By Jan Stoddard of Raine Consulting January 21, 2003 -- Editor’s Note: In the last few weeks, Workflow Management has held two conference calls. One discussing their Q2 results and another concerning their new credit facility and executive management changes. Gerald Mahoney (former Mail-Well, Inc. Chairman and CEO) will immediately replace Tom D'Agostino, Sr. as interim Chief Executive Officer and President immediately. Steve R. Gibson, Executive Vice President of Workflow and President of the Printing Division, has also resigned. -- Workflow Management’s Q2 Conference Call Workflow Management, Inc. (NASDAQ: WORK), one of the nation’s largest outsourcers of printed products, announced its second quarter results on December 23, 2002. Second quarter revenues for the period ended October 31, 2002 increased 2.6% to $164.6 million compared to $160.3 million in the prior year. Revenues in the Solutions Division improved 2.8% to $81.2 million and revenues in the Printing Division increased 1.8% to $86.4 million. For the six months ended October 31, 2002, operating income before restructuring costs increased 19.2% to $15.7 million versus $13.2 million during the same period last year. Before restructuring costs, Workflow generated $21.0 million in EBITDA for the six months ended October 31, 2002 versus $18.7 million in the same period last year. Net income before non-recurring items for the first six months of fiscal 2003 was $3.6 million, or $0.28 per diluted share, as compared to $3.7 million, or $0.28 per diluted share in the same period of fiscal 2002. A webcast was held to announce these earnings followed by a question-and-answer session between financial analysts and company executives Tom D'Agostino, Sr., Chairman and CEO and Michael L. Schmickle, CFO. Here is a summary. 1. Workflow Management is in the process of finalizing a new long-term relationship with its lending group in order to stabilize the relationship with the lending vendor and to strengthen the balance sheet. A 10/15/02 press release detailed the process that initially required a Business Plan created with a special committee of advisors by 11/30/02, followed by a new long-term agreement that was pushed by waiver to January 15, 2002. (Follow-up inquires into the Investor Relations Group regarding whether Workflow Management would meet the 1/15/02 finalization or request an additional waiver were not answered on this call.) 2. When asked to further discuss the details submitted in the business plan, including debt reduction or capital restructuring, company executives stated that they were not at liberty to discuss any until after finalization with the bank on 1/15/02. D’Agostino did state that development of the business plan had not “been easy,” but “a lengthy and ticklish process” in which “we did our best to negotiate for our shareholders.” 3. No printing in-plants were sold during the last quarter. 4. Additional discussion focused on a non-recurring items of $1.1 million of expense related to the loss on the Company's interest rate swap agreement which must be marked to market quarterly as the swap can no longer be designated as a cash flow hedge of variable rate debt due to the Company's borrowings under its credit facility bearing a non-LIBOR based fixed interest rate of 12%. Roughly $800,000.00 (difference in LIBOR and interest rate hedge) is being paid out on a quarterly basis. 5. Another non-recurring item of $810,000 was incurred for continued restructuring costs that were defined upon request as “advisor fee’s paid to the “special committee of financial & management advisors.” 6. If the stock price continues to hover in the $2.00 range, new impairment tests may be required regardless of the positive cash flow due to a gap between book equity of $97 million and market CAP of $30 million based on recent changes to goodwill. The most current stock activity (WORK – NSD) tracks a gradual increase to $3.50+ versus an Oct ’02 52wk low of $1.41. 7. Sales performance for both divisions was improved over prior year although competitive commercial print pricing was cited as the reason for the 1.8% increased revenue performance not being higher. While specific new customers were not cited, overall customers are now hitting critical mass citing igetsmart.com results of $52.4million versus $46million last year (+14%). Sales forecasts for 2003 are $640-660million. -- Workflow Management’s January 15th Conference Call On January 15th, 2003 Workflow Management announced that it had completed a new credit agreement with its’ lenders. In conjunction, Gerald Mahoney (former Mail-Well, Inc. Chairman and CEO) will immediately replace Tom D'Agostino, Sr. as interim Chief Executive Officer and President immediately. Steve R. Gibson, Executive Vice President of Workflow and President of the Printing Division, has also resigned. The new credit agreement has a final maturity date of June 30, 2005 of 3 staggered loans totaling $180 million and a new blended LIBOR rate of 9%. Additional strategies from the business plan include: a singular focus on the Printing and Solutions Divisions (reduced costs and increased sales), no additional acquisitions, and debt reduction that could include a capital markets transaction. The following comments are additional detail abstracted from a January 16th, 2003 Conference Call and Question-and-Answer session concerning the announcement conducted by Gerry Mahoney 1. Impetus behind management change had to do with timing, the current rough economic year, and both Tom D’Agostino and Board agreeing it was time for a change. The contracts for both Gibson and D’Agostino will be honored; with a 14-15 month extension of the contract and extension for D’Agostino, as well as a multi-year consulting agreement. 2. Revenues of $640-660 million and $44 million EBITDA were reconfirmed. There will be no additional restructuring advisor costs for advisors (as in previous quarter) but restructuring and integration. (Examples include possible office consolidation in cities such as New York and moving out of corporate offices in Florida.) Mahoney will use his previous Mail-Well experience to drive cost-cutting programs. 3. The loan agreements are significant in that the reduced interest alone will extend $1+ million in the remainder of the fiscal year (ending April ’04). 4. Mahoney committed to driving down debt and repaying the banks through a mixed strategy that could include strengthening balance sheet through equity, convertible, high yield options. Mahoney states he will leverage his Wall Street contacts. he said WorkFlow was never in trouble, has an excellent management team and good cash flow and that is why the banks extended the loan. 5. Workflow does not anticipate a significant asset sale from either the Solutions or the Print Division to raise cash in the near future. 6. Mahoney stated that whole print industry has been hurt by the economy. He has talked to a lot of people on a regular basis, including some of the biggest players in the industry like R.R. Donnelley and Quebecor who believe print is coming out of it. He believes that he can regain more favorable attention from analysts. 7. It is hard to compare Workflow against other public companies, as it is hard to get an exact match-up of a company like this. The Canadian operation, headquartered in Toronto, which produces forms and envelopes could be compared against Standard Register, Wallace, and Moore. SFI is more distributor-oriented where it buys up to 80% or $300 million dollars of its print through outsourcing. igetsmart.com is an Internet company that is growing. Mahoney believes the Internet is a wonderful tool for efficient customer and employee communications, as well as driving cost reductions.