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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, 2002
OR
[ ] |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 0-24383
WORKFLOW
MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
|
06-1507104 |
| (State or other jurisdiction of |
|
(I.R.S. Employer |
| incorporation or organization.) |
|
Identification No.) |
| |
|
|
| 240 Royal Palm Way |
|
|
| Palm Beach, FL |
|
33480 |
| (Address of principal executive offices) |
|
(Zip Code) |
(561) 659-6551
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
.
As of September 12, 2002, there were 13,180,489 shares of common
stock outstanding.
WORKFLOW MANAGEMENT, INC.
| |
|
|
|
Page No.
|
| PART I—FINANCIAL INFORMATION |
|
|
| |
|
Financial Statements |
|
|
| |
|
|
|
3 |
| |
|
July 31, 2002 (unaudited) and April 30, 2002 |
|
|
| |
|
|
|
4 |
| |
|
For the three months ended July 31, 2002 and July 31, 2001 |
|
|
| |
|
|
|
5 |
| |
|
For the three months ended July 31, 2002 and July 31, 2001 |
|
|
| |
|
|
|
7 |
| |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
17 |
| |
|
Quantitative and Qualitative Disclosure About Market Risk |
|
25 |
| PART II—OTHER INFORMATION |
|
|
| |
|
Exhibits and Reports on Form 8-K |
|
26 |
| |
|
27 |
| |
|
27 |
| |
|
28 |
Page 2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET (In thousands, except share amounts)
| ASSETS |
|
July 31, 2002
|
|
|
April 30, 2002
|
|
| |
|
(Unaudited) |
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
4,535 |
|
|
$ |
5,262 |
|
| Accounts receivable, less allowance for doubtful accounts of $4,934 and $4,917, respectively |
|
|
93,782 |
|
|
|
102,184 |
|
| Inventories |
|
|
52,785 |
|
|
|
50,529 |
|
| Prepaid expenses and other current assets |
|
|
18,878 |
|
|
|
13,821 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
169,980 |
|
|
|
171,796 |
|
| Property and equipment, net |
|
|
47,475 |
|
|
|
48,992 |
|
| Goodwill |
|
|
131,810 |
|
|
|
128,232 |
|
| Other intangible assets, net |
|
|
1,394 |
|
|
|
1,544 |
|
| Other assets |
|
|
6,506 |
|
|
|
7,635 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
357,165 |
|
|
$ |
358,199 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Short-term debt |
|
$ |
169,000 |
|
|
$ |
157,843 |
|
| Accounts payable |
|
|
38,623 |
|
|
|
42,594 |
|
| Accrued compensation |
|
|
10,530 |
|
|
|
12,641 |
|
| Accrued additional purchase consideration |
|
|
3,183 |
|
|
|
8,525 |
|
| Accrued income taxes |
|
|
|
|
|
|
933 |
|
| Accrued restructuring costs |
|
|
516 |
|
|
|
573 |
|
| Other accrued liabilities |
|
|
23,264 |
|
|
|
22,457 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
245,116 |
|
|
|
245,566 |
|
| |
|
|
|
|
|
|
|
|
| Other long-term debt |
|
|
1,321 |
|
|
|
1,500 |
|
| Deferred income taxes |
|
|
6,777 |
|
|
|
6,820 |
|
| Long-term swap contract liability |
|
|
4,345 |
|
|
|
3,666 |
|
| Other long-term liabilities |
|
|
3,189 |
|
|
|
3,865 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
260,748 |
|
|
|
261,417 |
|
| |
|
|
|
|
|
|
|
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Preferred stock, $.001 par value, 1,000,000 shares authorized, none outstanding
|
|
|
|
|
|
|
|
|
| Common stock, $.001 par value, 150,000,000 shares authorized, 13,178,489 and 13,132,724 issued and outstanding,
respectively |
|
|
13 |
|
|
|
13 |
|
| Additional paid-in capital |
|
|
52,598 |
|
|
|
52,501 |
|
| Notes receivable from officers |
|
|
(4,820 |
) |
|
|
(4,820 |
) |
| Accumulated other comprehensive loss |
|
|
(4,319 |
) |
|
|
(6,255 |
) |
| Retained earnings |
|
|
52,945 |
|
|
|
55,343 |
|
| |
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
96,417 |
|
|
|
96,782 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
|
$ |
357,165 |
|
|
$ |
358,199 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts)
(Unaudited)
| |
|
Three Months Ended
|
|
| |
|
July 31, 2002
|
|
|
July 31, 2001
|
|
| Revenues |
|
$ |
156,209 |
|
|
$ |
155,166 |
|
| Cost of revenues |
|
|
112,802 |
|
|
|
111,213 |
|
| |
|
|
|
|
|
|
|
|
| Gross profit |
|
|
43,407 |
|
|
|
43,953 |
|
| Selling, general and administrative expenses |
|
|
36,385 |
|
|
|
36,545 |
|
| Restructuring costs |
|
|
221 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Operating income |
|
|
6,801 |
|
|
|
7,408 |
|
| Interest expense |
|
|
4,149 |
|
|
|
3,703 |
|
| Interest income |
|
|
(140 |
) |
|
|
(220 |
) |
| Loss on ineffective interest rate hedge |
|
|
4,345 |
|
|
|
|
|
| Debt offering costs |
|
|
1,705 |
|
|
|
|
|
| Other expense (income) |
|
|
13 |
|
|
|
(14 |
) |
| |
|
|
|
|
|
|
|
|
| (Loss) income before (benefit) provision for income taxes |
|
|
(3,271 |
) |
|
|
3,939 |
|
| (Benefit) provision for income taxes |
|
|
(872 |
) |
|
|
1,641 |
|
| |
|
|
|
|
|
|
|
|
| Net (loss) income |
|
$ |
(2,399 |
) |
|
$ |
2,298 |
|
| |
|
|
|
|
|
|
|
|
| (Loss) income per share: |
|
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.18 |
) |
|
$ |
0.18 |
|
| Diluted |
|
$ |
(0.18 |
) |
|
$ |
0.18 |
|
| Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
| Basic |
|
|
13,155 |
|
|
|
13,002 |
|
| Diluted |
|
|
13,155 |
|
|
|
13,069 |
|
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
(Unaudited)
| |
|
Three Months Ended
|
|
| |
|
July 31, 2002
|
|
|
July 31, 2001
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net (loss) income |
|
$ |
(2,399 |
) |
|
$ |
2,298 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization expense |
|
|
2,644 |
|
|
|
2,740 |
|
| Restructuring costs, net of cash paid |
|
|
(57 |
) |
|
|
(966 |
) |
| Amortization of deferred financing costs |
|
|
295 |
|
|
|
161 |
|
| Changes in assets and liabilities (net of assets acquired and liabilities assumed in business
combinations): |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
8,321 |
|
|
|
4,583 |
|
| Inventories |
|
|
(2,313 |
) |
|
|
849 |
|
| Prepaid expenses and other assets |
|
|
(3,654 |
) |
|
|
240 |
|
| Accounts payable |
|
|
(3,927 |
) |
|
|
6,193 |
|
| Accrued liabilities |
|
|
(418 |
) |
|
|
(2,804 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by operating activities |
|
|
(1,508 |
) |
|
|
13,294 |
|
| |
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Cash paid in acquisitions, net of cash received |
|
|
(1,072 |
) |
|
|
(3,624 |
) |
| Cash paid for additional purchase consideration |
|
|
(7,306 |
) |
|
|
(7,043 |
) |
| Additions to property and equipment |
|
|
(1,396 |
) |
|
|
(5,053 |
) |
| Cash collection of notes receivable |
|
|
175 |
|
|
|
|
|
| Cash received on the sale of property and equipment |
|
|
245 |
|
|
|
9,218 |
|
| Other |
|
|
(79 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(9,433 |
) |
|
|
(6,503 |
) |
| |
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from credit facility borrowings |
|
|
43,950 |
|
|
|
48,111 |
|
| Payments of credit facility borrowings |
|
|
(32,800 |
) |
|
|
(52,058 |
) |
| Payments of short-term debt, net |
|
|
|
|
|
|
(157 |
) |
| Payments of other long-term debt |
|
|
(179 |
) |
|
|
(1,222 |
) |
| Payments of deferred financing costs |
|
|
(831 |
) |
|
|
(221 |
) |
| Proceeds from common stock issued under employee benefit programs |
|
|
92 |
|
|
|
116 |
|
| Issuance of common stock to outside directors |
|
|
6 |
|
|
|
5 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
10,238 |
|
|
|
(5,426 |
) |
| |
|
|
|
|
|
|
|
|
| Effect of exchange rates on cash and cash equivalents |
|
|
(24 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
| Net (decrease) increase in cash and cash equivalents |
|
|
(727 |
) |
|
|
1,364 |
|
| Cash and cash equivalents at beginning of period |
|
|
5,262 |
|
|
|
2,126 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
4,535 |
|
|
$ |
3,490 |
|
| |
|
|
|
|
|
|
|
|
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
| |
|
Three Months Ended
|
| |
|
July 31, 2002
|
|
July 31, 2001
|
| Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
| Interest paid |
|
$ |
4,848 |
|
$ |
3,283 |
| Income taxes paid |
|
$ |
2,255 |
|
$ |
2,552 |
During the three months ended July 31, 2002 and July 31, 2001, the
Company paid a total of $8,378 and $10,667, respectively, in cash representing the aggregate of: 1) the initial fixed consideration for purchase acquisitions, 2) earn-out provisions and other purchase price adjustments relating to certain
acquisitions and 3) acquisition costs such as legal and accounting fees associated with certain business combinations all of which related to business combinations that were accounted for under the purchase method of accounting. The fair value of
the assets and liabilities at the date of acquisition and the impact of recording the various earn-outs and acquisition costs are as follows:
| |
|
Three Months Ended
|
|
| |
|
July 31, 2002
|
|
July 31, 2001
|
|
| Accounts receivable |
|
$ |
|
|
$ |
$739 |
|
| Inventories |
|
|
|
|
|
31 |
|
| Property and equipment |
|
|
|
|
|
65 |
|
| Intangible assets(1) |
|
|
8,378 |
|
|
10,416 |
|
| Accounts payable |
|
|
|
|
|
(348 |
) |
| Accrued compensation and other accrued liabilities |
|
|
|
|
|
(236 |
) |
| |
|
|
|
|
|
|
|
| Net assets acquired |
|
$ |
8,378 |
|
$ |
10,667 |
|
| |
|
|
|
|
|
|
|
Non-cash transactions:
· |
|
At July 31, 2002 and July 31, 2001, the Company had $3,183 and $5,191 accrued for additional purchase consideration for earn-outs, respectively.
|
See accompanying notes to consolidated financial statements.
(1) |
|
Due to the accrual of earn-out provisions, intangible assets include cash payments during the period related to prior period acquisitions.
|
Page 6
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts and non-financial data)
(Unaudited)
NOTE 1—NATURE OF BUSINESS
Workflow Management, Inc. (the “Company” or “Workflow Management”) is a leading provider
of end-to-end business management outsourcing solutions that allows its customers to control all of their print related costs. The Company produces and distributes a full range of printed business products and provides related management services to
approximately 43,000 customers in North America ranging in size from small businesses to Fortune 100 companies. The Company is comprised of two main operating divisions: 1) the Workflow Solutions Division, which provides customers with an integrated
set of services and information tools that reduce the costs of procuring, storing, distributing and using printed business products; and 2) the Workflow Printing Division, which produces custom business documents, envelopes/direct mail, commercial
printing, specialty packaging, and labels and signs. Workflow Management employs approximately 3,200 persons and has 18 manufacturing facilities, 15 distribution centers, 8 print-on-demand centers and 63 sales offices throughout North America.
NOTE 2—BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes to consolidated financial statements include the accounts of Workflow Management and the companies acquired in business combinations
accounted for under the purchase method from their respective dates of acquisition.
As used in the Notes to
Consolidated Financial Statements, “Fiscal 2002”, “Fiscal 2001”, “Fiscal 2000” and “Fiscal 1999” refer to the Company’s fiscal years ended April 30, 2002, 2001, 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.
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, 2002.
Page 7
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 3—INVENTORIES
Inventories consist of the following:
| |
|
July 31, 2002
|
|
April 30, 2002
|
| Raw materials |
|
$ |
13,601 |
|
$ |
12,661 |
| Work-in-process |
|
|
6,977 |
|
|
7,521 |
| Finished goods |
|
|
32,207 |
|
|
30,347 |
| |
|
|
|
|
|
|
| Total inventories |
|
$ |
52,785 |
|
$ |
50,529 |
| |
|
|
|
|
|
|
NOTE 4—DEBT
Revolving Credit Facility
The
Company has entered into a secured revolving credit facility (the “Credit Facility) with $183,500 available, subject to certain leverage tests, for working capital and acquisition purposes, including a $135,000 revolver and a $48,500 amortizing
term note. The existing Credit Facility is secured by substantially all of the Company’s assets and is subject to terms and conditions typical of a credit facility of such type and size, including certain financial covenants. The Credit
Facility matures on March 10, 2004. At July 31, 2002, the Company had $168,300 outstanding under the Credit Facility, at an effective annual interest rate of approximately 12.4%. During the three months ended July 31, 2002, the Company incurred
$3,259 in interest expense relating to the Credit Facility.
During the quarter ended April 30, 2002, the Company
breached a leverage covenant in the Credit Facility. However, the Company’s lenders waived the default (the “Waivers”) under the leverage covenant, allowing the Company to be in compliance with the Credit Facility as of April 30, 2002
and July 31, 2002 and the Company agreed to amendments to certain provisions of the Credit Facility. Under the terms of the Waivers, (i) the leverage ratio from April 30, 2002 to July 30, 2002 was increased to 4.15 to 1.0, (ii) from July 31, 2002 to
October 30, 2002 the leverage ratio was increased to 4.60 to 1.0, (iii) at October 31, 2002 and thereafter, the leverage ratio will decrease to 3.75 to 1.0 and (iv) certain minimum cumulative consolidated EBITDA requirements were imposed. At July
31, 2002, the Company’s leverage ratio was 4.37 to 1.0.
The Waivers provided the Company with the
flexibility to pursue several strategic and financing alternatives to reduce borrowings under the Credit Facility. During the quarter ended July 31, 2002, the Company unsuccessfully pursued various strategic and financing alternatives to reduce
borrowings under the Credit Facility, including a private placement of senior secured notes. Due to unfavorable market conditions, the Company is not actively pursuing the private note placement at this time. As a result, the Company expensed $1,705
in transaction costs paid in connection with the proposed private placement of senior secured notes.
The Waivers
provided that if the Company was not able to procure alternative financing or otherwise generate cash to significantly reduce borrowings under the Credit Facility, then the Company and its lenders agreed in principle to enter into a new credit
facility that would bear interest at 12% and provide access to working capital based on a borrowing base formula. However, as part of its ongoing consideration of various financial and strategic alternatives, a Special Committee of the
Company’s Board of Directors is actively engaged in further discussions and negotiations with the Company’s secured lenders. As a result, the lenders under the Credit Facility have extended the Waivers until October 15, 2002 so that the
Company and the
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Special Committee can consider and analyze various financial and strategic alternatives. As
part of the current agreement between the Company and its lenders, the Company’s outstanding borrowings on the Credit Facility now bear interest at 12%. However, because the Company has not yet reached agreement with its lenders regarding all
of the specific terms and conditions that would be contained in an amended or restructured credit facility, the existing Credit Facility must be classified as short-term debt under accounting principles generally accepted in the United States of
America.
The Company currently anticipates that it will be able to obtain alternative financing, but cannot give
any assurance as to when or whether this actually will occur. The Company anticipates that any alternative financing would subject it and its subsidiaries to material covenants that would restrict certain aspects of its operations. The Company also
anticipates that this financing will be secured by substantially all of the Company’s and its domestic subsidiaries’ assets and guaranteed by the Company’s domestic subsidiaries.
The financing alternative the Company ultimately implements likely will impose restrictions on its operations and these restrictions could adversely affect its
liquidity. Specifically, (i) the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) the Company likely will be required to use a
substantial portion of its cash flow from operations to pay interest on its indebtedness, which will reduce the funds available for other purposes; and (iii) the Company’s level of indebtedness likely will make it more vulnerable to economic
downturns and adverse developments in the Company’s business.
Letters of Credit
The Company has outstanding letters of credit of approximately $2,319 related to performance and payment guarantees. Based upon
the Company’s experience with these arrangements, the Company does not believe that any obligations that may arise will be significant.
Interest Rate Swap
On May 3, 2001, the Company entered
into an interest rate swap agreement (the “Swap”) with various lending institutions at no cost to the Company with an effective date of August 1, 2001 and an expiration date of March 10, 2004. The Company exchanged its variable interest
rate on $100,000 in Credit Facility debt for a fixed LIBOR of approximately 5.10% plus the Company’s interest rate spread under its Credit Facility. The Company accounted for the Swap per the guidelines of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and the Swap thus was classified under hedge accounting as a cash flow hedge. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows.
However, on July 16, 2002, the Company’s Credit Facility was
amended so that borrowings under the Credit Facility now bear a non-LIBOR based fixed interest rate. Thus, under SFAS No. 133 as amended, the Swap has become ineffective and can no longer be designated as a cash flow hedge of variable rate debt. As
such, during the three months ended July 31, 2002, the Company wrote off the $4,345 fair market value of the ineffective hedge and must record subsequent changes in the value of the Swap as a component of income. The Swap will continue to be cash
settled quarterly dependent upon the movement of 3-month LIBOR rates. During the three months ended July 31, 2002, the Company recognized in earnings, as additional interest expense, $817 for the change in the prevailing LIBOR rate compared to the
fixed rate under the Swap agreement.
Page 9
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 5—STOCKHOLDERS’ EQUITY
Changes in stockholders’ equity during the three months ended July 31, 2002 were as follows:
| Stockholders’ equity balance at April 30, 2002 |
|
$ |
96,782 |
|
| Issuance of common stock in conjunction with: |
|
|
|
|
| Employee stock purchase program |
|
|
92 |
|
| Fees paid to outside members of the Company’s Board of Directors |
|
|
6 |
|
| Comprehensive loss |
|
|
(463 |
) |
| |
|
|
|
|
| Stockholders’ equity balance at July 31, 2002 |
|
$ |
96,417 |
|
| |
|
|
|
|
Comprehensive (Loss) Income
The components of comprehensive income are as follows:
| |
|
Three Months Ended
|
| |
|
July 31, 2002
|
|
|
July 31, 2001
|
| Net (loss) income |
|
$ |
(2,399 |
) |
|
$ |
2,298 |
| Other comprehensive (loss) income: |
|
|
|
|
|
|
|
| Changes in fair market value of financial instruments designated as hedges of interest rate exposure, net of
taxes |
|
|
(197 |
) |
|
|
|
| Write-off of fair market value of ineffective interest rate hedge, net of tax |
|
|
2,323 |
|
|
|
|
| Foreign currency translation adjustment |
|
|
(190 |
) |
|
|
198 |
| |
|
|
|
|
|
|
|
| Comprehensive (loss) income |
|
$ |
(463 |
) |
|
$ |
2,496 |
| |
|
|
|
|
|
|
|
· |
|
Due to the write-off of the ineffective interest rate hedge, comprehensive income solely will be comprised of net income or loss and the foreign currency
translation adjustments in future periods. |
Page 10
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Notes Receivable from Officers
During Fiscal 2001 and Fiscal 1999, the Company extended loans to certain members of management and the Board of Directors (“the Stock Loans”) for the purchase,
in the open market, of the Company’s common stock by those individuals. The Stock Loans are full recourse promissory notes bearing interest at 6.75% and 8.0% per annum, respectively, with principal and interest payable at maturity on January 2,
2003. Upon a change of control of the Company prior to maturity of the notes, as the term change of control is defined in the notes, the principal amount and accrued interest outstanding under the Stock Loans will be forgiven. At July 31, 2002,
$4,820 and $779 in principal and interest, respectively, were outstanding on these notes.
NOTE 6—EARNINGS PER SHARE
(“EPS”)
Basic EPS excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock. The following information presents the Company’s computations of basic and diluted EPS for the periods presented in the consolidated statement of income:
| |
|
Three Months Ended
|
| |
|
July 31, 2002
|
|
|
July 31, 2001
|
| Net (loss) income |
|
$ |
(2,399 |
) |
|
$ |
2,298 |
| Weighted average common shares outstanding: |
|
|
|
|
|
|
|
| Basic |
|
|
13,155 |
|
|
|
13,002 |
| Potentially dilutive shares* |
|
|
|
|
|
|
67 |
| |
|
|
|
|
|
|
|
| Diluted |
|
|
13,155 |
|
|
|
13,069 |
| |
|
|
|
|
|
|
|
| (Loss) income per share: |
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.18 |
) |
|
$ |
0.18 |
| Diluted |
|
$ |
(0.18 |
) |
|
$ |
0.18 |
* |
|
The Company had additional employee stock options outstanding during the periods presented that were not included in the computation of diluted earnings per
share because they were anti-dilutive. Options to purchase 4,885 and 4,495 shares of common stock were anti-dilutive and outstanding during the three months ended July 31, 2002 and July 31, 2001, respectively. |
Page 11
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 7—BUSINESS COMBINATIONS
During the three months ended July 31, 2002, the Company did not complete any business combinations. Acquisition costs and additional purchase considerations paid during the three months ended July 31,
2002, for companies acquired in prior periods totaled $8,378.
During Fiscal 2002 and Fiscal 2001, the Company
made two and eight acquisitions (the “Purchased Companies”) accounted for under the purchase method, respectively. Initial cash consideration and subsequent acquisition costs paid associated with the Purchased Companies totaled $19,561 and
$32,898, during Fiscal 2002 and Fiscal 2001, respectively. The total assets acquired during Fiscal 2002 and Fiscal 2001 related to the Purchased Companies were $20,145 and $42,340, respectively, including intangible assets of $18,531 and $23,191,
respectively. The results of these acquisitions have been included in the Company’s results from their respective dates of acquisition.
The majority of the Purchased Companies 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 these acquired companies. During Fiscal 2002 and Fiscal 2001, the Company paid $10,260 and $7,698 for additional purchase consideration, respectively. During the three months ended July 31, 2002, the Company paid another
$7,306 for these earn-out provisions and has an additional $3,183 accrued for these earn-outs at July 31, 2002. This additional consideration, whether paid or accrued, has been reflected in the accompanying balance sheet as goodwill at July 31,
2002.
Following the Company’s Fiscal 2000 acquisition of Office Electronics, Inc. (“OEI”), the
Company sold certain of OEI’s manufacturing divisions and related assets. Net cash proceeds from these divested assets and divisions totaled $9,764 and $350 during Fiscal 2001 and the three months ended July 31, 2001, respectively.
The following presents the unaudited pro forma results of operations of the Company for the three months ended
July 31, 2002 and July 31, 2001, as if the purchase acquisitions completed since the beginning of Fiscal 2002 had been consummated at the beginning of Fiscal 2002. The pro forma results of operations include certain pro forma adjustments to reflect
the increased interest expense and reductions in executive compensation of $41 for the three months ended July 31, 2001 at the acquired companies:
| |
|
Three Months Ended July ,
|
| |
|
2002
|
|
2001
|
| Revenues |
|
$ |
156,209 |
|
$ |
155,629 |
| Net income |
|
|
1,740 |
|
|
2,351 |
| |
|
|
|
|
|
|
| Earnings per share: |
|
|
|
|
|
|
| Basic |
|
$ |
0.13 |
|
$ |
0.18 |
| Diluted |
|
$ |
0.13 |
|
$ |
0.18 |
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 divestitures occurred at the beginning of Fiscal 2002 or the results that may occur in the future. The pro forma results for
the three months ended July 31, 2002 exclude restructuring costs, loss on ineffective interest rate hedge and debt offering costs of $221, $4,345 and $1,705, respectively.
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 8—RESTRUCTURING COSTS
During Fiscal 2001, the Company incurred expenses of $8,292 in connection with its reorganization and integration plan. Under this restructuring plan, the Company
streamlined its operations by eliminating duplicate facilities and employee functions and reducing corporate overhead. The Company paid $57 for facility closures and consolidations, severance and terminations and other asset write-downs and costs
associated with this plan during the three months ended July 31, 2002.
Under the restructuring plan implemented
during Fiscal 2001, the Company anticipated that it would terminate and provide severance benefits to 100 employees. By the end of Fiscal 2002, the Company had terminated all employees it intended to terminate under the restructuring plans. However,
certain severed employees have delayed severance payments. The majority of the workforce reductions were within the production area and backroom functions such as accounting, human resources and administration.
During the three months ended July 31, 2002, the Company reversed into income a $1,242 restructuring charge taken in the three months
ended April 30, 2001 that is no longer required since the Company recently settled the underlying contract dispute and expensed $1,463 in strategic restructuring costs associated with the exploration of other financial, restructuring and strategic
alternatives.
The following table sets forth the Company’s accrued restructuring costs for the three months
ended July 31, 2002.
| |
|
Facility Closure and Consolidation
|
|
|
Severance and Terminations
|
|
|
Other Asset Writedowns and Costs
|
|
|
Total
|
|
| Balance at April 30, 2002 |
|
$ |
100 |
|
|
$ |
58 |
|
|
$ |
415 |
|
|
$ |
573 |
|
| Additions |
|
|
|
|
|
|
|
|
|
|
1,463 |
|
|
|
1,463 |
|
| Utilizations |
|
|
(4 |
) |
|
|
(38 |
) |
|
|
(1,478 |
) |
|
|
(1,520 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 31, 2002 |
|
$ |
96 |
|
|
$ |
20 |
|
|
$ |
400 |
|
|
$ |
516 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill consists of the following:
| |
|
Workflow Printing
|
|
Workflow Solutions
|
|
Total
|
| Balance at April 30, 2002, net of accumulated amortization of $5,805 |
|
$ |
63,174 |
|
$ |
65,058 |
|
$ |
128,232 |
| Additions |
|
|
1,591 |
|
|
1,987 |
|
|
3,578 |
| |
|
|
|
|
|
|
|
|
|
| Balance at July 31, 2002, net of accumulated amortization of $5,805 |
|
$ |
64,765 |
|
$ |
67,045 |
|
$ |
131,810 |
| |
|
|
|
|
|
|
|
|
|
Page 13
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Intangible assets subject to
amortization consist of the following:
| |
|
July 31, 2002
|
|
|
April 30, 2002
|
|
| Non-compete agreements |
|
$ |
398 |
|
|
$ |
398 |
|
| Other |
|
|
2,016 |
|
|
|
2,004 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
2,414 |
|
|
|
2,402 |
|
| Less: Accumulated amortization |
|
|
(1,020 |
) |
|
|
(858 |
) |
| |
|
|
|
|
|
|
|
|
| Net intangible assets |
|
$ |
1,394 |
|
|
$ |
1,544 |
|
| |
|
|
|
|
|
|
|
|
NOTE 10—SEGMENT REPORTING
The Company’s operating segments prepare separate financial information that is evaluated regularly by the Company’s Chief
Executive Officer, the Company’s operating division Presidents and the Company’s Chief Financial Officer. Operating segments of the Company are defined primarily by the segment operation’s core business function whether it is: a) the
procurement and subsequent distribution of product to the customer, or b) the sale of an internally manufactured product to the customer. The Company has determined that its operating activities consist of two reportable operating segments: the
Company’s Workflow Solutions Division and the Company’s Workflow Printing Division.
The Company’s
Workflow Solutions Division represents those subsidiaries of the Company that procure product, primarily custom print products and office supplies, and distribute it to customers through one of the Company’s distribution centers or directly
from the product’s manufacturer. The results of the Workflow Solutions Division also include transactions with customers utilizing the Company’s proprietary iGetSmart inventory and distribution system. The Company’s Workflow Printing
Division represents those subsidiaries primarily engaged in the sale of products internally manufactured by the Company. The Workflow Printing Division provides envelopes, commercial print products, custom forms and documents, annual reports, direct
mail pieces, specialty packaging, labels and advertising specialty products to its customers. The Workflow Printing Division also provides product to the Company’s Workflow Solutions Division for distribution to customers. Corporate expenses
include the costs of maintaining a corporate office and supporting the Company’s two operating segments. The Company does not allocate corporate overhead by segment in assessing performance.
Page 14
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Operating Segments
The following table sets forth information as to the Company’s reportable operating segments:
| |
|
Three Months Ended
|
|
| |
|
July 31, 2002
|
|
|
July 31, 2001
|
|
| Revenues: |
|
|
|
|
|
|
|
|
| Workflow Solutions Division |
|
$ |
76,726 |
|
|
$ |
75,848 |
|
| Workflow Printing Division |
|
|
82,869 |
|
|
|
83,278 |
|
| Intersegment |
|
|
(3,386 |
) |
|
|
(3,960 |
) |
| |
|
|
|
|
|
|
|
|
| Total |
|
$ |
156,209 |
|
|
$ |
155,166 |
|
| |
|
|
|
|
|
|
|
|
| Operating income: |
|
|
|
|
|
|
|
|
| Workflow Solutions Division |
|
$ |
4,776 |
|
|
$ |
4,183 |
|
| Workflow Printing Division |
|
|
4,427 |
|
|
|
4,594 |
|
| Corporate |
|
|
(2,402 |
) |
|
|
(1,369 |
) |
| |
|
|
|
|
|
|
|
|
| Total |
|
$ |
6,801 |
|
|
$ |
7,408 |
|
| |
|
|
|
|
|
|
|
|
| |
| |
|
July 31, 2002
|
|
|
April 30, 2002
|
|
| Identifiable assets (at period end): |
|
|
|
|
|
|
|
|
| Workflow Solutions Division |
|
$ |
143,808 |
|
|
$ |
149,581 |
|
| Workflow Printing Division |
|
|
187,434 |
|
|
|
189,672 |
|
| Corporate |
|
|
25,923 |
|
|
|
18,946 |
|
| |
|
|
|
|
|
|
|
|
| Total |
|
$ |
357,165 |
|
|
$ |
358,199 |
|
| |
|
|
|
|
|
|
|
|
Geographic Segments
The following table sets forth information as to the Company’s operations in its different geographic segments:
| |
|
Three Months Ended
|
| |
|
July 31, 2002
|
|
July 31, 2001
|
| Revenues: |
|
|
|
|
|
|
| United States |
|
$ |
120,723 |
|
$ |
119,009 |
| Canada |
|
|
33,172 |
|
|
33,676 |
| Puerto Rico |
|
|
2,314 |
|
|
2,481 |
| |
|
|
|
|
|
|
| Total |
|
$ |
156,209 |
|
$ |
155,166 |
| |
|
|
|
|
|
|
| Operating income: |
|
|
|
|
|
|
| United States |
|
$ |
3,825 |
|
$ |
4,015 |
| Canada |
|
|
2,965 |
|
|
2,940 |
| Puerto Rico |
|
|
11 |
|
|
453 |
| |
|
|
|
|
|
|
| Total |
|
$ |
6,801 |
|
$ |
7,408 |
| |
|
|
|
|
|
|
Page 15
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
| |
|
July 31,
2002
|
|
April 30,
2002
|
| Identifiable assets (at period end): |
|
|
|
|
|
|
| United States |
|
$ |
299,732 |
|
$ |
302,977 |
| Canada |
|
|
54,415 |
|
|
52,156 |
| Puerto Rico |
|
|
3,018 |
|
|
3,066 |
| |
|
|
|
|
|
|
| Total |
|
$ |
357,165 |
|
$ |
358,199 |
| |
|
|
|
|
|
|
Page 16
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,” “Workflow Management,” “we,”
“us,” and “our”) 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. is a leading provider of end-to-end business management outsourcing solutions that allow our customers to
control all of their print related costs. We produce and distribute a full range of printed business products and provide related management services to approximately 43,000 customers in North America ranging in size from small businesses to Fortune
100 companies. We are comprised of two main operating divisions: 1) the Workflow Solutions Division, which provides customers with an integrated set of services and information tools that reduce the costs of procuring, storing, distributing and
using printed business products; and 2) the Workflow Printing Division, which produces custom business documents, envelopes/direct mail, commercial printing, specialty packaging, and labels and signs. We employ approximately 3,200 persons and have
18 manufacturing facilities, 15 distribution centers, 8 print-on-demand centers and 63 sales offices throughout North America.
As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Fiscal 2003”, “Fiscal 2002” and “Fiscal 2001” refer to our fiscal years ending April 30, 2003
and ended April 30, 2002 and 2001, respectively.
The following discussion should be read in conjunction with the
consolidated historical financial statements, including the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements, and notes thereto, included in our Annual Report
on Form 10-K for the fiscal year ended April 30, 2002.
Page 17
Consolidated Results of Operations
Three Months Ended July 31, 2002 Compared to Three Months Ended July 31, 2001
Revenues. Consolidated revenues increased 0.7%, from $155.2 million for the three months ended July 31, 2001, to $156.2 million for the
three months ended July 31, 2002. Our Solutions Division revenues increased by $0.9 million or 1.2% and our Printing Division revenues decreased by $0.4 million or 0.5% when comparing the three months ended July 31, 2002 to the three months ended
July 31, 2001. The increase in consolidated revenues was entirely due to our business combinations consummated after May 1, 2001. Revenues for the three months ended July 31, 2002 and July 31, 2001, include revenues from three companies acquired in
business combinations accounted for under the purchase method after the beginning of the first quarter of Fiscal 2002 (the “Purchased Companies”).
International revenues decreased 1.5%, from $33.7 million, or 21.7% of consolidated revenues, for the three months ended July 31, 2001, to $33.2 million, or 21.2% of consolidated revenues, for the
three months ended July 31, 2002. The decline in international revenues was primarily due to the depressed economic conditions in Canada and a decline in the Canadian exchange rate during the three months ended July 31, 2002. International revenues
consisted exclusively of revenues generated in Canada.
Gross Profit. Gross profit
decreased 1.2%, from $44.0 million, or 28.3% of revenues, for the three months ended July 31, 2001, to $43.4 million, or 27.8% of revenues, for the three months ended July 31, 2002. The decrease in gross profit was primarily a result of lower
margins in our Printing Division due to: (i) pricing pressures from competition, and (ii) an overall decrease in manufacturing volumes within our commercial printing, direct mail and envelope operations.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 0.4%,
from $36.5 million, or 23.6% of revenues, for the three months ended July 31, 2001, to $36.4 million, or 23.3% of revenues, for the three months ended July 31, 2002. The decrease in selling, general and administrative expenses in whole and as a
percentage of revenues was primarily due to the cost savings realized associated with our restructuring plan implemented during the fourth quarter of Fiscal 2001.
Restructuring Costs. During the three months ended July 31, 2002, net restructuring costs totaled $221,000 as we reversed into income a $1.2
million restructuring charge taken in the three months ended April 30, 2001 that is no longer required since we recently settled the underlying contract dispute and we expensed $1.5 million in strategic restructuring costs associated with the
exploration of other financial, restructuring and strategic alternatives.
Interest Expense,
net. Interest expense, net of interest income, increased 15.1%, from $3.5 million for the three months ended July 31, 2001, to $4.0 million for the three months ended July 31, 2002. This increase in net interest expense
was due to increased debt outstanding during the three months ended July 31, 2002 and the increase in the Company’s interest rates under its secured credit facility. See “Note 4 to the Company’s Consolidated Financial Statements”
of this Form 10-Q and “Liquidity and Capital Resources” below.
Loss on Ineffective Interest Rate
Hedge. On July 16, 2002, our existing Credit Facility was amended so that borrowings under the Credit Facility now bear a non-LIBOR based fixed interest rate. Thus, under SFAS No. 133 as amended the Swap has become
ineffective and can no longer be designated as a cash flow hedge of variable rate debt. As such, we wrote off the $4.3 million fair market value of the ineffective hedge and must record subsequent changes in the value of the Swap as a component of
income.
Debt Offering Costs. During the three months ended July 31, 2002, we
incurred $1.7 million in transaction costs paid in connection with a proposed private placement of senior secured notes (the “Offering”). Due to unfavorable market conditions at the timing of the Offering, we decided not to actively pursue
the placement of the senior secured notes. The transaction costs incurred in connection with the Offering were expensed during the three months ended July 31, 2002.
Page 18
Other Expense (Income). Other income, net of other
expense decreased $27,000 from net other income of $14,000 for the three months ended July 31, 2001, to net other expense of $13,000 for the three months ended July 31, 2002. Other income primarily represents the net of gains and/or losses on sales
of equipment and miscellaneous other income and expense items.
Income
Taxes. Provision for income taxes decreased 153.1% from $1.6 million for the three months ended July 31, 2001, to a tax benefit of $0.9 million for the three months ended July 31, 2002, reflecting effective income tax
rates of 41.7% and 26.7%, respectively. During the three months ended July 31, 2002, the effective income tax rate decreased due to the 34.0% tax benefit recorded on the restructuring costs, loss on ineffective interest rate hedge and debt offering
costs. Excluding these non-recurring items, our effective tax rate is approximately 42.0%. During both periods, the effective income tax rates reflect the recording of tax provisions at the federal statutory rate of 35.0%, plus appropriate state and
local taxes.
Liquidity and Capital Resources
At July 31, 2002, we had a working capital deficit of $75.1 million, which included $168.3 million in debt under our existing credit facility classified as short-term debt.
Our capitalization, defined as the sum of long-term debt and stockholders’ equity, at July 31, 2002 was approximately $97.7 million.
We use a centralized approach to cash management and the financing of our 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 our revolving
credit facility. Cash at July 31, 2002, primarily represented customer collections and in-transit cash sweeps from our subsidiaries at the end of the quarter.
Our anticipated capital expenditures budget for the next twelve months is approximately $5.0 million for new equipment and maintenance.
During the three months ended July 31, 2002, net cash used in operating activities was $1.5 million. Net cash used in investing activities was $9.4 million, including $8.4
million used for acquisitions and additional purchase consideration and $1.4 million used for capital expenditures which were partially offset by the net proceeds of $0.2 million received on the sale of property and equipment and $0.2 million
received from the collection of notes receivable. Net cash provided by financing activities was $10.2 million, which was mainly comprised of $11.2 million in net borrowings on our revolving credit facility which was partially offset by $0.2 million
in payments of other long-term debt and $0.8 million in payments of deferred financing costs.
During the three
months ended July 31, 2001, net cash provided by operating activities was $13.3 million. Net cash used in investing activities was $6.5 million, including $10.7 million used for acquisitions and additional purchase consideration and $5.1 million
used for capital expenditures, which were partially offset by the net proceeds of $9.2 million received on the sale of property and equipment. Net cash used by financing activities was $5.4 million, which was mainly comprised of $3.9 million in net
payments on our revolving credit facility used primarily to fund acquisition activity.
We have significant
operations in Canada. Net sales from our Canadian operations accounted for approximately 21.2% of our total revenues for the three months ended July 31, 2002. As a result, we are 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 our business, financial condition and results of operations.
We have entered into a secured revolving credit facility (the “Credit Facility”) with $183.5 million available, subject to certain leverage tests, for working
capital and acquisition purposes, including a $135.0 million revolver and a $48.5 million amortizing term note. The existing Credit Facility is secured by substantially all of our assets and is subject to terms and conditions typical of a credit
facility of such type and size, including certain financial covenants. The Credit Facility matures on March 10, 2004. At July 31, 2002, we had $168.3 million outstanding under the Credit Facility, at an effective annual interest rate of
Page 19
approximately 12.4%. During the three months ended July 31, 2002, we incurred $3.3 million in interest expense relating to the Credit Facility.
During the quarter ended April 30, 2002, we breached a leverage covenant in the Credit Facility. However, our lenders waived the defaults
(the “Waivers”) under the leverage covenant, allowing us to be in compliance with the Credit Facility as of April 30, 2002 and July 31, 2002 and we agreed to amendments to certain provisions of the Credit Facility. Under the terms of the
Waivers, (i) the leverage ratio from April 30, 2002 to July 30, 2002 was increased to 4.15 to 1.0, (ii) from July 31, 2002 to October 30, 2002 the leverage ratio was increased to 4.60 to 1.0, (iii) at October 31, 2002 and thereafter, the leverage
ratio will decrease to 3.75 to 1.0 and (iv) certain minimum cumulative consolidated EBITDA requirements were imposed. At July 31, 2002, our leverage ratio was 4.37 to 1.0.
The Waivers provided us with the flexibility to pursue several strategic and financing alternatives to reduce borrowings under the Credit Facility. During the quarter ended
July 31, 2002, we unsuccessfully pursued various strategic and financing alternatives to reduce borrowings under the Credit Facility, including a private placement of senior secured notes. Due to unfavorable market conditions, we are not actively
pursuing the private note placement at this time. As a result, we expensed $1.7 million in transaction costs paid in connection with the proposed private placement of senior secured notes.
The Waivers provided that if we were not able to procure alternative financing or otherwise generate cash to significantly reduce borrowings under the Credit Facility, then
we and our lenders agreed in principle to enter into a new credit facility that would bear interest at 12% and provide access to working capital based on a borrowing base formula. However, as part of its ongoing consideration of various financial
and strategic alternatives, a Special Committee of our Board of Directors is actively engaged in further discussions and negotiations with our secured lenders. As a result, the lenders under the Credit Facility have extended the Waivers until
October 15, 2002 so that we and the Special Committee can consider and analyze various financial and strategic alternatives. As part of the current agreement between us and our lenders, our outstanding borrowings on the Credit Facility now bear
interest at 12%. However, because we have not yet reached agreement with our lenders regarding all of the specific terms and conditions that would be contained in an amended or restructured credit facility, the existing Credit Facility must be
classified as short-term debt under accounting principles generally accepted in the United States of America.
We
currently anticipate that we will be able to obtain alternative financing, but cannot give any assurance as to when or whether this actually will occur. We anticipate that any alternative financing would subject us and our subsidiaries to material
covenants that would restrict certain aspects of our operations. We also anticipate that this financing will be secured by substantially all of our and our domestic subsidiaries’ assets and guaranteed by our domestic subsidiaries.
The financing alternative that we ultimately implement likely will impose restrictions on our operations and these restrictions
could adversely affect our liquidity. Specifically, (i) our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) we likely will be required to use a
substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available for other purposes; and (iii) our level of indebtedness likely will make us more vulnerable to economic downturns and
adverse developments in our business.
We anticipate that current cash on hand, cash flow from operations and
available financing will be sufficient to meet our liquidity requirements for our operations for the next twelve months. We also expect that our financing will be sufficient to meet our long-term liquidity requirements for operations. However, we
may have to seek additional funding for our 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.
Page 20
The following table summarizes our cash obligations as of July 31, 2002:
| |
|
Payments Due by Period (in millions)
|
| |
|
Less than one year
|
|
Years 2 and 3
|
|
Years 4 and 5
|
|
Thereafter
|
|
Total
|
| Short-term debt |
|
$ |
168.3 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
168.3 |
| Long-term debt, including capital leases |
|
|
0.6 |
|
|
1.1 |
|
|
0.3 |
|
|
|
|
|
2.0 |
| Operating leases |
|
|
17.5 |
|
|
31.8 |
|
|
25.1 |
|
|
43.8 |
|
|
118.2 |
| Earn-out provisions |
|
|
8.1 |
|
|
7.8 |
|
|
0.2 |
|
|
|
|
|
16.1 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total cash obligations |
|
$ |
194.5 |
|
$ |
40.7 |
|
$ |
25.6 |
|
$ |
43.8 |
|
$ |
304.6 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which expire at various dates.
Many of the
purchase agreements for our acquisitions include earn-out provisions that could result in additional purchase consideration payable in the form of cash payments in future years dependent upon future operating performance of the acquired businesses.
It is not possible to currently predict with certainty the future operating performance of the acquired businesses or the exact amount and timing of future earn-out payments. Accordingly, these amounts are only intended to be indicative of
management’s current expectations for such obligations.
In addition, we also have outstanding letters of
credit of approximately $2.3 million related to performance and payment guarantees. Based upon our experience with these arrangements, we do not believe that any obligations that may arise will be significant.
Fluctuations in Quarterly Results of Operations
Our envelope and commercial print businesses are subject to seasonal influences. Both our Solutions Division and our Printing Division are subject to seasonal influences of the potential lower demand
for consumable printed business products during the summer months which coincide with our fiscal quarters ending in July. If we continue to complete acquisitions, we may become subject to seasonal influences if the businesses we acquire 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 us for the products we sell, the mix of products sold and
general economic conditions. Moreover, the operating margins of companies acquired may differ substantially from those of our existing operations, which could contribute to further fluctuation in its quarterly operating results. Therefore, results
for any quarter are not necessarily indicative of results that may be achieved for any subsequent fiscal quarter or full fiscal year.
Inflation
We do not believe that inflation has had a material impact on its results of
operations during the three month periods ended July 31, 2002 and July 31, 2001, respectively.
Critical Accounting Policies and
Judgments
In preparing our financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and 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. We evaluate our
estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, income taxes, restructuring costs, and contingencies and litigation. We base our estimates and
judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Page 21
Our most critical accounting policy relates to goodwill, which totaled $131.8
million at July 31, 2002. During Fiscal 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, was issued. We have adopted this new standard and as a result, have ceased to amortize
goodwill effective May 1, 2001. In lieu of amortization, during the first half of Fiscal 2002 we performed an initial impairment review of our goodwill as of the implementation date, following which we concluded that there was no impairment of
goodwill at May 1, 2001. We recently completed our required annual ongoing impairment review of our goodwill at April 30, 2002. Consistent with our initial test, no impairment of recorded goodwill was required as a result of this analysis. We intend
to perform an impairment review upon the completion of each fiscal year. The results of these annual impairment reviews are highly dependent on management’s projection of future results for its operating subsidiaries and there can be no
assurance that at the time such reviews are completed a material impairment charge will not be recorded.
New Accounting
Pronouncements
Accounting for the Impairment or Disposal of Long-Lived
Assets. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes both SFAS No. 121 and the accounting and reporting provisions of APB No.
30, for the disposal of a business. SFAS 144 provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules change the criteria
to be met to classify an asset as held-for-sale. The new rules also broaden the criteria regarding classification of a discontinued operation. We were required to adopt the provisions of SFAS 144 effective May 1, 2002. We believe that the adoption
of SFAS 144 will not have a material impact on our results of operations, financial position or cash flows.
Extinguishment of Debt and Accounting for Leases. In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections,” that supercedes previous guidance for the reporting of gains and losses from extinguishment of debt and accounting for leases, among other things.
SFAS No. 145 requires that only gains and losses from the extinguishment of debt that meet the requirements for classification as “Extraordinary Items,” as
prescribed in Accounting Practices Board Opinion No. 30, should be disclosed as such in the financial statements. Previous guidance required all gains and losses from the extinguishment of debt to be classified as “Extraordinary Items.”
This portion of SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with restatement of prior periods required. Implementation of this portion of the standard will result in the reclassification of certain losses on
extinguishment of debt previously treated by us as extraordinary items.
In addition, SFAS No. 145 amends SFAS
No. 13, “Accounting for Leases,” as it relates to accounting by a lessee for certain lease modifications. Under SFAS No. 13, if a capital lease is modified in such a way that the change gives rise to a new agreement classified as an
operating lease, the assets and obligation are removed, a gain or loss is recognized and the new lease is accounted for as an operating lease. Under SFAS No. 145, capital leases that are modified so the resulting lease agreement is classified as an
operating lease are to be accounted for under the sale-leaseback provisions of SFAS No. 98, Accounting for Leases. These provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002.
SFAS No. 145 will be applied as required. Adoption of SFAS No. 145 is not expected to have a material impact on our results of operations,
financial position or cash flows.
In June 2002 the FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit of Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS 146 supercedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 (“EITF No. 94-3”).
We have adopted the provisions of SFAS No. 146 for restructuring activities initiated after May 1, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred.
Under EITF 94-3, a liability for an exit cost was recognized at the date of a commitment to an exit
Page 22
plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs
as well as the amounts recognized.
SFAS No. 146 will be applied as required. Adoption of SFAS No. 146 is not
expected to have a material impact on our results of operations, financial position or cash flows.
Page 23
Factors Affecting the Company’s Business
Risks Associated with our Credit Facility and Access to Financing. As previously discussed in this Form 10-Q, we received Waivers from our senior lenders for a breach of a
leverage covenant under the Credit Facility and we are actively engaged in further discussions and negotiations with the lenders regarding various financial and strategic alternatives. Based on the current status of these negotiations we anticipate
that we will have to procure alternative financing, generate cash to significantly reduce borrowings under the Credit Facility, restructure the terms of the Credit Facility or effectuate some combination of the foregoing. The financing alternative
that we ultimately implement likely will impose restrictions on our operations and these restrictions could adversely affect our liquidity. Specifically, (i) our ability to obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; (ii) we likely will be required to use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available for other purposes;
and (iii) our level of indebtedness likely will make us more vulnerable to economic downturns and adverse developments in our business.
Reduction in Acquisition Activity; Lack of Growth. Historically, we have experienced material growth through acquisitions funded by bank financing. As noted elsewhere in this 10-Q, the pace of
our acquisition activity has slowed dramatically in recent periods, particularly as a result of (i) economic conditions in our industry following the September 11, 2001 terrorist attacks and (ii) our financing status with our senior lenders. Based
on our limited financing sources at this time and current economic conditions, we do not anticipate consummating any material acquisitions during Fiscal 2003. As a result, our revenues and overall growth are not likely to increase significantly, if
at all, during Fiscal 2003.
Potential Divestitures. We may determine that our
business interests would be best served by selling certain subsidiaries, assets or operations to third parties. Accordingly, we have 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 our overall financial condition and/or future prospects. Any such divestitures would reduce our revenues. Divestitures could also (i) eliminate certain products or product lines
that we have historically offered to our customers and (ii) reduce or eliminate our presence in certain geographic markets.
Material Amount of Goodwill. At July 31, 2002, goodwill totaled $131.8 million, or 36.9% of our total assets. Goodwill represents the excess of cost over the fair market value of net assets acquired in
business combinations accounted for under the purchase method. Following the May 2001 adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill, however, we are
required to annually evaluate 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 goodwill for potential impairment. If goodwill becomes
impaired, we would be required to write down the carrying value of the goodwill and incur a related charge to 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 our common stock.
Risks Associated with the Canadian
Operations. We have significant operations in Canada. Revenues from our Canadian operations accounted for approximately 21.2% of revenues during the three months ended July 31, 2002. As a result, we are subject to certain
risks inherent in conducting business internationally, including fluctuations in currency exchange rates. We are 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 our Canadian operations, significant revenues and expenses are denominated in Canadian dollars. Changes in exchange rates may have a significant effect on our cash flow and profitability.
For additional risk factors, refer to our Annual Report on Form 10-K for the fiscal year ended April 30, 2002.
Page 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our financial instruments include cash, accounts receivable, accounts payable and long-term debt. Market risks relating to our operations result primarily from changes in interest rates. The estimated fair value of long-term debt
approximates its carrying value at July 31, 2002.
On July 16, 2002, our Credit Facility was amended so that
borrowings now bear a non-LIBOR based fixed interest rate. Thus, under SFAS No. 133 as amended the Swap has become ineffective and can no longer be designated as a cash flow hedge of variable rate debt. As such, we must record subsequent changes in
the value of the Swap as a component of income. If 3-month LIBOR were to increase or decrease by 1.0%, the impact would be a savings of $1.0 million recorded in other income or an additional expense of $1.0 million recorded in other expense. Any
such change in interest rates would have a related impact on the Swap in that a 1% increase or decrease would have an impact on the fair value of the Swap of approximately $1.3 million. The Swap will continue to be cash settled quarterly dependent
upon the movement of 3-month LIBOR rates.
Page 25
PART II—OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
| 10.74 |
|
Amended and Restated Limited Waiver and Amendment, dated May 29, 2002, by and among Workflow Management, Inc., Data Business Forms Limited, Fleet National
Bank, Bank One, N.A., Comerica Bank, Bank of America, Union Bank of California, N.A., National City Bank, LaSalle Bank National Association, and Chevy Chase Bank, F.S.B. |
| |
| 10.75 |
|
Limited Waiver and Amendment, dated July 16, 2002, by and among Workflow Management, Inc., Data Business Forms Limited, Fleet National Bank, Comerica Bank,
Bank of America, National City Bank, LaSalle Bank National Association, and Chevy Chase Bank, F.S.B. |
| |
| 10.76 |
|
Amendment No. 1 to Limited Waiver and Amendment dated as of July 16, 2002, dated August 15, 2002, by and among Workflow Management, Inc., Data Business
Forms Limited, Fleet National Bank, Bank One, N.A., Bank of America, National City Bank, LaSalle Bank National Association, and Chevy Chase Bank, F.S.B. |
(b) Reports on Form 8-K
None.
Page 26
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 13, 2002
|
|
|
|
By: |
|
/s/ THOMAS B. D’AGOSTINO, SR.
|
| Date |
|
|
|
|
|
Thomas B. D’Agostino, Sr. Chairman of the Board, Director, President and Chief Executive Officer (Principal Executive
Officer) |
| |
| |
|
|
|
|
|
|
|
|
| September 13, 2002
Date |
|
|
|
By: |
|
/s/ MICHAEL L. SCHMICKLE
Michael L. Schmickle Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial
Officer and Principal Accounting Officer) |
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas B.
D’Agostino, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Workflow
Management, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
| |
| |
|
Date: September 13, 2002
|
|
|
|
|
|
/s/ THOMAS B. D’AGOSTINO, SR.
|
| |
|
|
|
|
|
|
|
Thomas B. D’Agostino, Sr. Chief Executive Officer |
27
I, Michael L. Schmickle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Workflow Management, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
| |
| Date: September 13, 2002 |
|
|
|
/s/ MICHAEL L. SCHMICKLE
|
| |
|
|
|
|
|
Michael L. Schmickle,
Chief Financial Officer |
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, the Company’s chief executive officer and chief financial officer each certify as follows:
(a) This Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
(b) The information contained in this Report on Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
| |
| /s/ THOMAS B. D’AGOSTINO, SR.
|
|
|
| Thomas B. D’Agostino, Sr.
Chief Executive Officer
September 13, 2002 |
|
|
| |
| /s/ MICHAEL L. SCHMICKLE
|
|
|
| Michael L. Schmickle
Chief Financial Officer
September 13, 2002 |
|
|
28