, but emerges with a new Chairman and Stock Market Recovery By Jan Stoddard of Raine Consulting July 24, 2003 - Workflow Management Inc. (NASDAQ: WORK), reported both fiscal 2003 fourth quarter results for the period ending April 30th, 2003 and fiscal year 2003 results. Editor's Note: Workflow Management has been in a fight for survival over the year. By April 30th, 2003, it exceeded covenants in its credit facility that limited capital expenditures (by approximately $600,000) and the incurrence of restructuring costs by spending (by $1.1 million dollars). On June 25th, Workflow announced it was delaying its' quarterly financial reporting call and said it was exploring strategic alternatives ranging from a restructuring to a possible sale of the company. This resulted in a $0.40 plunge in the stock price by day's end -- amid speculation that it would not be able to meet a $50 million year-end debt repayment schedule. Behind the scenes, a special Board-appointed Audit Committee (along with forensic auditors and special counsel) was investigating Thomas B. D'Agostino, Sr., the Chairman of the Board of Directors. With today's announcement, the stock surged $0.45 resulting in the highest stock price since Raine Radar began coverage. For the Fourth quarter, Workflow posted a loss from continuing operations of $21.3 million, $1.60 per share, compared with a profit of $2.8 million, or $0.21 per share, the previous year. Including discontinued operations, the quarterly loss was $1.56 per share. Revenue in the period fell to $152.5 million from $158.7 million a year ago. Fourth quarter EBITDA was $10.2million, before $22.0 million in charges for restructuring, asset write-downs, severance costs and goodwill impairment, compared to EBITDA of $10.6 million last year. Topics: * Chairman Comments * Financial Summary * Q&A * Summary Comments Chairman Comments: Newly appointed President and CEO, Gary W. Ampulski, summarized the high points addressing the most important issues of the past 90 days (Ampulski most recently served as President and CEO of TAB Products Company, Vernon Hills, Illinois, and previously for eight years with Moore Corporation, Ltd. as President Moore North America, Inc. and President, Moore Business Communications Services). * We have an agreement in principle with senior lenders on the terms of the amendment of the company's credit facility, subject to final approval, various covenant issues and addressing maturity dates. Once executed, the concern expressed in the June 25th release about Workflow's year-end, will be eliminated. * Workflow is continuing to look at strategic financial alternatives through Jefferies & Company, Inc., who is exploring a number of potential strategic alternatives to improve the Company's capital structure, including a potential re-capitalization or sale of the Company. * Thomas B. D'Agostino, Sr., the Chairman of the Board of Directors, has resigned from the Board and as Chairman, and has released the Company from any obligation to pay severance or other amounts of $2.6 million. (Editor's Note: The Audit Committee determined that Mr. D'Agostino failed to comply with Company policies and procedures, including those relating to expenses and personal business activities, that Mr. D'Agostino failed to furnish complete information to the Board regarding certain transactions, and that Mr. D'Agostino should reimburse the Company for certain expenses paid by the company. While not admitting to any wrongdoing, Mr. D'Agostino has paid $400,000 to the Company in settlement of these matters) * Gerald F. Mahoney was appointed to the Chairman of the Board. He was initially elected to the Board in October 2002 and later served as the Company's interim CEO. Mr. Mahoney was a founder, and from 1994 to 2001 served as the Chairman, Chief Executive Officer and as a member of the board of directors of Mail-Well, Inc. Financial Summary Mr. Michael L. Schmickle, Executive VP and CFO, reviewed the fiscal 2003 results: 1. Year-over-year revenue was relatively flat (Revenues for fiscal 2003 increased 0.6% to $622.7 million from $619 million prior year) due to soft economy. Overcapacity in the printing industry due to decreased spending from advertisers and direct mail programs, especially impacted the envelope and commercial printing operations. Historical volumes were maintained by a focus on customer service and price concessions. There was a GAAP net loss for the fiscal year ended April 30, 2003 of $39.9 million or $3.02 per diluted share versus net income of $9.2 million or $0.70 per diluted share in fiscal 2002. 2. Gross profit decreased 0.3% from $172.7 million (27.9% of revenues from FY2002) to $172.1 million (27.6% of revenues from FY2003) due to excess production capacity throughout the printing industry, ongoing pricing pressures from competitors, and an overall decrease in manufacturing volumes in commercial printing, direct mail and envelope operations. 3. Overall reduction in FY2003 SGA expense to 22.9% of 2003 revenues, a decrease of 0.9%. 4. A review of expenses in 2003 showed $3.4 million in restructuring costs associated with the implementation of the business plan which included 2003 objectives to complete the consolidation of the New York, Toronto and Los Angeles operations, and amalgamation of the SFI and iGetSmart businesses. 5. The annual impairment review of goodwill resulted in a non-cash goodwill impairment charge of approximately $18 million for the valuation of the direct mail and commercial printing operations in Southern California, due to the sustained significant deterioration of operating results and expected future cash flows. Other write-downs included: * $2.1million in capitalized software costs within envelope operations, * $600,000 loss from a letter of guarantee for a third party, * $681,000 in uncollectible notes receivable (primarily notes to former officers and a former director), * $4.0 million in severance and other employment costs relating to termination of executive officers, employee retention and recruiting costs, * $6.0 million loss from an interest rate hedge, * $3.5 million in financing fees and other banking related costs (including consultant fee's); and * $1.1 million inventory write-off included within cost of revenues. Q & A Session: 1. Workflow is feeling "softness" of economy in all operations including legacy 'Solutions Division.' Going forward, Ampulski says they are focusing on the improving relationships between different groups, identifying synergies such as sourcing products from each other, leveraging economies of scale, and best practices. 2. A comparison of April versus January quarters shows a substantial increase in operating margins due to both integration and seasonal impacts. Integration results closed mid-stream fourth quarter, but they are now seeing impact of those changes from the January timeframe. 3. The $2.6 million severance accrual (re: Thomas B. D'Agostino, Sr) remains on balance sheet and included in $4.0 million dollars in expense and other employment costs (noted above). 4. The board seat vacancy will not be resolved until the annual board meeting. 5. When asked if Workflow was positioning the potential sale take advantage of potential third and fourth quarter economic recovery, Ampulski commented that "We are launching a process and are not in a position to provide interim communications to shareholders. However, Workflow is a good business and when economy turns (with a reminder that printing tends to lag the economy) it will be a great one." Additionally, he noted that additional cost cutting measures were planned and are being implementing based on the not anticipating economic growth this year. He added, "It's too early to tell, but it's a good time to buy." 6. As noted in the press release, there is currently a waiver on two restrictive covenants in previous lending agreement for capital expense and restructuring with lenders on current July covenants moved in ahead of schedule. Regarding the earn-out program (which ensures that money owed to banks is going to them), Schmickle noted that two groups in particular agreed to defer their payments. As of April 30th, Workflow is in compliance with earn-out covenants. 7. The fiscal year 2003 capital expenditure budget was $5.8 million with $6.9 budgeted for next year. Schmickle notes that they will continue to focus on continued improvement in inventory turns and DSO. 8. When asked to comment on the new 'opt out - nationwide no call program,' Ampulski anticipates a positive impact as marketing dollars shift back to direct mail. Summary: A final comment from CEO Gary Ampulski: "Workflow Management is a remarkable company especially given the growth in EBITDA for the year. We are making progress, reducing debt, and exploring strategic alternatives all focused on increasing shareholder value."