FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended AUGUST 31, 2003
---------------------------------------------
Commission File Number 1-5807
-----------------------------------------
ENNIS BUSINESS FORMS, INC.
- ----------------------------------------------------------------
(Exact name of registrant as
specified in its charter)
TEXAS 75-0256410
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(State or other Jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
1510 N. Hampton, Suite 300, DeSoto, TX 75115
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(Address of principal executive offices) (Zip Code)
(972) 228-7801
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
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(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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 31, 2003
- ------------------------- ------------------------------
Common stock, par value 16,362,659
$2.50 per share
ENNIS BUSINESS FORMS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
August 31, 2003 and February 28, 2003 2 - 3
Condensed Consolidated Statements of Earnings
-- Three and Six Months Ended August 31,
2003 and 2002 4
Condensed Consolidated Statements of Cash
Flows -- Three and Six Months Ended
August 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial
Statements 6 - 11
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11 - 14
Item 3 - Quantitative and Qualitative
Disclosures of Market Risk 14 - 15
Item 4 - Controls and Procedures 15
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 31, February 28,
2003 2003
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 20,882 $ 13,860
Accounts receivable, net 29,813 32,077
Prepaid expenses 1,365 1,708
Inventories 14,680 13,104
Contract costs in excess of billings 279 967
Other current assets 3,399 3,296
------- -------
Total current assets 70,418 65,012
------- -------
Property, plant and equipment, net 48,870 51,264
Goodwill, net 34,269 34,241
Other assets 1,921 2,020
------- -------
$155,478 $152,537
======= =======
(Continued)
2
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
August 31, February 28,
2003 2003
---- ----
(unaudited)
Liabilities and
Shareholders' Equity
-------------------------
Current liabilities:
Accounts payable $ 7,211 $ 6,644
Accrued expenses:
Employee compensation and
benefits 7,456 6,784
Federal and state income tax 141 --
payable
Taxes other than income 1,741 1,430
Other 3,689 3,398
Current installments of long-term
debt 6,336 7,038
------- -------
Total current liabilities 26,574 25,294
------- -------
Accrued pension 3,441 2,130
Long-term debt, less current
installments 14,800 18,135
Deferred credits, principally income
taxes 9,800 10,075
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 249 461
Retained earnings 141,381 137,848
Accumulated other comprehensive
loss (5,128) (5,225)
------- -------
189,627 186,209
Treasury stock (88,764) (89,306)
------- -------
Total shareholders'
equity 100,863 96,903
------- -------
$155,478 $152,537
======= =======
See accompanying notes to condensed consolidated financial
statements.
3
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $65,003 $56,646 $129,877 $114,389
Costs and expenses:
Cost of sales 47,496 41,050 95,820 83,789
Selling, general
and administrative
expenses 9,866 9,123 19,521 18,474
------- ------- ------- -------
57,362 50,173 115,341 102,263
------- ------- ------- -------
Earnings from
operations 7,641 6,473 14,536 12,126
------- ------- ------- -------
Other income
(expense):
Investment
income 13 42 27 114
Interest expense (192) (300) (479) (638)
Other expense, net (208) (58) (211) (123)
------- ------- ------- -------
(387) (316) (663) (647)
------- ------- ------- -------
Earnings before
income taxes 7,254 6,157 13,873 11,479
Provision for
income taxes 2,757 2,340 5,272 4,362
------- ------- ------- -------
Net earnings $ 4,497 $ 3,817 $ 8,601 $ 7,117
======= ======= ======= =======
Weighted average
number of
common shares
outstanding
- Basic 16,347,228 16,280,438 16,340,968 16,277,224
Plus
incremental
shares from
assumed
exercise of
stock options 262,047 218,668 215,605 218,668
------- ------- ------- -------
Weighted average
number of
common shares
outstanding
- Diluted 16,609,275 16,499,106 16,556,573 16,495,892
========== ========== ========== ==========
Per share amounts:
Net earnings -
basic $.28 $.24 $.53 $.44
==== ==== ==== ====
Net earnings -
diluted $.27 $.23 $.52 $.43
==== ==== ==== ====
Cash dividends
per share $.155 $.155 $.31 $.31
===== ===== ==== ====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
August 31,
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $8,601 $7,117
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 4,709 4,722
Amortization of trademark 66 --
Gain on the sale of equipment (4) (2)
Other 1,038 993
Changes in operating assets and
liabilities:
Receivables 2,264 (737)
Prepaid expenses 343 (1,304)
Inventories (1,576) (471)
Other current assets 525 (197)
Accounts payable and accrued
expenses 2,139 1,785
Other assets 31 17
------- -------
Net cash provided by operating
activities 18,136 11,923
------- -------
Cash flows from investing activities:
Capital expenditures (2,402) (2,146)
Redemption of investments -- 1,442
Proceeds from disposal of property 91 57
Other (28) 6
------- -------
Net cash used in investing
activities (2,339) (641)
------- -------
Cash flows from financing activities:
Repayment of debt issued to finance
acquisition (3,700) (3,840)
Dividends (5,068) (5,046)
Purchase of treasury stock 330 103
Other (337) (437)
------- -------
Net cash used in financing
activities (8,775) (9,220)
------- -------
Net change in cash and cash equivalents 7,022 2,062
Cash and cash equivalents at beginning of
period 13,860 16,180
------- -------
Cash and cash equivalents at end of period $20,882 $18,242
======= =======
See accompanying notes to condensed consolidated financial
statements.
5
ENNIS BUSINESS FORMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
These unaudited condensed consolidated financial statements
of Ennis Business Forms, Inc. and its subsidiaries
(collectively the "Company" or "Ennis"), for the quarter
ended August 31, 2003 have been prepared in accordance with
generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements and
should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the
Company's Form 10-K for the year ended February 28, 2003,
from which the accompanying condensed consolidated balance
sheet at February 28, 2003 was derived. All significant
intercompany balances and transactions have been eliminated
in consolidation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the interim
financial information have been included. The results of
operations for any interim period are not necessarily
indicative of the results of operations for a full year.
2. Stock Option Plans and Stock Based Compensation
-----------------------------------------------
The Company has stock options granted to key executive and
managerial employees and non-employee directors. At August
31, 2003, the Company has two incentive stock option plans:
the 1998 Option and Restricted Stock Plan and the 1991
Incentive Stock Option Plan. The Company has 785,984 shares
of unissued common stock reserved under the stock option
plans for issuance to officers and directors, and supervisory
employees of the Company and its subsidiaries. The exercise
price of each option granted equals the quoted market price
of the Company's common stock on the date of grant, and an
option's maximum term is ten years. Options may be granted
at different times during the year and vest over a five year
period.
The Company accounts for employee and director stock-based
compensation arrangements in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), and related
interpretations, and complies with the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation and
Disclosure."
The following table represents the effect on net income and
earnings per share as if the Company had applied the fair
value based method and recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-
based Employee Compensation (in thousands, except per share
amounts):
6
2. Stock Option Plans and Stock Based Compensation (continued)
-----------------------------------------------------------
Three Months Six Months
Ended August 31, Ended August 31,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings:
As reported $4,497 $3,817 $8,601 $7,117
Deduct: Stock-based
Employee compensation
expense not included
in reported income,
net of related tax 14 15 28 30
effects
------ ------ ------ ------
Pro forma $4,483 $3,802 $8,573 $7,087
====== ====== ====== ======
Net earnings per share:
As reported - basic $.28 $.24 $.53 $.44
Pro forma - basic .27 .23 .52 .44
As reported - diluted .27 .23 .52 .43
Pro forma - diluted .27 .23 .52 .43
As required, the pro forma disclosures above include options
granted since March 1, 1996. Consequently, the effects of
applying SFAS 123 for providing pro forma disclosures may not
be representative of the effects on reported net income for
future years until all options outstanding are included in
the pro forma disclosures. For purposes of pro forma
disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense
primarily over the vesting period.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation and Disclosure." SFAS No. 148
amends the transition and disclosure provisions of SFAS No.
123. If the Company had adopted the prospective transition
method prescribed by SFAS 148 in first quarter 2003,
compensation expense of $23,000 and $45,000 would have been
recorded for the three and six months ended August 31, 2003,
respectively. After related income tax effects, this would
have reduced net income by $14,000 and $28,000 for the three
and six months ended August 31, 2003, respectively. Earnings
per share would have decreased one cent for the six months
ended August 31, 2003.
For the six month periods ended August 31, 2003 and 2002,
73,250 and 71,250 of options, respectively, were not included
in the diluted earnings per share computation because their
exercise price exceeded the average fair market value of the
Company's stock for the period.
7
3. Inventories
-----------
The Company uses the Last-In, First-Out (LIFO) method of
pricing the raw material content of most of its business
forms inventories, and the First-In, First-Out (FIFO) method
is used to value the remainder. The following table
summarizes the components of inventory at the different
stages of production (in thousands of dollars):
August 31, February
28,
2003 2003
---- ----
Raw material $7,706 $ 6,664
Work-in-process 1,728 1,161
Finished goods 5,246 5,279
------- -----
$14,680 $13,104
====== ======
4. Accumulated other comprehensive loss
------------------------------------
Accumulated other comprehensive loss consists of the
unrealized portion of changes in the fair value of the
Company's cash flow hedge and the minimum pension liability.
Comprehensive income was approximately $8,698,000 for the six
months ended August 31, 2003 and $7,274,000 for the six
months ended August 31, 2002. Amounts charged directly to
Shareholder's Equity related to the Company's interest rate
swap and pension plan are included in "other comprehensive
income."
5. Segment Data
------------
The Company operates three business segments. The Forms
Solutions Group is primarily in the business of manufacturing
and selling business forms and other printed business
products to customers primarily located in the United States.
On November 13, 2002, effective November 14, 2002, the
Company acquired Calibrated Forms Co., Inc. (Calibrated)
which became part of the Forms Solutions Group segment. The
Promotional Solutions Group is comprised of Adams McClure
(design, production and distribution of printed and
electronic media), Admore (presentation products) and Wolfe
City (flexographic printing, advertising specialties and Post-
it (registered trademark) Notes). The Financial Solutions
Group is comprised of Northstar Computer Forms which is a
manufacturer and seller of official bank checks, money
orders, and internal bank forms. Corporate information is
included to reconcile segment data to the consolidated
financial statements and includes assets and expenses related
to the Company's corporate headquarters and other
administrative costs. Segment data for the three months and
six months ended August 31, 2003 and 2002 were as follows (in
thousands):
8
5. Segment Data (continued)
------------------------
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
----- ----- ----- --------- ------
Three months ended August 31, 2003:
Net sales $36,227 $16,639 $12,137 $ -- $ 65,003
Depreciation 741 677 736 178 2,332
Amortization of
trademark 33 -- -- -- 33
Segment earnings
(loss) before
income tax 5,717 1,969 1,511 (1,943) 7,254
Segment assets 75,720 34,231 40,461 5,066 155,478
Capital
expenditures 428 281 621 230 1,560
Three months ended August 31, 2002:
Net sales $26,660 $18,009 $11,977 $ -- $ 56,646
Depreciation 909 573 801 191 2,474
Segment earnings
(loss) before
income tax 4,767 2,257 701 (1,568) 6,157
Segment assets 53,988 38,740 41,163 4,817 138,708
Capital
expenditures 189 322 927 268 1,706
Six months ended August 31, 2003:
Net sales $71,693 $34,067 $24,117 $ -- $129,877
Depreciation 1,679 1,174 1,499 357 4,709
Amortization of
trademark 66 -- -- -- 66
Segment earnings
(loss) before
income tax 10,903 3,805 2,739 (3,574) 13,873
Segment assets 75,720 34,231 40,461 5,066 155,478
Capital
expenditures 998 435 721 248 2,402
Six months ended August 31, 2002:
Net sales $54,096 $36,247 $24,046 $ -- $114,389
Depreciation 1,564 1,145 1,627 386 4,722
Segment earnings
(loss) before
income tax 9,136 3,975 1,576 (3,208) 11,479
Segment assets 53,988 38,740 41,163 4,817 138,708
Capital
expenditures 311 496 996 343 2,146
"Post-it" is a registered trademark of 3M.
9
6. Purchase of Calibrated
----------------------
On November 14, 2002, the Company completed its acquisition of
all of the outstanding stock of Calibrated Forms Co., Inc.
(Calibrated), a company which is principally engaged in the
design, manufacture and marketing of printed business forms
within the wholesale business forms marketplace. Calibrated
was acquired to help strengthen the Company in the wholesale
business forms marketplace. Calibrated became a wholly owned
subsidiary and operated as part of the Forms Solutions Group.
The acquisition was financed with an additional $15,000,000
draw against the Company's Revolving Credit Facility. The
purchase price for the transaction was $22,038,000 less
liabilities excluded of $7,195,060, and the liabilities
excluded were evidenced by two promissory notes bearing
interest at 3.75% per annum, which were paid January 3, 2003.
In addition, the Purchase Agreement provides for additional
consideration in the form of an earn-out. The earn-out will
be 50% of the amount, if any, of Calibrated's EBITDA, as
defined in the Purchase Agreement in excess of $6,300,000 each
year, to a maximum amount of $3,000,000. This earn-out will
be paid as long as one of the two former shareholders
acceptable to the Company, is employed as General Manager of
Calibrated on a full-time basis during the entire fiscal year
for which the earn-out is paid. Any such earn out will be
recorded as compensation expense in the year to which it
relates. The acquisition was accounted for by the purchase
method. Approximately $2,400,000 of the goodwill related to
the Calibrated acquisition is deductible for tax purposes.
The accompanying consolidated financial statements include the
operations of Calibrated since the date of acquisition. The
following table represents certain operating information on a
pro forma basis as though Calibrated had been acquired as of
March 1, 2002, after the estimated impact of adjustments such
as amortization of intangible assets, interest expense,
reduced interest income and related tax effects (in thousands
except per share amounts):
For the Three Months Ended August 31, 2002
Pro forma net sales $70,461
Pro forma net earnings 3,916
Pro forma earnings per share - diluted 0.24
For the Six Months Ended August 31, 2002
Pro forma net sales $138,574
Pro forma net earnings 7,289
Pro forma earnings per share - diluted 0.44
The pro forma results are not necessarily indicative of what
would have occurred if the acquisition had been in effect for
the period presented.
10
7. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
The Company's interest rate swaps are held for purposes other
than trading. The Company utilized swap agreements related to
its term and revolving loans to effectively fix the interest
rate for a specified principal amount of the loans. Amounts
receivable or payable under interest rate swap agreements are
recorded as adjustments to interest expense. This swap has
been designated as a cash flow hedge and the after-tax effect
of the mark-to-market valuation that relates to the effective
amount of derivative financial instrument is recorded as an
adjustment to accumulated other comprehensive income with the
offset included in accrued expenses.
The Company utilized swap agreements related to the term loan
and revolving credit facility to effectively fix the interest
rate at 3.2% for a pre-set principal amount of the loans. The
pre-set principal amount of the loans covered by the swap
agreements declines quarterly in connection with expected
principal reductions and totaled $15,000,000 at August 31,
2003. The fair value of the swap at August 31, 2003 was
approximately ($235,000) and the change in the fair value of
the loss from March 1, 2003, net of tax, has been charged to
accumulated other comprehensive loss.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Company has maintained a strong financial position with
working capital at August 31, 2003, of $43,844,000, an increase
of 10.4% from the beginning of the year, and a current ratio of
2.6 to 1. The increase in current assets is due to operating
profits less funds used to pay dividends. The Company has
$20,882,000 in cash and cash equivalents and $14,800,000 in long-
term debt, less current installments. The Company made payments
of $3,335,000 of the debt financing for the six months ended
August 31, 2003. The Company anticipates repaying the long-term
debt of $1,500,000 per quarter until the debt is extinguished in
January 2006. The Company believes current inventory levels are
sufficient to satisfy customer demand and anticipates having
adequate sources of supply of raw materials to meet future
business requirements. The Company recorded a charge to Other
Comprehensive Income in the amount of $4,982,000 related to its
pension plan at February 28, 2003. SFAS No. 87 required the
recognition of a "minimum pension liability" if, as of a given
measurement date, the fair value of the plan's assets is less
than its accumulated benefit obligation. The decline in recent
years of the U.S. equity markets has reduced the value of the
Company's qualified pension plan assets. The Company estimates
the plan assets will exceed the plan's accumulated benefit
obligation in five years with annual pension plan contributions
of approximately $2,500,000. Capital expenditures for the six
months totaled $2,402,000. For the full fiscal year, capital
expenditures are expected to be between $6,000,000 and
$8,000,000, which are expected to be financed through internally
generated funds. The Company expects to generate sufficient cash
flow from its operating activities to more than cover its
operating and capital requirements for the foreseeable future.
11
Accounting Standards
- --------------------
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure-an Amendment to FASB Statement No. 123" (SFAS 148).
SFAS 148 provides alternate methods of transition for a voluntary
change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of "Accounting for Stock-Based
Compensation" (SFAS 123) to require prominent disclosures in both
annual and interim financial statements about the method of
accounting used in reporting results. SFAS 148 is effective for
fiscal years beginning after December 15, 2003.
Results of Operations 2003
- --------------------------
Net sales for the three months ended August 31, 2003 increased
14.8% from the corresponding period in the prior year. This
increase is the result of the inclusion of Calibrated Forms Co.,
Inc. (Calibrated) revenues for the full fiscal quarter, offset by
a decrease of 1.5% from the remaining portion of the Forms
Solutions Group and a 2.4% decrease in the Promotional Solutions
Group. For the six months ended August 31, 2003, net sales
increased 13.5% from the corresponding period in the prior year.
This increase is attributed to the inclusion of Calibrated
revenues offset by a decrease of 2.0% from the remaining portion
of the Forms Solution Group and a 1.9% decrease in the
Promotional Solutions Group. Revenues in the Financial Solutions
Group were flat for the three months and the six months ended
August 31, 2003. The general economy and industry declines
continue to be factors impacting each Group.
Gross profit margins decreased from 27.5% in the three months
ended August 31, 2002 to 26.9% in the three months ended August
31, 2003 and from 26.8% in the six months ended August 31, 2002
to 26.2% in the six months ended August 31, 2003. The decrease
is the result of a combination of factors. The Forms Solutions
Group gross profit margin decreased from 30.4% in the three
months ended August 31, 2002 to 27.9% in the three months ended
August 31, 2003 and from 29.4% for the six months end August 31,
2002 to 27.0% for the six months ended August 31, 2003. The
general weakness in the economy and the decline in the forms
industry contributed to lower prices in the Forms Solutions
Group. In addition, the gross profit margin decreased due to a
combination of lower fixed cost absorption resulting from
decreased sales volumes in certain plants and a shift in mix to
lower margin products. The Promotional Solutions Group had
relatively flat gross profit margins for the three and six months
ended August 31, 2003 when compared to the prior respective
period. The Financial Solutions Group experienced a slight
increase in gross profit margins for the three and six months
ended August 31, 2003 due to more efficient fixed cost absorption
and an increase in the volume of profitable sales.
Selling, general and administrative expenses increased 8.1% for
the three months ended August 31, 2003 and 5.7% for the six
months ended August 31, 2003 when compared to the corresponding
periods in the prior year. The increase is primarily the result
of the inclusion of Calibrated.
12
Interest expense decreased from $300,000 in the three months
ended August 31, 2002 to $192,000 in the three months ended
August 31, 2003 and from $638,000 in the six months ended August
31, 2002 to $479,000 in the six months ended August 31, 2003 due
to a decline in interest rates.
Investment income decreased from $42,000 in the three months
ended August 31, 2002 to $13,000 in the three months ended August
31, 2003 and from $114,000 in the six months ended August 31,
2002 to $27,000 in the six months ended August 31, 2003 due to
the decline in interest rates.
The effective rate of the Federal and state income tax expense
was 38.0% for the six months ended August 31, 2003 and August 31,
2002.
Critical Accounting Policies and Judgments
- ------------------------------------------
In preparing our financial statements, we are required to make
estimates and assumptions that affect the disclosures and
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates
and judgments on an ongoing basis, including those related to bad
debts, inventory valuations, property, plant and equipment,
intangible assets and income taxes. We base our estimates and
judgments on historical experience and on various other factors
that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates.
We exercise judgment in evaluating our long-lived assets for
impairment. The Company assesses the impairment of long-lived
assets, which includes other intangible assets, goodwill and
plant and equipment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The
Company assesses the impairment of goodwill annually. In
performing tests of impairment, the Company estimates future cash
flows that are expected to result from the operating segments.
Actual results could differ from assumptions made by management.
We believe our businesses will generate sufficient undiscounted
cash flow to more than recover the investments we have made in
property, plant and equipment, as well as the goodwill and other
intangibles recorded as a result of our acquisitions. The
Company cannot predict the occurrence of future impairment
triggering events nor the impact such events might have on its
reported asset values.
Revenue is recognized upon shipment for all printed products.
Revenue from fixed price contracts for the design and
construction of tools, dies and special machinery is recognized
using the percentage of completion method of accounting.
Derivative instruments are recognized on the balance sheet at
fair value. Changes in fair values of derivatives are accounted
for based upon their intended use and designation. The Company's
interest rate swaps are held for purposes other than trading.
The Company utilized swap agreements related to its term and
revolving loans to effectively fix the interest rate for a
specified principal amount of the loans. Amounts receivable or
13
payable under interest rate swap agreements are recorded as
adjustments to interest expense. This swap has been designated
as a cash flow hedge and the after tax effect of the mark-to-
market valuation that relates to the effective amount of
derivative financial instrument is recorded as an adjustment to
accumulated other comprehensive income with the offset included
in accrued expenses.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The Forms Solutions Group sells a mature product line of business
forms and other printed business products. The demand for this
product line may decrease with increasing electronic and
paperless forms and filings.
The Promotional and Financial Solutions Groups are dependent upon
certain major customers. The loss of such customers may affect
the revenue and earnings of the Groups.
The Company has various contracts with suppliers that are subject
to change upon renewal and may not provide the same cost ratios
for future periods.
Forward looking statement
- -------------------------
Management's result of operations contains forward-looking
statements that reflect the Company's current view with respect
to future revenues and earnings. These statements are subject to
numerous uncertainties, including (but not limited to) the rate
at which the business forms market is contracting, the
application of technology to the production of business forms,
demand for the Company's products in the context of a contracting
market, variability in the prices of paper and other raw
materials, and competitive conditions in the business forms
market. Because of such uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements, which
speak only as of September 29, 2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
- -----------
The Company is exposed to market risk from changes in interest
rates on debt. A discussion of the Company's accounting policies
for derivative instruments is included in the Notes to the
Consolidated Financial Statements for period ended August 31,
2003.
The Company's net exposure to interest rate risk consists of a
floating rate debt instrument that is benchmarked to U.S. and
European short-term interest rates. The Company may from time to
time utilize interest rate swaps to manage overall borrowing
costs and reduce exposure to adverse fluctuations in interest
rates. The Company does not use derivative instruments for
trading purposes. The Company is exposed to interest rate risk
on short-term and long-term financial instruments carrying
variable interest rates. The Company's variable rate financial
instruments, including the outstanding credit facilities, totaled
$20,800,000 at August 31, 2003. The impact on the Company's
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results of operations of a one-point interest rate change on the
outstanding balance of the variable rate financial instruments as
of August 31, 2003 would be immaterial. This market risk
discussion contains forward-looking statements. Actual results
may differ materially from this discussion based upon general
market conditions and changes in domestic and global financial
markets.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed
to ensure that it is able to collect the information it is
required to disclose in the reports it files with the Securities
and Exchange Commission (SEC), and to process, summarize and
disclose this information within the time periods specified in
the rules of the SEC. Based on their evaluation of the Company's
disclosure controls and procedures which took place as of a date
within 90 days of the filing date of this report, the Chief
Executive and Chief Financial Officers believe that these
controls and procedures are effective to ensure that the Company
is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within
the required time periods.
The Company also maintains a system of internal controls designed
to provide reasonable assurance that: transactions are executed
in accordance with management's general or specific
authorization; transactions are recorded as necessary (1) to
permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain
accountability for assets; access to assets is permitted only in
accordance with management's general or specific authorization;
and the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
Since the date of the most recent evaluation of the Company's
internal controls by the Chief Executive and Chief Financial
Officers, there have been no significant changes in such controls
or in the other factors that could have significantly affected
those controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits as listed on the accompanying index to
exhibits on page 19 are filed as part of this Form 10-
Q.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on September 26,
2003 regarding the press release announcing its first
quarter operating results.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ENNIS BUSINESS FORMS, INC.
Date September 29, 2003 /s/Harve Cathey
------------------- -------------------------------
Harve Cathey
Vice President - Finance and CFO,
Secretary and Treasurer,
Principal Financial and
Accounting Officer
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INDEX TO EXHIBITS
Exhibit 31.1 Section 302 Certification of the CEO
Exhibit 31.2 Section 302 Certification of the CFO
Exhibit 32.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 32.2 Certification Pursuant to 18.U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
17