Overview

We are a leading provider of managed print and promotional procurement solutions to corporate clients across a wide range of industries. We combine the talent of our employees with our proprietary technology, extensive supplier base and domain expertise to procure, manage and deliver printed products as part of a comprehensive outsourced enterprise solution. Our technology is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.

Our proprietary software applications and database, PPM4tm, create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for print jobs. As a result, we believe PPM4tm contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. We leverage our technology to match our print jobs with suppliers that are optimally suited to meet the client's needs at a highly competitive price.

Through our supplier base of over 7,000 suppliers, we offer a full range of print, fulfillment and logistics services that allow us to procure printed products on virtually any substrate. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill all of the print procurement needs of our clients. By leveraging our technology platform, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide-basis provides our clients with greater visibility and control of their print expenditures.

We maintain sales offices in New York, New Jersey, California, Hawaii, Michigan, Minnesota, Texas, Pennsylvania, Georgia, Wisconsin, Missouri, Ohio and the United Kingdom. We believe the opportunity exists to expand our business into new geographic markets. Our objective is to continue to increase our sales in the major print markets in the United States and Europe. We intend to hire or acquire more account executives within close proximity to these large markets. In addition, given that the print industry is a global business, over time we intend to evaluate opportunities to access other attractive markets outside the United States.

Revenue

We generate revenue through the sale of printed products to our clients. Our revenue was $94.3 million and $87.2 million during the three months ended March 31, 2009 and 2008, respectively, an increase of 8.1%. Our revenue is generated from two different types of clients: enterprise and transactional. Enterprise jobs usually involve higher dollar amounts and volume than transactional jobs. We categorize a client as an enterprise client if we have a contract with the client for the provision of printing services on a recurring basis; if the client has signed an open-ended purchase order, or a series of related purchase orders; or if the client has enrolled in our e-stores program, which enables the client to make online purchases of printing services on a recurring basis. We categorize all other clients as transactional. We enter into contracts with our enterprise clients to provide some or a substantial portion of their printed products on a recurring basis. Our contracts with enterprise clients generally have an open-ended term subject to termination by either party upon prior notice ranging from 90 days to twelve months. Several of our larger enterprise clients have outsourced substantially all of their recurring print needs to us. We provide printed products to our transactional clients on an order-by-order basis. As of March 31, 2009, we had 150 enterprise clients and, for the three months ended March 31, 2009, we have served over 3,000 transactional clients. During the three months ended March 31, 2009, enterprise clients accounted for 65% of our revenue, while transactional clients accounted for 35% of our revenue.

Our revenue consists of the prices paid by our clients for printed products. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of transactional clients, is negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment.

The finished product is typically shipped directly from the supplier to a destination specified by the client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

Our revenue from enterprise clients tends to generate lower gross profit margins than our revenue from transactional clients because the gross profit margins established in our contracts with large enterprise clients are generally lower than the gross profit margins we typically realize in our transactional business.

The print industry has historically been subject to seasonal sales fluctuations because a substantial number of print orders are placed for the year-end holiday season. We have historically experienced seasonal client buying patterns with a higher percentage of our revenue being earned in our third and fourth quarters. We expect these seasonal revenue patterns to continue.

Cost of Goods Sold and Gross Profit

Our cost of goods sold consists primarily of the price at which we purchase products from our suppliers. Our selling price, including our gross profit, in the case of some of our enterprise jobs, is based on a fixed gross margin established by contract or, in the case of transactional jobs, is determined at the discretion of the account executive or procurement manager within predetermined parameters. Our gross margins on our enterprise jobs are typically lower than our gross margins on our transactional jobs. As a result, our cost of goods sold as a percentage of revenue for our enterprise jobs is typically higher than it is for our transactional jobs. Our gross profit for the three months ended March 31, 2009 and 2008 was $23.0 million, or 24.4% of revenue, and $21.6 million, or 24.7% of revenue, respectively.

Operating Expenses and Income from Operations

Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and procurement managers as well as compensation costs for our finance and support employees, public company expenses, corporate systems, legal and accounting, facilities and travel and entertainment expenses. Selling, general and administrative expenses as a percentage of revenue were 21.9% and 17.3% for the three months ended March 31, 2009 and 2008, respectively. The increase in selling, general and administrative expenses as a percentage of revenue is the result of our 2008 acquisitions, which increased our selling, general and administrative expenses, combined with sluggish revenue growth from poor macroeconomic conditions in the first quarter of 2009.

We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance, net of accrued earned commissions not yet paid, increased to $3.8 million as of March 31, 2009 from $1.9 million as of March 31, 2008.

We agree to provide our clients with printed products that conform to the industry standard of a "commercially reasonable quality," and our suppliers in turn agree to provide us with products of the same quality. In addition, the quotes we provide our clients include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations.

Our income from operations for the three months ended March 31, 2009 and 2008 was $896,000 and $5.8 million, respectively.

Comparison of three months ended March 31, 2009 and 2008

Revenue

Our revenue increased by $7.1 million, or 8.1%, from $87.2 million during the three months ended March 31, 2008 to $94.3 million during the three months ended March 31, 2009. The revenue growth reflects an increase in both enterprise and transactional clients. Our revenue from enterprise clients increased by $5.8 million, or 10.4%, from $55.6 million during the three months ended March 31, 2008 to $61.4 million during the three months ended

March 31, 2009. As of March 31, 2009, we had 150 enterprise clients compared to 121 enterprise clients under contract as of March 31, 2008. Additionally, revenue from transactional clients increased by $1.3 million, or 4.2%, from $31.6 million during the three months ended March 31, 2008 to $32.9 million during the three months ended March 31, 2009. The incremental transactional revenue is largely a result of increasing the number of experienced sales executives. We increased our number of sales executives by 52, or 22.4%, from 232 as of March 31, 2008 to 284 as of March 31, 2009.

Our revenue for the three months ended March 31, 2009 includes an organic decline of 19%, which is the result of growth from new enterprise accounts offset by a decrease in revenue from our existing customers.

Cost of goods sold

Our cost of goods sold increased by $5.6 million, or 8.6%, from $65.6 million during the three months ended March 31, 2008 to $71.3 million during the three months ended March 31, 2009. The increase is a result of the revenue growth during the three months ended March 31, 2009. Our cost of goods sold as a percentage of revenue increased slightly from 75.3% during the three months ended March 31, 2008 to 75.6% during the three months ended March 31, 2009.

Gross Profit

Our gross profit as a percentage of revenue, which we refer to as gross margin, decreased from 24.7% during the three months ended March 31, 2008 to 24.4% during the three months ended March 31, 2009. The 30 basis point decrease is primarily the result of a higher concentration of our business coming from enterprise clients, which generate lower gross margins.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $5.6 million, or 37.0%, from $15.1 million during the three months ended March 31, 2008 to $20.6 million during the three months ended March 31, 2009. As a percentage of revenue, selling, general and administrative expenses increased from 17.3% for the three months ended March 31, 2008 to 21.9% for the three months ended March 31, 2009. The increase in selling, general and administrative expenses as a percentage of revenue is the result of our 2008 acquisitions, which increased our selling, general and administrative expenses, combined with sluggish revenue growth from poor macroeconomic conditions in the first quarter of 2009.

Depreciation and amortization

Depreciation and amortization expense increased by $772,000, or 106.9%, from $723,000 during the three months ended March 31, 2008 to $1.5 million during the three months ended March 31, 2009. The increase in depreciation expense is primarily attributable to additions of computer hardware and software, equipment and furniture and fixtures as well as amortization of the capitalized costs of internal use software. The increase in amortization expense is a result of the amortization of the intangible assets acquired in our 2008 acquisitions.

Income from operations

Income from operations decreased by $4.9 million, or 84.5%, from $5.8 million during the three months ended March 31, 2008 to $896,000 during the three months ended March 31, 2009. As a percentage of revenue, income from operations decreased from 6.6% during the three months ended March 31, 2008 to 1.0% during the three months ended March 31, 2009. The decrease in income from operations as a percentage of revenue is a result of a decrease in our gross profit margin as well as an increase in our selling, general and administrative expenses and depreciation and amortization expenses as a percentage of revenue.

Other income and expense

Other expense increased by $1.1 million to $492,000 during the three months ended March 31, 2009. The increase is due to a decrease in interest income of $311,000 from $406,000 to $94,000 for the three months ended March 31, 2008 and 2009, respectively, and an increase in interest expense of $442,000 for the three months ended March 31, 2009.

Provision for income taxes

Provision for income taxes decreased by $2.4 million from $2.5 million during the three months ended March 31, 2008 to $155,000 during the three months ended March 31, 2009. Our effective tax rate was 39.4% and 38.4% for the three month periods ended March 31, 2008 and 2009, respectively.

Net income

Net income decreased by $3.6 million, or 93.6%, from $3.9 million during the three months ended March 31, 2008 to $248,000 during the three months ended March 31, 2009. Net income as a percentage of revenue decreased from 4.4% during the three months ended March 31, 2008 to 0.3% during the three months ended March 31, 2009.

Liquidity and Capital Resources

At March 31, 2009, we had $5.0 million of cash and cash equivalents and $14.0 million in auction-rate securities. The auction-rate securities are variable rate debt instruments, having long-term maturity dates (typically 15 to 40 years), but whose interest rates are reset through an auction process, most commonly at intervals of seven, 28 and 35 days. In mid-February 2008, liquidity issues in the global credit markets resulted in the failure of auctions, involving substantially all of the auction-rate securities we hold. Substantially all of our auction-rate securities are backed by pools of student loans guaranteed by the U.S. Department of Education. In October 2008, we entered into an agreement with UBS regarding our outstanding auction-rate securities. Under the agreement, we have the right to sell all of our outstanding auction-rate securities back to UBS at their par value. The agreement allows us to exercise this right starting June 30, 2010, and the right will expire on July 2, 2012. As a result of this agreement, our auction-rate securities are classified as long-term investments.

Operating Activities. Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization, and the effect of changes in working capital and other activities. Cash provided by operating activities for the three months ended March 31, 2009 was $7.7 million and primarily consisted of $3.6 million of non-cash items and $3.8 million provided by working capital and other activities. The most significant impact on working capital and other activities consisted of a decrease in unbilled revenue of $4.0 million and an increase in accounts payable of $13.7 million offset by a decrease in accrued expenses and other liabilities of $10.3 million.

Cash provided by operating activities for the three months ended March 31, 2008 was $1.8 million and primarily consisted of net income of $3.9 million and $2.6 million of non-cash items, offset by $4.6 million used to fund working capital and other activities. The most significant impact on working capital and other activities consisted of a decrease in accounts receivable of $7.7 million resulting from cash collections offset by decreases in accounts payable of $6.3 million due to early payments to vendors and accrued expenses and other liabilities of $4.8 million.

Investing Activities. Cash used in investing activities in the three months ended March 31, 2009 of $6.1 million was attributable to the $3.8 million in payments made in connection with our acquisitions completed during the three months ended March 31, 2009 and capital expenditures of $2.4 million.

Cash used in investing activities in the three months ended March 31, 2008 of $23,000 was attributable to the proceeds on sale of marketable securities of $2.4 million, offset by $1.2 million in payments made in connection with our 2007 acquisitions and capital expenditures of $1.2 million.

Financing Activities. Cash used in financing activities in the three months ended March 31, 2009 of $477,000 was primarily attributable to the repayment of $590,000 of borrowings under our revolving credit facility, offset by $100,000 in tax benefit of stock options exercised.

Cash provided by financing activities in the three months ended March 31, 2008 of $1.0 million was primarily attributable to a tax benefit of stock options exercised of $900,000 and the proceeds related to the exercise of stock options of $123,000.

We have a $75.0 million revolving credit facility with JPMorgan Chase Bank, N.A that matures on May 21, 2011. As of March 31, 2009, we had outstanding borrowings of $42.0 million and availability of approximately $30.0 million under this facility. Outstanding borrowings under the revolving credit facility are guaranteed by our material domestic subsidiaries. Our obligations under the revolving credit facility and our material domestic subsidiaries' guaranty obligations are secured by substantially all of our respective assets. Interest is payable at the adjusted LIBOR rate or the alternate base rate, as elected by us. The terms of the revolving credit facility include various covenants, including covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. As of March 31, 2009, we were not in violation of any of these various covenants. Outstanding borrowings may be used for general corporate and working capital purposes of the Company and our subsidiaries in the ordinary course of business, for permitted acquisitions, for capital expenditures and for restricted payments, including the repurchase of shares of our common stock, as permitted pursuant to the terms of the revolving credit facility.

We will continue to utilize cash to fund acquisitions of or make strategic investments in complementary businesses and to expand our sales force. Although we can provide no assurances, we believe that our available cash and cash equivalents and amounts available under our revolving credit facility should be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Off-Balance Sheet Obligations

We do not have any off-balance sheet arrangements.

Contractual Obligations

As of March 31, 2009, we had the following contractual obligations:


                                                     Payments Due by Period
                                              Less than        1-3         3-5        More than
                                 Total         1 Year         Years       Years        5 Years
                                                         (In thousands)

  Capital lease obligations          251             145         106           -               -
  Operating lease obligations     18,191           4,453       6,940       4,471           2,327

  Total                         $ 18,442     $     4,598     $ 7,046     $ 4,471     $     2,327

This table includes capital lease obligations associated with the May 2008 etrinsic acquisition. This table does not include any contingent obligations related to any acquisitions. For discussion of our 2006 and 2007 acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments" in the Company's Form 10-K for the year ended December 31, 2007. For discussion of our 2008 acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments" in the Company's Form 10-K for the year ended December 31, 2008.

Critical Accounting Policies and Estimates

As of March 31, 2009, there were no material changes to the Company's critical accounting policies and estimates disclosed in its Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP 107-1"). FSP 107-1 relates to fair value disclosures in public entity financial statements for financial instruments that are within the scope of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"). This guidance increases the frequency of those disclosures, requiring public entities to provide the disclosures on a quarterly basis (rather than just annually). The quarterly disclosures are intended to provide financial statement users with more timely information about the effects of current market conditions on an entity's financial instruments that are not otherwise reported at fair value. FSP 107-1 is effective for interim and annual periods ending after June 15, 2009. FSP 107-1 must be applied prospectively. We do not believe the adoption of FSP 107-1 will have a material impact on our consolidated financial statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains words such as "may," "will," "believe," "expect," "anticipate," "intend," "plan," "project," "estimate" and "objective" or the negative thereof or similar terminology concerning the Company's future financial performance, business strategy, plans, goals and objectives. These expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning the Company's possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different. Some of the factors that would cause future results to differ from the recent results or those projected in forward-looking statements include, but are not limited to, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2008.

Additional Information

The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and information filed with the SEC and amendments to those reports available, free of charge, through its Internet website (http://www.inwk.com) as soon as reasonably practical after it electronically files or furnishes such materials to the SEC. All of the Company's filings may be read or copied at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Filing Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.