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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended April 25, 1998
Commission file number 0-24383
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WORKFLOW MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1507104
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
240 ROYAL PALM WAY, PALM BEACH, FLORIDA 33480
(Address of principal executive offices) (Zip Code)
(561) 659-6551
(Registrant's telephone number including area code)
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Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock
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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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of July 15, 1998: $104,750,056.
The number of shares of common stock of the registrant outstanding as of
July 15, 1998: 14,625,268.
PART I
THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" IN ITEM 1 AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF WORKFLOW MANAGEMENT, INC. (THE "COMPANY" OR "WORKFLOW
MANAGEMENT") APPEARING ELSEWHERE IN THIS FORM 10-K. THIS FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED
HEREIN, THE WORDS "ANTICIPATE,""BELIEVE,""ESTIMATE,""EXPECT,""PLAN" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "ITEM 1. BUSINESS -- RISK FACTORS,""ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND THOSE DISCUSSED ELSEWHERE IN THIS FORM 10-K.
UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL REFERENCES TO THE COMPANY (OR
WORKFLOW MANAGEMENT) INCLUDE SFI OF DELAWARE, LLC ("SFI DELAWARE"), SFI OF
PUERTO RICO, INC. ("SFI PUERTO RICO") (SFI DELAWARE AND SFI PUERTO RICO
COLLECTIVELY "SFI"), HANO DOCUMENT PRINTERS, INC. ("HANO"), UNITED ENVELOPE,
LLC ("UE"), REX ENVELOPE CO., INC. ("REX"), HUXLEY ENVELOPE CORP. ("HUXLEY"),
POCONO ENVELOPE CORP. ("POCONO") (UE, REX, HUXLEY AND POCONO COLLECTIVELY
"UNITED"), ASTRID OFFSET CORP. ("ASTRID") AND BUSINESSES OF 1186202 ONTARIO
LIMITED ("1186202 ONTARIO"), OF WHICH 3303471 CANADA LIMITED ("3303471 CANADA")
IS A DIRECT SUBSIDIARY AND DATA BUSINESS FORMS LIMITED ("DBF") (DBF, 1186202
ONTARIO AND 3303471 CANADA COLLECTIVELY THE "DBF GROUP") IS AN INDIRECT
SUBSIDIARY, WHOLLY-OWNED DIRECT OR INDIRECT SUBSIDIARIES OF THE COMPANY, AS
WELL AS ALL PREDECESSORS THEREOF.
ITEM 1. BUSINESS
SPIN-OFF FROM U.S. OFFICE PRODUCTS
Workflow Management is a Delaware corporation formed by U.S. Office
Products Company, also a Delaware corporation ("U.S. Office Products") in
connection with U.S. Office Products' strategic restructuring plan ("Strategic
Restructuring Plan"). As part of its Strategic Restructuring Plan, U.S. Office
Products (i) transferred to the Company substantially all the assets and
liabilities of U.S. Office Products' Print Management Division and (ii)
distributed to holders of U.S. Office Products common stock ("U.S. Office
Products Common Stock") 14,625,268 shares (the "Distribution" or "Workflow
Distribution") of the Company's Common Stock, par value $.001 per share (the
"Common Stock" or "Company Common Stock"). Holders of U.S. Office Products
Common Stock were not required to pay any consideration for the shares of
Company Common Stock they received in the Workflow Distribution. The Workflow
Distribution occurred on June 9, 1998 ("Distribution Date").
As part of its Strategic Restructuring Plan, U.S. Office Products also
distributed to the holders of U.S. Office Products Common Stock shares of
common stock (the "Related Distributions") (the Workflow Distribution and
Related Distributions collectively the "Distributions") of three additional
companies, Aztec Technology Partners, Inc., Navigant International, Inc. and
School Specialty, Inc. (collectively the "other Spin-Off Companies"). Effective
upon consummation of the Workflow Distribution and the Related Distributions,
the Company entered into the following principal agreements with U.S. Office
Products and the other Spin-Off Companies. See "Risk Factors -- Potential
Conflicts of Interest in the Distributions" below.
o a Distribution Agreement ("Distribution Agreement"), pursuant to which
(i) the equity interests of the U.S. Office Products subsidiaries engaged
in the print management business were transferred to the Company, (ii)
liabilities were allocated among the Company, U.S. Office Products and the
other Spin-Off Companies and (iii) the Company, U.S. Office Products and
the other Spin-Off Companies agreed to indemnify one another for
liabilities allocated to them under the Distribution Agreement and a share
of certain other liabilities. See "Risk Factors -- Risks Related to
Allocation for Certain Liabilities" below.
o a Tax Allocation Agreement ("Tax Allocation Agreement"), pursuant to
which (i) the Company is responsible for its share of U.S. Office Products'
consolidated income tax liability for the years it was included in U.S.
Office Products' consolidated federal income tax returns, (ii) the Company,
U.S. Office Products and the other Spin-Off Companies share certain state,
local and foreign taxes, and (iii) the Company has (a) indemnified U.S.
Office Products for certain taxes if they are assessed against U.S. Office
Products as a result of the Workflow Distribution or the Related
Distributions and (b) jointly and severally indemnified U.S. Office
Products for certain taxes resulting from certain acts taken by the Company
or any of the other Spin-Off Companies. The joint and several liabilities
of the Company and the other Spin-Off Companies have been allocated
pursuant to a separate agreement (the "Tax Indemnification Agreement"). As
a consequence, the Company is primarily liable for taxes resulting from
acts taken by the
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Company and liable (subject to rights of indemnification under the Tax
Indemnification Agreement) for taxes resulting from acts taken by the other
Spin-Off Companies. See "Risk Factors -- Potential Liability for Taxes
Related to the Distributions" below.
o an Employee Benefits Agreement ("Employee Benefits Agreement"),
pursuant to which the assets, liabilities and responsibilities with respect
to employee benefit plans and programs and certain related matters were
allocated among the Company, U.S. Office Products and the other Spin-Off
Companies.
Workflow Management was incorporated in the state of Delaware on February
13, 1998. U.S. Office Products acquired SFI Corp. ("SFI Corp."), a predecessor
to SFI, and a related company, Hano, on January 24, 1997. On April 25, 1997,
U.S. Office Products acquired United Envelope Co., Inc. ("United Co."), a
predecessor to UE, as well as Rex, Huxley and Pocono. On April 26, 1997, U.S.
Office Products acquired DBF, and on February 26, 1998, U.S. Office Products
acquired Astrid. As part of the Strategic Restructuring Plan, SFI Corp. and
United Co. were converted into the limited liability companies SFI Delaware and
UE, respectively, whose sole members and equity owners are the Company, the
shares of Rex, Huxley, Pocono and Astrid were transferred to UE, the shares of
SFI Puerto Rico were transferred to SFI Delaware, and the shares of Hano and
the DBF Group were transferred to the Company. The principal executive offices
of the Company are located at 240 Royal Palm Way, Palm Beach, Florida 33480.
Workflow Management's telephone number is (561) 659-6551.
COMPANY OVERVIEW
Workflow Management is an integrated graphic arts company providing
documents, envelopes and commercial printing to more than 22,000 businesses in
the United States and Canada. The Company also offers various print and
facilities management services, which allow customers to realize cost savings
by outsourcing non-core operations, as well as graphic design services and
workflow analysis. Drawing on its position in the industry and its experience
in completing acquisitions, the Company seeks to become a consolidator in the
highly fragmented graphic arts industry. In the last ten years the Company's
senior management team completed the acquisition of 16 smaller distributors for
Standard Forms, Inc., the predecessor to SFI. Since the acquisition of SFI and
Hano by the Print Management Division of U.S. Office Products in January 1997,
that same management team has continued its acquisition strategy by buying
seven additional companies. As a result, the enterprise has grown from SFI's
revenues and operating income of $115.1 million and $6.7 million, respectively,
for the year ended December 31, 1996, to the Company's revenues and operating
income of $353.4 million and $16.6 million, respectively, for the fiscal year
ended April 25, 1998. The Company currently has over 2,100 employees and has 17
manufacturing facilities in seven states and five Canadian Provinces, 26
distribution centers, eight print-on-demand centers and 59 sales offices.
Workflow Management intends to continue to pursue its aggressive acquisition
strategy to extend its geographic scope and market penetration, and to increase
sales to existing customers by cross-selling documents, envelopes and
commercial printing.
Workflow Management offers a full range of printed products which are
either manufactured by the Company or procured from one of the Company's more
than 3,500 vendors. The Company's product line includes: (i) documents, such as
custom invoices, purchase orders, checks and labels; (ii) envelopes, including
specialty envelopes for uses such as credit card solicitations, annual reports,
direct mail and airline tickets; and (iii) commercial printing, such as product
and corporate brochures, personalized direct mail literature, catalogs,
directories and digital imaging. The Company's manufacturing base, combined
with its extensive vendor network and distribution capability, gives the
Company broad flexibility to meet customers' demand for printed products. For
the year ended April 25, 1998, approximately 53.6% of the Company's revenues
were derived from products purchased by the Company for distribution, and 46.4%
were derived from products manufactured by the Company.
Many of the Company's customers are attempting to reduce their overhead
and direct costs by focusing on core competencies and by outsourcing non-core
operations to specialists. The Company provides customers with print management
services that are designed to control the costs of procuring, storing and using
graphic arts in their business operations. As an outsourcing specialist for
print management services, Workflow Management enables its customers to reduce
costs and improve control by soliciting competitive bids, establishing more
efficient inventory levels and order quantities, and consolidating
requisitions, production and deliveries. The Company also performs design and
procurement services for its customers. In order to meet growing demand,
Workflow Management plans to continue to expand its product lines and services,
and to promote its print and facilities management services, which allow
customers to outsource the management of printed products.
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The Company believes that its proprietary technology and systems are
central to its ability to capitalize effectively on industry outsourcing trends
and provide it with a competitive advantage. The Company has developed its
GetSmart and Informa transaction and information systems to support these
services and the Company's sales of printed products. The GetSmart system
provides transaction, reporting and control capabilities to the Company and its
customers in the United States. The Informa system supports requisition,
distribution and imaging services with a control database and a variety of
customer interfaces for its customers in Canada, including the Imagenet
Document Manager that provides access via the world wide web. In addition,
using the GetSmart and the Informa systems, the Company believes it has the
flexibility to integrate future acquisitions and increase its customer base
rapidly and seamlessly. In addition, with its technology platform, Workflow
Management believes that it is able to position itself as a premier technology
deployer, thus increasing the Company's attractiveness to potential acquisition
targets. The Company has granted a license to U.S. Office Products for the
Company's Imagenet technology effective on the Distribution Date. See "Item 13.
Certain Relationships and Related Transactions."
The document, envelope and commercial printing industries that comprise
the graphic arts businesses are highly fragmented, and the Company believes
consolidation opportunities exist within these industries. The Company believes
that (i) the market for documents was approximately $12.7 billion in 1996, up
from $11.1 billion in 1993; (ii) while the United States market for envelopes
decreased from $3.0 billion in 1989 to $2.6 billion in 1992, the market has
since increased to approximately $3.0 billion in 1996; and (iii) the general
commercial segment of the United States printing industry shipped more than
$88.0 billion of products in 1996, an increase of 8% over 1995. Furthermore,
management believes there are approximately 200 envelope manufacturers in the
U.S., and that the commercial printing industry is composed of approximately
25,000 printing plants, 70% of which have fewer than 10 employees.
The principal subsidiaries of the Company are as follows:
o SFI is a national distributor of documents and other printed consumables
used by businesses in the United States and Puerto Rico. SFI also provides
print management services that are designed to control its customers'
costs of procuring, storing and using graphic arts. SFI developed its
proprietary GetSmart information system as the platform for delivering
these services and executing sales. SFI has 380 employees, 167 of which
are in sales. SFI has 25 sales offices and nine distribution warehouses
located in eight states and Puerto Rico.
o United is a regional manufacturer and distributor of envelopes, primarily
custom and specialty envelopes for applications such as credit card
solicitations, annual reports, direct mail and airline tickets. United
manufactures its products in four plants located in New York, New Jersey
and Pennsylvania. United also has several digital pre-press systems for
converting text and graphics to film and plates prior to printing,
enabling United to offer design services to its customers. United has 411
employees, of which 16 are in sales and 287 are in manufacturing.
o DBF is a Canadian manufacturer, printer and distributor of documents and
other printed products, such as labels, direct mail, business
communications, security products, bar coding and thermal labeling. DBF
also offers its customers document and print facility management services
through its proprietary Informa and Imagenet systems. These systems allow
DBF's customers to control printing processes at DBF's eight Imagenet
print centers which are located in six cities across Canada. In addition,
DBF has 11 plants with approximately 1,200 employees, of which 737 are
engaged in manufacturing or printing.
o Hano is a manufacturer and printer of documents. Hano has three plants
located in Georgia, Illinois and Massachusetts. Hano has 179 employees.
Approximately 21% of Hano's products are sold to SFI.
BUSINESS STRATEGY
The Company's objective is to become a leading single source provider of
printed products and related services to businesses of all sizes. To attain its
goals, Workflow Management plans to grow both externally, through strategic
acquisitions, and internally, through product development, cross-selling the
full suite of the Company's products and services to its subsidiaries, which
had previously limited product offerings, and cross-utilization of the
Company's proprietary computer systems. In addition, the Company intends to
develop additional systems to establish a position as a technologically
sophisticated provider of printed products and related management services.
Workflow Management intends to capitalize on consolidation opportunities
in three segments of the North American graphic arts industry: U.S. printed
products, U.S. envelopes and Canadian printed products. Through acquisitions,
the Company plans to expand its presence into new geographic regions and
increase penetration in regions where it currently
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has operations. In the U.S. printed products market, the acquisition strategy
will focus on the large population of independent distributors. In the U.S.
envelope market, Workflow Management will seek to acquire high value-added
producers of specialty envelope and direct mail concerns. In the Canadian
printed products market, the Company plans to leverage its document sales force
and customer base with selective acquisitions of commercial print
manufacturers.
Workflow Management intends to grow internally through product
development, cross-marketing and cross-utilization of its proprietary GetSmart,
Informa and Imagenet computer systems. A substantial majority of the Company's
net sales are derived from custom documents, envelopes, and commercial
printing. The Company believes that its analysis, design work and print
management services enable the Company to better understand customers'
requirements, and fosters close business relationships between the Company and
its customers. Workflow Management believes that its knowledge of customer
requirements and these relationships enable the Company to identify new product
lines and services in response to emerging customer opportunities and provide
cross-marketing opportunities for the Company's various product lines and
services. The Company also believes that it will be able to increase sales by
implementing its GetSmart, Informa and Imagenet systems on a Company-wide
basis.
PRODUCT LINES
DOCUMENTS. Workflow Management offers a complete line of custom and stock
documents, such as invoices, purchase orders, money orders, bank drafts and
labels. These documents may be fan-folded, roll-fed, snap-apart or cut-sheet,
and manufactured to specification with respect to content, size, plies, paper
and inks. More than 85% of the Company's revenues from sales of documents are
from sales of custom products.
ENVELOPES. Workflow Management offers a complete line of conventional and
specialty envelopes for applications such as billing, credit card
solicitations, annual reports, proxy solicitations, direct mail and airline
tickets. These envelopes may be of varying sizes and specialized materials,
with constructions including wallet flap, flat mailer, safety fold, peel and
seal, clasp, button and string, window, expansion and continuous. The Company
can customize dimensions, materials, construction and graphics to customers'
specific requirements.
COMMERCIAL PRINTING. The Company's commercial printing line includes
products such as corporate brochures, personalized direct mail, catalogs,
directories and promotional products. These products are designed and
manufactured to customers' requirements. Workflow Management provides a variety
of custom services, including art direction, digital and conventional design,
layout, illustration, photography and production.
The following table sets forth the amount of the Company's revenue (in
thousands) derived from each of its three largest product lines for the periods
indicated:
FISCAL YEAR FISCAL YEAR
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 APRIL 26, 1997 APRIL 25, 1998
------------------- ---------------- ---------------
Documents ................... $178,806 $186,787 $176,448
Envelopes ................... 101,642 97,256 101,830
Commercial Printing ......... 24,850 37,426 49,440
PRINT MANAGEMENT
Workflow Management supports its product offering with a selection of
value-added services. For many businesses, the costs of managing, storing and
using printed products exceed their purchase price. The Company seeks to
control these costs and improve efficiency throughout the workflow by providing
systems analysis, design, and facilities and inventory management services.
Workflow Management delivers its print management services through GetSmart and
Informa, its proprietary computerized transaction and information systems. The
Company does not charge a separate fee for its management services, but instead
tailors its product pricing to reflect the services provided.
GETSMART SYSTEM. The Company offers the GetSmart system in the United
States. GetSmart provides transaction, reporting and control capabilities to
the Company and its customers. SFI introduced GetSmart in 1986, and it
re-engineered the system in 1993 to incorporate advances in hardware and
software technologies. The system's transaction database now includes more than
200,000 SKUs, 12,000 active customers and 3,500 active vendors. Customers can
access GetSmart
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either off-line, through the Company's sales and customer support personnel, or
on-line, through wide area network, dial-up, leased-line, and Internet
connections. This array of delivery options makes GetSmart available to
customers of every size and complexity, and to customers at every level of
computer sophistication. The discussion below summarizes these support
functions. The Company is continually refining and enhancing the GetSmart
system.
A customer can initiate a distribution from inventory by issuing a
requisition through GetSmart. GetSmart then allocates the merchandise to the
cost center and routes the release to the appropriate distribution facility.
Customers can specify their minimum inventory requirements or can rely on
GetSmart's ongoing analysis of usage patterns and lead times. GetSmart notifies
the Company's sales representative when a re-order point is reached, and the
representative negotiates a new purchase order with the customer. The purchase
order is entered into the system and GetSmart tracks the order to the product's
receipt at the Company's distribution center. At this point the storage,
shipment, usage and re-order cycle begins again. Throughout the cycle, the
system supports inventory transfers and write-offs, returns of items
requisitioned in error, and purchases that are shipped directly to customers by
the Company's vendors. GetSmart produces invoices when merchandise is received
at the Company's distribution centers, or when it is shipped to customers, and
tracks invoices through to remittance. All transactions can be consummated in a
number of electronic formats required by customers' data processing operations.
GetSmart also offers electronic catalogs of 375,000 promotional products and
30,000 office products. The catalogs provide product images and descriptions,
as well as powerful search engines enabling customers to locate the products
best suited to their requirements.
GetSmart can generate more than 100 real-time and periodic reports to
customers. These reports detail, summarize, and analyze purchases, inventory
levels, utilization rates, and billing by cost center, product, and product
line to meet each customer's specific needs. Reports can be viewed on-screen in
real time, printed at the customer's premises, printed remotely and delivered
to a customer, or transmitted electronically for further processing by a
customer's internal management information system. The Company maintains five
years of historical data on-line for comparative reports and analyses. In
addition, GetSmart's Base Line Pricing Report routinely analyzes changes in
prices charged to managed accounts, an analysis the Company believes is unique
in the industry.
GetSmart also provides customers with a system of management controls for
certain services. Customers may control cost center access with passwords,
allocate inventories to cost centers, limit the transacting and reporting
authority of each cost center by product or product line, constrain purchases
and requisitions to amounts budgeted for each cost center, and suspend
transactions until they are reviewed and approved. The Company can customize
GetSmart to create optimal programs for its customers.
INFORMA SYSTEM. Workflow Management offers the Informa system in Canada.
Informa supports requisition, distribution, and digital imaging services with a
central transaction database and a variety of customer interfaces. In addition
to sophisticated print-on-demand capabilities, Informa provides much of the
functionality of the GetSmart system: inventory inquiries and releases; order
tracking; usage analysis and forecasting; detailed reporting for cost centers
and products; and procurement-card and X.12 EDI billing. Customer interfaces
include terminal access, a graphical user interface client, e-mail, world wide
web browser, touch-tone, and automated voice recognition. Informa is accessed
through leased lines, dial-up service, Internet and wide area networks.
Informa's Electronic Job Ticket ("EJT") interface is a specialized e-mail
enabling customers to requisition documents and other products from the
Company's distribution centers, and to route attached documents to the
Company's network of Imagenet print-on-demand facilities. EJT's print on demand
feature supports a broad range of custom specifications, including quantities;
fixed and variable imaging; page orientation; paper size, weight, grade, and
color; drilling and binding; and cover page. EJT also provides fields for the
customer's budget code, billing information, and distribution instructions. EJT
originates jobs ranging from single impressions, to thousands of copies
delivered to a single location, to thousands of documents mailed to tens of
thousands of recipients.
IMAGENET DOCUMENT MANAGER. The Company intends to deploy Imagenet for use
in the United States. Workflow Management has also licensed Imagenet to U.S.
Office Products effective on the Distribution Date. See "Item 13. Certain
Relationships and Related Transactions."
Workflow Management provides customers with world wide web-access to
Informa through Imagenet. This application provides a browser interface to
Informa's transaction and reporting features for managing and distributing
inventories held for customers. The application also offers a full-featured
document librarian, with image storage, retrieval, viewing, downloading,
archiving, and version control. In addition, Imagenet provides estimation and
requisition for digital print-on-demand orders. Production images for these
orders can be uploaded to the world wide web or retrieved from the
application's document library.
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OPERATIONS
SALES. Workflow Management sells its products directly to end-users, as
well as to distributors and brokers who re-sell to end-users. The Company
employs more than 380 sales representatives and 189 customer service personnel
in 59 sales offices throughout the United States, Puerto Rico and Canada. Sales
representatives are compensated through salaries and commissions. Commissioned
sales representatives are compensated based on either product sales or gross
margins. In addition to the Company's line of documents, commercial printing,
envelopes and related products, the sales force offers value-added services
including workflow analysis, design, document management and print-on-demand.
The Company's sales force is supported by its GetSmart and Informa transaction
and information systems.
PURCHASING. Workflow Management purchases raw materials such as paper
stock, ink, stock envelopes, adhesives, plates, film, chemicals and cartons
from a variety of manufacturers and resellers. These materials are purchased
job-by-job or under contracts with terms of up to two years. Longer-term supply
contracts generally specify services to be provided and may guarantee product
availability, but typically reserve to vendors the right to adjust prices as
required by market conditions. The largest suppliers of paper stock to the
Company are Rollsource, Appleton, Mead, Avenor and Domtar. Workflow Management
also purchases finished goods for resale to customers. These finished goods
include the Company's full line of documents, envelopes and commercial
printing. Workflow Management has more than 3,500 suppliers of finished goods,
including, among the largest, Ward Kraft Forms, United Computer Supplies,
Gilman Sky, Transkrit and United Stationers, Inc.
MANUFACTURING. Workflow Management manufactures documents and envelopes.
Documents produced by the Company include continuous and snap-apart forms, roll
forms, cut sheets and label/form combinations, and checks and other security
documents. Workflow Management operates 13 document plants in Canada, and four
in the U.S. These plants employ more than 1,150 manufacturing personnel and
utilize over 250 presses and other machines. The Company also manufactures a
broad line of conventional and specialty envelopes in four plants located in
New York, New Jersey and Pennsylvania. The envelope plants currently operate
more than 80 manufacturing and printing machines. Workflow Management operates
a network of eight Imagenet print-on-demand facilities in Canada, providing
digital imaging and litho quick printing. The Company also operates several
conventional and digital pre-press systems for converting text and graphics to
film and plates prior to printing. Among these pre-press capabilities are
several state-of-the-art digital systems which enhance overall production
efficiency and provide high-process capabilities to customers.
DISTRIBUTION. Products manufactured by Workflow Management are either
shipped directly to customers or held in inventory and shipped as requisitioned
by customers. Finished goods purchased by the Company from manufacturers and
wholesalers are either shipped directly to customers by vendors, or shipped to,
stored in, and shipped from one of the Company's distribution centers. Workflow
Management owns or leases nine distribution centers in the United States and 17
in Canada, and rents additional warehouse space as necessary. More than 130
distribution personnel are employed by Workflow Management. Products are
transported from the Company's suppliers and to its customers by short-haul,
regional, contract and custom carriers, as well as by air and ground courier
services.
CUSTOMERS
Workflow Management has more than 22,000 customers ranging in size from
small office/home office businesses to Fortune 500 companies in industries such
as healthcare, insurance, energy, advertising, travel and financial services.
Significant customers of the Company include: Bank of Montreal; Aetna, Inc.;
Citibank N.A.; Chase Manhattan Corp.; Group Health Incorporated; Health
Insurance Plan of Greater New York, Inc.; Heilig-Meyers Company; Merrill Lynch
& Co., Inc.; Banco Popular, Inc.; Shell Canada and Salomon Smith Barney
Holdings, Inc.
The Company's five largest customers accounted for 11.4% of the Company's
net sales for the year ended April 25, 1998. The Company's single largest
customer accounted for 4.4% of net sales for the year ended April 25, 1998.
COMPETITION
Workflow Management competes for retail sales of documents and envelopes
against other independent distributors and against manufacturers' direct sales
organizations. In commercial printing, the Company also competes with
manufacturers' direct sales organizations, independent brokers, advertising
agencies and design firms. The principal competitive factors in the graphic
arts industry are price, quality, selection, services, production capacity,
delivery and customer support.
Although Workflow Management often competes with smaller businesses, it
also competes against the largest competitors in the North American documents
industry, such as Moore Corporation Ltd., Reynolds & Reynolds Company,
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Standard Register Company and Wallace Computer Services, Inc., and the largest
competitors in the U.S. envelope industry, such as Mail-Well, Westvaco and
Tension Envelope Company. The largest competitors for commercial printing
include direct sales organizations of Graphic Industries, Inc., R. R. Donnelley
& Sons, Quebecor, Inc. and World Color Press, Inc. Most of these competitors
have substantially greater financial resources than the Company.
EMPLOYEES
Workflow Management currently has more than 2,100 full- and part-time
employees, including over 575 in sales and sales support and more than 1,150 in
manufacturing. Approximately 31% of the Company's employees in the United
States and approximately 8% of the Company's employees in Canada are
represented by labor unions. There can be no assurance that work stoppages or
strikes will not occur. The Company considers its employee relations to be
good.
INTELLECTUAL PROPERTY
Workflow Management has more than 40 registered trademarks in the U.S. and
Canada, including Get Smart, Informa and Imagenet. The Company believes that
its trademarks and other proprietary rights are material to the operations of
its business. Workflow Management regards its GetSmart, Informa and Imagenet
software as proprietary, and relies on a combination of copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to
protect its rights. Workflow Management is not aware that any of its software,
trademarks or other proprietary rights are being infringed by third parties, or
that they infringe proprietary rights of third parties.
ENVIRONMENTAL REGULATIONS
The Company's operations and real property are subject to United States
and Canadian federal, state, provincial and local environmental laws and
regulations, including those governing the use, storage, treatment,
transportation and disposal of solid and hazardous materials, the emission or
discharge of such materials into the environment, and the remediation of
contamination associated with such disposal or emissions (the "Environmental
Laws"). Certain of these laws and regulations may impose joint and several
liability on lessees and owners or operators of facilities for the costs of
investigation or remediation of contaminated properties, regardless of fault or
the legality of the original disposal.
The past and present business operations of the Company that are subject
to the Environmental Laws include the use, storage, handling and contracting
for recycling or disposal of hazardous and nonhazardous materials such as
washes, inks, alcohol-based products, fountain solution, photographic fixer and
developer solutions, machine and hydraulic oils, and solvents. Workflow
Management generates both hazardous and non-hazardous waste.
Limited environmental investigations have been conducted at certain of the
Company's properties. Based on these investigations and all other available
information, management believes that the Company's current operations are in
substantial compliance with the Environmental Laws. The Company is not aware of
any liability under the Environmental Laws that the Company believes would have
a material adverse effect on the Company's business, financial condition or
results of operations. No assurance can be given, however, that all potential
environmental liabilities have been identified or that future uses, conditions
or legal requirements (including, without limitation, those that may result
from future acts or omissions or changes in applicable Environmental Laws) will
not require material expenditures to maintain compliance or resolve potential
liabilities.
RISK FACTORS
POTENTIAL VOLATILITY OF STOCK PRICE AND OTHER RISKS ASSOCIATED WITH SHARES
ELIGIBLE FOR IMMEDIATE SALE. As a result of the Workflow Distribution,
stockholders of U.S. Office Products acquired 14,625,268 shares of Company
Common Stock that are freely tradable without restrictions or further
registration under the Securities Act of 1933 ("Securities Act"), except that
any shares held by "affiliates" of Workflow Management within the meaning of
the Securities Act will be subject to the resale limitations of Rule 144
promulgated under the Securities Act. Because the Workflow Distribution was
made to existing stockholders of U.S. Office Products who did not make an
affirmative decision to invest in the Company Common Stock and who may not, for
whatever reason, have had an interest in holding Company Common Stock, the
Company believes that a significant number of shares of Common Stock were sold
immediately after the Workflow Distribution that would not have been sold
absent the ability of shareholders to sell such shares without restriction. The
Company believes that such sales have adversely affected the market price for
Company Common Stock.
In addition, the Company has outstanding immediately exercisable options
to acquire shares of Company Common Stock. The Company has registered the
shares of Company Common Stock reserved for issuance pursuant to its 1998
8
Stock Incentive Plan under the Securities Act. In view of the large number of
shares freely-tradable and available for immediate sale, the market for the
Company Common Stock could be highly volatile and the trading price of the
Company Common Stock could be adversely affected. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters."
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY. The Company is the result of
the consolidation by U.S. Office Products of nine separate companies engaged in
the graphic arts industry. The operations of Workflow Management as a stand-
alone, consolidated entity may place significant demands on the Company's
management, operational and technical resources. Prior to the Workflow
Distribution, certain general and administrative functions relating to the
Company's business (such as legal and accounting) were handled by U.S. Office
Products. The Company's future performance will depend on its ability to
function as a stand-alone entity, to finance and manage expanding operations,
and to adapt its information systems to changes in its business. In addition,
Workflow Management will not be able to rely on the purchasing power of U.S.
Office Products and, therefore, may not be able to obtain the same volume
discounts for products and services that are available to U.S. Office Products.
As a result, the Company's expenses may be higher than when it was a part of
U.S. Office Products, and the Company may experience disruptions it would not
encounter as a part of U.S. Office Products. Furthermore, the financial
information included herein may not necessarily reflect the results of
operations and financial condition of Workflow Management had it been a
separate, stand-alone entity during the periods presented, or may not be
indicative of future results of operations and financial condition of the
Company.
DEPENDENCE UPON ACQUISITIONS FOR FUTURE GROWTH. One of the Company's
strategies is to increase its revenues and the markets it serves through the
acquisition of additional graphic arts businesses. There can be no assurance
that suitable candidates for acquisitions can be identified or, if suitable
candidates are identified, that acquisitions can be completed on acceptable
terms, if at all. Prior to the Workflow Distribution, the Company's
acquisitions were completed with substantial business, legal and accounting
assistance from U.S. Office Products and the acquisitions were primarily paid
for with U.S. Office Products Common Stock. The pace of the Company's
acquisition program may be adversely affected by the absence of U.S. Office
Products' support for the acquisitions. In addition, Workflow Management
intends to use Company Common Stock to pay for certain of its acquisitions. If
the owners of potential acquisition candidates are not willing to receive
shares of Company Common Stock in exchange for their businesses, or if
management elects not to consummate acquisitions with Common Stock because
market prices for the Common Stock would require issuances of shares at a level
considered by management to be too dilutive to existing shareholders, the
Company's acquisition program could be adversely affected. Moreover, the
consolidation of the North American graphic arts industry has reduced the
number of larger companies available for sale, which could lead to higher
prices being paid for the acquisition of the remaining domestic, independent
companies. In addition, Workflow Management is subject to limitations on the
number of shares it can issue without jeopardizing the tax-free treatment of
the Workflow Distribution. Limitations on the Company's ability to issue shares
could also adversely affect the Company's acquisition strategy. See "Possible
Limitations on Issuances of Common Stock," "Material Amount of Goodwill,"
"Inability to Use Pooling-of-Interests Accounting" and "Tax Matters" below.
RISKS RELATED TO INTEGRATION OF ACQUISITIONS. Integration of acquired
companies may involve a number of special risks that could have a material
adverse effect on the Company's operations and financial performance, including
adverse short-term effects on its reported operating results (including those
adverse short-term effects caused by severance payments to employees of
acquired companies, restructuring charges associated with the acquisitions and
other expenses associated with a change of control, as well as non-recurring
acquisition costs including accounting and legal fees, investment banking fees,
recognition of transaction-related obligations and various other
acquisition-related costs); diversion of management's attention; difficulties
with retention, hiring and training of key personnel; risks associated with
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. Furthermore, although Workflow Management conducts due
diligence and generally requires representations, warranties and
indemnifications from the former owners of acquired companies, there can be no
assurance that such owners will have accurately represented the financial and
operating conditions of their companies. If an acquired company's financial or
operating results were misrepresented, the acquisition could have a material
adverse effect on the results of operations and financial condition of Workflow
Management.
RISKS RELATED TO ACQUISITION FINANCING; ADDITIONAL DILUTION. Workflow
Management currently intends to finance its future acquisitions by using shares
of Company Common Stock, cash, borrowed funds or a combination thereof. If the
Company Common Stock does not maintain a sufficient market value, if the price
of Company Common Stock is highly volatile, or if potential acquisition
candidates are otherwise unwilling to accept Company Common Stock as part of
the consideration for the sale of their businesses, Workflow Management may be
required to use more of its cash resources or more borrowed funds in order to
initiate and maintain its acquisition program. If Workflow Management does not
have
9
sufficient cash resources, its growth could be limited unless it is able to
obtain additional capital through debt or equity offerings. However, the use of
equity offerings will also be subject to certain limitations on the number of
shares that Workflow Management can issue without jeopardizing the tax-free
treatment of the Workflow Distribution. See "Possible Limitation on Issuances
of Common Stock" and "Tax Matters" below. Prior to the Workflow Distribution,
Workflow Management was not responsible for obtaining external sources of
funding. There can be no assurance that Workflow Management, as a stand-alone
company, will be able to obtain such financing if and when it is needed or that
any such financing will be available on terms it deems acceptable.
The Company will have 150,000,000 authorized shares of Company Common
Stock, a portion of which could be available (subject to the rules and
regulations of federal and state securities laws, limitations under U.S.
federal income tax laws and the rules of the Nasdaq Stock Market) to finance
acquisitions without obtaining stockholder approval for such issuances.
Existing stockholders may suffer dilution if Workflow Management uses Company
Common Stock as consideration for future acquisitions. Moreover, the issuance
of additional shares of Company Common Stock may have a negative impact on
earnings per share and may negatively impact the market price of the Company
Common Stock.
MATERIAL AMOUNT OF GOODWILL. Approximately $14.0 million, or 9.6% of the
Company's total assets as of April 25, 1998, represents intangible assets, the
significant majority of which is goodwill. Goodwill represents the excess of
cost over the fair market value of net assets acquired in business combinations
accounted for under the purchase method. The Company amortizes goodwill on a
straight line method over a period of 40 years with the amount amortized in a
particular period constituting a non-cash expense that reduces the Company's
net income. The Company will be required to periodically evaluate the
recoverability of goodwill by reviewing the anticipated undiscounted future
cash flows from the operations of the acquired companies and comparing such
cash flows to the carrying value of the associated goodwill. If goodwill
becomes impaired, Workflow Management would be required to write down the
carrying value of the goodwill and incur a related charge to its income. A
reduction in net income resulting from the amortization or write down of
goodwill could have a material and adverse impact upon the market price of the
Company Common Stock.
INABILITY TO USE POOLING-OF-INTERESTS ACCOUNTING. Generally accepted
accounting principles require that an entity be autonomous for a period of two
years before it is eligible to complete business combinations under the
pooling-of-interests method. As a result of the Company being a wholly-owned
subsidiary of U.S. Office Products prior to the Workflow Distribution, the
Company will be unable to satisfy this criteria for a period of two years
following the Workflow Distribution. Therefore, the Company will be precluded
from completing business combinations under the pooling-of-interests method for
a period of two years and any business combinations completed by the Company
during such period will be accounted for under the purchase method resulting in
the recording of goodwill. The amortization of the goodwill will reduce net
income reported by the Company below that which would have been reported if the
pooling-of-interests method had been used by the Company. See "Material Amount
of Goodwill" above.
POTENTIAL CONFLICTS OF INTEREST IN THE DISTRIBUTIONS. The Company, U.S.
Office Products and the other Spin-Off Companies have entered into the
Distribution Agreement, the Tax Allocation Agreement and the Employee Benefits
Agreement, and the Company and the other Spin-Off Companies have entered into
the Tax Indemnification Agreement. These agreements provide, among other
things, for U.S. Office Products and the Company to indemnify each other from
tax and other liabilities relating to their respective businesses prior to and
following the Workflow Distribution.
Certain indemnification obligations of the Company and the other Spin-Off
Companies to U.S. Office Products are joint and several. Therefore, if one of
the other Spin-Off Companies fails to satisfy its indemnification obligations
to U.S. Office Products when such a loss occurs, the Company may be required to
reimburse U.S. Office Products for all or a portion of the losses that
otherwise would have been allocated to such other Spin-Off Company. In
addition, the agreements allocate certain liabilities (including general
corporate and securities liabilities of U.S. Office Products not specifically
related to the specific business to be conducted by the Company, the other
Spin-Off Companies or U.S. Office Products) among the Company, U.S. Office
Products and the other Spin-Off Companies. Adverse developments involving U.S.
Office Products or one of the other Spin-Off Companies, or material disputes
with U.S. Office Products following the Distributions, could have a material
adverse effect on the Company.
The terms of the agreements that govern the relationship among the
Company, U.S. Office Products and the other Spin-Off Companies were established
by U.S. Office Products in consultation with the Company and the other Spin-Off
Companies prior to the Distributions and while the Company and the other
Spin-Off Companies were wholly-owned subsidiaries of U.S. Office Products. The
terms of these agreements, including the allocation of general corporate and
securities liabilities among U.S. Office Products, the Company and the other
Spin-Off Companies, may not be the same as
10
they would have been if the agreements were the result of arm's-length
negotiations. Accordingly, there can be no assurance that the terms and
conditions of these agreements are not more or less favorable to the Company
than those that might have been obtained from unaffiliated third parties.
As of June 10, 1998, Jonathan J. Ledecky, former Chairman of the U.S.
Office Products Board of Directors and a director of the Company, received
options for shares of the Company and the other Spin-Off Companies exercisable
for 7.5% of the common stock of the Company and the other Spin-Off Companies.
As a result, Mr. Ledecky has interests in the Distributions that differ in
certain respects from, and may conflict with, the interests of other
stockholders of Workflow Management. See "Item 11. Executive Compensation."
TAX MATTERS. In connection with the Workflow Distribution, Wilmer, Cutler
& Pickering, legal counsel to U.S. Office Products, delivered an opinion to the
Company (the "Tax Opinion") stating that for U.S. federal income tax purposes
the Workflow Distribution qualified as a tax-free spin-off under Section 355 of
the Internal Revenue Code of 1986, as amended (the "Code"), and was not taxable
under Section 355(e) of the Code. The Tax Opinion is based on certain
assumptions and the accuracy as of the time of the Distributions of factual
representations made by U.S. Office Products, the Company, and the other
Spin-Off Companies and certain other information, data, documentation and other
materials as Wilmer, Cutler & Pickering deemed necessary.
The Tax Opinion represents Wilmer, Cutler & Pickering's best judgment of
how a court would rule. However, the opinion is not binding upon either the
Internal Revenue Service (the "IRS") or any court. A ruling was not sought from
the IRS with respect to the U.S. federal income tax consequences of the
Workflow Distribution. Accordingly, the IRS and/or a court could reach a
conclusion that differs from the conclusions in the Tax Opinion.
If the Workflow Distribution fails to qualify under Section 355 as a
tax-free spin-off, each holder of U.S. Office Products Common Stock on the
record date of the Distribution will be treated as having received a taxable
corporate distribution in an amount equal to the fair market value (on the
Distribution Date) of the Company Common Stock distributed to such holder of
U.S. Office Products Common Stock including fractional shares. In addition,
U.S. Office Products will recognize gain equal to the difference between the
fair market value of the Company Common Stock (on the Distribution Date) and
U.S. Office Products' adjusted tax basis in the Company Common Stock (on the
Distribution Date). If U.S. Office Products were to recognize gain on the
Workflow Distribution, such gain would likely be substantial.
If the Workflow Distribution is taxable under Section 355(e), but
otherwise satisfies the requirements for a tax-free spin-off, U.S. Office
Products will recognize gain equal to the difference between the fair market
value of the Company Common Stock (on the Distribution Date) and U.S. Office
Products' adjusted tax basis in the Company Common Stock (on the Distribution
Date). However, no gain or loss will be recognized by holders of U.S. Office
Products Common Stock (except with respect to cash received in lieu of
fractional shares). If U.S. Office Products were to recognize gain on the
Workflow Distribution, such gain would likely be substantial.
POTENTIAL LIABILITY FOR TAXES RELATED TO THE DISTRIBUTIONS. In connection
with the Distributions, the Company entered into the Tax Allocation Agreement,
which provides that the Company and the other Spin-Off Companies will jointly
and severally indemnify U.S. Office Products for any losses associated with
taxes related to the Distributions ("Distribution Taxes") if an action or
omission (an "Adverse Tax Act") of the Company or the other Spin-Off Companies
materially contributes to a final determination that any or all of the
Distributions are taxable. Workflow Management has also entered into the Tax
Indemnification Agreement with the other Spin-Off Companies under which the
company that is responsible for the Adverse Tax Act will indemnify the other
companies for any liability to indemnify U.S. Office Products under the Tax
Allocation Agreement. As a consequence, Workflow Management will be liable for
any Distribution Taxes resulting from any Adverse Tax Act by Workflow
Management and liable (subject to indemnification by the other Spin-Off
Companies) for any Distribution Taxes resulting from an Adverse Tax Act by the
other Spin-Off Companies. If there is a final determination that any or all of
the Distributions are taxable and it is determined that there has not been an
Adverse Tax Act by either U.S. Office Products, the Company or the other
Spin-Off Companies, U.S. Office Products, the Company and the other Spin-Off
Companies will be liable for their pro rata portion of the Distribution Taxes
based on the value of each company's common stock after the Distributions. As a
result, the Company could become liable for a pro rata portion of any
Distribution Taxes with respect not only to the Workflow Distribution, but also
any of the other Distributions.
POSSIBLE LIMITATIONS ON ISSUANCES OF COMMON STOCK. Section 355(e) of the
Code, which was added in 1997, generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
spun-off subsidiary is acquired by one or more persons acting pursuant to a
plan or series of related transactions that include the spin-off. Stock
acquired by certain related persons is aggregated in determining whether the
50%
11
test is met. There is a presumption that any acquisition occurring two years
before or after the spin-off is pursuant to a plan that includes the spin-off.
However, the presumption may be rebutted by establishing that the spin-off and
such acquisition are not part of a plan or series of related transactions. This
limitation could adversely affect the pace of Workflow Management's
acquisitions and its ability to issue Company Common Stock for other purposes,
including equity offerings.
RISKS RELATED TO ALLOCATION FOR CERTAIN LIABILITIES. Under the
Distribution Agreement, Workflow Management is and became liable for (i) any
liabilities arising out of or in connection with the business conducted by it
or its subsidiaries, (ii) its liabilities under the Employee Benefits
Agreement, Tax Allocation Agreement and related agreements, (iii) $45.6 million
of U.S. Office Products' debt that was allocated to the Company, (iv)
liabilities under the securities laws relating to sections of the Information
Statement/Prospectus distributed to U.S. Office Products' shareholders in
connection with the spin-off, as well as other securities law liabilities
related to Workflow Management's business, that arise from information supplied
to U.S. Office Products (or that should have been supplied, but was not) by
Workflow Management, (v) U.S. Office Products' liabilities for earn-outs from
acquisitions in respect of Workflow Management and its subsidiaries, (vi)
Workflow Management's costs and expenses related to a planned public offering
that did not occur and its bank credit facility, and (vii) $1.0 million of the
transaction costs (including legal, accounting, investment banking and
financial advisory) and other fees incurred by U.S. Office Products in
connection with its Strategic Restructuring Plan. Each of the other Spin-Off
Companies is similarly obligated to U.S. Office Products. Workflow Management
and the other Spin-Off Companies have also agreed to bear a pro rata portion of
(i) U.S. Office Products' liabilities under the securities laws (other than
claims relating solely to a specific spin-off company or relating specifically
to the continuing businesses of U.S. Office Products) and (ii) U.S. Office
Products' general corporate liabilities (other than debt, except for that
specifically allocated to the Company and the other Spin-Off Companies)
incurred prior to the Distributions (I.E., liabilities not related to the
conduct of a particular distributed or retained subsidiary's business) (the
"Shared Liabilities"). If the Company or one of the other Spin-Off Companies
defaults on an obligation owed to U.S. Office Products, the non-defaulting
spin-off companies will be obligated on a pro rata basis to pay such obligation
("Default Liability"). As a result of the Shared Liabilities and Default
Liability, Workflow Management could be obligated to U.S. Office Products in
respect of obligations and liabilities not related to its business or
operations and over which neither it nor its management has or has had any
control or responsibility. The aggregate of the Shared Liabilities and Default
Liability for which any spin-off company may be liable, however, is limited to
$1.75 million.
EMERGING ALTERNATIVE TECHNOLOGIES. Electronic forms and electronic data
interchange technologies have recently been introduced. There can be no
assurance that such emerging technologies will not have a material adverse
effect on the Company or on the document industry. Over the last several years,
the document industry has undergone a transition as a result of the increased
usage of desk top publishing and laser printer technology, which has led to a
decreased demand for certain document products. The continuation of such
technological changes, or the development of other trends that decrease demand
for documents, could have a material adverse effect on the Company's business,
financial condition or results of operations.
ATTRACTION AND RETENTION OF PERSONNEL. The Company's senior management
team does not have experience operating a public company. The Company's
operations depend on the continued efforts of Thomas B. D'Agostino, its Chief
Executive Officer, its other executive officers and the senior management of
certain of its subsidiaries. Furthermore, the Company's operations will likely
depend on the senior management of certain of the companies that may be
acquired in the future. If any of these people becomes unable to continue in
his or her present role, or if the Company is unable to attract and retain
other skilled employees, its business could be adversely affected. The Company
does not have key man life insurance covering any of its executive officers or
other members of senior management of its subsidiaries.
In addition, Jonathan J. Ledecky is serving as a director and an employee
of Workflow Management and is providing services to Workflow Management
pursuant to an employment agreement between Mr. Ledecky and the Company. U.S.
Office Products has assigned to Workflow Management certain rights of, and
obligations under, U.S. Office Products' services agreement with Mr. Ledecky
dated January 13, 1998, as amended and restated as of June 8, 1998. See "Item
11. Executive Compensation." Mr. Ledecky is also serving as a director and
employee of each of the other Spin-Off Companies, and is the director or an
officer of other public companies. Mr. Ledecky may be unable to devote
substantial time to the activities of Workflow Management.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT. The
Company's success and ability to compete depends in part upon its proprietary
technology, trademarks and copyrights. Workflow Management regards the software
underlying its GetSmart, Imagenet and Informa systems as proprietary, and
relies primarily on trade secrets, copyright and trademark law to protect these
proprietary rights. The Company has registered some of its trademarks, and has
no patents issued nor applications pending. Existing trade secrets and
copyright laws afford the Company only limited protection.
12
Unauthorized parties may attempt to copy aspects of the Company's software or
to obtain and use information that Workflow Management regards as proprietary.
Policing unauthorized use of the Company's software is difficult. Workflow
Management generally enters into confidentiality and assignment agreements with
its employees and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's services or technology without authorization, or to
develop similar services or technology independently. Workflow Management is
not aware that any of its software, trademarks or other proprietary rights
infringe the proprietary rights of third parties. However, there can be no
assurance that third parties will not assert infringement claims against
Workflow Management in the future. Any such claims, with or without merit, can
be time consuming and expensive to defend and may require the Company to enter
into royalty or licensing agreements or cease the alleged infringing
activities.
EFFECTS OF CHANGES IN DEMAND FOR DOCUMENTS; CYCLICALITY. Historically, the
Company's operating results have depended heavily on sales of documents. For
the fiscal years ended April 25, 1998 and April 26, 1997, sales of documents
accounted for approximately 50% and 57%, respectively, of the Company's net
sales. Workflow Management anticipates that document sales will continue to
account for a significant percentage of the Company's sales for the foreseeable
future. An important element of the Company's business strategy is to continue
its growth in document sales by continuing to acquire other document companies,
hiring experienced sales representatives, attracting new customers and
increasing sales to existing customers. The overall document industry has not
grown in the last few years, although demand for certain products, such as
laser forms, pressure-sensitive labels, form/label combinations and single-part
cut-sheet mailers has increased. Accordingly, for Workflow Management to
continue its growth in document sales, it must increase its market share and
respond to changes in demand in the overall document industry. No assurance can
be given that Workflow Management will be successful in increasing its market
share or responding to shifts in demand. The failure by the Company to do so
could have a material adverse effect on its business, financial condition or
results of operations.
In addition, the document industry historically has been affected by
general economic and industry cycles that have materially and adversely
affected distributors and manufacturers of documents. No assurance can be given
as to the effect of a continuation of, or change in, such business cycles on
the Company's business, financial condition or results of operations. The delay
or inability of Workflow Management to respond to changing economic cycles
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH CANADIAN OPERATIONS. Workflow Management has
significant operations in Canada. Net sales from the Company's Canadian
operations accounted for approximately 36% of the Company's total net sales in
the fiscal year ended April 25, 1998. As a result, Workflow Management is
subject to certain risks inherent in conducting business internationally,
including fluctuations in currency exchange rates. Workflow Management is also
subject to risks associated with the imposition of protective legislation and
regulations, including those resulting from trade or foreign policy. In
addition, because of the Company's Canadian operations, significant revenues
and expenses are denominated in Canadian dollars. Changes in exchange rates may
have a significant effect on the Company's business, financial condition and
results of operations. Workflow Management does not currently engage in
currency hedging transactions.
UNITED STATES POSTAL RATES; ALTERNATIVE DELIVERY MEDIA. The Company's
operating results depend, to a significant extent, on sales of envelopes. Sales
of envelopes accounted for approximately 29% of the Company's net sales for the
fiscal year ended April 25, 1998. Because the great majority of envelopes used
in the United States are sent through the mail, postal rates are a significant
factor affecting the growth of envelope usage. Historically, increases in
postal rates, relative to changes in the cost of alternative delivery means
and/or advertising media, have resulted in temporary reductions in the growth
rate of mail sent. For example, third class postal rates increased
approximately 50% and 14% in 1991 and 1995, respectively, contributing to a
substantial leveling off in the growth rate of third class mail sent during the
periods following such increases. If postal rates increase, mail volume could
decline, which could reduce revenue from the Company's sale of envelopes and
reduce the Company's earnings and cash flow.
In addition, alternative delivery media may affect the demand for
envelopes. As the current trend towards usage of the Internet and other
electronic media by consumers for such purposes as paying utility and credit
card bills grows, Workflow Management expects the demand for envelopes for such
purposes to decline. Although management believes that overall demand for
envelopes, particularly the custom and specialty envelopes Workflow Management
focuses on, will continue to grow at rates comparable to recent historical
levels, competition from alternative media may reduce demand for envelopes, and
the Company's revenues from the sale of envelopes may decrease, which could
reduce the Company's earnings and cash flow.
13
IMPACT OF FLUCTUATIONS IN PAPER PRICES. Paper prices represent a
substantial portion of the cost of producing documents, envelopes and
commercial printing distributed and manufactured by the Company. Accordingly,
prevailing paper prices can have a significant impact on the Company's sales.
The timing of increases or decreases in paper prices and any subsequent change
in prices charged to the Company's customers could have a material adverse
effect on the Company's revenues and gross margins. Although Workflow
Management has generally been able to pass increases in paper costs on to its
customers, for competitive or other reasons, the Company cannot offer any
assurance that it will be able to pass all or a portion of any future paper
price or other cost increases on to its customers. If Workflow Management were
unable to pass on these costs, profit margins would decrease, which could
reduce earnings and cash flow. Moreover, an increase in the Company's prices
for the products it distributes, resulting from a pass-through of increased
paper costs, could reduce the volume of units sold by the Company and decrease
the Company's revenues.
Due to the significance of paper to most of the Company's products,
Workflow Management is dependent upon the availability of paper. During periods
of tight paper supply, many paper producers allocate shipments of paper based
on the historical purchase levels of customers. There can be no assurance that
the Company's document and envelope businesses would not be materially
adversely affected if either Workflow Management or its vendors experienced
difficulty in obtaining adequate quantities of paper in the future. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNIONIZED WORKFORCE. Approximately 31% of the Company's employees in the
United States and approximately 8% of the Company's employees in Canada are
covered by collective bargaining agreements. There can be no assurance that
strikes or work stoppages will not occur in the future. Strikes or work
stoppages and the resultant adverse impact on the Company's relationship with
its customers could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, the Company's
acquisition strategy could be adversely affected because of its union status
for a variety of reasons, including without limitation, incompatibility with a
target's existing unions and reluctance of non-union targets to become
affiliated with a union based company.
COST AND RISKS OF LOSS RELATING TO ENVIRONMENTAL REGULATION. The Company's
operations and real property are subject to the Environmental Laws. Workflow
Management utilizes certain hazardous materials, such as washes, inks,
alcohol-based products, fountain solution, photographic fixer and developer
solutions, machine and hydraulic oils and solvents. While management believes
that the Company's current operations are in substantial compliance with
Environmental Laws, there can be no assurance that all potential environmental
liabilities have been identified, or that future uses, conditions or legal
requirements (including without limitation those that may result from future
acts or omissions or changes in applicable Environmental Laws) will not
materially adversely affect the Company's business or operations in the future.
See " -- Environmental Regulations" above.
COMPETITION. Workflow Management competes for retail sales of documents
and envelopes against other independent distributors and against manufacturers'
direct sales organizations. In commercial printing, the Company also competes
with manufacturers' direct sales organizations, independent brokers,
advertising agencies and design firms. The principal competitive factors in the
graphic arts industry are price, quality, selection, services, production
capacity, delivery and customer support.
Although Workflow Management often competes with smaller businesses, it
also competes against the largest competitors in the North American documents
industry, such as Moore Corporation Ltd., Reynolds & Reynolds Company, Standard
Register Company and Wallace Computer Services, Inc., and the largest
competitors in the U.S. envelope industry, such as Mail-Well, Westvaco and
Tension Envelope Company. The largest competitors for commercial printing
include direct sales organizations of Graphic Industries, Inc., R. R. Donnelley
& Sons, Quebecor, Inc. and World Color Press, Inc. Most of these competitors
have substantially greater financial resources than the Company. See " --
Competition" above.
INABILITY TO ASSIGN CONTRACTS. In connection with the Workflow
Distribution, certain operating companies (the "Predecessor Companies")
reorganized into new business entities (the "Successor Companies"). The
Predecessor Companies entered into numerous contracts, including leases,
employment and services contracts that require the consents of the other
parties to assignment of such contracts to the Successor Companies. To date,
the Company has not obtained all of such consents. Failure to obtain any or all
of such consents could result in loss of benefits under leases or employment
contracts, or loss of revenues or the acceleration of obligations thereunder or
under other contracts. There can be no assurance that all of the parties to
contracts with Predecessor Companies will consent to the assignment of these
contracts to the Successor Companies. Inability to assign all of these
contracts may have a material adverse effect on the Successor Companies and
Workflow Management as a whole.
14
NO DIVIDENDS. Workflow Management does not expect to pay cash dividends on
Company Common Stock in the foreseeable future. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters."
ABSENCE OF PUBLIC MARKET. Prior to the Workflow Distribution, there was no
public market for the Company Common Stock. The trading price of the Company
Common Stock could be subject to wide fluctuations in response to variations in
the Company's quarterly operating results, changes in earnings estimates by
analysts, conditions in the Company's businesses, general market or economic
conditions or other factors. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had
a substantial effect on the market prices for many companies, often unrelated
to the operating performance of the specific companies. Such market
fluctuations could have a material adverse effect on the market price of the
Company Common Stock.
CONSIDERATION FOR OPERATING COMPANIES EXCEEDS ASSET VALUE. To date, the
purchase prices of the Company's acquisitions have not been established by
independent appraisals, but generally have been determined through arm's-length
negotiations between the Company's management and representatives of such
companies. The consideration paid for each such company has been based
primarily on the value of such company as a going concern and not on the value
of the acquired assets. Valuations of these companies determined solely by
appraisals of the acquired assets would have been less than the consideration
paid for the companies. No assurance can be given that the future performance
of such companies will be commensurate with the consideration paid. Workflow
Management does not expect to value future acquisitions on the basis of asset
appraisals. Therefore, this risk will apply to future acquisitions as well.
RISK OF LOSS FROM POSSIBLE FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE.
Several of the Company's operating companies are using billing or other
software that is not Year 2000 compliant. The Company has not quantified the
costs of addressing its Year 2000 issues, but it believes that the necessary
adaptations of these systems can be completed in the next 18 months, and that
the costs of achieving compliance will not be material. If the Company is
unable to make the necessary adaptations on a timely basis, or if the costs are
greater than expected, the consequences of untimely resolution or the costs of
complying could have an adverse impact on the Company's business or operations.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
15
ITEM 2. PROPERTIES
The following table sets forth certain information about the Company's
executive offices and manufacturing and printing facilities.
APPROXIMATE LEASE
FUNCTION AND LOCATION SQUARE FOOTAGE TITLE EXPIRATION
- -------------------------------- ---------------- -------- ---------------
EXECUTIVE OFFICE:
Palm Beach, Florida 5,300 Leased 2003
MANUFACTURING AND PRINTING:
Conyers, Georgia 71,300 Leased 2006
Mt. Olive, Illinois 82,000 Leased 2004
Springfield, Massachusetts 65,000 Leased 2004
Lyndhurst, New Jersey 16,000 Leased 2000
New York, New York 160,000 Leased 2002
New York, New York 53,000 Leased 2005
New York, New York 60,000 Leased 2002
Norfolk, Virginia 26,400 Owned
Mt. Pocono, Pennsylvania 140,000 Owned
Calgary, Alberta 48,000 Leased 1999
Calgary, Alberta 30,000 Leased 1999
Edmonton, Alberta 81,000 Leased 2006
Victoria, British Columbia 14,000 Leased 1999
Winnipeg, Manitoba 12,500 Leased 2002
Brampton, Ontario 174,500 Leased 1999
Brampton, Ontario 44,200 Leased 2000
London, Ontario 17,500 Leased month-to-month
Mississauga, Ontario 60,000 Leased 2004
Mississauga, Ontario 7,200 Leased month-to-month
Toronto, Ontario 10,000 Leased 2000
Regina, Saskatchewan 28,000 Leased 2006
Dorval, Quebec 42,000 Owned
Granby, Quebec 100,000 Owned
Pointe Claire, Quebec 30,000 Leased 1998
In addition to those facilities identified above, Workflow Management
leases other offices, warehouses and distribution centers across the United
States and Canada.
Workflow Management believes that its properties are adequate to support
its operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Workflow Management is involved in various lawsuits arising in the
ordinary course of business. Workflow Management believes that the outcome of
these matters will not have a material adverse effect on the Company's
business, financial condition or results of operations.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. By unanimous written consent in lieu of a special meeting of the sole
shareholder of the Company, dated February 1998, an amendment to the
Company's Certificate of Incorporation was adopted changing the legal name
of the Company from "Workflow Graphics, Inc." to "Workflow Management,
Inc." At the time of the consent, U.S. Office Products was the sole
shareholder of the Company.
b. By unanimous written consent in lieu of special meeting of the sole
shareholder of the Company, effective April 15, 1998, the Company adopted
Plans of Merger with SFI Corp. and United Co. These mergers were
consummated in contemplation of the Company's spin-off from U.S. Office
Products. See "Item 1. Business -- Spin-off from U.S. Office Products." At
the time of the consent, U.S. Office Products was the sole shareholder of
the Company.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. On June 10, 1998, the shares of the Company's Common Stock began
trading on the Nasdaq National Market ("Nasdaq") under the symbol "WORK." Prior
to June 10, 1998, there was no public market for the Common Stock.
The Company does not anticipate declaring and paying cash dividends on the
Common Stock in the foreseeable future. The decision whether to apply any
legally available funds to the payment of dividends on the Common Stock will be
made by the Company's Board of Directors from time to time in the exercise of
its business judgment, taking into account the Company's financial condition,
results of operations, existing and proposed commitments for use of the
Company's funds and other relevant factors. In addition, the Company's credit
agreement with its principal lender expressly prohibits the payment of any cash
dividends on the Common Stock. Any payment of cash dividends would therefore
require the lender's consent.
On July 15, 1998, the Company had approximately 3,950 shareholders of
record.
B. Effective February 13, 1998, the Company issued 1,000 shares of Common
Stock to U.S. Office Products in a private placement for aggregate cash
consideration of $1,000. The issuance of the shares was exempt from the
registration requirements of the Securities Act of 1933 ("Securities Act")
pursuant to Section 4(2) thereof and Regulation D, Rules 504, 505 and 506
promulgated thereunder. The shares were issued to capitalize the Company as a
subsidiary of U.S. Office Products in contemplation of the Company's spin-off
from U.S. Office Products.
C. In connection with the Company's spin-off from U.S. Office Products,
the Company filed a Registration Statement (Commission File No. 333-46535) on
Form S-1 that registered under the Securities Act the 14,625,268 shares of
Common Stock distributed to U.S. Office Products' shareholders. Shareholders of
U.S. Office Products were not required to pay any consideration for the shares
of Common Stock received in the spin-off and the Company therefore did not
receive any proceeds in connection with the share distribution. The Company
also filed a Registration Statement on Form S-1 under the Securities Act
(Commission File No. 333-47505) in connection with a planned initial public
offering of Common Stock. The Company elected not to proceed with the offering
and, therefore, did not receive any proceeds in connection with the shares
registered under this Registration Statement.
ITEM 6. SELECTED FINANCIAL DATA
The historical Statement of Income Data for the year ended December 31,
1995, the four months ended April 30, 1996 and the fiscal years ended April 26,
1997 and April 25, 1998 and the Balance Sheet Data at April 26, 1997 and April
25, 1998 have been derived from Workflow Management's consolidated financial
statements that have been audited and are included elsewhere in this Annual
Report on Form 10-K. The historical Statement of Income Data for the years
ended December 31, 1993 and 1994 and the Balance Sheet Data at December 31,
1993, 1994 and 1995 and April 30, 1996 have been derived from unaudited
consolidated financial statements which are not included elsewhere in this
Annual Report.
The Selected Financial Data provided herein should be read in conjunction
with the Company's historical financial statements, including the notes
thereto, and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
SELECTED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 (2)
---------------- ---------------- ----------------
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 121,463 $ 154,193 $ 309,426
Cost of revenues ................................. 88,255 114,885 234,959
--------- --------- ---------
Gross profit .................................... 33,208 39,308 74,467
Selling, general and administrative expenses ..... 27,683 32,020 62,012
Restructuring costs ..............................
Strategic restructuring costs ....................
Non-recurring acquisition costs ..................
--------- --------- ---------
Operating income ................................ 5,525 7,288 12,455
Other (income) expense:
Interest expense ................................ 1,328 2,048 5,370
Interest income ................................. (116)
Other ........................................... 511 186 62
--------- --------- ---------
Income before provision for (benefit from)
income taxes and extraordinary items ............ 3,802 5,054 7,023
Provision for (benefit from)
income taxes (3) ................................ 260 379 (33)
--------- --------- ---------
Income before extraordinary items ................ 3,542 4,675 7,056
Extraordinary items -- losses on early
terminations of credit facilities, net of
income taxes (4) ................................ 700
--------- --------- ---------
Net income ....................................... $ 3,542 $ 4,675 $ 6,356
========= ========= =========
Per share amounts:
Basic:
Income before extraordinary items ............. $ 0.60 $ 0.77 $ 0.90
Extraordinary items ........................... 0.09
--------- --------- ---------
Net income .................................... $ 0.60 $ 0.77 $ 0.81
========= ========= =========
Diluted:
Income before extraordinary items ............. $ 0.60 $ 0.77 $ 0.88
Extraordinary items ........................... 0.09
-------- --------- ---------
Net income .................................... $ 0.60 $ 0.77 $ 0.79
========= ========= =========
Weighted average shares outstanding:
Basic ........................................... 5,901 6,075 7,875
Diluted ......................................... 5,901 6,094 8,003
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------- --------- ---------
BALANCE SHEET DATA:
Working capital .................................. $ 7,264 $ 8,583 $ 20,127
Total assets ..................................... 48,374 51,357 120,630
Short-term debt payable to U.S. Office
Products ........................................
Long-term debt, less current portion ............. 9,632 7,355 28,812
Long-term debt payable to U.S. Office
Products ........................................
Stockholder's equity ............................. 11,675 12,889 24,719
FOUR MONTHS
ENDED FISCAL YEAR ENDED
------------ --------------------------
APRIL 30, APRIL 26, APRIL 25,
1996 1997 1998
------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 114,099 $ 327,381 $ 353,351
Cost of revenues ................................. 82,998 236,340 260,299
--------- --------- ---------
Gross profit .................................... 31,101 91,041 93,052
Selling, general and administrative expenses ..... 22,485 70,949 73,801
Restructuring costs .............................. 872
Strategic restructuring costs .................... 1,750
Non-recurring acquisition costs .................. 5,006
----- --------- --------
Operating income ................................ 8,616 15,086 16,629
Other (income) expense:
Interest expense ................................ 1,676 4,561 2,210
Interest income ................................. (18) (25) (274)
Other ........................................... (151) 632 (258)
--------- --------- ---------
Income before provision for (benefit from)
income taxes and extraordinary items ............ 7,109 9,918 14,951
Provision for (benefit from)
income taxes (3) ................................ 1,351 3,690 6,743
--------- --------- ---------
Income before extraordinary items ................ 5,758 6,228 8,208
Extraordinary items -- losses on early
terminations of credit facilities, net of
income taxes (4) ................................ 798
---------
Net income ....................................... $ 5,758 $ 5,430 $ 8,208
========= ========= =========
Per share amounts:
Basic:
Income before extraordinary items ............. $ 0.56 $ 0.52 $ 0.51
Extraordinary items ........................... 0.07
--------- --------- ---------
Net income .................................... $ 0.56 $ 0.45 $ 0.51
========= ========= =========
Diluted:
Income before extraordinary items ............. $ 0.55 $ 0.51 $ 0.50
Extraordinary items ........................... 0.07
--------- --------- ---------
Net income .................................... $ 0.55 $ 0.44 $ 0.50
========= ========= =========
Weighted average shares outstanding:
Basic ........................................... 10,333 12,003 15,941
Diluted ......................................... 10,547 12,235 16,257
APRIL 30, APRIL 26, APRIL 25,
1996 1997 1998
--------- --------- ---------
BALANCE SHEET DATA:
Working capital .................................. $ 23,378 $ 16,910 $ 33,625
Total assets ..................................... 117,949 125,108 146,678
Short-term debt payable to U.S. Office
Products ........................................ 23,622 13,536
Long-term debt, less current portion ............. 28,108 6,034 7,065
Long-term debt payable to U.S. Office
Products ........................................ 561 19,221
Stockholder's equity ............................. 29,120 47,780 59,491
19
(1) The historical financial information of the Pooled Companies (as defined in
Item 7. below) has been combined on a historical cost basis in accordance
with generally accepted accounting principles ("GAAP") to present this
financial data as if the Pooled Companies had always been members of the
same operating group. The financial information of the Purchased Companies
(as defined in Item 7. below) is included from the dates of their
respective acquisitions. See Note 4 of the Company's Notes to Consolidated
Financial Statements for a description of the number and accounting
treatment of the acquisitions by the Company.
(2) The results for the year ended December 31, 1995 include the results of
DBF, one of the Pooled Companies, from its date of incorporation on
February 8, 1995.
(3) Certain Pooled Companies were organized as subchapter S corporations prior
to the closing of their acquisitions by the Company and, as a result, the
federal tax on their income was the responsibility of their individual
stockholders. Accordingly, the specific Pooled Companies provided no
federal income tax expense prior to their acquisitions by the Company.
(4) Extraordinary items represent the losses associated with the early
terminations of credit facilities at one Pooled Company, net of the
related income tax benefits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. Workflow Management is an integrated graphic arts company
providing documents, envelopes and commercial printing to more than 22,000
businesses in the United States and Canada. The Company's subsidiaries
comprised the Print Management Division of U.S. Office Products, which acquired
such companies on the following dates: SFI and a related company, Hano, on
January 24, 1997; United on April 25, 1997; DBF on April 26, 1997; FMI
Graphics, Inc. ("FMI") on July 17, 1997, which was subsequently merged into
SFI; and Astrid on February 26, 1998. As part of the Company's spin-off from
U.S. Office Products, these companies became direct or indirect wholly-owned
subsidiaries of Workflow Management. See "Item 1. Business - Spin-off from U.S.
Office Products."
Workflow Management's consolidated financial statements give retroactive
effect to the seven business combinations accounted for under the
pooling-of-interests method during the period from January 1997 through April
1997 (the "Pooled Companies") and include the results of the three companies
acquired in business combinations accounted for under the purchase method, each
from its acquisition date (the "Purchased Companies"). Prior to their
respective dates of acquisition by U.S. Office Products, the Pooled Companies
reported results for years ended on December 31. Upon acquisition by U.S.
Office Products and effective for the fiscal year ended April 26, 1997 ("Fiscal
1997"), the Pooled Companies changed their year-ends from December 31 to
conform with U.S. Office Products' fiscal year, which ends on the last Saturday
of April. The following discussion should be read in conjunction with Workflow
Management's consolidated financial statements and related notes thereto
appearing elsewhere in this Form 10-K.
In accordance with GAAP, the Company will be unable to utilize the
pooling-of-interests method to account for acquisitions for a period of two
years following the Workflow Distribution. During this period, the Company will
not reflect any non-recurring acquisition costs in its results of operations,
as all costs incurred of this nature would be related to acquisitions accounted
for under the purchase method and, therefore, would be capitalized as a portion
of the purchase consideration.
20
RESULTS OF OPERATIONS.
The following table sets forth various items as a percentage of revenues
for the fiscal years ended April 25, 1998 and April 26, 1997 and the year ended
December 31, 1995:
FISCAL YEAR ENDED YEAR ENDED
------------------------- -------------
APRIL 25, APRIL 26, DECEMBER 31,
1998 1997 1995
----------- ----------- -------------
Revenues .................................................................... 100.0% 100.0% 100.0%
Cost of revenues ............................................................ 73.7 72.2 75.9
----- ----- -----
Gross profit ............................................................... 26.3 27.8 24.1
Selling, general and administrative expenses ................................ 20.9 21.7 20.1
Restructuring costs ......................................................... 0.2
Strategic restructuring costs ............................................... 0.5
Non-recurring acquisition costs ............................................. 1.5
----- ----- -----
Operating income ........................................................... 4.7 4.6 4.0
Interest expense, net ....................................................... 0.6 1.4 1.7
Other (income) .............................................................. ( 0.1) 0.2
----- ----- -----
Income before provision for income taxes and extraordinary items ............ 4.2 3.0 2.3
Provision for income taxes .................................................. 1.9 1.1
----- ----- -----
Income before extraordinary items ........................................... 2.3 1.9 2.3
Extraordinary items -- losses on early terminations of credit facilities,
net of income taxes ........................................................ 0.2 0.2
----- ----- -----
Net income .................................................................. 2.3% 1.7% 2.1%
===== ===== =====
CONSOLIDATED RESULTS OF OPERATIONS.
FISCAL YEAR ENDED APRIL 25, 1998 COMPARED TO FISCAL YEAR ENDED APRIL 26,
1997
Consolidated revenues increased 7.9%, from $327.4 million for Fiscal 1997
to $353.4 million for the year ended April 25, 1998 ("Fiscal 1998"). This
increase was primarily due to sales to a large new account, passing on
increased product costs to customers, increased sales to existing customers and
the purchase acquisitions of FMI and Astrid during Fiscal 1998.
Gross profit increased 2.2%, from $91.0 million, or 27.8% of revenues, for
Fiscal 1997 to $93.1 million, or 26.3% of revenues, for Fiscal 1998. This
decrease in gross profit as a percentage of revenues was primarily due to
inefficiencies related to the start-up period of a large new account.
Selling, general and administrative expenses increased 4.0%, from $70.9
million, or 21.7% of revenues, for Fiscal 1997 to $73.8 million, or 20.9% of
revenues, for Fiscal 1998. This decrease in selling, general and administrative
expenses as a percentage of revenues was primarily due to an increase in
revenues combined with a decrease in executive compensation at the subsidiary
level.
The Company incurred restructuring costs of $872,000 during Fiscal 1998.
These costs represent the external costs and liabilities to close redundant
Company facilities, severance costs related to the Company's employees and
other costs associated with the Company's restructuring plans. The Company
expects to incur similar costs in the future as the Company continues to review
its operations.
The Company also incurred expenses of approximately $1.8 million during
Fiscal 1998 associated with the U.S. Office Products Strategic Restructuring
Plan. As a result of the Workflow Distribution, U.S. Office Products allocated
$1.0 million to the Company for its share of the transaction costs (including
legal, accounting, investment banking and financial advisory) and other fees
incurred by U.S. Office Products in connection with the Strategic Restructuring
Plan. In addition to the allocation by U.S. Office Products, the Company itself
incurred an additional $750,000 in transaction costs during Fiscal 1998
relating to the Strategic Restructuring Plan for legal, accounting and
financial advisory services and various other fees.
21
The Company incurred non-recurring acquisition costs of $5.0 million for
Fiscal 1997 in conjunction with business combinations accounted for under the
pooling-of-interests method. These non-recurring acquisition costs included
accounting, legal and investment banking fees, real estate and environmental
assessments and appraisals and various regulatory fees. GAAP requires the
Company to expense all acquisition costs (both those paid by the Company and
those paid by the sellers of the acquired companies) related to business
combinations accounted for under the pooling-of-interests methods of
accounting.
Interest expense, net of interest income, decreased 57.3%, from $4.5
million for Fiscal 1997 to $1.9 million for Fiscal 1998. The decrease was due
primarily to the fact that a portion of the debt outstanding during Fiscal 1997
was repaid by U.S. Office Products upon acquisition of the Pooled Companies and
was replaced with intercompany debt bearing interest at U.S. Office Products'
lower cost of borrowing rate.
Other expense decreased $890,000 from other expense of $632,000 for Fiscal
1997, to other income of $258,000 for Fiscal 1998. The decrease is primarily
the result of costs incurred at one of the Pooled Companies, during Fiscal
1997, relating to a contemplated initial public offering that was aborted as a
result of that company's acquisition by U.S. Office Products.
Provision for income taxes increased from $3.7 million for Fiscal 1997 to
$6.7 million for Fiscal 1998, reflecting effective income tax rates of 37.2%
and 45.1%, respectively. The lower effective tax rate for Fiscal 1997, compared
to the federal statutory rate of 35.0% plus state taxes, is the result of
certain of the companies included in the results not being subject to federal
income taxes on a corporate level as they had elected to be treated as
subchapter S corporations. The higher effective tax rate for Fiscal 1998,
compared to the federal statutory rate of 35.0% plus state taxes, is a result
of nondeductibl e goodwill amortization and nondeductible costs associated with
the Strategic Restructuring Plan.
FISCAL YEAR ENDED APRIL 26, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenues increased 5.8%, from $309.4 million in 1995, to
$327.4 million in Fiscal 1997. This increase was primarily due to sales to a
large new account, passing on increased product costs to customers and
increased sales to existing customers.
Gross profit increased 22.3%, from $74.5 million, or 24.1% of revenues, in
1995 to $91.0 million, or 27.8% of revenues, in Fiscal 1997. The increase in
gross profit as a percentage of revenues was due primarily to cost reductions
resulting from an increased utilization of Company owned manufacturing
facilities and to increased rebates and purchase discounts from vendors.
Selling, general and administrative expenses increased 14.4%, from $62.0
million, or 20.1% of revenues, in 1995 to $70.9 million, or 21.7% of revenues,
in Fiscal 1997. The increase in selling, general and administrative expenses as
a percentage of revenues was due primarily to an increase in fixed costs as a
result of expansions to Company facilities for anticipated future growth.
The Company incurred non-recurring acquisition costs of $5.0 million for
the fiscal year ended April 26, 1997 in conjunction with business combinations
accounted for under the pooling-of-interests method.
Interest expense, net of interest income, decreased 15.5%, from $5.4
million in 1995 to $4.5 million in Fiscal 1997. The decrease was due primarily
to the fact that a portion of the debt outstanding during 1995 was repaid by
U.S. Office Products upon acquisition of the Pooled Companies and U.S. Office
Products did not charge the Company interest on the long-term portion of the
payable balance.
Other expense increased $570,000, from $62,000 in 1995, to $632,000 in
Fiscal 1997. Fiscal 1997 other expense consists primarily of costs incurred at
one of the Pooled Companies, prior to its acquisition, relating to a
contemplated initial public offering that was aborted as a result of that
company's acquisition by U.S. Office Products.
Provision for income taxes increased from a benefit of $33,000 in 1995 to
an expense of $3.7 million in Fiscal 1997, reflecting effective income tax
rates of -0.5% and 37.2%, respectively. The benefit from income taxes in 1995,
compared to the federal statutory rate of 35.0% plus state taxes, is the result
of certain of the companies included in the results not being subject to
federal income taxes on a corporate level as they had elected to be treated as
subchapter S corporations. In Fiscal 1997, this effect was partially offset by
non-deductible non-recurring acquisition costs.
During Fiscal 1997, the Company incurred an extraordinary item totaling
$798,000, which represented the expenses, net of the expected income tax
benefit, associated with the early termination of the credit facility at one of
the Pooled Companies during Fiscal 1997.
22
LIQUIDITY AND CAPITAL RESOURCES.
At April 25, 1998, the Company had cash of $234,000 and working capital of
$33.6 million. The Company's capitalization, defined as the sum of long-term
debt, long-term payable to U.S. Office Products and stockholder's equity, at
April 25, 1998 was approximately $85.8 million.
During Fiscal 1998, net cash provided by operating activities was $4.5
million. Net cash used in investing activities was $18.0 million, including
$12.8 million of net cash paid in acquisitions, $4.4 million of capital
expenditures and the payment of non-recurring acquisition costs of $906,000.
Net cash provided by financing activities totaled $11.5 million, consisting
primarily of $8.6 million in advances from U.S. Office Products and a $2.5
million capital contribution by U.S. Office Products.
During Fiscal 1997, net cash provided by operating activities was $19.7
million. Net cash used in investing activities was $14.1 million, including
$4.1 million of cash paid for non-recurring acquisition costs and $9.5 million
of capital expenditures. Net cash used in financing activities totaled $4.7
million, consisting primarily of the repayment of debt of $17.2 million and the
payment of dividends at Pooled Companies of $6.1 million, partially offset by
the $20.1 million capital contribution by U.S. Office Products.
During the year ended December 31, 1995, net cash provided by operating
activities was $11.1 million. Net cash used in investing activities was $42.4
million, including $37.9 million of net cash paid in acquisitions and $5.9
million of capital expenditures. Net cash provided by financing activities
totaled $31.4 million, consisting primarily of an increase in debt of $35.8
million and the payment of dividends at Pooled Companies of $3.9 million.
Workflow Management has significant operations in Canada. Net sales and
income before provision for income taxes from the Company's Canadian operations
accounted for approximately 36.2% and 34.8% of the Company's total net sales
and income before provision for income taxes, respectively, in Fiscal 1998. As
a result, Workflow Management is subject to certain risks inherent in
conducting business internationally, including fluctuations in currency
exchange rates. Changes in exchange rates may have a significant effect on the
Company's business, financial condition and results of operations. The Company
is currently reviewing certain hedge transaction options to mitigate the effect
of currency fluctuations.
Workflow Management's anticipated capital expenditures budget for the next
twelve months is approximately $10.0 million for new equipment and maintenance.
As a result of the provisions of Section 355 of the Code, the Company may
be subject to constraints on its ability to issue additional shares of Company
Common Stock in certain transactions for two years following the date of the
Workflow Distribution. In particular, if 50% or more, by vote or value, of the
capital stock of Workflow Management is acquired by one or more persons acting
pursuant to a plan or series of transactions that includes the Workflow
Distribution, Workflow Management will suffer significant tax liability.
Workflow Management will evaluate any significant future issuance of capital
stock to avoid the imposition of such tax liability. See "Item 1. Business -
Risk Factors."
The Distribution Agreement with U.S. Office Products called for an
allocation of $45.6 million of debt by U.S. Office Products resulting in the
forgiveness of $2.5 million and $20.1 million of debt during Fiscal 1998 and
Fiscal 1997, respectively, which is reflected in the Company's financial
statements as a contribution of capital by U.S. Office Products. The Company
has entered into a secured $150.0 million revolving credit facility
underwritten and agented by Bankers Trust Company. The credit facility matures
approximately five years from the Distribution Date and is secured by
substantially all assets of the Company. The credit facility is subject to
terms and conditions typical of a credit facility of such type and size,
including certain financial covenants. Interest rate options are available to
the Company conditioned on certain leverage tests. The maximum rate of interest
will be the prime rate from time to time in effect. Workflow Management expects
that the credit facility is adequate to fund working capital and capital
expenditure needs. The credit facility will also be available to fund the cash
portion of future acquisitions, subject to the maintenance of bank covenants.
The Company has repaid the $45.6 million of debt owed to U.S. Office Products
with funds available under the credit facility.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the bank line of credit
will be sufficient to meet the Company's liquidity requirements for its
operations for the next 12 months. However, the Company intends to pursue
acquisitions, which are expected to be funded through cash, stock or a
combination thereof. There can be no assurance that additional sources of
financing will not be required during the next 12 months or thereafter.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. Workflow Management's
envelope business is subject to seasonal influences from holiday mailings. As
Workflow Management continues to complete acquisitions, it may become subject
23
to other seasonal influences if the businesses it acquires are seasonal.
Quarterly results also may be materially affected by the timing of
acquisitions, the timing and magnitude of costs related to such acquisitions,
variations in the prices paid by the Company for the products it sells, the mix
of products sold and general economic conditions. Moreover, the operating
margins of companies acquired may differ substantially from those of Workflow
Management, which could contribute to further fluctuation in its quarterly
operating results. Therefore, results for any quarter are not necessarily
indicative of the results that Workflow Management may achieve for any
subsequent fiscal quarter or for a full fiscal year.
The following tables set forth certain unaudited quarterly financial data
for Fiscal 1998 and Fiscal 1997 (in thousands, except for per share amounts).
The information has been derived from unaudited consolidated financial
statements that in the opinion of management reflect adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of such
quarterly information.
FISCAL 1998 QUARTERS
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FIRST SECOND THIRD FOURTH TOTAL
------------- ------------ ------------ ------------ -------------
Revenues ...................... $ 82,163 $ 88,884 $ 86,730 $ 95,574 $ 353,351
Gross profit .................. 21,895 23,314 22,086 25,757 93,052
Operating income .............. 4,975 4,842 4,395 2,417 16,629
Net income .................... 2,703 2,582 2,265 658 8,208
Net income per share: .........
Basic ........................ 0.19 0.18 0.13 0.04 0.51
Diluted ...................... 0.19 0.17 0.13 0.04 0.50
FISCAL 1997 QUARTERS
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FIRST SECOND THIRD FOURTH TOTAL
------------- ------------- ----------- ----------- --------------
Revenues ................... $ 78,071 $ 80,227 $ 81,453 $ 87,630 $ 327,381
Gross profit ............... 21,717 22,518 22,647 24,159 91,041
Operating income ........... 4,650 6,085 1,510 2,841 15,086
Net income (loss) .......... 2,974 3,181 (658) (67) 5,430
Net income (loss) per share:
Basic ..................... 0.27 0.28 (0.06) (0.00) 0.45
Diluted ................... 0.27 0.27 (0.05) (0.00) 0.44
INFLATION. The Company does not believe that inflation had a material
impact on its results of operations during 1995 or the fiscal years ended April
26, 1997 and April 25, 1998.
NEW ACCOUNTING PRONOUNCEMENTS - REPORTING COMPREHENSIVE INCOME. In June
1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. Workflow
Management intends to adopt SFAS No. 130 in the fiscal year ending April 24,