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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 NOVEMBER 30, 2003
-----------------------------------------------
Commission File Number 1-5807
------------------------------------------
ENNIS BUSINESS FORMS, INC.
- ----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0256410
- ----------------------------------------------------------------
(State or other Jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
1510 N. Hampton, Suite 300, DeSoto, TX 75115
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 228-7801
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- ----------------------------------------------------------------
(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 November 30, 2003
- ----------------------- --------------------------------
Common stock, par value 16,363,623
$2.50 per share
ENNIS BUSINESS FORMS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
November 30, 2003 and February 28, 2003 2 - 3
Condensed Consolidated Statements of Earnings --
Three and Nine Months Ended November 30, 2003
and 2002 4
Condensed Consolidated Statements of Cash Flows --
Three and Nine Months Ended November 30, 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)
November 30, February 28,
2003 2003
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 23,811 $ 13,860
Accounts receivable, net 30,033 32,077
Prepaid expenses 1,720 1,708
Inventories 13,536 13,104
Contract costs in excess of billings 294 967
Other current assets 3,264 3,296
------- -------
Total current assets 72,658 65,012
------- -------
Property, plant and equipment, net 47,219 51,264
Goodwill, net 34,269 34,241
Other assets 1,891 2,020
------- -------
$156,037 $152,537
======= =======
(Continued)
2
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
November 30, February 28,
2003 2003
---- ----
(unaudited)
Liabilities and
Shareholders' Equity
--------------------
Current liabilities:
Accounts payable $ 7,135 $ 6,644
Accrued expenses:
Employee compensation and
benefits 9,063 6,784
Federal and state income tax
payable 841 --
Taxes other than income 1,941 1,430
Other 3,408 3,398
Current installments of long-term
debt 6,335 7,038
------- -------
Total current liabilities 28,723 25,294
------- -------
Accrued pension 1,510 2,130
Long-term debt, less current
installments 13,300 18,135
Deferred credits, principally income
taxes 9,661 10,075
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 245 461
Retained earnings 143,319 137,848
Accumulated other comprehensive
loss (5,099) (5,225)
------- -------
191,590 186,209
Treasury stock (88,747) (89,306)
------- -------
Total shareholders' equity 102,843 96,903
------- -------
$156,037 $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 Nine Months Ended
November 30, November 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $66,398 $59,151 $196,275 $173,540
Costs and expenses:
Cost of sales 48,824 43,560 144,644 127,349
Selling, general
and
administrative
expenses 9,949 9,331 29,470 27,805
------ ------ ------- -------
58,773 52,891 174,114 155,154
------ ------ ------- -------
Earnings from
operations 7,625 6,260 22,161 18,386
------ ------ ------- -------
Other income
(expense):
Investment income 6 33 33 147
Interest expense (183) (299) (662) (937)
Other expense, net (115) (67) (326) (190)
------ ------ ------- -------
(292) (333) (955) (980)
------ ------ ------- -------
Earnings before income
taxes 7,333 5,927 21,206 17,406
Provision for income 2,858 2,252 8,130 6,614
taxes
------ ------ ------- -------
Net earnings $ 4,475 $ 3,675 $ 13,076 $ 10,792
====== ====== ======= =======
Weighted average
number of common
shares outstanding
- Basic 16,363,391 16,282,938 16,347,768 16,278,938
Plus incremental
shares from
assumed exercise
of stock options 258,853 217,244 230,159 217,244
---------- ---------- ---------- ----------
Weighted average
number of common
shares outstanding
- Diluted 16,622,244 16,500,182 16,577,927 16,496,182
========== ========== ========== ==========
Per share amounts:
Net earnings -
basic $.27 $.23 $.80 $.66
==== ==== ==== ====
Net earnings -
diluted $.27 $.22 $.79 $.65
==== ==== ==== ====
Cash dividends per
share $.155 $.155 $.465 $.465
===== ===== ===== =====
See accompanying notes to condensed consolidated financial
statements.
4
PAGE
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
November 30,
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $13,076 $10,792
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 6,975 6,929
Amortization of trademark 99 --
Gain on the sale of equipment -- (53)
Changes in operating assets and
liabilities:
Receivables 2,044 (814)
Prepaid expenses (12) (2,116)
Inventories (432) 140
Contract costs in excess of
billings 673 (276)
Other current assets (45) 204
Accounts payable and accrued
expenses 4,335 974
Other assets and liabilities (1,004) 2,861
------ ------
Net cash provided by operating
activities 25,709 18,641
------ ------
Cash flows from investing activities:
Cash acquired from the acquisition of
Calibrated -- 1,508
Capital expenditures (3,040) (3,100)
Redemption of investments -- 1,802
Proceeds from disposal of property 110 110
Other (28) 6
------ ------
Net cash (used in) provided by
investing activities (2,958) 326
------ ------
Cash flows from financing activities:
Repayment of debt issued to finance
acquisition (5,538) (5,690)
Dividends (7,605) (7,570)
Issue of treasury stock, net 343 103
Other -- (480)
------ ------
Net cash used in financing
activities (12,800) (13,637)
------ ------
Net change in cash and cash equivalents 9,951 5,330
Cash and cash equivalents at beginning of
period 13,860 16,180
------ ------
Cash and cash equivalents at end of period $23,811 $21,510
====== ======
Non-cash activities:
Debt issued in connection with acquisition
of Calibrated $ -- $22,000
====== ======
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 November 30, 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 November
30, 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 784,984 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 Nine Months
Ended November 30 Ended November 30
2003 2002 2003 2002
---- ---- ---- ----
Net earnings:
As reported $4,475 $3,675 $13,076 $10,792
Deduct: Stock-based
Employee
compensation
expense not included
in reported income,
net of related tax 14 15 42 45
effects
----- ----- ----- ------
Pro forma $4,461 $3,660 $13,034 $10,747
===== ===== ====== ======
Net earnings per share:
As reported - basic $.27 $.23 $.80 $.66
Pro forma - basic .27 .22 .80 .66
As reported - diluted .27 .22 .79 .65
Pro forma - diluted .27 .22 .79 .65
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 $22,000 and $67,000 would have been
recorded for the three and nine months ended November 30,
2003, respectively. After related income tax effects, this
would have reduced net income by $14,000 and $42,000 for the
three and nine months ended November 30, 2003, respectively.
Earnings per share would have remained the same for the three
months ended November 30, 2003.
For the nine month periods ended November 30, 2003 and 2002,
42,250 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):
November 30, February 28,
2003 2003
---- ----
Raw material $ 7,105 $ 6,664
Work-in-process 1,594 1,161
Finished goods 4,837 5,279
------ ------
$13,536 $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 $13,202,000 for the
nine months ended November 30, 2003 and $11,030,744 for the
nine months ended November 30, 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
nine months ended November 30, 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
November 30, 2003:
Net sales $ 35,440 $ 17,339 $ 13,619 $ -- $ 66,398
Depreciation 799 587 739 141 2,266
Amortization
of trademark 33 -- -- -- 33
Segment
earnings
(loss)
before
income tax 5,057 2,190 2,099 (2,013) 7,333
Segment assets 80,101 34,186 36,887 4,863 156,037
Capital
expenditures 223 36 176 203 638
Three months ended
November 30, 2002:
Net sales $ 28,045 $ 17,830 $ 13,276 $ -- $ 59,151
Depreciation 443 579 777 408 2,207
Segment
Earnings
(loss)
before
income tax 4,262 1,917 1,399 (1,651) 5,927
Segment assets 81,103 36,880 41,169 4,817 163,969
Capital
expenditures 715 115 -- 124 954
Nine months ended
November 30, 2003:
Net sales $ 107,133 $ 51,406 $ 37,736 $ -- $ 196,275
Depreciation 2,478 1,761 2,238 498 6,975
Amortization
of trademark 99 -- -- -- 99
Segment
Earnings
(loss)
before
income tax 15,917 5,995 4,838 (5,544) 21,206
Segment assets 80,101 34,186 36,887 4,863 156,037
Capital
expenditures 1,221 471 897 451 3,040
Nine months ended
November 30, 2002:
Net sales $ 82,141 $ 54,077 $ 37,322 $ -- $ 173,540
Depreciation 2,199 1,724 2,404 602 6,929
Segment
Earnings
(loss)
before
income tax 13,398 5,892 2,975 (4,859) 17,406
Segment assets 81,103 36,880 41,169 4,817 163,969
Capital
expenditures 1,780 611 964 (255) 3,100
"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 November 30, 2002
Pro forma net sales $ 64,335
Pro forma net earnings 3,767
Pro forma earnings per share - diluted 0.23
For the Nine Months Ended November 30, 2002
Pro forma net sales $202,908
Pro forma net earnings 11,056
Pro forma earnings per share - diluted 0.67
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 $13,500,000 at November 30,
2003. The fair value of the swap at November 30, 2003 was
approximately ($189,000) 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 November 30, 2003, of $43,935,000, an increase
of 10.6% from the beginning of the year, and a current ratio of
2.5 to 1. The increase in current assets is due to operating
profits less funds used to pay dividends. The Company has
$23,811,000 in cash and cash equivalents and $13,300,000 in long-
term debt, less current installments. The Company made payments
of $5,538,000 of the debt financing for the nine months ended
November 30, 2003. The Company anticipates repaying the long-
term debt of $1,500,000 per quarter until the debt is
extinguished in January 2006. In December 2003, the Company
amended its debt agreement to provide more flexibility in its
pension plan funding requirements. 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 nine months totaled $3,040,000. 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 November 30, 2003 increased
12.3% 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 2.0% from the remaining portion of the Forms
Solutions Group and a .8% decrease in the Promotional Solutions
Group. For the nine months ended November 30, 2003, net sales
increased 13.1% 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 1.5% decrease in the
Promotional Solutions Group. Revenues in the Financial Solutions
Group increased .5% and .2% respectively for the three months and
the nine months ended November 30, 2003. The general economy and
industry declines continue to be factors impacting each Group.
Gross profit margins increased from 26.4% in the three months
ended November 30, 2002 to 26.5% in the three months ended
November 30, 2003 and decreased from 26.6% in the nine months
ended November 30, 2002 to 26.3% in the nine months ended
November 30, 2003. The decrease is the result of a combination
of factors. The Forms Solutions Group gross profit margin
decreased from 27.8% in the three months ended November 30, 2002
to 25.3% in the three months ended November 30, 2003 and from
29.2% for the nine months ended November 30, 2002 to 26.4% for
the nine months ended November 30, 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 nine months ended November 30, 2003
when compared to the prior respective period. The Financial
Solutions Group experienced a slight increase in gross profit
margins for the three and nine months ended November 30, 2003 due
to more efficient fixed cost absorption and an increase in the
volume of profitable sales.
Selling, general and administrative expenses increased 6.6% for
the three months ended November 30, 2003 and 6.0% for the nine
months ended November 30, 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 $299,000 in the three months
ended November 30, 2002 to $183,000 in the three months ended
November 30, 2003 and from $937,000 in the nine months ended
November 30, 2002 to $662,000 in the nine months ended November
30, 2003 due to a decline in interest rates.
Investment income decreased from $33,000 in the three months
ended November 30, 2002 to $6,000 in the three months ended
November 30, 2003 and from $147,000 in the nine months ended
November 30, 2002 to $33,000 in the nine months ended November
30, 2003 due to the decline in interest rates.
The effective rate of the Federal and state income tax expense
was 38.0% for the nine months ended November 30, 2003 and
November 30, 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 generally 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
payable under interest rate swap
13
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 December 22, 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 November 30,
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
$19,300,000 at November 30, 2003. The impact on the Company's
results of operations of a one-point interest rate change on the
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outstanding balance of the variable rate financial instruments as
of November 30, 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 17 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 December 22,
2003 regarding the press release announcing its third
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 December 22, 2003 /s/ Harve Cathey
------------------- -------------------------------
Harve Cathey
Vice President - Finance and
CFO, Secretary
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