Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Form 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2003

OR

[_]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to ___________________.

Commission File Number 0-24383

WORKFLOW MANAGEMENT, INC. (Exact name of registrant as specified in its charter)

Delaware		06-1507104
(State or other jurisdiction of incorporation or organization.)		(I.R.S. Employer Identification No.)

240 Royal Palm Way
Palm Beach, FL (Address of principal executive offices)		33480
		(Zip Code)

(561) 659-6551 (Registrant's telephone number, including area code)

N/A (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X        No___.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X

As of March 13, 2003, there were 13,273,922 shares of common stock outstanding.

WORKFLOW MANAGEMENT, INC. INDEX

Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheet    January 31, 2003 (unaudited) and April 30, 2002	3
	Consolidated Statement of Operations (unaudited)     For the three and nine months ended January 31, 2003 and January 31, 2002	4
	Consolidated Statement of Cash Flows (unaudited)     For the three and nine months ended January 31, 2003 and January 31, 2002	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition     and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	31
Item 4	Controls and Procedures	31
PART II - OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	32
Signatures		33
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002		33
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002		36

 

Page 2

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

WORKFLOW MANAGEMENT, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share amounts)

ASSETS	January 31, 2003		April 30, 2002
	(Unaudited)
Current assets:
Cash and cash equivalents	$     6,054		$     5,262
Accounts receivable, less allowance for doubtful     accounts of $2,976 and $4,917, respectively	88,808		102,184
Inventories	47,149		50,529
Prepaid expenses and other current assets	7,291		7,976
Deferred taxes	14,707		5,845
Assets held for sale	8,334
Total current assets	172,343		171,796
Property and equipment, net	38,557		48,992
Goodwill	125,130		128,232
Other intangible assets, net	1,371		1,544
Other assets	12,388		7,635
Total assets	$ 349,789		$ 358,199
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$   56,452		$ 157,843
Accounts payable	40,978		42,594
Accrued compensation	10,012		12,641
Accrued additional purchase consideration	5,683		8,525
Other accrued liabilities	23,030		23,963
Liabilities held for sale	3,334
Total current liabilities	139,489		245,566
Long-term debt	111,347		1,500
Deferred income taxes	6,825		6,820
Long-term swap contract liability	4,023		3,666
Other long-term liabilities	3,182		3,865
Total liabilities	264,866		261,417
Stockholders' equity:   Preferred stock, $.001 par value, 1,000,000 shares    authorized, none outstanding    Common stock, $.001 par value, 150,000,000 shares    authorized, 13,267,694 and 13,132,724 issued and      outstanding, respectively	13		13
Additional paid-in capital	52,932		52,501
Notes receivable from directors and officers	(977	)	(4,820	)
Accumulated other comprehensive loss	(3,157	)	(6,255	)
Retained earnings	36,112		55,343
Total stockholders' equity	84,923		96,782
Total liabilities and stockholders' equity	$ 349,789		$ 358,199

See accompanying notes to consolidated financial statements.

 

Page 3

 

WORKFLOW MANAGEMENT, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) (Unaudited)

		Three Months Ended				Nine Months Ended
		January 31, 2003		January 31, 2002		January 31, 2003		January 31, 2002
Revenues		$ 160,860		$ 156,179		$ 470,183		$ 460,223
Cost of revenues		118,917		112,230		341,412		330,880
Gross profit		41,943		43,949		128,771		129,343
Selling, general and administrative expenses		36,066		36,065		107,315		108,914
Restructuring costs		23				244
Abandoned software costs		2,105				2,105
Uncollectible notes receivable		681				681
Severance and other employment costs		3,845				3,845
Operating (loss) income		(777	)	7,884		14,581		20,429
Interest expense		5,566		3,432		15,569		10,427
Interest income		(79	)	(191	)	(341	)	(650	)
Loss on ineffective interest rate hedge		300				5,750
Financing fees and other banking related costs		3,162				5,851
Other expense (income)		5		(44	)	15		234
(Loss) income from continuing operations    before (benefit) provision for income taxes		(9,731	)	4,687		(12,263	)	10,418
(Benefit) provision for income taxes		(3,609	)	1,968		(4,180	)	4,350
(Loss) income from continuing operations		(6,122	)	2,719		(8,083	)	6,068
Discontinued operations    (Loss) income from discontinued     operations - including loss on     write-down of assets of $16,657)		(17,059	)	54		(16,924	)	695
(Benefit) provision for income taxes		(5,832	)	23		(5,776	)	292
(Loss) income from discontinued operations		(11,227	)	31		(11,148	)	403
Net (loss) income		$(17,349	)	$     2,750		$(19,231	)	$     6,471
Income (loss) per share:    Basic:        Continuing operations		$    (0.46	)	$       0.21		$    (0.61	)	$       0.47
Discontinued operations		(0.85	)	0.00		(0.85	)	0.03
Net (loss) income		$    (1.31	)	$       0.21		$    (1.46	)	$       0.50
Diluted:        Continuing operations		$    (0.46	)	$       0.21		$    (0.61	)	$       0.46
Discontinued operations		(0.85	)	0.00		(0.85	)	0.03
Net (loss) income		$    (1.31	)	$       0.21		$    (1.46	)	$       0.49
Weighted average common    shares outstanding:        Basic		13,240		13,069		13,196		13,034
Diluted		13,240		13,111		13,196		13,084

See accompanying notes to consolidated financial statements.

 

Page 4

WORKFLOW MANAGEMENT, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)

	Nine Months Ended
		January 31, 2003		January 31, 2002
Cash flows from operating activities:
Net (loss) income		$(19,231	)	$     6,471
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization expense		7,328		7,665
Restructuring costs, net of cash paid		(72	)	(1,699	)
Amortization of deferred financing costs		954		527
Loss on ineffective swap		5,750
Loss on write-down of assets		3,366
Loss on abandoned debt offering costs		1,755
Loss on uncollectible notes		681
Loss from write-down of assets from discontinued operations		16,657
Deferred income taxes		(15,233	)
Changes in balances from discontinued operations		(1,358	)	(982	)
Changes in assets and liabilities (net of acquisitions and dispositions):
Accounts receivable		9,551		4,437
Inventories		(57	)	194
Prepaid expenses and other assets		1,401		2,223
Accounts payable		(148	)	5,799
Accrued liabilities		(2,939	)	3,188
Net cash provided by operating activities		8,405		27,823
Cash flows from investing activities:
Cash paid in acquisitions, net of cash received		(1,072	)	(4,355	)
Cash paid for additional purchase consideration		(7,458	)	(9,262	)
Additions to property and equipment		(4,609	)	(9,405	)
Cash collection of notes receivable		4,543		1,854
Cash received on the sale of property and equipment				10,896
Other		(12	)	(1	)
Net cash used in investing activities		(8,608	)	(10,273	)
Cash flows from financing activities:
Proceeds from credit facility borrowings		107,775		133,349
Payments of credit facility borrowings		(98,782	)	(148,969	)
Payments of short-term debt, net		127		(285	)
Payments of other long-term debt		(472	)	(2,336	)
Payment of interest rate hedge cash settlement		(2,459	)
Payments of deferred financing costs		(3,733	)	(249	)
Payment of abandoned debt offering costs		(1,755	)
Proceeds from common stock issued under employee benefit programs		207		325
Issuance of common stock to outside directors		10		10
Net cash provided by (used in) financing activities		918		(18,155	)
Effect of exchange rates on cash and cash equivalents		77		(39	)
Net increase (decrease) in cash and cash equivalents		792		(644	)
Cash and cash equivalents at beginning of period		5,262		2,126
Cash and cash equivalents at end of period		$     6,054		$     1,482

(Continued)

 

Page 5

WORKFLOW MANAGEMENT, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) (Continued)

		Nine Months Ended
		January 31, 2003		January 31, 2002
Supplemental disclosures of cash flow information:
Interest paid		$   16,451		$   9,416
Income taxes paid		$     5,546		$   3,738

During the nine months ended January 31, 2003 and January 31, 2002, the Company paid a total of $8,530 and $14,427, respectively, in cash representing the aggregate of: 1) the initial fixed consideration for purchase acquisitions, 2) earn-out provisions and other purchase price adjustments relating to certain acquisitions and 3) other direct acquisition costs. The fair value of the assets and liabilities at the date of acquisition and the impact of recording the various earn-outs and acquisition costs are as follows:

	Nine Months Ended
	January 31, 2003		January 31, 2002
Accounts receivable	$		$          739
Inventories			31
Property and equipment			65
Intangible assets(1)	8,530		13,366
Accounts payable			(348	)
Accrued liabilities			(236	)
Net assets acquired	$     8,530		$     13,617

Non-cash transactions:

•	During the nine months ended January 31, 2003 and January 31, 2002, the Company accrued $ 5,943 and $ 6,396 for additional purchase consideration for earn-outs, respectively.

See accompanying notes to consolidated financial statements.

(1)

Due to the accrual of earn-out provisions, intangible assets include cash payments during the period related to prior period acquisitions.

 

Page 6

WORKFLOW MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts and non-financial data) (Unaudited)

NOTE 1 - NATURE OF BUSINESS

Workflow Management, Inc. (the "Company" or "Workflow Management") is a leading provider of end-to-end business management outsourcing solutions that allow our customers to control all of their print related costs. The Company produces and distributes a full range of printed business products and provides related management services to customers in North America ranging in size from small businesses to Fortune 100 companies. The Company provides customers with an integrated set of services and information tools that reduce the costs of procuring, storing, distributing and using printed business products and also produces custom business documents, envelopes/direct mail, commercial printing, specialty packaging and labels and signs. Workflow Management employs approximately 3,100 persons and has 17 manufacturing facilities, 14 distribution centers, 8 print-on-demand centers and 63 sales offices throughout North America.

NOTE 2 - BASIS OF PRESENTATION

The accompanying consolidated financial statements and related notes to consolidated financial statements include the accounts of Workflow Management and the companies acquired in business combinations accounted for under the purchase method from their respective dates of acquisition.

As used in the Notes to Consolidated Financial Statements, "Fiscal 2003","Fiscal 2002", "Fiscal 2001", "Fiscal 2000" and "Fiscal 1999" refer to the Company's fiscal years ended April 30, 2003, 2002, 2001 and 2000 and April 24, 1999, respectively. During Fiscal 2000, the Company's Board of Directors approved a change in the definition of the Company's fiscal year-end date from the last Saturday in April to April 30th of each year.

In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair presentation of such operations. All such adjustments are of a normal recurring nature. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. The consolidated financial statements included in this Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2002.

 

Page 7

WORKFLOW MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (Unaudited)

NOTE 3 - INVENTORIES

Inventories consist of the following:

		January 31, 2003		April 30, 2002
Raw materials		$11,071		$12,661
Work-in-process		7,216		7,521
Finished goods		28,862		30,347
Total inventories		$47,149		$50,529

NOTE 4 - DEBT

Restructured Credit Facility

During the nine months ended January 31, 2003, the Company unsuccessfully pursued various strategic and financing alternatives to reduce borrowings and restructure its previous credit facility. As a result, the Company expensed $3,162 in financing fees and other banking related costs during the nine months ended January 31, 2003.

On January 15, 2003, the Company entered into a restructured senior secured credit facility with its lenders (the "Restructured Credit Facility") totaling approximately $180,000 and comprised of three separate tranches. The tranches consist of: (i) an approximately $100,000 asset based revolving credit facility (the "Revolver") which provides access to working capital advanced on a borrowing base formula; (ii) an approximately $30,000 senior term loan (the "Term Loan A") which amortizes in scheduled increments semi-annually starting on June 30, 2003; and (iii) a $50,000 senior term loan (the "Term Loan B"). The Revolver and Term Loan A mature on June 30, 2005. Term Loan B matures on December 31, 2003. The Revolver contains advance rates of 80% of the Company's eligible accounts receivable, 50% of the Company's eligible inventories and $10,000 against the Company's fixed assets. The Restructured Credit Facility also contains provisions requiring the Company to issue warrants to its lenders for the purchase of the Company’s common stock in the event the Company defaults on its repayment obligations. These contingent warrants have an estimated value of $213 and have been recorded as a component of equity. At January 31, 2003, the blended annual interest rate on the Restructured Credit Facility was approximately 9.1%. During the nine months ended January 31, 2003, the Company incurred $14,575 in interest expense relating to its previous credit facility and the Restructured Credit Facility. The outstanding balances on the Restructured Credit Facility at January 31, 2003 were as follows:

	Maximum Availability		Amount Outstanding		Applicable Interest Rate
Revolver	$     97,793		$       90,350		LIBOR + 5%
Term Loan A	25,793		25,793		LIBOR + 8%
Term Loan B	50,000		50,000		11%, 12%, 13% & 14% for each      calendar quarter of 2003
	$   173,586		$     166,143

Including $2,819 in outstanding letters of credit, the Company's availability under the Restructured Credit Facility at January 31, 2003 was $4,624.

As noted above, the $50,000 Term Loan B portion of the Restructured Credit Facility matures on December 31, 2003. The Restructured Credit Facility requires that we deliver to our lenders by October 31, 2003 a commitment from a financing source to refinance and repay Term Loan B. In order to retire Term Loan B by the due date, we will have to obtain funding through new bank financing or the issuance of debt or equity securities (or some combination thereof). There can be no assurance that we will be successful in obtaining this funding and, if we do not obtain this funding, we will be in default with our lenders under the Restructured Credit Facility. Any such default likely would have a material adverse effect on our business, financial condition and results of operations and our lenders' remedies upon such default would include the right to foreclose on our assets. If we are able to obtain this funding, the financial terms and conditions of the funding may be onerous and could adversely affect our financial condition and results of operations.        In addition, the Restructured Credit Facility contains a number of other affirmative covenants related to our business with which we must comply. These covenants include, but are not limited to, the requirements that (i) by May 31, 2003, we defer until June 30, 2005 at least $4,000 of earn-out payments we would otherwise owe in Fiscal 2004 as a result of our prior acquisitions, (ii) we meet certain leverage ratio, interest coverage ratio, fixed charge ratio, and minimum EBITDA thresholds on an ongoing basis and (iii) by April 30, 2003, we engage a permanent Chief Executive Officer reasonably acceptable to our lenders. There can be no assurance that we will be able to satisfy all or any of these covenants. Any failure to satisfy these covenants (or any other covenants) would constitute a default under the Restructured Credit Facility. Any such default likely would have a material adverse effect on our business, financial condition and results of operations and our lenders' remedies upon such a default would include the right to foreclose on our assets.

 

Page 8

WORKFLOW MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (Unaudited)

Letters of Credit

The Company has outstanding letters of credit of approximately $2,819 related to performance and payment guarantees. Based upon the Company's experience with these arrangements, the Company does not believe that any obligations that may arise will be significant.

Interest Rate Swap

On May 3, 2001, the Company entered into an interest rate swap agreement (the "Swap") with various lending institutions at no cost to the Company with an effective date of August 1, 2001 and an expiration date of March 10, 2004. The Company exchanged its variable interest rate on $100,000 in debt under the Company's former credit facility for a fixed LIBOR of approximately 5.10% plus the Company's interest rate spread under the facility. The Company accounted for the Swap per the guidelines of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and thus classified the Swap under hedge accounting as a cash flow hedge. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows.

However, on July 16, 2002, the Company's former credit facility was amended so that borrowings under the facility bore a non-LIBOR based fixed interest rate. Thus, under SFAS No. 133 as amended, the Swap has become ineffective and can no longer be designated as a cash flow hedge of variable rate debt. As such, during the nine months ended January 31, 2003, the Company wrote off $4,345 for the fair market value of the ineffective hedge and recorded $1,405 for the subsequent change in the value of the Swap as a component of income. The Swap will continue to be cash settled quarterly dependent upon the movement of 3-month LIBOR rates. During the nine months ended January 31, 2003, the Company paid $2,459 representing cash settlement payments on the Swap and has $888 accrued at January 31, 2003. Prior to the Swap becoming ineffective, the Company recorded $817 as interest expense during the three months ended July 31, 2002.

 

Page 9

WORKFLOW MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) (Unaudited)

NOTE 5 - STOCKHOLDERS' EQUITY

Changes in stockholders' equity during the nine months ended January 31, 2003 were as follows:

Stockholders' equity balance at April 30, 2002		$ 96,782
Issuance of common stock in conjunction with:
Employee stock purchase program		207
Fees paid to outside members of the Company's Board of Directors		10
Change in balance of notes receivable from directors and officers		3,845
Value of contingent common stock warrants		213
Comprehensive loss		(16,134	)
Stockholders' equity balance at January 31, 2003		$ 84,923

Comprehensive (Loss) Income

The components of comprehensive income are as follows:

	Three Months Ended					Nine Months Ended
		January 31, 2003		January 31, 2002		January 31, 2003		January 31, 2002
Net (loss) income		$   (17,349	)	$   2,750		$  (19,231	)	$ 6,471
Other comprehensive income (loss):   Changes in fair market value of financial       instruments designated as hedges of        interest rate exposure, net of taxes				728		(394	)	(2,173	)
Write-off of fair market value of ineffective        interest rate hedge, net of tax						2,520
Foreign currency translation adjustment		965		(246	)	971		(1,009	)
Comprehensive (loss) income		$   (16,384	)	$   3,232		$  (16,134	)	$ 3,289<