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 MAY 31, 2004
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Commission File Number 1-5807
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ENNIS, 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.)
2441 Presidential Pkwy, Midlothian, TX 76065
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(Address of principal executive offices) (Zip Code)
(972) 775-9801
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(Registrant's telephone number, including area code)
ENNIS BUSINESS FORMS, INC,
1510 N. Hampton, Suite 300, DeSoto, TX 75115
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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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes X No
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The number of shares of the registrant's Common Stock, par value
$2.50, outstanding at May 31, 2004 was 16,420,463.
ENNIS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
May 31, 2004 and February 29, 2004 2 - 3
Condensed Consolidated Statements of
Earnings -- Three Months Ended May 31,
2004 and 2003 4
Condensed Consolidated Statements of Cash
Flows -- Three Months Ended May 31, 2004
and 2003 5
Notes to Condensed Consolidated Financial
Statements 6 - 10
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11 - 15
Item 3 - Quantitative and Qualitative
Disclosures of Market Risk 16
Item 4 - Controls and Procedures 16
Part II. Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
May 31, February 29,
2004 2004
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 20,853 $ 15,067
Accounts receivable, net 29,502 29,800
Prepaid expenses 1,700 2,022
Inventories 13,263 13,721
Other current assets 2,920 2,995
------- -------
Total current assets 68,238 63,605
------- -------
Property, plant and equipment, net 46,406 46,480
Goodwill, net 34,420 34,420
Other assets 8,965 9,538
------- -------
$158,029 $154,043
======= =======
(Continued)
2
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
May 31, February 29,
2004 2004
---- ----
(unaudited)
Liabilities and
Shareholders' Equity
--------------------
Current liabilities:
Accounts payable $ 7,165 $ 5,804
Accrued expenses:
Employee compensation and
benefits 8,676 7,908
Federal and state income tax
payable 2,175 --
Taxes other than income 1,428 1,427
Insurance accrual 1,316 2,329
Other 1,554 1,597
Current installments of long-term
debt 6,335 6,335
------- -------
Total current liabilities 28,649 25,400
------- -------
Long-term debt, less current
installments 6,300 7,800
Deferred credits, principally income
taxes 10,119 10,261
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 126 126
Retained earnings 147,481 145,653
Accumulated other comprehensive
loss (57) (114)
------- -------
200,675 198,790
Treasury stock (87,714) (88,208)
------- -------
Total shareholders'
equity 112,961 110,582
------- -------
$158,029 $154,043
======= =======
See accompanying notes to condensed consolidated financial
statements.
3
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended
May 31,
2004 2003
---- ----
Net sales $65,736 $64,874
Costs and expenses:
Cost of sales 48,676 48,324
Selling, general and administrative 9,386 9,655
------ ------
58,062 57,979
------ ------
Earnings from operations 7,674 6,895
------ ------
Other income (expense):
Investment income 5 14
Interest expense (134) (287)
Other expense, net (81) (3)
------ ------
(210) (276)
------ ------
Earnings before income taxes 7,464 6,619
Provision for income taxes 2,882 2,515
------ ------
Net earnings $ 4,582 $ 4,104
====== ======
Weighted average number of common
shares outstanding - basic 16,406,631 16,332,565
Plus incremental shares from assumed
exercise of stock options 287,919 173,917
---------- ----------
Weighted average number of common
shares outstanding - diluted 16,694,550 16,506,482
========== ==========
Per share amounts:
Net earnings - basic $.28 $.25
==== ====
Net earnings - diluted $.27 $.25
==== ====
Cash dividends per share $.155 $.155
===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
May 31,
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $4,582 $4,104
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation 2,209 2,377
Amortization of trademark 33 33
Gain on the sale of equipment (3) (78)
Other -- (135)
Changes in operating assets and
liabilities:
Receivables 298 1,830
Prepaid expenses 322 160
Inventories 458 (642)
Contract costs in excess of
billings 34 530
Other current assets 6 (260)
Accounts payable and accrued
expenses 3,341 571
Other assets 398 664
------ ------
Net cash provided by
operating activities 11,678 9,154
------ ------
Cash flows from investing activities:
Capital expenditures (2,139) (842)
Proceeds from disposal of property 7 89
------ ------
Net cash used in investing
activities (2,132) (753)
------ ------
Cash flows from financing activities:
Repayment of debt issued to finance
acquisition (1,500) (1,850)
Dividends (2,542) (2,533)
Purchase (issue) of treasury stock,
net 282 (3)
Other -- (2)
------ ------
Net cash used in financing
activities (3,760) (4,388)
------ ------
Net change in cash and cash equivalents 5,786 4,013
Cash and cash equivalents at beginning
of period 15,067 13,860
------ ------
Cash and cash equivalents at end of
period $20,853 $17,873
====== ======
See accompanying notes to condensed consolidated financial
statements.
5
ENNIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
These unaudited condensed consolidated financial statements
of Ennis, Inc. and its subsidiaries (collectively the
"Company" or "Ennis"), for the quarter ended May 31, 2004
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 29, 2004, from which the
accompanying condensed consolidated balance sheet at February
29, 2004 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 May 31,
2004, 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 722,652 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)
-----------------------------------------------------------
For the Three Months Ended May 31, 2004 2003
---- ----
Net earnings:
As reported $4,582 $4,104
Deduct: Stock-based Employee
compensation expense not
included in reported income,
net of related tax effects 10 14
----- -----
Pro forma $4,572 $4,090
====== ======
Net earnings per share:
As reported - basic $.28 $.25
Pro forma - basic .28 .25
As reported - diluted .27 .25
Pro forma - diluted .27 .25
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 2004,
compensation expense of $17,000 would have been recorded.
After related income tax effects, this would have reduced net
income by $10,000. There would have been no effect to
earnings per share.
As of May 31, 2004, the Company has reserved 722,652 shares
of common stock under incentive stock option plans. For the
three month periods ended May 31, 2004 and 2003, 35,000 and
65,500 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. Employee Benefit Plans
----------------------
The following table provides the components of net periodic
benefit cost for the three months ended May 31, 2004 and 2003
(in thousands):
May 31, 2004 May 31, 2003
Components of net
periodic benefit
cost
Service cost $367 $334
Interest cost 604 589
Expected return on
Assets (666) (548)
Amortization of:
Prior service cost (36) (36)
Unrecognized net
loss 267 262
---- ----
Net periodic benefit
Cost $536 $601
==== ====
The Company expects to contribute $2,500,000 during the
current fiscal year end. For the current fiscal year ending
February 28, 2005, there is not a minimum contribution
requirement and no pension payments have been made.
4. 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):
May 31, February 29,
2004 2004
---- ----
Raw material $ 6,690 $ 6,911
Work-in-process 1,194 1,393
Finished goods 5,379 5,417
------ ------
$13,263 $13,721
====== ======
5. Accumulated other comprehensive income
--------------------------------------
Accumulated other comprehensive income consists of the
unrealized portion of changes in the fair value of the
Company's cash flow hedge. Comprehensive income was
approximately $4,639,000 for the three months ended May 31,
2004 and $4,116,000 for the three months ended May 31, 2003.
Amounts charged directly to Shareholder's Equity related to
the Company's interest rate swap are included in "other
comprehensive income."
8
6. 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.
The Promotional Solutions Group is comprised of Adams
McClure, Admore and Wolfe City is primarily in the business
of manufacturing and selling promotional products. 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 ended May 31, 2004 and 2003 were as follows (in
thousands):
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
----- ----- ----- --------- ------
Three months ended May 31, 2004:
Net sales $34,562 $19,462 $11,712 $ -- $ 65,736
Depreciation 776 626 702 105 2,209
Amortization
of
trademark 33 -- -- -- 33
Segment
Earnings
(loss)
before
income tax 5,536 2,163 1,486 (1,721) 7,464
Segment
assets 80,246 34,842 35,331 7,610 158,029
Capital
expenditures 267 241 100 1,531 2,139
Three months ended May 31, 2003:
Net sales $34,765 $18,129 $11,980 $ -- $ 64,874
Depreciation 820 616 763 178 2,377
Amortization
of
trademark 33 -- -- -- 33
Segment
Earnings
(loss)
before
income tax 5,197 1,700 1,224 (1,502) 6,619
Segment
assets 73,349 37,925 37,092 4,970 153,336
Capital
expenditures 570 154 100 18 842
"Post-it" is a registered trademark of 3M.
9
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 $10,500,000 at May 31, 2004.
The fair value of the swap at May 31, 2004 was approximately
($92,000) and the change in the fair value of the loss from
March 1, 2004, net of tax, has been charged to accumulated
other comprehensive loss.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Ennis, Inc. was organized under the laws of Texas in 1909. Ennis,
Inc. and its subsidiaries (collectively "Ennis" or the "Company")
prints and constructs a broad line of business forms and other
business products for national distribution. Distribution of
business forms and other business products throughout the United
States is primarily through independent dealers. These include
business forms distributors, stationers, printers, computer
software developers and advertising agencies, among others.
On November 14, 2002, the Company acquired all of the outstanding
shares of Calibrated Forms Co., (Calibrated). The purchase price
for the transaction was $22,038,000, less liabilities excluded of
$7,195,000. Calibrated designs, manufactures and markets printed
business forms within the wholesale business forms marketplace.
Calibrated became part of the Forms Solutions Group.
The Company operates in three business segments. The first
segment, the Forms Solutions Group is primarily in the business
of manufacturing and selling business forms and other printed
business products primarily to distributors located in the United
States. The second segment, the Promotional Solutions Group, is
comprised of Adams McClure, Admore and Wolfe City and is
primarily in the business of manufacturing and selling
promotional products. The third segment, the Financial Solutions
Group designs, manufactures and markets printed forms and
specializes in internal bank forms, secure and negotiable
documents and custom products.
Economic pressure and the contraction of the traditional business
forms industry continue to impact each segment of the Company.
As a result, the Company continues to concentrate on reducing
other costs where sales are declining. The installation of the
Company's Enterprise Resource Planning Software (ERP) System has
decreased the waste in materials in the plants which have the
system. The Company is continuing to install the ERP System
throughout the organization. The Company is also focusing on
increasing sales where the market is expanding. In addition, the
Company will continue to search for acquisition opportunities
that will expand our mix of products away from traditional forms,
as well as strategic acquisitions within the traditional forms
industry.
Liquidity and Capital Resources
- -------------------------------
Cash Flow
Cash provided by operating activities for the three months ended
May 31, 2004 was $11,678,000 and represented an increase of
$2,524,000 from the $9,154,000 provided in the comparable period
last year. This increase in cash provided by operating activities
was due to routine fluctuation due dates in Accounts payable and
accrued expenses. Cash flows used in investing activities for
the three months ended May 31, 2004 was $2,132,000 and
represented an increase use of $1,379,000 from the $753,000 used
in the comparable period last year. This increase in cash used
was primarily the result of capital expenditures for the new
Corporate facility. Cash flows used in financing activities for
the three months ended May 31, 2004 was $3,760,000 and
represented a decrease of $628,000 from the $4,388,000 used in
the comparable period last year. The decrease in financing
activities was primarily the result of reduction in quarterly
payments of the long term debt and proceeds received from
issuance of treasury stock.
11
Working Capital
The Company has maintained a strong financial position with
working capital at May 31, 2004, of $39,589,000, an increase of
3.6% from the beginning of the year, and a current ratio of 2.4
to 1. The increase in current assets is due to operating profits
less funds used to pay dividends. The Company has $20,853,000 in
cash and cash equivalents.
Credit Facility
The Company has $12,635,000 in long-term debt. The Company made
payments of $1,500,000 of the debt financing for the three months
ended May 31, 2004. The Company anticipates repaying the long-
term debt of $1,500,000 per quarter and a final payment of
$1,800,000 in January 2006. The available line of credit at May
31, 2004 was approximately $17,700,000.
Pension
The Company is required to make contributions to its defined
benefit pension plan. These contributions are required under the
minimum funding requirements of the Employee Retirement Pension
Plan Income Security Act (ERISA). The Company anticipates it
will pay $2,500,000 for the fiscal year ended 2005. For the
current fiscal year ending February 28, 2005, there is not a
minimum contribution requirement and no pension payments have
been made.
Inventory
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.
Capital Expenditures
Capital expenditures for the three months totaled $2,139,000. For
the full fiscal year, capital expenditures are expected to be
between $5,000,000 and $6,000,000, 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.
Commitments
There have been no material changes in our contractual
obligations since fiscal year-end 2004 outside the normal course
of business.
12
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. To date, the Company has
not adopted SFAS 123 utilizing any of the transition methods of
SFAS 148. The FASB recently issued an exposure for public
comment and a final standard is expected in the second half of
2004. Tentative decisions by the FASB indicate that expensing of
stock options will be required for fiscal years beginning after
December 15, 2004.
Results of Operations 2004
- --------------------------
Net sales for the three months ended May 31, 2004 increased 1.3%
from the corresponding period in the prior year. This increase is
primarily the result of increased product sales to new customers
in the Promotional Solutions Group 2.1%, offset by decreases in
the Forms Solutions Group 0.4% and the Financial Solutions
Group 0.4%. The Forms Solutions Group and the Financial
Solutions Group continue to be impacted by the general economy
and industry decline. The declines are primarily caused by
decreased volume.
Gross profit margins increased from 25.5% in the three months
ended May 31, 2003 to 26.0% in the three months ended May 31,
2004. The increase is the result of a combination of factors.
The Forms Solutions Group gross profit margin increased from
26.4% in the three months ended May 31, 2003 to 27.0% in the
three months ended May 31, 2004. While the general weakness in
the economy and the decline in the forms industry contributed to
decreased volume, prices were able to be increased in the Forms
Solutions Group, while controlling variable costs and maintaining
efficient fixed cost absorption. The Financial Solutions Group
and the Promotional Solutions Group had relatively consistent
gross profit margins for the three months ended May 31, 2004 and
2003.
Selling, general and administrative expenses decreased 2.8% for
the three months ended May 31, 2004 when compared to the
corresponding period in the prior year. Reduced administrative
personnel in the Forms and financial groups accounted for the
reduction.
Interest expense decreased from $287,000 in the three months
ended May 31, 2003 to $134,000 in the three months ended May 31,
2004 primarily as a result of the reduction of long-term
financial debt.
The Company's effective federal and state income tax rate
remained relatively constant from May 31, 2004 to May 31, 2003.
13
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 under different
assumptions or conditions. The Company believes the following
accounting policies are the most critical due to their affect on
the Company's more significant estimates and judgments used in
preparation of its consolidated financial statements.
The Company maintains a defined-benefit pension plan for
employees. Included in our financial results are pension costs
which are measured using actuarial valuations. The actuarial
assumptions used may differ from actual results.
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.
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 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.
14
Critical Accounting Policies and Judgments (continued)
- ------------------------------------------------------
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
jurisdiction in which we operate that imposes a tax on income.
This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from
different treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included in our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe
that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance, we
must include an expense within the tax provision in the
consolidated statements of income. In the event that accrual
results differ from these estimates, our provision for income
taxes could be materially impacted.
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 June 23, 2004.
15
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 May 31, 2004.
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
$10.5 million at May 31, 2004. The impact on the Company's
results of operations of a one-point interest rate change on the
outstanding balance of the variable rate financial instruments as
of May 31, 2004 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.
16
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on June
17, 2004.
(b) Proxies for the meeting were solicited pursuant to
Regulation 14; there was no solicitation in opposition to
management's nominees for directors listed in the Proxy
Statement and all such nominees were elected.
Directors elected were:
Nominees for Director Votes Cast for Votes Withheld
Harold W. Hartley 14,659,145 330,894
Kenneth G. Pritchett 14,496,292 493,746
James C. Taylor 14,599,251 390,787
(c) Briefly described below are the other matters voted upon at
the Annual Meeting and the number of affirmative votes and
negative votes respectively.
Approve the long-term incentive plan.
For 8,863,405
Against 1,690,899
Withheld 101,380
Broker-non votes 4,334,354
Amend the Company's Articles of Incorporation to change the
name of the Company to Ennis, Inc.
For 14,876,196
Against 69,439
Withheld 44,403
Broker-non votes --
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits as listed on the accompanying index to
exhibits on page 16 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 June 23, 2004
regarding the press release announcing its first
quarter operating results.
17
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, INC.
Date June 23, 2004 /s/Harve Cathey
--------------------- --------------------------------
Harve Cathey
Vice President - Finance and
CFO, Secretary and Principal
Financial and Accounting Officer
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INDEX TO EXHIBITS
Exhibit 31.1 Certification Pursuant to Rule 13a-
14(a)/15d-14(a) (Chief Executive Officer)
Exhibit 31.2 Certification Pursuant to Rule 13a-
14(a)/15d-14(a) (Chief Financial Officer)
Exhibit 32 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
19