<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to
Commission File Number 0-24383
WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1507104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization.) Identification No.)
241 Royal Palm Way
Palm Beach, FL 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
---
As of September 5, 2000, there were 12,916,926 shares of common stock
outstanding.
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WORKFLOW MANAGEMENT, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet.............................................. 3
July 31, 2000 (unaudited) and April 30, 2000
Consolidated Statement of Income (unaudited)............................ 4
For the three months ended July 31, 2000 and July 24, 1999
Consolidated Statement of Cash Flows (unaudited)........................ 5
For the three months ended July 31, 2000 and July 24, 1999
Notes to Consolidated Financial Statements (unaudited).................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk............... 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 22
Signatures...................................................................... 23
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
July 31, April 30,
ASSETS 2000 2000
------ -------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,222 $ 2,851
Accounts receivable, less allowance for doubtful
accounts of $3,943 and $4,191, respectively 85,074 100,366
Inventories 44,175 46,223
Prepaid expenses and other current assets 11,433 11,405
-------- --------
Total current assets 143,904 160,845
Property and equipment, net 56,885 55,859
Intangible assets, net 97,289 92,650
Other assets 11,969 12,346
Net assets held for sale 2,891 10,012
-------- --------
Total assets $312,938 $331,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 3,596 $ 1,139
Notes payable for acquisition 10,337 10,337
Accounts payable 25,464 33,950
Accrued compensation 10,973 15,824
Accrued additional purchase consideration 5,137 9,581
Accrued income taxes 4,654
Other accrued liabilities 14,829 15,388
-------- --------
Total current liabilities 70,336 90,873
Long-term credit facility 136,843 135,695
Subordinated related party debt 4,184 4,174
Other long-term debt 4,767 5,005
Deferred income taxes 4,655 4,557
Other long-term liabilities 1,496 1,486
-------- --------
Total liabilities 222,281 241,790
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 12,911,850 and 12,880,895 issued and
outstanding, respectively 13 13
Additional paid-in capital 52,296 51,981
Notes receivable from officers (1,958) (1,958)
Accumulated other comprehensive loss (3,729) (2,631)
Retained earnings 44,035 42,517
-------- --------
Total stockholders' equity 90,657 89,922
-------- --------
Total liabilities and stockholders' equity $312,938 $331,712
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
--------------------
July 31, July 24,
2000 1999
-------- --------
Revenues $141,829 $118,462
Cost of revenues 100,629 83,597
-------- --------
Gross profit 41,200 34,865
Selling, general and administrative expenses 34,612 26,223
Amortization expense 642 447
-------- --------
Operating income 5,946 8,195
Interest expense 3,542 2,217
Interest income (123) (44)
Other income (65) (51)
-------- --------
Income before provision for income taxes 2,592 6,073
Provision for income taxes 1,074 2,636
-------- --------
Net income $ 1,518 $ 3,437
======== ========
Income per share:
Basic $ 0.12 $ 0.27
Diluted $ 0.11 $ 0.26
Weighted average common
shares outstanding:
Basic 12,891 12,603
Diluted 13,564 13,462
See accompanying notes to consolidated financial statements.
Page 4
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WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
July 31, July 24,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,518 $ 3,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 2,940 2,530
Cash paid for restructuring costs (419) (95)
Amortization of deferred financing costs 136 184
Changes in assets and liabilities (net of assets
acquired and liabilities assumed in business combinations):
Accounts receivable 15,314 8,136
Inventories 1,287 (834)
Prepaid expenses and other current assets 365 (1,326)
Accounts payable (8,524) (9,586)
Accrued compensation and other accrued liabilities (9,650) (733)
-------- --------
Net cash provided by operating activities 2,967 1,713
-------- --------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (9,425) (11,994)
Cash received for net assets held for sale 6,781
Additions to property and equipment (3,660) (3,342)
Cash received on the sale of property and equipment 42 329
Other 21 48
-------- --------
Net cash used in investing activities (6,241) (14,959)
-------- --------
Cash flows from financing activities:
Proceeds from credit facility borrowings 31,690 24,600
Payments of credit facility borrowings (30,581) (11,975)
Payments of other long-term debt (226) (205)
Proceeds from issuance of other long-term debt 1,362
Payments of short-term debt, net 2,457 (718)
Payments of deferred financing costs (98)
Proceeds from common stock issued under employee benefit programs 284 271
Issuance of common stock to outside directors 25 29
-------- --------
Net cash provided by financing activities 3,649 13,266
-------- --------
Effect of exchange rates on cash and cash equivalents (4) (1)
-------- --------
Net increase in cash and cash equivalents 371 19
Cash and cash equivalents at beginning of period 2,851 607
-------- --------
Cash and cash equivalents at end of period $ 3,222 $ 626
======== ========
</TABLE>
Page 5
<PAGE>
(Continued)
Page 6
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WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Three Months Ended
------------------
July 31, July 24,
2000 1999
-------- --------
Supplemental disclosures of cash flow information:
Interest paid $4,000 $1,896
Income taxes paid $5,272 $1,174
During the three months ended July 31, 2000 and July 24, 1999, the Company paid
$9,425 and $11,994, respectively, which represents the aggregate of: 1) the
initial fixed consideration for purchase acquisitions, 2) earn-out provisions
and other purchase price adjustments relating to certain acquisitions and 3)
acquisition costs such as legal and accounting fees associated with certain
business combinations all of which related to business combinations that were
accounted for under the purchase method of accounting. Acquisition costs
incurred during the three months ended July 31, 2000, exclusively represented
earn-out payments and acquisition costs associated with the Fiscal 1999 and
Fiscal 2000 acquisitions. The fair value of the assets and liabilities at the
date of acquisition and the impact of recording the various earn-outs and
acquisition costs are presented as follows:
Three Months Ended
--------------------
July 31, July 24,
2000 1999
---------- ---------
Accounts receivable $ $ 2,216
Inventories 596
Prepaid expenses and other current assets 256
Property and equipment (323) 637
Goodwill and other intangible assets 5,303 13,276
Short-term debt (400)
Accounts payable (2,449)
Accrued compensation and other accrued liabilities 4,445 (2,138)
------ -------
Net assets acquired $9,425 $11,994
====== =======
Non-cash transactions:
. During the three months ended July 31, 2000 and July 24, 1999, the Company
accrued $5,137 and $2,095, respectively, as additional purchase consideration
for earn-outs.
. During the three months ended July 31, 2000 and July 24, 1999, the Company
recorded additional paid-in capital of $6 and $68, respectively, related to
the tax benefit of stock options exercised.
See accompanying notes to consolidated financial statements.
Page 7
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 1 - NATURE OF BUSINESS
---------------------------
Workflow Management, Inc. (the "Company" or "Workflow Management") is a
Delaware corporation formed by U.S. Office Products Company, also a Delaware
corporation ("U.S. Office Products"), in connection with U.S. Office Products'
strategic restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,643 shares (the
"Distribution" or "Workflow Distribution") of the Company's common stock, par
value $.001 per share ("Company Common Stock"). Holders of U.S. Office Products'
common stock were not required to pay any consideration for the shares of the
Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date"). U.S. Office Products and the
Company entered into a number of agreements to facilitate the Distribution and
the transition of the Company to an independent business enterprise.
Workflow Management is a leading integrator of graphic arts companies,
providing a variety of custom print products and office supplies and related
management services to more than 44,000 businesses in the United States and
Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, iGetSmart, designed to
minimize the costs of procuring, storing and using custom print products and
office supplies, and the Fulfillment Division, which prints and produces
envelopes, custom business documents, commercial print, labels, packaging and
direct mail literature. Workflow Management employs approximately 2,900 persons
and has 20 manufacturing facilities in 6 states and 4 Canadian provinces, 11
distribution centers, 11 print-on-demand centers and 56 sales offices.
NOTE 2 - BASIS OF PRESENTATION
-------------------------------
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of Workflow Management
and the companies acquired in business combinations accounted for under the
purchase method from their respective dates of acquisition.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair presentation of such operations. All such adjustments are of a normal
recurring nature. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. The
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 2000.
As used in these consolidated financial statements and related notes to
consolidated financial statements, "Fiscal 2001", "Fiscal 2000" and "Fiscal
1999" refer to the Company's fiscal years ending April 30, 2001 and ended April
30, 2000 and April 24, 1999, respectively. During Fiscal 2000, the Company's
Board of Directors approved a change in the definition of the Company's fiscal
year-end date from the last Saturday in April to April 30th of each year. As a
result of this change, the three months ended July 31, 2000 consisted of 92 days
as compared to the three months ended July 24, 1999, which consisted of 91 days.
Page 8
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 3 - INVENTORIES
--------------------
Inventories consist of the following:
July 31, April 30,
2000 2000
-------- ---------
Raw materials $ 13,314 $ 15,130
Work-in-process 2,453 3,287
Finished goods 28,408 27,806
-------- ---------
Total inventories $ 44,175 $ 46,223
======== =========
NOTE 4 - LONG-TERM DEBT
-----------------------
Revolving Credit Facility
During Fiscal 2000, the Company replaced its $200,000 credit facility with
Deutsche Bank and entered into a secured $250,000 revolving credit facility (the
"Credit Facility") underwritten and agented by Fleet Bank. The Credit Facility
is composed of a $200,000 revolver, including a $50,000 sublimit for Canadian
borrowings and a $50,000 amortizing term note. The Credit Facility matures on
March 10, 2004 and is secured by substantially all assets of the Company and is
subject to terms and conditions typical of a credit facility of such type and
size, including certain financial covenants, which include a total debt to
proforma EBITDA maximum of 4.0 to 1.0. Interest rate options are available to
the Company conditioned on certain leverage tests. The maximum rate of interest
is the prime rate from time to time in effect. The Credit Facility is also
available to fund the cash portion of future acquisitions, subject to the
maintenance of bank covenants and total availability under the facility. At July
31, 2000, the Company had approximately $136,843 outstanding under the Credit
Facility, at an annual interest rate of approximately 9.37%, and $113,157
available under the Credit Facility for acquisitions and working capital
purposes. During the three months ended July 31, 2000, the Company incurred
$2,981 in interest expense relating to the Credit Facility.
Subordinated Related Party Debt
During Fiscal 1999, the Company issued $4,127 in subordinated unsecured
notes including attached warrants with a value of $751 at the time of the debt
issuance (the "Subordinated Notes") to certain members of the Company's
management for $4,878. The proceeds from the Subordinated Notes were used to
repurchase the Company's Common Stock. The Subordinated Notes mature on January
18, 2009, and have a stated coupon of 12% payable semi-annually in arrears. The
attached warrants are exercisable into shares of Company Common Stock at a
nominal cost and will be issued on each anniversary of the purchase of the
Subordinated Notes at an amount sufficient to provide a 15% total annual return
to each holder. Upon the payment in full of the Subordinated Notes, or upon a
change of control of the Company (as defined in the Subordinated Notes), the
warrants previously issued to the note holders will be returned to the Company
and reissued in an amount which would provide for at least a 15%, but not more
than an 18%, total annual return to each note holder. The indebtedness evidenced
by the Subordinated Notes is subordinate to all amounts outstanding under the
Credit Facility. In addition to payment and other customary default provisions,
the Company would be in default under the terms of the Subordinated Notes if
more than $5,000 of the Company's debt under the Credit Facility was
accelerated. Any such acceleration could occur if the Company defaulted under
the terms of the Credit Facility. Based upon an analysis performed by an
independent lending institution acting as a financial advisor to the Company,
Workflow Management believes
Page 9
<PAGE>
that the terms and conditions of the Subordinated Notes were no less favorable
than the terms and conditions that would have been available in an arm's-length
transaction
Page 10
<PAGE>
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
with unaffiliated third parties. Interest expense for the three months ended
July 31, 2000 relating to the Subordinated Notes was $163. During Fiscal 2000,
the Company issued 5 warrants related to the Subordinated Notes.
Interest Rate Protection
During Fiscal 2000, the Company entered into an interest rate collar
agreement with Bank of America (the "Collar") at no cost to the Company whereby
the Company established a LIBOR cap of 6.74% on $25,000 of its variable interest
rate Credit Facility debt. The Collar became effective on October 15, 1999 and
will terminate on October 13, 2000. The Company has no other interest rate
collars, futures, forward, swap or option contracts.
NOTE 5 - STOCKHOLDERS' EQUITY
-----------------------------
Changes in stockholders' equity during the three months ended July 31, 2000 were
as follows:
Stockholders' equity balance at April 30, 2000 $ 89,922
Issuance of common stock in conjunction with:
Exercise of stock options, including tax benefits 49
Employee stock purchase program 241
Fees paid to outside members of the Company's Board of Directors 25
Comprehensive income 420
--------
Stockholders' equity balance at July 31, 2000 $ 90,657
========
Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended
------------------
July 31, July 24,
2000 1999
--------- -------
Net income $ 1,518 $ 3,437
Other comprehensive income:
Foreign currency translation adjustment (1,098) (854)
--------- -------
Comprehensive income $ 420 $ 2,583
========= =======
Notes Receivable from Officers
The Company extended secured loans to certain members of management for the
purchase, in the open market, of Company Common Stock by those individuals. The
notes are full recourse promissory notes bearing interest at 6.75% per annum and
are collateralized and secured with margined Company Common Stock personally
owned by those management members participating in the program. The terms of the
notes were amended and extended during Fiscal 2001. Under the revised terms,
principal and interest are payable at maturity on August 31, 2001.
Page 11
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 6 - EARNINGS PER SHARE ("EPS")
----------------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The following information presents the Company's computations
of basic and diluted EPS for the periods presented in the consolidated statement
of income:
Three Months Ended
------------------
July 31, July 24,
2000 1999
-------- --------
Basic earnings per share:
Net income $ 1,518 $ 3,437
======== ========
Weighted average number of
common shares outstanding 12,891 12,603
======== ========
Basic earnings per share $ 0.12 $ 0.27
======== ========
Diluted earnings per share:
Net income $ 1,518 $ 3,437
======== ========
Weighted average number of:
Common shares outstanding 12,891 12,603
Effect of dilutive employee stock options* 673 859
-------- --------
Total 13,564 13,462
======== ========
Diluted earnings per share $ 0.11 $ 0.26
======== ========
* The Company had additional employee stock options outstanding during the
periods presented that were not included in the computation of diluted earnings
per share because they were anti-dilutive. Options to purchase 1,236 and 231
shares of common stock were anti-dilutive and outstanding during the three
months ended July 31, 2000 and July 24, 1999, respectively.
Page 12
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 7 - BUSINESS COMBINATIONS
------------------------------
During the three month period ended July 31, 2000, the Company did not
complete any business combinations. However, the Company paid an additional
$6,288 and $3,137 related to earn-out provisions and other various acquisition
costs for the previously acquired companies. These costs were offset by the
cash receipts of $6,781 for net assets held for sale. The assets held for sale
were acquired in an acquisition completed in the last quarter of Fiscal 2000.
During Fiscal 2000, the Company made six acquisitions accounted for under
the purchase method for an aggregate purchase price of $46,807, consisting of
$36,470 in cash and notes payable of $10,337. The total assets related to these
acquisitions were $69,584, including intangible assets of $30,916. The results
of these acquisitions have been included in the Company's results from their
respective dates of acquisition.
Following the acquisition of Office Electronics, Inc. ("OEI") during Fiscal
2000, the Company decided to sell certain of OEI's manufacturing divisions and
the related assets. As of July 31, 2000 all manufacturing divisions and assets
except for the St. Louis division and its facility and the real estate upon
which two other former OEI facilities were located, have been sold. At July
31, 2000 the carrying value of these net assets held for sale is based upon the
net realizable value of the facilities.
During Fiscal 1999, the Company made twelve acquisitions accounted for
under the purchase method for an aggregate purchase price of $70,125, consisting
entirely of cash. The total assets related to these acquisitions were $88,379,
including intangible assets of $50,074. The results of these acquisitions have
been included in the Company's results from their respective dates of
acquisition.
All of the Company's acquisitions have earn-out provisions that could
result in additional purchase consideration payable in subsequent periods,
ranging from three to five years, dependent upon the future earnings of the
acquired companies. Additional purchase consideration of $6,288 was paid by the
Company in connection with these earn-out provisions during the three months
ended July 31, 2000, and another $5,137 is accrued for these earn-out provisions
at July 31, 2000. This additional consideration, whether paid or accrued, has
been reflected in the accompanying balance sheet as goodwill at July 31, 2000.
The following presents the unaudited pro forma results of operations of the
Company for the three month period July 24, 1999, as if the divestiture of a
subsidiary and the purchase acquisitions completed since the beginning of Fiscal
2000 had been consummated at the beginning of Fiscal 2000. The pro forma
results of operations include certain pro forma adjustments including the
amortization of intangible assets and reductions in executive compensation at
the acquired companies. During the three months ended July 24, 1999, the Company
had pro forma adjustments of $181.
Three Months Ended
------------------
July 24,
1999
---------
Revenues $ 137,801
Net income 4,036
Earnings
Basic $ 0.32
Diluted 0.30
Page 13
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The unaudited pro forma results of operations are prepared for comparative
purposes only and do not necessarily reflect the results that would have
occurred had the acquisitions and the divestiture occurred at the beginning of
Fiscal 2000 or the results that may occur in the future.
Page 14
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 8 - SEGMENT REPORTING
--------------------------
The Company's operating segments prepare separate financial information
that is evaluated regularly by the Company's Chief Executive Officer and the
Company's Chief Financial Officer. Operating segments of the Company are defined
primarily by the segment operation's core business function whether it is: a)
the procurement and subsequent distribution of product to the customer or b) the
sale of an internally manufactured product to the customer. The Company has
determined that its operating activities consist of two reportable operating
segments: the Company's Integrated Business Services Division and the Company's
Fulfillment Division.
The Company's Integrated Business Services Division represents those
subsidiaries of the Company that procure product, primarily custom print
products and office supplies, and distribute it to customers through one of the
Company's distribution centers or directly from the product's manufacturer. The
results of the Integrated Business Services Division also include transactions
with customers utilizing the Company's proprietary iGetSmart inventory and
distribution system. The Company's Fulfillment Division represents those
subsidiaries primarily engaged in the sale of products internally manufactured
at the Company. The Fulfillment Division provides envelopes, commercial print
products, custom forms and documents, annual reports, direct mail pieces,
specialty packaging, labels and advertising specialty products to its customers.
The Fulfillment Division also provides product to the Company's Integrated
Business Services Division for distribution to customers. Corporate expenses
include the costs of maintaining a corporate office. The Company does not
allocate corporate overhead by segment in assessing performance.
Operating Segments
The following table sets forth information as to the Company's reportable
operating segments:
Three Months Ended
---------------------
July 31, July 24,
2000 1999
-------- --------
Revenues:
Integrated Business Services Division $ 67,330 $ 43,876
Fulfillment Division 78,716 77,194
Intersegment (4,217) (2,608)
-------- --------
Total $141,829 $118,462
======== ========
Operating income:
Integrated Business Services Division $ 2,713 $ 3,591
Fulfillment Division 5,892 6,210
Corporate (2,659) (1,606)
-------- --------
Total $ 5,946 $ 8,195
======== ========
July 31, April 30,
2000 2000
-------- --------
Identifiable assets (at period end):
Integrated Business Services Division $118,295 $134,673
Fulfillment Division 176,771 181,461
Corporate 17,872 15,578
-------- --------
Total $312,938 $331,712
======== ========
Page 15
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WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Geographic Segments
The following table sets forth information as to the Company's operations in
its different geographic segments:
Three Months Ended
-------------------
July 31, July 24,
2000 1999
-------- --------
Revenues:
United States $106,148 $ 84,452
Canada 35,681 34,010
-------- --------
Total $141,829 $118,462
======== ========
Operating income:
United States $ 2,921 $ 5,566
Canada 3,025 2,629
-------- --------
Total $ 5,946 $ 8,195
======== ========
July 31, April 30,
2000 2000
-------- --------
Identifiable assets (at period end):
United States $252,277 $267,398
Canada 60,661 64,314
-------- --------
Total $312,938 $331,712
======== ========
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate," "intend," "may," "will," "expect" and
similar expressions as they relate to Workflow Management, Inc. (the "Company"
or "Workflow Management") or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements, which are made only as of the date hereof.
Introduction
Workflow Management, Inc. (the "Company" or "Workflow Management") is a
Delaware corporation formed by U.S. Office Products Company, also a Delaware
corporation ("U.S. Office Products"), in connection with U.S. Office Products'
strategic restructuring plan that was consummated June 9, 1998 (the "Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products' common stock 14,642,981 shares
(the "Distribution" or "Workflow Distribution") of the Company's common stock,
par value $.001 per share ("Company Common Stock"). Holders of U.S. Office
Products' common stock were not required to pay any consideration for the shares
of the Company Common Stock they received in the Distribution. The Distribution
occurred on June 9, 1998 (the "Distribution Date"). U.S. Office Products and the
Company entered into a number of agreements to facilitate the Distribution and
the transition of the Company to an independent business enterprise.
Workflow Management is a leading integrator of graphic arts companies,
providing a variety of custom print products and office supplies and related
management services to more than 44,000 businesses in the United States and
Canada. The Company is comprised of two main operating divisions - the
Integrated Business Services Division, which provides customers with print
management services, including an e-commerce solution, iGetSmart, designed to
minimize the costs of procuring, storing and using custom print products and
office supplies, and the Fulfillment Division, which prints and produces
envelopes, custom business documents, commercial print, labels, packaging and
direct mail literature. Workflow Management employs approximately 2,900 persons
and has 20 manufacturing facilities in 6 states and 4 Canadian provinces, 11
distribution centers, 11 print-on-demand centers and 56 sales offices.
As used in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Fiscal 2001" and "Fiscal 2000" refer to the
Company's fiscal years ending April 30, 2001 and ended April 30, 2000,
respectively. During Fiscal 2000, the Company's Board of Directors approved a
change in the definition of the Company's fiscal year-end date from the last
Saturday in April to April 30th of each year. As a result of this change, the
three months ended July 31, 2000 consisted of 92 days as compared to the three
months ended July 24, 1999, which consisted of 91 days.
The following discussion should be read in conjunction with the
consolidated historical financial statements, including the related notes
thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as
the Company's audited consolidated financial statements, and notes thereto, for
the fiscal year ended April 30, 2000 included in the Company's Annual Report on
Form 10-K.
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Consolidated Results of Operations
Three Months Ended July 31, 2000 Compared to Three Months Ended July 24, 1999
Consolidated revenues increased 19.7%, from $118.5 million for the three
months ended July 24, 1999, to $141.8 million for the three months ended July
31, 2000. The Company's Integrated Business Services Division revenues increased
by $23.5 million or 53.5% and its Fulfillment Division revenues increased by
$1.5 million or 2.0% when comparing the three months ended July 31, 2000 to the
three months ended July 24, 1999. These increases were primarily due to the
Company's business combinations consummated after July 24, 1999. Revenues for
the three months ended July 30, 2000, include revenues from six companies
acquired in business combinations accounted for under the purchase method after
the beginning of the first quarter of Fiscal 2000 (the "Purchased Companies").
International revenues increased 4.9%, from $34.0 million, or 28.7% of
consolidated revenues, for the three months ended July 24, 1999, to $35.7
million, or 25.2% of consolidated revenues, for the three months ended July 31,
2000.
Gross profit increased 18.2%, from $34.9 million, or 29.4% of revenues, for
the three months ended July 24, 1999, to $41.2 million, or 29.1% of revenues,
for the three months ended July 31, 2000. The increase in gross profit was
primarily due to the Purchased Companies. The primary reason for the decrease
in gross profit as a percentage of revenues was due to the increased pricing
pressure in the envelope and direct mail product lines.
Selling, general and administrative expenses increased 32.0%, from $26.2
million, or 22.1% of revenues, for the three months ended July 24, 1999, to
$34.6 million, or 24.4% of revenues, for the three months ended July 31, 2000.
The increase in selling, general and administrative expenses was primarily due
to the increased spending in the Company's iGetSmart.com, Inc. subsidiary.
During the quarter, the Company incurred approximately $1.6 million in
additional expenses to further develop and market the iGetSmart technology and
to hire additional personnel.
Amortization expense increased 43.6%, from $447,000, or 0.4% of revenues,
for the three months ended July 24, 1999, to $642,000, or 0.5% of revenues, for
the three months ended July 31, 2000. This increase was due exclusively to the
increased number of acquisitions accounted for under the purchase method that
are included in the Company's results for the three months ended July 31, 2000
versus the three months ended July 24, 1999.
Interest expense, net of interest income, increased 57.3%, from $2.2
million for the three months ended July 24, 1999, to $3.4 million for the three
months ended July 31, 2000. This increase in net interest expense was due to
the increased level of debt outstanding during the three months ended July 31,
2000 and the increase in overall market interest rates.
Other income increased 27.5% from $51,000 for the three months ended July
24, 1999, to $65,000 for the three months ended July 31, 2000. Other income
primarily represents the net of gains and/or losses on sales of equipment and
miscellaneous other income and expense items.
Provision for income taxes decreased 59.3% from $2.6 million for the three
months ended July 24, 1999 to $1.1 million for the three months ended July 31,
2000, reflecting effective income tax rates of 43.4% and 41.4%, respectively.
During both periods, the effective income tax rates reflect the recording of tax
provisions at the federal statutory rate of 34.0%, plus appropriate state and
local taxes.
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<PAGE>
Liquidity and Capital Resources
At July 31, 2000, the Company had working capital of $73.6 million. The
Company's capitalization, defined as the sum of long-term debt, subordinated
related party debt and stockholders' equity, at July 31, 2000 was approximately
$236.5 million.
Workflow Management uses a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents are typically on hand as any excess cash would be used to pay down
the Company's revolving credit facility. Cash at July 31, 2000, primarily
represented customer collections and in-transit cash sweeps from the Company's
subsidiaries at the end of the quarter.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $15.0 million for new equipment and maintenance.
During the three months ended July 31, 2000, net cash provided by operating
activities was $3.0 million. Net cash used in investing activities was $6.2
million, including $9.4 million used for acquisitions, $3.7 million used for
capital expenditures which were partially offset by the collection of $6.8
million for net assets held for sale. Net cash provided by financing activities
was $3.6 million, which included $1.1 million in net borrowings by the Company
on its revolving credit facility to primarily pay for the additional purchase
considerations due under the earn-outs agreements, $0.2 million in payments of
other long-term debt and $2.5 in net proceeds of short-term debt.
During the three months ended July 24, 1999, net cash provided by operating
activities was $1.7 million. Net cash used in investing activities was $15.0
million, including $12.0 million used for acquisitions, $3.3 million used for
capital expenditures. Net cash provided by financing activities was $13.3
million, which included $12.6 million in net borrowings by the Company on its
revolving credit facility to primarily pay for acquisitions and $0.4 million in
net other borrowings.
Workflow Management has significant operations in Canada. Net sales from
the Company's Canadian operations accounted for approximately 25.2% of the
Company's total net sales for the three months ended July 31, 2000. As a
result, Workflow Management is subject to certain risks inherent in conducting
business internationally, including fluctuations in currency exchange rates.
Changes in exchange rates may have a significant effect on the Company's
business, financial condition and results of operations.
During Fiscal 2000, the Company replaced its $200.0 million credit facility
with Deutsche Bank and entered into a secured $250.0 million revolving credit
facility (the "Credit Facility") underwritten and agented by Fleet Bank. The
Credit Facility is composed of a $200.0 million revolver, including a $50.0
million sublimit for Canadian borrowings, and a $50.0 million amortizing term
note. The Credit Facility matures on March 10, 2004 and is secured by
substantially all assets of the Company and is subject to terms and conditions
typical of a credit facility of such type and size, including certain financial
covenants, which include a total debt to proforma EBITDA maximum of 4.0 to 1.0.
Interest rate options are available to the Company conditioned on certain
leverage tests. The maximum rate of interest is the prime rate from time to
time in effect. The Credit Facility is also available to fund the cash portion
of future acquisitions, subject to the maintenance of bank covenants and total
availability under the facility. At September 5, 2000, the Company had
approximately $133.8 million outstanding under the Credit Facility, at an annual
interest rate of approximately 9.26%, and $116.2 million available under the
Credit Facility for acquisitions and working capital purposes.
During Fiscal 1999, the Company issued $4.1 million in subordinated
unsecured notes including attached warrants with a value of $0.8 million at the
time of the debt issuance (the "Subordinated Notes") to certain members of the
Company's management for $4.9 million. The proceeds from the Subordinated Notes
were used to repurchase the Company's Common Stock. The Subordinated Notes
mature on January 18, 2009, and have a stated coupon of 12% payable semi-
annually in arrears. The attached warrants are exercisable into shares of
Company Common Stock at a nominal cost and will be issued on each anniversary of
the purchase of the Subordinated Notes at an amount sufficient to provide a 15%
total annual return to each
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<PAGE>
holder. The indebtedness evidenced by the Subordinated Notes is subordinate to
all amounts outstanding under the Credit Facility. In addition to payment and
other customary default provisions, the Company would be in default under the
terms of the Subordinated Notes if more than $5.0 million of the Company's debt
under the Credit Facility was accelerated. Any such acceleration could occur if
the Company defaulted under the terms of the Credit Facility. Based upon the
structure provided and the analysis performed by an independent lending
institution, which acted as the financial advisor to the Company, Workflow
Management believes that the terms and conditions of the Subordinated Notes were
no less favorable than the terms and conditions that would have been available
in an arm's-length transaction with unaffiliated third parties. During Fiscal
2000, warrants to purchase 5,441 shares of the Company's Common Stock for an
exercise price of $0.01, per share, were issued to the Subordinated Note
noteholders.
Under the terms of the Distribution Agreement entered into between the
Company and U.S. Office Products in connection with the Strategic Restructuring
Plan, the Company is obligated, subject to a maximum obligation of $1.75
million, to indemnify U.S. Office Products for certain liabilities incurred by
U.S. Office Products prior to the Distribution, including liabilities under
federal securities laws (the "Indemnification Obligation"). This
Indemnification Obligation is reduced by any insurance proceeds actually
recovered in respect of the Indemnification Obligation and is shared on a pro
rata basis with the other three divisions of U.S. Office Products which were
spun-off from U.S. Office Products in connection with the Strategic
Restructuring Plan.
U.S. Office Products has been named a defendant in various class action
lawsuits. These lawsuits generally allege violations of federal securities laws
by U.S. Office Products and other named defendants during the months preceding
the Strategic Restructuring Plan. The Company has not received any notice or
claim from U.S. Office Products alleging that these lawsuits are within the
scope of the Indemnification Obligation, but the Company believes that certain
liabilities and costs associated with these lawsuits (up to a maximum of $1.75
million) are likely to be subject to the Company's Indemnification Obligation.
Nevertheless, the Company does not presently anticipate that the Indemnification
Obligation will have a material adverse effect on the Company.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will be
sufficient to meet the Company's liquidity requirements for its operations and
acquisition purposes for the next twelve months. The Company expects that
additional financing under the Credit Facility will be sufficient to meet its
long-term liquidity requirements for operations. However, the Company intends
to pursue acquisitions in the next twelve months and thereafter which are
expected to be funded through cash, stock or a combination thereof. The Company
may have to seek additional funding for its long-term liquidity from the
issuance of additional bank debt, the issuance of public debt or the issuance of
additional common stock in the public markets. There can be no assurance that
additional sources of financing will not be required during the next twelve
months or thereafter.
Fluctuations in Quarterly Results of Operations
Workflow Management's envelope business is subject to seasonal influences
from year-end mailings. Both the Company's Integrated Business Services
Division and its Fulfillment Division are subject to seasonal influences of the
potential lower demand for office consumables during the summer months which
coincide with Workflow Management's fiscal quarters ending in July. As the
Company continues to complete acquisitions, it may become subject to other
seasonal influences if the businesses it acquires are seasonal.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired may differ substantially from those of Workflow
Management, which could contribute to further fluctuation in its quarterly
operating results. Therefore, results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
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<PAGE>
Inflation
The Company does not believe that inflation has had a material impact on
its results of operations during the three-month periods ended July 31, 2000 and
July 24, 1999, respectively.
Factors Affecting the Company's Business
Risks Associated with Acquisitions and Divestitures
One of the Company's strategies is to increase its revenues and the markets
it serves through the acquisition of additional graphic arts businesses. There
can be no assurance that suitable candidates for acquisitions can be identified
or, if suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all. In addition, the Company may determine that its
business interests would be best served by selling certain subsidiaries, assets
or operations to third parties. Accordingly, the Company has in the past
considered, and will continue to consider in the future, divestitures of certain
operations or assets to the extent management believes that such transactions
could improve the Company's overall financial condition and/or future prospects.
Any such divestitures would reduce the Company's revenues. Divestitures could
also (i) eliminate certain products or product lines that the Company has
historically offered to its customers and (ii) reduce or eliminate the Company's
presence in certain geographic markets.
Integration of acquired companies may involve a number of special risks
that could have a material adverse effect on the Company's operations and
financial performance, including adverse short-term effects on its reported
operating results (including those adverse short-term effects caused by
severance payments to employees of acquired companies, restructuring charges
associated with the acquisitions and other expenses associated with a change of
control, as well as non-recurring acquisition costs including accounting and
legal fees, investment banking fees, recognition of transaction-related
obligations and various other acquisition-related costs); diversion of
management's attention; difficulties with retention, hiring and training of key
personnel; risks associated with unanticipated problems or legal liabilities;
and amortization of acquired intangible assets. Furthermore, although Workflow
Management conducts due diligence and generally requires representations,
warranties and indemnifications from the former owners of acquired companies,
there can be no assurance that such owners will have accurately represented the
financial and operating conditions of their companies. If an acquired company's
financial or operating results were misrepresented, the acquisition could have a
material adverse effect on the results of operations and financial condition of
Workflow Management.
Workflow Management may in the future seek to finance its acquisitions by
using shares of Company Common Stock. If the Company Common Stock does not
maintain a sufficient market value, if the price of Company Common Stock is
highly volatile, or if potential acquisition candidates are otherwise unwilling
to accept Company Common Stock as part of the consideration for the sale of
their businesses, Workflow Management may be required to use more of its cash
resources or more borrowed funds in order to initiate and maintain its
acquisition program. If Workflow Management does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity offerings. The Company does not anticipate
utilizing Company Common Stock for acquisition purposes during the current
fiscal year.
Approximately $97.3 million, or 31.1% of the Company's total assets at July
31, 2000, represents intangible assets, the significant majority of which is
goodwill. Goodwill represents the excess of cost over the fair market value of
net assets acquired in business combinations accounted for under the purchase
method. The Company amortizes goodwill on a straight-line method over a period
of 40 years with the amount amortized in a particular period constituting a non-
cash expense that reduces the Company's net income. The Company will be required
to periodically evaluate the recoverability of goodwill by reviewing the
anticipated undiscounted future cash flows from the operations of the acquired
companies and comparing such cash flows to the carrying value of the associated
goodwill. If goodwill becomes impaired, Workflow Management would be required to
write down the carrying value of the goodwill and incur a related charge to its
income. A reduction in net income resulting from the amortization or write down
of goodwill could have a material and adverse impact upon the market price of
the Company Common Stock.
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<PAGE>
Risks Associated with Canadian Operations
Workflow Management has significant operations in Canada. Net sales from
the Company's Canadian operations accounted for approximately 25.2% and 27.0% of
the Company's total net sales in the three months ended July 31, 2000 and the
fiscal year ended April 30, 2000, respectively. As a result, Workflow Management
is subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Management is also
subject to risks associated with the imposition of protective legislation and
regulations, including those resulting from trade or foreign policy. In
addition, because of the Company's Canadian operations, significant revenues and
expenses are denominated in Canadian dollars. Changes in exchange rates may have
a significant effect on the Company's business, financial condition and results
of operations. Workflow Management does not currently engage in currency hedging
transactions.
For additional risk factors, refer to the Company's Annual Report on Form 10-K
for the year ended April 30, 2000.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's financial instruments include cash, accounts receivable,
accounts payable and long-term debt. Market risks relating to the Company's
operations result primarily from changes in interest rates. The Company's
borrowings are primarily dependent upon LIBOR rates. The estimated fair value
of the Company's long-term debt approximated its carrying value at July 31,
2000.
The Company does not hold or issue derivative financial instruments for
trading purposes. To manage interest rate risk on the variable rate borrowings
under the Credit Facility, the Company entered into an interest rate collar
agreement on September 27, 1999. For a specified period, this interest rate
collar has the effect of mitigating fluctuations in the Credit Facility's
variable base interest rate by establishing an interest rate floor and an
interest rate cap the Company will pay on $25.0 million notional principal
amount established in the collar. As a result, while this hedging arrangement
is structured to reduce the Company's exposure to interest rate increases, it
also limits the benefit the Company might otherwise have received from any
interest rate decreases. This swap will be cash settled quarterly, with interest
expense adjusted for amounts paid or received.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement between Workflow Management, Inc. and Paul K.
MacMillan.
10.2 Severance Agreement between Workflow Management, Inc. and Paul K.
MacMillan.
11.1 Statement regarding computation of net income per share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORKFLOW MANAGEMENT, INC.
September 14, 2000 By: /s/ Steve R. Gibson
---------------------------- --------------------
Date Steve R. Gibson
Director, Chief Executive Officer and
President
(Principal Executive Officer)
September 14, 2000 By: /s/ Michael L. Schmickle
---------------------------- -------------------------
Date Michael L. Schmickle
Chief Financial Officer, Executive Vice
President and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
Page 25
