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, 2001
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Commission File Number 1-5807
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ENNIS BUSINESS FORMS, INC.
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(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
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(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 May 31, 2001
- ----------------------------- ------------------------------
Common stock, par value 16,270,748
$2.50 per share
ENNIS BUSINESS FORMS, INC.
INDEX
Part I. Financial information - unaudited
Condensed Consolidated Balance Sheets --
May 31, 2001 and February 28, 2001 2 - 3
Condensed Consolidated Statements of
Earnings -- Three Months Ended
May 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash
Flows -- Three Months Ended May 31,
2001 and 2000 5
Notes to Condensed Consolidated Financial
Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9 - 10
Part II. Other Information 11 - 12
Signatures 13
PART I. FINANCIAL INFORMATION
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
May 31, February 28,
2001 2001
---- ----
Assets
-------
Current assets:
Cash and cash equivalents $ 11,403 $ 8,964
Investment securities 1,694 980
Accounts receivable, net 31,280 29,957
Inventories 11,529 13,088
Other current assets 4,277 5,274
-------- --------
Total current assets 60,183 58,263
-------- --------
Investment securities 1,084 2,170
Property, plant and equipment, net 56,140 57,781
Cost of purchased businesses in
excess of amounts allocated to
tangible net assets 23,220 23,615
Other assets and deferred charges 786 1,025
-------- --------
Total assets $141,413 $142,854
======== ========
(Continued)
2
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
May 31, February 28,
2001 2001
---- ----
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term
debt $ 4,174 $ 4,176
Accounts payable 5,337 6,067
Accrued expenses 9,568 7,665
Federal and state income taxes
payable 419 --
-------- --------
Total current liabilities 19,498 17,908
-------- --------
Long-term debt, less current
installments 20,297 23,555
Deferred credits, principally Federal
income taxes 9,905 9,851
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 1,040 1,040
Retained earnings 128,703 127,817
Accumulated other comprehensive loss (713) --
-------- --------
182,155 181,982
Less: Treasury stock 90,442 90,442
-------- --------
Total shareholders' equity 91,713 91,540
-------- --------
Total liabilities and
shareholders' equity $141,413 $142,854
======== ========
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
May 31
2001 2000
---- ----
Net sales $59,823 $49,347
Costs and expenses:
Cost of sales 43,742 34,660
Selling, general and administrative
expenses 9,854 8,549
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53,596 43,209
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Earnings from operations 6,227 6,138
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Other income (expense):
Interest expense (686) (10)
Investment and other income 69 86
------- -------
(617) 76
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Earnings before income taxes 5,610 6,214
Provision for income taxes 2,202 2,360
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Net earnings $ 3,408 $ 3,854
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Weighted average number of common
shares outstanding 16,270,761 16,191,808
========== ==========
Per share amounts:
Net earnings per basic and diluted
share of common stock $ .21 $ .24
===== =====
Cash dividends $.155 $.155
===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
May 31
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 3,408 $ 3,854
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 2,612 1,628
Changes in operating assets and
liabilities 2,112 612
Other 280 340
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Net cash provided by operating
activities 8,412 6,434
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Cash flows from investing activities:
Capital expenditures (563) (667)
Redemption of investment securities 372 --
Other -- 53
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Net cash used in investing
activities (191) (614)
------- -------
Cash flows from financing activities:
Repayment of Northstar acquisition (3,200) --
financing
Dividends declared (2,522 (2,510)
Other (60) (74)
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Net cash used in financing
activities (5,782) (2,584)
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Net change in cash and cash equivalents 2,439 3,236
Cash and cash equivalents at beginning of
period 8,964 2,037
------- -------
Cash and cash equivalents at end of period $11,403 $ 5,273
======= =======
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 May 31, 2001 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, 2001,
from which the accompanying condensed consolidated balance
sheet at February 28, 2001 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
------------------
As of May 31, 2001, the Company has reserved 980,777 shares
of common stock under incentive stock option plans. For the
three month periods ended May 31, 2001 and 2000, options,
respectively, were not included in the diluted earnings per
share computation because their inclusion would not be
dilutive. The difference between basic and diluted earnings
per share would be due to dilutive stock options.
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):
May 31, February 28,
2001 2001
---- ----
Raw material $ 5,964 $ 7,159
Work-in-process 1,145 1,220
Finished goods 4,420 4,709
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$11,529 $13,088
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4. Accumulated other comprehensive loss
------------------------------------
Accumulated other comprehensive loss consists of the
effective unrealized portion of changes in the fair value of
the Company's cash flow hedge. Comprehensive income was
approximately $2,700,000 for the three months ended May 31,
2001. There were no differences between net income and
comprehensive income in fiscal year 2001.
6
5. Segment Data
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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
(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). On June 6, 2000, the
Company acquired Northstar Computer Forms, Inc. (Northstar)
which became the Financial Solutions Group. Segment data
for the three months ended May 31, 2001 and 2000 were as
follows (in thousands):
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
----- ----- ----- --------- -------
Three months ended May 31, 2001:
Net sales $28,846 $19,237 $11,740 $ -- $ 59,823
Depreciation and
amortization 932 691 853 136 2,612
Segment earnings
(loss) before
income tax 4,873 1,776 457 (1,496) 5,610
Segment assets 49,737 39,676 46,617 5,383 141,413
Capital
expenditures 167 123 -- 273 563
Three months ended May 31, 2000:
Net sales $30,118 $19,229 $ -- $ -- $ 49,347
Depreciation and
amortization 752 734 -- 142 1,628
Segment earnings
(loss) before
income tax 5,993 1,744 -- (1,523) 6,214
Segment assets 57,602 43,251 -- 5,450 106,303
Capital
expenditures 202 76 -- 389 667
"Post-it" is a registered trademark of 3M.
6. Purchase of Northstar
---------------------
On June 6, 2000, the Company completed its acquisition of
Northstar Computer Forms, Inc. (Northstar). The following
table presents certain operating information on a pro forma
basis as though Northstar had been acquired as of March 1,
2000, after including the estimated impact of adjustments such
as amortization of goodwill and depreciation, interest
expense, reduced interest income and related tax effects (in
thousands, except per share amounts):
For the Three Months Ended May 31, 2000
Net sales 60,406
Net earnings 3,769
Earnings per share - basic and 0.24
diluted
7
7. Derivative Financial Instruments and Hedging Activities
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The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No.
138, on March 1, 2001. SFAS No. 133 establishes standards for
derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. It
establishes conditions under which a derivative may be
designated as a hedge, and establishes standards for reporting
changes in the fair value of a derivative.
The Company uses principally floating-rate debt to finance its
operations. These debt obligations expose the Company to
variability in interest payments due to changes in interest
rates. Management believes it is prudent to limit the
variability of its interest payments. To meet this objective
and in accordance with the Company's hedging policy, the
Company utilizes interest rate swaps to manage overall
borrowing costs and reduce exposure to adverse fluctuations in
interest rates. The Company does not enter into derivative
instruments for any purpose other than cash flow hedging
purposes. That is, the Company does not speculate using
derivative instruments.
The Company assesses interest rate cash flow risk by
continually identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities.
The Company has entered into an interest rate swap agreement
with a notional amount of $22,450,000 at May 31, 2001. The
interest rate swap agreement expires in fiscal 2003 and
effectively converts the floating rate debt under the term
loan and revolving credit facility to fixed rate debt. The
estimated fair value of the swap agreement at May 31, 2001 was
a liability of approximately $713,000, which is included in
accrued expenses in the accompanying condensed consolidated
balance sheet. The transition adjustment recorded upon
adoption of SFAS No. 133 was $825,000 and the change during
the three months ended May 31, 2001 was due to the early
extinguishments of a portion of the hedged debt obligation
and amounts reclassified into interest expense.
Changes in the fair value of interest rate swaps designed as
hedging instruments of the variability of cash flows
associated with floating rate obligations are reported in
accumulated other comprehensive income. These amounts
subsequently are reclassified into interest expense as a yield
adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earnings.
During the next twelve months, approximately $400,000 of
losses in accumulated other comprehensive income related to
the interest rate swap are expected to be reclassified into
interest expense as a yield adjustment of the hedged debt
obligation.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- ------------------------------
At May 31, 2001, the Company's financial position continues
to be strong. Working capital increased marginally from
$40,355,000 at February 28, 2001 to $40,685,000 at May 31, 2001.
The Company has $11,403,000 in cash and cash equivalents,
$1,694,000 in short term investments, $1,084,000 in long term
investments and $20,297,000 in long-term debt, less current
installments. The Company expects to generate sufficient cash
flow to more than cover its operating and capital requirements
for the foreseeable future.
Results of Operations
- ---------------------
Net sales for the first quarter ended May 31, 2001 increased
21.2% from the corresponding period in the prior year. The
increase in the first quarter resulted from Northstar Computer
Forms, Inc. (Northstar), which we acquired in June 2000 and
accounted for an increase of 23.8%. This was mitigated by a 2.6%
decline in revenue in the Forms Solutions Group which was a
result of weakness in the general economy. The Promotional
Solutions Group remained relatively unchanged.
Gross profit margins decreased from 29.8% in the first
quarter ended May 31, 2000 to 26.9% in the first quarter ended
May 31, 2001. The decrease is the result of a combination of
factors, primarily margin pressures in the Forms Solutions Group,
which are due to economic conditions and accounted for
approximately 1.4 percentage points of the reduction. In
addition, the Promotional Solutions Group accounted for
approximately 1.1 percentage points of the reduction due to
higher cost of sales from the prior year. Finally, the inclusion
of the Financial Solutions Group (Northstar) accounted for an
approximate reduction of .4 percentage points, as this group's
normal margins are generally lower than the Forms Solutions
Group.
Selling, general and administrative expenses for the first
quarter ended May 31, 2001 increased 15.3% compared to the
corresponding period in the prior year. This increase was mainly
attributable to the acquisition of Northstar in June 2000 which
accounted for an increase of 26%. This was mitigated by cost
reductions in the Forms Solutions Group of 3.4%, the Promotional
Solutions Group of 6.5% and in Corporate of .8%.
Interest expense increased from $10,000 in the first quarter
ended May 31, 2000 to $686,000 in the first quarter ended May 31,
2001 as a result of the $36,500,000 debt incurred on June 6, 2000
to finance the Northstar Acquisition.
Investment and other income decreased in the first quarter
ended May 31, 2000 from the same period in the prior year due to
decreased amounts of funds available for investment.
The effective rate of the Federal and state income tax
expense was 39.3% and 37.8% for the first quarter ended May 31,
2001 and May 31, 2000, respectively. The primary reason for the
increase is due to non-deductible goodwill from the acquisition
of Northstar.
9
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 29, 2001.
10
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
21, 2001.
(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 nominee's were elected.
Directors elected were:
Nominees for Director Votes Cast for Votes Withheld
--------------------- ------------- --------------
Harold W. Hartley 14,377,952 311,263
Kenneth G. Pritchett 14,450,562 238,653
James C. Taylor 14,423,098 266,117
(c) Briefly described below are the other matters voted upon at
the Annual Meeting and the number of affirmative votes and
negatives votes respectively.
(1) Selection of KPMG LLP as independent auditors of the Company
for the fiscal year ending February 28, 2002.
For 14,484,523
Against 144,526
Abstain 60,166
Broker-non votes --
(2) Authorization of the proxies to vote, in their
discretion, upon such other business as may properly
come before the meeting
For 13,150,959
Against 980,091
Abstain 558,165
Broker-non-votes --
Item 5. Other Information
- ----------------------------
One June 21, 2001, The Company's Audit Committee of the
Board of Directors amended the Company's Audit Charter. A
copy of the amended charter is included as Exhibit 99.
11
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibit 99
Charter of the Audit Committee of The Board of
Directors of Ennis Business Forms, Inc. as amended
June 21, 2001
(b) Reports on Form 8-K
None
12
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 June 29, 2001 /s/Robert M. Halowec
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Robert M. Halowec
Vice President Finance
and Chief Financial Officer
Date June 29, 2001 /s/Harve Cathey
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Harve Cathey
Secretary and Treasurer
Principal Accounting Officer
13