unanticipated problems with respect to the Year 2000 Issue
include the availability and cost of adequately trained personnel, the ability
to locate and correct all affected computer code, and the timing and success of
Year 2000 efforts by the Company's customers, suppliers and vendors.
During the period immediately following the Strategic Restructuring Plan of U.S.
Office Products, the Company had to postpone its Year 2000 compliance project
because of the inability to allocate adequate personnel. The Company intends to
have its proprietary software systems and related services (known as GetSmart
and Informa) Year 2000 ready by the end of calendar year 1998. With respect to
the third party vendors components, the Company will use its best efforts to
replace third-party software, hardware, and computer systems that are currently
not Year 2000 ready by December 31, 1999.
Factors Affecting the Company's Business
Risks Associated with Acquisitions
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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.
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 currently intends to finance its future acquisitions by
using shares of Company Common Stock, cash, borrowed funds or a combination
thereof. If the Company Common Stock does not maintain a sufficient market
value, if the price of Company Common Stock is highly volatile, or if potential
acquisition candidates are otherwise unwilling to accept Company Common
Stock as part of the consideration for the sale of their businesses,
Workflow 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.
Approximately $13.9 million, or 9.4% of the Company's total assets as of
July 25, 1998, 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
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goodwill and incur a related charge to its income. A reduction in net income
resulting from the amortization or write down of goodwill could have a material
and adverse impact upon the market price of the Company Common Stock.
Risks Associated with Canadian Operations.
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 32.5% and 36.2% of
the Company's total net sales in the three months ended July 25, 1998 and
the fiscal year ended April 25, 1998, 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 25, 1998.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
NONE
(b) Reports on Form 8-K
During the period covered by this report, the Company filed one Current
Report on Form 8-K on August 26, 1998. The Form 8-K reported (i)
quarterly results for the Company's fiscal quarter ended July 25, 1998,
(ii) the execution of letters of intent to acquire four companies and
(iii) the implementation of a stock repurchase plan.
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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.
September 8, 1998 By: /s/ Thomas B. D'Agostino
- ----------------- ------------------------------
Date Thomas B. D'Agostino
Chairman of the Board, Chief Executive
Officer, President,
Director (Principal Executive Officer)
September 8, 1998 By: /s/ Steven R. Gibson
- ----------------- -------------------------------------
Date Steven R. Gibson
Vice President, Chief Financial Officer,
Treasurer, Secretary (Principal
Financial Officer and Principal
Accounting Officer)
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