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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 October 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 December 16, 2002, there were 13,229,207 shares of common stock
outstanding.
WORKFLOW MANAGEMENT, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet............................................3
October 31, 2002 (unaudited) and April 30, 2002
Consolidated Statement of Operations (unaudited)......................4
For the three and six months ended October 31, 2002 and
October 31, 2001
Consolidated Statement of Cash Flows (unaudited)......................5
For the three and six months ended October 31, 2002 and
October 31, 2001
Notes to Consolidated Financial Statements (unaudited)................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................19
Item 3. Quantitative and Qualitative Disclosure About Market Risk............30
Item 4. Controls and Procedures..............................................30
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders.................31
Item 6. Exhibits and Reports on Form 8-K....................................31
Signatures...................................................................32
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002...........32
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002...........35
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
October 31, April 30,
ASSETS 2002 2002
- ------ --------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,264 $ 5,262
Accounts receivable, less allowance for doubtful
accounts of $3,082 and $4,917, respectively 97,144 102,184
Inventories 54,316 50,529
Prepaid expenses and other current assets 16,648 13,821
--------- ---------
Total current assets 174,372 171,796
Property and equipment, net 46,119 48,992
Goodwill 134,050 128,232
Other intangible assets, net 1,381 1,544
Other assets 6,222 7,635
--------- ---------
Total assets $ 362,144 $ 358,199
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 169,373 $ 157,843
Accounts payable 42,768 42,594
Accrued compensation 11,836 12,641
Accrued additional purchase consideration 5,061 8,525
Accrued income taxes 933
Accrued restructuring costs 513 573
Short-term swap contract liability 840 803
Other accrued liabilities 18,612 21,654
--------- ---------
Total current liabilities 249,003 245,566
Other long-term debt 1,156 1,500
Deferred income taxes 6,786 6,820
Long-term swap contract liability 4,611 3,666
Other long-term liabilities 3,186 3,865
--------- ---------
Total liabilities 264,742 261,417
--------- ---------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, none outstanding
Common stock, $.001 par value, 150,000,000 shares
authorized, 13,223,097 and 13,132,724 issued and
outstanding, respectively 13 13
Additional paid-in capital 52,670 52,501
Notes receivable from Directors and officers (4,620) (4,820)
Accumulated other comprehensive loss (4,123) (6,255)
Retained earnings 53,462 55,343
--------- ---------
Total stockholders' equity 97,402 96,782
--------- ---------
Total liabilities and stockholders' equity $ 362,144 $ 358,199
========= =========
See accompanying notes to consolidated financial statements.
Page 3
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenues $ 164,556 $ 160,309 $ 320,765 $ 315,475
Cost of revenues 118,904 116,313 231,706 227,526
------------ ------------ ------------ -----------
Gross profit 45,652 43,996 89,059 87,949
Selling, general and administrative expenses 36,954 38,218 73,339 74,763
Restructuring costs 810 1,031
----------- ------------ ------------ -----------
Operating income 7,888 5,778 14,689 13,186
Interest expense 5,860 3,292 10,009 6,995
Interest income (123) (239) (263) (459)
Loss on ineffective interest rate hedge 1,106 5,451
Abandoned debt offering costs 174 1,879
Other (income) expense (3) 292 9 278
------------ ------------ ------------ -----------
Income (loss) before provision (benefit)
for income taxes 874 2,433 (2,396) 6,372
Provision (benefit) for income taxes 357 1,010 (514) 2,651
------------ ------------ ------------ -----------
Net income (loss) $ 517 $ 1,423 $ (1,882) $ 3,721
============ ============ ============ ===========
Income (loss) per share:
Basic $ 0.04 $ 0.11 $ (0.14) $ 0.29
Diluted $ 0.04 $ 0.11 $ (0.14) $ 0.28
Weighted average common shares outstanding:
Basic 13,194 13,030 13,174 13,016
Diluted 13,224 13,072 13,174 13,071
See accompanying notes to consolidated financial statements.
Page 4
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
October 31, October 31,
2002 2001
------------ -----------
Cash flows from operating activities:
Net (loss) income $ (1,882) $ 3,721
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization expense 5,312 5,474
Restructuring costs, net of cash paid (60) (1,197)
Amortization of deferred financing costs 631 343
Loss on ineffective swap 5,451
Loss on abandoned debt offering 1,879
Changes in assets and liabilities (net of assets acquired
and liabilities assumed in business combinations):
Accounts receivable 5,060 (1,329)
Inventories (3,758) 1,128
Prepaid expenses and other assets 443 2,165
Accounts payable 158 13,504
Accrued liabilities (8,107) (959)
----------- -----------
Net cash provided by operating activities 5,127 22,850
----------- -----------
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received (1,082) (3,871)
Cash paid for additional purchase consideration (7,637) (9,241)
Additions to property and equipment (2,652) (7,372)
Cash collection of notes receivable 175 854
Cash received on the sale of property and equipment 273 9,952
Other (67)
----------- -----------
Net cash used in investing activities (10,990) (9,678)
----------- -----------
Cash flows from financing activities:
Proceeds from credit facility borrowings 75,800 86,479
Payments of credit facility borrowings (64,250) (96,495)
Payments of short-term debt, net (20) (288)
Payments of other long-term debt (353) (2,146)
Payment of abandoned debt offering cost (1,879)
Payment of cash settlement of interest rate hedge (1,620)
Payments of deferred financing costs (1,177) (242)
Proceeds from notes receivable from officers 200
Proceeds from common stock issued under employee benefit programs 160 206
Issuance of common stock to outside directors 10 10
----------- -----------
Net cash provided by (used in) financing activities 6,872 (12,476)
----------- -----------
Effect of exchange rates on cash and cash equivalents (7) (34)
---------- -----------
Net increase in cash and cash equivalents 1,002 662
Cash and cash equivalents at beginning of period 5,262 2,126
----------- -----------
Cash and cash equivalents at end of period $ 6,264 $ 2,788
=========== ===========
(Continued)
Page 5
WORKFLOW MANAGEMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
(Continued)
Six Months Ended
---------------------------
October 31, October 31,
2002 2001
------------ -----------
Supplemental disclosures of cash flow information:
Interest paid $ 11,228 $ 6,173
Income taxes paid $ 3,657 $ 4,210
During the six months ended October 31, 2002 and October 31, 2001, the
Company paid a total of $8,719 and $13,112, 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:
Six Months Ended
------------------------------
October 31, October 31,
2002 2001
-------------- --------------
Accounts receivable $ $ 739
Inventories 31
Property and equipment 65
Intangible assets(1) 8,719 12,861
Accounts payable (348)
Accrued liabilities (236)
-------------- --------------
Net assets acquired $ 8,719 $ 13,112
============== ==============
Non-cash transactions:
o During the six months ended October 31, 2002 and October 31, 2001, the
Company accrued $4,173 and $4,278 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
allow our 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 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, 12 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 ending April 30, 2002, 2001 and 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:
October 31, April 30,
2002 2002
------------- -------------
Raw materials $ 13,648 $ 12,661
Work-in-process 9,484 7,521
Finished goods 31,184 30,347
------------- -------------
Total inventories $ 54,316 $ 50,529
============= =============
NOTE 4 - DEBT
- -------------
Revolving Credit Facility
The Company has entered into a secured revolving credit facility (the
"Credit Facility") with $183,250 available, subject to certain leverage tests,
for working capital and acquisition purposes, including a $135,000 revolver and
a $48,250 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 October 31, 2002,
the Company had $168,700 outstanding under the Credit Facility, at an effective
annual interest rate of approximately 12.4%. During the six months ended October
31, 2002, the Company incurred $9,100 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 have
granted various waivers of 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 October 31, 2002 and the Company agreed to amendments to
certain provisions of the Credit Facility. Under the terms of the currently
effective 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 January 15, 2003 the
leverage ratio was increased to 4.60 to 1.0, (iii) at January 16, 2003 and
thereafter, the leverage ratio will decrease to 3.75 to 1.0 and (iv) certain
minimum cumulative consolidated EBITDA requirements were imposed. At October 31,
2002, the Company's leverage ratio was 4.16 to 1.0.
The Waivers have provided the Company with the flexibility to pursue
several strategic and financing alternatives to reduce borrowings under the
Credit Facility. During the six months ended October 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 $1,879 in transaction costs paid in connection with the proposed
private placement of senior secured notes.
Page 8
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
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 January 15, 2003 so that the Company and the Special
Committee can consider and analyze various financial and strategic alternatives.
The current terms of the Waivers provide a detailed timetable for the Company,
its management, and the Special Committee and its advisors to complete the
process of reviewing strategic and financial alternatives and implementing a
strategic plan. 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%. The Company also has agreed that it will not amend or renew the
terms and conditions of its outstanding director and officer loans due in
January 2003 and February 2003 and that proceeds from the collection of those
loans will be paid to permanently reduce bank debt. 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 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 also anticipates that this financing will be secured by
substantially all of the Company's and its subsidiaries' assets and guaranteed
by the Company's 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 $2,569
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.
Page 9
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
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 thus classified the Swap 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 six months ended October 31, 2002, the Company
wrote off $4,345 for the fair market value of the ineffective hedge and recorded
$1,106 for the subsequent change 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 six months ended October 31, 2002,
the Company paid $1,620 representing cash settlement payments on the Swap and
has $840 accrued at October 31, 2002. Prior to the Swap becoming ineffective,
the Company recorded $817 as interest expense during the three months ended July
31, 2002.
Page 10
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 six months ended October 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 160
Fees paid to outside members of the Company's Board of Directors 10
Collection on notes receivable from Directors and officers 200
Comprehensive income 250
----------
Stockholders' equity balance at October 31, 2002 $ 97,402
==========
Comprehensive Income (Loss)
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ 517 $ 1,423 $ (1,882) $ 3,721
Other comprehensive income (loss):
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes (2,901) (394) (2,901)
Write-off of fair market value of ineffective
interest rate hedge, net of tax 2,520
Foreign currency translation adjustment 197 (962) 6 (764)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 714 $ (2,440) $ 250 $ 56
============= =============- ============= =============
Page 11
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Notes Receivable from Directors and Officers
During Fiscal 2001 and Fiscal 1999, the Company extended loans to
certain members of management and the Board of Directors (the "Director and
Officer Notes") for the purchase, in the open market, of the Company's common
stock by those individuals. The Director and Officer Notes 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 and February
3, 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 Director and Officer Notes will be
forgiven. During the six months ended October 31, 2002, the Company collected
$200 as full payment on a Director and Officer Note due from a member of the
Company's Board of Directors. At October 31, 2002, $4,620 and $854 in principal
and interest, respectively, were outstanding on these notes.
NOTE 6 - EARNINGS PER SHARE ("EPS")
- -----------------------------------
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The following information presents the
Company's computations of basic and diluted EPS for the periods presented in the
consolidated statement of income:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Earnings per share:
Net income $ 517 $ 1,423 $ (1,882) $ 3,721
============ ============ =========== ============
Weighted average number of
Common shares outstanding 13,194 13,030 13,174 13,016
Potentially dilutive shares* 30 42 55
------------ ------------ ------------ ------------
Total 13,224 13,072 13,174 13,071
============ ============ ============ ============
Basic earnings per share $ 0.04 $ 0.11 $ (0.14) $ 0.29
============ ============ =========== ============
Diluted earnings per share $ 0.04 $ 0.11 $ (0.14) $ 0.28
============ ============ =========== ============
* 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 4,549 and 4,772
shares of common stock were anti-dilutive and outstanding during the six months
ended October 31, 2002 and October 31, 2001, respectively.
Page 12
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
NOTE 7 - BUSINESS COMBINATIONS
- ------------------------------
During the six months ended October 31, 2002, the Company did not
complete any business combinations. Acquisition costs and additional purchase
considerations paid for companies acquired in prior periods totaled $8,719
during the six months ended October 31, 2002.
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, the Company paid $10,260 for additional
purchase consideration. During the six months ended October 31, 2002, the
Company paid an additional $7,637 for these earn-out provisions and has an
additional $5,061 accrued for earn-outs at October 31, 2002. This additional
consideration, whether paid or accrued, has been reflected in the accompanying
balance sheet as goodwill at October 31, 2002.
Page 13
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The following presents the unaudited pro forma results of operations of
the Company for the three and six months ended October 31, 2002 and October 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 six
months ended October 31, 2001 at the acquired companies:
Three Months Ended Six Months Ended
---------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenues $ 164,556 $ 160,309 $ 320,765 $ 315,938
Net income 517 1,423 (1,882) 3,774
Earnings per share:
Basic $ 0.04 $ 0.11 $ (0.14) $ 0.29
Diluted 0.04 0.11 (0.14) 0.29
The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisitions occurred at the beginning of Fiscal 2002 or
the results that may occur in the future. The pro forma results include total
restructuring costs, loss on ineffective interest rate hedge and debt offering
costs of $2,090 and $8,361 for the three and six months ended October 31, 2002,
respectively.
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 $60 for facility closures and consolidations, severance and
terminations and other asset write-downs and costs associated with this plan
during the six months ended October 31, 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 general backroom
functions such as accounting, human resources and administration.
Page 14
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
During the six months ended October 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 $2,273 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 six months ended October 31, 2002:
Facility Severance Other Asset
Closure and and Writedowns
Consolidation Terminations and Costs Total
---------------- ------------- -------------- ------------
Balance at April 30, 2002 $ 100 $ 58 $ 415 $ 573
Additions 2,273 2,273
Utilizations (7) (38) (2,288) (2,333)
---------------- ------------- -------------- ------------
Balance at October 31, 2002 $ 93 $ 20 $ 400 $ 513
=============== ============= ============== ============
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
- ---------------------------------------------
Goodwill consists of the following:
Workflow Workflow
Printing Solutions Total
-------------- ------------- -------------
Balance at April 30, 2002 $ 63,174 $ 65,058 $ 128,232
Additions 2,016 3,802 5,818
-------------- ------------- -------------
Balance at October 31, 2002 $ 65,190 $ 68,860 $ 134,050
============== ============= =============
At October 31, 2002, goodwill totaled $134,050, or 37.0% 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," the Company no longer
amortizes goodwill, however, the Company is required to annually evaluate
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 goodwill for potential impairment. If goodwill becomes
impaired, the Company would be required to write 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's common stock.
Specifically, the Company's overall goodwill impairment analysis for Fiscal 2003
must be completed by the fourth quarter and based on the Company's current
market capitalization as implied by its stock price and current market
conditions in the print distribution and manufacturing industries, management
believes that it is probable that a material goodwill impairment would be
recorded at that time. However, at this time management cannot reasonably
estimate the magnitude of such an impairment. The magnitude of any impairment
will take into consideration the Company's overall market capitalization as well
as the extent to which the stock prices of comparable businesses in the
industries in which the Company does business remain depressed. Any impairment
charge would be noncash in nature and, therefore, is not expected to affect the
Company's liquidity or result in non-compliance with any covenants that it may
have from time to time with its lenders. In addition, the Company would record
any such noncash charge as a component of operating income.
Page 15
WORKFLOW MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Intangible assets subject to amortization consist of the following:
October 31, April 30,
2002 2002
------------- --------------
Non-compete agreements $ 398 $ 398
Other 2,028 2,004
------------- -------------
2,426 2,402
Less: Accumulated amortization (1,045) (858)
------------- -------------
Net intangible assets $ 1,381 $ 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 respective 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 16
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 Six Months Ended
---------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenues:
Workflow Solutions Division $ 81,151 $ 78,936 $ 157,876 $ 154,784
Workflow Printing Division 86,427 84,870 169,296 168,148
Intersegment (3,022) (3,497) (6,407) (7,457)
------------ ------------ ------------ -----------
Total $ 164,556 $ 160,309 $ 320,765 $ 315,475
============ ============ ============ ===========
Operating income:
Workflow Solutions Division $ 5,583 $ 4,133 $ 10,359 $ 8,315
Workflow Printing Division 4,487 3,770 8,914 8,364
Corporate (2,182) (2,125) (4,584) (3,493)
------------ ------------ ------------ -----------
Total $ 7,888 $ 5,778 $ 14,689 $ 13,186
============ ============ ============ ===========
October 31, April 30,
2002 2002
------------ -----------
Identifiable assets (at period end):
Workflow Solutions Division $ 144,755 $ 149,581
Workflow Printing Division 188,747 189,672
Corporate 28,642 18,946
------------ -----------
Total $ 362,144 $ 358,199
============ ===========
Page 17
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 Six Months Ended
---------------------------- ---------------------------
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenues:
United States $ 128,333 $ 124,505 $ 249,056 $ 243,512
Canada 33,612 33,227 66,784 66,904
Puerto Rico 2,611 2,577 4,925 5,059
------------ ------------ ------------ -----------
Total $ 164,556 $ 160,309 $ 320,765 $ 315,475
============ ============ ============ ===========
Operating income:
United States $ 4,805 $ 2,510 $ 8,630 $ 6,893
Canada 2,968 3,252 5,933 6,192
Puerto Rico 115 16 126 101
------------ ------------ ------------ -----------
Total $ 7,888 $ 5,778 $ 14,689 $ 13,186
============ ============ ============ ===========
October 31, April 30,
2002 2002
------------ -----------
Identifiable assets (at period end):
United States $ 304,019 $ 302,977
Canada 55,139 52,156
Puerto Rico 2,986 3,066
------------ -----------
Total $ 362,144 $ 358,199
============ ===========
Page 18
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
42,000 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, 12
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 19
Consolidated Results of Operations
Three Months Ended October 31, 2002 Compared to Three Months Ended October
31, 2001
Revenues. Consolidated revenues increased 2.6%, from $160.3 million for
the three months ended October 31, 2001, to $164.6 million for the three months
ended October 31, 2002. Our Solutions Division revenues increased by $2.2
million or 2.8% and our Printing Division revenues increased by $1.6 million or
1.8% when comparing the three months ended October 31, 2002 to the three months
ended October 31, 2001. Revenues for the three months ended October 31, 2002 and
October 31, 2001 include revenues from one company acquired in a business
combination accounted for under the purchase method after the beginning of the
second quarter of Fiscal 2002 (the "Purchased Company"). The increase in
consolidated revenues was due to the Purchased Company and internal growth of
0.9% when comparing the three months ended October 31, 2002 to October 31, 2001.
International revenues increased 1.2%, from $35.8 million, or 22.3% of
consolidated revenues, for the three months ended October 31, 2001, to $36.2
million, or 22.0% of consolidated revenues, for the three months ended October
31, 2002. International revenues consisted exclusively of revenues generated in
Canada and Puerto Rico.
Gross Profit. Gross profit increased 3.8%, from $44.0 million, or 27.4%
of revenues, for the three months ended October 31, 2001, to $45.7 million, or
27.7% of revenues, for the three months ended October 31, 2002. The increase in
gross profit was primarily a result of higher margins in our Solutions Division
which were partially offset by lower margins in our Printing Division due to
pricing pressures from competition and 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 3.3%, from $38.2 million, or 23.8% of
revenues, for the three months ended October 31, 2001, to $37.0 million, or
22.5% of revenues, for the three months ended October 31, 2002. The decrease in
selling, general and administrative expenses was primarily due to the realized
cost savings associated with our restructuring plan implemented during the
fourth quarter of Fiscal 2001 and additional cost initiatives implemented during
Fiscal 2002 and Fiscal 2003.
Restructuring Costs. During the three months ended October 31, 2002,
net restructuring costs totaled $0.8 million. The restructuring costs primarily
consisted of expenses associated with the continued exploration of other
financial, restructuring and strategic alternatives.
Interest Expense, net. Interest expense, net of interest income,
increased 87.9%, from $3.1 million for the three months ended October 31, 2001,
to $5.7 million for the three months ended October 31, 2002. This increase in
net interest expense was primarily due to the increase in our interest rates and
level of debt outstanding under our 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 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. During the three months ended October 31, 2002, we
recorded $1.1 million for the subsequent change in the value of the Swap as a
component of income.
Debt Offering Costs. During the three months ended October 31, 2002, we
incurred $0.2 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 have decided not to actively
pursue the placement of the senior secured notes.
Other (Income) Expense. Other income, net of other expense, increased
$295,000 from other expense of $292,000 for the three months ended October 31,
2001, to other income of $3,000 for the three months ended
Page 20
October 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 64.7% from $1.0
million for the three months ended October 31, 2001, to $0.4 million for the
three months ended October 31, 2002, reflecting effective income tax rates of
41.5% and 40.8%, respectively. During the three months ended October 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 36.0%. 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.
Six Months Ended October 31, 2002 Compared to Six Months Ended October 31,
2001
Revenues. Consolidated revenues increased 1.7%, from $315.5 million for
the six months ended October 31, 2001, to $320.8 million for the six months
ended October 31, 2002. Our Solutions Division revenues increased by $3.1
million or 2.0% and our Printing Division revenues increased by $1.1 million or
0.7% when comparing the six months ended October 31, 2002 to the six months
ended October 31, 2001. Revenues for the six months ended October 31, 2002 and
October 31, 2001, include revenues from two companies acquired in business
combinations accounted for under the purchase method after the beginning of the
first quarter of Fiscal 2002 (the "Purchased Companies"). The increase in
consolidated revenues was entirely due to the Purchased Companies.
International revenues decreased 0.4%, from $72.0 million, or 22.8% of
consolidated revenues, for the three months ended October 31, 2001, to $71.7
million, or 22.4% of consolidated revenues, for the six months ended October 31,
2002. International revenues consisted exclusively of revenues generated in
Canada and Puerto Rico.
Gross Profit. Gross profit increased 1.3%, from $87.9 million, or 27.9%
of revenues, for the six months ended October 31, 2001, to $89.1 million, or
27.8% of revenues, for the six months ended October 31, 2002. The increase in
gross profit was primarily a result of higher margins in our Solutions Division
which were partially offset by lower margins in our Printing Division due to
pricing pressures from competition and 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 1.9%, from $74.8 million, or 23.7% of
revenues, for the six months ended October 31, 2001, to $73.3 million, or 22.9%
of revenues, for the six months ended October 31, 2002. The decrease in selling,
general and administrative expenses was primarily due to the realized cost
savings associated with our restructuring plan implemented during the fourth
quarter of Fiscal 2001 and additional cost initiatives implemented during Fiscal
2002 and Fiscal 2003.
Restructuring Costs. During the six months ended October 31, 2002, net
restructuring costs totaled $1.0 million 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 $2.2 million in strategic restructuring costs associated with
the continued exploration of other financial, restructuring and strategic
alternatives.
Interest Expense, net. Interest expense, net of interest income,
increased 49.1%, from $6.5 million for the six months ended October 31, 2001, to
$9.7 million for the six months ended October 31, 2002. This increase in net
interest expense was primarily due to the increase in our interest rates and
level of debt outstanding under our 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 Credit
Facility was amended so that borrowings under the Credit Facility now bear a
non-LIBOR based fixed interest rate. Thus, under SFAS No.
Page 21
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 $4.3 million
for the fair market value of the ineffective hedge and recorded $1.1 million for
the subsequent changes in the value of the Swap as a component of income. During
the six months ended October 31, 2002, we paid $1.6 million representing cash
settlement payments on the Swap and have $840,000 accrued at October 31, 2002.
Prior to the Swap becoming ineffective, we recorded $817,000 as interest expense
during the three months ended July 31, 2002.
Debt Offering Costs. During the six months ended October 31, 2002, we
incurred $1.9 million in transaction costs paid in connection the Offering. Due
to unfavorable market conditions at the timing of the Offering, we have decided
not to actively pursue the placement of the senior secured notes.
Other (Income) Expense. Other expense decreased $269,000 from $278,000
for the six months ended October 31, 2001, to $9,000 for the six months ended
October 31, 2002. Other expense 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 119.4% from $2.7
million for the six months ended October 31, 2001, to a tax benefit of $0.5
million for the six months ended October 31, 2002, reflecting effective income
tax rates of 41.6% and 21.5%, respectively. During the six months ended October
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 39.0%. 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.
Page 22
Liquidity and Capital Resources
At October 31, 2002, we had a working capital deficit of $74.6 million,
which included $168.7 million in debt under our existing credit facility
classified as short-term debt. Our capitalization at October 31, 2002, defined
as the sum of long-term debt and stockholders' equity, was approximately $98.6
million.
We use 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 our revolving
credit facility. Cash at October 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 $6.0 million for new equipment and maintenance.
During the six months ended October 31, 2002, net cash provided by
operating activities was $5.1 million. Net cash used in investing activities was
$11.0 million, including $8.7 million used for acquisitions and additional
purchase consideration and $2.7 million used for capital expenditures which were
partially offset by the net proceeds of $0.3 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 $6.9 million, which
was mainly comprised of $11.6 million in net borrowings on our revolving credit
facility and $0.2 million in proceeds from notes receivable from directors and
officers which was partially offset by $1.9 million in payments of abandoned
debt offering costs, $1.6 million for the cash settlement of the interest rate
hedge, $1.2 million in payments of deferred financing costs and $0.4 million in
payments of other long-term debt.
During the six months ended October 31, 2001, net cash provided by
operating activities was $22.9 million. Net cash used in investing activities
was $9.7 million, including $13.1 million used for acquisitions and additional
purchase consideration, $7.4 million used for capital expenditures which were
partially offset by the net proceeds of $10.0 million received on the sale of
property and equipment and $0.9 million received from the collection of a note
receivable. Net cash used in financing activities was $12.5 million, which was
mainly comprised of $10.0 million in net payments on our revolving credit and
$2.1 in payments of other long-term debt.
We have significant operations in Canada. Net sales from our Canadian
operations accounted for approximately 20.8% of our total revenues for the six
months ended October 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 $183.3 million available, subject to certain leverage tests, for
working capital and acquisition purposes, including a $135.0 million revolver
and a $48.3 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 October
31, 2002, we had $168.7 million outstanding under the Credit Facility, at an
effective annual interest rate of approximately 12.4%. During the six months
ended October 31, 2002, we incurred $9.1 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 have granted various
waivers of the defaults (the "Waivers") under the leverage covenant, allowing us
to be in compliance with the Credit Facility as of April 30, 2002 and October
31, 2002 and we agreed to amendments to certain provisions of the Credit
Facility. Under the terms of the currently effective 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 January 15, 2003 the leverage ratio was increased to 4.60
to 1.0, (iii) at January 16, 2003 and thereafter, the leverage ratio will
decrease to 3.75 to 1.0 and (iv) certain minimum cumulative consolidated EBITDA
requirements were imposed. At October 31, 2002, our leverage ratio was 4.16 to
1.0.
Page 23
The Waivers have provided us with the flexibility to pursue several
strategic and financing alternatives to reduce borrowings under the Credit
Facility. During the quarter ended October 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 $1.9 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 January 15, 2003 so that we and
the Special Committee can consider and analyze various financial and strategic
alternatives. The current terms of the Waivers provide a detailed timetable us,
our management, and the Special Committee and its advisors to complete the
process of reviewing strategic and financial alternatives and implementing a
strategic plan. As part of the current agreement between us and our lenders, our
outstanding borrowings on the Credit Facility now bear interest at 12%. We also
have agreed that we will not amend or renew the terms and conditions of our
outstanding director and officer loans due in January 2003 and February 2003 and
that proceeds from the collection of those loans will be paid to permanently
reduce bank debt. However, because we have not yet reached agreement with our
lenders regarding all of the specific terms and conditions that would be
contained in the amended 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 also anticipate that this financing will be secured by
substantially all of our and our subsidiaries' assets and guaranteed by our
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 24
The following table summarizes our cash obligations as of October 31, 2002:
Payments Due by Period (in millions)
------------------------------------
Less than Years 2 Years 4
one year and 3 and 5 Thereafter Total
----------- ----------- ----------- ---------- ------------
Short-term debt $ 168.7 $ $ $ $ 168.7
Long-term debt, including capital leases 0.7 1.1 0.1 1.9
Operating leases 17.9 29.5 21.8 40.6 109.8
Earn-out provisions 7.6 8.5 16.1
----------- ----------- ----------- ----------- ------------
Total cash obligations $ 194.9 $ 39.1 $ 21.9 $ 40.6 $ 296.5
=========== =========== =========== =========== ============
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 $2.6 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 coincides 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 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.
Page 25
Inflation
We do not believe that inflation has had a material impact on its
results of operations during the six months periods ended October 31, 2002 and
October 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.
Our most critical accounting policy relates to goodwill, which totaled
$134.1 million at October 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 also 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. Specifically, our overall goodwill
impairment analysis for Fiscal 2003 must be completed by the fourth
quarter, and based on our current market capitalization as implied by our stock
price and current market conditions in the print distribution and manufacturing
industries, management believes that it is probable that a material goodwill
impairment would be recorded at that time. However, at this time management
cannot reasonably estimate the magnitude of such an impairment. The magnitude of
any impairment will take into consideration our overall market capitalization as
well as the extent to which the stock prices of comparable businesses in the
industries in which we do business remain depressed. Any impairment charge would
be noncash in nature and, therefore, is not expected to affect our liquidity or
result in non-compliance with any covenants that we may have from time to time
with our lenders. In addition, we would record any such noncash charge as a
component of operating income.
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
Page 26
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 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 27
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 have received various 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.
Material Amount of Goodwill. At October 31, 2002, goodwill totaled
$134.1 million, or 37.0% 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 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 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 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's common stock.
Specifically, our overall goodwill impairment analysis for Fiscal 2003 must be
completed by the fourth quarter, and based on our current market capitalization
as implied by our stock price and current market conditions in the print
distribution and manufacturing industries, management believes that it is
probable that a material goodwill impairment would be recorded at that time.
However, at this time management cannot reasonably estimate the magnitude of
such an impairment. The magnitude of any impairment will take into consideration
our overall market capitalization as well as the extent to which the stock
prices of comparable businesses in the industries in which we do business remain
depressed. Any impairment charge would be noncash in nature and, therefore, is
not expected to affect our liquidity or result in non-compliance with any
covenants that we may have from time to time with our lenders. In addition, we
would record any such noncash charge as a component of operating income.
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.
Page 28
Risks Associated with the Canadian Operations. We have significant
operations in Canada. Revenues from our Canadian operations accounted for
approximately 20.8% of revenues during the six months ended October 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 29
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 October 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 $1.4 million. The Swap will continue to be
cash settled quarterly dependent upon the movement of 3-month LIBOR rates.
Item 4. Controls and Procedures
(a) Within the 90-day period prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's Exchange Act filings.
(b) There have been no significant changes in the Company's internal
controls or in other factors which could significantly affects its internal
controls subsequent to the date the Company carried out its evaluation.
Page 30
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders.
Workflow Management, Inc. held its 2002 Annual Meeting of Stockholders
on October 28, 2002. At the Annual Meeting, the following matters were acted
upon by the stockholders:
1. Election of Directors. The following persons were elected as directors to
serve a one year term, with the vote For and Withheld indicated below:
Director For Withheld
- -------- --- --------
Thomas A. Brown, Sr. 12,253,518 159,672
Thomas B. D'Agostino, Sr. 11,751,814 661,376
Thomas B. D'Agostino, Jr. 12,296,398 116,792
Steve R. Gibson 12,156,652 256,538
Gus J. James, II 12,190,179 223,011
Gerald F. Mahoney 12,287,526 125,664
James J. Maiwurm 12,248,605 164,585
Roger J. Pearson 12,239,568 173,622
Peter S. Redding 12,286,858 126,332
F. Craig Wilson 12,248,685 164,505
2. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the 2003 fiscal year.
For Against Abstain
- --- ------- -------
12,111,715 291,160 10,315
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.77 Limited Waiver and Amendment, dated as of October 15, 2002, by
and among Workflow Management, Inc., Data Business Forms
Limited, Fleet National Bank, Bank One, N.A., Comerica Bank,
Bank of America and Union Bank of California, N.A.
(b) Reports on Form 8-K
None.
Page 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORKFLOW MANAGEMENT, INC.
December 23, 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)
December 23, 2002 By: /s/ Michael L. Schmickle
- ------------------------- -------------------------
Date Michael L. Schmickle
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas B. D'Agostino, Sr., Chief Executive Officer, 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;
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;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
Page 32
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 23, 2002 /s/ Thomas B. D'Agostino, Sr.
-----------------------------
Thomas B. D'Agostino Sr., Chief Executive
Officer
Page 33
I, Michael L. Schmickle, Chief Financial Officer, 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;
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;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: December 23, 2002 /s/ Michael L. Schmickle
------------------------
Michael L. Schmickle, Chief Financial Officer
Page 34
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
December 23, 2002
/s/ Michael L. Schmickle
------------------------
Michael L. Schmickle
Chief Financial Officer
December 23, 2002
Page 35