<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 333-47505
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
-------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
----------------------
<TABLE>
<S> <C> <C>
DELAWARE 2759 06-1507104
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------
240 ROYAL PALM WAY
PALM BEACH, FLORIDA 33480
(561) 659-6551
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
STEVEN R. GIBSON
CHIEF FINANCIAL OFFICER
WORKFLOW MANAGEMENT, INC.
240 ROYAL PALM WAY
PALM BEACH, FLORIDA 33480
(561) 659-6551
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C>
GEORGE P. STAMAS, ESQ. LELAND E. HUTCHINSON, ESQ.
WILMER, CUTLER & PICKERING JOHN L. MACCARTHY, ESQ.
2445 M STREET, N.W. WINSTON & STRAWN
WASHINGTON, D.C. 20037 35 W. WACKER DRIVE
TELEPHONE NO. (202) 663-6000 CHICAGO, ILLINOIS 60601
FACSIMILE NO. (202) 663-6363 TELEPHONE NO. (312) 558-5600
FACSIMILE NO. (312) 558-5700
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF SECURITIES AGGREGATE REGISTRATION
TO BE REGISTERED OFFERING PRICE FEE (1)
<S> <C> <C>
Common Stock, par value $0.001 per share............................................. $37,375,000 $14,750
</TABLE>
(1) The Company has previously paid the Securities and Exchange Commission the
registration fee.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
2,500,000 SHARES
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Workflow Management, Inc. (the "Company"). Prior to this
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$12.00 and $14.00 share. See "Underwriting" for information relating to the
method of determining the initial public offering price. The Company has applied
for quotation of the Common Stock on the Nasdaq National Market under the symbol
"WORK."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.................................................. $ $ $
Total(3)................................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at $1.5
million.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
------------------
The Common Stock is offered by the Underwriters, as stated herein, subject
to receipt and acceptance by
them and subject to their right to reject any order in whole or in part. It is
expected that delivery of such shares will be made through the offices of
BancAmerica Robertson Stephens, San Francisco, California, on or about
, 1998.
BANCAMERICA ROBERTSON STEPHENS
MORGAN STANLEY DEAN WITTER
SANDS BROTHERS & CO., LTD.
The date of this Prospectus is , 1998
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
The Spin-Offs From U.S. Office Products.................................................................... 14
Use of Proceeds............................................................................................ 20
Dividend Policy............................................................................................ 20
Dilution................................................................................................... 21
Capitalization............................................................................................. 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Business................................................................................................... 32
Management................................................................................................. 41
Certain Transactions....................................................................................... 49
Principal Stockholders..................................................................................... 50
Description of Capital Stock............................................................................... 52
Shares Eligible for Future Sale............................................................................ 54
Underwriting............................................................................................... 55
Validity of Common Stock................................................................................... 56
Experts.................................................................................................... 56
Additional Information..................................................................................... 57
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------
The Company intends to furnish to its stockholders annual reports containing
audited financial statements examined by its independent public accountants and
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
GetSmart-TM-, Informa-TM- and Imagenet-TM- are trademarks of the Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY AND NOTES THERETO, THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS OF THE COMPANY AND THE NOTES THERETO, AND THE FINANCIAL STATEMENTS OF
CERTAIN COMPANIES ACQUIRED BY THE COMPANY AND THE NOTES THERETO, APPEARING
ELSEWHERE IN THE PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES: (I) CONSUMMATION OF THE TRANSACTIONS DESCRIBED UNDER "THE SPIN-OFFS
FROM U.S. OFFICE PRODUCTS;" (II) AN INITIAL PUBLIC OFFERING PRICE OF $13.00 PER
SHARE OF COMMON STOCK (REPRESENTING THE MIDPOINT OF THE PRICE RANGE); (III) A
DISTRIBUTION RATIO OF ONE SHARE OF COMMON STOCK FOR EVERY 7.5 SHARES OF U.S.
OFFICE PRODUCTS COMPANY'S ("U.S. OFFICE PRODUCTS") COMMON STOCK (THE
"DISTRIBUTION RATIO"); AND (IV) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION
WILL NOT BE EXERCISED. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "COMMON
STOCK OUTSTANDING AFTER THE WORKFLOW DISTRIBUTION" ON A PRO FORMA BASIS SHALL
MEAN 14,760,000 SHARES OF COMMON STOCK, WHICH IS CALCULATED AS FOLLOWS: (A)
APPROXIMATELY 110,700,000 SHARES OF U.S. OFFICE PRODUCTS' COMMON STOCK EXPECTED
TO BE OUTSTANDING AT THE DATE OF THE WORKFLOW DISTRIBUTION (WHICH IS EQUAL TO
(I) APPROXIMATELY 133,800,000 SHARES OF U.S. OFFICE PRODUCTS COMMON STOCK
OUTSTANDING ON APRIL 25, 1998; PLUS (II) APPROXIMATELY 8,900,000 SHARES OF U.S.
OFFICE PRODUCTS' COMMON STOCK ASSUMED TO BE ISSUED BY U.S. OFFICE PRODUCTS ON
CONVERSION OF THE U.S. OFFICE PRODUCTS 5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE
2001 (THE "2001 NOTES"); PLUS (III) APROXIMATELY 5,000,000 SHARES OF U.S. OFFICE
PRODUCTS' COMMON STOCK ASSUMED TO BE ISSUED BY U.S. OFFICE PRODUCTS ON EXERCISE
OF STOCK OPTIONS ACCEPTED INTO THE TENDER OFFER (AS DEFINED BELOW); AND LESS
(IV) 37,037,037 MILLION SHARES OF U.S. OFFICE PRODUCTS' COMMON STOCK (INCLUDING
SHARES THAT MAY BE ISSUED ON EXERCISE OF VESTED AND UNVESTED STOCK OPTIONS)
TENDERED AND ACCEPTED UPON COMPLETION OF THE SELF-TENDER OFFER BY U.S. OFFICE
PRODUCTS AT $27.00 PER SHARE (OR, IN THE CASE OF STOCK OPTIONS, AT $27.00 MINUS
THE EXERCISE PRICE OF THE OPTIONS) (THE "TENDER OFFER")), DIVIDED BY (B) THE
DISTRIBUTION RATIO.
UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL REFERENCES TO THE COMPANY (OR
WORKFLOW MANAGEMENT) INCLUDE SFI CORP. ("SFI"), HANO DOCUMENT PRINTERS, INC.
("HANO"), UNITED ENVELOPE CO., INC. ("UE"), REX ENVELOPE CO., INC. ("REX"),
HUXLEY ENVELOPE CORP. ("HUXLEY"), POCONO ENVELOPE CORP. ("POCONO") (UE, REX,
HUXLEY AND POCONO ARE COLLECTIVELY REFERRED TO HEREAFTER AS "UNITED"), DATA
BUSINESS FORMS LIMITED ("DBF"), AND ASTRID OFFSET CORP. ("ASTRID"), WHOLLY-OWNED
DIRECT OR INDIRECT SUBSIDIARIES OF THE COMPANY, AS WELL AS ALL PREDECESSORS
THEREOF.
THE COMPANY
Workflow Management, Inc. (the "Company" or "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 design services and workflow analysis. Drawing on its position in the
industry and its experience in completing acquisitions, the Company seeks to
become a leading consolidator in the highly-fragmented graphic arts industry. In
the last ten years, the Company's senior management team successfully completed
the acquisition of 16 companies for Standard Forms, Inc., the predecessor to
SFI. Since the acquisition of SFI and Hano by the Print Management Division of
U.S. Office Products in January 1997, that same senior management team has
continued its acquisition strategy by successfully buying six additional
companies. As a result, the enterprise has grown from SFI's revenues and
operating income of $115.1 million and $6.7 million, respectively, for the year
ended December 31, 1996, to the Company's revenues and operating income of
$345.4 million and $17.1 million, respectively, for the twelve months ended
January 24, 1998. The Company currently has
<PAGE>
over 2,000 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. Workflow Management intends to continue to pursue its
aggressive acquisition strategy to extend its geographic scope and market
penetration, and to increase sales to existing customers by cross-selling
documents, envelopes and commercial printing.
Workflow Management offers a full range of printed products which are either
manufactured by the Company or procured from one of the Company's more than
3,500 vendors. The Company's product line includes: (i) documents, such as
custom invoices, purchase orders, checks and labels; (ii) envelopes, including
specialty envelopes for uses such as credit card solicitations, annual reports,
direct mail and airline tickets; and (iii) commercial printing, such as product
and corporate brochures, personalized direct mail literature, catalogs,
directories and digital imaging. The Company's manufacturing base, combined with
its extensive vendor network and distribution capability, gives the Company
broad flexibility to meet customers' demands for printed products. For the nine
months ended January 24, 1998, approximately 55.2% of its revenues were derived
from products purchased by the Company for distribution, and 44.8% were derived
from products manufactured by the Company.
Many of the Company's customers are attempting to reduce their overhead and
direct costs by focusing on core competencies and by outsourcing non-core
operations to specialists. The Company provides customers with print management
services that are designed to control the costs of procuring, storing and using
graphic arts in their business operations. As an outsourcing specialist for
print management services, Workflow Management enables its customers to reduce
costs and improve control by soliciting competitive bids, establishing more
efficient inventory levels and order quantities, and consolidating requisitions,
production and deliveries. The Company also performs design and procurement
services for its customers. In order to meet growing demand, Workflow Management
plans to continue to expand its product lines and services, and to promote its
print and facilities management services, which allow customers to outsource the
management of print products.
The Company believes its proprietary technology and systems are central to
its ability to capitalize effectively on industry outsourcing trends and provide
it with a significant competitive advantage. The Company has developed its
GetSmart and Informa transaction and information systems to support these
services and the Company's sales of print products. The GetSmart system provides
transaction, reporting and control capabilities to the Company and its customers
in the United States. The Informa system supports requisition, distribution and
imaging services with a control database and a variety of customer interfaces
for its customers in Canada, including the Imagenet Document Manager
("Imagenet") that provides access via the world wide web. In addition, using the
GetSmart and the Informa systems, the Company has the flexibility to integrate
future acquisitions and increase its customer base rapidly and seamlessly. In
addition, with its technology platform, Workflow Management believes that it is
able to position itself as a premier technology deployer, thus increasing the
Company's attractiveness to potential acquisition targets. The Company intends
to grant a license to U.S. Office Products for the Company's Imagenet
technology. See "Certain Transactions."
The document, envelope and commercial printing industries that comprise the
graphic arts businesses are highly fragmented, and the Company believes they are
ripe for consolidation. The Company believes that (i) the market for documents
was approximately $12.7 billion in 1996, up from $11.1 billion in 1993; (ii)
while the U.S. market for envelopes decreased from $3.0 billion in 1989 to $2.6
billion in 1992, the market has since increased to approximately $3.0 billion in
1996; and (iii) the general commercial segment of the U.S. printing industry
shipped more than $88.0 billion of products in 1996, an increase of 8% over
1995. Furthermore, management believes there are approximately 200 envelope
manufacturers in the U.S., and that the commercial printing industry is composed
of approximately 25,000 printing plants, 70% of which have fewer than 10
employees.
The Company intends to capitalize on consolidation opportunities primarily
in three business lines of the North American graphic arts industry: United
States printed products, United States envelopes and Canadian printed products.
The Company will focus on acquisition opportunities that complement and complete
its product line and service offerings. The Company believes that the greatest
consolidation opportunities exist among distribution
2
<PAGE>
companies in the graphic arts industry. The Company plans to offer the customers
of its newly acquired companies its GetSmart and Informa systems and its full
offering of print and facilities management services. Workflow Management also
plans to grow internally by developing new products, cross-selling the full
complement of the Company's products and services to the customers of its
subsidiaries (which previously had limited product offerings) and implementing
its transaction and information systems throughout the Company.
Workflow Management was incorporated in the state of Delaware on February
13, 1998. The principal executive offices of the Company are located at 240
Royal Palm Way, Palm Beach, Florida 33480. Workflow Management's telephone
number is (561) 659-6551.
WORKFLOW DISTRIBUTION
Prior to the completion of this Offering, shares of Common Stock will be
distributed to the stockholders of record on June 9, 1998 of U.S. Office
Products (the "Workflow Distribution"). U.S. Office Products is spinning off
Workflow Management as part of a comprehensive restructuring plan adopted by the
U.S. Office Products Board of Directors, including modifications the Board of
Directors has made since first adopting this plan (as so modified, the
"Strategic Restructuring Plan") in which U.S. Office Products is spinning off
the shares of the four companies (the "Spin-Off Companies") that conduct U.S.
Office Products' current print management, technology solutions, educational
supplies and corporate travel services businesses. (These spin-offs are
collectively referred to as the "Distributions.") The effective time of the
Distributions is expected to be 12:01 a.m. on June 10, 1998 (the "Distribution
Date"). See "The Spin-Offs From U.S. Office Products."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company....................................... 2,500,000 shares(1)
Common Stock to be Outstanding after the Offering and the Workflow 17,260,000 shares(1)(2)
Distribution............................................................
Use of Proceeds........................................................... For working capital and
general corporate
purposes, including
future acquisitions
Nasdaq National Market Symbol............................................. WORK
</TABLE>
- ------------------
(1) Excludes 375,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Excludes shares of Common Stock reserved for issuance upon the exercise of
stock options exercisable upon consummation of the Workflow Distribution.
See "Management--Replacement of Outstanding U.S. Office Products Options and
--1998 Stock Incentive Plan."
3
<PAGE>
SUMMARY FINANCIAL DATA (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NINE MONTHS ENDED
APRIL 26, ------------------------
FOUR MONTHS --------------------
YEAR ENDED DECEMBER 31, ENDED PRO
------------------------------------------ APRIL 30, FORMA JANUARY 25, JANUARY 24,
1992 1993 1994 1995(2) 1996 1997 1997(3) 1997 1998
--------- --------- --------- --------- ------------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................. $ 80,731 $ 121,463 $ 154,193 $ 309,426 $ 114,099 $ 327,381 $ 342,335 $ 239,751 $ 257,777
Cost of revenues.......... 57,054 88,255 114,885 234,959 82,998 236,340 244,475 172,869 190,482
--------- --------- --------- --------- ------------ --------- --------- ----------- -----------
Gross profit.............. 23,677 33,208 39,308 74,467 31,101 91,041 97,860 66,882 67,295
Selling, general and
administrative
expenses................ 20,800 27,683 32,020 62,012 22,485 70,949 75,568 51,735 53,083
Non-recurring acquisition
costs................... 5,006 5,006 2,902
--------- --------- --------- --------- ------------ --------- --------- ----------- -----------
Operating income.......... 2,877 5,525 7,288 12,455 8,616 15,086 17,286 12,245 14,212
Interest expense.......... 904 1,328 2,048 5,370 1,676 4,561 3,647 3,910 1,665
Interest income........... (81) (116) (18) (25) (21) (9)
Other (income) expense.... 366 511 186 62 (151) 632 408 610 (205)
--------- --------- --------- --------- ------------ --------- --------- ----------- -----------
Income before provision
for (benefit from)
income taxes and
extraordinary items..... 1,688 3,802 5,054 7,023 7,109 9,918 13,231 7,746 12,761
Provision for (benefit
from) income taxes(5)... 153 260 379 (33) 1,351 3,690 5,425 2,249 5,212
--------- --------- --------- --------- ------------ --------- --------- ----------- -----------
Income before
extraordinary items..... 1,535 3,542 4,675 7,056 5,758 6,228 $ 7,806 5,497 7,549
---------
---------
Extraordinary items(6).... 700 798
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income................ $ 1,535 $ 3,542 $ 4,675 $ 6,356 $ 5,758 $ 5,430 $ 5,497 $ 7,549
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Per share amounts:
Basic:
Income from before
extraordinary
items............... $ 0.26 $ 0.60 $ 0.77 $ 0.90 $ 0.56 $ 0.52 $ 0.53(7) $ 0.48 $ 0.49
---------
---------
Extraordinary items... 0.09 0.07
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income............ $ 0.26 $ 0.60 $ 0.77 $ 0.81 $ 0.56 $ 0.45 $ 0.48 $ 0.49
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Diluted.................
Income from before
extraordinary
items............... $ 0.26 $ 0.60 $ 0.77 $ 0.88 $ 0.55 $ 0.51 $ 0.53(7) $ 0.47 $ 0.48
---------
---------
Extraordinary items... 0.09 0.07
--------- --------- --------- --------- ------------ --------- ----------- -----------
Net income............ $ 0.26 $ 0.60 $ 0.77 $ 0.79 $ 0.55 $ 0.44 $ 0.47 $ 0.48
--------- --------- --------- --------- ------------ --------- ----------- -----------
--------- --------- --------- --------- ------------ --------- ----------- -----------
Weighted average shares
outstanding:............
Basic................... 5,901 5,901 6,075 7,875 10,333 12,003 14,760(8) 11,464 15,301
Diluted................. 5,901 5,901 6,094 8,003 10,547 12,235 14,760(8) 11,710 15,625
<CAPTION>
PRO PRO PRO FORMA
FORMA FORMA JANUARY 24,
JANUARY 25, JANUARY 24, 1998, AS
1997(3) 1998(3) ADJUSTED(4)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................. $ 250,820 $ 263,960 $ 263,960
Cost of revenues.......... 178,983 193,104 193,104
----------- ----------- -----------
Gross profit.............. 71,837 70,856 70,856
Selling, general and
administrative
expenses................ 55,472 55,095 55,095
Non-recurring acquisition
costs................... 2,902
----------- ----------- -----------
Operating income.......... 13,463 15,761 15,761
Interest expense.......... 2,735 2,735 1,011
Interest income...........
Other (income) expense.... 445 (333) (333)
----------- ----------- -----------
Income before provision
for (benefit from)
income taxes and
extraordinary items..... 10,283 13,359 15,083
Provision for (benefit
from) income taxes(5)... 4,216 5,477 6,184
----------- ----------- -----------
Income before
extraordinary items..... $ 6,067 $ 7,882 $ 8,899
----------- ----------- -----------
----------- ----------- -----------
Extraordinary items(6)....
Net income................
Per share amounts:
Basic:
Income from before
extraordinary
items............... $ 0.41(7) $ 0.53(7) $ 0.52(7)
----------- ----------- -----------
----------- ----------- -----------
Extraordinary items...
Net income............
Diluted.................
Income from before
extraordinary
items............... $ 0.41(7) $ 0.53(7) $ 0.52(7)
----------- ----------- -----------
----------- ----------- -----------
Extraordinary items...
Net income............
Weighted average shares
outstanding:............
Basic................... 14,760(8) 14,760(8) 17,260(9)
Diluted................. 14,760(8) 14,760(8) 17,260(9)
</TABLE>
<TABLE>
<CAPTION>
JANUARY
24, 1998
---------
DECEMBER 31,
------------------------------------------ APRIL 30, APRIL 26,
1992 1993 1994 1995 1996 1997 ACTUAL
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 6,005 $ 7,264 $ 8,583 $ 20,127 $ 23,378 $ 16,910 $ 25,370
Total assets................................ 26,543 48,374 51,357 120,630 117,949 125,108 127,105
Short-term debt payable to U.S. Office
Products.................................. 23,622 17,658
Long-term debt, less current portion........ 4,632 9,632 7,355 28,812 28,108 6,034 5,498
Long-term debt payable to U.S. Office
Products.................................. 561 1,905
Stockholders' equity........................ 7,459 11,675 12,889 24,719 29,120 47,780 55,979
<CAPTION>
PRO FORMA
PRO AS ADJUSTED
FORMA(10) (4)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 43,958 $ 43,958
Total assets................................ 143,073 143,073
Short-term debt payable to U.S. Office
Products..................................
Long-term debt, less current portion........ 40,638 11,913
Long-term debt payable to U.S. Office
Products..................................
Stockholders' equity........................ 55,979 84,704
</TABLE>
- ------------------
(1) The historical financial information of the businesses that were acquired
in business combinations accounted for under the pooling-of-interests
method (the "Pooled Companies") has been combined on a historical cost
basis in accordance with generally accepted accounting principles ("GAAP")
to present this financial data as if the Pooled Companies had always been
members of the same operating group. The financial information of the
businesses acquired in the business combinations accounted for under the
purchase method (the "Purchased Companies") is included from the dates of
their respective acquisitions. The pro forma financial information reflects
completed acquisitions through May 1, 1998. See Note 4 of the Company's
Notes to Consolidated Financial Statements for a description of the number
and accounting treatment of the acquisitions by the Company.
(2) The results for the year ended December 31, 1995 include the results of
DBF, one of the Pooled Companies, from its date of incorporation on
February 8, 1995.
(3) Gives effect to the Distribution and the purchase acquisitions completed by
the Company since May 1, 1996 as if all such transactions had been made on
May 1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(4) Adjusted to give effect to the sale by the Company of 2,500,000 shares of
Common Stock offered hereby at the assumed initial public offering price
and the anticipated application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(5) Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no
federal income tax expense prior to these acquisitions by the Company.
(6) Extraordinary items represent the losses associated with the early
terminations of credit facilities at one Pooled Company, net of the related
income tax benefits.
(7) Pro forma net income per share is pro forma income before extraordinary
items per share.
(8) For calculation of the pro forma weighted average shares outstanding for
the fiscal year ended April 26, 1997 and for the nine months ended January
24, 1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein.
(9) For calculation of pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(m) of
Notes to Pro Forma Combined Financial Statements included herein.
(10) Gives effect to the Distribution and purchase acquisition of Astrid as if
such transactions had been made on January 24, 1998. The pro forma balance
sheet data are not necessarily indicative of the financial position that
would have been achieved had these events actually then occurred and
should not be construed as representative of future financial position.
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
POTENTIAL VOLATILITY OF STOCK PRICE AND OTHER RISKS ASSOCIATED WITH SHARES
ELIGIBLE FOR IMMEDIATE SALE
As a result of the Workflow Distribution, stockholders of U.S. Office
Products will acquire shares of Common Stock that are freely tradeable at the
time of this Offering without restrictions or further registration under the
Securities Act, except that any shares held by "affiliates" of Workflow
Management within the meaning of the Securities Act will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). Because the Workflow Distribution is being made to existing stockholders
of U.S. Office Products who have not made an affirmative decision to invest in
the Common Stock, there can be no assurance that some or all of these
stockholders will not sell the shares of Common Stock that they receive into the
market shortly after the Workflow Distribution. In addition, U.S. Office
Products is included in certain broad-based indices tracked by a number of
investment companies and other institutional investors, and such investors can
be expected to sell the shares of Common Stock they receive in the Workflow
Distribution shortly thereafter.
In addition, upon completion of this Offering and the Workflow Distribution,
the Company will have outstanding (i) 2,500,000 shares of Common Stock issued in
this Offering, all of which will be freely tradeable unless held by affiliates
of the Company, and (ii) immediately exercisable options to acquire shares of
Common Stock. Certain executive officers and directors of the Company have
agreed (the "Lock-Up Agreements") not to sell or otherwise dispose of their
shares of Common Stock for a period of 180 days following this Offering without
the consent of BancAmerica Robertson Stephens. The Company intends to register
the shares of Common Stock reserved for issuance pursuant to its stock incentive
plan as soon as practicable following the closing of this Offering. Following
this Offering and the Workflow Distribution, in view of the large number of
shares freely-tradeable and available for immediate sale, the market for the
Company's Common Stock could be highly volatile and the trading price of the
Common Stock could be adversely affected. See "Shares Eligible for Future Sale."
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company is the result of the consolidation by U.S. Office Products of
nine separate companies engaged in the graphic arts industry. The operations of
Workflow Management as a stand-alone, consolidated entity may place significant
demands on the Company's management, operational and technical resources. Prior
to the Workflow Distribution, certain general and administrative functions
relating to the Company's business (such as legal and accounting) were handled
by U.S. Office Products. The Company's future performance will depend on its
ability to function as a stand-alone entity, to finance and manage expanding
operations, and to adapt its information systems to changes in its business. In
addition, Workflow Management will not be able to rely on the purchasing power
of U.S. Office Products and, therefore, may not be able to obtain the same
volume discounts for products and services that are available to U.S. Office
Products. As a result, the Company's expenses may be higher than when it was a
part of U.S. Office Products, and the Company may experience disruptions it
would not encounter as a part of U.S. Office Products. Furthermore, the
financial information included herein may not necessarily reflect the results of
operations and financial condition of Workflow Management had it been a
separate, stand-alone entity during the periods presented, or is indicative of
future results of operations and financial condition of the Company.
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH
One of the Company's strategies is to increase its revenues and the markets
it serves through the acquisition of additional graphic arts businesses. There
can be no assurance that suitable candidates for
5
<PAGE>
acquisitions can be identified or, if suitable candidates are identified, that
acquisitions can be completed on acceptable terms, if at all. Prior to the
Workflow Distribution, the Company's acquisitions were completed with
substantial business, legal and accounting assistance from U.S. Office Products
and the acquisitions were primarily paid for with U.S. Office Products' common
stock. The pace of the Company's acquisition program may be adversely affected
by the absence of U.S. Office Products support for the acquisitions. In
addition, Workflow Management intends to use Common Stock to pay for certain of
its acquisitions and, therefore, if the owners of potential acquisition
candidates are not willing to receive shares of Common Stock of the Company in
exchange for their businesses, the Company's acquisition program could be
adversely affected. Moreover, the consolidation of the North American graphic
arts industry has reduced the number of larger companies available for sale,
which could lead to higher prices being paid for the acquisition of the
remaining domestic, independent companies. In addition, Workflow Management is
subject to limitations on the number of shares of capital stock it can issue
without jeopardizing the tax-free treatment of the Workflow Distribution.
Limitations on the Company's ability to issue shares of capital stock could also
adversely affect the Company's acquisition strategy. See "--Possible Limitations
on Issuances of Common Stock," "--Material Amount of Goodwill" and "--Inability
to Use Pooling-of-Interests Accounting."
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 shares of its Common Stock, cash, borrowed funds or a combination thereof.
If the Common Stock does not maintain a sufficient market value, if the price of
Common Stock is highly volatile, or if potential acquisition candidates are
otherwise unwilling to accept 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. However, the use of equity offerings
in connection with the Workflow Distribution will also be subject to certain
limitations on the number of shares that Workflow Management can issue without
jeopardizing the tax-free treatment of the Workflow Distribution. See
"--Possible Limitations on Issuances of Common Stock." Prior to the Workflow
Distribution, Workflow Management was not responsible for obtaining external
sources of funding. There can be no assurance that Workflow Management, as a
stand-alone company, will be able to obtain such financing if and when it is
needed or that any such financing will be available on terms it deems
acceptable.
6
<PAGE>
The Company will have 150 million authorized shares of Common Stock, a
portion of which could be available (subject to the rules and regulations of
federal and state securities laws, limitations under U.S. federal income tax
laws and the rules of the Nasdaq Stock Market) to finance acquisitions without
obtaining stockholder approval for such issuances. Existing stockholders may
suffer dilution if the Company uses Common Stock as consideration for future
acquisitions. Moreover, the issuance of additional shares of Common Stock may
have a negative impact on earnings per share and may negatively impact the
market price of the Common Stock.
MATERIAL AMOUNT OF GOODWILL
Approximately $14.2 million, or 9.9%, of the Company's pro forma total
assets as of January 24, 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, the
Company would be required to write down the carrying value of the goodwill and
incur a related charge to its income. A reduction in net income resulting from
the amortization or write down of goodwill could have a material and adverse
impact upon the market price of the Common Stock.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING
Generally accepted accounting principles require that an entity be
autonomous for a period of two years before it is eligible to complete business
combinations under the pooling-of-interests method. As a result of the Company
being a wholly-owned subsidiary of U.S. Office Products prior to the Workflow
Distribution, the Company will be unable to satisfy this criteria for a period
of two years following the Workflow Distribution. Therefore, the Company will be
precluded from completing business combinations under the pooling-of-interests
method for a period of two years and any business combinations completed by the
Company during such period will be accounted for under the purchase method
resulting in the recording of goodwill. The amortization of the goodwill will
reduce net income reported by the Company below that which would have been
reported if the pooling-of-interests method had been used by the Company.
ATTRACTION AND RETENTION OF PERSONNEL
The Company's senior management team does not have experience operating a
public company. Timothy L. Tabor is expected to resign as Executive Vice
President of U.S. Office Products Print Management Division and Executive Vice
President and Chief Operating Officer of SFI and Hano prior to the Workflow
Distribution. Therefore, the Company is recruiting a qualified individual to
perform the functions associated with these positions. Mr. Tabor is a member of
the Board of Directors of the Company. There can be no assurance that the
Company will be successful in hiring, integrating or retaining such an
individual. Steven R. Gibson assumed the position of Vice President of Finance
and Chief Financial Officer of the Company on April 8, 1998.
The Company's operations depend on the continued efforts of Thomas B.
D'Agostino, its Chief Executive Officer, its other executive officers and the
senior management of certain of its subsidiaries. Furthermore, the Company's
operations will likely depend on the senior management of certain of the
companies that may be acquired in the future. If any of these people becomes
unable to continue in his or her present role, or if the Company is unable to
attract and retain other skilled employees, its business
7
<PAGE>
could be adversely affected. The Company does not have key man life insurance
covering any of its executive officers or other members of senior management of
its subsidiaries.
In addition, Jonathan J. Ledecky will serve as a director and an employee of
Workflow Management and is expected to provide services to Workflow Management
after the Workflow Distribution pursuant to an employment agreement to be
entered into between Mr. Ledecky and the Company. U.S. Office Products is
permitted to (and will) assign to Workflow Management certain rights of, and
obligations under, U.S. Office Products' services agreement, as amended, with
Mr. Ledecky dated January 13, 1998 (the "Ledecky Services Agreement") following
the Distributions. See "Management--Ledecky Services Agreement." Mr. Ledecky
will also serve as a director and employee of each of the other Spin-Off
Companies, and is the director or an officer of other public companies. Mr.
Ledecky may be unable to devote substantial time to the activities of Workflow
Management.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT
The Company's success and ability to compete depends in part upon its
proprietary technology, trademarks and copyrights. Workflow Management regards
the software underlying its GetSmart, Imagenet and Informa systems as
proprietary, and relies primarily on trade secrets, copyright and trademark law
to protect these proprietary rights. The Company has registered some of its
trademarks, and has no patents issued nor applications pending. Existing trade
secret and copyright laws afford the Company only limited protection.
Unauthorized parties may attempt to copy aspects of the Company's software or to
obtain and use information that Workflow Management regards as proprietary.
Policing unauthorized use of the Company's software is difficult. Workflow
Management generally enters into confidentiality and assignment agreements with
its employees and generally controls access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's services or technology without authorization, or to develop similar
services or technology independently. Workflow Management is not aware that any
of its software, trademarks or other proprietary rights infringe the proprietary
rights of third parties. However, there can be no assurance that third parties
will not assert infringement claims against Workflow Management in the future.
Any such claims, with or without merit, can be time consuming and expensive to
defend and may require the Company to enter into royalty or licensing agreements
or cease the alleged infringing activities. See "Business--Print Management."
EFFECTS OF CHANGES IN DEMAND FOR DOCUMENTS; CYCLICALITY
Historically, the Company's operating results have depended heavily on sales
of documents. For the fiscal year ended April 26, 1997, and for the nine months
ended January 24, 1998, sales of documents accounted for approximately 56% and
49%, respectively, of the Company's net sales. Workflow Management anticipates
that document sales will continue to account for a significant percentage of the
Company's sales for the foreseeable future. An important element of the
Company's business strategy is to continue its growth in document sales by
continuing to acquire other document companies, hiring experienced sales
representatives, attracting new customers and increasing sales to existing
customers. The overall document industry has not grown in the last few years,
although demand for certain products, such as laser forms, pressure-sensitive
labels, form/label combinations and single-part cut-sheet mailers has increased.
Accordingly, for Workflow Management to continue its growth in document sales,
it must increase its market share and respond to changes in demand in the
overall document industry. No assurance can be given that Workflow Management
will be successful in increasing its market share or responding to shifts in
demand. The failure by the Company to do so could have a material adverse effect
on its business, financial condition or results of operations.
In addition, the document industry historically has been affected by general
economic and industry cycles that have materially and adversely affected
distributors and manufacturers of documents. No assurance can be given as to the
effect of a continuation of, or change in, such business cycles on the
8
<PAGE>
Company's business, financial condition or results of operations. The delay or
inability of Workflow Management to respond to changing economic cycles could
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Business Strategy."
RISKS ASSOCIATED WITH CANADIAN OPERATIONS
Workflow Management has significant operations in Canada. Net sales from the
Company's Canadian operations accounted for approximately 37% of the Company's
total net sales in the fiscal year ended April 26, 1997. 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.
UNITED STATES POSTAL RATES; ALTERNATIVE DELIVERY MEDIA
The Company's operating results depend, to a significant extent, on sales of
envelopes. Sales of envelopes accounted for approximately 31% of the Company's
net sales for the fiscal year ended April 26, 1997. Because the great majority
of envelopes used in the United States are sent through the mail, postal rates
are a significant factor affecting the growth of envelope usage. Historically,
increases in postal rates, relative to changes in the cost of alternative
delivery means and/or advertising media, have resulted in temporary reductions
in the growth rate of mail sent. For example, third class postal rates increased
approximately 50% and 14% in 1991 and 1995, respectively, contributing to a
substantial leveling off in the growth rate of third class mail sent during the
periods following such increases. If postal rates increase, mail volume could
decline, which could reduce revenue from the Company's sale of envelopes and
reduce the Company's earnings and cash flow.
In addition, alternative delivery media may affect the demand for envelopes.
As the current trend towards usage of the Internet and other electronic media by
consumers for such purposes as paying utility and credit card bills grows,
Workflow Management expects the demand for envelopes for such purposes to
decline. Although management believes that overall demand for envelopes,
particularly the custom and specialty envelopes Workflow Management focuses on,
will continue to grow at rates comparable to recent historical levels,
competition from alternative media may reduce demand for envelopes, and the
Company's revenues from the sale of envelopes may decrease, which could reduce
the Company's earnings and cash flow.
IMPACT OF FLUCTUATIONS IN PAPER PRICES
Paper prices represent a substantial portion of the cost of producing
documents, envelopes and commercial printing distributed and manufactured by
Workflow Management. Accordingly, prevailing paper prices can have a significant
impact on the Company's sales. The timing of increases or decreases in paper
prices and any subsequent change in prices charged to the Company's customers
could have a material adverse effect on the Company's revenues and gross
margins. Although Workflow Management has generally been able to pass increases
in paper costs on to its customers, for competitive or other reasons, the
Company cannot offer any assurance that it will be able to pass all or a portion
of any future paper price or other cost increases on to its customers. If
Workflow Management were unable to pass on these costs, profit margins would
decrease, which could reduce earnings and cash flow. Moreover, an increase in
the Company's prices for the products it distributes, resulting from a
pass-through of increased paper costs, could reduce the volume of units sold by
the Company and decrease the Company's revenues.
9
<PAGE>
Due to the significance of paper to most of the Company's products, Workflow
Management is dependent upon the availability of paper. During periods of tight
paper supply, many paper producers allocate shipments of paper based on the
historical purchase levels of customers. There can be no assurance that the
Company's document and envelope businesses would not be materially adversely
affected if either Workflow Management or its vendors experienced difficulty in
obtaining adequate quantities of paper in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNIONIZED WORKFORCE
Approximately 31% of the Company's employees in the United States and
approximately 8% of the Company's employees in Canada are covered by collective
bargaining agreements. There can be no assurance that strikes or work stoppages
will not occur in the future. Strikes or work stoppages and the resultant
adverse impact on the Company's relationship with its customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's acquisition strategy could be
adversely affected because of its union status for a variety of reasons,
including without limitation, incompatibility with a target's existing unions
and reluctance of non-union targets to become affiliated with a union based
company. See "Business--Employees."
COSTS AND RISKS OF LOSS RELATING TO ENVIRONMENTAL REGULATION
The Company's operations and real property are subject to U.S. and Canadian
federal, state, provincial and local environmental laws and regulations,
including those governing the use, storage, treatment, transportation and
disposal of solid and hazardous materials, the emission or discharge of such
materials into the environment, and the remediation of contamination associated
with such disposal or emissions (collectively, "Environmental Laws"). Workflow
Management utilizes certain hazardous and non-hazardous materials such as
washes, inks, alcohol-based products, fountain solution, photographic fixer and
developer solutions, machine and hydraulic oils and solvents. While management
believes that the Company's current operations are in substantial compliance
with Environmental Laws, there can be no assurance that all potential
environmental liabilities have been identified, or that future uses, conditions
or legal requirements (including, without limitation, those that may result from
future acts or omissions or changes in applicable Environmental Laws) will not
materially adversely affect the Company's business or operations. See
"Business--Environmental Regulations."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS
In connection with the Distributions, U.S. Office Products will enter into a
tax allocation agreement with the Spin-Off Companies (the "Tax Allocation
Agreement"), which will provide that the Spin-Off Companies will jointly and
severally indemnify U.S. Office Products for any losses associated with taxes
related to the Distributions ("Distribution Taxes") if an action or omission (an
"Adverse Tax Act") of any of the Spin-Off Companies materially contributes to a
final determination that any or all of the Distributions are taxable. Workflow
Management will also enter into a tax indemnification agreement with the other
Spin-Off Companies (the "Tax Indemnification Agreement"), under which the
Spin-Off Company that is responsible for the Adverse Tax Act will indemnify the
other Spin-Off Companies for any liability to indemnify U.S. Office Products
under the Tax Allocation Agreement. As a consequence, Workflow Management will
be liable for any Distribution Taxes resulting from any Adverse Tax Act by
Workflow Management and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products or any of the Spin-Off Companies,
U.S. Office Products and each of the Spin-Off Companies will be liable for its
pro rata portion of the Distribution Taxes based on the value of each company's
common stock after the Distributions. As a result, the Company could become
liable for a
10
<PAGE>
pro rata portion of any Distribution Taxes with respect to not only the Workflow
Distribution but also any of the other Distributions. See "The Spin-Offs From
U.S. Office Products--Tax Allocation Agreement and Tax Indemnification
Agreement" and "The Spin-Offs From U.S. Office Products--U.S. Federal Income Tax
Consequences of the Distributions" for a detailed discussion of the Tax
Allocation Agreement, the Tax Indemnification Agreement and the U.S. Federal
Income Tax Consequences of the Distributions.
RISKS RELATED TO ALLOCATION FOR CERTAIN LIABILITIES
Under the Distribution Agreement, Workflow Management will be liable for (i)
any liabilities arising out of or in connection with the business conducted by
it or its subsidiaries, (ii) its liabilities under the Employee Benefits
Agreement, Tax Allocation Agreement and related agreements described under "The
Spin-Offs From U.S. Office Products," (iii) U.S. Office Products' debt that has
been allocated to the Company (see "The Spin-Offs From U.S. Office
Products--Distribution Agreement--Debt"), (iv) liabilities under the securities
laws relating to this Prospectus and sections of the Information
Statement/Prospectus distributed to the stockholders of U.S. Office Products in
connection with the Workflow Distribution (the "Information
Statement/Prospectus") as well as other securities law liabilities related to
the Workflow Management business that arise from information supplied to U.S.
Office Products (or that should have been supplied, but was not) by Workflow
Management, (v) U.S. Office Products' liabilities for earn-outs from
acquisitions in respect of Workflow Management and its subsidiaries, (vi)
Workflow Management's costs and expenses related to this Offering and its bank
credit facility, and (vii) $1.0 million of the transaction costs (including
legal, accounting, investment banking and financial advisory) and other fees
incurred by U.S. Office Products in connection with its Strategic Restructuring
Plan. Each of the other Spin-Off Companies will be similarly obligated to U.S.
Office Products. Workflow Management and the other Spin-Off Companies have also
agreed to bear a pro rata portion of (i) U.S. Office Products' liabilities under
the securities laws (other than claims relating solely to a specific Spin-Off
Company or relating specifically to the continuing businesses of U.S. Office
Products) and (ii) U.S. Office Products' general corporate liabilities (other
than debt, except for that specifically allocated to the Spin-Off Companies)
incurred prior to the Distributions (I.E., liabilities not related to the
conduct of a particular distributed or retained subsidiary's business) (the
"Shared Liabilities"). If one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, the non-defaulting Spin-Off Companies
will be obligated on a pro rata basis to pay such obligation ("Default
Liability"). As a result of the Shared Liabilities and Default Liability,
Workflow Management could be obligated to U.S. Office Products in respect of
obligations and liabilities not related to its business or operations and over
which neither it nor its management has or has had any control or
responsibility. The aggregate of the Shared Liabilities and Default Liability
for which any Spin-Off Company may be liable is, however, limited to $1.75
million. See "--Potential Liability for Taxes Related to the Distributions" and
"The Spin-Offs From U.S. Office Products." The Company's pro rata share of
Shared Liabilities and Default Liability is described in the section captioned
"The Spin-Offs From U.S. Office Products--The Distribution
Agreement--Liabilities."
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK
Section 355(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), which was added in 1997, generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free will
incur U.S. federal income tax liability if 50% or more, by vote or value, of the
capital stock of either the company making the distribution or the spun-off
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that includes the spin-off. Stock acquired by
certain related persons is aggregated in determining whether the 50% test is
met. There is a presumption that any acquisition occurring two years before or
after the spin-off is pursuant to a plan that includes the spin-off. However,
the presumption may be rebutted by establishing that the spin-off and such
acquisition are not part of a plan or series of related transactions. As a
result of the provisions of Section 355(e), there can be no assurance that
issuances of stock by Workflow Management, including issuances in connection
11
<PAGE>
with an acquisition of another business by Workflow Management, will not create
a tax liability for U.S. Office Products.
Workflow Management has entered into the Tax Allocation Agreement and the
Tax Indemnification Agreement pursuant to which Workflow Management will be
liable to U.S. Office Products and the other Spin-Off Companies if its actions
or omissions materially contribute to a final determination that the Workflow
Distribution is taxable. See "The Spin-Offs From U.S. Office Products--Tax
Allocation Agreement and Tax Indemnification Agreement."
This limitation could adversely affect the pace of Workflow Management's
acquisitions and its ability to issue Common Stock for other purposes, including
equity offerings.
EMERGING ALTERNATIVE TECHNOLOGIES
Electronic forms and electronic data interchange technologies have recently
been introduced. There can be no assurance that such emerging technologies will
not have a material adverse effect on the Company or on the document industry.
Over the last several years, the document industry has undergone a transition as
a result of the increased usage of desk top publishing and laser printer
technology, which has led to a decreased demand for certain document products.
The continuation of such technological changes, or the development of other
trends that decrease demand for documents, could have a material adverse effect
on the Company's business, financial condition or results of operations.
COMPETITION
Workflow Management competes for retail sales of documents and envelopes
against other independent distributors and against manufacturers' direct sales
organizations. In commercial printing, the Company also competes with
manufacturers' direct sales organizations, independent brokers, advertising
agencies and design firms. The principal competitive factors in the graphic arts
industry are price, quality, selection, services, production capacity, delivery
and customer support.
Although Workflow Management often competes with smaller businesses, it also
competes against the largest competitors in the North American documents
industry, such as Moore Corporation Ltd., Reynolds & Reynolds Company, Standard
Register Company and Wallace Computer Services, Inc., and the largest
competitors in the U.S. envelope industry, such as Mail-Well, Westvaco and
Tension Envelope Company. The largest competitors for commercial printing
include direct sales organizations of Graphic Industries, Inc., R. R. Donnelley
& Sons, Quebecor, Inc. and World Color Press, Inc. Most of these competitors
have substantially greater financial resources than the Company.
INABILITY TO ASSIGN CONTRACTS
In connection with the Workflow Distribution, certain operating companies
(the "Predecessor Companies") will be reorganized into new business entitities
(the "Successor Companies"). The Predecessor Companies have entered into
numerous contracts, including leases, employment and services contracts that
will require the consents of the other parties to assignment of such contracts
to the Successor Companies. Failure to obtain any or all of such consents could
result in loss of benefits under leases or employment contracts, or loss of
revenues or the acceleration of obligations thereunder or under other contracts.
There can be no assurance that any of the parties to contracts with Predecessor
Companies will consent to the assignment of these contracts to the Successor
Companies. Inability to assign any or all of these contracts may have a material
adverse effect on the Successor Companies and Workflow Management as a whole.
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NO DIVIDENDS
Workflow Management does not expect to pay cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
DILUTION
Purchasers of Common Stock in this Offering will sustain a substantial and
immediate dilution of $8.94 per share, based on the assumed initial public
offering price. In addition, the exercise of outstanding stock options after
this Offering could have a further dilutive effect. See "Dilution."
ABSENCE OF PUBLIC MARKET
Prior to the Workflow Distribution and this Offering, it is anticipated that
there will be no public market for the Common Stock. The initial public offering
price of the Common Stock offered hereby will be determined through negotiations
among the Company and the underwriters of this Offering and may not be
indicative of the market price for the Common Stock after this Offering. See
"Underwriting." The trading price of the Common Stock could be subject to wide
fluctuations in response to variations in the Company's quarterly operating
results, changes in earnings estimates by analysts, conditions in the Company's
businesses, general market or economic conditions or other factors. In addition,
in recent years the stock market has experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many companies, often unrelated to the operating performance of the
specific companies. Such market fluctuations could have a material adverse
effect on the market price of the Common Stock. See "--Potential Volatility of
Stock Price and Other Risks Associated With Shares Eligible for Immediate Sale."
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE
To date, the purchase prices of the Company's acquisitions have not been
established by independent appraisals, but generally have been determined
through arm's-length negotiations between the Company's management and
representatives of such companies. The consideration paid for each such company
has been based primarily on the value of such company as a going concern and not
on the value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets would have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Workflow Management does not expect to value future acquisitions on the basis of
asset appraisals. Therefore, this risk will apply to future acquisitions as
well.
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE
Several of the Company's operating companies are using billing or other
software that is not Year 2000 compliant. The Company has not quantified the
costs of addressing its Year 2000 issues, but it believes that the necessary
adaptations of these systems can be completed in the next 18 months, and that
the costs of achieving compliance will not be material. If the Company is unable
to make the necessary adaptations on a timely basis, or if the costs are greater
than expected, the consequences of untimely resolution or the costs of complying
could have an adverse impact on the Company's business or operations.
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THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS
Prior to the Offering, Workflow Management has been a wholly-owned
subsidiary of U.S. Office Products. At the time of this Offering, Workflow
Management will hold all of the business and assets of, and will be responsible
for substantially all of the liabilities associated with, the Print Management
Division of U.S. Office Products. Following this Offering, all the shares of
Workflow Management's Common Stock will be distributed to the stockholders of
U.S. Office Products of record on June 9, 1998. U.S. Office Products is spinning
off Workflow Management as part of the Strategic Restructuring Plan in which
U.S. Office Products is spinning off the shares of the Spin-Off Companies that
conduct U.S. Office Products' current print management, technology solutions,
educational supplies and corporate travel services businesses. At the same time
as the Distributions, U.S. Office Products is repurchasing 37,037,037 shares
(including shares that may be issued on exercise of vested and unvested stock
options) of U.S. Office Products' common stock, in a tender offer and is selling
equity securities to an affiliate ("CD&R") of an investment fund managed by
Clayton, Dubilier & Rice, Inc. ("CD&R, Inc."), which will give CD&R a 24.9%
equity interest in U.S. Office Products (but no interest in the Spin-Off
Companies).
CD&R has contracted to purchase a 24.9% equity interest in U.S. Office
Products, including the shares issued to CD&R (the "Initial CD&R Acquisition").
CD&R's percentage ownership of U.S. Office Products will not increase or
decrease depending on the actual number of shares of U.S. Office Products'
common stock outstanding on the closing date of the Initial CD&R Acquisition.
CD&R will receive special warrants (the "Special Warrants") that would allow
CD&R to maintain its 24.9% ownership interest in U.S. Office Products if (i) any
of its 2001 Notes that remain outstanding after the exchange offer for U.S.
Office Products' common stock (the "2001 Note Offer") were converted into U.S.
Office Products' common stock at the conversion price in effect after adjusting
for the Tender Offer and the Distributions, or (ii) additional shares are issued
under contracts for certain acquisitions completed by U.S. Office Products. CD&R
will also receive warrants for Common Stock (the "Common Stock Warrants"). The
Common Stock Warrants will be exercisable at any time after the second
anniversary of the Initial CD&R Acquisition until the 12th anniversary of that
date.
Assuming (i) exercise of all currently exercisable outstanding options, (ii)
no 5 1/2% convertible subordinated notes due 2003 (the "2003 Notes") were
repurchased in the tender by U.S. Office Products for its 2003 Notes for a
purchase price of 94.5% of the principal amount and accrued interest (the "2003
Note Tender") and all 2003 Notes were converted in accordance with their
existing terms, in each case without any adjustment for the Strategic
Restructuring Plan, (iii) exercise of the Special Warrants in full, and (iv)
exercise of the Common Stock Warrants in full, CD&R could own approximately
34.7% of U.S. Office Products' common stock on a fully diluted basis. U.S.
Office Products expects to make adjustments to the number and exercise price of
outstanding options, and of the conversion price of any 2001 Notes of U.S.
Office Products remaining after the 2001 Note Offer and the 2003 Note Tender on
account of the restructuring transactions, and these adjustments will result in
a greater number of shares of U.S. Office Products' common stock that may be
issued upon exercise of the options and conversion of such notes. Although the
amount of these adjustments will not be known until after the completion of the
Strategic Restructuring Plan, the effect of these adjustments will be to reduce
CD&R's fully-diluted ownership interest in U.S. Office Products from the amounts
set forth above. If no currently exercisable outstanding options are exercised,
CD&R could own approximately 39.9% of outstanding U.S. Office Products' common
stock after implementation of the Strategic Restructuring Plan (assuming that
all of the 2001 Notes are exchanged in the 2001 Note Offer and all of the 2003
Notes are tendered in the 2003 Note Tender.)
In connection with the Workflow Distribution, Workflow Management is
entering into a series of agreements with U.S. Office Products and the other
Spin-Off Companies to provide mechanisms for an orderly transition and to define
certain relationships among Workflow Management, U.S. Office Products and the
other Spin-Off Companies after the Workflow Distribution. These agreements are:
a distribution
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agreement (the "Distribution Agreement") among Workflow Management, U.S. Office
Products and the other Spin-Off Companies; the Tax Allocation Agreement among
Workflow Management, U.S. Office Products and the other Spin-Off Companies; an
employee benefits agreement (the "Employee Benefits Agreement") among Workflow
Management, U.S. Office Products and the other Spin-Off Companies; and the Tax
Indemnification Agreement among Workflow Management and the other Spin-Off
Companies. The terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not yet been
finally determined. Those terms will be agreed to while Workflow Management is a
wholly-owned subsidiary of U.S. Office Products. In addition, the agreement
between U.S. Office Products and CD&R relating to CD&R's investment in U.S.
Office Products (the "Investment Agreement") specifies certain terms of these
agreements and provides that they are subject to CD&R's reasonable approval.
Therefore, they will not be the result of arm's-length negotiations between
independent parties.
Although the terms of the Distribution Agreement, Tax Allocation Agreement,
Tax Indemnification Agreement and Employee Benefits Agreement have not been
finally determined, Workflow Management currently expects that the terms will
include those described below. There can be no assurance that the terms of the
Distribution Agreement, Tax Allocation Agreement, Tax Indemnification Agreement
and Employee Benefits Agreement will not be less favorable to the stockholders
of Workflow Management than the terms set out below.
DISTRIBUTION AGREEMENT
TRANSFER OF SUBSIDIARIES AND ASSETS. The Distribution Agreement provides
for the transfer from U.S. Office Products to Workflow Management of
substantially all of the equity interests in the U.S. Office Products
subsidiaries that are engaged in the business of Workflow Management. It also
provides that the recovery on any claims that U.S. Office Products may have
against the persons who sold businesses to U.S. Office Products that will become
part of Workflow Management in connection with the Workflow Distribution
pursuant to the relevant acquisition agreements (the "Workflow Acquisition
Indemnity Claims") will be shared between U.S. Office Products and Workflow
Management. In addition, to the extent that the Workflow Acquisition Indemnity
Claims are currently secured by the pledge of stock of U.S. Office Products that
is owned by persons who sold businesses to U.S. Office Products that will become
part of Workflow Management (and no previous claims have been made against such
shares), the pledged shares of Common Stock will be used, subject to final
resolution of the claim, to reimburse U.S. Office Products and Workflow
Management for their respective damages, expenses and agreed upon allocation of
recovery rights, which will be determined prior to the Workflow Distribution.
DEBT. The Distribution Agreement allocates a specified amount of U.S.
Office Products' debt outstanding under its credit facilities to each Spin-Off
Company and requires each Spin-Off Company, on or prior to its respective
Distribution, to obtain credit facilities, to borrow funds under such facilities
and to use the proceeds of such borrowings to pay off U.S. Office Products' debt
so allocated plus any additional debt incurred by U.S. Office Products after
January 12, 1998 (the date of the Investment Agreement) in connection with the
acquisition of an entity that has become or will become a subsidiary of such
Spin-Off Company. Under the Distribution Agreement, $30.0 million of U.S. Office
Products' debt has been allocated to Workflow Management, and, since January 12,
1998, U.S. Office Products has incurred an additional $15.6 million of debt in
connection with acquired companies that will become subsidiaries of Workflow
Management. Prior to the Workflow Distribution, Workflow Management will enter
into the credit facility described under "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and the Company may borrow up to $45.6 million under the facility to
pay off the debt allocated to Workflow Management by U.S. Office Products.
LIABILITIES. Under the Distribution Agreement, Workflow Management will be
responsible for (i) any liabilities arising out of or in connection with the
businesses conducted by Workflow Management and/or its subsidiaries, (ii) its
liabilities under the Distribution Agreement, Tax Allocation Agreement, Employee
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Benefits Agreement and related agreements, (iii) the U.S. Office Products debt
that has been allocated to the Company as described above, (iv) liabilities
under the securities laws relating to this Prospectus and certain sections of
the Information Statement/Prospectus relating to the Workflow Distribution, as
well as other securities law liabilities related to the Workflow Management
business that arise from information supplied to U.S. Office Products (or that
should have been supplied but was not) by Workflow Management, (v) U.S. Office
Products' liabilities for earn-outs from acquisitions in respect of Workflow
Management or its subsidiaries, (vi) the Company's costs and expenses related to
this Offering and its bank credit facility, and (vii) $1.0 million of the
transaction costs (including legal, accounting, investment banking and financial
advisory) and other fees incurred by U.S. Office Products in connection with the
Strategic Restructuring Plan. Each of the other Spin-Off Companies will be
similarly obligated to U.S. Office Products. Workflow Management and the other
Spin-Off Companies have agreed to bear a pro rata share of (i) U.S. Office
Products' liabilities under the securities laws (other than claims relating
solely to a specific Spin-Off Company or relating specifically to the continuing
businesses of U.S. Office Products) and (ii) U.S. Office Products' general
corporate liabilities (other than debt, except for that specifically allocated
to the Spin-Off Companies) incurred prior to the Distributions (I.E.,
liabilities not related to the conduct of a particular distributed or retained
subsidiary's business). If one of the Spin-Off Companies defaults on an
obligation owed to U.S. Office Products, the non-defaulting Spin-Off Companies
will be obligated on a pro rata basis to pay such obligation.
The Spin-Off Companies' pro rata share of Shared Liabilities will be, based
upon the fiscal year ended April 25, 1998, the average of (a) their revenues
relative to those of U.S. Office Products and (b) their operating income
relative to that of U.S. Office Products. The residual will be U.S. Office
Products' pro rata share. Based upon financial data for the nine-month period
ended January 24, 1998, the Company's pro rata share of Shared Liabilities would
have been 9.1%, the other Spin-Off Companies' pro rata share would have
aggregated 25.0% and U.S. Office Products' pro rata share would have been 65.6%.
As to any Default Liability, each non-defaulting company's pro rata share will
be increased to include a portion of the defaulting company's pro rata share.
The aggregate of the Shared Liabilities and Default Liability for which any
Spin-Off Company may be liable is, however, limited to $1.75 million.
The Distribution Agreement provides that each party will indemnify and hold
all of the other parties harmless from any and all liabilities for which the
former assumed liability under the Distribution Agreement. All indemnity
payments will be subject to adjustment upward or downward to take account of tax
costs or tax benefits as well as insurance proceeds. If there are any claims
made under U.S. Office Products' existing insurance policies, the amount of any
deductible or retention will be allocated by U.S. Office Products among the
claimants in a fair and reasonable manner.
OTHER PROVISIONS. The Distribution Agreement will have other customary
provisions including provisions relating to mutual release, access to
information, witness services, confidentiality and alternative dispute
resolution.
TAX ALLOCATION AGREEMENT AND TAX INDEMNIFICATION AGREEMENT
The Tax Allocation Agreement will provide that each Spin-Off Company will be
responsible for its respective share of U.S. Office Products' consolidated tax
liability for the years that each such corporation was included in U.S. Office
Products' consolidated U.S. federal income tax return. The Tax Allocation
Agreement also will provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distributions.
The Tax Allocation Agreement will further provide that the Spin-Off
Companies will jointly and severally indemnify U.S. Office Products for any
Distribution Taxes assessed against U.S. Office Products if an Adverse Tax Act
of any of the Spin-Off Companies materially contributes to a final determination
that any or all of the Distributions are taxable. Workflow Management will also
enter into the Tax Indemnification Agreement with the other Spin-Off Companies
under which the Spin-Off Company that is responsible
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for the Adverse Tax Act will indemnify the other Spin-Off Companies for any
liability to U.S. Office Products under the Tax Allocation Agreement. As a
consequence, Workflow Management will be liable for any Distribution Taxes
resulting from any Adverse Tax Act by Workflow Management and liable (subject to
indemnification by the other Spin-Off Companies) for any Distribution Taxes
resulting from an Adverse Tax Act by the other Spin-Off Companies. If there is a
final determination that any or all of the Distributions are taxable and it is
determined that there has not been an Adverse Tax Act by either U.S. Office
Products or any of the Spin-Off Companies, each of U.S. Office Products and the
Spin-Off Companies will be liable for its pro rata portion of such Distribution
Taxes based on the value of each company's common stock after the Distributions.
As a result, Workflow Management could become liable for a pro rata portion of
any Distribution Taxes with respect to not only the Workflow Distribution but
also any other Distribution. The Liabilities of Workflow Management under the
Tax Allocation Agreement and the Tax Indemnification Agreement are not subject
to any limits.
EMPLOYEE BENEFITS AGREEMENT
In connection with the Distributions, U.S. Office Products expects to enter
into the Employee Benefits Agreement with Workflow Management and the other
Spin-Off Companies to provide for an orderly transition of benefits coverage
between U.S. Office Products and the Spin-Off Companies. Pursuant to this
agreement, the respective Spin-Off Companies will retain or assume liability for
employment-related claims and severance for persons currently or previously
employed by the respective Spin-Off Companies and their subsidiaries, while U.S.
Office Products and its post-Distributions subsidiaries will retain or assume
responsibility for their current and previous employees.
The proposed Employee Benefits Agreement reflects U.S. Office Products'
expectation that each of the Spin-Off Companies will establish 401(k) plans for
their respective employees effective as of, or shortly after, the Distribution
Date and that U.S. Office Products will transfer 401(k) accounts to those plans
as soon as practicable. The proposed Employee Benefits Agreement also provides
for spinning off portions of U.S. Office Products' cafeteria plan that relate to
employees of the Spin-Off Companies (and their subsidiaries) and having those
spun-off plans assume responsibilities for claims submitted on or after the
Distributions.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
Pursuant to the Tax Allocation Agreement and Tax Indemnification Agreement,
see "--Tax Allocation Agreement and Tax Indemnification Agreement," Workflow
Management could be liable for Distribution Taxes if any or all of the
Distributions fail to qualify as tax-free spin-offs under Section 355 of the
Code or are taxable under Section 355(e) of the Code.
THE TAX OPINION. Wilmer, Cutler & Pickering expects to deliver an opinion
(the "Tax Opinion") at the time of the Distributions stating that for U.S.
federal income tax purposes the Distributions will qualify as tax-free spin-offs
under Section 355 of the Code and will not be taxable under Section 355(e) of
the Code. U.S. Office Products will not complete the Distributions unless it
receives the Tax Opinion. The Tax Opinion will be based on the accuracy as of
the time of the Distributions of factual representations made by U.S. Office
Products, the Spin-Off Companies and CD&R, and certain other information, data,
documentation and other materials that Wilmer, Cutler & Pickering has deemed
necessary.
The Tax Opinion will represent Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the Tax Opinion is not binding upon either the
IRS or any court. A ruling has not been, and will not be, sought from the IRS
with respect to the U.S. federal income tax consequences of the Distributions.
Assuming the Distributions qualify as tax-free spin-offs under Section 355
and are not taxable under Section 355(e), no gain or loss will be recognized by
U.S. Office Products as a result of the Distributions.
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CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. As noted
above, the Tax Opinion is not binding on the IRS or the courts. Prospective
stockholders should be aware that the requirements of Section 355 pertaining to
business purpose, active trade or business, and absence of a device for
distribution of earnings and profits, as well as the requirements of Section
355(e) pertaining to a plan or series of related transactions to acquire 50% or
more by vote or value of a company, are highly dependent on factual
interpretations, are to a significant extent subjective in nature, and have a
relative absence of authority addressing their application to the particular
facts presented by the Distributions. Accordingly, the IRS and/or a court could
reach a conclusion that differs from the conclusions in the Tax Opinion.
BUSINESS PURPOSE. In order for a Distribution to qualify as a tax-free
spin-off under Section 355, it must be motivated, in whole or substantial part,
by one or more corporate business purposes. U.S. Office Products will represent
that the Distributions were motivated, in whole or substantial part, to allow
U.S. Office Products and the Spin-Off Companies to adopt strategies and pursue
objectives that are more appropriate to their respective industries and stages
of growth; to allow the Spin-Off Companies to pursue independent acquisition
programs with a more focused use of resources and, where stock is used as
consideration, to allow the Spin-Off Companies to provide stock of a public
company that is in the same industry as the business being acquired; to allow
U.S. Office Products and the Spin-Off Companies to offer their respective
employees more focused compensation packages; and to make possible the Equity
Investment which the Board of Directors of the Company concluded would
contribute to U.S. Office Products development, based on the skills and
experience of CD&R, Inc. Based on these representations and certain other
information, data, documentation and other materials, Wilmer, Cutler & Pickering
expects to deliver the Tax Opinion at the time of the Distributions stating that
each Distribution satisfies the business purpose requirement of Section 355.
However, although similar rationales have been accepted by the IRS in other
circumstances as sufficient to meet the business purpose requirement of Section
355, there can be no assurance that the IRS will not assert that the business
purpose requirement is not satisfied.
ACTIVE TRADE OR BUSINESS. In order for the distribution of the stock of a
Spin-Off Company (other than Navigant International, Inc. ("Navigant")) to
qualify as a tax-free spin-off under Section 355, both the Spin-Off Company and
U.S. Office Products must be engaged in an active trade or business that has
been actively conducted for the five-year period preceding the Distributions,
taking into account only businesses that have been acquired in transactions in
which no gain or loss was recognized. In order for the distribution of the stock
of Navigant to qualify as a tax-free spin-off under Section 355, substantially
all of the assets of Navigant must consist of the stock of Professional Travel
Corporation ("Profesional Travel"), and Professional Travel and U.S. Office
Products must meet the requirements described in the preceding sentences.
Whether current and historical business activity constitutes an active trade or
business, and whether any gain or loss should have been recognized in an
acquisition structured and reported as a nontaxable transaction, turn in some
instances on the application of subjective legal standards and on factual
determinations, such as intentions of the parties involved. Based on the
representations of U.S. Office Products and the Spin-Off Companies, Wilmer,
Cutler & Pickering expects to deliver the Tax Opinion at the time of the
Distributions stating that each Distribution will satisfy the active trade or
business requirement. However, because of the inherently subjective nature of
important elements of the active trade or business requirement, and because the
IRS may challenge the representations upon which Wilmer, Cutler & Pickering
relies, there can be no assurance that the IRS will not assert that the active
trade or business requirement is not satisfied.
ABSENCE OF A DEVICE FOR DISTRIBUTION OF EARNINGS AND PROFITS. A
Distribution will not qualify as a tax-free spin-off under Section 355 if the
Distribution was used principally as a device for the distribution of the
earnings and profits of U.S. Office Products or the Spin-Off Company. Treasury
regulations provide that this test is applied based on all the facts and
circumstances, including the presence or absence of factors described in the
Treasury Regulations as "device factors" and "nondevice factors." Application of
this test is uncertain in part because of its subjective nature. Based on the
representations of U.S. Office
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Products and the Spin-Off Companies, Wilmer, Cutler & Pickering expects to
deliver the Tax Opinion at the time of the Distributions stating that none of
the Distributions is a transaction used principally as a device for the
distribution of earnings and profits of either U.S. Office Products or any of
the Spin-Off Companies. However, because of the inherently subjective nature of
the device test (including the subjectivity involved in assigning weight to
various factors), and because the IRS may challenge the representations upon
which Wilmer, Cutler & Pickering relies, there can be no assurance that the IRS
will not assert that any or all of the Distributions are transactions used
principally as a device for the distribution of earnings and profits.
EFFECT OF POST-DISTRIBUTION TRANSACTIONS. Section 355(e), which was added
in 1997, generally provides that a company that distributes shares of a
subsidiary in a spin-off that is otherwise tax-free will incur U.S. federal
income tax liability if 50% or more, by vote or value, of the capital stock of
either the company making the distribution or the subsidiary is acquired by one
or more persons acting pursuant to a plan or a series of related transactions
that includes the spin-off. Stock acquired by certain related persons is
aggregated in determining whether this 50% test is met. There is a presumption
that any acquisition of 50% or more, by vote or value, of the capital stock of
the company or the subsidiary occurring two years before or after the spin-off
is pursuant to a plan that includes the spin-off. However, the presumption may
be rebutted by establishing that the spin-off and the acquisition are not part
of a plan or a series of related transactions. Based on the representations of
U.S. Office Products, CD&R and the Spin-Off Companies, and the assumption that
no Distribution is part of a plan that is outside the knowledge of U.S. Office
Products and the Spin-Off Companies pursuant to which one or more persons will
acquire directly or indirectly 50% or more by vote or value of the capital stock
of U.S. Office Products or of any Spin-Off Company, Wilmer, Cutler & Pickering
expects to deliver the Tax Opinion at the time of the Distributions stating that
the Distributions will not be taxable under Section 355(e). However, there can
be no assurance that the IRS will not assert that any or all of the
Distributions are taxable under Section 355(e).
If a Distribution fails to qualify as a tax-free spin-off or is taxable
under Section 355(e), U.S. Office Products will recognize gain equal to the
difference between the fair market value of the common stock of the Spin-Off
Company and U.S. Office Products adjusted tax basis in the common stock of the
Spin-Off Company (on the Distribution Date). If U.S. Office Products were to
recognize gain on one or more Distributions, such gain would likely be
substantial.
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USE OF PROCEEDS
The proceeds to the Company from the sale of the Common Stock offered
hereby, net of the estimated expenses and underwriting discounts and commissions
of this Offering, are expected to be approximately $28.7 million ($33.3 million
if the Underwriters' over-allotment option is exercised in full), based on the
assumed initial public offering price. The Company will use the net proceeds of
this Offering for working capital and general corporate purposes, including
future acquisitions.
The Company has entered into a commitment letter for a secured credit
facility in the amount of $150.0 million underwritten and agented by Bankers
Trust Company. The Company expects to close the credit facility prior to the
closing of this Offering. While the Company intends to make acquisitions in the
future, it has not entered into any agreement as of the date of this Prospectus
to make any such acquisitions. Pending the described uses, any remaining net
proceeds will be invested in short-term readily marketable interest-bearing
securities, interest-bearing bank accounts, certificates of deposit, money
market securities, U.S. government securities or mortgage-backed securities.
DIVIDEND POLICY
Workflow Management does not anticipate declaring and paying cash dividends
on the Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of dividends on the Common Stock will be
made by the Board of Directors of the Company from time to time in the exercise
of its business judgment, taking into account the Company's financial condition,
results of operations, existing and proposed commitments for use of the
Company's funds and other relevant factors. The Company's ability to pay
dividends may be restricted from time to time by financial covenants in its
credit agreements.
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DILUTION
The pro forma net tangible book value of the Company as of January 24, 1998
was approximately $41.7 million, or $2.83 per share of Common Stock. Pro forma
net tangible book value per share is equal to the Company's total pro forma
tangible assets less its pro forma total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of 2,500,000 shares of Common Stock offered hereby at the assumed
initial public offering price and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds," the pro forma net tangible book
value of the Company at January 24, 1998 would have been approximately $70.0
million, or approximately $4.06 per share. This represents an immediate increase
of $1.23 per share in the pro forma net tangible book value to existing
stockholders and an immediate dilution of $8.94 per share in the pro forma net
tangible book value to new investors purchasing Common Stock in this Offering.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $ 13.00
Pro forma net tangible book value per share before the
Offering............................................... $ 2.83
Increase per share attributable to new investors......... 1.23
---------
Pro forma net tangible book value per share after the
Offering................................................. 4.06
---------
Dilution per share to new investors........................ $ 8.94
---------
---------
</TABLE>
The foregoing computations assume no exercise of stock options to acquire
shares of Common Stock exercisable upon consummation of the Workflow
Distribution. To the extent that shares of Common Stock are issued upon exercise
of these options, the effect would be to increase the dilution to new investors.
See "Management--Replacement of Outstanding U.S. Office Products Options" and
"--1998 Stock Incentive Plan."
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Workflow Management at
January 24, 1998: (i) on an actual basis; (ii) on a pro forma basis to reflect
the Workflow Distribution, the allocation of $30.0 million of debt plus $15.6
million of additional debt of the Company and the acquisition of Astrid; and
(iii) on a pro forma, as adjusted basis to give effect to the sale by the
Company of the Common Stock offered hereby and after deduction of estimated
offering expenses and underwriting discounts and commissions and application of
the net proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the historical consolidated financial statements and
the pro forma combined financial statements of the Company, and the related
notes to each thereof, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1998
--------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- --------------
<S> <C> <C> <C>
(In thousands)
Short-term debt payable to U.S. Office Products........................... $ 17,658 $ $
--------- ----------- -------
--------- ----------- -------
Long-term debt, less current portion...................................... $ 5,498 $ 40,638 $ 11,913
Long-term debt payable to
U.S. Office Products..................................................... 1,905
Stockholder's equity:
Divisional equity....................................................... 47,726
Preferred Stock, $0.001 par value, 1,000,000 shares authorized; no
shares outstanding....................................................
Common Stock, $0.001 par value, 150,000,000 shares authorized, no shares
actual; 14,760,000 shares pro forma; 17,260,000 shares pro forma, as
adjusted(1)........................................................... 15 17
Additional paid-in capital.............................................. 47,711 76,434
Cumulative translation adjustment....................................... (1,365) (1,365) (1,365)
Retained earnings....................................................... 9,618 9,618 9,618
--------- ----------- -------
Total stockholder's equity............................................ 55,979 55,979 84,704
--------- ----------- -------
Total capitalization................................................ $ 63,382 $ 96,617 $ 96,617
--------- ----------- -------
--------- ----------- -------
</TABLE>
- ----------------------
(1) Excludes shares of Common Stock reserved for issuance upon exercise of
options. See "Management--Replacement of Outstanding U.S. Office Products
Options" and "--1998 Stock Incentive Plan."
22
<PAGE>
SELECTED FINANCIAL DATA
The historical Statement of Income Data for the years ended December 31,
1994 and 1995, the four months ended April 30, 1996 and the fiscal year ended
April 26, 1997 and the Balance Sheet Data at April 30, 1996 and 1997 have been
derived from Workflow Management's consolidated financial statements that have
been audited and are included elsewhere in this Prospectus. The historical
Statement of Income Data for the years ended December 31, 1992 and 1993 and the
Balance Sheet Data at December 31, 1992, 1993, 1994 and 1995 have been derived
from unaudited consolidated financial statements which are not included
elsewhere in this Prospectus. The Selected Financial Data for the nine months
ended January 25, 1997 and January 24, 1998 (except pro forma amounts) have been
derived from unaudited consolidated financial statements that appear elsewhere
in this Prospectus. These unaudited consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial position
and results of operations for the periods presented.
The pro forma financial data give effect, as applicable, to the Workflow
Distribution and the acquisitions completed by Workflow Management between May
1, 1996 and May 1, 1998 as if all such transactions had been consummated on May
1, 1996. In addition, the pro forma information is based on available
information and certain assumptions and adjustments.
The Selected Financial Data provided herein should be read in conjunction
with the historical financial statements, including the notes thereto, the pro
forma financial information, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Prospectus.
23
<PAGE>
SELECTED FINANCIAL DATA(1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 26,
FOUR MONTHS --------------------
YEAR ENDED DECEMBER 31, ENDED PRO
------------------------------------------ APRIL 30, FORMA
1992 1993 1994 1995(2) 1996 1997 1997(3)
--------- --------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................. $ 80,731 $ 121,463 $ 154,193 $ 309,426 $ 114,099 $ 327,381 $ 342,335
Cost of revenues.......................... 57,054 88,255 114,885 234,959 82,998 236,340 244,475
--------- --------- --------- --------- ------------- --------- ---------
Gross profit.............................. 23,677 33,208 39,308 74,467 31,101 91,041 97,860
Selling, general and administrative
expenses................................ 20,800 27,683 32,020 62,012 22,485 70,949 75,568
Non-recurring acquisition costs........... 5,006 5,006
--------- --------- --------- --------- ------------- --------- ---------
Operating income.......................... 2,877 5,525 7,288 12,455 8,616 15,086 17,286
Interest expense.......................... 904 1,328 2,048 5,370 1,676 4,561 3,647
Interest income........................... (81) (116) (18) (25)
Other (income) expense.................... 366 511 186 62 (151) 632 408
--------- --------- --------- --------- ------------- --------- ---------
Income before provision for (benefit from)
income taxes and extraordinary items.... 1,688 3,802 5,054 7,023 7,109 9,918 13,231
Provision for (benefit from) income
taxes(5)................................ 153 260 379 (33) 1,351 3,690 5,425
--------- --------- --------- --------- ------------- --------- ---------
Income before extraordinary items......... 1,535 3,542 4,675 7,056 5,758 6,228 $ 7,806
---------
---------
Extraordinary items(6).................... 700 798
--------- --------- --------- --------- ------------- ---------
Net income................................ $ 1,535 $ 3,542 $ 4,675 $ 6,356 $ 5,758 $ 5,430
--------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- ------------- ---------
Per share amounts:
Basic:
Income from before extraordinary
items............................... $ 0.26 $ 0.60 $ 0.77 $ 0.90 $ 0.56 $ 0.52 $ 0.53(7)
---------
---------
Extraordinary items................... 0.09 0.07
--------- --------- --------- --------- ------------- ---------
Net income............................ $ 0.26 $ 0.60 $ 0.77 $ 0.81 $ 0.56 $ 0.45
--------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- ------------- ---------
Diluted:
Income from before extraordinary
items............................... $ 0.26 $ 0.60 $ 0.77 $ 0.88 $ 0.55 $ 0.51 $ 0.53(7)
---------
---------
Extraordinary items................... 0.09 0.07
--------- --------- --------- --------- ------------- ---------
Net income............................ $ 0.26 $ 0.60 $ 0.77 $ 0.79 $ 0.55 $ 0.44
--------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- ------------- ---------
Weighted average shares outstanding
Basic................................. 5,901 5,901 6,075 7,875 10,333 12,003 14,760(8)
Diluted............................... 5,901 5,901 6,094 8,003 10,547 12,235 14,760(8)
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------------------
PRO PRO PRO FORMA
FORMA FORMA AS ADJUSTED
JANUARY 25, JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 24,
1997 1998 1997(3) 1998(3) 1998(4)
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................. $ 239,751 $ 257,777 $ 250,820 $ 263,960 $ 263,960
Cost of revenues.......................... 172,869 190,482 178,983 193,104 193,104
----------- ----------- ----------- ----------- ---------------
Gross profit.............................. 66,882 67,295 71,837 70,856 70,856
Selling, general and administrative
expenses................................ 51,735 53,083 55,472 55,095 55,095
Non-recurring acquisition costs........... 2,902 2,902
----------- ----------- ----------- ----------- ---------------
Operating income.......................... 12,245 14,212 13,463 15,761 15,761
Interest expense.......................... 3,910 1,665 2,735 2,735 1,011
Interest income........................... (21) (9)
Other (income) expense.................... 610 (205) 445 (333) (333)
----------- ----------- ----------- ----------- ---------------
Income before provision for (benefit from)
income taxes and extraordinary items.... 7,746 12,761 10,283 13,359 15,083
Provision for (benefit from) income
taxes(5)................................ 2,249 5,212 4,216 5,477 6,184
----------- ----------- ----------- ----------- ---------------
Income before extraordinary items......... 5,497 7,549 $ 6,067 $ 7,882 $ 8,899
----------- ----------- ---------------
----------- ----------- ---------------
Extraordinary items(6)....................
----------- -----------
Net income................................ $ 5,497 $ 7,549
----------- -----------
----------- -----------
Per share amounts:
Basic:
Income from before extraordinary
items............................... $ 0.48 $ 0.49 $ 0.41(7) $ 0.53(7) $ 0.52(7)
----------- ----------- ---------------
----------- ----------- ---------------
Extraordinary items...................
----------- -----------
Net income............................ $ 0.48 $ 0.49
----------- -----------
----------- -----------
Diluted:
Income from before extraordinary
items............................... $ 0.47 $ 0.48 $ 0.41(7) $ 0.53(7) $ 0.52(7)
----------- ----------- ---------------
----------- ----------- ---------------
Extraordinary items...................
----------- -----------
Net income............................ $ 0.47 $ 0.48
----------- -----------
----------- -----------
Weighted average shares outstanding
Basic................................. 11,464 15,301 14,760(8) 14,760(8) 17,260(9)
Diluted............................... 11,710 15,625 14,760(8) 14,760(8) 17,260(9)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1992 1993 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 6,005 $ 7,264 $ 8,583 $ 20,127
Total assets................................................................... 26,543 48,374 51,357 120,630
Short-term debt payable to U.S. Office Products................................
Long-term debt, less current portion........................................... 4,632 9,632 7,355 28,812
Long-term debt payable to U.S. Office Products.................................
Stockholder's equity........................................................... 7,459 11,675 12,889 24,719
<CAPTION>
JANUARY 24, 1998
----------------------
APRIL 30, APRIL 26, PRO
1996 1997 ACTUAL FORMA(10)
----------- ----------- --------- -----------
<S> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 23,378 $ 16,910 $ 25,370 $ 43,958
Total assets................................................................... 117,949 125,108 127,105 143,073
Short-term debt payable to U.S. Office Products................................ 23,622 17,658
Long-term debt, less current portion........................................... 28,108 6,034 5,498 40,638
Long-term debt payable to U.S. Office Products................................. 561 1,905
Stockholder's equity........................................................... 29,120 47,780 55,979 55,979
<CAPTION>
PRO FORMA,
AS ADJUSTED(4)
----------------
BALANCE SHEET DATA:
Working capital................................................................ $ 43,958
Total assets................................................................... 143,073
Short-term debt payable to U.S. Office Products................................
Long-term debt, less current portion........................................... 11,913
Long-term debt payable to U.S. Office Products.................................
Stockholder's equity........................................................... 84,704
</TABLE>
- ----------------------
(1) The historical financial information of the Pooled Companies has been
combined on a historical cost basis in accordance with GAAP to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
is included from the dates of their respective acquisitions. The pro forma
financial information reflects completed acquisitions through May 1, 1998.
See Note 4 of the Company's Notes to Consolidated Financial Statements for
a description of the number and accounting treatment of the acquisitions by
the Company.
(2) The results for the year ended December 31, 1995 include the results of
DBF, one of the Pooled Companies, from its date of incorporation on
February 8, 1995.
(3) Gives effect to the Distribution and the acquisitions completed by the
Company since May 1, 1996 as if all such transactions had been made on May
1, 1996. The pro forma statement of income data are not necessarily
indicative of the operating results that would have been achieved had these
events actually then occurred and should not be construed as representative
of future operating results.
(4) Adjusted to give effect to the sale by the Company of 2,500,000 shares of
Common Stock offered hereby at the assumed initial public offering price
and the anticipated application of the estimated net proceeds therefrom.
See"Use of Proceeds."
(5) Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no
federal income tax expense prior to these acquisitions by the Company.
(6) Extraordinary items represent the losses associated with the early
terminations of credit facilities at one Pooled Company, net of the related
income tax benefits.
(7) Pro forma net income per share is pro forma income before extraordinary
items per share.
(8) For calculation of the pro forma weighted average shares outstanding for
the fiscal year ended April 26, 1997 and for the nine months ended January
24, 1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined
Financial Statements included herein.
(9) For calculation of pro forma as adjusted weighted average shares
outstanding for the nine months ended January 24, 1998, see Note 2(m) of
Notes to Pro Forma Combined Financial Statements included herein.
(10) Gives effect to the Distribution and the purchase acquisition of Astrid as
if such transactions had been made on January 24, 1998. The pro forma
balance sheet data are not necessarily indicative of the financial
position that would have been achieved had these events actually then
occurred and should not be construed as representative of future financial
position.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "expect," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business," as well as those discussed elsewhere
in this Prospectus.
OVERVIEW
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. U.S. Office Products acquired SFI and a related
company, Hano, on January 24, 1997. On April 25, 1997, U.S. Office Products
acquired United. On April 26, 1997, U.S. Office Products acquired DBF. On
February 26, 1998, U.S. Office Products acquired Astrid. Upon consummation of
the transactions described under the caption "The Spin-Offs From U.S. Office
Products," these companies will become direct or indirect wholly-owned
subsidiaries of Workflow Management.
Workflow Management's consolidated financial statements give retroactive
effect to the seven business combinations accounted for under the
pooling-of-interests method during the period from January 1997 through April
1997 (the "Pooled Companies") and include the results of the two companies
acquired in business combinations accounted for under the purchase method, each
from its acquisition date. Prior to their respective dates of acquisition by
U.S. Office Products, the Pooled Companies reported results for years ended on
December 31. Upon acquisition by U.S. Office Products and effective for the
fiscal year ended April 26, 1997 ("Fiscal 1997"), the Pooled Companies changed
their year-ends from December 31 to conform with U.S. Office Products' fiscal
year, which ends on the last Saturday of April. The following discussion should
be read in conjunction with Workflow Management's consolidated financial
statements and related notes thereto and pro forma financial statements and
related notes thereto appearing elsewhere in this Prospectus.
In accordance with generally accepted accounting principles, the Company
will be unable to utilize the pooling-of-interests method to account for
acquisitions for a period of two years following the completion of the Strategic
Restructuring Plan. During this period, the Company will not reflect any
non-recurring acquisition costs in its results of operations, as all costs
incurred of this nature would be related to acquisitions accounted for under the
purchase method and would, therefore, be capitalized as a portion of the
purchase consideration.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of revenues for
the years ended December 31, 1994 and 1995, the fiscal year ended April 26, 1997
and for the nine months ended January 25, 1997 and January 24, 1998, as well as
for the fiscal year ended April 26, 1997 and for the nine months ended January
25, 1997 and January 24, 1998, on a pro forma basis reflecting the Workflow
Distribution and the results of the completed business combinations accounted
for under the purchase method as if such transactions had occurred on May 1,
1996.
25
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
YEAR ENDED -------------------------- ----------------------------
-------------------------------- PRO FORMA
DECEMBER 31, DECEMBER 31, APRIL 26, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1997 1997 1997 1998
--------------- --------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 74.5 75.9 72.2 71.4 72.1 73.9
----- ----- ----- ----- ----- -----
Gross profit.......................... 25.5 24.1 27.8 28.6 27.9 26.1
Selling, general and administrative
expenses.............................. 20.8 20.1 21.7 22.1 21.6 20.6
Non-recurring acquisition costs......... 1.5 1.5 1.2
----- ----- ----- ----- ----- -----
Operating income...................... 4.7 4.0 4.6 5.0 5.1 5.5
Interest expense, net................... 1.3 1.7 1.4 1.1 1.6 0.6
Other (income).......................... 0.1 0.2 0.3 (0.1)
----- ----- ----- ----- ----- -----
Income before provision for income taxes
and extraordinary items............... 3.3 2.3 3.0 3.9 3.2 5.0
Provision for income taxes.............. 0.3 1.1 1.6 0.9 2.1
----- ----- ----- ----- ----- -----
Income before extraordinary items....... 3.0 2.3 1.9 2.3% 2.3 2.9
-----
-----
Extraordinary items--loss on early
terminations of credit facilities, net
of income taxes....................... 0.2 0.2
----- ----- ----- ----- -----
Net income.............................. 3.0% 2.1% 1.7% 2.3% 2.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 25, JANUARY 24,
1997 1998
------------- -------------
<S> <C> <C>
Revenues................................ 100.0% 100.0%
Cost of revenues........................ 71.4 73.2
----- -----
Gross profit.......................... 28.6 26.8
Selling, general and administrative
expenses.............................. 22.1 20.8
Non-recurring acquisition costs......... 1.1
----- -----
Operating income...................... 5.4 6.0
Interest expense, net................... 1.1 1.0
Other (income).......................... 0.2 (0.1)
----- -----
Income before provision for income taxes
and extraordinary items............... 4.1 5.1
Provision for income taxes.............. 1.7 2.1
----- -----
Income before extraordinary items....... 2.4% 3.0%
----- -----
----- -----
Extraordinary items--loss on early
terminations of credit facilities, net
of income taxes.......................
Net income..............................
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Consolidated revenues increased 7.5%, from $239.8 million for the nine
months ended January 25, 1997, to $257.8 million for the nine months ended
January 24, 1998. This increase was primarily due to sales to a large new
account, passing on increased product costs to customers, increased sales to
existing customers and the purchase acquisition of FMI Graphics, Inc. in 1997,
which was subsequently merged into SFI.
Gross profit increased 0.6%, from $66.9 million, or 27.9% of revenues, for
the nine months ended January 25, 1997 to $67.3 million, or 26.1% of revenues,
for the nine months ended January 24, 1998. This decrease in gross profit as a
percentage of revenues was primarily due to inefficiencies related to the start-
up period of a large new account.
Selling, general and administrative expenses increased 2.6%, from $51.7
million, or 21.6% of revenues, for the nine months ended January 25, 1997 to
$53.1 million, or 20.6% of revenues, for the nine months ended January 24, 1998.
This decrease in selling, general and administrative expenses as a percentage of
revenues was primarily due to an increase in revenues combined with a decrease
in executive compensation at the subsidiary level.
The Company incurred non-recurring acquisition costs of $2.9 million for the
nine-months ended January 25, 1997 in conjunction with business combinations
accounted for under the pooling-of-interests method. These non-recurring
acquisition costs included accounting, legal and investment banking fees, real
estate and environmental assessments and appraisals and various regulatory fees.
GAAP requires the Company to expense all acquisition costs (both those paid by
the Company and those paid by the sellers of the acquired companies) related to
business combinations accounted for under the pooling-of-interests methods of
accounting.
Interest expense, net of interest income, decreased 57.4%, from $3.9 million
for the nine months ended January 25, 1997 to $1.7 million for the nine months
ended January 24, 1998. The decrease was due primarily to the fact that a
portion of the debt outstanding during the nine months ended January 25, 1997
was repaid by U.S. Office Products upon acquisition of the Pooled Companies, and
U.S. Office Products did not charge the Company interest on the long-term
portion of the payable balance.
26
<PAGE>
Other expense decreased $815,000 from other expense of $610,000 for the nine
months ended January 25, 1997, to other income of $205,000 for the nine months
ended January 24, 1998. The decrease is primarily the result of costs incurred
at one of the Pooled Companies, prior to January 25, 1997, relating to a
contemplated initial public offering that was aborted as a result of that
company's acquisition by U.S. Office Products.
Provision for income taxes increased from $2.2 million for the nine months
ended January 25, 1997 to $5.2 million for the nine months ended January 24,
1998, reflecting effective income tax rates of 29.0% and 40.8%, respectively.
The lower effective tax rate for the nine months ended January 25, 1997,
compared to the federal statutory rate of 35.0% plus state taxes, is the result
of certain of the companies included in the results not being subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations.
FISCAL YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 5.8%, from $309.4 million in 1995, to $327.4
million in Fiscal 1997. This increase was primarily due to sales to a large new
account, passing on increased product costs to customers and increased sales to
existing customers.
Gross profit increased 22.3%, from $74.5 million, or 24.1% of revenues, in
1995 to $91.0 million, or 27.8% of revenues, in Fiscal 1997. The increase in
gross profit as a percentage of revenues was due primarily to cost reductions
resulting from an increased utilization of Company owned manufacturing
facilities and to increased rebates and purchase discounts from vendors.
Selling, general and administrative expenses increased 14.4%, from $62.0
million, or 20.1% of revenues, in 1995 to $70.9 million, or 21.7% of revenues,
in Fiscal 1997. The increase in selling, general and administrative expenses as
a percentage of revenues was due primarily to an increase in fixed costs as a
result of expansions to Company facilities for anticipated future growth.
The Company incurred non-recurring acquisition costs of $5.0 million for the
fiscal year ended April 26, 1997 in conjunction with business combinations
accounted for under the pooling-of-interests method.
Interest expense, net of interest income, decreased 15.5%, from $5.4 million
in 1995 to $4.5 million in Fiscal 1997. The decrease was due primarily to the
fact that a portion of the debt outstanding during 1995 was repaid by U.S.
Office Products upon acquisition of the Pooled Companies and U.S. Office
Products did not charge the Company interest on the long-term portion of the
payable balance.
Other expense increased $570,000, from $62,000 in 1995, to $632,000 in
Fiscal 1997. Fiscal 1997 other expense consists primarily of costs incurred at
one of the Pooled Companies, prior to January 25, 1997, relating to a
contemplated initial public offering that was aborted as a result of that
company's acquisition by U.S. Office Products.
Provision for income taxes increased from a benefit of $33,000 in 1995 to an
expense of $3.7 million in Fiscal 1997, reflecting effective income tax rates of
- -0.5% and 37.2%, respectively. The benefit from income taxes in 1995, compared
to the federal statutory rate of 35.0% plus state taxes, is the result of
certain of the companies included in the results not being subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations. In Fiscal 1997, this effect was partially offset by
non-deductible non-recurring acquisition costs.
During Fiscal 1997, the Company incurred an extraordinary item totaling
$798,000, which represented the expenses, net of the expected income tax
benefit, associated with the early termination of the credit facility at one of
the Pooled Companies during Fiscal 1997.
27
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated revenues increased 100.7%, from $154.2 million in 1994, to
$309.4 million in 1995. This increase was primarily due to a purchase
acquisition by one of the Pooled Companies in February 1995 (the "1995 Purchased
Company"), sales to new accounts and increased sales to existing customers.
Gross profit increased 89.4%, from $39.3 million, or 25.5% of revenues, in
1994 to $74.5 million, or 24.1% of revenues, in 1995. The increase in gross
profit was due primarily to the acquisition of the 1995 Purchased Company. The
decrease in gross profit as a percentage of revenues was due primarily to the
acquisition of the 1995 Purchased Company, which historically had lower gross
margins.
Selling, general and administrative expenses increased 93.7%, from $32.0
million, or 20.8% of revenues, in 1994 to $62.0 million, or 20.1% of revenues,
in 1995. The decrease in selling, general and administrative expenses as a
percentage of revenues was due primarily to increased revenues which were
generated without a correlating increase in selling, general and administrative
expense which were primarily fixed in nature.
Interest expense, net of interest income, increased 162.2%, from $2.0
million in 1994 to $5.4 million in fiscal 1995. The increase is due primarily to
financing obtained by one of the Pooled Companies to acquire the 1995 Purchased
Company.
Provision for income taxes decreased from $379,000 in 1994 to a benefit of
$33,000 in 1995, reflecting effective income tax rates of 7.5% and -0.5%,
respectively. The lower effective income tax rate in 1994 and the benefit from
income taxes in 1995, compared to the federal statutory rate of 35.0% plus state
taxes, is the result of certain of the companies included in the results not
being subject to federal income taxes on a corporate level as they had elected
to be treated as subchapter S corporations.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The pro forma combined financial data discussed herein does not purport to
represent the results that the Company would have obtained had the transactions
which are the subject of pro forma adjustments occurred at the beginning of the
applicable periods, as assumed, or the future results of the Company.
NINE MONTHS ENDED JANUARY 24, 1998 COMPARED TO NINE MONTHS ENDED JANUARY 25,
1997
Pro forma revenues increased 5.2%, from $250.8 million for the nine months
ended January 25, 1997, to $264.0 million for the nine months ended January 24,
1998. This increase was primarily due to sales to a large new account, passing
on increased product costs to customers and increased sales to existing
customers.
Pro forma gross profit decreased 1.4%, from $71.8 million, or 28.6% of pro
forma revenues, for the nine months ended January 25, 1997, to $70.9 million, or
26.8% of pro forma revenues, for the nine months ended January 24, 1998. This
decrease in gross profit as a percentage of revenues was primarily due to
inefficiencies related to the start-up period of a large new account.
Pro forma selling, general and administrative expenses decreased 0.7%, from
$55.5 million, or 22.1% of pro forma revenues for the nine months ended January
25, 1997, to $55.1 million, or 20.8% of pro forma revenues for the nine months
ended January 24, 1998. The decrease in selling, general and administrative
expenses as a percentage of revenues was primarily due to spreading fixed costs
over a larger revenue base during the nine months ended January 24, 1998.
The provision for income taxes has been estimated using an effective income
tax rate of 41.0%, which represents anticipated federal and state income tax
rates.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 24, 1998, the Company had cash of $248,000 and working capital of
$25.4 million. The Company's capitalization, defined as the sum of long-term
debt, long-term payable to U.S. Office Products and stockholder's equity, at
January 24, 1998 was approximately $63.4 million. On a pro forma basis at
January 24, 1998, the Company had working capital of $44.0 million and
capitalization of $96.6 million.
During the nine months ended January 24, 1998, net cash provided by
operating activities was $6.0 million. Net cash used in investing activities was
$4.0 million, including $3.4 million of capital expenditures and the payment of
non-recurring acquisition costs of $906,000. Net cash used by financing
activities totaled $3.9 million which consisted entirely of the net repayment of
debt.
During the nine months ended January 25, 1997, net cash provided by
operating activities was $19.5 million. Net cash used in investing activities
was $7.7 million, including $7.4 million of capital expenditures. Net cash used
in financing activities totaled $10.6 million, consisting of the repayment of
debt of $22.4 million and the payment of dividends at Pooled Companies of $4.6
million which was partially offset by the $16.4 million capital contribution by
U.S. Office Products.
During the fiscal year ended April 26, 1997, net cash provided by operating
activities was $19.7 million. Net cash used in investing activities was $14.1
million, including $4.1 million of cash paid for non-recurring acquisition costs
and $9.5 million of capital expenditures. Net cash used in financing activities
totaled $4.7 million, consisting primarily of the repayment of debt of $17.2
million and the payment of dividends at Pooled Companies of $6.1 million,
partially offset by the $20.1 million capital contribution by U.S. Office
Products.
During the year ended December 31, 1995, net cash provided by operating
activities was $11.1 million. Net cash used in investing activities was $42.4
million, including $37.9 million of net cash paid in acquisitions and $5.9
million of capital expenditures. Net cash provided by financing activities
totaled $31.4 million, consisting primarily of an increase in debt of $35.8
million and the payment of dividends at Pooled Companies of $3.9 million.
During the year ended December 31, 1994, net cash provided by operating
activities was $6.1 million. Net cash used in investing activities was $123,000.
Net cash used in financing activities totaled $5.3 million, consisting primarily
of the payment of debt of $3.1 million and the payment of dividends at Pooled
Companies of $2.3 million.
Workflow Management has significant operations in Canada. Net sales and
income before provision for income taxes from the Company's Canadian operations
accounted for approximately 37.1% and 59.6% of the Company's total net sales and
income before provision for income taxes, respectively, in the fiscal year ended
April 26, 1997. 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 is currently reviewing certain hedge transaction options to mitigate the
effect of currency fluctuations.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $10.0 million for new equipment and maintenance.
As a result of the provisions of Section 355 of the Code, the Company may be
subject to constraints in its ability to issue additional shares of Common Stock
in certain transactions for two years following the date of the Workflow
Distribution. 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 spin-off transaction,
Workflow Management will suffer significant tax liability. Workflow Management
will evaluate any significant future issuance of capital stock to avoid the
imposition of such tax liability. See "Risk Factors--Possible Limitations on
Issuances of Common Stock."
29
<PAGE>
Workflow Management expects that the Distribution Agreement with U.S. Office
Products will call for an allocation of $45.6 million of debt by U.S. Office
Products resulting in the forgiveness of $20.1 million of debt at January 24,
1998, which will be reflected in the financial statements as a contribution of
capital by U.S. Office Products. The Company has entered into a commitment
letter for a secured $150.0 million revolving credit facility underwritten and
agented by Bankers Trust Company. The credit facility will mature five years
from closing of this Offering and will be secured by all assets of the Company.
The credit facility will be 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 will be the prime rate from time to time in effect.
Workflow Management expects that the credit facility will be adequate to repay
the debt allocated by U.S. Office Products and to fund working capital and
capital expenditure needs. Workflow Management expects that a portion of the
credit facility will also be available to fund the cash portion of future
acquisitions, subject to the maintenance of bank covenants.
The Company anticipates that its current cash on hand, cash flow from
operations, the net proceeds from this Offering and additional financing
available under the bank line of credit 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 holiday mailings. As Workflow Management 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 Workflow Management may achieve for
any subsequent fiscal quarter or for a full fiscal year.
The following tables set forth certain unaudited quarterly financial data
for the year ended December 31, 1995, the fiscal year ended April 26, 1997 and
the nine months ended January 24, 1998. The information has been derived from
unaudited consolidated financial statements, that in the opinion of management
reflect adjustments, consisting only of normal recurring accruals, necessary for
a fair presentation of such quarterly information.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues........................................................................ $ 65,497 $ 80,595 $ 79,815 $ 83,519
Gross profit.................................................................... 15,770 19,361 19,229 20,107
Operating income................................................................ 2,681 3,296 3,306 3,172
Net income...................................................................... 1,789 1,529 1,744 1,294
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
JULY 27, OCT. 26, JAN. 25, APRIL 26,
1996 1996 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues........................................................................ $ 78,071 $ 80,227 $ 81,453 $ 87,630
Gross profit.................................................................... 21,717 22,518 22,647 24,159
Operating income................................................................ 4,650 6,085 1,510 2,841
Net income (loss)............................................................... 2,974 3,181 (658) (67)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------
JULY 26, OCT. 25, JAN. 24,
1997 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues..................................................................................... $ 82,163 $ 88,884 $ 86,730
Gross profit................................................................................. 21,895 23,314 22,086
Operating income............................................................................. 4,975 4,842 4,395
Net income................................................................................... 2,703 2,582 2,264
</TABLE>
INFLATION
The Company does not believe that inflation has had a material impact on its
results of operations during 1994, 1995 or Fiscal 1997.
NEW ACCOUNTING PRONOUNCEMENT
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 intends to
adopt SFAS No. 130 in the fiscal year ending April 24, 1999.
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"). The Company has reviewed the potential impact of
the Year 2000 Issue on its business, operations and financial condition and has
concluded that it will not be material.
The Company intends to have its proprietary software systems and related
services (known as GetSmart) Year 2000 ready by July 1998 and its proprietary
systems and related services (known as Informa) Year 2000 ready by the end of
the third fiscal quarter of 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 is currently not Year 2000 ready
by December 31, 1999.
31
<PAGE>
BUSINESS
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," "expect," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business," as well as those discussed elsewhere
in this Prospectus.
COMPANY OVERVIEW
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 design services and workflow
analysis. Drawing on its position in the industry and its experience in
completing acquisitions, the Company seeks to become a leading consolidator in
the highly-fragmented graphic arts industry. In the last ten years, the
Company's senior management team successfully completed the acquisition of 16
companies for Standard Forms, Inc., the predecessor to SFI. Since the
acquisition of SFI and Hano by the Print Management Division of U.S. Office
Products in January 1997, that same management team has continued its
acquisition strategy by successfully buying six additional companies. As a
result, the enterprise has grown from SFI's revenues and operating income of
$115.1 million and $6.7 million, respectively, for the year ended December 31,
1996, to the Company's revenues and operating income of $345.4 million and $17.1
million, respectively, for the twelve months ended January 24, 1998. The Company
currently has over 2,000 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. Workflow Management intends to continue to
pursue its aggressive acquisition strategy to extend its geographic scope and
market penetration and to increase sales to existing customers by cross-selling
documents, envelopes and commercial printing.
Workflow Management offers a full range of printed products which are either
manufactured by the Company or procured from one of the Company's more than
3,500 vendors. The Company's product line includes: (i) documents, such as
custom invoices, purchase orders, checks and labels; (ii) envelopes, including
specialty envelopes for uses such as credit card solicitations, annual reports,
direct mail and airline tickets; and (iii) commercial printing, such as product
and corporate brochures, personalized direct mail literature, catalogs,
directories and digital imaging. The Company's manufacturing base, combined with
its extensive vendor network and distribution capability, gives the Company
broad flexibility to meet customers' demands for printed products. For the nine
months ended January 24, 1998, approximately 55.2% of its revenues were derived
from products purchased by the Company for distribution, and 44.8% were derived
from products manufactured by the Company.
Many of the Company's customers are attempting to reduce their overhead and
direct costs by focusing on core competencies and by outsourcing non-core
operations to specialists. The Company provides customers with print management
services that are designed to control the costs of procuring, storing and using
graphic arts in their business operations. As an outsourcing specialist for
print management services, Workflow Management enables its customers to reduce
costs and improve control by soliciting competitive bids, establishing more
efficient inventory levels and order quantities, and consolidating requisitions,
production and deliveries. The Company also performs design and procurement
services for its customers. In order to meet growing demand, Workflow Management
plans to continue to expand its product lines and services, and to promote its
print and facilities management services, which allow customers to outsource the
management of print products.
32
<PAGE>
The Company believes that its proprietary technology and systems are central
to its ability to capitalize effectively on industry outsourcing trends and
provide it with a significant competitive advantage. The Company has developed
its GetSmart and Informa transaction and information systems to support these
services and the Company's sales of print products. The GetSmart system provides
transaction, reporting and control capabilities to the Company and its customers
in the United States. The Informa system supports requisition, distribution and
imaging services with a control database and a variety of customer interfaces
for its customers in Canada, including the Imagenet Document Manager that
provides access via the world wide web. In addition, using the GetSmart and the
Informa systems, the Company has the flexibility to integrate future
acquisitions and increase its customer base rapidly and seamlessly. In addition,
with its technology platform, Workflow Management believes that it is able to
position itself as a premier technology deployer, thus increasing the Company's
attractiveness to potential acquisition targets. The Company intends to grant a
license to U.S. Office Products for the Company's Imagenet technology. See
"Certain Transactions."
The document, envelope and commercial printing industries that comprise the
graphic arts businesses are highly fragmented, and the Company believes they are
ripe for consolidation. The Company believes that the market for documents was
approximately $12.7 billion in 1996, up from $11.1 billion in 1993; (ii) while
the U.S. market for envelopes decreased from $3.0 billion in 1989 to $2.6
billion in 1992, the market has since increased to approximately $3.0 billion in
1996; and (iii) the general commercial segment of the United States printing
industry shipped more than $88.0 billion of products in 1996, an increase of 8%
over 1995. Furthermore, management believes there are approximately 200 envelope
manufacturers in the U.S., and that the commercial printing industry is composed
of approximately 25,000 printing plants, 70% of which have fewer than 10
employees.
The principal subsidiaries of the Company are as follows:
- SFI is a national distributor of documents and other printed consumables
used by businesses in the United States. SFI also provides print
management services that are designed to control its customers' costs of
procuring, storing and using graphic arts. SFI developed its proprietary
GetSmart information system as the platform for delivering these services
and executing sales. SFI has 338 employees, 150 of which are in sales. SFI
has 25 sales offices and nine distribution warehouses located in eight
states.
- United is a regional manufacturer and distributor of envelopes, primarily
custom and specialty envelopes for applications such as credit card
solicitations, annual reports, direct mail and airline tickets. United
manufactures its products in four plants located in New York, New Jersey
and Pennsylvania. United also has several digital pre-press systems for
converting text and graphics to film and plates prior to printing,
enabling United to offer design services to its customers. United has 311
employees, of which 19 are in sales and 223 are in manufacturing.
- DBF is a Canadian manufacturer, printer and distributor of documents and
other printed products, such as labels, direct mail, business
communications, security products, bar coding and thermal labeling. DBF
also offers its customers document and print facility management services
through its proprietary Informa and Imagenet systems. These systems allow
DBF's customers to control printing processes at DBF's eight Imagenet
print centers which are located in six cities across Canada. In addition,
DBF has 11 plants with approximately 1200 employees, of which 854 are
engaged in manufacturing or printing.
- Hano is a manufacturer and printer of documents. Hano has three plants
located in Georgia, Illinois and Massachusetts. Hano has 184 employees.
Approximately 21% of Hano's products are sold to SFI.
BUSINESS STRATEGY
The Company's objective is to become a leading single source provider of
printed products and related services to businesses of all sizes. To attain its
goals, Workflow Management plans to grow both
33
<PAGE>
externally, through strategic acquisitions, and internally, through new product
development, cross-selling the full suite of the Company's products and services
to its subsidiaries, which had previously limited product offerings, and
cross-utilization of the Company's proprietary computer systems. In addition,
the Company intends to develop additional systems to establish a position as one
of the industry's most technologically sophisticated providers of printed
products and related management services.
Workflow Management intends to capitalize on consolidation opportunities in
three segments of the North American graphic arts industry: U.S. printed
products, U.S. envelopes and Canadian printed products. Through acquisitions,
the Company plans to expand its presence in new geographic regions and increase
penetration in regions where it currently has operations. In the U.S. printed
products market, the acquisition strategy will focus on the large population of
independent distributors. Workflow Management is the third largest print
distributor in North America. In the last ten years the Company's senior
management team successfully completed the acquisition of 16 smaller
distributors for Standard Forms, Inc., the predecessor to SFI. Since the
acquisition of SFI and Hano by the Print Management Division of U.S. Office
Products in January 1997, that same senior management team has continued its
acquisition strategy by successfully buying six additional companies, including
envelope businesses and print businesses. The Company intends to pursue
additional acquisitions in the highly fragmented U.S. print distribution market.
In the U.S. envelope market, Workflow Management will seek to acquire high
value-added producers of specialty envelope and direct mail concerns. In the
Canadian printed products market, the Company plans to leverage its document
sales force and customer base with selective acquisitions of commercial print
manufacturers.
Workflow Management intends to grow internally through product development,
cross-marketing and cross-utilization of its proprietary GetSmart, Informa and
Imagenet computer systems. A substantial majority of the Company's net sales are
derived from custom documents, envelopes and commercial printing. The Company
believes that its analysis, design work and print management services enable the
Company to better understand customers' requirements, and foster close business
relationships between the Company and its customers. Workflow Management
believes that its knowledge of customer requirements and these relationships
enable the Company to identify new product lines and services in response to
emerging customer opportunities and provide cross-marketing opportunities for
the Company's various product lines and services. The Company also believes that
it will be able to increase sales by implementing its GetSmart, Informa and
Imagenet systems on a Company-wide basis.
PRODUCT LINES
DOCUMENTS. Workflow Management offers a complete line of custom and stock
documents, such as invoices, purchase orders, money orders, bank drafts and
labels. These documents may be fan-folded, roll-fed, snap-apart or cut-sheet,
and manufactured to specification with respect to content, size, plies, paper
and inks. More than 85% of the Company's revenues from sales of documents are
from sales of custom products.
ENVELOPES. Workflow Management offers a complete line of conventional and
specialty envelopes for applications such as billing, credit card solicitations,
annual reports, proxy solicitations, direct mail and airline tickets. These
envelopes are of varying sizes and specialized materials, with constructions
including wallet flap, flat mailer, safety fold, peel and seal, clasp, button
and string, window, expansion and continuous. The Company can customize
dimensions, materials, construction, and graphics to customers' specific
requirements.
COMMERCIAL PRINTING. The Company's commercial printing line includes
products such as corporate brochures, personalized direct mail, catalogs,
directories and promotional products. These products are designed and
manufactured to customers' requirements. Workflow Management provides a variety
of custom services, including art direction, digital and conventional design,
layout, illustration, photography and production.
34
<PAGE>
The following table sets forth the amount of the Company's revenue derived
from each of its three product lines for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, APRIL 26, JANUARY 24,
1995 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Documents............................................ $ 178,806 $ 186,787 $ 126,756
Envelopes............................................ 101,642 97,256 74,290
Commercial Printing.................................. 24,850 37,426 32,978
</TABLE>
PRINT MANAGEMENT
Workflow Management supports its product offering with a selection of
value-added services. For many businesses, the costs of managing, storing, and
using printed products exceed their purchase price. The Company seeks to control
these costs and improve efficiency throughout the workflow by providing systems
analysis, design, and facilities and inventory management services. Workflow
Management delivers its print management services through GetSmart and Informa,
its proprietary computerized transaction and information systems. The Company
does not charge a separate fee for its management services, but instead tailors
its product pricing to reflect the services provided.
GETSMART SYSTEM. The Company offers the GetSmart system in the United
States. GetSmart provides transaction, reporting and control capabilities to the
Company and its customers. SFI introduced GetSmart in 1986, and it re-engineered
the system in 1993 to incorporate advances in hardware and software
technologies. The system's transaction database now includes more than 200,000
SKUs, 12,000 active customers and 3,500 active vendors. Customers can access
GetSmart either off-line, through the Company's sales and customer support
personnel, or on-line, through wide area network, dial-up, leased-line and
Internet connections. This array of delivery options makes GetSmart available to
customers of every size and complexity, and to customers at every level of
computer sophistication. The discussion below summarizes these support
functions. The Company is continually refining and enhancing the GetSmart
system.
A customer can initiate a distribution from inventory by issuing a
requisition through GetSmart. GetSmart then allocates the merchandise to the
cost center and routes the release to the appropriate distribution facility.
Customers can specify their minimum inventory requirements or can rely on
GetSmart's ongoing analysis of usage patterns and lead times. GetSmart notifies
the Company's sales representative when a re-order point is reached, and the
representative negotiates a new purchase order with the customer. The purchase
order is entered into the system and GetSmart tracks the order to the product's
receipt at the Company's distribution center. At this point the storage,
shipment, usage and re-order cycle begins again. Throughout the cycle, the
system supports inventory transfers and write-offs, returns of items
requisitioned in error, and purchases that are shipped directly to customers by
the Company's vendors. GetSmart produces invoices when merchandise is received
at the Company's distribution centers, or when it is shipped to customers, and
tracks invoices through to remittance. All transactions can be consummated in a
number of electronic formats required by customers' data processing operations.
GetSmart also offers electronic catalogs of 375,000 promotional products and
30,000 office products. The catalogs provide product images and descriptions, as
well as powerful search engines enabling customers to locate the products best
suited to their requirements.
GetSmart can generate more than 100 real-time and periodic reports to
customers. These reports detail, summarize and analyze purchases, inventory
levels, utilization rates and billing by cost center, product, and product line
to meet each customer's specific needs. Reports can be viewed on-screen in real
time, printed at the customer's premises, printed remotely and delivered to a
customer, or transmitted electronically for further processing by a customer's
internal management information system. The
35
<PAGE>
Company maintains five years of historical data on-line for comparative reports
and analyses. In addition, GetSmart's Base Line Pricing Report routinely
analyzes changes in prices charged to managed accounts, an analysis the Company
believes is unique in the industry.
GetSmart also provides customers with a system of management controls for
certain services. Customers may control cost center access with passwords,
allocate inventories to cost centers, limit the transacting and reporting
authority of each cost center by product or product line, constrain purchases
and requisitions to amounts budgeted for each cost center, and suspend
transactions until they are reviewed and approved. The Company can customize
GetSmart to create optimal programs for its customers.
INFORMA SYSTEM. Workflow Management offers the Informa system in Canada.
Informa supports requisition, distribution, and digital imaging services with a
central transaction database and a variety of customer interfaces. In addition
to sophisticated print-on-demand capabilities, Informa provides much of the
functionality of the GetSmart system: inventory inquiries and releases; order
tracking; usage analysis and forecasting; detailed reporting for cost centers
and products; and procurement-card and X.12 EDI billing. Customer interfaces
include terminal access, a graphical user interface client, e-mail, world wide
web browser, touch-tone, and automated voice recognition. Informa is accessed
through leased lines, dial-up service, Internet and wide area networks.
Informa's Electronic Job Ticket ("EJT") interface is a specialized e-mail
enabling customers to requisition documents and other products from the
Company's distribution centers, and to route attached documents to the Company's
network of Imagenet print-on-demand facilities. EJT's print-on-demand feature
supports a broad range of custom specifications, including quantities; fixed and
variable imaging; page orientation; paper size, weight, grade, and color;
drilling and binding; and cover page. EJT also provides fields for the
customer's budget code, billing information, and distribution instructions. EJT
originates jobs ranging from single impressions, to thousands of copies
delivered to a single location, to thousands of documents mailed to tens of
thousands of recipients.
IMAGENET DOCUMENT MANAGER. The Company intends to deploy Imagenet for use
in the United States. Workflow Management is negotiating with U.S. Office
Products regarding the licensing of Imagenet to U.S. Office Products.
Workflow Management provides customers with world wide web-access to Informa
through its Imagenet. This application provides a browser interface to Informa's
transaction and reporting features for managing and distributing inventories
held for customers. The application also offers a full-featured document
librarian, with image storage, retrieval, viewing, downloading, archiving, and
version control. In addition, Imagenet provides estimation and requisition for
digital print-on-demand orders. Production images for these orders can be
uploaded to the world wide web or retrieved from the application's document
library.
OPERATIONS
SALES. Workflow Management sells its products directly to end-users, as
well as to distributors and brokers who re-sell to end-users. The Company
employs more than 350 sales representatives and 175 customer service personnel
in 59 sales offices throughout the United States and Canada. Sales
representatives are compensated through salaries and commissions. Commissioned
sales representatives are compensated based on either product sales or gross
margins. In addition to the Company's line of documents, commercial printing,
envelopes and related products, the sales force offers value-added services
including workflow analysis, design, document management, and print-on-demand.
The Company's sales force is supported by its GetSmart and Informa transaction
and information systems. See "--Print Management."
PURCHASING. Workflow Management purchases raw materials such as paper
stock, ink, stock envelopes, adhesives, plates, film, chemicals, and cartons
from a variety of manufacturers and resellers. These materials are purchased
job-by-job or under contracts with terms of up to two years. Longer-term
36
<PAGE>
supply contracts generally specify services to be provided and may guarantee
product availability, but typically reserve to vendors the right to adjust
prices as required by market conditions. The largest suppliers of paper stock to
the Company are Rollsource, Appleton, Mead, Avenor and Domtar. Workflow
Management also purchases finished goods for resale to customers. These finished
goods include the Company's full line of documents, envelopes and commercial
printing. Workflow Management has more than 3,500 suppliers of finished goods,
including, among the largest, Ward Kraft Forms, United Computer Supplies, Gilman
Sky, Transkrit and United Stationers, Inc.
MANUFACTURING. Workflow Management manufactures documents and envelopes.
Documents produced by the Company include continuous and snap-apart forms, roll
forms, cut sheets and label/form combinations, and checks and other security
documents. Workflow Management operates 13 document plants in Canada and four in
the United States. These plants employ more than 1,100 manufacturing personnel
and utilize over 250 presses and other machines. The Company also manufactures a
broad line of conventional and specialty envelopes in four plants located in New
York, New Jersey and Pennsylvania. The envelope plants currently operate more
than 80 manufacturing and printing machines. Workflow Management operates a
network of eight Imagenet print-on-demand facilities in Canada, providing
digital imaging and litho quick printing. The Company also operates several
conventional and digital pre-press systems for converting text and graphics to
film and plates prior to printing. Among these pre-press capabilities are
several state-of-the art digital systems which enhance overall production
efficiency and provide high-process capabilities to customers.
DISTRIBUTION. Products manufactured by Workflow Management are either
shipped directly to customers or held in inventory and shipped as requisitioned
by customers. Finished goods purchased by the Company from manufacturers and
wholesalers are either shipped directly to customers by vendors, or shipped to,
stored in, and shipped from one of the Company's distribution centers. Workflow
Management owns or leases nine distribution centers in the United States and 17
in Canada, and rents additional warehouse space as necessary. More than 120
distribution personnel are employed by Workflow Management. Products are
transported from the Company's suppliers and to its customers by short-haul,
regional, contract and custom carriers, as well as by air and ground courier
services.
CUSTOMERS
Workflow Management has more than 22,000 customers ranging in size from
small office/home office businesses to Fortune 500 companies in industries such
as healthcare, insurance, energy, advertising, travel and financial services.
Significant customers of the Company include: Bank of Montreal; Aetna, Inc.;
Citibank N.A.; Chase Manhattan Corp.; Group Health Incorporated; Health
Insurance Plan of Greater New York, Inc.; Heilig-Meyers Company; Merrill Lynch &
Co., Inc.; Banco Popular, Inc.; Shell Canada; and Salomon Smith Barney Holdings,
Inc.
The Company's five largest customers accounted for 10.7% of the Company's
net sales for the nine months ended January 24, 1998. The Company's single
largest customer accounted for approximately 4.1% of net sales for the nine
months ended January 24, 1998. Although that customer has recently agreed to be
acquired, the Company has entered into a new four year services agreement with
the customer.
COMPETITION
Workflow Management competes for retail sales of documents and envelopes
against other independent distributors and against manufacturers' direct sales
organizations. In commercial printing, the Company also competes with
manufacturers' direct sales organizations, independent brokers, advertising
agencies and design firms. The principal competitive factors in the graphic arts
industry are price, quality, selection, services, production capacity, delivery
and customer support.
Although Workflow Management often competes with smaller businesses, it also
competes against the largest competitors in the North American documents
industry, such as Moore Corporation Ltd., Reynolds & Reynolds Company, Standard
Register Company and Wallace Computer Services, Inc., and the largest
37
<PAGE>
competitors in the U.S. envelope industry, such as Mail-Well, Westvaco and
Tension Envelope Company. The largest competitors for commercial printing
include direct sales organizations of Graphic Industries, Inc., R. R. Donnelley
& Sons, Quebecor, Inc. and World Color Press, Inc. Most of these competitors
have substantially greater financial resources than the Company.
EMPLOYEES
As of December 31, 1997, Workflow Management had more than 2,000 full- and
part-time employees, including over 550 in sales and sales support and more than
1,200 in manufacturing. Approximately 31% of the Company's employees in the
United States and approximately 8% of the Company's employees in Canada are
represented by labor unions. There can be no assurance that work stoppages or
strikes will not occur. The Company considers its employee relations to be good.
INTELLECTUAL PROPERTY
Workflow Management has more than 40 registered trademarks in the U.S. and
Canada, including GetSmart, Informa and Imagenet. The Company believes that its
trademarks and other proprietary rights are material to the operations of its
business. Workflow Management regards its GetSmart, Informa and Imagenet
software as proprietary, and relies on a combination of copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to
protect its rights. Workflow Management is not aware that any of its software,
trademarks or other proprietary rights are being infringed by third parties, or
that it infringes proprietary rights of third parties. See "Risk
Factors--Dependence on Intellectual Property Rights; Risks of Infringement."
PROPERTIES
The following table sets forth certain information about the Company's
executive offices and manufacturing and printing facilities:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
FUNCTION AND LOCATION FOOTAGE TITLE EXPIRATION
- ---------------------------------------------------------------------- ------------ ---------- --------------------
<S> <C> <C> <C>
EXECUTIVE OFFICE:
Palm Beach, Florida................................................. 5,000 Leased 2003
MANUFACTURING AND PRINTING:
Conyers, Georgia.................................................... 71,300 Leased 2006
Mt. Olive, Illinois................................................. 82,000 Leased 2004
Springfield, Massachusetts.......................................... 65,000 Leased 2004
Lyndhurst, New Jersey............................................... 16,000 Leased 2000
New York, New York.................................................. 160,000 Leased 2002
New York, New York.................................................. 53,000 Leased 2005
New York, New York.................................................. 60,000 Leased 2002
Norfolk, Virginia................................................... 26,400 Owned --
Mt. Pocono, Pennsylvania............................................ 140,000 Owned --
Calgary, Alberta.................................................... 48,000 Leased 1999
Calgary, Alberta.................................................... 30,000 Leased 1999
Edmonton, Alberta................................................... 81,000 Leased 2006
Victoria, British Columbia.......................................... 14,000 Leased 1999
Winnipeg, Manitoba.................................................. 12,500 Leased 2002
Brampton, Ontario................................................... 174,500 Leased 1999
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
FUNCTION AND LOCATION FOOTAGE TITLE EXPIRATION
- ---------------------------------------------------------------------- ------------ ---------- --------------------
<S> <C> <C> <C>
Brampton, Ontario................................................... 44,200 Leased 2000
London, Ontario..................................................... 17,500 Leased month-to-month
Mississauga, Ontario................................................ 60,000 Leased 2004
Mississauga, Ontario................................................ 7,200 Leased month-to-month
Toronto, Ontario.................................................... 10,000 Leased 2000
Regina, Saskatchewan................................................ 28,000 Leased 2006
Dorval, Quebec...................................................... 42,000 Owned --
Granby, Quebec...................................................... 100,000 Owned --
Pointe Claire, Quebec............................................... 30,000 Leased 1998
</TABLE>
In addition to those facilities identified above, Workflow Management leases
other offices, warehouses and distribution centers across the United States and
Canada.
Workflow Management believes that its properties are adequate to support its
operations for the foreseeable future.
ENVIRONMENTAL REGULATIONS
The Company's operations and real property are subject to United States and
Canadian federal, state, provincial, and local environmental laws and
regulations, including those governing the use, storage, treatment,
transportation and disposal of solid and hazardous materials, the emission or
discharge of such materials into the environment, and the remediation of
contamination associated with such disposal or emissions. Certain of these laws
and regulations may impose joint and several liability on lessees and owners or
operators of facilities for the costs of investigation or remediation of
contaminated properties, regardless of fault or the legality of the original
disposal.
The past and present business operations of the Company that are subject to
the Environmental Laws and regulations include the use, storage, handling, and
contracting for recycling or disposal of hazardous and nonhazardous materials
such as washes, inks, alcohol-based products, fountain solution, photographic
fixer and developer solutions, machine and hydraulic oils, and solvents.
Workflow Management generates both hazardous and non-hazardous waste.
Limited environmental investigations have been conducted at certain of the
Company's properties. Based on these investigations and all other available
information, management believes that the Company's current operations are in
substantial compliance with the Environmental Laws. The Company is not aware of
any liability under the Environmental Laws that the Company believes would have
a material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given, however, that all potential
environmental liabilities have been identified or that future uses, conditions
or legal requirements (including, without limitation, those that may result from
future acts or omissions or changes in applicable Environmental Laws) will not
require material expenditures to maintain compliance or resolve potential
liabilities.
LEGAL MATTERS
Workflow Management is involved in various lawsuits arising in the ordinary
course of business. Workflow Management believes that the outcome of these
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Following this Offering, it is anticipated that the directors, executive
officers and key employees of the Company will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
OFFICERS AND DIRECTORS OF THE COMPANY:
Thomas B. D'Agostino................................. 55 Chairman of the Board, Chief Executive Officer and
Director
Steven R. Gibson..................................... 38 Vice President of Finance and Chief Financial
Officer
Claudia S. Amlie..................................... 29 Vice President and General Counsel
Thomas A. Brown, Sr.(1).............................. 55 Director
Gus J. James, II(1).................................. 59 Director
Jonathan J. Ledecky.................................. 40 Director
Timothy L. Tabor..................................... 44 Director
F. Craig Wilson(2)................................... 48 Director
KEY EMPLOYEES OF SUBSIDIARIES:
John Conway.......................................... 55 President of Data Business Forms Limited
Thomas B. D'Agostino, Jr.*........................... 31 President of SFI Corp.
Robert M. Fishbein................................... 55 Co-President of United Envelope Co., Inc.
Richard M. Schlanger................................. 53 Co-President of United Envelope Co., Inc.
Andre Beaudet........................................ 55 President of Hano Document Printers, Inc.
</TABLE>
- ------------------
* Thomas B. D'Agostino, Jr. is the son of Thomas B. D'Agostino, Chairman of
the Board and Chief Executive Officer of the Company.
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Board of Directors intends to increase its size from six to seven
members following the closing date of this Offering and to appoint the seventh
director to serve on the Compensation Committee.
THOMAS B. D'AGOSTINO is Chairman of the Board and Chief Executive Officer of
the Company. Mr. D'Agostino was President of SFI and its predecessor company,
Forms & Peripherals, Inc., from 1972 until 1998, and was appointed President of
U.S. Office Products Print Management Division in January 1997 when U.S. Office
Products acquired SFI and Hano.
STEVEN R. GIBSON is Vice President of Finance and Chief Financial Officer of
the Company, the position to which he was appointed in April 1998. From February
1997 until April 1998, Mr. Gibson was President of Cortez Financial Services,
Inc, an investment banking company. From May 1985 to February 1997, he was
employed in various positions at NationsBank Corporation, ultimately serving as
Senior Vice President.
CLAUDIA S. AMLIE was appointed General Counsel of the Company in May 1998.
From July 1997 until April 1998, she served as an associate attorney at the law
firm of Edwards & Angell in Palm Beach, Florida. Ms. Amlie worked as an
associate attorney at Foley & Lardner in West Palm Beach, Florida from June 1996
to July 1997 and Stearns, Weaver, Miller, Weissler, Alhadeff & Sitterson in
Miami, Florida from August 1994 to May 1996. Ms. Amlie graduated from law school
in 1994.
40
<PAGE>
THOMAS A. BROWN, SR. has served as the Vice
President-Purchasing/Sourcing/Logistics of Pfizer, Inc., a large pharmaceutical
company, since May 1996. From June 1991 until May 1996, Mr. Brown was Vice
President-Procurement of Aetna, Inc., a national insurance company.
GUS J. JAMES, II is the President, a director and shareholder of the law
firm of Kaufman & Canoles in Norfolk, Virginia. Mr. James has practiced law with
Kaufman & Canoles since 1967. See "Certain Transactions."
JONATHAN J. LEDECKY will serve as a Director and an employee of the Company
and each of the other Spin-Off Companies as of the Distribution Date. He founded
Consolidation Capital Corporation in February 1997 and will serve as its
Chairman and Chief Executive Officer. Mr. Ledecky founded U.S. Office Products
in October 1994 and will serve as its Chairman of the Board until the
Distribution Date and served as its Chief Executive Officer until November 5,
1997. Mr. Ledecky has also served as the Non-Executive Chairman of the Board of
USA Floral Products, Inc. since April 1997 and has been a director of UniCapital
Corporation since October 1997. Mr. Ledecky served from 1989 to 1991 as the
President of The Legacy Fund, Inc., and from 1991 to September 1994 as President
and Chief Executive Officer of Legacy Dealer Capital Fund, Inc., a wholly-owned
subsidiary of Steelcase Inc. Prior to his tenure at The Legacy Fund, Inc., Mr.
Ledecky was a partner at Adler and Company and a Senior Vice President at Allied
Capital Corporation, an investment management company.
TIMOTHY L. TABOR has served as Executive Vice President of U.S. Office
Products Print Management Division and Executive Vice President and Chief
Operating Officer of SFI and Hano since May 1997. From 1996 until 1997, he
served as an executive officer of SFI and Hano. From 1993 to 1995, Mr. Tabor
managed his own investments. From 1987 to 1993, Mr. Tabor held various positions
with Tudor Investment Corp., serving as Director of Technology from 1987 to
1990, Director of the Securities Department from 1990 until 1992 and as a
proprietary trader in 1993.
F. CRAIG WILSON has served as Chief Executive Officer and Chairman of the
Board of Cortez III Service Corporation ("Cortez III") since March 1997. Cortez
III provides logistics and technical services to various governmental agencies.
Mr. Wilson also serves as President of EC III, Inc., a joint venture of Cortez
III, and EG&G, Inc. From 1993 to 1997, Mr. Wilson was Chief Operating Officer of
Cortez III.
JOHN CONWAY has served as President of DBF since 1992. From 1987 to 1992,
Mr. Conway was Vice President and General Manager of Data East.
THOMAS B. D'AGOSTINO, JR. was appointed President of SFI in 1998. He
previously served as Vice President of Sales of SFI from 1997 until 1998. From
1995 to 1997, he served as President of Hano. From 1993 to 1995, Mr. D'Agostino,
Jr. held several other positions with Hano, including Vice President of Sales
and Marketing and General Manager.
ROBERT M. FISHBEIN is Co-Chairman of United. He has also served as
Co-President of United since 1994. From 1982 to 1994, Mr. Fishbein held the
position of Executive Vice President of United.
RICHARD M. SCHLANGER is also Co-Chairman of United. He has also served as
Co-President of United since 1994. From 1982 to 1994, Mr. Schlanger held the
position of Executive Vice President of United.
ANDRE BEAUDET is President of both Hano and Multiple Pakfold, Inc., the
distributor arm of DBF. Mr. Beaudet joined DBF in 1992 when it acquired Southam
Paragon, where he had been employed since 1965. From 1986 to 1997, Mr. Beaudet
held a variety of positions at Southam Paragon, including President and Vice
President.
Directors are elected for a one-year term and hold office until their
successors have been elected and qualified or until such director's earlier
resignation or removal.
41
<PAGE>
COMMITTEES OF THE BOARD
The Board of Directors has an Audit Committee. The Audit Committee is
charged with reviewing Workflow Management's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls and
financial management practices. Messrs. Brown and James are members of the Audit
Committee.
The Board of Directors has a Compensation Committee. The Compensation
Committee is charged with determining the compensation of Workflow Management's
executive officers and administering the 1998 Stock Incentive Plan. Mr. Wilson
is a member of the Compensation Committee. See "--1998 Stock Incentive Plan."
LEDECKY SERVICES AGREEMENT
Jonathan J. Ledecky entered into the Ledecky Services Agreement with U.S.
Office Products on January 13, 1998, effective on the Distribution Date and
contingent on the consummation of the Distributions. The Ledecky Services
Agreement will expire on September 30, 1998 if none of the Distributions has
occurred by that date. If the Ledecky Services Agreement becomes effective, it
will replace his employment agreement with U.S. Office Products as amended
November 4, 1997. The principal terms of this agreement, as it is expected to be
amended, are summarized here.
The Ledecky Services Agreement governs Mr. Ledecky's continuing obligations
to U.S. Office Products. Under the Ledecky Services Agreement, Mr. Ledecky will
report to the U.S. Office Products Board and will provide high-level acquisition
negotiation services and strategic business advice. Under the Agreement, Mr.
Ledecky will remain an employee of U.S. Office Products at an annual salary of
$48,000 through June 30, 2001. As a continuing employee of U.S. Office Products,
Mr. Ledecky will also retain his existing U.S. Office Products' options despite
his reduction in services to U.S. Office Products. U.S. Office Products can
terminate Mr. Ledecky's employment only for "cause" where cause consists of (i)
his conviction of, or guilty or nolo contendere plea to, a felony, (ii) his
engaging, despite notice, in conduct demonstrably and materially injurious to
U.S. Office Products, or (iii) his violation of the noncompetition agreement as
it relates to U.S. Office Products. If Mr. Ledecky resigns or is terminated, he
will cease to vest in his U.S. Office Products stock options and will have 90
days to exercise any vested options.
It is expected that the Company will enter into an employment agreement with
Mr. Ledecky which will implement assigned portions of the Ledecky Services
Agreement. Under the employment agreement, Mr. Ledecky will report to the Board
of Directors and senior management of the Company. In such capacity, Mr. Ledecky
will provide high-level acquisition negotiation services and strategic business
advice. The Company can require Mr. Ledecky's performance of such services,
consistent with his other contractual obligations to Consolidation Capital
Corporation, U.S. Office Products and the other Spin-Off Companies. As an
employee, Mr. Ledecky will also be subject to the generally applicable personnel
policies of the Company and will be eligible for such benefit plans in
accordance with their terms. The
Company will pay Mr. Ledecky an annual salary of $48,000 for up to two years.
The Company may terminate Mr. Ledecky's employment with or without "cause,"
where cause is defined as in the Ledecky Services Agreement as modified to refer
to the Company. If without cause, the termination would entitle Mr. Ledecky to
severance equal to his salary for the lesser of 12 months or the remainder of
the employment term.
The Ledecky Services Agreement provides for non-competition and
non-solicitation restrictions that continue for four years after the Workflow
Distribution has been completed. These provisions generally restrict Mr. Ledecky
from, among other things, investing in or working for or on behalf of any
business selling any products or services in direct competition with U.S. Office
Products or the Spin-Off Companies (collectively, the "U.S. Office Products
Companies"), within 100 miles of any location where any of the U.S. Office
Products Companies conducts business. (For this purpose, "products or services"
are those that U.S. Office Products offered on January 13, 1998.)
Notwithstanding this prohibition, Mr. Ledeckey may serve in a policy making role
(but not engage in direct personal competition) with respect to the following
42
<PAGE>
businesses: (i) certain businesses potentially competitive with Aztec Technology
Partners, Inc. if those businesses (A) are acquired by electrical contracting
and services businesses, (B) had revenues for no more than $15.0 million in the
prior year and no more than 30% of the revenues of the acquiring business, and
(C) have their principal place of business in the same metropolitan area as that
of the acquiring business, (ii) businesses selling, supplying, or distributing
janitorial or sanitary products or services; (iii) businesses managing or
servicing office equipment (other than computers); (iv) businesses providing
internet access services; or (v) UniCapital Corporation's leasing businesses
(which include equipment leasing). The Ledecky Services Agreement prohibits Mr.
Ledecky from trying to hire away managerial employees of the U.S. Office
Products Companies or from calling upon customers of the U.S. Office Products
Companies to solicit or sell products or services in direct competition with the
U.S. Office Products Companies. Mr. Ledecky also may not hire away for
Consolidation Capital Corporation any person then or in the preceding one year
employed by the U.S. Office Products Companies. U.S. Office Products is
permitted to (and will) assign to Workflow Management the ability to enforce the
non-competiton provisions described above as to its own business, which will
then constitute part of his employment agreement with the Company.
Mr. Ledecky will receive a stock option for Common Stock from Workflow
Management as of the Distribution Date. The option is intended to compensate Mr.
Ledecky for his services to Workflow Management as an employee. That option will
be granted under the Company's 1998 Stock Incentive Plan. The option will cover
up to 7.5% of the outstanding Common Stock, determined as of the Distribution
Date, without regard to the Offering. The option will have a per share exercise
price equal to the initial public offering price of the Common Stock. The
estimated value of this option depends on the initial public offering price of
the Common Stock and the trading volatility of the Common Stock. Based on an
assumed initial public offering price of $13.00 per share and an assumed trading
volatility index of the Common Stock of 40%, the estimated value of the option
would be $2.9 million.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the
Workflow Distribution. Mr. Ledecky's option from the Company will be exercisable
immediately if Mr. Ledecky dies before the option expires or, if Workflow
Management accelerates the exercise schedule of options for substantially all
management option holders (in this latter case, Mr. Ledecky's option will become
exercisable on the same accelerated schedule as the other Workflow Management
option holders). All unexercised portions of the option will expire ten years
after its date of grant or, if applicable, as of the date Mr. Ledecky violates
his non-competition agreement with Workflow Management.
DIRECTOR COMPENSATION
Non-employee directors will receive cash compensation in the amount of
$10,000 per year. In addition, the Company anticipates that non-employee
directors will receive formula stock options under the 1998 Stock Incentive Plan
of 15,000 shares on the effective date of the Workflow Distribution, exercisable
at the initial public offering price, as well as formula stock options for
additional shares at each annual meeting at which such director is reelected to
the Company's Board of Directors. The exercise price of these options will be
the fair market value of the Common Stock on the date of grant. The Company
anticipates that the options will vest at 25% per year over four years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Board of Directors of Workflow Management has ever been an
officer of the Company or any of its subsidiaries, except that Mr. D'Agostino is
the President of U.S. Office Products Print Management Division, and a member of
the Board of Directors of SFI, and Mr. Tabor is the Executive Vice President of
U.S. Office Products Print Management Division and the Executive Vice President
and Chief Operating Officer of SFI and Hano. In addition, Mr. Ledecky was the
Chief Executive Officer of U.S. Office Products until November 5, 1997 and will
be Chairman of U.S. Office Products until the Distribution Date.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
paid by the Company for services rendered during the fiscal year ended April 25,
1998 to the Chief Executive Officer and to the other officers of the Company
whose combined compensation exceeded $100,000 during this period (collectively
the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- -------------------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Thomas B. D'Agostino
Chairman of the Board,
Chief Executive Officer and
Director of the Company............................... $ 400,000 $ -0- 45,000 $ 9,968(1)
Michael B. Feldman
Vice President of Finance
and Chief Financial Officer of the Company (3)........ $ 133,750 $ 25,000 37,500 $ 6,319(2)
Timothy L. Tabor (4)
Executive Vice President--
U.S. Office Products Print
Management Division and Director of the Company....... $ 260,000 $ 25,000 15,000 $ 5,041(5)
</TABLE>
- ----------------------
(1) Includes $6,805 of insurance premiums and $3,163 of 401(k) plan
contributions paid by the Company on Mr. D'Agostino's behalf.
(2) Includes $3,403 of insurance premiums and $2,916 of 401(k) plan
contributions paid by the Company on Mr. Feldman's behalf.
(3) Steven R. Gibson assumed the position of Vice President of Finance and Chief
Financial Officer on April 8, 1998.
(4) The Company anticipates that Mr. Tabor will resign as an officer of the
Print Management Division of U.S. Office Products, SFI and Hano prior to the
Workflow Distribution.
(5) Includes $5,041 of insurance premiums paid by the Company on Mr. Tabor's
behalf.
EMPLOYMENT CONTRACTS AND RELATED MATTERS
On January 23, 1997, SFI entered into an employment agreement with Thomas B.
D'Agostino. The employment agreement provides for a four-year term. Pursuant to
this agreement, Mr. D'Agostino is entitled to receive minimum annual
compensation of $400,000, incentive bonuses as determined by the compensation
committee of the U.S. Office Products' Board of Directors and certain
perquisites and benefits. In the event that Mr. D'Agostino's employment is
terminated for any reason other than cause, Mr. D'Agostino's employment
agreement provides that he is entitled to receive his base salary and benefits
for the longer of (i) six months from the date of termination or (ii) the
remaining time under the term of the employment agreement. The employment
agreement also contains a non-competition covenant which prohibits Mr.
D'Agostino from engaging in certain activities during the term of the employment
agreement and for the longer of (i) a period of one year thereafter or (ii) as
long as Mr. D'Agostino continues to receive severance payments from SFI. The
Company anticipates entering into a new employment agreement with Mr. D'Agostino
after the closing of the Offering, subject to the approval of the Compensation
Committee. The Company does not anticipate that the terms of any such employment
agreement will differ materially from the terms of Mr. D'Agostino's current
employment agreement with SFI, except that the maximum incentive bonus payable
to Mr. D'Agostino is currently $300,000 and the Company does not anticipate that
the incentive bonus payable to Mr. D'Agostino under his employment agreement
with the Company will be subject to any maximum.
On January 23, 1997, Hano entered into an employment agreement with Timothy
L. Tabor in the capacity of Executive Vice President. The employment agreement
provides a one-year initial term and a
44
<PAGE>
one-year renewal term. Pursuant to this agreement, Mr. Tabor is entitled to
receive minimum annual compensation of $260,000, incentive bonuses as determined
by the compensation committee of the U.S. Office Products' Board of Directors
and certain perquisites and benefits. In the event that Mr. Tabor's employment
is terminated for any reason other than cause, Mr. Tabor's employment agreement
provides that he is entitled to receive his base salary and benefits for the
longer of (i) three months from the date of termination or (ii) the remaining
time under the term of the employment agreement. The employment agreement also
contains a non-competition covenant which prohibits Mr. Tabor from engaging in
certain activities during the term of the employment agreement and for the
longer of (i) a period of one year thereafter or (ii) as long as Mr. Tabor
continues to receive severance payments from Hano.
Prior to the closing of the Offering, the Company anticipates entering into
employment agreements with Steven R. Gibson, Vice President of Finance and Chief
Financial Officer, Claudia S. Amlie, Vice President and General Counsel, and
certain other employees (collectively, the "Executive Employment Agreements") on
the general terms described here. The Company expects that the Executive
Employment Agreements will (i) provide for an initial term of two years; (ii)
contain non-competition covenants which will prohibit the employees from
engaging in certain activities during the term of the Executive Employment
Agreements and for the longer of (x) a period of one year thereafter or (y) as
long as the employees receive severance payments from the Company; and (iii)
provide for severance payments upon termination without cause for the longer of
(x) three months from the date of termination or (y) the remaining term under
the Executive Employment Agreement. Under the Executive Employment Agreements,
employees will be eligible to receive up to 50% of their base salary in bonus
compensation, payable in cash or stock based awards, as determined by the
Compensation Committee based on specified performance criteria. Mr. Gibson's
base salary under his Executive Employment Agreement will be $175,000 annually
and Ms. Amlie's base salary under her Executive Employment Agreement will be
$110,000 annually.
INDEMNIFICATION
The Certificate of Incorporation of the Company provides that no director
will be liable to the Company or its stockholders for monetary damages for a
breach of fiduciary duty to the fullest extent permissible under Delaware law.
The Company's By-laws provide that the Company will, to the fullest extent
permitted under Delaware law, indemnify its officers and directors against any
damages arising out of their actions as officers or directors of the Company.
REPLACEMENT OF OUTSTANDING U.S. OFFICE PRODUCTS OPTIONS
Workflow Management expects that all or substantially all vested and
unvested options (the "U.S. Office Products Options") to acquire shares of U.S.
Office Products' common stock that are held by Workflow Management employees on
the Distribution Date will be replaced with options (the "Workflow Options") to
acquire shares of Company Common Stock. As of the Distribution Date,
approximately 1,066,437 U.S. Office Products Options were held by employees of
Workflow Management. The number of Worklfow Options that will be outstanding
after the Distributions will depend on the trading prices of U.S. Office
Products' common stock around the time of the Distributions and the public
offering price of the Common Stock in the Offering. For those reasons, the
number of Workflow Options into which the U.S. Office Products Options will
convert is not yet determinable. The following formulae will be used to adjust
the number and exercise price of U.S. Office Products Options. Such formulae
will adjust solely for the Distributions and not for other events, such as the
Tender Offer. The formulae will not affect when the options vest or when
employees can exercise the options. The exercise price of U.S. Office Products
Options will be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price of
Common Stock in the Offering
Trading Price of U.S. Office
Products Common Stock Pre-Workflow
Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New)=Option Shares (Old) X Trading Price of U.S. Office Products
Common Stock Pre-Workflow Distribution
Initial Public Offering Price of
Common Stock in the Offering
45
<PAGE>
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Workflow Distribution" will be the average closing price of U.S. Office
Products' common stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the expiration
of the Tender Offer and the completion of the Distributions. The foregoing
formula adjustments are intended to preserve for the holders of U.S. Office
Products Options the intrinsic value per option, measured as the difference
between the market value of one share of U.S. Office Products' common stock at
the time of the Workflow Distribution and the exercise price of such option. The
intrinsic value of the adjusted Workflow Options will be no greater than the
intrinsic value of the U.S. Office Products Options immediately before the
Distributions, and the ratio of exercise price to market price will be not less
than the ratio immediately before the Distributions.
1998 STOCK INCENTIVE PLAN
The Company expects to adopt the 1998 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by providing employees with incentives to improve stockholder value and
contribute to the growth and financial success of the Company, and by enabling
the Company to attract, retain and reward highly motivated and qualified
employees. The maximum percentage of shares of Common Stock that may be issued
with respect to awards granted under the Plan will be approximately 30% of the
outstanding Common Stock of the Company following the Workflow Distribution,
without regard to this Offering. The maximum number of shares that may be issued
with respect to awards granted under the Plan to any individual in a calendar
year may not exceed 1,500,000 shares. The Plan will be administered by the
Compensation Committee of the Board of Directors. All employees of the Company
and its subsidiaries, as well as non-employee directors of the Company, are
eligible to receive awards under the Plan. The Plan authorizes the Compensation
Committee to make awards of stock options, restricted stock, stock appreciation
rights and other stock-based awards. The Compensation Committee will determine
the prices, vesting schedules, expiration dates and other material conditions
under which such awards may be exercised.
Mr. Ledecky will receive a stock option for Common Stock from Workflow
Management, pursuant to the Plan, as of the Distribution Date. The option is
intended to compensate Mr. Ledecky for his services to Workflow Management as an
employee. The option will cover up to 7.5% of the outstanding Common Stock
determined as of the Distribution Date, without regard to the Offering. The
option will have a per share exercise price equal to the initial public offering
price of the Common Stock.
It is expected that Mr. Ledecky's option will become fully vested when
granted but will not be exercisable until the 12-month anniversary of the
Distribution Date. Mr. Ledecky's option from the Company will be exercisable
immediately if Mr. Ledecky dies before the option expires or, if and to the
extent that, Workflow Management accelerates the exercise schedule of options
for substantially all Workflow Management option holders. All unexercised
portions of the option will expire ten years after its date of grant or, if
applicable, as of the date Mr. Ledecky violates his non-competition agreement
with Workflow Management.
The Company expects that Thomas B. D'Agostino will also receive an option
(the "D'Agostino Option") pursuant to the Plan for 7.5% of the outstanding
Common Stock as of the Distribution Date, without regard to the Offering. The
D'Agostino Option is anticipated to have the same terms as Mr. Ledecky's option,
including an exercise price equal to the initial public offering price. The
estimated value of this option depends on the initial public offering price of
the Common Stock and the trading volatility of the Common Stock. Based on the
assumed initial public offering price and an assumed trading volatility index of
the Common Stock of 40%, the estimated value of the option would be $2.9
million.
In addition, management currently expects to recommend option grants to
certain executive officers of the Company for no more than 10% of the Common
Stock following the Workflow Distribution, without regard to the Offering, also
at an exercise price equal to the initial public offering price.
46
<PAGE>
OPTIONS GRANTED IN FISCAL YEAR 1998
The following table sets forth certain information regarding options to
acquire common stock of U.S. Office Products granted to the Named Officers
during the year ended April 25, 1998. All options were granted by U.S. Office
Products as options to acquire U.S. Office Products' common stock and are
expected to be replaced with options to acquire Common Stock of the Company in
connection with the Workflow Distribution. See "--Replacement of Outstanding
U.S. Office Products Options."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
PERCENT OF APPRECIATION FOR
OPTIONS TOTAL OPTIONS OPTION TERM (4)
GRANTED GRANTED IN EXERCISE EXPIRATION ----------------------
NAME (1)(2) FISCAL YEAR(3) PRICE (2) DATE 5% 10%
- ------------------------------ ------------- --------------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas B. D'Agostino.......... 45,000 5.9% $ 15.17 4/28/07 $ 429,315 $ 1,087,968
Timothy L. Tabor.............. 15,000 2.0% $ 15.17 4/28/07 $ 143,105 $ 362,656
Michael B. Feldman............ 15,000 2.0% $ 15.17 4/28/07 $ 143,105 $ 362,656
22,500 2.9% $ 21.13 9/17/07 $ 298,992 $ 757,705
</TABLE>
- --------------------
(1) The options granted are non-qualified stock options, which are exercisable
at the market price on the date of grant.
(2) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Common Stock in this Offering
Trading Price of U.S. Office Products Common
Stock Pre-Workflow
Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock
Pre-Workflow Distribution
Initial Public Offering Price of
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Workflow Distribution" will be the average closing price of U.S. Office
Products common stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
exercise price and number of options will be adjusted solely for the
Distributions and not for other events, such as the Tender Offer. The
foregoing formula adjustments are intended to preserve for the holders of
U.S. Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products'
common stock at the time of the Workflow Distribution and the exercise price
of such option. The intrinsic value of the adjusted Workflow Options will be
no greater than the intrinsic value of the U.S. Office Products Options
before the Distributions, and the ratio of exercise price to market price
will be not less than the ratio before the Distributions. The formulae will
not affect when the options vest or when employees can exercise the options.
(3) Total options granted means all options granted to employees of Workflow
Management.
(4) The dollar amounts under these columns are the results of calculations at
assumed annual rates of stock appreciation of 5% and 10%. These assumed
rates of growth were selected by the Securities and Exchange Commission (the
"Commission") for illustration purposes only. They are not intended to
forecast possible future appreciation, if any, of stock prices. No gain to
the optionees is possible without an increase in stock prices, which will
benefit all stockholders.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED APRIL 25, 1998 AND FISCAL
YEAR-END 1998 OPTION VALUES
The following table sets forth certain information regarding option
exercises and unexercised options held by the Named Officers at April 25, 1998.
All options were granted by U.S. Office Products as options to acquire U.S.
Office Products' common stock and are expected to be replaced with options to
acquire
47
<PAGE>
shares of Common Stock of the Company in connection with the Workflow
Distribution. See "--Replacement of Outstanding U.S. Office Products Options."
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-
OPTIONS HELD AT APRIL 25, MONEY OPTIONS AT FISCAL
1998 (1) (4) YEAR END ($) (1) (2) (3)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas B. D'Agostino........ -- -- -- 45,000 -- $ 76,725
Timothy L. Tabor............ 48,522 486,601 -- 15,000 -- $ 25,575
Michael B. Feldman.......... -- -- 36,391 37,500 $ 224,714 $ 25,575
</TABLE>
- ------------------
(1) The exercise price of U.S. Office Products Options will be adjusted by
applying the following formula:
Exercise Price (New) = Exercise Price (Old) X Initial Public Offering Price
of Common Stock in the Offering
Trading Price of U.S. Office Products Common
Stock Pre-Workflow Distribution
The number of U.S. Office Products Options will be adjusted by applying the
following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock
Pre-Workflow Distribution
Initial Public Offering Price of
Common Stock in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Workflow Distribution" will be the average closing price of U.S. Office
Products' common stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
exercise price and number of options will be adjusted solely for the
Distributions and not for other events, such as the Tender Offer. The
foregoing formula adjustments are intended to preserve for the holders of
U.S. Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products'
common stock at the time of the Workflow Distribution and the exercise price
of such option. The intrinsic value of the adjusted Workflow Options will be
no greater than the intrinsic value of the U.S. Office Products Options
before the Distributions, and the ratio of exercise price to market price
will be not less than the ratio before the Distributions. The formulae will
not affect when the options vest or when employees can exercise the options.
(2) Options are "in-the-money" if the closing market price of U.S. Office
Products' common stock exceeds the exercise price of the options.
(3) The value of unexercised options represents the difference between the
exercise price of such options and $16.875, the closing market price of U.S.
Office Products' common stock at April 24, 1998.
(4) 25% of these options became exercisable on April 28, 1998.
48
<PAGE>
CERTAIN TRANSACTIONS
On January 24, 1997, in separate, related transactions, U.S. Office Products
acquired SFI and Hano from Thomas B. D'Agostino, the Chairman and Chief
Executive Officer of Workflow Management, and other stockholders, including
Thomas B. D'Agostino, Jr., Mr. D'Agostino's son, for a total of 3,628,500 shares
of U.S. Office Products' common stock valued at $18.00 per share. The
transactions were effected through mergers which were accounted for as
pooling-of-interests. At the time of the acquisitions, Mr. D'Agostino owned 98%
of the issued and outstanding securities of SFI, and 75% of the issued and
outstanding securities of Hano, and received 3,387,699 shares of U.S. Office
Products' common stock in consideration for these transactions. Thomas B.
D'Agostino, Jr. received 73,144 shares of U.S. Office Products' common stock in
consideration for these transactions. In connection with the transaction, SFI
entered into a four-year employment agreement with Mr. D'Agostino which provided
an annual salary of $400,000 and a one-year employment agreement with Timothy L.
Tabor, a Director of the Company, which provided an annual salary of $260,000.
See "Management--Employment Contracts and Related Matters." These transactions
were the subject of arm's-length negotiations with U.S. Office Products.
The Company has from time to time retained the law firm of Kaufman & Canoles
in connection with certain legal representations. Gus J. James, II, a Director
of the Company, is the President, a director and a shareholder of Kaufman &
Canoles.
Prior to December 1996, SFI leased warehouse space from a partnership in
which Mr. D'Agostino had a 50% interest. The total payments by SFI under this
lease were $81,000 in each of calendar years 1995 and 1996. This lease was
terminated in December 1996. The Company believes that the terms of this
transaction are as favorable as could be negotiated with third parties.
Prior to or after the Workflow Distribution, the Company expects to enter
into a lease with an entity owned or controlled by Mr. D'Agostino for office
space in Norfolk, Virginia. The terms of any such lease have not yet been
determined. The Company anticipates that lease payments will be based on the
market value of the office space and will be comparable to rents that would be
charged to parties not affiliated with Mr. D'Agostino. The Company believes that
the terms of this transaction are as favorable as could be negotiated with third
parties.
SFI loaned Mr. D'Agostino $453,000 in 1995 and $382,000 in 1996. Interest
accrued on amounts outstanding at prime plus 1%. All of Mr. D'Agostino's
outstanding indebtedness to SFI was offset against dividend distributions to Mr.
D'Agostino. The Company believes that the terms of this transaction were subject
to terms no less favorable than an arm's-length transaction.
Workflow Management is negotiating with U.S. Office Products regarding the
license of the Imagenet technology to U.S. Office Products. The parties
anticipate that Workflow Management will retain ownership of Imagenet, but U.S.
Office Products will receive a perpetual, non-exclusive, non-transferable
license to use the technology and the source code to develop derivative
applications; provided, however, that for a period of time to be negotiated,
U.S. Office Products will not use the Imagenet technology or any derivative
application to offer its customers the kind of print and forms services that
Workflow Management offers its customers, including print-on-demand and print
management. The parties anticipate that U.S. Office Products will agree to refer
customers seeking such services to the Company during the restricted period. The
parties are negotiating the license fee payable with respect to the license. The
parties anticipate that the terms of the license will be no less favorable to
the Company than those that would be obtained from third parties in arm's-length
negotiations.
For a discussion of matters related to the spin-off of the Company from U.S.
Office Products, see "The Spin-Offs From U.S. Office Products."
For a discussion of transactions between the Company and Mr. Ledecky, see
"Management--Ledecky Services Agreement."
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of U.S. Office Products' common stock beneficially owned as of April 25,
1998 and as adjusted to reflect the Workflow Distribution and this Offering
(assuming no exercise of the Underwriters' over-allotment option), by (i) all
persons known by Workflow Management to own beneficially more than 5% of the
U.S. Office Products' common stock, (ii) each director and each Named Officer
who is a stockholder, and (iii) all directors and executive officers as a group.
All persons listed below have sole voting and investment power with respect to
their shares of U.S. Office Products' common stock unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF U.S. NUMBER OF SHARES PERCENT OF
NUMBER OF SHARES OFFICE PRODUCTS OF WORKFLOW SHARES OF
OF U.S. OFFICE COMMON STOCK MANAGEMENT COMMON WORKFLOW
PRODUCTS COMMON PRIOR TO STOCK, AS MANAGEMENT
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK OFFERING ADJUSTED (1) COMMON STOCK
- -------------------------------------------- ----------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C>
OFFICERS AND DIRECTORS
Thomas B. D'Agostino (7).................... 500,183(2) *
301 Australian Ave.
Palm Beach, FL 33480
Thomas A. Brown, Sr......................... 0 0%
165 Flanders Road
Bethlehem, CT 06751
Jonathan J. Ledecky (7)..................... 2,428,125(3) 1.8%
240 Royal Palm Way
Palm Beach, Florida 33480
Gus J. James, II............................ 0 0
One Commercial Place
Norfolk, VA 23514
Timothy L. Tabor (7)........................ 3,750(4) *
276 Park Avenue South
New York, NY 10010
Michael B. Feldman (7)...................... 45,766(5) *
3701 E. Virginia Beach Blvd.
Norfolk, VA 23502
F. Craig Wilson............................. 0 0
4841 Tramway Ridge Drive N.E.
Albuquerque, NM 87111
All current executive officers and directors 2,977,824 2.2%
as a group (six persons) (7)..............
5% STOCKHOLDERS
FMR Corp.(6)................................ 15,754,406 11.2%
Devonshire Street
Boston, MA 02109
Massachusetts Financial Services (6)........ 8,262,886 5.9%
500 Boylston Street
Boston, MA 02116
</TABLE>
- ------------------
* Less than 1%.
(1) The "Number of Shares of Workflow Management Common Stock, As Adjusted"
reflects the results of the Tender Offer and the application of the
Distribution Ratio. It assumes no options are exercisable within 60 days.
50
<PAGE>
(2) Includes 11,250 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution. Excludes Mr.
D'Agostino's option for 7.5% of the Common Stock that the Company expects to
grant under the 1998 Stock Incentive Plan, which will not be exercisable
until the 12-month anniversary of the Workflow Distribution. See
"Management--1998 Stock Incentive Plan."
(3) Excludes options for U.S. Office Products' common stock that will not be
converted into options for Common Stock at the time of the Workflow
Distribution. Also excludes Mr. Ledecky's option for up to 7.5% of the
Common Stock that will be granted under the Company's 1998 Stock Incentive
Plan, which will not be exercisable until the 12-month anniversary of the
Workflow Distribution. See "Management--Ledecky Services Agreement."
(4) Includes 3,750 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution.
(5) Includes 45,766 shares which may be acquired upon exercise of options
exercisable within 60 days following the Workflow Distribution.
(6) Based upon a Schedule 13G for U.S. Office Products filed with the Securities
and Exchange Commission.
(7) In respect of U.S. Office Products' Options, the option exercise price will
be adjusted by applying the following formula:
Exercise Price (New) = Exercise Price (Old) XInitial Public Offering Price
of Common Stock in the Offering
Trading Price of U.S. Office Products Common
Stock Pre-Workflow Distribution
In respect of U.S. Office Products Options, the number of options will be
adjusted by applying the following formula:
Option Shares (New) = Option Shares (Old) XTrading Price of U.S. Office
Products Common Stock Pre-Workflow Distribution
Initial Public Offering Price of Common Stock
in the Offering
For all optionees, the "Trading Price of U.S. Office Products Common Stock
Pre-Workflow Distribution" will be the average closing price of U.S. Office
Products' common stock for the lesser of (a) ten business days preceding the
Distributions, or (b) the number of business days falling between the
expiration of the Tender Offer and the completion of the Distributions. The
exercise price and number of options will be adjusted solely for the
Distributions and not for other events, such as the Tender Offer. The
foregoing formula adjustments are intended to preserve for the holders of
U.S. Office Products Options the intrinsic value per option, measured as the
difference between the market value of one share of U.S. Office Products'
common stock at the time of the Workflow Distribution and the exercise price
of such option. The intrinsic value of the adjusted Workflow Options will be
no greater than the intrinsic value of the U.S. Office Products Options
before the Distributions, and the ratio of exercise price to market price
will be not less than the ratio before the Distributions. The formulae will
not affect when the options vest or when employees can exercise the options.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the time of this Offering and the Workflow Distribution, the Company's
authorized capital stock will consist of 150,000,000 shares of Common Stock and
1 million shares of preferred stock, par value $0.001 per share (the "Preferred
Stock"). Upon completion of this Offering and the Workflow Distribution, the
Company will have outstanding approximately 17,260,000 shares of Common Stock
and no shares of Preferred Stock. Set forth below is a description of the
Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Subject
to the rights of any then outstanding shares of Preferred Stock, the holders of
the Common Stock are entitled to such dividends as may be declared in the
discretion of the Board of Directors out of funds legally available therefor.
See "Dividend Policy." The holders of Common Stock are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. The holders of Common Stock have no preemptive rights to
purchase any other securities of the Company. Shares of Common Stock are not
subject to any redemption provisions and are not convertible into any other
securities of the Company. All of the shares of Common Stock to be distributed
pursuant to this Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Certificate of Incorporation and limitations prescribed by law,
the Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the authority of the
Board of Directors described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before
52
<PAGE>
the person becomes an interested stockholder; (ii) the interested stockholder
acquired 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes such person an interested stockholder (excluding
shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans); or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the interested stockholder. Under
Section 203, an "interested stockholder" is defined as any person who is: (i)
the owner of 15% or more of the outstanding voting stock of the corporation; or
(ii) an affiliate or associate of the corporation if such affiliate or associate
was the owner of 15% or more of the outstanding voting stock of the corporation
at any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested stockholder.
Under the Company's Certificate of Incorporation the affirmative vote of a
majority of the directors is required to approve an interested stockholder
transaction.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaws or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Certificate of Incorporation and under Delaware law,
directors of Workflow Management are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
The Company's By-laws provide that the Company will, to the fullest extent
permitted under Delaware law, indemnify its officers and directors against any
damages arising out of their actions as officers or directors of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be American Stock
Transfer & Trust Company.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
following this Offering and the Workflow Distribution could have an adverse
effect on the market price of the Common Stock. The 2,500,000 shares of Common
Stock offered by the Company hereby (and any shares sold pursuant to the
exercise of the Underwriters' over-allotment option) will be freely tradable
without restriction other than in the hands of "affiliates" of the Company as
defined in Rule 144. Shares of Common Stock issued upon consummation of the
Workflow Distribution will be freely tradeable after the Workflow Distribution
other than in the hands of "affiliates" of the Company as defined in Rule 144.
Common stock in the hands of affiliates will be "restricted securities" subject
to Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least one year, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the outstanding Common
Stock (approximately 172,600 shares of Common Stock immediately after this
Offering and the Workflow Distribution or 172,635 shares if the Underwriters'
over-allotment option is exercised in full) or (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed pursuant
to Rule 144. Sales under Rule 144 are also subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information about the Company. A stockholder (or stockholders
whose shares are aggregated) who is not an affiliate of the Company for at least
90 days prior to a sale and who has beneficially owned "restricted securities"
for at least two years is entitled to sell such shares under Rule 144 without
regard to the limitations described above.
Certain executive officers and directors of the Company have agreed not to
sell or otherwise dispose of their shares of Common Stock for a period of 180
days following this Offering without the consent of BancAmerica Robertson
Stephens.
The Company intends to register the shares of Common Stock reserved for
issuance pursuant to its stock incentive plan as soon as practicable following
the date of this Prospectus. A substantial number of options to acquire shares
of Common Stock will be exercisable upon consummation of the Workflow
Distribution. Following this Offering and the Workflow Distribution, in view of
the large number of shares freely tradeable and available for immediate sale,
the market for the Company's Common Stock could be highly volatile, which could
adversely affect the trading price of the Common Stock. See "Risk Factors--
Potential Volatility of Stock Price and Other Risks Associated with Shares
Eligible for Immediate Sale."
54
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, BancAmerica Robertson Stephens, Morgan Stanley Dean Witter and
Sands Brothers & Co., Ltd. (the "Representatives"), have severally agreed,
subject to the terms and conditions of an underwriting agreement among the
Company and the Underwriters (the "Underwriting Agreement"), to purchase the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
BancAmerica Robertson Stephens.....................................................
Morgan Stanley Dean Witter.........................................................
Sands Brothers & Co., Ltd. ........................................................
-----------
Total..........................................................................
-----------
-----------
</TABLE>
The Representatives have advised the Company that they propose to offer the
shares of Common Stock to the public at the offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall affect the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 2,500,000 shares that the Underwriters have agreed to
purchase from the Company. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 2,500,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 2,500,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Pursuant to the terms of the Lock-Up Agreements, the holders of
approximately shares of the Common Stock have agreed with the
Representatives that for a period of 180 days after the date of this Prospectus
(the "Lock-Up Period"), subject to certain limited exceptions, they will not
sell or otherwise dispose of shares of Common Stock, including shares issuable
under options or warrants exercisable during the Lock-Up Period, any options or
warrants to purchase shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock owned directly by such holders or
with respect to which they have the power of disposition without the prior
written consent of BancAmerica Robertson Stephens. However, BancAmerica
Robertson Stephens may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
There are no agreements between the Representatives and any of the Company's
stockholders providing consent by the Representatives to the sale of shares
prior to the expiration of the Lock-Up Period. The Company has agreed that
during the Lock-Up Period, the Company will not, subject to certain exceptions,
without the prior written consent of BancAmerica Robertson Stephens, (i) consent
to the disposition of any shares held by stockholders prior to the expiration of
the Lock-Up Period or (ii) issue, sell, contract to sell or otherwise dispose
of, any shares of Common Stock, any options or warrants to purchase any shares
of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common
55
<PAGE>
Stock, other than the Company's sale of shares in this Offering, the issuance of
Common Stock upon the exercise of outstanding options and warrants and the
Company's issuance of options and stock under the existing stock option and
stock purchase plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations between the Company and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions, certain financial information of the
Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
Certain persons participating in this Offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock will be passed upon for the
Company by Wilmer, Cutler & Pickering, Washington, D.C. Certain legal matters in
connection with the Common Stock will be passed upon for the Underwriters by
Winston & Strawn, Chicago, Illinois.
EXPERTS
The consolidated financial statements of Workflow Management as of April 30,
1996 and April 26, 1997, and for the fiscal year ended December 31, 1995, the
four months ended April 30, 1996 and the fiscal year ended April 26, 1997
included in this Prospectus, except as they relate to Workflow Management, Inc.
for the year ended December 31, 1994; Hano Document Printers, Inc. as of
December 31, 1995 and for the year then ended; and United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc. as of December 31, 1994 and 1995 and for
the years then ended, have been audited by Price Waterhouse LLP, independent
accountants, and insofar as they relate to Workflow Management, Inc. for the
year ended December 31, 1994 by KPMG Peat Marwick LLP; Hano Document Printers,
Inc., by KPMG Peat Marwick LLP; and United Envelope Co., Inc. and Huxley
Envelope Corporation by Hertz, Herson & Company
56
<PAGE>
LLP, independent accountants, whose reports dated February 17, 1998, August 28,
1996 and March 6, 1996, respectively, thereon appear herein. Such financial
statements have been so included in reliance on the reports of such independent
accountants given on the authority of such firms as experts in auditing and
accounting.
The financial statements of Astrid Offset Corporation as of July 31, 1997
and for the year then included in this Prospectus have been so included in
reliance on the February 6, 1997 report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 pursuant to the Securities Act with respect to the Common Stock offered
hereby (the "Registration Statement"). This prospectus (the "Prospectus") does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus concerning the provisions of any document filed with the Registration
Statement as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement.
For further information about the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the financial
statements, schedules and exhibits filed as a part thereof. Upon completion of
this Offering, the Company will be subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, will file reports and other information with the
Commission. The Registration Statement, the exhibits and schedules forming a
part thereof and the reports and other information filed by the Company with the
Commission in accordance with the Exchange Act may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; at its New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048; and its Chicago Regional
Officer, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the public reference section of the
Commission, 450 Fifth Street N.W., Washington, D.C. 20549, upon payment of the
prescribed rates. The Commission maintains a world wide web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, and the address of
such site is http://www.sec.gov.
57
<PAGE>
WORKFLOW MANAGEMENT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WORKFLOW MANAGEMENT, INC. HISTORICAL FINANCIAL STATEMENTS
Page
---
Report of Price Waterhouse LLP, Independent Accountants F-2
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors F-3
Report of KPMG Peat Marwick LLP, Independent Auditors F-4
Report of Hertz, Herson & Company, LLP, Independent Auditors F-5
Report of Hertz, Herson & Company, LLP, Independent Auditors F-6
Consolidated Balance Sheet as of April 30, 1996, April 26, 1997 and January 24,
1998 (unaudited) F-7
Consolidated Statement of Income for the years ended December 31, 1994 and 1995,
the four months ended April 30, 1996, the fiscal year ended April 26, 1997 and
the nine months ended January 25, 1997 (unaudited) and January 24, 1998
(unaudited) F-8
Consolidated Statement of Stockholder's Equity for the years ended December 31,
1994 and 1995, the four months ended April 30, 1996, the fiscal year ended April
26, 1997 and the nine months ended January 24, 1998 (unaudited) F-9
Consolidated Statement of Cash Flows for the years ended December 31, 1994 and
1995, the four months ended April 30, 1996, the fiscal year ended April 26, 1997
and the nine months ended January 25, 1997 (unaudited) and January 24, 1998
(unaudited) F-10
Notes to Consolidated Financial Statements F-12
ASTRID OFFSET CORPORATION
Report of Price Waterhouse LLP, Independent Accountants F-27
Balance Sheet as of July 31, 1997 and October 31, 1997 (unaudited) F-28
Statement of Income for the year ended July 31, 1997 and the three months ended
October 31, 1996 (unaudited) and 1997 (unaudited) F-29
Statement of Stockholder's Equity for the year ended July 31, 1997 and the three
months ended October 31, 1997 (unaudited) F-30
Statement of Cash Flows for the year ended July 31, 1997 and the three months ended
October 31, 1996 (unaudited) and 1997 (unaudited) F-31
Notes to Financial Statements F-32
WORKFLOW MANAGEMENT, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Pro Forma Financial Information F-36
Pro Forma Combined Balance Sheet as of January 24, 1998 (unaudited) F-37
Pro Forma Combined Statement of Income for the nine months ended January 24, 1998
(unaudited) F-38
Pro Forma Combined Statement of Income for the nine months ended January 25, 1997
(unaudited) F-39
Pro Forma Combined Statement of Income for the fiscal year ended April 26, 1997
(unaudited) F-40
Notes to Pro Forma Combined Financial Statements F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Workflow Management, Inc.:
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Workflow Management, Inc. (the
"Company") and its subsidiaries at April 30, 1996 and April 26, 1997, and the
results of their operations and their cash flows for the fiscal year ended
December 31, 1995, the four months ended April 30, 1996 and the fiscal year
ended April 26, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Hano Document Printers, Inc. ("Hano"), United Envelope Co., Inc. and its
affiliate, Rex Envelope Co. Inc. ("United") and Huxley Envelope Corporation
("Huxley"), wholly-owned subsidiaries, which statements reflect total revenues
for the year ended December 31, 1995 of $31,299,000, $81,917,000 and
$18,868,000, respectively. Those statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Hano, United and Huxley, is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 10, 1998, except for Note 1
and the last paragraph of Note 3,
which are as of May 14, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Workflow Management, Inc.:
We have audited the accompanying consolidated statements of income,
stockholder's equity and cash flows of Workflow Management, Inc. and
subsidiaries (the "Company") for the year ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of United Envelope Co., Inc. and its affiliates, Rex Envelope Co.,
Inc. ("United"), and Huxley Envelope Corporation ("Huxley"), wholly owned
subsidiaries, which statements reflect total revenues constituting 46.3 percent
of the consolidated total for the year ended December 31, 1994. Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for United and Huxley, is
based solely on the reports of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Workflow
Management, Inc. and subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 17, 1998
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Hano Document Printers, Inc.:
We have audited the balance sheet of Hano Document Printers, Inc. as of
December 31, 1995 and the related statements of income, stockholders' equity and
cash flows for the year then ended, which are not included herein. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hano Document Printers, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
August 28, 1996
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
United Envelope Co., Inc.
We have audited the combined balance sheets of United Envelope Co., Inc. and
its affiliate, Rex Envelope Co., Inc., as at December 31, 1995 and 1994, and the
related combined statements of income and retained earnings and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referred to in Note A on "Principles of Combination," the companies,
whose financial statements are combined, are related through common ownership
and control. In addition, each has pledged certain assets and guaranteed
long-term indebtedness of the other as described in the notes to financial
statements. In view of their close operating and financial relationship, the
preparation of combined financial statements was considered appropriate. The
combined statements, however, do not refer to a legal entity and neither of the
companies guarantees trade obligations of the other.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of United
Envelope Co., Inc. and its affiliate as at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
HERTZ, HERSON & COMPANY, LLP
New York, New York
March 6, 1996
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Huxley Envelope Corporation
Industrial Park Blvd.
Mt. Pocono Industrial Park
Mt. Pocono, PA 18344
We have audited the balance sheets of Huxley Envelope Corporation as at
December 31, 1995 and 1994, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Huxley Envelope Corporation
as at December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HERTZ, HERSON & COMPANY LLP
New York, New York
March 4, 1996
F-6
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 1,324 $ 2,168 $ 248
Accounts receivable, less allowance for doubtful accounts of $1,993,
$1,831 and $2,828, respectively......................................... 50,942 50,917 54,121
Inventories............................................................... 23,815 26,990 29,330
Prepaid expenses and other current assets................................. 3,314 3,402 1,875
---------- ---------- -----------
Total current assets.................................................. 79,395 83,477 85,574
Property and equipment, net................................................. 31,647 33,119 31,064
Notes receivable from employees............................................. 3,461 3,643
Intangible assets, net...................................................... 879 913 2,203
Other assets................................................................ 6,028 4,138 4,621
---------- ---------- -----------
Total assets.......................................................... $ 117,949 $ 125,108 $ 127,105
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term debt........................................................... $ 23,515 $ 3,681 $ 4,939
Short-term payable to U.S. Office Products................................ 23,622 17,658
Accounts payable.......................................................... 22,163 27,031 23,749
Accrued compensation...................................................... 4,752 4,173 4,004
Other accrued liabilities................................................. 5,587 8,060 9,854
---------- ---------- -----------
Total current liabilities............................................. 56,017 66,567 60,204
Long-term debt.............................................................. 28,108 6,034 5,498
Long-term payable to U.S. Office Products................................... 561 1,905
Deferred income taxes....................................................... 4,704 4,045 3,507
Other long-term liabilities................................................. 121 12
---------- ---------- -----------
Total liabilities..................................................... 88,829 77,328 71,126
---------- ---------- -----------
Commitments and contingencies
Stockholder's equity:
Divisional equity......................................................... 11,790 45,614 47,726
Cumulative translation adjustment......................................... 352 97 (1,365)
Retained earnings......................................................... 16,978 2,069 9,618
---------- ---------- -----------
Total stockholder's equity............................................ 29,120 47,780 55,979
---------- ---------- -----------
Total liabilities and stockholder's equity............................ $ 117,949 $ 125,108 $ 127,105
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE FOUR FISCAL FOR THE NINE
YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED
-------------------------- ------------- ------------- ------------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25, JANUARY 24,
1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................ $ 154,193 $ 309,426 $ 114,099 $ 327,381 $ 239,751 $ 257,777
Cost of revenues.................... 114,885 234,959 82,998 236,340 172,869 190,482
------------ ------------ ------------- ------------- ----------- -----------
Gross profit.................. 39,308 74,467 31,101 91,041 66,882 67,295
Selling, general and administrative
expenses.......................... 32,020 62,012 22,485 70,949 51,735 53,083
Non-recurring acquisition costs..... 5,006 2,902
------------ ------------ ------------- ------------- ----------- -----------
Operating income.............. 7,288 12,455 8,616 15,086 12,245 14,212
Other (income) expense:
Interest expense.................. 2,048 5,370 1,676 4,561 3,910 1,665
Interest income................... (18) (25) (21) (9)
Other............................. 186 62 (151) 632 610 (205)
------------ ------------ ------------- ------------- ----------- -----------
Income before provision for (benefit
from) income taxes and
extraordinary items............... 5,054 7,023 7,109 9,918 7,746 12,761
Provision for (benefit from) income
taxes............................. 379 (33) 1,351 3,690 2,249 5,212
------------ ------------ ------------- ------------- ----------- -----------
Income before extraordinary items... 4,675 7,056 5,758 6,228 5,497 7,549
Extraordinary items--losses on early
terminations of credit facilities,
net of income taxes............... 700 798
------------ ------------ ------------- ------------- ----------- -----------
Net income.......................... $ 4,675 $ 6,356 $ 5,758 $ 5,430 $ 5,497 $ 7,549
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Per share amounts:
Basic:
Income from before
extraordinary items......... $ 0.77 $ 0.90 $ 0.56 $ 0.52 $ 0.48 $ 0.49
Extraordinary items........... 0.09 0.07
------------ ------------ ------------- ------------- ----------- -----------
Net income.................... $ 0.77 $ 0.81 $ 0.56 $ 0.45 $ 0.48 $ 0.49
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Diluted:
Income from before
extraordinary items......... $ 0.77 $ 0.88 $ 0.55 $ 0.51 $ 0.47 $ 0.48
Extraordinary items........... 0.09 0.07
------------ ------------ ------------- ------------- ----------- -----------
Net income.................... $ 0.77 $ 0.79 $ 0.55 $ 0.44 $ 0.47 $ 0.48
------------ ------------ ------------- ------------- ----------- -----------
------------ ------------ ------------- ------------- ----------- -----------
Unaudited pro forma net income
before extraordinary items (see
Note 8)........................... $ 3,788 $ 3,344 $ 7,549
------------- ----------- -----------
------------- ----------- -----------
Unaudited pro forma income per share
before extraordinary items:
Basic........................... $ 0.32 $ 0.29 $ 0.49
------------- ----------- -----------
------------- ----------- -----------
Diluted......................... $ 0.31 $ 0.29 $ 0.48
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
DIVISIONAL TRANSLATION RETAINED STOCKHOLDER'S
EQUITY ADJUSTMENT EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................................... $ 4,239 $ $ 7,436 $ 11,675
Cash dividends at Pooled Companies........................... (3,461) (3,461)
Net income................................................... 4,675 4,675
----------- ----------- ----------- -------------
Balance at December 31, 1994................................... 4,239 8,650 12,889
Transactions of Pooled Companies:
Issuance of Pooled Company common stock in conjunction with
acquisition.............................................. 7,451 7,451
Capital contributions...................................... 100 100
Cash dividends............................................. (2,465) (2,465)
Cumulative translation adjustment............................ 388 388
Net income................................................... 6,356 6,356
----------- ----------- ----------- -------------
Balance at December 31, 1995................................... 11,790 388 12,541 24,719
Cash dividends at Pooled Companies........................... (1,321) (1,321)
Cumulative translation adjustment............................ (36) (36)
Net income................................................... 5,758 5,758
----------- ----------- ----------- -------------
Balance at April 30, 1996...................................... 11,790 352 16,978 29,120
Transactions of Pooled Companies:
Retirement of common stock................................. (477) (477)
Cash dividends............................................. (6,102) (6,102)
Undistributed earnings of subchapter S corporations........ 14,237 (14,237)
Cumulative translation adjustment............................ (255) (255)
Capital contribution by U.S. Office Products................. 20,064 20,064
Net income................................................... 5,430 5,430
----------- ----------- ----------- -------------
Balance at April 26, 1997...................................... 45,614 97 2,069 47,780
Unaudited data:
Issuance of U.S. Office Products Company common stock in
conjunction with acquisition............................... 2,112 2,112
Cumulative translation adjustment............................ (1,462) (1,462)
Net income................................................... 7,549 7,549
----------- ----------- ----------- -------------
Balance at January 24, 1998 (unaudited)........................ $ 47,726 $ (1,365) $ 9,618 $ 55,979
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE
FOR THE FOUR FISCAL MONTHS
FOR THE YEAR ENDED MONTHS ENDED YEAR ENDED ENDED
--------------------------- ------------- ------------- -----------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26, JANUARY 25,
1994 1995 1996 1997 1997
------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income......................................... $ 4,675 $ 6,356 $ 5,758 $ 5,430 $ 5,497
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 1,921 5,890 3,583 6,469 5,480
Non-recurring acquisition costs.................. 5,006 2,902
Deferred income taxes............................ (660) (956)
Extraordinary loss............................... 700 798
Other............................................ 92 122
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (4,607) (7,039) 3,098 25 (91)
Inventory...................................... 370 1,884 302 (3,175) (737)
Prepaid expenses and other current assets...... (720) (284) (354) 249 234
Accounts payable............................... 4,140 1,541 (339) 4,643 4,345
Accrued liabilities............................ 202 1,942 (930) 894 2,842
------------- ------------ ------------- ------------- -----------
Net cash provided by operating activities.... 6,073 11,112 11,118 19,679 19,516
------------- ------------ ------------- ------------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.... (37,859)
Payments of non-recurring acquisition costs........ (4,100) (397)
Additions to property and equipment................ (1,716) (5,944) (4,505) (9,450) (7,416)
Cash received on the sale of property and
equipment........................................ 2,033 269 82 2,199 1,324
Other.............................................. (440) 1,147 (2,739) (1,186)
------------- ------------ ------------- ------------- -----------
Net cash used in investing activities........ (123) (42,387) (4,423) (14,090) (7,675)
------------- ------------ ------------- ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........... 1,269 65,218 82 1,178 951
Payments of long-term debt......................... (4,194) (4,710) (23,135) (16,003)
Proceeds from (payments of) short-term debt, net... (134) (24,684) (5,844) (19,414) (7,353)
Payment to terminate credit facility............... (579) (974)
Payments of dividends at Pooled Companies.......... (2,266) (3,909) (1,321) (6,141) (4,630)
Retirement of common stock......................... (477)
Capital contributed by stockholders of Pooled
Company.......................................... 100
Advances from (to) U.S. Office Products............ 24,183
Capital contributed by U.S. Office Products........ 20,064 16,449
------------- ------------ ------------- ------------- -----------
Net cash provided by (used in) financing
activities................................. (5,325) 31,436 (7,083) (4,716) (10,586)
------------- ------------ ------------- ------------- -----------
Effect of exchange rates on cash and cash
equivalents........................................ 388 (29) (3)
------------- ------------ ------------- ------------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 625 549 (388) 844 1,252
Cash and cash equivalents at beginning of period..... 538 1,163 1,712 1,324 1,324
------------- ------------ ------------- ------------- -----------
Cash and cash equivalents at end of period........... $ 1,163 $ 1,712 $ 1,324 $ 2,168 $ 2,576
------------- ------------ ------------- ------------- -----------
------------- ------------ ------------- ------------- -----------
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 2,349 $ 2,703 $ 794 $ 2,063 $ 616
Income taxes paid.................................. $ 437 $ 560 $ 674 $ 3,390 $ 1,211
<CAPTION>
JANUARY 24,
1998
-----------
<S> <C>
Cash flows from operating activities:
Net income......................................... $ 7,549
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............ 4,803
Non-recurring acquisition costs..................
Deferred income taxes............................
Extraordinary loss...............................
Other............................................
Changes in current assets and liabilities (net of
assets acquired and liabilities assumed in
business combinations accounted for under the
purchase method):
Accounts receivable............................ (2,863)
Inventory...................................... (2,830)
Prepaid expenses and other current assets...... 703
Accounts payable............................... (3,875)
Accrued liabilities............................ 2,517
-----------
Net cash provided by operating activities.... 6,004
-----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received.... 114
Payments of non-recurring acquisition costs........ (906)
Additions to property and equipment................ (3,383)
Cash received on the sale of property and
equipment........................................ 141
Other..............................................
-----------
Net cash used in investing activities........ (4,034)
-----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........... 1,771
Payments of long-term debt......................... (2,307)
Proceeds from (payments of) short-term debt, net... 1,257
Payment to terminate credit facility...............
Payments of dividends at Pooled Companies..........
Retirement of common stock.........................
Capital contributed by stockholders of Pooled
Company..........................................
Advances from (to) U.S. Office Products............ (4,620)
Capital contributed by U.S. Office Products........
-----------
Net cash provided by (used in) financing
activities................................. (3,899)
-----------
Effect of exchange rates on cash and cash
equivalents........................................ 9
-----------
Net increase (decrease) in cash and cash
equivalents........................................ (1,920)
Cash and cash equivalents at beginning of period..... 2,168
-----------
Cash and cash equivalents at end of period........... $ 248
-----------
-----------
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 535
Income taxes paid.................................. $ 3,468
</TABLE>
F-10
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
The Company issued common stock and cash in connection with certain business
combinations accounted for under the purchase method in the year ended December
31, 1995 and for the nine months ended January 24, 1998. The fair values of the
assets and liabilities of the acquired companies at the dates of the
acquisitions are presented as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
------------
DECEMBER 31,
1995
------------ FOR THE NINE
MONTHS ENDED
---------------
JANUARY 24,
1998
---------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable.................................................................... $ 19,106 $ 1,109
Inventories............................................................................ 17,436 41
Prepaid expenses and other current assets.............................................. 578 26
Property and equipment................................................................. 21,466 84
Intangible assets...................................................................... 1,445
Other assets........................................................................... 4,499
Accounts payable....................................................................... (9,651) (332)
Accrued liabilities.................................................................... (3,700) (365)
Long-term debt......................................................................... (10)
Other long-term liabilities and minority interest...................................... (4,424)
------------ ------
Net assets acquired.............................................................. $ 45,310 $ 1,998
------------ ------
------------ ------
The acquisitions were funded as follows:
Common stock........................................................................... $ 7,451 $ 2,112
Cash paid, net of cash received........................................................ 37,859 (114)
------------ ------
Total.............................................................................. $ 45,310 $ 1,998
------------ ------
------------ ------
</TABLE>
Noncash transactions:
During the year ended December 31, 1995 and the four months ended April 30,
1996, the Company forgave receivables from an employee of $509 and $382,
respectively.
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
Workflow Management, Inc. (the "Company") is a Delaware corporation which is
a wholly-owned subsidiary of U.S. Office Products Company ("U.S. Office
Products"). On January 13, 1998, U.S. Office Products announced its intention to
spin-off its Print Management Division as an independent publicly owned company.
This transaction is expected to be effected through the distribution of shares
of the Company to U.S. Office Products shareholders effective on or about June
9, 1998 (the "Distribution"). Prior to the Distribution, U.S. Office Products
plans to contribute its equity interests in certain wholly-owned subsidiaries
associated with U.S. Office Products' Print Management Division to the Company.
U.S. Office Products and the Company will enter into a number of agreements to
facilitate the Distribution and the transition of the Company to an independent
business enterprise. On March 6, 1998, the Company filed an initial public
offering registration statement for the issuance of 2.5 million shares of the
Company's common stock (plus 375,000 shares to cover over-allotments), which is
expected to close prior to or concurrent with the Distribution.
The Print Management Division was created by U.S. Office Products in January
1997 and completed seven business combinations accounted for under the
pooling-of-interests method during the period from January 1997 to April 1997
(the "Pooled Companies"). As a result of these business combinations being
accounted for under the pooling-of-interests method, the results of the Company
prior to the completion of such business combinations represent the combined
results of the Pooled Companies operating as separate autonomous entities.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements reflect the assets, liabilities,
divisional equity, revenues and expenses that were directly related to the
Company as it was operated within U.S. Office Products. In cases involving
assets and liabilities not specifically identifiable to any particular business
of U.S. Office Products, only those assets and liabilities expected to be
transferred to the Company prior to the Distribution were included in the
Company's separate consolidated balance sheet. With the exception of interest
expense, the Company's statement of income includes all of the related costs of
doing business including an allocation of certain general corporate expenses of
U.S. Office Products which were not directly related to these businesses
including certain corporate executives' salaries, accounting and legal fees,
departmental costs for accounting, finance, legal, purchasing, marketing, human
resources as well as other general overhead costs. These allocations were based
on a variety of factors, dependent upon the nature of the costs being allocated,
including revenues, number and size of acquisitions and number of employees.
Management believes these allocations were made on a reasonable basis.
U.S. Office Products uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents and an agreed upon amount of debt will be allocated to the Company
at the time of the Distribution. The consolidated statement of income includes
an allocation of interest expense on all debt allocated to the Company. See Note
7 for further discussion of interest expense.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-12
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CHANGE IN FISCAL YEAR
Prior to their respective dates of acquisition by U.S. Office Products, the
Pooled Companies reported results on years ending on December 31. Upon
acquisition by U.S. Office Products and effective for the fiscal year ended
April 26, 1997 ("fiscal 1997"), the Pooled Companies changed their year-ends
from December 31 to conform to U.S. Office Products' fiscal year, which ends on
the last Saturday in April. A four month fiscal transition period from January
1, 1996 through April 30, 1996 has been presented for the Company to conform its
fiscal year-end.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers temporary cash investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
Receivables arising from sales to customers are not collateralized and, as a
result, management continually monitors the financial condition of its customers
to reduce the risk of loss.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out (FIFO) basis and consist primarily of products held for
sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions and improvements are
capitalized. Maintenance and repairs are expensed as incurred. Depreciation of
property and equipment is calculated using the straight-line method over the
estimated useful lives of the respective assets. The estimated useful lives
range from 25 to 40 years for buildings and its components and 3 to 15 years for
furniture, fixtures and equipment. Property and equipment leased under capital
leases is being amortized over the lesser of its useful life or its lease terms.
NOTES RECEIVABLE FROM EMPLOYEES
The Company has outsanding promissory notes receivable due from two
employees which earn interest at a rate of approximately 7% per annum. The
promissory notes receivable are due in two equal
F-13
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
installments with the first payment, including accrued interest, due on June 30,
1998 and the final payment, including all outstanding principal and remaining
interest, due on June 30, 1999.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of cost over the fair value of assets acquired in business combinations
accounted for under the purchase method, and non-compete agreements.
Substantially all goodwill is amortized on a straight line basis over an
estimated useful life of 40 years. Management periodically evaluates the
recoverability of goodwill, which would be adjusted for a permanent decline in
value, if any, by comparing anticipated undiscounted future cash flows from
operations to net book value. Intangible assets associated with non-compete
agreements are being amortized using the straight-line method over the estimated
useful lives of the agreements which are generally one to five years. Other
intangibles primarily consist of customer lists which are amortized over the
estimated useful lives of the agreements which are generally one to five years.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts of foreign subsidiaries are translated using the
year-end exchange rate, and statement of income accounts are translated using
the average exchange rate for the year. Translation adjustments are recorded as
a separate component of stockholder's equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value.
INCOME TAXES
As a division of U.S. Office Products, the Company does not file separate
federal income tax returns but rather is included in the federal income tax
returns filed by U.S. Office Products and its subsidiaries from the respective
dates that the entities within the Company were acquired by U.S. Office
Products. For purposes of the consolidated financial statements, the Company's
allocated share of U.S. Office Products' income tax provision was based on the
"separate return" method. Certain companies acquired in pooling-of-interests
transactions elected to be taxed as subchapter S corporations, and accordingly,
no federal income taxes were recorded by those companies for periods prior to
their acquisition by U.S. Office Products.
TAXES ON UNDISTRIBUTED EARNINGS
No provision is made for U.S. income taxes on earnings of the Company's
Canadian subsidiary company which the Company controls but does not include in
the consolidated federal income tax return since it is management's practice and
intent to permanently reinvest the earnings of this subsidiary.
REVENUE RECOGNITION
Revenue is recognized upon the delivery of products or upon the completion
of services provided to customers as no additional obligations to the customers
exist. Returns of the Company's product are considered immaterial.
F-14
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF REVENUES
Vendor rebates are recognized on an accrual basis in the period earned and
are recorded as a reduction to cost of revenues. Delivery and occupancy costs
are included in cost of revenues.
ADVERTISING COSTS
The Company expenses advertising costs when the advertisement occurs.
Advertising costs are included in the consolidated statement of income as a
component of selling, general and administrative expenses. Advertising expense
for the years ended December 31, 1994 and 1995 and the fiscal year ended April
26, 1997 was $284, $551 and $1,410, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations in the year
incurred. Research and development costs are included in the consolidated
statement of income as a component of selling, general and administrative
expenses.
INTERNALLY DEVELOPED SOFTWARE
Internal costs related to internally developed software such as internal
salaries and supplies are expensed as incurred as a component of selling,
general and administrative expenses. External costs related to internally
developed software such as outside programmers and consultants are capitalized
and expensed over the expected useful life of the software, normally three to
five years.
NON-RECURRING ACQUISITION COSTS
Non-recurring acquisition costs represent acquisition costs incurred by the
Company in business combinations accounted for under the pooling-of-interests
method. These costs include accounting, legal, and investment banking fees, real
estate and environmental assessments and appraisals and various regulatory fees.
Generally accepted accounting principles require the Company to expense all
acquisition costs (both those paid by the Company and those paid by the sellers
of the acquired companies) related to business combinations accounted for under
the pooling-of-interests method.
NET INCOME PER SHARE
Net income per share is calculated in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of 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 difference between the
weighted-average number of common shares used for the calculation of basic EPS
and the weighted-average number of shares of common shares used for the diluted
EPS is comprised of the dilutive effect of outstanding common stock options.
However, a portion of the Company's employee stock options outstanding during
the periods presented were not included in the computation of diluted EPS as
they were anti-dilutive.
F-15
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recgonized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999.
UNAUDITED INTERIM FINANCIAL DATA
In the opinion of management, the Company has made all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial condition of the Company as of January 24, 1998 and the results
of operations and of cash flows for the nine months ended January 25, 1997 and
January 24, 1998, as presented in the accompanying unaudited consolidated
financial data.
DISTRIBUTION RATIO
On May 14, 1998, the U.S. Office Products Board of Directors approved the
distribution ratio for the Company in connection with the Distribution. At the
date of Distribution, the Company will issue to U.S. Office Products
shareholders one share of its 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 the date indicated, and
retroactively adjusted to give effect to 1 for 7.5 distribution ratio.
NOTE 4--BUSINESS COMBINATIONS
POOLING-OF-INTERESTS METHOD
In fiscal 1997, the Company issued 10,868,509 shares of U.S. Office Products
common stock to acquire the Pooled Companies. The Pooled Companies and the
number of shares issued are as follows:
<TABLE>
<CAPTION>
NUMBER OF
COMPANY NAME SHARES ISSUED
- ------------------------------------------------------------------------------- -------------
<S> <C>
SFI Corp. ..................................................................... 2,897,060
Hano Document Printers, Inc. .................................................. 731,440
United Envelope Co., Inc.*..................................................... 2,863,634
Data Business Forms Limited.................................................... 4,376,375
-------------
Total shares issued........................................................ 10,868,509
-------------
-------------
</TABLE>
- ------------------
* Includes shares issued for the acquisitions of United Envelope Co.,
Inc.; Rex Envelope Co., Inc.; Huxley Envelope Corporation and Pocono
Envelope Corporation which were simultaneously acquired in the
aggregate.
F-16
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The Company's consolidated financial statements give retroactive effect to
the acquisitions of the Pooled Companies for all periods presented. Prior to
being acquired by U.S. Office Products, the Pooled Companies all reported on
years ending on December 31. Upon completion of the acquisitions of the Pooled
Companies, their year-ends were changed to U.S. Office Products' year-end of the
last Saturday in April.
The following presents the separate results, in each of the periods
presented, of the Company (excluding the results of Pooled Companies prior to
the dates on which they were acquired), and the Pooled Companies up to the dates
on which they were acquired:
<TABLE>
<CAPTION>
WORKFLOW POOLED
MANAGEMENT, INC. COMPANIES COMBINED
---------------- ----------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1994
Revenues............................................................. $ $ 154,193 $ 154,193
Net income........................................................... $ $ 4,675 $ 4,675
For the year ended December 31, 1995
Revenues............................................................. $ $ 309,426 $ 309,426
Net income........................................................... $ $ 6,356 $ 6,356
For the four months ended April 30, 1996
Revenues............................................................. $ $ 114,099 $ 114,099
Net income........................................................... $ $ 5,758 $ 5,758
For the year ended April 26, 1997
Revenues............................................................. $ 29,373 $ 298,008 $ 327,381
Net income (loss).................................................... $ (61) $ 5,491 $ 5,430
For the nine months ended January 25, 1997 (unaudited):
Revenues............................................................. $ $ 239,751 $ 239,751
Net income........................................................... $ $ 5,497 $ 5,497
For the nine months ended January 24, 1998 (unaudited):
Revenues............................................................. $ 257,777 $ $ 257,777
Net income........................................................... $ 7,549 $ $ 7,549
</TABLE>
PURCHASE METHOD
In 1995, one of the Pooled Companies made an acquisition accounted for under
the purchase method for an aggregate purchase price of $45,310, consisting of
$37,859 of cash and common stock with a market value of $7,451. The total assets
related to this acquisition were $63,085. No goodwill was generated in the
acquisition. The results of this acquisition have been included in the Company's
results from its date of acquisition.
During the nine months ended January 24, 1998, the Company made one
acquisition accounted for under the purchase method for an aggregate purchase
price of $1,998, consisting of 120,066 shares of common stock with a market
value of $2,112 and net of $114 of cash acquired. The total assets related to
this acquisition were $2,705, including intangible assets of $1,445. The results
of this acquisition have been included in the Company's results from its date of
acquisition.
F-17
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--BUSINESS COMBINATIONS (CONTINUED)
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 and includes the Company's
consolidated financial statements, which give retroactive effect to the
acquisitions of the Pooled Companies for all periods presented, and the results
of the purchase acquisition completed in 1995 as if it had been made at the
beginning of 1995. The results presented below include certain pro forma
adjustments to reflect the amortization of intangible assets, adjustments in
executive compensation of $875 for the year ended December 31, 1995, and the
inclusion of a federal income tax provision on all earnings:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues................................................................... $ 319,527
Income before extraordinary items.......................................... 5,303
Net income................................................................. 4,603
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of 1995 or the results
which may occur in the future.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
---------- ----------
<S> <C> <C>
Land.................................................................. $ 1,589 $ 1,022
Buildings............................................................. 3,144 4,705
Furniture and fixtures................................................ 34,207 42,394
Warehouse equipment................................................... 3,624 1,013
Equipment under capital leases........................................ 589 916
Leasehold improvements................................................ 2,167 2,933
---------- ----------
45,320 52,983
Less: Accumulated depreciation........................................ (13,673) (19,864)
---------- ----------
Net property and equipment............................................ $ 31,647 $ 33,119
---------- ----------
---------- ----------
</TABLE>
Depreciation expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, and the fiscal year ended April 26, 1997 was
$1,904, $4,720, $3,174 and $5,778, respectively.
F-18
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, JANUARY 24,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill.................................................... $ 496 $ 496 $ 1,940
Non-compete agreements...................................... 287 322 322
Other....................................................... 304 507 506
----------- ----------- -----------
1,087 1,325 2,768
Less: Accumulated amortization.............................. (208) (412) (565)
----------- ----------- -----------
Net intangible assets................................. $ 879 $ 913 $ 2,203
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Amortization expense for the years ended December 31, 1994 and 1995, the
four months ended April 30, 1996, fiscal year ended April 26, 1997 and the nine
months ended January 24, 1998 was $17, $74, $44, $204 and $165 (unaudited),
respectively.
NOTE 7--CREDIT FACILITIES
SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Credit facilities with banks, average interest rate of 8.4% at
April 30, 1996........................................................ $ 19,201 $
Current maturities of long-term debt.................................... 4,314 3,681
--------- ---------
Total short-term debt............................................. $ 23,515 $ 3,681
--------- ---------
--------- ---------
</TABLE>
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Notes payable, secured by certain assets of the Company, interest rates
ranging from 7.5% to 13.4%............................................ $ 32,037 $ 9,283
Capital lease obligations............................................... 385 432
--------- ---------
32,422 9,715
Less: Current maturities of long-term debt.............................. (4,314) (3,681)
--------- ---------
Total long-term debt.............................................. $ 28,108 $ 6,034
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 7--CREDIT FACILITIES (CONTINUED)
MATURITIES OF LONG-TERM DEBT
Maturities on long-term debt, including capital lease obligations, are as
follows:
<TABLE>
<S> <C>
1998............................................................... $ 3,681
1999............................................................... 5,953
2000............................................................... 36
2001............................................................... 26
2002............................................................... 19
Thereafter.........................................................
---------
Total maturities of long-term debt........................... $ 9,715
---------
---------
</TABLE>
PAYABLE TO U.S. OFFICE PRODUCTS
The short-term payable to U.S. Office Products was incurred by the Company
primarily as a result of U.S. Office Products repaying short-term debt
outstanding at the businesses acquired by U.S. Office Products at or soon after
the respective dates of acquisition and through the centralized cash management
system, which involves daily advances or sweeps of cash to keep the cash balance
at or near zero on a daily basis.
The long-term payable to U.S. Office Products primarily represents payments
made by U.S. Office Products on behalf of the Company and a reasonable
allocation by U.S. Office Products of certain general corporate expenses.
Interest has been allocated to the Company based upon the Company's average
outstanding payable balance with U.S. Office Products at U.S. Office Products
average interest rate during such period. U.S. Office Products allocated $1,013
(unaudited) of interest expense to the Company during the nine months ended
January 24, 1998. There was no significant amount of intercompany debt
outstanding during prior periods and, therefore, no interest expense was
allocated to the Company by U.S. Office Products during such periods.
At the date of Distribution, U.S. Office Products has agreed to allocate
$30,000 in debt to the Company. The allocation will first include debt
outstanding with third parties and the balance will represent intercompany debt
payable to U.S. Office Products. The debt payable to U.S. Office Products will
be payable upon the completion of the Distribution. The Company is currently in
discussions with several financial institutions regarding a credit facility of
approximately $150,000 which would be used for working capital and acquisition
purposes. The Company expects that the credit facility will include customary
covenants including maintenance of financial ratios and limitations on dividend
payments.
F-20
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INCOME TAXES
Domestic and foreign income before provision for income taxes and
extraordinary items consist of the following:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
---------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Domestic.............................................. $ 5,054 $ 5,582 $ 4,599 $ 4,006
Foreign............................................... 1,441 2,510 5,912
------ ------ ------ ------
Total............................................. $ 5,054 $ 7,023 $ 7,109 $ 9,918
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED FOR THE FOUR FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Income taxes currently payable:
Federal............................................. $ $ $ $ 196
State............................................... 379 376 460 628
Foreign............................................. (409) 891 3,526
----- --- ------ ------
379 (33) 1,351 4,350
----- --- ------ ------
Deferred income tax expense (benefit)................. (660)
----- --- ------ ------
Total provision for income taxes.................. $ 379 $ (33) $ 1,351 $ 3,690
----- --- ------ ------
----- --- ------ ------
</TABLE>
Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26,
1996 1997
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Inventory.................................................................................. $ $ 145
Allowance for doubtful accounts............................................................ 497
Accrued liabilities........................................................................ 168
--------- ---------
Total current deferred tax assets........................................................ 810
--------- ---------
Long-term deferred tax liabilities:
Property and equipment..................................................................... (1,238)
Intangible assets.......................................................................... 36
Other...................................................................................... (4,704) (3,653)
--------- ---------
Total long-term deferred tax liabilities................................................. (4,704) (4,855)
--------- ---------
Net deferred tax liability............................................................... $ (4,704) $ (4,045)
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 8--INCOME TAXES (CONTINUED)
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE FOUR FOR THE FISCAL
-------------------------------- MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 26,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate........................... 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit............................................. 7.5 5.4 6.5 6.8
Subchapter S corporation income not subject to
corporate level taxation............................ (35.0) (27.7) (22.6) (24.6)
Foreign earnings not subject to U.S. taxes............ (7.3) (12.4) (21.4)
Nondeductible acquisition costs....................... 11.8
Foreign taxes......................................... 12.5 25.6
Other................................................. (5.9) 4.0
----- ----- ----- -----
Effective income tax rate............................. 7.5% (0.5)% 19.0% 37.2%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no federal
income tax expense prior to these acquisitions by the Company.
The following unaudited pro forma income tax information is presented in
accordance with SFAS 109 as if the specific Pooled Companies had been subject to
federal income taxes for the fiscal year ended April 26, 1997.
<TABLE>
<CAPTION>
FOR THE
FISCAL
YEAR ENDED
APRIL 26,
1997
-------------
<S> <C>
Income before extraordinary items per consolidated statement of income............................. $ 6,228
Pro forma income tax provision adjustment.......................................................... 2,440
------
Pro forma income before extraordinary items........................................................ $ 3,788
------
------
</TABLE>
F-22
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 9--LEASE COMMITMENTS
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998......................................................................................... $ 216 $ 3,915
1999......................................................................................... 150 3,751
2000......................................................................................... 67 3,093
2001......................................................................................... 29 2,612
2002......................................................................................... 22 2,334
Thereafter................................................................................... 3,467
----- -----------
Total minimum lease payments................................................................. 484 $ 19,172
-----------
-----------
Less: Amounts representing interest.......................................................... (52)
-----
Present value of net minimum lease payments.................................................. $ 432
-----
-----
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1994
and 1995, the four months ended April 30, 1996, and the fiscal year ended April
26, 1997 was $2,112, $6,137, $1,844, and $4,928, respectively.
NOTE 10--COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of this litigation
will have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
POSTEMPLOYMENT BENEFITS
The Company has entered into employment agreements with several employees
that would result in payments to these employees upon a change of control or
certain other events. No amounts have been accrued at April 30, 1996 or April
26, 1997 related to these agreements, as no change of control has occurred.
DISTRIBUTION
On or immediately after the Distribution, the Company expects to have a
credit facility in place. The terms of the credit facility are expected to
contain customary covenants including financial covenants. The Company plans to
use a portion of the proceeds from the credit facility to repay certain amounts
payable to U.S. Office Products.
On or before the date of the Distribution, the Company, U.S. Office Products
and the other Spin-Off Companies will enter into the Distribution Agreement, the
Tax Allocation Agreement, and the Employee Benefits Agreement, and the Spin-Off
Companies will enter into the Tax Indemnification Agreement, and
F-23
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
may enter into other agreements, including agreements relating to referral of
customers to one another. These agreements are expected to provide, among other
things, for U.S. Office Products and the Company to indemnify each other from
tax and other liabilities relating to their respective businesses prior to and
following the Workflow Distribution. Certain of the obligations of the Company
and the other Spin-Off Companies to indemnify U.S. Office Products are joint and
several. Therefore, if one of the other Spin-Off Companies fails to satisfy its
indemnification obligations to U.S. Office Products when such a loss occurs, the
Company may be required to reimburse U.S. Office Products for all or a portion
of the losses that otherwise would have been allocated to other Spin-Off
Companies. In addition, the agreements will allocate liabilities, including
general corporate and securities liabilities of U.S. Office Products not
specifically related to the Company's business, between U.S. Office Products and
each Spin-Off Company.
NOTE 11--EMPLOYEE BENEFIT PLANS
Effective September 1, 1996, the Company implemented the U.S. Office
Products 401(k) Retirement Plan (the "401(k) Plan") which allows employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The Company matches a portion of employee contributions and all full-time
employees are eligible to participate in the 401(k) Plan after one year of
service.
Certain subsidiaries of the Company have, or had prior to implementation of
the 401(k) Plan, qualified defined contribution benefit plans, which allow for
voluntary pre-tax contributions by the employees. The subsidiaries paid all
general and administrative expenses of the plans and in some cases made matching
contributions on behalf of the employees. For 1994, 1995, the four months ended
April 30, 1996 and fiscal 1997, the subsidiaries incurred expenses totaling
$444, $602, $179 and $481, respectively, related to these plans.
NOTE 12--STOCKHOLDER'S EQUITY
CAPITAL CONTRIBUTION BY U.S. OFFICE PRODUCTS
During the fiscal year ended April 26, 1997, U.S. Office Products
contributed $20,064 of capital to the Company. The contribution reflects the
forgiveness of intercompany debt by U.S. Office Products, as it was agreed that
the Company would be allocated only $30,000 of debt plus the amount of any
additional debt incurred after January 12, 1998 in connection with the
acquisition of entities that will become subsidiaries of the Company.
EMPLOYEE STOCK PLANS
Prior to the Distribution, certain employees of the Company participated in
the U.S. Office Products 1994 Long-Term Incentive Plan covering employees of
U.S. Office Products. U.S. Office Products, as the sole stockholder of the
Company prior to distribution, has approved a new stock option plan for the
Company. Upon Distribution, the Company expects to replace the options to
purchase shares of common stock of U.S. Office Products held by employees with
options to purchase shares of common stock of the Company.
U.S. Office Products granted 402,290 options to Company employees under the
Plan during fiscal 1997; and the Company accounted for these options in
accordance with APB Opinion No. 25. Accordingly, because the exercise prices of
the options have equaled the market price on the date of grant, no
F-24
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 12--STOCKHOLDER'S EQUITY (CONTINUED)
compensation expense was recognized for the options granted. Had compensation
expense been recognized based upon the fair value of the stock options on the
grant date under the methodology prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per share for
the year ended April 26, 1997 would not have been materially effected.
Under the Ledecky Services Agreement, the Board of Directors of U.S. Office
Products has agreed that Mr. Ledecky will receive a stock option for Company
Common Stock from the Company as of the date of the Distribution. The Board
intends the option to be compensation for Mr. Ledecky's services as a director
of the Company, and certain services as an employee of the Company. The option
will cover up to 7.5% of the outstanding Company Common Stock determined as of
the date of the Distribution, with no anti-dilution provisions in the event of
issuance of additional shares of Common Stock (other than with respect to stock
splits or reverse stock splits). The option will have a per share exercise price
equal to the IPO price.
Immediately following the effective date of the registration statements
filed in connection with the IPO and the Distribution, the Company's Board of
Directors is expected to grant an option for up to 7.5% of the outstanding
common stock to Mr. Ledecky, 7.5% to Mr. D'Agostino, approximately 10% to
certain executive officers and 15,000 shares to each non-employee director,
determined as of the Distribution Date, without regard to the IPO. The options
will be granted under the 1998 Stock Incentive Plan (the "Plan") and will have a
per share exercise price equal to the IPO price. Total options available for
grant under the Plan will be up to 30% of the outstanding shares of the
Company's common stock immediately following the Distribution, including the
options to be granted to Mr. Ledecky, Mr. D'Agostino, executive officers and
non-employee directors described above.
F-25
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 13--SEGMENT REPORTING
GEOGRAPHIC SEGMENTS
The following table sets forth information as to the Company's operations in
its different geographic segments:
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1994:
Revenues................................................................... $ 154,193 $ $ 154,193
Operating income........................................................... 7,288 7,288
Identifiable assets at year-end............................................ 51,357 51,357
For the year ended December 31, 1995:
Revenues................................................................... $ 196,922 $ 112,504 $ 309,426
Operating income........................................................... 7,859 4,596 12,455
Identifiable assets at year-end............................................ 64,301 56,329 120,630
For the four months ended April 30, 1996:
Revenues................................................................... $ 73,047 $ 41,052 $ 114,099
Operating income........................................................... 3,435 5,181 8,616
Identifiable assets at period end.......................................... 66,255 51,694 117,949
For the fiscal year ended April 26, 1997:
Revenues................................................................... $ 205,910 $ 121,471 $ 327,381
Operating income........................................................... 7,010 8,076 15,086
Identifiable assets at year-end............................................ 72,854 52,254 125,108
</TABLE>
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents certain unaudited quarterly financial data for the
year ended December 31, 1995, the fiscal year ended April 26, 1997 and the
fiscal year ending April 25, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
Revenues.................................................. $ 65,497 $ 80,595 $ 79,815 $ 83,519 $ 309,426
Gross profit.............................................. 15,770 19,361 19,229 20,107 74,467
Operating income.......................................... 2,681 3,296 3,306 3,172 12,455
Net income................................................ 1,789 1,529 1,744 1,294 6,356
</TABLE>
F-26
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 14--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 26, 1997
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 78,071 $ 80,227 $ 81,453 $ 87,630 $ 327,381
Gross profit.............................................. 21,717 22,518 22,647 24,159 91,041
Operating income.......................................... 4,650 6,085 1,510 2,841 15,086
Net income (loss)......................................... 2,974 3,181 (658) (67) 5,430
Pro forma income (loss) before extraordinary item
(see Note 8)............................................ 1,809 1,935 (400) 444 3,788
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 25, 1998
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH(1) TOTAL
--------- --------- --------- ----------- ----------
Revenues................................................. $ 82,163 $ 88,884 $ 86,730 $ 257,777
Gross profit............................................. 21,895 23,314 22,086 67,295
Operating income......................................... 4,975 4,842 4,395 14,212
Net income............................................... 2,703 2,582 2,264 7,549
Pro forma income before extraordinary item (See Note
8)..................................................... 2,703 2,582 2,264 7,549
</TABLE>
- ------------------
(1) This column was intentionally left blank as the information included in the
consolidated financial statements for the fiscal year ending April 25, 1998
is currently included through January 24, 1998.
NOTE 15--SUBSEQUENT EVENTS (UNAUDITED)
On January 13, 1998, U.S. Office Products announced its intention to
complete the Distribution described in Note 1. In addition, subsequent to April
26, 1997, the Company has completed two business combinations accounted for
under the purchase method in exchange for U.S. Office Products common stock with
a market value on the date of acquisition of approximately $2,112 and cash of
$13,275. The results of operations for the nine months ended January 24, 1998
include the results of the acquired companies from their dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for fiscal 1997 as if the Distribution and acquisitions described above
had been consummated as of the beginning of fiscal 1997. The results presented
below include certain pro forma adjustments to reflect the amortization of
intangible assets, adjustments in executive compensation of $1,058, $793 and $84
for the fiscal year ended April 26, 1997, the nine months ended January 25,
1997, and the nine months ended January 24, 1998, respectively, and the
inclusion of a federal income tax provision on all earnings:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ------------------------
ENDED JANUARY 25, JANUARY 24,
APRIL 26, 1997 1997 1998
---------------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................................. $ 342,335 $ 250,820 $ 263,960
Income before extraordinary items.................................... 7,806 6,067 7,882
</TABLE>
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions occurred at the beginning of fiscal 1997 or the
results which may occur in the future.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Astrid Offset Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Astrid Offset Corporation at July
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 6, 1998
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Astrid Offset Corporation
In our opinion, the accompanying balance sheet and the related statements of
income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Astrid Offset Corporation at July
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
February 6, 1998
F-29
<PAGE>
ASTRID OFFSET CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1997
--------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash....................................................................................... $ 481 $ 412
Marketable securities...................................................................... 916 904
Accounts receivable........................................................................ 954 1,180
Prepaid expenses and other assets.......................................................... 74 102
Inventory.................................................................................. 241 237
--------- -----------
Total current assets................................................................. 2,666 2,835
Property and equipment, net................................................................ 1,695 1,582
Other assets............................................................................... 22
--------- -----------
Total assets......................................................................... $ 4,383 $ 4,417
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities, long-term debt......................................................... $ 422 $ 271
Accounts payable........................................................................... 39 163
Accrued liabilities........................................................................ 149 56
Due to officer............................................................................. 55 58
--------- -----------
Total current liabilities............................................................ 665 548
Long-term debt............................................................................. 1,607 1,606
Deferred income taxes...................................................................... 140 145
--------- -----------
Total liabilities.................................................................... 2,412 2,299
Stockholder's equity:
Common stock, no par value, 10 shares authorized, issued and outstanding................. 14 14
Treasury stock........................................................................... (1,064) (1,064)
Retained earnings........................................................................ 3,021 3,168
--------- -----------
Total stockholder's equity........................................................... 1,971 2,118
--------- -----------
--------- -----------
Total liabilities and stockholder's equity........................................... $ 4,383 $ 4,417
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
ASTRID OFFSET CORPORATION
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JULY 31, --------------------
1997 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Sales............................................................................. $ 10,022 $ 2,400 $ 2,566
Cost of sales..................................................................... 5,850 1,306 1,378
----------- --------- ---------
Gross profit.................................................................... 4,172 1,094 1,188
Selling, general and administrative expenses...................................... 1,819 370 419
----------- --------- ---------
Operating income................................................................ 2,353 724 769
Other (income) expense:
Interest expense................................................................ 252 123 6
Interest income................................................................. (74) (10) (9)
Realized and unrealized (gains) losses.......................................... (257) (69) 13
----------- --------- ---------
Income before taxes on income..................................................... 2,432 680 759
Provision for city income taxes................................................... 87 11 19
----------- --------- ---------
Net income........................................................................ $ 2,345 $ 669 $ 740
----------- --------- ---------
----------- --------- ---------
Unaudited pro forma information (see Note 2):
Income before provision for income taxes........................................ $ 2,432 $ 680 $ 759
Pro forma Provision for income taxes............................................ 973 272 304
----------- --------- ---------
Pro forma net income.......................................................... $ 1,459 $ 408 $ 455
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ASTRID OFFSET CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON TREASURY RETAINED STOCKHOLDER'S
STOCK STOCK EARNINGS EQUITY
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balance, July 31, 1996............................................. $ 14 $ (1,064) $ 2,798 $ 1,748
Net income....................................................... 2,345 2,345
Distributions.................................................... (2,122) (2,122)
--------- --------- --------- ------------
Balance, July 31, 1997............................................. 14 (1,064) 3,021 1,971
Unaudited data:
Net income....................................................... 740 740
Distributions.................................................... (593) (593)
--------- --------- --------- ------------
Balance, October 31, 1997 (unaudited).............................. $ 14 $ (1,064) $ 3,168 $ 2,118
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
ASTRID OFFSET CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JULY 31, --------------------
1997 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income................................................................. $ 2,345 $ 669 $ 740
Adjustments to net income to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................ 475 76 135
Unrealized/realized (gain) loss on sale of marketable trading
securities............................................................. (257) (69) 13
Deferred income taxes.................................................. 32 4 5
Changes in operating assets and liabilities:
Marketable trading securities.......................................... 4 (1) (1)
Accounts receivable.................................................... (192) (506) (226)
Prepaid and other assets............................................... (54) (42) (28)
Inventory.............................................................. (26) (116) 4
Accounts payable and accrued liabilities............................... (155) (98) 31
Due to officer......................................................... (3) 3
----------- --------- ---------
Net cash provided by (used in) operating activities.................. 2,169 (83) 676
----------- --------- ---------
Cash flow from financing activities:
Principal payments on long-term debt....................................... (525) (85) (152)
Distributions to stockholder............................................... (2,122) (391) (593)
----------- --------- ---------
Net cash used in financing activities................................ (2,647) (476) (745)
----------- --------- ---------
Net decrease in cash......................................................... (478) (559) (69)
Cash and cash equivalents, beginning of year................................. 959 959 481
----------- --------- ---------
Cash and cash equivalents, end of year....................................... $ 481 $ 400 $ 412
----------- --------- ---------
----------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................... $ 74 $ 24 $ 27
Cash paid for taxes........................................................ $ 54 $ 13 $ 11
Supplemental disclosure of non-cash transaction:
Purchase of machinery and equipment for Note Payable....................... $ 1,550 $ 1,550 $
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS AND ORGANIZATION
Astrid Offset Corporation (the "Company") is a manufacturer and wholesale
vendor of sheet-fed offset printing and envelopes. The Company's sales are to
trade customers primarily in the greater New York City area.
On February 2, 1998, the Company entered into a Letter of Intent with U.S.
Office Products Company ("U.S. Office Products") for the potential sale of
Astrid Offset Corporation to U.S. Office Products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's financial statements are prepared on the accrual basis of
accounting, whereby revenues and related assets are generally recognized when
products are completed and shipped and expenses and related liabilities are
recognized when the obligations are incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using straight-line and accelerated
methods over their estimated useful lives of three to seven years.
INCOME TAXES
The Company has elected S-Corporation status as defined by the Internal
Revenue Code and states whereby the stockholder is taxed on his proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the financial statements. The Company
is subject to New York City income tax which has been appropriately reflected in
the financial statements.
Deferred income taxes are provided in recognition of timing differences
between financial statements and tax reporting of income and expense items since
the Company files its New York City income tax returns on a cash basis.
The unaudited pro forma income tax information included in the Statement of
Operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for
F-34
<PAGE>
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes", as if the Company had been subject to federal income taxes for
the entire periods presented.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities as reflected in the financial
statements approximates fair value because of the short-term maturity of these
instruments. The carrying amounts of long-term debt approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities consist of investments in certain
equities and mutual funds and are classified as trading, accordingly, any
realized or unrelated gains and losses are recorded in the period incurred.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the three month periods ended October
31, 1996 and 1997 has been prepared from the unaudited financial records of the
Company and in the opinion of management, reflects all adjustments, consisting
only of normal recurring items, necessary for a fair presentation of the
financial position and results of operations and of cash flows for the interim
periods presented.
CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables are
not collateralized and accordingly, the Company performs ongoing credit
evaluations to reduce the risk of loss. At July 31, 1997, $515 of the accounts
receivable balance relates to one customer and its subsidiaries.
The Company maintains bank accounts at one financial institution. The
balances are insured by the Federal Deposit Insurance Corporation up to $100. At
July 31, 1997, the Company has no uninsured cash balances.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JULY 31,
1997
-----------
<S> <C>
Raw materials........................................................................ $ 159
Work-in-process...................................................................... 82
-----
$ 241
-----
-----
</TABLE>
F-35
<PAGE>
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Machinery and equipment............................................. $ 4,699
Furniture and fixtures.............................................. 80
Computer equipment.................................................. 64
Leasehold improvements.............................................. 206
Delivery equipment.................................................. 31
---------
5,080
Accumulated depreciation............................................ (3,385)
---------
$ 1,695
---------
---------
</TABLE>
Depreciation expense for the year ended July 31, 1997 was $304.
5. LONG-TERM DEBT
The long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31,
1997
---------
<S> <C>
Instrument note to Summit Leasing Corp. payable in monthly installments of $9 including interest at 7.95%
per annum. Note is collateralized by Komori Lithrone two-color press, with note maturing March
1998. ................................................................................................. $ 70
Installment note to Komar Leasing Corp. payable in monthly installments of $25 including interest at 8.9%
per annum. Note is collateralized by Komori six-color press with the note maturing July 2004........... 1,385
Installment note to Emanuel Rosenbaum payable in monthly installments of $9 including interest at 10% per
annum. The note matures October 1997. ................................................................. 26
Note payable to Emanuel Rosenbaum due September 2000 with payment of interest only at 10% until September
1997, monthly payments of $17 thereafter. Note is secured by treasury stock. .......................... 548
---------
2,029
Current maturities....................................................................................... 422
---------
$ 1,607
---------
---------
</TABLE>
F-36
<PAGE>
ASTRID OFFSET CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
Principal payments required under long-term debt obligations are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 422
1999................................................................ 372
2000................................................................ 409
2001................................................................ 268
2002-2004........................................................... 558
---------
$ 2,029
---------
---------
</TABLE>
6. LEASE COMMITMENTS
In June 1997, the Company entered into a lease agreement for its primary
office facility. The lease terms requires annual payments of $384 (or $32
monthly) through 2007.
7. RELATED PARTY TRANSACTIONS
The Company's stockholder is the trustee for the profit sharing plan
maintained by the Company.
The Company's largest customer, United Envelope, is a subsidiary of U.S.
Office Products Company and represents $515 of the Company's July 31, 1997
accounts receivable balance.
8. TREASURY STOCK
In September 1990, the Company purchased common stock in the amount of
$1,064 from its former stockholder. The Company has a note outstanding in
connection with this treasury stock purchase.
9. EMPLOYEE BENEFIT PLAN
In April 1991, the Company established a profit sharing plan. Contributions
by the Company are discretionary and cannot exceed 15% of the total plan
compensation of all participants.
10. SUBSEQUENT EVENTS
Shareholder distributions of $595 were made during the period of November 1,
1997, through January 31, 1998.
F-37
<PAGE>
WORKFLOW MANAGEMENT, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial statements give effect to the spin-off of
Workflow Management, Inc. (the "Company"), formerly the Print Management
Division of U.S. Office Products Company ("U.S. Office Products"), through the
distribution of shares of the Company to U.S. Office Products shareholders (the
"Distribution") and probable and completed acquisitions through May 1, 1998.
The pro forma combined balance sheet gives effect to the Distribution and
the acquisition of Astrid Offest Corporation as if both transactions had
occurred as of the Company's most recent balance sheet date, January 24, 1998.
The pro forma combined statements of income for the fiscal year ended April 26,
1997 and the nine months ended January 24, 1998 and January 25, 1997 give effect
to the Distribution and the acquisitions of Astrid Offset Corporation and FMI
Graphics, Inc., an individually insignificant company, in business combinations
accounted for under the purchase method which have been completed during the
fiscal year ending April 25, 1998 (the "Fiscal 1998 Purchase Acquisitions"), as
if all such transactions had occurred on May 1, 1996.
The pro forma combined statement of income for the year ended April 26, 1997
includes the audited financial information of the Company for the year ended
April 26, 1997 and the unaudited financial information of the Fiscal 1998
Purchase Acquisitions for the period from May 1, 1996 through April 26, 1997.
The pro forma combined statement of income for the nine months ended January
24, 1998 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisitions for the nine months ended January 24, 1998.
The pro forma combined statement of income for the nine months ended January
25, 1997 includes the unaudited financial information of the Company and the
Fiscal 1998 Purchase Acquisitions for the nine months ended January 25, 1997.
The historical financial statements of the Company give retroactive effect
to the results of the seven companies acquired by the Company during the fiscal
year ended April 26, 1997 in business combinations accounted for under the
pooling-of-interests method of accounting.
The historical financial statements of the Company also reflect an allocated
portion of general and administrative costs incurred by U.S. Office Products.
The allocated costs include expenses such as: certain corporate executives'
salaries, accounting and legal fees, departmental costs for accounting, finance,
legal, purchasing, marketing and human resources, as well as other general
overhead costs. These corporate overheads have been allocated to the Company
using one of several factors, dependent on the nature of the costs being
allocated, including revenues, number and size of acquisitions and number of
employees. Interest costs have been allocated to the Company based upon the
Company's average intercompany balance with U.S. Office Products at U.S. Office
Products' weighted average interest rate during such periods.
The pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma combined financial data presented herein does not purport to
represent what the Company's financial position or results of operations would
have been had the transactions which are the subject of pro forma adjustments
occurred on those dates, as assumed, and are not necessarily representative of
the Company's financial position or results of operations in any future period.
The pro forma combined financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in this
Prospectus.
F-38
<PAGE>
WORKFLOW MANAGEMENT, INC.
PRO FORMA COMBINED BALANCE SHEET
JANUARY 24, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASTRID PRO FORMA
WORKFLOW OFFSET PRO FORMA PRO FORMA OFFERING PRO FORMA
MANAGEMENT, INC. CORPORATION ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
---------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 248 $ 330 $ (578)(b) $ $ 28,725(d) $
(28,725)(d)
Accounts receivable, net............ 54,121 1,158 55,279 55,279
Inventory........................... 29,330 209 29,539 29,539
Prepaid and other current assets.... 1,875 87 1,962 1,962
---------------- ------------- ----------- ----------- ----------- -----------
Total current assets.............. 85,574 1,784 (578) 86,780 86,780
Property and equipment, net........... 31,064 2,718 33,782 33,782
Notes receivable from employees....... 3,643 3,643 3,643
Intangible assets, net................ 2,203 12,029(a) 14,232 14,232
Other assets.......................... 4,621 15 4,636 4,636
---------------- ------------- ----------- ----------- ----------- -----------
Total assets...................... $ 127,105 $ 4,517 $ 11,451 $ 143,073 $ $ 143,073
---------------- ------------- ----------- ----------- ----------- -----------
---------------- ------------- ----------- ----------- ----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Short-term debt..................... $ 4,939 $ 640 $ (640)(b) $ 4,939 $ $ 4,939
Short-term payable to U.S. Office
Products.......................... 17,658 (17,658)(b)
Accounts payable.................... 23,749 173 23,922 23,922
Accrued compensation................ 4,004 4,004 4,004
Other accrued liabilities........... 9,854 103 9,957 9,957
---------------- ------------- ----------- ----------- ----------- -----------
Total current liabilities......... 60,204 916 (18,298) 42,822 42,822
Long-term debt........................ 5,498 2,240 32,900(b) 40,638 (28,725)(d) 11,913
Long-term payable to U.S. Office
Products............................ 1,905 13,275(a)
(15,180)(b)
Deferred income taxes................. 3,507 115 3,622 3,622
Other long-term liabilities........... 12 12 12
---------------- ------------- ----------- ----------- ----------- -----------
Total liabilities................. 71,126 3,271 12,697 87,094 (28,725) 58,369
---------------- ------------- ----------- ----------- ----------- -----------
Stockholder's equity:
Common stock........................ 15(c) 15 2(d) 17
Additional paid-in-capital.......... 47,711(c) 47,711 28,723(d) 76,434
Divisional equity................... 47,726 (47,726)(c)
Cumulative translation adjustment... (1,365) (1,365) (1,365)
Retained earnings................... 9,618 9,618 9,618
Equity in purchased company......... 1,246 (1,246)(a)
---------------- ------------- ----------- ----------- ----------- -----------
Total stockholder's equity........ 55,979 1,246 (1,246) 55,979 28,725 84,704
---------------- ------------- ----------- ----------- ----------- -----------
Total liabilities and
stockholder's equity............ $ 127,105 $ 4,517 $ 11,451 $ 143,073 $ $ 143,073
---------------- ------------- ----------- ----------- ----------- -----------
---------------- ------------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-39
<PAGE>
WORKFLOW MANAGEMENT, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 24, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASTRID PRO FORMA
WORKFLOW OFFSET FMI PRO FORMA PRO FORMA OFFERING PRO FORMA
MANAGEMENT, INC. CORPORATION GRAPHICS, INC. ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------------- ------------- --------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 257,777 $ 7,115 $ 1,914 $ (2,846)(e) $ 263,960 $ $ 263,960
Cost of revenues..... 190,482 4,210 1,258 (2,846)(e) 193,104 193,104
-------- ------ ------ ------------- ----------- ------------- -----------
Gross profit..... 67,295 2,905 656 70,856 70,856
Selling, general and
administrative
expenses........... 52,918 1,364 499 (84)(f) 54,697 54,697
Amortization
expense............ 165 233(h) 398 398
-------- ------ ------ ------------- ----------- ------------- -----------
Operating
income......... 14,212 1,541 157 (149) 15,761 15,761
Other (income)
expense:
Interest expense... 1,665 22 2 1,046(i) 2,735 (1,724)(l) 1,011
Interest income.... (9) (17) (2) 28(i)
Other income....... (205) (128) (333) (333)
-------- ------ ------ ------------- ----------- ------------- -----------
Income (loss) before
provision for
income taxes....... 12,761 1,664 157 (1,223) 13,359 1,724 15,083
Provision for income
taxes.............. 5,212 4 261(j) 5,477 707(j) 6,184
-------- ------ ------ ------------- ----------- ------------- -----------
Net income (loss).... $ 7,549 $ 1,664 $ 153 $ (1,484) $ 7,882 $ 1,017 $ 8,899
-------- ------ ------ ------------- ----------- ------------- -----------
-------- ------ ------ ------------- ----------- ------------- -----------
Weighted average
shares outstanding:
Basic............ 15,301 14,760(k) 17,260(m)
Diluted.......... 15,625 14,760(k) 17,260(m)
Net income per share:
Basic............ $ 0.49 $ 0.53 $ 0.52
-------- ----------- -----------
-------- ----------- -----------
Diluted.......... $ 0.48 $ 0.53 $ 0.52
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-40
<PAGE>
WORKFLOW MANAGEMENT, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JANUARY 25, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASTRID PRO FORMA
WORKFLOW OFFSET FMI PRO FORMA PRO FORMA OFFERING PRO FORMA
MANAGEMENT, INC. CORPORATION GRAPHICS, INC. ADJUSTMENTS SUBTOTAL ADJUSTMENTS COMBINED
----------------- ------------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 239,751 $ 7,056 $ 6,835 $ (2,822)(e) $ 250,820 $ $ 250,820
Cost of revenues...... 172,869 4,219 4,717 (2,822)(e) 178,983 178,983
-------- ------ ------ ----------- ----------- ----------- -----------
Gross profit...... 66,882 2,837 2,118 71,837 71,837
Selling, general and
administrative
expenses............ 51,590 1,469 2,086 (793)(f) 55,074 55,074
722(g)
Amortization expense.. 145 253(h) 398 398
Non-recurring
acquisition costs... 2,902 2,902 2,902
-------- ------ ------ ----------- ----------- ----------- -----------
Operating income.. 12,245 1,368 32 (182) 13,463 13,463
Other (income)
expense:
Interest expense.... 3,910 10 (1,185)(i) 2,735 (1,724)(l) 1,011
Interest income..... (21) (27) (11) 59(i)
Other............... 610 (146) (19) 445 445
-------- ------ ------ ----------- ----------- ----------- -----------
Income before
provision for income
taxes............... 7,746 1,541 52 944 10,283 1,724 12,007
Provision for income
taxes............... 2,249 1,967(j) 4,216 707(j) 4,923
-------- ------ ------ ----------- ----------- ----------- -----------
Net income........ $ 5,497 $ 1,541 $ 52 $ (1,023) $ 6,067 $ 1,017 $ 7,084
-------- ------ ------ ----------- ----------- ----------- -----------
-------- ------ ------ ----------- ----------- ----------- -----------
Weighted average
shares outstanding:
Basic............... 11,464 14,760(k) 17,260(m)
Diluted............. 11,710 14,760(k) 17,260(m)
Net income per share:
Basic............... $ 0.48 $ 0.41 $ 0.41
-------- ----------- -----------
-------- ----------- -----------
Diluted............. $ 0.47 $ 0.41 $ 0.41
-------- ----------- -----------
-------- ----------- -----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-41
<PAGE>
WORKFLOW MANAGEMENT, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED APRIL 26, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASTRID PRO FORMA
WORKFLOW OFFSET FMI PRO FORMA PRO FORMA OFFERING
MANAGEMENT, INC. CORPORATE GRAPHICS, INC ADJUSTMENTS SUBTOTAL ADJUSTMENTS
----------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 327,381 $ 9,963 $ 8,976 $ (3,985)(e) $ 342,335 $
Cost of revenues............... 236,340 5,934 6,186 (3,985)(e) 244,475
-------- ----------- ------ ------------- ----------- -------------
Gross profit............... 91,041 4,029 2,790 97,860
Selling, general and
administrative expenses...... 70,753 2,035 2,779 (1,058)(f) 75,038
529(g)
Amortization expense........... 196 334(h) 530
Non-recurring acquisition
costs........................ 5,006 5,006
-------- ----------- ------ ------------- ----------- -------------
Operating income........... 15,086 1,994 11 195 17,286
Other (income) expense:
Interest expense............. 4,561 10 (924)(i) 3,647 (2,299)(l)
Interest income.............. (25) (36) (15) 76(j)
Other........................ 632 (209) (15) 408
-------- ----------- ------ ------------- ----------- -------------
Income before provision for
income taxes and
extraordinary items.......... 9,918 2,239 31 1,043 13,231 2,299
Provision for income taxes..... 3,690 1,735(j) 5,425 943(j)
-------- ----------- ------ ------------- ----------- -------------
Net income (loss).............. $ 6,228 $ 2,239 $ 31 $ (692) $ 7,806 $ 1,356
-------- ----------- ------ ------------- ----------- -------------
-------- ----------- ------ ------------- ----------- -------------
Weighted average shares
outstanding:
Basic...................... 12,003 14,760(k)
Diluted.................... 12,235 14,760(k)
Income before extraordinary
items per share:
Basic...................... $ 0.52 $ 0.53
-------- -----------
-------- -----------
Diluted.................... $ 0.51 $ 0.53
-------- -----------
-------- -----------
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
Revenues....................... $ 342,335
Cost of revenues............... 244,475
-----------
Gross profit............... 97,860
Selling, general and
administrative expenses...... 75,038
Amortization expense........... 530
Non-recurring acquisition
costs........................ 5,006
-----------
Operating income........... 17,286
Other (income) expense:
Interest expense............. 1,348
Interest income..............
Other........................ 408
-----------
Income before provision for
income taxes and
extraordinary items.......... 15,530
Provision for income taxes..... 6,368
-----------
Net income (loss).............. $ 9,162
-----------
-----------
Weighted average shares
outstanding:
Basic...................... 17,260(m)
Diluted.................... 17,260(m)
Income before extraordinary
items per share:
Basic...................... $ 0.53
-----------
-----------
Diluted.................... $ 0.53
-----------
-----------
</TABLE>
See accompanying notes to pro forma combined financial statements.
F-42
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect purchase price adjustments associated with the
acquisition of Astrid Offset Corporation ("Astrid"). The acquisition of Astrid
will be initially funded by U.S. Office Products, accordingly, an adjustment has
been made to increase the long-term payable to U.S. Office Products by $13,275.
The portion of the consideration assigned to goodwill ($12,029) in this
transaction, which was accounted for under the purchase method, represents the
excess of the cost over the fair market value of the net assets acquired. The
Company amortizes goodwill over a period of 40 years. The recoverability of the
unamortized goodwill will be assessed on an ongoing basis by comparing
anticipated undiscounted future cash flows from operations to net book value.
(b) Represents payment of debt of $33,478 due to U.S. Office Products
through the use of $578 of cash and $32,900 in borrowings drawn from the
Company's credit facility entered into concurrently with the Distribution as
U.S. Office Products agreed to allocate only $45,577 of the total debt payable
to U.S. Office Products by the Company ($4,939 and $40,638 in short-term and
long-term debt, respectively) at the date of the Distribution.
(c) Adjustment to reflect the reclassification of divisional equity to
common stock and additional paid-in-capital as a result of the Workflow
Distribution. The Workflow Distribution will result in the issuance of 14,760
shares of Common Stock.
(d) Adjustment to reflect $28,725 of net proceeds from the sale of 2,500
shares of Common Stock as part of the Offering (net of expenses and underwriting
discount) and the utilization of the proceeds to repay debt.
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS
(e) Adjustment to reflect the elimination of revenues and cost of revenues
on transactions between Astrid Offset and the Company.
(f) Adjustment to reflect reductions in executive compensation as a result
of the elimination of certain executive positions and the renegotiations of
executive compensation agreements resulting from certain acquisitions. The
Company believes that these reductions are expected to remain in place for the
foreseeable future and are not reasonably likely to affect operating
performance.
(g) Adjustment to reflect additional corporate overhead during the period
prior to the formation of the Print Management division by U.S. Office Products
as if the division had been formed on May 1, 1996.
(h) Adjustment to reflect the increase in amortization expense relating to
goodwill recorded in purchase accounting related to the Fiscal 1998 Purchase
Acquisitions for the periods prior to the respective dates of acquisition. The
Company has recorded goodwill amortization in the historical financial
statements from the respective dates of acquisition forward. The goodwill is
being amortized over an estimated life of 40 years.
(i) Adjustment to reflect the increase/reduction in interest expense.
Interest expense is being calculated on the debt outstanding at January 24, 1998
of $45,577 at a weighted average interest rate of approximately 8.0%. The
adjustment also reflects a reduction in interest income to zero as the Company
expects to use all available cash to repay debt rather than for investment
purposes. Pro forma interest expense will fluctuate $21 on an annual basis for
each 0.125% change in interest rates.
F-43
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS)
2. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME ADJUSTMENTS (CONTINUED)
(j) Adjustment to calculate the provision for income taxes on the combined
pro forma results at an effective income tax rate of approximately 41%. The
difference between the effective tax rate of 41% and the statutory tax rate of
35% relates primarily to state income taxes and non-deductible goodwill. This
adjustment assumes that all companies were taxed at 41% regardless of how they
were taxed prior to being acquired by the Company, including those companies
that previously paid no taxes under subchapter S.
(k) The weighted average shares outstanding used to calculate pro forma
earnings per share of 14,760 is calculated based upon approximately 110,700
shares of U.S. Office Products common stock expected to be outstanding on the
date of the Workflow Distribution divided by 7.5, which is the Distribution
Ratio. The shares of U.S. Office Products common stock expected to be
outstanding on the date of the Workflow Distribution are based upon (a)
approximately 133,800 shares currently outstanding, plus (b) approximately 8,900
shares expected to be issued on conversion of U.S. Office Products convertible
debt, plus (c) approximately 5,000 shares expected to be issued on exercise of
outstanding U.S. Office Products stock options, minus (d) approximately 37,000
shares expected to be accepted in U.S. Office Products' equity self-tender which
is part of the Strategic Restructuring Plan.
(l) Adjustment to reflect a decrease in interest expense as a result of the
utilization of the net proceeds from the Offering of $28,725 to repay debt at an
annual interest rate of 8.0%.
(m) The weighted average shares outstanding used to calculate pro forma as
adjusted earnings per share of 17,260 is based upon the 14,760 shares of common
stock issued as a result of the Workflow Distribution and 2,500 shares issued in
the Offering.
F-44
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses payable by the Company
in connection with the issuance and distribution of the Common Stock. All of
such expenses, except the Securities and Exchange Commission registration fee,
are estimated:
<TABLE>
<S> <C>
SEC Registration Fee............................................................ $ 14,750
NASD Fee........................................................................ 5,500
The Nasdaq Stock Market Listing Fee............................................. 47,500
Blue Sky Fees and Expenses...................................................... 5,000
Legal Fees and Expenses......................................................... 500,000
Accounting Fees and Expenses.................................................... 500,000
Printing Fees and Expenses...................................................... 350,000
Transfer Agent & Registration Fees and Expenses................................. 75,000
Miscellaneous................................................................... 12,250
---------
Total..................................................................... $1,500,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of the Certificate of Incorporation provides that the Company
shall indemnify its directors and officers to the fullest extent permitted by
the General Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, I.E., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Eight of the Certificate of Incorporation states that directors of
Workflow Management will not be liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the General Corporation Law of the State of Delaware, which makes
directors liable for unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit.
II-1
<PAGE>
Article IV of the By-laws provides that Workflow Management shall indemnify
its officers and directors (and those serving at the request of the Company as
an officer or director of another corporation, partnership, joint venture, trust
or other enterprise), and may indemnify its employees and agents (and those
serving at the request of the Company as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise), against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred, if such officer, director, employee
or agent acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of Workflow Management, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. In a derivative action, indemnification shall be limited to
expenses (including attorney's fees) actually and reasonably incurred by such
officer, director, employee or agent in the defense or settlement of such action
or suit, and no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to Workflow
Management unless and only to the extent that the Delaware Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Unless the Board of Directors otherwise determines in a specific case,
expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding shall be paid by Workflow Management in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the officer or director to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See index to exhibits.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-2
<PAGE>
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in Palm
Beach, Florida, on May 18, 1998.
<TABLE>
<S> <C> <C>
WORKFLOW MANAGEMENT, INC.
By: /s/ THOMAS B. D'AGOSTINO
-----------------------------------------
Name: Thomas B. D'Agostino
TITLE: CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
/s/ THOMAS B. D'AGOSTINO Chief Executive Officer
- ------------------------------ (Principal Executive May 18, 1998
Thomas B. D'Agostino Officer) and Director
/s/ STEVEN R. GIBSON Chief Financial Officer
- ------------------------------ (Principal Financial and May 18, 1998
Steven R. Gibson Accounting Officer)
/s/ THOMAS A. BROWN, SR.
- ------------------------------ Director May 18, 1998
Thomas A. Brown, Sr.
/s/ GUS J. JAMES, II
- ------------------------------ Director May 18, 1998
Gus J. James, II
- ------------------------------ Director
Jonathan J. Ledecky
/s/ TIMOTHY L. TABOR
- ------------------------------ Director May 18, 1998
Timothy L. Tabor
/s/ F. CRAIG WILSON
- ------------------------------ Director May 18, 1998
F. Craig Wilson
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<S> <C>
1.1*** Underwriting Agreement
3.1** Certificate of Incorporation
3.2** Certificate of Amendment of Certificate of Incorporation
3.3** Bylaws
4.1* Specimen certificate representing shares of Common Stock
5*** Opinion of Wilmer, Cutler & Pickering as to legality of securities being offered
8*** Tax opinion of Wilmer, Cutler & Pickering
10.1* Form of Distribution Agreement among U.S. Office Products Company, Workflow Management, Inc., Paradigm
Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.2*** Form of Tax Allocation Agreement among U.S. Office Products Company, Workflow Management, Inc.,
Paradigm Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.3* Form of Tax Indemnification Agreement among Workflow Management, Inc., Paradigm Concepts, Inc., TDOP,
Inc. and School Specialty, Inc.
10.4* Form of Employee Benefits Agreement among U.S. Office Products Company, Workflow Management, Inc.,
Paradigm Concepts, Inc., TDOP, Inc. and School Specialty, Inc.
10.5** Agreement dated as of January 24, 1997 between SFI Corp. and Thomas B. D'Agostino
10.6** Agreement dated as of January 24, 1997 between Hano Document Printers, Inc. and Timothy L. Tabor
10.7*** Agreement dated as of January 13, 1998 between U.S. Office Products Company and Jonathan J. Ledecky
10.8*** Credit Agreement
10.9*** 1998 Stock Incentive Plan
10.10*** Form of Executive Employment Agreement
21* Subsidiaries of Registrant
23.1*** Consent of Wilmer, Cutler & Pickering contained in Exhibits 5 and 8 hereto
23.2* Consent of Price Waterhouse LLP
23.3* Consent of KPMG Peat Marwick LLP
23.4* Consent of Hertz, Herson & Company LLP
23.5* Consent of KPMG Peat Marwick LLP
23.6 Consent of Price Waterhouse LLP
23.7** Consent of Jonathan J. Ledecky to be named as a director
23.8** Consent of Timothy L. Tabor to be named as a director
23.9** Consent of Gus J. James, II to be named as a director
23.10** Consent of Thomas A. Brown, Sr. to be named as a director
27* Financial data schedule
99.1** Valuation and Qualifying Accounts and Reserves
</TABLE>
- ------------------
* Filed herewith
** Previously filed
*** To be filed by amendment
<PAGE>
Exhibit 4.1
CERTIFICATE OF STOCK
COMMON STOCK COMMON STOCK
NUMBER SHARES
WORKFLOW MANAGEMENT, INC.
INCORPORATED UNDER THE CUSIP 98137N 10 9
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE ($.001)
PER SHARE, OF
WORKFLOW MANAGEMENT, INC.
transferable on the books of the Corporation by the owner hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF the Facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Steve R. Gibson /s/ Thomas B. D'Agostino
SECRETARY PRESIDENT
<PAGE>
<TABLE>
<CAPTION>
WORKFLOW MANAGEMENT, INC.
_____________________________________________________________________________________________________________________
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as
though they were written out in full according to applicable laws or regulations:
<S> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT- __________________ Custodian ___________________
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with
right of survivorship and under Uniform Gifts to Minors
not as tenants in common Act ______________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value received, _______________________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_____________________________________________________________________________________________________________________
_____________________________________________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
_____________________________________________________________________________________________________________________
_____________________________________________________________________________________________________________________
_____________________________________________________________________________________________________________________
______________________________________________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________
_________________________________________________________________________________________________________ Attorney to
transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.
Dated, _______________________________ X ___________________________________________________________________________
X ___________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
By
________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
AGREEMENT
AND
PLAN OF DISTRIBUTION
Dated as of May __, 1998
between
U.S. Office Products Company,
Workflow Management, Inc.,
School Specialty, Inc.,
Aztec Technology Partners, Inc.
and
Navigant International, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................2
SECTION 1.01 General.........................................................................2
SECTION 1.02 References; Interpretation.....................................................16
ARTICLE II
PRELIMINARY TRANSACTIONS................................................................................16
SECTION 2.01 Stock Transfers................................................................16
SECTION 2.02 Liabilities....................................................................16
SECTION 2.03 Transfer of Certain Licenses and Permits.......................................17
SECTION 2.04 Transfer and Assumption Documentation..........................................18
SECTION 2.05 Intercompany Accounts..........................................................18
SECTION 2.06 Elimination of Guarantees......................................................19
SECTION 2.07 Assignments and Transfers Not Effected Prior to the
Distribution.................................................................................19
SECTION 2.08 Debt...........................................................................20
SECTION 2.09 Assignment of Acquisition Claims...............................................20
SECTION 2.10 Pledged Shares.................................................................21
SECTION 2.11 Other Transactions.............................................................21
ARTICLE III
THE DISTRIBUTION........................................................................................21
SECTION 3.01 Directors and Employees........................................................21
SECTION 3.02 Mechanics of Distribution......................................................21
SECTION 3.03 Timing of Distribution.........................................................22
ARTICLE IV
MUTUAL RELEASE..........................................................................................22
ARTICLE V
INDEMNIFICATION.........................................................................................23
SECTION 5.01 Indemnification by the Company.................................................23
SECTION 5.02 Indemnification by Printco.....................................................24
SECTION 5.03 Indemnification by Schoolco....................................................25
SECTION 5.04 Indemnification by Techco......................................................25
SECTION 5.05 Indemnification by Travelco....................................................26
SECTION 5.06 Limitations on Indemnification Obligations.....................................27
SECTION 5.07 Procedures for Indemnification of Third Party Claims...........................27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 5.08 Indemnification Payments.......................................................29
SECTION 5.09 Defaults.......................................................................29
SECTION 5.10 Tax Adjustments................................................................30
SECTION 5.11 MCI Agreement..................................................................30
SECTION 5.12 Survival of Indemnities........................................................30
ARTICLE VI
COVENANTS...............................................................................................31
SECTION 6.01 Provision of Corporate Records.................................................31
SECTION 6.02 Access to Information..........................................................31
SECTION 6.03 Retention of Records...........................................................31
SECTION 6.04 Witness Services...............................................................32
SECTION 6.05 Reimbursement..................................................................32
SECTION 6.06 Confidentiality................................................................32
SECTION 6.07 Further Assurances.............................................................33
ARTICLE VII
INSURANCE...............................................................................................33
SECTION 7.01 General........................................................................33
SECTION 7.02 Distributed Companies' Insurance...............................................33
SECTION 7.03 Access to the Company's Insurance Program and to the
Transferred Policies.........................................................................34
SECTION 7.04 Insurance Recoveries...........................................................34
SECTION 7.05 Insurance Representations......................................................35
SECTION 7.06 Assignment.....................................................................36
SECTION 7.07 Deductibles and Maximums.......................................................36
SECTION 7.08 Conflicts Between Article VII and the Company's Insurance
Program......................................................................................36
ARTICLE VIII
CONDITIONS..............................................................................................36
SECTION 8.01 Conditions to Obligations of the Company.......................................36
ARTICLE IX
DISPUTE RESOLUTION......................................................................................38
SECTION 9.01 Mediation and Binding Arbitration..............................................38
SECTION 9.02 Initiation of Negotiation......................................................38
SECTION 9.03 Submission to Mediation........................................................38
SECTION 9.04 Selection of Mediator..........................................................38
SECTION 9.05 Treatment of Negotiation and Mediation.........................................38
SECTION 9.06 Arbitration....................................................................38
SECTION 9.07 Confidentiality................................................................40
SECTION 9.08 Notices........................................................................40
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 9.09 Consolidation..................................................................40
ARTICLE X
MISCELLANEOUS...........................................................................................40
SECTION 10.01 Modification, Amendment or Termination........................................40
SECTION 10.02 Waiver; Remedies..............................................................40
SECTION 10.03 Counterparts..................................................................41
SECTION 10.04 Notices.......................................................................41
SECTION 10.05 Entire Agreement..............................................................42
SECTION 10.06 Certain Obligations...........................................................42
SECTION 10.07 Assignment....................................................................42
SECTION 10.08 Captions......................................................................42
SECTION 10.09 Severability..................................................................43
SECTION 10.10 Equitable Relief..............................................................43
SECTION 10.11 Third Party Beneficiaries.....................................................43
SECTION 10.12 Expenses......................................................................43
SECTION 10.13 Exhibits and Schedules........................................................43
SECTION 10.14 Governing Law.................................................................43
SECTION 10.15 Consent to Jurisdiction........................................................43
SECTION 10.16 Ancillary Agreements..........................................................44
SECTION 10.17 Survival of Agreements........................................................44
SECTION 10.18 Successors and Assigns........................................................44
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF DISTRIBUTION
AGREEMENT AND PLAN OF DISTRIBUTION dated as of May __, 1998,
between U.S. OFFICE PRODUCTS COMPANY, a Delaware corporation (the "Company"),
WORKFLOW MANAGEMENT, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Printco"), SCHOOL SPECIALTY, INC., a Delaware corporation and
wholly owned subsidiary of the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS,
INC., a Delaware corporation and wholly owned subsidiary of the Company
("Techco"), and NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly
owned subsidiary of the Company ("Travelco"). Certain capitalized terms used
herein without definition have the meanings specified in Section 1.01.
W I T N E S S E T H:
WHEREAS the Board of Directors of the Company has approved the
form, terms and provisions of this Agreement, pursuant to which and subject to
the terms of which (a) the Company will distribute all the issued and
outstanding shares of common stock of the Distributed Companies held by the
Company (as to the shares of each Distributed Company, the "Printco Common
Shares," the "Schoolco Common Shares," the "Techco Common Shares," and the
"Travelco Common Shares") to the holders of record of shares of common stock of
the Company (the "Company Common Stock"), other than shares held in the treasury
of the Company, (b) each Distributed Company will assume entirely such
Distributed Company's Liabilities and other liabilities specified herein, (c)
each Distributed Company will agree to indemnify the Company and hold it
harmless from and against its Pro Rata Share of certain Shared Liabilities and
(d) certain other transactions will be consummated, all as set forth in Article
II hereof (the "Preliminary Transactions");
WHEREAS the purpose of the Preliminary Transactions and the
Distributions is to divest the Company of all businesses, operations and
Liabilities other than the Retained Business, Retained Assets and Retained
Liabilities of the Company and its Subsidiaries;
WHEREAS it is the intention of the parties to this Agreement
that for U.S. federal income tax purposes the Distributions shall qualify as
tax-free spin-offs under Section 355 of the Code and shall not be taxable under
Section 355(e) of the Code; and
WHEREAS in order to effect the separation of ownership of the
Company and the Distributed Companies, this Agreement sets forth the principal
corporate transactions required to effect the Preliminary Transactions and the
Distributions and sets forth other agreements that will govern certain other
matters following the Distributions.
NOW, THEREFORE, in consideration of the premises, and of the
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01 General. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"AAA" shall mean the American Arbitration Association.
"Acquisition Agreement" shall mean each of the merger, stock
purchase, asset purchase or other acquisition agreements pursuant to which
certain of the Distributed Company Subsidiaries were acquired by the Company or
any of its Subsidiaries prior to the Distributions.
"Acquisition Claim" shall mean any and all rights or claims
that the Company or any of its Subsidiaries may have against the sellers of the
Distributed Company Subsidiaries under any of the Acquisition Agreements.
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
Person, another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
"Agent" shall mean American Stock Transfer & Trust Company, as
transfer agent for the Company.
"Ancillary Agreements" shall mean the Employee Benefits
Agreement, the Tax Allocation Agreement, the Imagenet Licensing Agreement and
the Lead Generation System Licensing Agreement.
"Assets" shall mean any and all assets, properties and rights,
whether tangible or intangible, whether real, personal or mixed, whether fixed,
contingent or otherwise, and wherever located, including, without limitation,
the following:
(i) real property interests (including leases), land,
plants, buildings and improvements;
(ii) machinery, equipment, tooling, vehicles, furniture and
fixtures, leasehold improvements, repair parts, tools,
plant, and office equipment and other tangible personal
property, together with any rights or claims arising
2
<PAGE>
out of the breach of any express or implied warranty by
the manufacturers or sellers of any of such assets or
any component part thereof;
(iii) inventories, including raw materials, work-in-process,
finished goods, parts, accessories and supplies;
(iv) cash, bank accounts, notes, loans and accounts
receivable (whether current or not current), interests
as beneficiary under letters of credit, advances and
performance and surety bonds;
(v) certificates of deposit, banker's acceptances, shares
of stock, bonds, debentures, evidences of indebtedness,
certificates of interest or participation in
profit-sharing agreements, collateral-trust
certificates, preorganization certificates or
subscriptions, transferable shares, investment
contracts, voting-trust certificates, puts, calls,
straddles, options, swaps, collars, caps and other
securities or hedging arrangements of any kind;
(vi) financial, accounting and operating data and records
including, without limitation, books, records, notes,
sales and sales promotional data, advertising
materials, credit information, cost and pricing
information, customer and supplier lists, reference
catalogs, payroll and personnel records, minute books,
stock ledgers, stock transfer records and other similar
property, rights and information;
(vii) patents, patent applications, trademarks, trademark
applications and registrations, trade names, service
marks, service mark applications and registrations,
service names, copyrights and copyright applications
and registrations, commercial and technical information
including engineering, production and other designs,
drawings, specifications, formulae, technology,
computer and electronic data processing programs and
software, inventions, processes, trade secrets,
know-how, confidential information and other
proprietary property, rights and interest and all
rights thereto;
(viii) agreements, leases, contracts, sale orders, purchase
orders, open bids and other commitments and all rights
therein;
(ix) prepaid expenses, deposits and retentions held by third
parties;
(x) claims, causes of action, choses in action, rights
under insurance policies, rights under express or
implied warranties, rights of recovery, rights of
set-off, rights of subrogation and all other rights of
any kind;
(xi) licenses, franchises, permits, authorizations and
approvals; and
3
<PAGE>
(xii) goodwill and going concern value.
"Assignee" shall have the meaning set forth in Section 2.07.
"Assignor" shall have the meaning set forth in Section 2.07.
"CDR-PC" shall mean CDR-PC Acquisition, L.L.C., a Delaware
limited liability company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Company" shall have the meaning set forth in the heading of
this Agreement.
"Company Debt" shall mean all Liabilities of the Company and
its Subsidiaries under or arising out of the Credit Agreement, dated as of
August 21, 1996, among the Company, various lending institutions and Bankers
Trust Company, as agent.
"Company Common Stock" shall have the meaning set forth in
the recitals to this Agreement.
"Company Indemnitees" shall mean the Company, each Affiliate
of the Company after the Distribution Date, Clayton, Dubilier & Rice, Inc.,
CDR-PC, Clayton, Dubilier & Rice Fund V Limited Partnership, CD&R Associates V
Limited Partnership, each of their respective partners, members, directors,
officers, employees and agents and each of the heirs, executors, successors and
assigns of any of the foregoing.
"Company Transaction Costs" shall mean Transaction Costs
incurred by the Company in connection with the Transactions.
"Conveyancing and Assumption Instruments" shall have the
meaning set forth in Section 2.04.
"Conveyancing Instruments" shall have the meaning set forth
in Section 2.04.
"Covered Claims" shall mean those Liabilities that,
individually or in the aggregate, and if reported timely, are covered within the
terms and conditions of any Policy in the Insurance Program.
"Defaulted Payment Obligation" shall have the meaning set
forth in Section 5.09.
"Dispute" shall have the meaning set forth in Section 9.01.
4
<PAGE>
"Distributed Companies" shall mean Printco, Schoolco, Techco
and Travelco.
"Distributed Companies' Assets" shall mean the Printco
Assets, the Schoolco Assets, the Techco Assets and the Travelco Assets.
"Distributed Companies' Businesses" shall mean the Printco
Business, the Schoolco Business, the Techco Business and the Travelco Business.
"Distributed Companies' Indemnitees" shall mean the Printco
Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees.
"Distributed Companies' Liabilities" shall mean the Printco
Liabilities, the Schoolco Liabilities, the Techco Liabilities and the Travelco
Liabilities.
"Distributed Company Subsidiaries" shall mean the Printco
Subsidiaries, the Schoolco Subsidiaries, the Techco Subsidiaries and the
Travelco Subsidiaries.
"Distributed Company Transaction Costs" shall mean, as to any
Distributed Company, the Transaction Costs incurred by such Distributed Company
or the Company that relate to such Distributed Company's IPO or credit
facilities described in Section 2.08.
"Distribution Date" shall mean such date as hereafter may be
determined by the Company's Board of Directors as the date as of which the
Distributions shall be effected.
"Distribution Record Date" shall mean such date as hereafter
may be determined by the Company's Board of Directors as the record date for the
Distributions.
"Distribution Shares" shall mean the Printco Common Shares,
the Schoolco Common Shares, the Techco Common Shares and the Travelco Common
Shares.
"Distribution Time" shall mean 11:59 P.M. (Eastern time) on
the Distribution Date.
"Distributions" shall mean the distributions on the
Distribution Date to holders of record of shares of Company Common Stock, as
of the Distribution Record Date, other than shares held in the treasury of
the Company, of (i) all the Printco Common Shares on the basis of one Printco
Common Share for each outstanding shares of Company Common Stock, (ii)
all the Schoolco Common Shares on the basis of one Schoolco Common Share for
each outstanding shares of Company Common Stock, (iii) all the Techco
Common Shares on the basis of one Techco Common Share for each
outstanding shares of Company Common Stock, and (iv) all the Travelco Common
Shares on the basis of one Travelco Common Share for each outstanding
shares of Company Common Stock.
5
<PAGE>
"Earn-Out Payment Liability" shall mean any contingent cash
payment required to be made after the Distribution Date by the Company or any of
its Subsidiaries to sellers of certain Distributed Company Subsidiaries or
Retained Subsidiaries under circumstances that may arise under the Acquisition
Agreements.
"Employee Benefits Agreement" shall mean the Employee
Benefits Agreement between the Company and the Distributed Companies
substantially in the form of Exhibit I hereto.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Guaranteed Liability" shall have the meaning set forth in
Section 2.06.
"Guaranteed Party" shall have the meaning set forth in
Section 2.06.
"Guarantor" shall have the meaning set forth in Section 2.06.
"Imagenet Licensing Agreement" shall have the meaning set
forth in Schedule 2.11.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' and accountants' fees and expenses and any and
all out-of-pocket expenses) arising from Third Party Claims or any Indemnifying
Party's breach of its obligations under the Ancillary Agreements or this
Agreement, including all losses, liabilities, claims, damages, demands, costs or
expenses reasonably incurred in investigating, preparing for or defending
against any Actions or potential Actions or in asserting, preserving or
enforcing any rights hereunder (including, without limitation, rights under
Article V) or under any Ancillary Agreement.
"Indemnifying Party" shall have the meaning set forth in
Section 5.06.
"Indemnitee" shall have the meaning set forth in Section
5.06.
"Information" of a party shall mean any and all information
that such party or any of its Representatives furnishes or has furnished to the
receiving party or any of its Representatives whether furnished orally or in
writing or by any other means or gathered by inspection and regardless of
whether the same is specifically marked or designated as "confidential" or
"proprietary," together with any and all notes, memoranda, analyses,
compilations, studies or other documents (whether in hard copy or electronic
media) prepared by the receiving party or any of its Representatives which
contain or otherwise reflect such Information, together with any and all copies,
extracts or other reproductions of any of the same; provided, however, that for
the purposes hereof all information relating to the Distributed Companies, the
Distributed Companies' Businesses or the Distributed
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Companies' Assets in the possession of the Company at the Distribution Time
shall be deemed to have been furnished by the related Distributed Company and
all information relating to the Retained Business or the Retained Assets in the
possession of the Distributed Companies or any of the Distributed Company
Subsidiaries at the Distribution Time shall be deemed to have been furnished by
the Company; provided further, however, that the term "Information" does not
include information that:
(a) at the time of disclosure is generally
available to and known by the public (other than as a result of a violation of
this Agreement or any other confidentiality obligation, whether directly or
indirectly, by a party to this Agreement or any of its Representatives);
(b) is available to the receiving party on a
non-confidential basis from a source other than the providing party or its
Representatives, provided that such source is not known by the receiving party
to be subject to a confidentiality agreement regarding such information; or
(c) has been independently acquired or developed by
the receiving party without violation of any of the obligations of the receiving
party or its Representatives under this Agreement.
"Information Statements" shall mean the Information
Statements/Prospectuses to be sent to the holders of shares of Company Common
Stock, as of the Distribution Record Date, in connection with the Distributions,
including any amendments or supplements thereto, which are included as exhibits
to the registration statements on Forms S-1 filed by the Distributed Companies,
as applicable, under the Securities Act.
"Insurance Program" shall mean, collectively, the series of
policies pursuant to which various insurance carriers provide insurance coverage
to the Company and its Affiliates in respect of claims or occurrences relating
to, without limitation, property damage, bodily injury, business interruption,
transit, fire, non-owned aircrafts, crime, fiduciary liability, general
liability, products' liability, professional liability, automobile liability and
employer's liability.
"Investment Agreement" shall mean the Investment Agreement,
dated as of January 12, 1998, as amended, between the Company and CDR-PC, as the
same may be amended from time to time.
"IPO" shall mean, as to any Distributed Company, the initial
public offering of securities to be conducted by such company, which offering is
scheduled to occur on or about the Distribution Date.
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"IPO Prospectus" shall mean, as to any Distributed Company,
the Registration Statement/Prospectus prepared in connection with such
Distributed Company's IPO.
"Lead Generation System Licensing Agreement" shall have the
meaning set forth in Schedule 2.11.
"Liabilities" shall mean any and all debts, liabilities,
obligations, claims, damages, fees, costs and expenses, absolute or contingent,
matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or
unknown, whenever arising, including, without limitation, those debts,
liabilities, obligations, claims, damages, fees, costs and expenses, arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"Mediation Period" shall have the meaning set forth in Section
9.03.
"MCI Agreement" shall mean the Special Customer Arrangement,
effective as of November 15, 1997, by and between MCI Telecommunications
Corporation and the Company.
"NASDAQ" shall mean the NASDAQ National Market System.
"Nonassignable Contract" shall have the meaning set forth in
Section 2.07.
"Person" shall mean any natural person, corporation, trust,
limited liability company, joint venture, association, company, partnership,
entity, unincorporated organization or government, or any agency or political
subdivision thereof.
"Pledged Shares" shall mean any Company Common Stock pledged
or assigned to the Company as of the Distribution Date as collateral security by
sellers of certain of the Distributed Company Subsidiaries under the Acquisition
Agreements.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies, commercial
general liability policies, fiduciary liability, automobile, aircraft, property
and casualty, workers' compensation and employee dishonesty insurance policies,
bonds and self-insurance and captive insurance company arrangements, together
with the rights, benefits and privileges thereunder.
"Preliminary Transactions" shall have the meaning set forth in
the recitals to this Agreement.
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"Printco" shall have the meaning set forth in the heading of
this Agreement.
"Printco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Printco and the Printco Subsidiaries under the Acquisition Agreements
pursuant to which Printco and the Printco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Printco Assets" shall mean (a) the Assets of Printco and the
Printco Subsidiaries and (b) the rights of Printco and the Printco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Printco Assets shall not include any claim of Printco against the Company
relating to the payment of finders' fees or other compensation in respect of
customers referred to the Company by Printco or the payment of rebates or other
compensation in respect of office products sold by Printco.
"Printco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Printco and
the Printco Subsidiaries including all businesses, Assets and operations
conducted or owned by Printco and the Printco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Printco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Printco Indemnitees" shall mean Printco, the Printco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Printco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Printco and the Printco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all Liabilities of the Company and its Subsidiaries
arising primarily out of or relating primarily to the management or conduct of
the Printco Business or the administration of the Printco Subsidiaries, (iii)
all Specified Securities Liabilities of Printco, (iv) all Liabilities of the
Company relating to any Earn-Out Payment Liabilities arising out of any of the
Acquisition Agreements pursuant to which any of the Printco Subsidiaries or any
part of the Printco Business was acquired, (v) the Distributed Company
Transaction Costs of Printco, (vi) $1,000,000 of the Company Transaction Costs
and (vii) any Company Debt allocated to Printco pursuant to Section 2.08 of this
Agreement.
"Printco Subsidiaries" shall mean the Subsidiaries of Printco
as listed on Exhibit II.
"Pro Rata Share" shall mean, (i) as to any Distributed
Company, the percentage that is equal to the average of (a) the ratio of the pro
forma fiscal year 1998
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revenues for such Distributed Company to the fiscal year 1998 consolidated
revenues of the Company (prior to the Distributions), and (b) the ratio of the
pro forma fiscal year 1998 net income for such Distributed Company to the fiscal
year 1998 consolidated net earnings of the Company (prior to the Distributions),
and (ii) as to the Company, the percentage that is equal to 100% less the sum of
the Pro Rata Share percentages of the Distributed Companies as defined in (i)
above. Estimations of the Company's Pro Rata Share and each Distributed
Company's Pro Rata Share using financial data for the nine-month period ended
January 24, 1998 are set forth in Exhibit III.
"Proxy" shall mean the definitive proxy statement dated May 1,
1998, distributed by the Company to the holders of the Company Common Stock,
describing and seeking approval for (i) the investment provided for in the
Investment Agreement and (ii) a one-for-four reverse stock split, as the same
may be amended.
"Recovery" shall mean those monies received by an insured from
an insurance carrier or paid by an insurance carrier on behalf of an insured
pursuant to a claim under an insurance policy in the Insurance Program.
"Recovery Costs" shall have the meaning set forth in Section
7.04.
"Representatives" of either party shall mean such party's
Affiliates, directors, officers, partners, employees, agents or other
representatives (including attorneys, accountants and financial advisors).
"Retained Assets" shall mean (a) all the Assets of the Company
and its Subsidiaries except for the Distributed Companies' Assets, and (b) the
rights of the Company and its Subsidiaries under this Agreement and the
Ancillary Agreements.
"Retained Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by the Company
and the Retained Subsidiaries, including all businesses, Assets or operations
conducted or owned by the Company or its Subsidiaries that have been sold or
otherwise disposed of or discontinued, (other than the Distributed Companies'
Assets, Distributed Companies' Businesses and the business of managing and
administering the Distributed Companies' Subsidiaries).
"Retained Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of the Company and the Retained Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all Liabilities of the Company and its Retained
Subsidiaries arising primarily out of or relating primarily to the management or
conduct of the Retained Business or the administration of the Retained
Subsidiaries, (iii) all Specified Securities Liabilities of the Company, (iv)
all Liabilities of the Company relating to any Earn-Out Payment Liabilities
arising out of any of the Acquisition Agreements pursuant to which any of the
Retained Subsidiaries or any part of
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the Retained Business was acquired, (v) all of the Company Transaction Costs
(excluding, in aggregate, the $4,000,000 that is treated as part of the
Distributed Companies' Liabilities) and (vi) any indebtedness for borrowed money
of the Company other than Company Debt to be allocated to the Distributed
Companies pursuant to Section 2.08 of this Agreement.
"Retained Subsidiaries" shall mean (x) all of the Subsidiaries
of the Company other than the Distributed Companies and the Distributed Company
Subsidiaries, and (y) 1186203 Ontario Limited, 1243231 Ontario Limited and
1203803 Ontario Limited, and their respective Subsidiaries.
"Schoolco" shall have the meaning set forth in the heading of
this Agreement.
"Schoolco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Schoolco and the Schoolco Subsidiaries under the Acquisition Agreements
pursuant to which Schoolco and the Schoolco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Schoolco Assets" shall mean (a) the Assets of Schoolco and
the Schoolco Subsidiaries and (b) the rights of Schoolco and the Schoolco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Schoolco Assets shall not include any claim of Schoolco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Schoolco or the payment of
rebates or other compensation in respect of office products sold by Schoolco.
"Schoolco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Schoolco and
the Schoolco Subsidiaries including all businesses, Assets or operations
conducted or owned by Schoolco and the Schoolco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Schoolco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Schoolco Indemnitees" shall mean Schoolco, the Schoolco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Schoolco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Schoolco and the Schoolco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries or Affiliates, arising primarily out of or relating primarily to
the management or conduct of the Schoolco Business or the administration of the
Schoolco Subsidiaries, (iii) all Specified Securities Liabilities of Schoolco,
(iv) all Liabilities of the Company relating to any Earn-Out Payment Liabilities
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arising out of any of the Acquisition Agreements pursuant to which any of the
Schoolco Subsidiaries or any part of the Schoolco Business was acquired, (v) the
Distributed Company Transaction Costs of Schoolco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Schoolco
pursuant to Section 2.08 of this Agreement.
"Schoolco Subsidiaries" shall mean the Subsidiaries of
Schoolco as listed on Exhibit II.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securities Laws" shall mean the Exchange Act, the Securities
Act and foreign, provincial and state securities laws.
"Shared Liability" shall mean (i) any Liability of the Company
and its Subsidiaries, including without limitation a Liability arising under the
Securities Laws, that (x) arises out of an act or omission that occurred prior
to the Distribution Date, and (y) is not a Retained Liability, Printco
Liability, Schoolco Liability, Techco Liability or Travelco Liability, and (ii)
the Liabilities listed on Exhibit IV. By way of example and not of limitation,
Shared Liabilities shall include: any Liability arising in connection with the
Proxy or Tender Offer (other than a liability relating to information supplied
by a specific subsidiary of the Company); and any Liability relating to the
operation of the Company's headquarters arising prior to the Distribution Date;
and any other liability not relating to the business of any particular Retained
Subsidiary or Distributed Company Subsidiary.
"Special Insurance Recoveries" shall mean Recoveries whenever
received by the Company (i) relating to insured casualty losses of a Distributed
Company or Distributed Company Subsidiary occurring prior to the Distribution
Date and (ii) not actually used by the relevant Distributed Company or
Distributed Company Subsidiary to rebuild, reconstruct, renovate or repair
properties or facilities that suffered such loss.
"Specified Securities Liabilities" shall mean (a) as to any
Distributed Company, any Liability under the Securities Laws arising out of or
relating to (x) the Information Statement (other than Liabilities relating to
those sections of the Information Statements specified on Exhibit V) and/or IPO
Prospectus of such Distributed Company, and (y) any other securities filings or
disclosures made by, or the failure to make filings or disclosures required to
be made by, the Company or any of its Subsidiaries prior to the Distribution
Date to the extent such Liability arises primarily out of material omissions
made by or materially incorrect, false, or misleading information supplied by
such Distributed Company or any of its Subsidiaries; and (b) as to the Company,
any Liability under the Securities Laws arising out of or relating to any
securities filings or disclosures made by, or the failure to make filings or
disclosures required to be made by, the Company, or any of its
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Subsidiaries prior to the Distribution Date to the extent such Liability arises
primarily out of material omissions made by or materially incorrect, false or
misleading information supplied by the Retained Business or a Retained
Subsidiary.
"Subsidiary" shall mean any corporation, partnership, joint
venture or other entity (i) in which another entity owns, directly or
indirectly, ownership interests sufficient to elect a majority of the Board of
Directors (or persons performing similar functions) (irrespective of whether at
the time any other class or classes of ownership interests of such corporation,
partnership, joint venture or other entity shall or might have such voting power
upon the occurrence of any contingency) or (ii) of which another entity is a
general partner or an entity performing similar functions (e.g., a trustee or
managing member).
"Tax" shall mean all U.S. federal, state, local and foreign
taxes and assessments, including all interest, penalties and additions imposed
with respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation
Agreement between the Company and the Distributed Companies substantially in the
form of Exhibit VI hereto, as and to the extent amended and restated as of the
closing of the Transactions.
"Techco" shall have the meaning set forth in the heading of
this Agreement.
"Techco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Techco and the Techco Subsidiaries under the Acquisition Agreements pursuant
to which Techco and the Techco Subsidiaries were acquired by the Company or any
of its Subsidiaries.
"Techco Assets" shall mean (a) the Assets of Techco and the
Techco Subsidiaries and (b) the rights of Techco and the Techco Subsidiaries
under this Agreement and the Ancillary Agreements; provided, however, that
Techco Assets shall not include any claim of Techco against the Company relating
to the payment of finders' fees or other compensation in respect of customers
referred to the Company by Techco or the payment of rebates or other
compensation in respect of office products sold by Techco.
"Techco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Techco and
the Techco Subsidiaries including all businesses, Assets or operations conducted
or owned by Techco and the Techco Subsidiaries that have been sold or otherwise
disposed of or discontinued.
"Techco Common Shares" shall have the meaning set forth in the
recitals to this Agreement.
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"Techco Indemnitees" shall mean Techco, the Techco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Techco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Techco and the Techco Subsidiaries under this Agreement or the
Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Techco Business or the administration of the Techco
Subsidiaries, (iii) all Specified Securities Liabilities of Techco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Techco
Subsidiaries or any part of the Techco Business was acquired, (v) the
Distributed Company Transaction Costs of Techco, (vi) $1,000,000 of the Company
Transaction Costs and (vii) any Company Debt allocated to Techco pursuant to
Section 2.08 of this Agreement.
"Techco Subsidiaries" shall mean the Subsidiaries of Techco as
listed on Exhibit II.
"Tender Offer" shall mean, collectively, (i) the cash tender
offer by the Company to purchase approximately 37 million shares (including
shares issuable upon exercise of outstanding stock options) of Company Common
Stock at a price of $27 per share commenced on May 4, 1998, and (ii) the tender
offer of the Company to purchase any and all of its $230.0 million outstanding 5
1/2% Convertible Subordinated Notes due 2003 for a purchase price of 94.5% of
the principal amount, plus accrued interest, commenced on May 5, 1998.
"Third Party Claim" shall have the meaning set forth in
Section 5.07.
"Transaction Costs" shall mean all transaction costs including
legal, accounting, investment banking, financial advisory and other fees
incurred by a party hereto (or one of its Subsidiaries) in connection with the
Transactions or any of the other transactions described in, or contemplated by,
IPO Prospectuses and Section 2.08.
"Transactions" shall mean the execution, delivery and
performance of this Agreement, the Ancillary Agreements, and the Investment
Agreement and the consummation of the Preliminary Transactions, the
Distributions, the Proxy, the Tender Offer, the 2001 Note Exchange Offer and any
other transactions contemplated by this Agreement, the Ancillary Agreements and
the Investment Agreement, including without limitation the financing of the
Company related thereto, but not including the initial public offerings by the
Distributed Companies or the financings of the Distributed Companies.
"Transferred Policies" shall have the meaning set forth in
Section 7.02(b).
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"Travelco" shall have the meaning set forth in the heading of
this Agreement.
"Travelco Acquisition Claims" shall mean any and all rights or
claims that the Company or any of its Subsidiaries may have against the sellers
of Travelco and the Travelco Subsidiaries under the Acquisition Agreements
pursuant to which Travelco and the Travelco Subsidiaries were acquired by the
Company or any of its Subsidiaries.
"Travelco Assets" shall mean (a) the Assets of Travelco and
the Travelco Subsidiaries and (b) the rights of Travelco and the Travelco
Subsidiaries under this Agreement and the Ancillary Agreements; provided,
however, that Travelco Assets shall not include any claim of Travelco against
the Company relating to the payment of finders' fees or other compensation in
respect of customers referred to the Company by Travelco or the payment of
rebates or other compensation in respect of office products sold by Travelco.
"Travelco Business" shall mean all the businesses, Assets and
operations heretofore, currently or hereafter conducted or owned by Travelco and
the Travelco Subsidiaries including all businesses, Assets or operations
conducted or owned by Travelco and the Travelco Subsidiaries that have been sold
or otherwise disposed of or discontinued.
"Travelco Common Shares" shall have the meaning set forth in
the recitals to this Agreement.
"Travelco Indemnitees" shall mean Travelco, the Travelco
Subsidiaries, their Affiliates, each of their respective directors, officers,
employees and agents and each of the heirs, executors, successors and assigns of
any of the foregoing.
"Travelco Liabilities" shall mean collectively, whenever
arising, whether prior to, at or following the Distribution Time, (i) all
Liabilities of Travelco and the Travelco Subsidiaries under this Agreement or
the Ancillary Agreements, (ii) all the Liabilities of the Company and its
Subsidiaries, arising primarily out of or relating primarily to the management
or conduct of the Travelco Business or the administration of the Travelco
Subsidiaries, (iii) all Specified Securities Liabilities of Travelco, (iv) all
Liabilities of the Company relating to any Earn-Out Payment Liabilities arising
out of any of the Acquisition Agreements pursuant to which any of the Travelco
Subsidiaries or any part of the Travelco Business was acquired, (v) the
Distributed Company Transaction Costs of Travelco, (vi) $1,000,000 of the
Company Transaction Costs and (vii) any Company Debt allocated to Travelco
pursuant to Section 2.08 of this Agreement.
"Travelco Subsidiaries" shall mean the Subsidiaries of
Travelco as listed on Exhibit II.
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"2001 Note Exchange Offer" shall mean the Company's offer to
exchange its 5 1/2% Convertible Subordinated Notes due 2001 for Company Common
Stock at a temporarily reduced conversion price commenced on May 1, 1998.
SECTION 1.02 References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
or "Article" are, unless otherwise specified, to one of the Sections and
Articles of this Agreement. Any time the word "including" is used herein it
means "including without limitation".
ARTICLE II
PRELIMINARY TRANSACTIONS
SECTION 2.01 Stock Transfers.
(a) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Printco all its right, title and
interest in and to all the shares of capital stock of the Printco Subsidiaries.
(b) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Schoolco all its right, title and
interest in and to all the shares of capital stock of the Schoolco Subsidiaries.
(c) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Techco all its right, title and
interest in and to all the shares of capital stock of the Techco Subsidiaries.
(d) At or prior to the Distribution Time, the
Company shall transfer or otherwise convey to Travelco all its right, title and
interest in and to all the shares of capital stock of the Travelco Subsidiaries.
Immediately after the stock transfers set forth in this Section 2.01, the
Company shall not own any capital stock of (or other equity interest in) any of
the Distributed Company Subsidiaries.
SECTION 2.02 Liabilities.
(a) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Printco hereby unconditionally agrees to cause each
Printco Subsidiary that has incurred a Printco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
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(b) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Schoolco hereby unconditionally agrees to cause each
School Subsidiary that has incurred a Schoolco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
(c) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Techco hereby unconditionally agrees to cause each Techco
Subsidiary that has incurred a Techco Liability to pay, perform and discharge
such Liability when due in accordance with its terms.
(d) Effective as of the Distribution Time and
except as otherwise specifically provided in this Agreement or any of the
Ancillary Agreements, Travelco hereby unconditionally agrees to cause each
Travelco Subsidiary that has incurred a Travelco Liability to pay, perform and
discharge such Liability when due in accordance with its terms.
SECTION 2.03 Transfer of Certain Licenses and Permits.
(a) In furtherance of the transfer of the capital
stock of the Printco Subsidiaries to Printco and the assumption of the Printco
Liabilities set forth in this Article II, at or prior to the Distribution Time,
(i) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Printco Business but which are held in the name of the Company or any
Retained Subsidiary shall be duly and validly transferred by the Company or such
Subsidiary to Printco or the appropriate Printco Subsidiary, and (ii) all
transferrable licenses, permits and authorizations issued by governmental or
regulatory entities which are used primarily in connection with the Retained
Business but which are held in the name of Printco or the Printco Subsidiaries
shall be duly and validly transferred by Printco or such Subsidiary to the
Company or the appropriate Subsidiary of the Company.
(b) In furtherance of the transfer of the capital
stock of the Schoolco Subsidiaries to Schoolco and the assumption of the
Schoolco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Schoolco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Schoolco or the appropriate Schoolco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Schoolco or the Schoolco
Subsidiaries shall be duly and validly transferred by Schoolco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
(c) In furtherance of the transfer of the capital
stock of the Techco Subsidiaries to Techco and the assumption of the Techco
Liabilities set forth in this Article
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II, at or prior to the Distribution Time, (i) all transferrable licenses,
permits and authorizations issued by governmental or regulatory entities which
are used primarily in connection with the Techco Business but which are held in
the name of the Company or any Retained Subsidiary shall be duly and validly
transferred by the Company or such Subsidiary to Techco or the appropriate
Techco Subsidiary, and (ii) all transferrable licenses, permits and
authorizations issued by governmental or regulatory entities which are used
primarily in connection with the Retained Business but which are held in the
name of Techco or the Techco Subsidiaries shall be duly and validly transferred
by Techco or such Subsidiary to the Company or the appropriate Subsidiary of the
Company.
(d) In furtherance of the transfer of the capital
stock of the Travelco Subsidiaries to Travelco and the assumption of the
Travelco Liabilities set forth in this Article II, at or prior to the
Distribution Time, (i) all transferrable licenses, permits and authorizations
issued by governmental or regulatory entities which are used primarily in
connection with the Travelco Business but which are held in the name of the
Company or any Retained Subsidiary shall be duly and validly transferred by the
Company or such Subsidiary to Travelco or the appropriate Travelco Subsidiary,
and (ii) all transferrable licenses, permits and authorizations issued by
governmental or regulatory entities which are used primarily in connection with
the Retained Business but which are held in the name of Travelco or the Travelco
Subsidiaries shall be duly and validly transferred by Travelco or such
Subsidiary to the Company or the appropriate Subsidiary of the Company.
SECTION 2.04 Transfer and Assumption Documentation. In
furtherance of the transfer of the capital stock of the Distributed Company
Subsidiaries to the relevant Distributed Companies and the assumption of the
Distributed Companies' Liabilities set forth in this Article II, at or prior to
the Distribution Time, (i) the parties hereto shall execute and deliver, and
cause their respective Subsidiaries to execute and deliver, such deeds, bills of
sale, stock powers, certificates of title, assignments of leases and contracts
and other instruments of contribution, grant, conveyance, assignment, transfer
and delivery necessary to evidence such contribution, grant, conveyance,
assignment, transfer and delivery (collectively, the "Conveyancing Instruments")
and (ii) each party hereto or the appropriate Subsidiary of such party shall
execute and deliver such instruments of assumption (together with the
Conveyancing Instruments, the "Conveyancing and Assumption Instruments") as and
to the extent necessary to evidence such assumption.
SECTION 2.05 Intercompany Accounts. All intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder) between any Distributed Company or Distributed Company Subsidiary, on
the one hand, and the Company or any of the Retained Subsidiaries, on the other
hand, including, without limitation, in respect of any cash balances, any cash
balances representing deposited checks or drafts for which only a provisional
credit has been allowed or any cash held in any centralized cash management
system, shall be settled or otherwise eliminated prior to the Distribution Date.
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SECTION 2.06 Elimination of Guarantees. To the extent that any
of the parties to this Agreement or any Subsidiary thereof is a guarantor of or
obligor for (a "Guarantor") any Liability of any other party to this Agreement
or any Subsidiary thereof (a "Guaranteed Party"), the Guarantor and the
Guaranteed Party shall use their commercially reasonable efforts to have, on or
prior to the Distribution Date, or as soon as practicable thereafter, the
Guarantor removed as guarantor of or obligor for such Liability of the
Guaranteed Party (a "Guaranteed Liability"). In the event that the Guarantor
cannot be removed as guarantor of or obligor for such Guaranteed Liability, the
Guaranteed Party agrees that until such Guaranteed Liability is discharged in
full, the Guaranteed Party shall take no action, and shall not permit any of its
Subsidiaries to take any action, which will have the effect of increasing the
contingent liability or exposure of the Guarantor or any of its Subsidiaries
with respect to such Guaranteed Liability. This Section 2.06 shall not apply to
the obligations set forth on Schedule 2.06.
SECTION 2.07 Assignments and Transfers Not Effected Prior to
the Distribution. Anything contained herein to the contrary notwithstanding, (a)
this Agreement shall not constitute an agreement to assign or transfer any
agreement, contract, lease, license, permit, sales order, purchase order, open
bid or other commitment if an assignment, attempted assignment, transfer or
attempted transfer of the same without the consent of a third party would
constitute a breach thereof or in any way impair the rights of the Distributed
Companies or the Company or any of their respective Subsidiaries thereunder (any
such item being referred to as a "Nonassignable Contract") and (b) nothing
herein shall be deemed to require the transfer of any Assets or the assumption
of any Liabilities which by their terms or operation of law cannot be
transferred or assumed. To the extent that any assignments or transfers
contemplated by this Article II shall not have been consummated at or prior to
the Distribution Time, the parties hereto and their respective Subsidiaries
shall cooperate and use commercially reasonable efforts to obtain any necessary
consents or approvals for the assignment of all Nonassignable Contracts, the
transfer of all Assets and the assumption of all Liabilities contemplated to be
assigned, transferred or assumed pursuant to this Article II and shall otherwise
cooperate and use reasonable best efforts to effect any such assignments,
transfers or assumptions as promptly following the Distribution Time as shall be
practicable. In the event that any consent required with respect to a
Nonassignable Contract is not obtained or an attempted assignment thereof would
be ineffective or would impair either party's rights under any such
Nonassignable Contract, then the party obligated to assign such Nonassignable
Contract (the "Assignor") will promptly pay or cause to be paid to the assignee
thereof (the "Assignee"), when received, all monies received by the Assignor
with respect to any such Nonassignable Contract and in consideration thereof the
Assignee shall pay, perform and discharge on behalf of the Assignor all the
Assignor's Liabilities, thereunder in a timely manner and in accordance with the
terms thereof. In the event that any such transfer of Assets or assumption of
Liabilities has not been consummated, from and after the Distribution Time, the
party retaining such Asset or Liability shall hold such Asset in trust for the
use and benefit of the party entitled thereto (at the expense of the party
entitled thereto) or retain such Liability for the account
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of the party by whom such Liability is to be assumed pursuant hereto, as the
case may be. The parties hereto will take such other action as may be reasonably
requested by the Assignee or party to whom such Asset is to be transferred, or
by whom such Liability is to be assumed, as the case may be, in order to place
such party, insofar as is reasonably possible, in the same position as would
have existed had such Nonassignable Contract been assigned, or such Asset or
Liability been transferred or assumed, as contemplated hereby. As and when any
required consent to the assignment of a Nonassignable Contract is obtained or
any such Asset or Liability becomes transferable or able to be assumed, such
assignment, transfer or assumption shall be effected forthwith. The parties
agree that, as of the Distribution Time, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership over all Assets, together
with all rights, powers and privileges incident thereto, and shall be deemed to
have assumed all Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party is entitled to acquire or required to assume
pursuant to the terms of this Agreement or any of the Ancillary Agreements.
SECTION 2.08 Debt. On or prior to the Distribution Date, each
Distributed Company shall obtain bank credit facilities, borrow funds under such
facilities and pay such moneys borrowed to reduce the Company Debt equal in
amount to (i) the amounts reflected in relation to such Distributed Company on
Schedule 2.08, and (ii) the amount of any debt incurred by the Company after the
date of the Investment Agreement in connection with the acquisition of any
entities that, upon the Distributions, will become a Subsidiary of such
Distributed Company, which money shall be paid to the Company to be applied to
the Company Debt.
SECTION 2.09 Assignment of Acquisition Claims. The Company
shall contribute, grant, convey, assign, transfer and deliver to Printco,
Schoolco, Techco and Travelco all the Company's rights and interest in and to
the Printco Acquisition Claims, the Schoolco Acquisition Claims, the Techco
Acquisition Claims and the Travelco Acquisition Claims, respectively.
Notwithstanding the assignment of the foregoing Acquisition Claims under this
Section 2.09: (i) the net recoveries of Printco arising out of the Printco
Acquisition Claims shall be shared between Printco and the Company, as they are
collected, in a ratio of 20% to 80%, respectively, until the Company has
received the amount shown on Schedule 2.09 (including through any Special
Insurance Proceeds retained by the Company pursuant to Section 7.04), after
which time any net recoveries from the Printco Acquisition Claims shall be
shared, as they are collected, between Printco and the Company in a ratio of 95%
to 5%, respectively, (ii) the net recoveries of Schoolco arising out of the
Schoolco Acquisition Claims shall be shared, as they are collected, between
Schoolco and the Company in a ratio of 20% to 80%, respectively, until the
Company has received the amount shown on Schedule 2.09, after which time any net
recoveries from the Schoolco Acquisition Claims shall be shared, as they are
collected, between Schoolco and the Company in a ratio of 95% to 5%,
respectively, (iii) the net recoveries from the Techco Acquisition Claims shall
be assigned 100% to Techco, and (iv) the net recoveries from the Travelco
Acquisition Claims shall be assigned 100% to Travelco.
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SECTION 2.10 Pledged Shares. The Company shall hold all
Pledged Shares for the purposes specified in, and distribute such Pledged Shares
as provided pursuant to, Schedule 2.10.
SECTION 2.11 Other Transactions. In furtherance of the
transfer of the capital stock of the Distributed Company Subsidiaries to the
relevant Distributed Companies and the assumption of the Distributed Companies'
Liabilities set forth in this Article II, at or prior to the Distribution Time,
the parties agree to effect the transactions, if any, described in Schedule 2.11
attached hereto.
ARTICLE III
THE DISTRIBUTION
SECTION 3.01 Directors and Employees.
(a) The Company shall cause all those individuals
who will be officers or directors of the Company or any Retained Subsidiary
immediately after the Distribution Time to resign, effective as of the
Distribution Time, from all officer or director positions with any of the
Distributed Companies or Distributed Company Subsidiaries in which they serve.
(b) The Company shall cause all those individuals
who will be officers or directors of any of the Distributed Companies or the
Distributed Company Subsidiaries immediately after the Distribution Time to
resign, effective as of the Distribution Time, from all officer or director
positions with the Company or any Retained Subsidiary in which they serve.
SECTION 3.02 Mechanics of Distribution.
(a) Delivery of Shares to Agent. Following
consummation of the transactions contemplated by Section 2.01 and subject to the
closing conditions set forth in Article VIII the Company shall deliver to the
Agent, for the benefit of holders of record of the Company Common Stock as at
the close of business on the Distribution Record Date, the share certificates
representing (i) all the Printco Common Shares, (ii) all the Schoolco Common
Shares, (iii) all the Techco Common Shares and (iv) all the Travelco Common
Shares, and shall instruct the Agent to distribute such share certificates to
such holders of the Company Common Stock upon notice from the Company that the
conditions to the obligation of the Company to consummate the Distributions have
been satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares. Immediately following the
Distributions, the Company shall not own any capital stock of the Distributed
Companies or the Distributed Company Subsidiaries.
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(b) Distribution of Certificates. The
Distributions shall be effected by the distribution to each holder of record
of Company Common Stock, as of the Distribution Record Date, of certificates
representing one Printco Common Share for each shares of Company
Common Stock, one Schoolco Common Share for each shares of Company Common
Stock, one Techco Common Share for each shares of Company Common Stock, one
Travelco Common Share for each shares of Company Common Stock and
of cash in lieu of fractional shares as set forth in Section 3.02(c). The
Company shall instruct the Agent to distribute the Distribution Shares and
the cash in lieu of fractional shares as promptly as practicable after the
Distribution Time.
(c) Payment for Fractional Shares. No certificate
or scrip representing fractional shares of the Distribution Shares shall be
distributed to holders of the Company Common Stock as part of the Distributions.
Each holder of Company Common Stock who would otherwise be entitled to receive a
fractional share of the common stock of any of the Distributed Companies
pursuant to the Distributions shall receive cash in lieu of such fractional
share. As soon as practicable after the Distribution Date, the Company shall
direct the Agent to determine the number of fractional shares of any of the
Distribution Shares allocable to each holder of record of Company Common Stock
as of the Distribution Record Date who will receive cash in lieu of such
fractional shares, to aggregate all such fractional shares into whole shares and
sell the whole shares obtained thereby in open market transactions or otherwise,
in each case at then prevailing trading prices, and to cause to be distributed
to each such holder, in lieu of any fractional share, such holder's ratable
share of the proceeds of such sale, after making appropriate deductions of the
amount required to be withheld for U.S. federal income tax purposes and after
deducting an amount equal to all brokerage charges, commissions and transfer
taxes attributed to such sale.
SECTION 3.03 Timing of Distribution. The Board of Directors of
the Company shall, or shall authorize certain officers of the Company to,
formally declare the Distributions and shall authorize the Company to effect the
Distributions at the Distribution Time, subject to the satisfaction or waiver of
the conditions set forth in Article VIII. The Distributions shall be deemed to
be effective upon notification by the Company to the Agent that the conditions
to the obligations of the Company to consummate the Distributions have been
satisfied or waived and that the Agent is authorized to proceed with the
distribution of the Distribution Shares.
ARTICLE IV
MUTUAL RELEASE
Effective as of the Distribution Time and except as otherwise
specifically set forth in this Agreement or any of the Ancillary Agreements,
each of the parties hereto, on its own behalf and on behalf of each of its
respective Subsidiaries, releases and forever discharges all of the other
parties hereto and their respective Subsidiaries, and their
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respective officers, directors, agents, Affiliates, record and beneficial
security holders (including, without limitation, trustees and beneficiaries of
trusts holding such securities), advisors and Representatives (in their
respective capacities as such) and their respective heirs, executors,
administrators, successors and assigns, of and from all debts, demands, actions,
causes of action, suits, accounts, covenants, contracts, agreements, damages,
claims and Liabilities whatsoever of every name and nature, both in law and in
equity, which the releasing party has or ever had, which arise out of or relate
to the Transactions or the IPOs; provided, however, that the foregoing general
release shall not apply to (i) any Liabilities (including Liabilities with
respect to indemnification) assumed, transferred, assigned, allocated or arising
under this Agreement, any of the Ancillary Agreements or the Investment
Agreement and shall not affect any party's right to enforce this Agreement, any
Ancillary Agreement or the Investment Agreement in accordance with their
respective terms, (ii) any Liabilities of the Company, any of its Subsidiaries
or any seller of a Retained Subsidiary or Distributed Company Subsidiary arising
out of the agreement pursuant to which such Retained Subsidiary or Distributed
Company Subsidiary was acquired by the Company or any of its Subsidiaries or any
other agreement to which the Company or any of its Subsidiaries and such a
seller (acting in the capacity of a seller) are parties, or (iii) any Liability
arising out of an agreement between any party to this Agreement and Jonathan J.
Ledecky. Each party understands and agrees that, except as otherwise
specifically provided in this Agreement or the Ancillary Agreements, none of the
parties is, in this Agreement or the Ancillary Agreements or otherwise,
representing or warranting in any way as to the Assets, business or Liabilities
transferred, assumed or retained as contemplated hereby or as to any consents or
approvals required in connection with the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements, it being agreed and
understood that each party shall take or keep all of its Assets "as is" and that
it shall bear the economic and legal risk that conveyance of such Assets shall
prove to be insufficient or that the title to any Assets shall be other than
good and marketable and free from encumbrances of any nature whatsoever;
provided, however, that the foregoing disclaimer shall not apply to any
representations made by the Company, any of its Subsidiaries or any seller of a
Retained Subsidiary or Distributed Company Subsidiary under the agreement
pursuant to which such Retained Subsidiary or Distributed Company Subsidiary was
acquired.
ARTICLE V
INDEMNIFICATION
SECTION 5.01 Indemnification by the Company. Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, (a) the Company and, as to any particular Indemnifiable
Loss, the Retained Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the
Distributed Companies' Indemnitees from and against, and pay or reimburse the
Distributed Companies' Indemnitees for, any and all Indemnifiable Losses, as
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incurred, of the Distributed Companies' Indemnitees arising out of, relating to
or resulting from (i) the Retained Liabilities, the Retained Assets or the
Retained Business or (ii) the breach by the Company or any of the Retained
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to or arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) the Company shall bear the costs of and indemnify, defend and hold harmless
the Printco Indemnitees, the Schoolco Indemnitees, the Techco Indemnitees and
the Travelco Indemnitees from the Company's Pro Rata Share of Indemnifiable
Losses, as incurred, that relate to, arise out of or result from the Shared
Liabilities; provided, however, that the Company shall have no obligation to
indemnify any of the Distributed Companies' Indemnitees for any Indemnifiable
Losses arising out of, relating to or resulting from (y) the gross negligence,
bad faith or wilful misconduct of the relevant Distributed Company or
Distributed Company Subsidiary after the Distribution Time or (z) the failure of
such Distributed Company or any of its Subsidiaries to perform its obligations
under any agreement in accordance with the terms of such agreement after the
Distribution Time.
SECTION 5.02 Indemnification by Printco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Printco and, as to any particular Indemnifiable Loss, the Printco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Schoolco Indemnitees, the Techco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Schoolco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Printco Liabilities, the Printco Assets,
the Printco Business or the Printco Acquisition Claims, (ii) the breach by
Printco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time and (b) Printco shall bear the costs of and indemnify, defend
and hold harmless the Company Indemnitees, the Schoolco Indemnitees, the Techco
Indemnitees and the Travelco Indemnitees from Printco's Pro Rata Share of
Indemnifiable Losses, as incurred, that relate to, arise out of or result from
the Shared Liabilities; provided, however, that Printco shall have no obligation
to indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the
Techco Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable, after the Distribution Time or (y)
the failure of the Company, Schoolco, Techco or Travelco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time; provided further, however, that Printco shall have no obligation to
indemnify any of the Company Indemnitees, the Schoolco Indemnitees, the Techco
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Indemnitees or the Travelco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.02 to the extent that Printco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.02 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.03 Indemnification by Schoolco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Schoolco and, as to any particular Indemnifiable Loss, the
Schoolco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees and the Travelco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Techco Indemnitees and the Travelco Indemnitees arising out of,
relating to or resulting from (i) the Schoolco Liabilities, the Schoolco Assets,
the Schoolco Business or the Schoolco Acquisition Claims and (ii) the breach by
Schoolco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to,
arise out of or result from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted at, before or after the
Distribution Time, and (b) Schoolco shall bear the costs of and indemnify,
defend and hold harmless the Company Indemnitees, the Printco Indemnitees, the
Techco Indemnitees and the Travelco Indemnitees from Schoolco's Pro Rata Share
of Indemnifiable Losses, as incurred, that relate to, arise out of or result
from the Shared Liabilities; provided, however, that Schoolco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Techco Indemnitees and the Travelco Indemnitees for any Indemnifiable Losses
relating to, arising out of or resulting from (x) the gross negligence, bad
faith or wilful misconduct of the Company, Printco, Techco or Travelco, as
applicable, after the Distribution Time or (y) the failure of the Company,
Printco, Techco or Travelco, or any of their respective Subsidiaries, as
applicable, to perform its obligations under any agreement in accordance with
the terms of such agreement after the Distribution Time; provided further,
however, that Schoolco shall have no obligation to indemnify any of the Company
Indemnitees, the Printco Indemnitees, the Techco Indemnitees or the Travelco
Indemnitees for any Indemnifiable Losses pursuant to clause (b) of this Section
5.03 to the extent that Schoolco has previously indemnified such Indemnitees for
Losses pursuant to clause (b) of this Section 5.03 in an aggregate amount equal
to or exceeding $1.75 million.
SECTION 5.04 Indemnification by Techco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Techco and, as to any particular Indemnifiable Loss, the Techco
Subsidiary out of whose assets, business or operations the Indemnifiable Loss
arises, shall indemnify, defend and hold harmless the Company Indemnitees, the
Printco Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees from
and against, and pay or reimburse such Indemnitees for, any and all
Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Travelco Indemnitees arising out
of, relating to or resulting
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from (i) the Techco Liabilities, the Techco Assets, the Techco Business or the
Techco Acquisition Claims and (ii) the breach by Techco or any of its
Subsidiaries of any provision of this Agreement or of any Ancillary Agreement,
in each case, whether such Indemnifiable Losses relate to, arise out of or
result from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Techco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees from Techco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Techco shall have no obligation to indemnify any of the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Travelco Indemnitees for any Indemnifiable Losses relating to, arising out of or
resulting from (x) the gross negligence, bad faith or wilful misconduct of the
Company, Printco, Schoolco or Travelco, as applicable, after the Distribution
Time or (y) the failure of the Company, Printco, Schoolco or Travelco, or any of
their respective Subsidiaries, as applicable, to perform its obligations under
any agreement in accordance with the terms of such agreement after the
Distribution Time; provided further, however, that Techco shall have no
obligation to indemnify any of the Company Indemnitees, the Printco Indemnitees,
the Schoolco Indemnitees or the Travelco Indemnitees for any Indemnifiable
Losses pursuant to clause (b) of this Section 5.04 to the extent that Techco has
previously indemnified such Indemnitees for Losses pursuant to clause (b) of
this Section 5.04 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.05 Indemnification by Travelco. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, (a) Travelco and, as to any particular Indemnifiable Loss, the
Travelco Subsidiary out of whose assets, business or operations the
Indemnifiable Loss arises, shall indemnify, defend and hold harmless the Company
Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the Techco
Indemnitees from and against, and pay or reimburse such Indemnitees for, any and
all Indemnifiable Losses, as incurred, of the Company Indemnitees, the Printco
Indemnitees, the Schoolco Indemnitees and the Techco Indemnitees arising out of,
relating to or resulting from (i) the Travelco Liabilities, the Travelco Assets,
the Travelco Business or the Travelco Acquisition Claims and (ii) the breach by
Travelco or any of its Subsidiaries of any provision of this Agreement or of any
Ancillary Agreement, in each case, whether such Indemnifiable Losses relate to
or arise from events, occurrences, actions, omissions, facts or circumstances
occurring, existing or asserted at, before or after the Distribution Time, and
(b) Travelco shall bear the costs of and indemnify, defend and hold harmless the
Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and the
Techco Indemnitees from Travelco's Pro Rata Share of Indemnifiable Losses, as
incurred, that relate to, arise out of or result from the Shared Liabilities;
provided, however, that Travelco shall have no obligation to indemnify any of
the Company Indemnitees, the Printco Indemnitees, the Schoolco Indemnitees and
the Techco Indemnitees for any Indemnifiable Losses relating to, arising out of
or resulting from (x) the gross negligence, bad faith or wilful misconduct of
the Company, Printco, Schoolco or Techco, as applicable, after the Distribution
Time or
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(y) the failure of the Company, Printco, Schoolco or Techco, or any of their
respective Subsidiaries, as applicable, to perform its obligations under any
agreement in accordance with the terms of such agreement after the Distribution
Time ; provided further, however, that Travelco shall have no obligation to
indemnify any of the Company Indemnitees, the Printco Indemnitees, the Schoolco
Indemnitees or the Techco Indemnitees for any Indemnifiable Losses pursuant to
clause (b) of this Section 5.05 to the extent that Travelco has previously
indemnified such Indemnitees for Losses pursuant to clause (b) of this Section
5.05 in an aggregate amount equal to or exceeding $1.75 million.
SECTION 5.06 Limitations on Indemnification Obligations. The
amount that any party (an "Indemnifying Party") is or may be required to pay to
any other Person (an "Indemnitee") pursuant to Sections 5.01, 5.02, 5.03, 5.04
or 5.05, as applicable, shall be reduced (retroactively or prospectively) by any
Insurance Proceeds, settlement recoveries or other amounts actually recovered by
or on behalf of such Indemnitee in respect of the related Indemnifiable Loss. If
an Indemnitee shall have received the payment required by this Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
actually receive Insurance Proceeds, settlement recoveries or other amounts in
respect of such Indemnifiable Loss, then such Indemnitee shall pay to such
Indemnifying Party a sum equal to the amount of such Insurance Proceeds,
settlement recoveries or other amounts actually received, up to the aggregate
amount of any payments made by such Indemnifying Party pursuant to this
Agreement in respect of such Indemnifiable Loss. Amounts paid by an Indemnifying
Party pursant to clause (b) of Sections 5.01, 5.02, 5.03, 5.04 or 5.05 which are
paid with, or reimbursed by, Insurance Proceeds, settlement recoveries or other
amounts actually recovered, by or on behalf of an Indemnifying Party, in respect
of the related Indemnifiable Loss, shall not count toward the limit on each
party's Shared Liabilities set forth in the second proviso of Sections 5.01,
5.02, 5.03, 5.04 or 5.05, as applicable.
SECTION 5.07 Procedures for Indemnification of Third Party
Claims.
(a) If a claim or demand is made against an
Indemnitee by any person who is not a party, or an Affiliate of a party, to this
Agreement or any of the Ancillary Agreements (a "Third Party Claim") as to which
such Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 10 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent that the
defense or conduct of such Third Party Claim by the Indemnifying Party shall
have been actually and materially prejudiced as a result of such failure (except
that the Indemnifying Party shall not be liable for any expenses incurred during
the period in which the Indemnitee failed to give such notice); provided
further, however, that in no event shall such failure to notify the Indemnifying
Party (i) constitute prejudice suffered by the Indemnifying Party if it has
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otherwise received notice of the Third Party Claim or (ii) relieve it from any
liability or obligation that it may otherwise have to such Indemnitee.
Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly
(and in any event within 10 business days) after the Indemnitee's receipt
thereof, copies of all notices and documents (including court papers) received
by the Indemnitee relating to the Third Party Claim.
(b) (i) If a Third Party Claim is made against an
Indemnitee, the Indemnifying Party shall be entitled to participate in the
defense thereof and, if it so chooses and acknowledges in writing its obligation
to indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party, provided that such counsel is not reasonably
objected to by the Indemnitee, and, thereafter, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
elects to assume the defense of a Third Party Claim pursuant to this subsection
(b)(i), the Indemnitee shall have the right to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by the Indemnifying Party, it being understood that the Indemnifying
Party shall have full control of such defense, and the Indemnifying Party shall
be liable for the reasonable fees and expenses of counsel employed by the
Indemnitee for any period during which the Indemnifying Party has failed to
assume the defense thereof.
(ii) Notwithstanding subsection (b)(i) of this
Section 5.07, if the Indemnitee reasonably believes that a Third Party Claim
could lead to a material adverse effect on its business, it shall be entitled to
retain control of (and the related Indemnifying Party shall not be entitled to
assume), or to reassert control over, the defense of the claim and shall be
entitled to be reimbursed for its reasonable out-of-pocket expenses attributable
to such defense. If the Indemnitee elects to retain control of, or to reassert
control over, the defense of a Third Party Claim pursuant to this subsection
(b)(ii), the Indemnifying Party shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnitee, it being understood that the Indemnitee
shall have full control of such defense.
(c) If the Indemnifying Party elects to assume the
defense of any Third Party Claim pursuant to subsection (b)(i) of this Section
5.07, all of the Indemnitees shall cooperate with the Indemnifying Party in the
defense or prosecution thereof. If the Indemnitee elects to retain control of,
or to reassert control over, the defense of any Third Party Claim pursuant to
subsection (b)(ii) of this Section 5.07, the Indemnifying Party shall cooperate
with the Indemnitee in the defense or prosecution thereof. Such cooperation
shall include the retention and, upon the Indemnitee's or Indemnifying Party's
request, as applicable, the provision to such party of records and information
which are reasonably relevant to such Third Party Claim and making employees
available on a mutually convenient basis to provide additional information
regarding any material provided hereunder.
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(d) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Third Party Claim seeks
an order, injunction or other equitable relief or relief for other than money
damages against the Indemnitee which the Indemnitee reasonably determines in
good faith, after conferring with its counsel, cannot be separated from any
related claim for money damages. If such equitable relief or other relief
portion of the Third Party Claim can be so separated from that for money
damages, the Indemnifying Party shall be entitled to assume the defense of the
portion relating to money damages.
(e) Notwithstanding the foregoing, the Indemnifying
Party shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable for the reasonable fees and expenses of counsel incurred by the
Indemnitee in defending such Third Party Claim) if the Indemnitee reasonably
determines in good faith, after conferring with its counsel, that the Indemnitee
has available to it one or more defenses or counterclaims that are inconsistent
with one or more of those that may be available to the Indemnifying Party in
respect of such Third Party Claim.
(f) Whether or not the Indemnifying Party shall
have assumed the defense of a Third Party Claim, in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Indemnifying Party's prior written consent (which
consent shall not be unreasonably withheld or delayed); provided, however, that
the Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases in writing the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such settlement,
compromise or discharge would not otherwise adversely affect the Indemnifying
Party. If the Indemnifying Party shall have assumed the defense of a Third Party
Claim (and the Indemnitee shall not have reasserted control over the defense of
such claim pursuant to Section 5.07(b)(ii)), the Indemnitee shall agree to any
settlement, compromise or discharge of a Third Party Claim that the Indemnifying
Party may recommend and that by its terms does not obligate the Indemnitee to
pay any of the liability in connection with such Third Party Claim, releases the
Indemnitee completely and unconditionally in connection with such Third Party
Claim and does not provide for injunctive or other nonmonetary relief affecting
the Indemnitee.
SECTION 5.08 Indemnification Payments. Indemnification
required by this Article V shall be made by prompt periodic payments of the
amount thereof during the course of the investigation, preparation or defense,
as and when bills are received or loss, liability, claim, damage, cost or
expense is incurred.
SECTION 5.09 Defaults. In the event that any obligation of any
Indemnifying Party to indemnify an Indemnitee as required by Sections 5.02,
5.03, 5.04 and
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5.05 proves to be uncollectible by the Indemnitee despite reasonable collection
efforts (a "Defaulted Payment Obligation"), such Defaulted Payment Obligation
shall be treated as a Shared Liability and shall be shared by the Company and
the Distributed Companies as provided in clause (b) of Sections 5.02, 5.03, 5.04
and 5.05; provided, however, that for purposes of calculating each
non-defaulting party's Pro Rata Share of such Shared Liability, "Pro Rata Share"
for each non-defaulting party shall be calculated as the fraction (a) the
numerator of which is such party's Pro Rata Share and (b) the denominator of
which is the sum of each non-defaulting party's Pro Rata Share. Defaulted
Payment Obligations shall count toward the limit on each party's Shared
Liabilities set forth in the second proviso to Sections 5.02, 5.03, 5.04 and
5.05, as applicable.
SECTION 5.10 Tax Adjustments. The amount of any Indemnifiable
Loss shall be (i) increased by the amount of any net Tax cost actually incurred
by the Indemnitee arising from any payments required by this Article V (other
than this Section 5.10) and received from the Indemnifying Party, together with
such additional amounts as are necessary so that the aggregate payments received
from the Indemnifying Party on account of such Indemnifiable Loss, net of any
such net Tax cost and any net Tax cost actually incurred by the Indemnitee as a
result of the receipt or accrual of such additional amounts, is equal to the
amount of such Indemnifiable Loss; and (ii) reduced by the amount of any net Tax
benefit actually realized by the Indemnitee arising from the incurrence or
payment of any such Indemnifiable Loss; provided however, that in the event such
net Tax benefit is subsequently reduced as a result of the carryback of any
other Tax benefit, or disallowed, the Indemnifying party shall promptly pay the
Indemnitee the amount of such reduction or disallowance. For purposes of this
Section 5.10, a net Tax benefit shall be deemed to be "actually realized" only
to the extent of the excess of (i) the aggregate amount of Taxes that would have
been shown as due and payable on the U.S. federal, state and local income Tax
returns of the Indemnitee in the taxable period in which such net Tax benefit is
actually realized if such Indemnifiable Loss had not been incurred, and no
payment had been made in respect of such Indemnifiable Loss by the Indemnifying
Party over (ii) the aggregate amount of Taxes actually shown as due and payable
on such Tax returns.
SECTION 5.11 MCI Agreement. Notwithstanding Sections 5.01,
5.02, 5.03, 5.04 and 5.05, each of the parties hereto agrees to indemnify and
hold the other parties hereto harmless for any Liability under the MCI Agreement
attributable to the failure of such party to meet the required targets under the
MCI Agreement set forth on Schedule 5.11.
SECTION 5.12 Survival of Indemnities. The obligations of the
parties under this Article V shall survive the sale or other transfer by any of
them of any Assets or businesses or the assignment by any of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related to
such Assets, businesses or Liabilities.
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ARTICLE VI
COVENANTS
SECTION 6.01 Provision of Corporate Records. Prior to or as
promptly as practicable after the Distribution Time, the Company shall deliver
to each Distributed Company copies of, or, if in the possession of such
Distributed Company or its Subsidiaries, such Distributed Company shall retain,
all corporate books and records and the relevant portions (or copies thereof) of
all corporate books and records relating directly and primarily to such
Distributed Company's Assets, such Distributed Company's Business, or such
Distributed Company's Liabilities, including, in each case, all agreements,
litigation files and government filings, whether or not active. From and after
the Distribution Time, all such books, records and other items or such copies
thereof shall be the property of such Distributed Company; provided however,
that nothing in this Section 6.01 shall preclude the Company from retaining
duplicates of all such corporate records that are delivered to a Distributed
Company.
SECTION 6.02 Access to Information. From and after the
Distribution Time each party hereto shall afford to each other party and their
respective authorized accountants, counsel and other designated representatives
reasonable access and duplicating rights (at such other party's expense) during
normal business hours and upon reasonable advance notice, subject to the
confidentiality provisions hereof and any additional appropriate restrictions
for classified, privileged or confidential information, to all Information
within the possession or control of such party or to which it has access
relating to the business, Assets or Liabilities of such other party as they
existed prior to the Distribution Time or relating to or arising in connection
with the relationship between the Retained Business, on the one hand, and the
Distributed Companies' Businesses, on the other hand, on or prior to the
Distribution Time, insofar as such access is reasonably required for a
reasonable purpose. Without limiting the foregoing, Information may be requested
under this Section 6.02 for audit, accounting, claims, litigation and Tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations.
SECTION 6.03 Retention of Records. Except as provided in this
Agreement or any of the Ancillary Agreements or as otherwise agreed in writing,
if any Information relating to the business, Assets or Liabilities of a party
hereto, as they existed prior to the Distribution Time or as they are
transferred, assumed or imposed pursuant to this Agreement, is retained by one
of the other parties hereto, the party retaining such Information shall, and
shall cause its Subsidiaries to, retain all such Information in such party's
possession or under its control until such Information is at least ten years old
except that if, prior to the expiration of such period, the party retaining such
information wishes to destroy or dispose of any such Information that is at
least three years old, prior to destroying or disposing of any of such
Information, (a) such party shall provide no less than 30 days' prior written
notice to the other party, specifying the Information proposed to be destroyed
or disposed of and (b) if, prior to the scheduled date for such destruction or
disposal, the other party requests in writing
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that any of the Information proposed to be destroyed or disposed of be delivered
to such other party, the party proposing to dispose of or destroy such
Information shall arrange for the delivery of the requested Information to a
location specified by, and at the expense of, the requesting party.
SECTION 6.04 Witness Services. From and after the Distribution
Time, each of the parties hereto shall use commercially reasonable efforts to
make available to each other party hereto, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses to
the extent that (i) such persons may reasonably be required in connection with
the prosecution, investigation or defense of any Action or threatened Action in
which the requesting party may from time to time be involved and (ii) there is
no conflict in the Action or threatened Action between the requesting party and
the other party.
SECTION 6.05 Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing books and records,
access to Information or witness services to the other party under this Article
VI shall be entitled to receive from the recipient, upon the presentation of
invoices therefor, payments for supplies, disbursements and other out-of-pocket
expenses and direct and indirect costs of employees, as may be reasonably
incurred in providing such books and records, access to Information or witness
services.
SECTION 6.06 Confidentiality.
(a) Each party hereto shall keep, and shall cause
its Representatives to keep, the other party's Information strictly confidential
and will disclose such Information only to such of its Representatives who need
to know such Information and who agree to be bound by this Section 6.06 and not
to disclose such Information to any other Person or entity. Without the prior
written consent of the other party, each party and its Representatives shall not
disclose the other party's Information to any Person or entity except as may be
required by law or judicial process or in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements and, in each
case, in accordance with this Section 6.06. Each party agrees to be responsible
for any breach of this confidentiality provision by any of its Representatives.
(b) In the event that any party hereto or any of
its Representatives becomes legally compelled (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process),
or determines that it is necessary in connection with the enforcement of its
rights under this Agreement or any of the Ancillary Agreements, to disclose all
or any part of the other party's Information, the receiving party or its
Representatives shall promptly notify the other party of such compulsion or
determination in writing, and consult with and assist the other party in seeking
a protective order or request for other appropriate remedy. In the event that
such protective order or other
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remedy is not obtained or the other party waives compliance with the terms
hereof, such receiving party or its Representatives, as the case may be, shall
disclose only that portion of the Information which, in the opinion of the
receiving party's outside counsel, is legally required to be disclosed, and
shall exercise all commercially reasonable efforts to assure that confidential
treatment will be accorded such Information by the Persons or entities receiving
such Information. The providing party shall be given an opportunity to review
the Information prior to disclosure.
SECTION 6.07 Further Assurances. In case at any time after the
Distribution Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers at such time of each party to this Agreement shall promptly take
all such action. Without limiting the foregoing, the Company and the Distributed
Companies or their respective Subsidiaries, as appropriate, shall use
commercially reasonable efforts to obtain all consents and approvals, to enter
into all agreements and to make all filings and applications that may be
required or are reasonably necessary for the consummation of the Transactions,
including, without limitation, all applicable governmental and regulatory
filings.
ARTICLE VII
INSURANCE
SECTION 7.01 General. Except as provided in this Article, the
Company shall keep in effect all policies under its Insurance Program as of the
date hereof insuring the Distributed Companies' Assets and the operations of the
Distributed Companies' Businesses until 12:00 midnight (Eastern time) on the
Distribution Date, except to the extent that a Distributed Company shall have
earlier obtained appropriate coverage and notified the Company in writing to
that effect. Except for the Transferred Policies (as defined below), beginning
at 12:01 a.m. (Eastern time) on the day following the Distribution Date, the
Distributed Companies will cease to be insured under all policies in the
Company's Insurance Program. Each Distributed Company understands that the
effect of these actions will be to eliminate insurance coverage under the
Insurance Program for future occurrences under such Policies, and in some cases
(as set forth in Section 7.03(b)), for prior occurrences that might have given
or may give rise to liabilities for which such Distributed Company and its
Affiliates would be responsible.
SECTION 7.02 Distributed Companies' Insurance.
(a) Each Distributed Company will purchase and pay
for the types and amounts of insurance coverage that it reasonably deems
appropriate and sufficient for the period beginning on and continuing after the
Distribution Date, including Broad Form Contractual Liability insurance coverage
as to such Distributed Company's indemnity obligations set forth in this
Agreement.
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(b) The Company shall transfer, on or prior to the
Distribution Date, the Policies in the Company's Insurance Program listed on
Schedule 7.02(b) (the "Transferred Policies") to certain of the Distributed
Companies designated as Transferees on such schedule.
(c) Each Distributed Company agrees that the
Company has made no warranty, expressed or implied, and no representation that
the insurance described in Sections 7.01, 7.02(a) or 7.02(b) above is or will be
adequate or sufficient to meet such Distributed Company's current or future
insurance needs.
SECTION 7.03 Access to the Company's Insurance Program and to
the Transferred Policies.
(a) Except as provided in Section 7.03(b), each
Distributed Company and its Affiliates shall have access through the Company
after the Distribution Date to such coverages and limits as may be available
under the Company's Insurance Program for Covered Claims occurring prior to the
Distribution Date. Such access shall be subject to available coverage and to all
of the terms, conditions, exclusions, retentions and limits of such Policies.
(b) The Distributed Companies and their Affiliates'
access to the Company's Insurance Program as provided in Section 7.03(a) hereof
shall be limited as to Policies listed on Schedule 7.03(b) in that the
Distributed Companies shall have no access to any insurance provided by such
Policies after the Distribution Date other than for Covered Claims the Company
has reported to its carriers or underwriters as of the Distribution Date.
(c) The Company and its Affiliates shall have
access through the relevant Distributed Company after the Distribution Date to
coverages and limits under the Transferred Policies to the extent specified in
Schedule 7.02(b). Such access shall be subject to available coverage and to all
the terms, conditions, exclusions, retentions and limits on such Transferred
Policies.
SECTION 7.04 Insurance Recoveries.
(a) The Company shall use reasonable efforts to
obtain Recoveries for the Distributed Companies and their Affiliates from the
Company's insurance carriers for coverage available under Section 7.03 and shall
keep the Distributed Companies reasonably informed of the Company's efforts
under this Section 7.04. The Company will reimburse the Distributed Companies
for any Recovery obtained by it on behalf of such Distributed Company or
Affiliate thereof pursuant to such claims; provided, however, that Special
Insurance Recoveries shall be shared between the Company and the relevant
Distributed Company in the same manner as any net recoveries of an Acquisition
Claim of such Distributed Company (payable at that time) would be shared between
the Company and such
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Distributed Company pursuant to Section 2.09, including that, if the net
recoveries from an Acquisition Claim of such Distributed Company are not
required to be shared in any manner with the Company pursuant to Section 2.09,
any Special Insurance Recoveries related to such Distributed Company should be
entirely payable to it. Any Distributed Company receiving a Recovery in its
entirety under this Section 7.04 shall pay all costs incurred by the Company
after the Distribution Date in making the related claim pursuant to this Section
7.04, including the salaries of the Company's officers and employees based on
the portion of time spent on such claims ("Recovery Costs"), and such Recovery
Costs incurred in pursuing the claim may be deducted from the Recovery. As to
any Recovery Costs incurred in relation to Special Insurance Recoveries, the
party or parties receiving such Special Insurance Recoveries, or a portion
thereof, shall bear the related Recovery Costs in proportion to the share of the
Special Insurance Recoveries such party receives. Each Distributed Company
agrees to make available to the Company such of its employees as the Company may
reasonably request as witnesses or deponents in connection with the Company's
management of claims, at such Distributed Company's sole cost and expense
notwithstanding Sections 6.04 and 6.05. Each Distributed Company agrees that, if
the Company has paid a Recovery to it for such a claim and such Distributed
Company receives proceeds from any other person with respect to such claim, it
will pay over to the Company the amount of proceeds it has received.
(b) In relation to the Transferred Policies, the
relevant Distributed Company shall use reasonable efforts to obtain recoveries
for the Company and its Affiliates from the Distributed Company's insurance
carrier for coverage available under the Transferred Policies and shall keep the
Company reasonably informed of such Distributed Company's efforts under this
Section 7.04. The Distributed Company will reimburse the Company for any
Recovery obtained by it on behalf of the Company or an Affiliate thereof
pursuant to such claims. The Company shall pay all costs incurred by the
Distributed Company after the Distribution Date in making any claim pursuant to
this Section 7.04, including the salaries of the Distributed Company's officers
and employees based on the portion of time spent on such claims, and such costs
incurred in pursuing a claim may be deducted from any Recovery for such claim.
The Company agrees to make available to the Distributed Company such of its
employees as the Distributed Company may reasonably request as witnesses or
deponents in connection with the Distributed Company's management of claims, at
the Company's sole cost and expense notwithstanding Sections 6.04 and 6.05. The
Company agrees that, if the Distributed Company has paid a Recovery to it for
such a claim and the Company receives proceeds from any other person with
respect to such claim, it will pay over to the Distributed Company the amount of
proceeds it has received.
SECTION 7.05 Insurance Representations. Each Distributed
Company hereby represents and warrants to the Company that no representation by
such Distributed Company (or any of its officers, directors or Subsidiaries)
relating to information underlying any Insurance Policy of the Company contains
an untrue statement of material fact or omits
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to state a material fact necessary to make a statement contained therein, in
light of the circumstances under which they were made, not misleading with
respect to such information.
SECTION 7.06 Assignment. Except to the extent that the
Transferred Policies are considered to be assigned by the Company to the
relevant Distributed Company, nothing in this Agreement shall be deemed to
constitute (or to reflect) an assignment of any insurance policy or insurance
benefit.
SECTION 7.07 Deductibles and Maximums.
(a) To the extent that there are deductible amounts
or retentions applicable to potential insurance recoveries for claims of the
Company or a Distributed Company that are not per-occurrence deductibles, the
Company or the relevant Distributed Company (as to any deductibles in relation
to the Transferred Policies) shall allocate such deductibles or retentions in
such manner as the Company or a Distributed Company, as applicable, determines,
in good faith, is fair and reasonable. For purposes of this Section 7.06, the
parties agree that it is fair and reasonable to allocate the deductibles, if
any, first to any claims based on recklessness, bad faith or wilful misconduct.
(b) To the extent that the Recoveries for any
particular group of claims of the Company or a Distributed Company may be
subject to overall policy limits, the Company or the relevant Distributed
Company (as to any policy maximums in relation to the Transferred Policies)
shall allocate Recoveries in such manner as the Company or Distributed Company,
as applicable, determines, in good faith, is fair and reasonable.
SECTION 7.08 Conflicts Between Article VII and the Company's
Insurance Program. Any provision of this Agreement that conflicts with any term
or provision of the Company's applicable insurance policies shall be void.
ARTICLE VIII
CONDITIONS
SECTION 8.01 Conditions to Obligations of the Company. The
obligation of the Company to consummate the Distributions hereunder shall be
subject to the satisfaction or waiver of each of the following conditions:
(a) All of the transactions contemplated by Article
II hereof to occur prior to the Distribution Time shall have been consummated.
(b) The Distribution Shares to be issued in the
Distributions shall have been approved for trading on the NASDAQ, subject only
to official notice of issuance.
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(c) All filings required to be made prior to the
Distribution Time with, and all consents, approvals and authorizations required
to be obtained prior to the Distribution Time from, any government or any court,
arbitral tribunal, administrative agency or commission or other regulatory
authority, agency or commission, governmental or otherwise, in connection with
the consummation of the Preliminary Transactions, the Distributions and any
other transaction contemplated hereby shall have been made or obtained, except
where the failure to make or obtain the same would not, individually or in the
aggregate, have a material adverse effect on the business, properties, results
of operations or financial condition of the Company, the Distributed Companies
or any of their respective Subsidiaries, or on the ability of any thereof to
consummate the transactions contemplated hereby, or to perform its obligations
under this Agreement or any of the Ancillary Agreements to which it is or will
be a party.
(d) Each of the Ancillary Agreements shall have
been executed and delivered by each of the parties thereto and shall be in full
force and effect in accordance with its terms.
(e) Each of the registration statements on Forms
S-1 under the Securities Act filed with the SEC by the Distributed Companies in
connection with the Distributions shall have become effective under the Exchange
Act, no stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated by the SEC; and
the Information Statements shall have been or shall be simultaneously mailed to
holders of Distribution Shares in accordance with the rules, regulations and
policies of the SEC.
(f) No statute, rule or regulation or temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
shall be in effect that prohibits consummation of the Preliminary Transactions
or the Distributions.
(g) All conditions to the Tender Offer shall have
been satisfied or waived by the Company, and the Tender Offer shall have been
consummated prior to or on the Distribution Date.
(h) The Company and each of the Distributed
Companies shall have received an opinion of Wilmer, Cutler & Pickering, counsel
to the Company, that for U.S. federal income tax purposes the Distributions will
qualify as tax-free spin-offs under Section 355 of the Code and will not be
taxable under Section 355(e) of the Code. In rendering such opinion, such
counsel shall be entitled to rely on certain assumptions and representations
provided by the Company, the Distributed Companies and CDR-PC and certain other
information, data, documentation and other materials that Wilmer, Cutler &
Pickering deems necessary.
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ARTICLE IX
DISPUTE RESOLUTION
SECTION 9.01 Mediation and Binding Arbitration. Except as may
be expressly provided in any of the Ancillary Agreements or in any other
agreement between the parties entered into pursuant hereto, if a dispute,
controversy or claim (collectively, a "Dispute") between the Company and any of
the Distributed Companies or any of their respective Affiliates arises out of or
relates to this Agreement, any Ancillary Agreement, or any other agreement
entered into pursuant hereto or thereto, including, without limitation, the
breach, termination, enforceability, interpretation or validity of any such
agreement or any matter involving an Indemnifiable Loss, the Company and such
Distributed Company agree to use the following procedures, in lieu of either
party pursuing other available remedies and as the sole and exclusive remedy
(except as provided in Section 10.11 below), to resolve the Dispute.
SECTION 9.02 Initiation of Negotiation. A party seeking to
initiate the procedures shall provide written notice to the other party,
describing briefly the nature of the Dispute. A meeting shall be held between
the parties within 10 days of the receipt of such notice, attended by executives
who have decision-making authority regarding the Dispute, to attempt in good
faith to negotiate a resolution of the Dispute.
SECTION 9.03 Submission to Mediation. If, within 30 days after
such meeting, the parties have not succeeded in negotiating a resolution of the
Dispute, the parties agree to submit the Dispute at the earliest possible date
to mediation conducted in accordance with the Commercial Mediation Rules of the
AAA, and to bear equally the costs of the mediation. The parties agree to
participate in good faith in the mediation and negotiations related thereto for
a period of 30 days or such longer period as they may mutually agree following
the initial mediation session (the "Mediation Period").
SECTION 9.04 Selection of Mediator. The parties will jointly
appoint a mutually acceptable and neutral mediator. If they are unable to agree
upon such appointment within 20 days from the conclusion of the negotiation
period, a mediator shall be appointed by the AAA pursuant to the Commercial
Mediation Rules of the AAA.
SECTION 9.05 Treatment of Negotiation and Mediation. All
negotiations and mediations pursuant to this Article shall be treated as
compromise and settlement negotiations for purposes of Rule 408 of the Federal
Rules of Evidence and comparable state rules.
SECTION 9.06 Arbitration.
(a) Notwithstanding the foregoing provisions of
this Article IX, at the end of the Mediation Period any party may submit the
matter to binding arbitration
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conducted in accordance with the Commercial Arbitration Rules of the AAA, by one
or three arbitrators(s) selected in accordance with the provisions of Section
9.06(b). Any arbitration proceeding hereunder shall be held in the city of New
York, New York, and shall be governed by the Federal Arbitration Act, 9 U.S.C.
ss.ss. 1-16, and judgment upon the award rendered by the arbitrator(s) may be
entered by any court having jurisdiction thereof or having jurisdiction over the
relevant party or its assets. Any arbitral award hereunder shall be in writing,
state the reasons for the award and be final and binding on the parties.
(b) The parties shall seek to appoint jointly a
mutually acceptable sole arbitrator. If the parties cannot agree on an
acceptable sole arbitrator within 10 days after the commencement of the
arbitration, the Dispute shall be heard by a panel of three arbitrators, one
appointed by each of the parties within 20 days after commencement of the
arbitration, and the third arbitrator selected by the other two arbitrators
within 15 days of appointment of the first two arbitrators. If either side fails
to appoint an arbitrator within 20 days after the commencement of the
arbitration, then that arbitrator shall be appointed by the AAA, which shall
promptly notify the parties of such appointment. If the first two arbitrators
appointed fail to appoint a third arbitrator within the 15-day period prescribed
above, then the AAA shall appoint the third arbitrator and shall promptly notify
the parties of the appointment. References herein to the "Arbitrator" shall mean
the sole arbitrator or the three-arbitrator panel, as the case may be.
(c) In the event the Dispute involves (i) valuation
of a liability under (A) this Agreement, (B) any Ancillary Agreement or (C) any
other agreement entered into by the parties pursuant to this Agreement or any
Ancillary Agreement, (ii) an amount in controversy in a Dispute or (iii) the
amount of damages following a determination of liability, the arbitration shall
proceed in the following manner: Each party shall submit to the Arbitrator and
exchange with each other, on a schedule to be determined by the Arbitrator, a
proposed valuation, amount or damages, as the case may be, together with a
statement, including all supporting documents or other evidence upon which it
relies, setting forth such party's explanation as to why its proposal is
reasonable and appropriate. The Arbitrator, within 15 days of receiving such
proposals and supporting documents, shall choose between the two proposals and
shall be limited to awarding only one or the other of the two proposals
submitted.
(d) Cost of Arbitration. The costs of arbitration
shall be apportioned between the parties to the arbitration as determined by the
Arbitrator in such manner as the Arbitrator deems reasonable taking into account
the circumstances of the case, the conduct of the parties during the proceeding
and the result of the arbitration.
(e) Arbitration Period. Any arbitration proceeding
shall be concluded in a maximum of six (6) months from the commencement of the
arbitration. The parties involved in the proceeding may agree in writing to
extend the arbitration period if necessary to appropriately resolve the Dispute.
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SECTION 9.07 Confidentiality. All negotiation, mediation and
arbitration proceedings under this Article shall be treated as confidential
Information in accordance with the provisions of Section 6.06 hereof. Any
mediator or the Arbitrator shall be bound by an agreement containing
confidentiality provisions at least as restrictive as those contained in Section
6.06 hereof.
SECTION 9.08 Notices. All notices by one party to the other
party in connection with the dispute resolution provisions set forth in this
Article shall be in accordance with the provisions of Section 10.05 hereof.
SECTION 9.09 Consolidation. The Arbitrator may consolidate an
arbitration under this Agreement with any arbitration arising under or relating
to the Ancillary Agreements or any other agreement between the parties entered
into pursuant hereto, as the case may be, if the subject of the Disputes
thereunder arise out of or relate essentially to the same set of facts or
transactions. Such consolidated arbitration shall be determined by the
arbitrator appointed for the arbitration proceeding that was commenced first in
time.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Modification, Amendment or Termination. This
Agreement may not be modified, amended or terminated except by an agreement in
writing signed by each of the parties hereto and approved by the board of
directors of each of the parties hereto; provided, however, that any
modification or amendment to this Agreement that is adverse to the rights or
interests of CDR-PC, as determined by those directors of the Company that are
not employed by either the Company or CD&R, in their good faith reasonable
judgment, and any termination of this Agreement shall not be effective unless
such modification, amendment or termination was approved by an affirmative vote
of not less than three-fourths of the members of the board of directors of the
Company; provided further, however, that the preceding proviso shall apply only
for so long as CDR-PC has the right to designate at least two nominees to the
board of directors of the Company pursuant to Section 4.01(b) of the Investment
Agreement; provided further, however, that Article V shall not be terminated or
amended after the Distribution Time in respect of the third party beneficiaries
thereto without the consent of such persons.
SECTION 10.02 Waiver; Remedies. The conditions to the
Company's obligation to consummate the Distributions are for the sole benefit of
the Company and may be waived by the Company in whole or in part in its sole
discretion. No delay on the part of the Company or the Distributed Companies in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either the Company or the
Distributed Companies of any right, power or privilege hereunder operate as a
waiver of any other right, power or privilege hereunder, nor will any single or
partial
40
<PAGE>
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the parties
may otherwise have at law or in equity.
SECTION 10.03 Counterparts. For the convenience of the
parties, this Agreement may be executed in any number of separate counterparts,
each such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
SECTION 10.04 Notices. Any notice, request, instruction or
other communication to be given hereunder by any party to another shall be in
writing and shall be deemed to have been duly given (i) on the date of delivery
if delivered personally, or by telefacsimile, upon confirmation of receipt, (ii)
on the first business day following the date of dispatch if delivered by Federal
Express or other nationally reputable next-day courier service with proof of
delivery, or (iii) on the fifth business day following the date of mailing if
delivered by registered or certified mail, return receipt requested, postage
prepaid. All notices hereunder shall be delivered as set forth below, or
pursuant to such other instructions as may be designated in writing by the party
to receive such notice.
(a) If to Printco:
Workflow Management, Inc.
[contact information]
(b) If to Schoolco:
School Specialty, Inc.
[contact information]
(c) If to Techco:
Aztec Consulting, Inc.
[contact information]
(d) If to Travelco:
Navigant International, Inc.
[contact information]
41
<PAGE>
(e) If to the Company:
U.S. Office Products Company
1025 Thomas Jefferson Street, N.W., Suite 600 East
Washington, D.C. 20007-5490
Attention: Mark D. Director, Esq.
Kathleen Delaney, Esq.
Telefacsimile: (202) 339-6733
with copies to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
18th Floor
New York, NY 10152
Attention: Brian D. Finn
Telefacsimile: (212) 407-5200
SECTION 10.05 Entire Agreement. This Agreement and the
Ancillary Agreements (including Exhibits, Annexes and Schedules hereto and
thereto) constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties, both written and
oral, between the parties, with respect to the subject matter hereof and
thereof.
SECTION 10.06 Certain Obligations. Whenever any Ancillary
Agreement requires any of the Subsidiaries of any party to such Ancillary
Agreement to take any action, this Agreement will be deemed to include an
undertaking on the part of such party to cause such Subsidiary to take such
action.
SECTION 10.07 Assignment. This Agreement shall be assignable
in whole in connection with a merger or consolidation or the sale or transfer of
all or substantially all the Assets or stock of a party hereto so long as the
resulting, surviving or transferee entity assumes all the obligations of the
relevant party hereto by operation of law or pursuant to an agreement in form
and substance reasonably satisfactory to the other party. Otherwise, this
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Agreement
without such consent shall be void.
SECTION 10.08 Captions. The Article, Section and paragraph
captions herein are for convenience of reference only, do not constitute part of
this Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
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<PAGE>
SECTION 10.09 Severability. If any provision of this Agreement
or any of the Ancillary Agreements or the application thereof to any person or
circumstance is determined to be invalid, void or unenforceable by a court of
competent jurisdiction or by one or more arbitrator(s), the remaining provisions
thereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated thereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith in
an effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
SECTION 10.10 Equitable Relief. No provision of this Agreement
shall preclude any party from seeking equitable relief to prevent any immediate,
irreparable harm to its interests, including multiple breaches of this Agreement
or the Ancillary Agreements by another party. Otherwise, the procedures set
forth in Article IX regarding dispute resolution are exclusive and shall be
fully exhausted prior to the initiation of litigation. Any party to this
Agreement may also seek specific enforcement of the Arbitrator's decision under
Article IX; the opposing party's only defense to such a request for specific
performance shall be fraud by or on the Arbitrator.
SECTION 10.11 Third Party Beneficiaries. Except as provided in
Article V relating to Indemnitees and Sections 10.01 and 10.02 relating to
modification, amendment and termination, this Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates,
directors and officers, and should not be deemed to confer upon third parties
any remedy, claim, liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.
SECTION 10.12 Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses incurred after the Distribution Time.
SECTION 10.13 Exhibits and Schedules. The Exhibits and
Schedules to this Agreement shall be construed with and as an integral part of
this Agreement to the same extent as if the same had been set forth verbatim
herein.
SECTION 10.14 Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such state,
without regard to the conflicts of law principles of such state.
SECTION 10.15 Consent to Jurisdiction. Each of the parties
irrevocably submits to the exclusive jurisdiction of the state and federal
courts of Delaware for the purposes of any suit, action or other proceeding
arising out of this Agreement or any
43
<PAGE>
transaction contemplated hereby. Each of the parties agree that service of any
process, summons, notice or document by U.S. registered mail to such party's
respective address set forth above shall be effective service of process for any
action, suit or proceeding in Delaware with respect to any matters to which it
has submitted to jurisdiction in this Section 10.17. Each of the parties
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in the state and federal courts of Delaware, and hereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum. This consent to jurisdiction
provision does not, in any way, limit the force and effect of the requirements
set forth in Article IX regarding resolution of Disputes.
SECTION 10.16 Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 10.17 Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Time.
SECTION 10.18 Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement and
Plan of Distribution to be duly executed as of the day and year first above
written.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
44
<PAGE>
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
45
<PAGE>
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of , 1998, among
Workflow Management, Inc., a Delaware corporation ("Workflow Management"),
School Specialty, Inc., a Delaware corporation ("School Specialty"), Aztec
Technology Partners, Inc., a Delaware corporation ("Aztec") and Navigant
International, Inc., a Delaware corporation ("Navigant"). Workflow Graphics,
School Specialty, Aztec and Navigant are hereinafter jointly referred to as the
"Companies."
WITNESSETH
WHEREAS, U.S. Office Products Company, a Delaware Corporation ("USOP") and
the Companies entered into an agreement dated as of , 1998 (the "Tax
Allocation Agreement") to allocate the Tax burdens and benefits of transactions
which occurred on or prior to the Distribution Date, and to provide for certain
other tax matters, including the assignment of responsibility for the
preparation and filing of Tax returns and the prosecution and defense of any Tax
controversies; and
WHEREAS, pursuant to Section 10 of the Tax Allocation Agreement, the
Companies are jointly and severally liable for and will jointly and severally
indemnify, defend and hold USOP harmless from and against any Losses with
respect to Taxes that result from or arise in connection with an Adverse Tax Act
of any of the Companies or any of their respective Subsidiaries.
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the Companies (each on its own behalf and on behalf of each of its Subsidiaries)
hereby agree as follows:
SECTION 1
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meaning:
"Adverse Company" shall mean a Company that has or whose Subsidiary has
committed an Adverse Tax Act.
"Adverse Tax Act" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Agreement" shall mean this Tax Indemnification Agreement.
"Aztec" shall have the meaning assigned to such term in the preamble to this
Agreement.
"Companies" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Losses" shall have the meaning assigned to such term in the Tax Allocation
Agreement.
"Market Capitalization" shall have the meaning assigned to such term in the
Tax Allocation Agreement.
"Navigant" shall have the meaning assigned to such term in the preamble to
this Agreement.
"Non-Adverse Company" shall mean a Company that has not and whose
Subsidiaries have not committed an Adverse Tax Act.
"School Specialty" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Subsidiary" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax" or "Taxes" shall have the meaning assigned to such term in the Tax
Allocation Agreement.
"Tax Allocation Agreement" shall have the meaning assigned to such term in
the recitals to this Agreement.
"USOP" shall have the meaning assigned to such term in the recitals to this
Agreement.
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<PAGE>
"Workflow Management" shall have the meaning assigned to such term in the
preamble to this Agreement.
SECTION 2
INDEMNIFICATION
(a) Workflow Management Indemnification. Workflow Management shall be liable
for and shall indemnify, defend and hold the Non-Adverse Companies harmless from
and against an amount equal to that which each of the Non-Adverse Companies pays
to USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of Workflow Management or its Subsidiaries.
(b) School Specialty Indemnification. School Specialty shall be liable for
and shall indemnify, defend and hold the Non-Adverse Companies harmless from and
against an amount equal to that which each of the Non-Adverse Companies pays to
USOP pursuant to Section 10 of the Tax Allocation Agreement as a result of an
Adverse Tax Act of School Specialty or its Subsidiaries.
(c) Aztec Indemnification. Aztec shall be liable for and shall indemnify,
defend and hold the Non-Adverse Companies harmless from and against an amount
equal to that which each of the Non-Adverse Companies pays to USOP pursuant to
Section 10 of the Tax Allocation Agreement as a result of an Adverse Tax Act of
Aztec or its Subsidiaries.
(d) Navigant Indemnification. Navigant shall be liable for and shall
indemnify, defend and hold the Non-Adverse Companies harmless from and against
an amount equal to that which each of the Non-Adverse Companies pays to USOP
pursuant to Section 10 of the Tax Allocation Agreement as a result of an Adverse
Tax Act of Navigant or its Subsidiaries.
(e) Right of Contribution. With respect to any Adverse Tax Act, the
Non-Adverse Companies shall have rights and obligations of contribution among
themselves to the extent necessary to cause the payments by each Non-Adverse
Company to USOP pursuant to Section 10 of the Tax Allocation Agreement as of any
date, adjusted for payments received from the Adverse Company under Section 2(a)
through 2(d) hereof and for payments made to, or received from, any other
Non-Adverse Company under this Section 2(e), to be in proportion to the
Non-Adverse Companies' respective Market Capitalizations.
SECTION 3
DISPUTE RESOLUTION
Any dispute, controversy or claim between the Companies or any of their
respective Subsidiaries arising out of or relating to this Agreement shall be
resolved (and costs shall be apportioned) pursuant to the procedures set forth
in Article IX of the Distribution Agreement.
SECTION 4
CHOICE OF LAW; SUCCESSORS AND ASSIGNS
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Delaware applicable to contracts made and to be
performed entirely within such state, without regard to the conflicts of law
principles of such state.
The provisions of this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the Companies and their respective successors and
permitted assigns.
2
<PAGE>
SECTION 5
ENTIRE AGREEMENT AND MODIFICATIONS
This Agreement contains the entire agreement among the Companies with
respect to the subject matter hereof and supersedes all prior written Tax
Indemnification agreements, memoranda, negotiations and oral understandings, if
any, and may not be amended, supplemented or discharged except by performance or
by an instrument in writing signed by all of the Companies.
SECTION 6
COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the Companies have duly executed this Agreement as of
the date first above written.
<TABLE>
<S> <C>
WORKFLOW MANAGEMENT, INC.
By
Name:
Title:
Seal
Attest:
SCHOOL SPECIALTY, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
AZTEC TECHNOLOGY PARTNERS, INC.
By
Name:
Title:
Seal
Attest:
NAVIGANT INTERNATIONAL, INC.
By
Name:
Title:
Seal
Attest:
</TABLE>
4
<PAGE>
EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT
This EMPLOYEE BENEFITS SERVICES AND LIABILITIES AGREEMENT dated as
of ___________, 1998 (the "Benefits Agreement"), between U.S. OFFICE PRODUCTS
COMPANY, a Delaware corporation (the "Company"), WORKFLOW MANAGEMENT, INC., a
Delaware corporation and wholly owned subsidiary of the Company ("Printco"),
SCHOOL SPECIALTY, INC., a Delaware corporation and wholly owned subsidiary of
the Company ("Schoolco"), AZTEC TECHNOLOGY PARTNERS, INC., a Delaware
corporation and wholly owned subsidiary of the Company ("Techco"), and
NAVIGANT INTERNATIONAL, INC., a Delaware corporation and wholly owned
subsidiary of the Company ("Travelco") pursuant to the agreement and plan of
distribution dated as of ____________, 1998 (the "Distribution Agreement")
among Company, Printco, Schoolco, Techco, and Travelco.
WHEREAS, the Board of Directors of the Company has determined that it
is appropriate and desirable to enter into the Benefits Agreement as an
Ancillary Agreement under the Distribution Agreement; and
WHEREAS, each of the Company, Printco, Schoolco, Techco, and Travelco
has determined that it is necessary and desirable to allocate and assign
responsibility for certain employee benefit liabilities in respect of the
activities of the businesses of such entities on and following the Distribution
Date.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company, Printco, Schoolco, Techco, and Travelco agree as
follows:
1. PURPOSE AND DEFINITIONS
a. Purpose. The purpose of this Benefits Agreement is to set
forth the agreement of the Company, Printco, Schoolco, Techco, and Travelco
regarding the allocation and assignment of the respective rights and obligations
of each before and after the Distributions with respect to their current and
former employees and with respect to benefits and compensation matters.
b. Definitions. In addition to the terms defined elsewhere in
the text or in the Distribution Agreement, as used in this Benefits Agreement,
the following terms have the following meanings:
"Distributed Company Employees" shall mean the Printco
Employees, Schoolco Employees, Techco Employees, and Travelco Employees,
collectively.
<PAGE>
"Employee" shall mean, as to the Company and each
Distributed Company, an individual who is employed (including an individual who
is not actively employed because of an approved disability, lay-off with right
of recall or an authorized leave of absence (or who is receiving salary
continuation severance payments)) by the Company or the specified Distributed
Company or any of their respective Subsidiaries (other than, for the Company,
any Distributed Company or its Subsidiaries) immediately before the
Distribution.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
"Former Employee" shall mean a former employee of the
Company or the specified Distributed Company or any of their respective
Subsidiaries (other than, for the Company, any Distributed Company or its
Subsidiaries) whose employment terminated before the Distribution.
"Individual" shall mean each Employee and Former Employee.
Solely for purposes of Section 3(b), "Individual" shall also include
unsuccessful applicants for employment.
"Stand-Alone Plan" shall mean each benefit or compensation
plan, program, policy, or arrangement currently or formerly maintained for the
exclusive benefit of all or some Individuals with respect to the Company or the
applicable Distributed Company.
2. EMPLOYEES. Effective as of the Distribution Date and unless
otherwise provided by the Distribution Agreement, each Company Employee, Printco
Employee, Schoolco Employee, Travelco Employee, and Techco Employee will remain
an employee of his or her respective employer. Nothing contained in this Section
2 confers on any such person any right to continued employment, whether before
or after the Distribution Date, nor does it detract from or otherwise amend any
employment agreement currently in force, except as specifically noted.
3. GENERAL PRINCIPLES. Except as otherwise provided in this Benefits
Agreement, as of the Distribution Date:
a. Each party will remain or become responsible for its
respective Stand-Alone Plans.
b. The Company, Printco, Schoolco, Techco, and Travelco each
will be allocated Liability for employment-related claims regardless of when
filed (including, but not limited to, harassment and discrimination) based upon
whether the claimant was at the time the claim arose, respectively, a Company
Individual, Printco Individual, Schoolco Individual, Techco Individual, or
Travelco Individual.
c. Except as specifically provided herein, as of and after the
Distribution Date, all Liabilities with respect to employee benefit plans,
programs, or arrangements relating to
2
<PAGE>
(i) Company Former Employees that presently are Company liabilities will be
retained by the Company, (ii) Printco Former Employees that presently are
Company or Printco liabilities will be retained or assumed by Printco, as
applicable, (iii) Schoolco Former Employees that presently are Company or
Schoolco liabilities will be retained or assumed by Schoolco, as applicable,
(iv) Techco Former Employees that presently are Company or Techco liabilities
will be retained or assumed by Techco, as applicable, and (v) Travelco Former
Employees that presently are Company or Travelco liabilities will be retained or
assumed by Travelco, as applicable.
d. Except to the extent recognition of past service credit
would result in a duplication of benefits, the Company, Printco, Schoolco,
Techco, and Travelco each will give past service credit under its applicable
benefit plans, programs, policies and arrangements to participants therein to
the extent their past service credit was recognized under the comparable benefit
plan, program, policy, or arrangement of the Company or its Subsidiaries in
which the Employee participated immediately before the Distribution Date.
e. No provision of this Benefits Agreement requires any of the
parties to continue any plan, program, policy, or arrangement for any period of
time after the Distributions.
f. Each party will amend its respective plans, programs,
policies, and arrangements (whether newly established, assumed, or retained) to
the extent necessary to reflect the provisions of this Benefits Agreement.
g. Any Company Employee, Printco Employee, Schoolco Employee,
Techco Employee, or Travelco Employee who continues in employment with the
Company, Printco, Schoolco, Techco, or Travelco or any related Subsidiaries
following the Distribution Date will not be deemed to have terminated employment
solely as a result of the Distribution for purposes of any benefit or
compensation plan, program, policy, or arrangement maintained by the Company,
Printco, Schoolco, Techco, or Travelco.
h. The Company will release any third party beneficiary rights
it may have to enforce employment agreements assumed or retained by the
Distributed Companies (other than with respect to the Company's "Information,"
as defined in those agreements).
4. 401(k) PLAN
a. The Company will retain sponsorship of the U.S. Office
Products 401(k) Retirement Plan (the "Company 401(k) Plan").
b. Effective as of or as soon as practicable after the
Distribution, the Distributed Companies will each establish new qualified 401(k)
plans covering each Distributed Company and all or substantially all of its
Subsidiaries in the United States. Distributed Company Employees will cease
participation in the Company 401(k) Plan effective as close in time before the
Distribution Date as is reasonably practicable. Distributed Company Employees
who have outstanding participant loans under the Company 401(k) Plan will be
permitted to
3
<PAGE>
continue making loan payments to the Company 401(k) Plan until such time as the
loans are transferred to the Distributed Company's 401(k) Plan.
c. Upon receipt by the Company and each of the Distributed
Companies of favorable determination letters from the Internal Revenue Service
to the effect that a newly established plan meets the requirements for
qualification under Section 401(a) of the Code (or as the parties otherwise
mutually agree), the Company will cause to be transferred to the trusts
established under the newly-established 401(k) plans, the respective account
balances (including any related loans and qualified domestic relations orders)
and related assets of that employer's Employees. Upon such transfer, Printco,
Schoolco, Techco, and Travelco will assume the related liabilities.
5. MEDICAL PLANS
a. Effective as of the Distribution Date, each of the
Distributed Companies will assume or retain sponsorship of their respective
Stand-Alone Plans that are medical (including dental) plans and arrangements and
will assume or retain responsibility for continuation health coverage under
ERISA Section 601 et seq. with respect to their respective Individuals.
b. To the extent permitted under any applicable indemnity,
health maintenance organization or stop-loss contracts, any newly established
health plans will waive waiting periods, pre-existing conditions to the extent
waived or satisfied under the applicable Stand-Alone Plan, and credit
deductible/copayments satisfied by Employees, if any, who are transferring among
the respective employers in connection with the Distributions. The Company will
use its best efforts to assist the Distributed Companies in their negotiations
with any third parties to accomplish the waiver of such waiting periods and
pre-existing conditions and the crediting of such deductibles and co-payments.
6. CAFETERIA PLAN
a. The Company will amend the U.S. Office Products Cafeteria
Compensation Plan (the "Company Cafeteria Plan") to provide for spinning off to
each Distributed Company the portions of the Cafeteria Plan's obligations and
credits that apply to that Distributed Company.
b. Effective as of the Distribution Date, each Distributed
Company will adopt a cafeteria plan substantially identical to the Cafeteria
Plan to receive and implement the obligations and credits spun off from the
Cafeteria Plan.
c. Each Distributed Company will treat as remaining in effect
any elections the Distributed Company Employees made before the Distribution
with respect to the Health Care Reimbursement Plan Benefit, the Dependent Care
Assistance Program Benefit, the Health Insurance Benefit, and, to the extent
offered by the Distributed Company after the Distribution,
4
<PAGE>
the Dental Insurance Benefit (each "Benefit" having the meaning provided in the
Company Cafeteria Plan).
d. After the spinoffs described in this Section, Distributed
Company Employees will submit any claims for the plan year ending December 31,
1998 to their respective Distributed Company's plan and not to the Company
Cafeteria Plan.
7. SEVERANCE
Effective as of the Distribution Date, the Company, Printco, Schoolco,
Techco, and Travelco each will be liable for any severance pay and benefits
(including salary continuation) owing, as of or after the Distribution Date, to
Company Individuals, Printco Individuals, Schoolco Individuals, Techco
Individuals, and Travelco Individuals, respectively.
8. STOCK OPTIONS
a. The Company will retain the 1994 Amended and Restated USOP
Long-Term Incentive Plan (the "Company Stock Plan") and the obligations under
that plan with respect to stock options granted thereunder that are held by or
in respect of Company Employees.
b. The Distributed Companies will establish stock option plans
under which they will provide options to their respective Employees to replace
any options those employees hold under the Company Stock Plan and under which
they may offer additional options.
c. Any option granted by a Distributed Company in replacement
for an option under the Company Stock Plan will expressly provide that it is
being granted in full satisfaction of, and in substitution for, any and all
Company stock options with respect to which it relates.
9. FOREIGN PLANS
Subject to applicable local law requirements and to the extent
practicable, the respective rights and obligations of the Company, Printco,
Schoolco, Techco, and Travelco (and their respective Subsidiaries) with respect
to plans maintained by the Company and its Subsidiaries immediately before the
Distribution Date outside of the United States will be treated in a manner
consistent with the general principles described in Section 2 of this Benefits
Agreement; provided, however, that nothing herein shall be construed so as to
(A) modify the terms and conditions of employment of any Company Employee,
Printco Employee, Schoolco Employee, Techco Employee, or Travelco Employee who
is employed outside of the United States (a "Foreign Employee") or (B)
constitute an actual or constructive termination of any Foreign Employee's
employment with the Company, Printco, Schoolco, Techco, Travelco, or any of
their respective Subsidiaries, as applicable.
5
<PAGE>
10. COOPERATION
a. The Company and the Distributed Companies will cooperate in
providing each other and other necessary parties with such data as may be
necessary to administer their respective benefit plans in accordance with the
terms of this Agreement. To that end, each will share, and will cause their
affiliates to share, with each other and their respective agents and vendors
(without obtaining releases) all participant, plan design, and other information
necessary for the efficient and accurate administration of, compliance with laws
and regulations applicable to, and response to governmental authorities
regarding, their respective benefit plans, programs, and arrangements after the
Distribution. Each party to this agreement and their respective authorized
agents will, subject to applicable laws on confidentiality, be given reasonable
and timely access to, and may make copies of, all information relating to the
subjects of this Agreement in the custody of another party, to the extent
necessary for such administration.
b. The Company and the Distributed Companies agree to
cooperate in completing all necessary filings with the Internal Revenue Service,
Department of Labor, and Pension Benefit Guaranty Corporation with respect to
the matters provided herein and will apprise the other parties hereto of any
written or oral communication to or from any such agency with respect thereto
that may bear on such other parties' interests hereunder. The Company will make
all necessary Internal Revenue Service filings for the 1997 plan year and, if
applicable, any "short year" filings for the 1998 plan year, with respect to the
plans (other than Stand-Alone Plans) in which Distributed Company Employees
participated before the Distribution Date.
11. NO THIRD PARTY BENEFICIARIES.
Notwithstanding anything to the contrary herein, this Benefits
Agreement is solely for the benefit of the Company and the Distributed
Companies. There shall be no third party beneficiaries under this Benefits
Agreement, including, without limitation, any Company Individual, Printco
Individual, Schoolco Individual, Techco Individual, or Travelco Individual.
12. INCORPORATION BY REFERENCE.
This Benefits Agreement is part of the Distribution Agreement, and
shall be incorporated by reference into the Distribution Agreement as if set
forth fully therein. Without limiting the generality of the foregoing, the
parties acknowledge and agree that all provisions of the Distribution Agreement
relating to Indemnification, Dispute Resolution, Notices, and the other
provisions labeled "Miscellaneous" in the Distribution Agreement shall apply
with respect to the matters described herein as if such terms were incorporated
herein and a part hereof.
13. TAX DEDUCTIONS
Except as otherwise provided in Section 5 of the Tax Allocation
Agreement dated __________, 1998 between the Company, Printco, Schoolco, Techco
and Travelco, the parties intend that the party that actually bears the cost
(whether directly or indirectly) of making a
6
<PAGE>
payment with respect to, or (except as provided below) whose stock is used to
satisfy, a liability governed by this Agreement will be entitled to any and all
tax benefits associated therewith, including the benefit of taking an income tax
deduction with respect to such payment or satisfaction, and will be obligated to
satisfy all tax withholding obligations with respect there, and the parties
agree to take no action inconsistent with such intention. Notwithstanding that
intent, the parties recognize that it is possible that the Internal Revenue
Service or another taxing authority will take a different position. Therefore,
the parties agree that
if any of them is notified by the IRS or another taxing authority that
it is taking or proposes to take a different position, the party
receiving such notice will notify any others affected by the notice;
and
if, when, and to the extent that one party or its Subsidiary receives a
tax benefit as a result of a payment made by another party to satisfy a
liability governed by this Agreement, the benefiting party will pay or
cause its Subsidiary to pay the other party an amount equal to the "net
tax benefit" (as defined below) realized by the benefiting party, as
and when realized.
For this purpose, the "net tax benefit" to either party resulting from payment
or satisfaction of a liability will be deemed to equal the excess of (a) the
taxes that would have been paid by such party if such party had not paid or
satisfied such liability over (b) the taxes that the party actually pays.
14. MISCELLANEOUS
a. Complete Agreement; Construction. This Benefits Agreement, including
all Exhibits attached hereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all previous
negotiations, commitments, and writings with respect to such subject matter.
b. Supersession. In the event of any conflict between any of the terms
of this Benefits Agreement and the terms of either Distribution Agreement, the
terms of this Benefits Agreement will govern.
15. OTHER ACTIONS. The parties hereto shall take such other and further
actions as may be necessary or appropriate to carry out this Benefits Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Benefits Agreement to
be executed by their duly authorized officers as of the day and year first
written above.
U.S. OFFICE PRODUCTS COMPANY
by
-------------------------
Name:
Title:
WORKFLOW MANAGEMENT, INC.
by
-------------------------
Name:
Title:
SCHOOL SPECIALTY, INC.
by
-------------------------
Name:
Title:
AZTEC TECHNOLOGY PARTNERS, INC.
by
-------------------------
Name:
Title:
NAVIGANT INTERNATIONAL, INC.
by
-------------------------
Name:
Title:
8
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
OF INCORPORATION OR
NAME ORGANIZATION
---------------------------------- ------------------------------
<S> <C> <C>
1. SFI New York
2. United Envelope Co., Inc. New York
3. Data Business Forms Limited Canada
4. Hano Document Printers, Inc. Virginia
5. Huxley Envelope Corp. New York
6. Pocono Envelope Corp. Pennsylvania
7. Rex Envelope Co., Inc. New York
8. Astrid Offset Corp. New York
9. SFI of Delaware, LLC Delaware
10. United Envelope, LLC Delaware
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 10, 1998,
relating to the financial statements of Workflow Management, Inc. at April 30,
1996 and April 26, 1997 and for the year ended December 31, 1995, the four
months ended April 30, 1996 and the fiscal year ended April 26, 1997, which
appears in such Prospectus. We also consent to the application of such report to
the Financial Statement Schedule for the year ended April 30, 1995, the four
month period ended April 30, 1996 and the year ended April 26, 1997 listed as
Exhibit 99.1 of this Registration Statement when such schedule is read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 14, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Workflow Management, Inc.:
The audit referred to in our report dated February 17, 1998, included the
related financial statement schedule for the year ended December 31, 1994,
included in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit. In our opinion,
based on our audit and the report of other auditors, such financial statement
schedule, when considered in relation to the basic consolidated statements of
income, stockholders' equity and cash flows taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our reports included herein, with respect to the
consolidated statements of income, stockholders' equity and cash flows of
Workflow Management, Inc. and subsidiaries for the year ended December 31, 1994.
We also consent to the application of such report to the Financial Statement
Schedule for the year ended December 31, 1994 listed as Exhibit 99.1 of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audit referred to in such
report also included this schedule. We also consent to the reference to our firm
under the heading "Experts" included herein.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
May 15, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of Workflow Management, Inc. of our report
dated March 6, 1996, relating to the combined financial statements of United
Envelope Co., Inc. and its affiliate Rex Envelope Co., Inc., and our report
dated March 4, 1996 relating to the financial statements of Huxley Envelope
Corporation, which reports appear in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the two years
ended December 31, 1995 listed as Exhibit 99.1 of this Registration Statement
when such schedule is read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also include this
schedule. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
HERTZ, HERSON & COMPANY, LLP
New York, New York
May 14, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Workflow Management, Inc.:
We consent to the use of our report included herein, with respect to the
balance sheet of Hano Document Printers, Inc. as of December 31, 1995 and the
related statements of income, stockholders' equity and cash flows for the year
then ended. We also consent to the application of such report to the Financial
Statement Schedule for the year ended December 31, 1995 listed as Exhibit 99.1
of this Registration Statement when such schedule is read in conjunction with
the financial statements referred to in our report. The audit referred to in
such report also included this schedule. We also consent to the reference to our
firm under the heading "Experts" included herein.
KPMG PEAT MARWICK LLP
Norfolk, Virginia
May 15, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 6, 1998,
relating to the financial statements of Astrid Offset Corporation which appears
in such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Minneapolis, MN
May 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY INCLUDED IN THE REGISTRATION
STATEMENT ON AMENDMENT NO. 1 TO FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-26-1997
<PERIOD-END> APR-26-1997
<CASH> 2,168
<SECURITIES> 0
<RECEIVABLES> 52,748
<ALLOWANCES> (1,831)
<INVENTORY> 26,990
<CURRENT-ASSETS> 83,477
<PP&E> 52,983
<DEPRECIATION> (19,864)
<TOTAL-ASSETS> 125,108
<CURRENT-LIABILITIES> 66,567
<BONDS> 6,595
0
0
<COMMON> 0
<OTHER-SE> 47,780
<TOTAL-LIABILITY-AND-EQUITY> 125,108
<SALES> 327,381
<TOTAL-REVENUES> 327,381
<CGS> 236,340
<TOTAL-COSTS> 236,340
<OTHER-EXPENSES> 75,955
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,561
<INCOME-PRETAX> 9,918
<INCOME-TAX> 3,690
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 798
<CHANGES> 0
<NET-INCOME> 5,430
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
