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, 2002
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Commission File Number 1-5807
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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
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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 November 30, 2002
- ---------------------------- ---------------------------------
Common stock, par value 16,278,938
$2.50 per share
ENNIS BUSINESS FORMS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
November 30, 2002 and February 28, 2002 2 - 3
Condensed Consolidated Statements of
Earnings -- Three and Nine Months Ended
November 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash
Flows -- Nine Months Ended November 30,
2002 and 2001 5
Notes to Condensed Consolidated Financial 6 - 9
Statements
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10 - 13
Item 3 - Quantitative and Qualitative
Disclosures of Market Risk 13
Item 4 - Controls and Procedures 14
Part II. Other Information 15
Signatures 16
PART I. FINANCIAL INFORMATION
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
November 30, February 28,
2002 2002
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 21,510 $ 16,180
Investment securities -- 1,802
Accounts receivable, net 33,495 28,713
Prepaid expenses 2,979 814
Inventories 13,196 12,222
Contract costs in excess of billings 532 256
Other current assets 2,443 2,659
------- -------
Total current assets 74,155 62,646
------- -------
Property, plant and equipment, net 52,855 51,343
Goodwill, net 34,405 21,951
Other assets 2,554 3,094
------- -------
$163,969 $139,034
======= =======
(Continued)
2
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
November 30, February 28,
2002 2002
---- ----
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 7,624 $ 5,568
Accrued expenses:
Employee compensation and
benefits 7,428 4,770
Taxes other than income 1,999 970
Other 2,769 3,623
Current installments of long-term
debt 24,964 9,035
------- -------
Total current liabilities 44,784 23,966
------- -------
Long-term debt, less current
installments 7,986 9,170
Deferred credits, principally income
taxes 11,600 9,863
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 961 1,040
Retained earnings 135,916 132,694
Accumulated other comprehensive
loss (162) (401)
------- -------
189,840 186,458
Treasury stock (90,241) (90,423)
------- -------
Total shareholders'
equity 99,599 96,035
------- -------
$163,969 $139,034
======= =======
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,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $59,151 $59,458 $173,540 $177,976
Costs and expenses:
Cost of sales 43,560 42,759 127,349 128,230
Selling, general and
administrative expenses 9,331 10,064 27,805 29,952
------ ------ ------- -------
52,891 52,823 155,154 158,182
------ ------ ------- -------
Earnings from operations 6,260 6,635 18,386 19,794
------ ------ ------- -------
Other income (expense):
Interest expense (299) (422) (937) (1,577)
Investment and other
income (34) 41 (43) 349
------ ------ ------- -------
(333) (381) (980) (1,228)
------ ------ ------- -------
Earnings before income taxes 5,927 6,254 17,406 18,566
Provision for income taxes 2,252 2,384 6,614 7,241
------ ------ ------- -------
Net earnings $ 3,675 $ 3,870 $ 10,792 $ 11,325
====== ====== ======= =======
Weighted average number of
common shares
outstanding - Basic 16,282,938 16,272,984 16,278,938 16,271,876
Plus incremental
shares from assumed
exercise of stock
options 217,244 36,583 217,244 36,583
--------- --------- --------- ----------
Weighted average number of
common shares
outstanding - Diluted 16,500,182 16,309,567 16,496,182 16,308,459
========== ========== ========== ==========
Per share amounts:
Net earnings - basic $.23 $.24 $.66 $.70
==== ==== ==== ====
Net earnings - diluted $.22 $.24 $.65 $.69
==== ==== ==== ====
Cash dividends per share $.155 $.155 $.465 $.465
===== ===== ===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
November 30,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $10,792 $11,325
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 6,929 6,504
Amortization -- 1,215
Gain on sale of property, plant, and (53) (23)
equipment
Changes in operating assets and
liabilities:
Receivables (814) 542
Prepaid expenses (2,116) (1,243)
Inventories 140 (998)
Contract costs in excess of
billings (276) (270)
Other current assets (net of
deferred taxes) 204 (28)
Accounts payable and accrued
expenses 974 3,624
Other assets and liabilities 2,861 662
------ ------
Net cash provided by operating
activities 18,641 21,310
------ ------
Cash flows from investing activities:
Cash acquired from the acquisition of
Calibrated 1,508 --
Capital expenditures (3,100) (1,536)
Redemption of investments 1,802 726
Proceeds from disposal of property 110 33
Other 6 194
------ ------
Net cash provided by (used in) 326 (583)
investing activities ------ ------
Cash flows from financing activities:
Repayment of debt issued to finance
Northstar acquisition (5,690) (7,040)
Issue of treasury stock for option
exercises 103 19
Dividends (7,570) (7,567)
Other (480) (545)
------ ------
Net cash used in financing
activities (13,637) (15,133)
------ ------
Net change in cash and cash equivalents 5,330 5,594
Cash and cash equivalents at beginning of
period 16,180 8,964
------ ------
Cash and cash equivalents at end of period $21,510 $14,558
====== ======
Non-cash activities:
Debt issued in connection with the
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, 2002 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, 2002,
from which the accompanying condensed consolidated balance
sheet at February 28, 2002 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 November 30, 2002, the Company has reserved 855,527
shares of common stock under incentive stock option plans.
For the nine month periods ended November 30, 2002 and 2001,
71,250 and 596,250 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.
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,
2002 2002
---- ----
Raw material $ 6,727 $ 6,065
Work-in-process 1,178 1,216
Finished goods 5,291 4,941
------ ------
$13,196 $12,222
====== ======
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 $11,030,744 for the nine months ended November
30, 2002 and $10,819,000 for the nine months ended November
30, 2001.
6
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
impact of Calibrated on the Forms Solutions Group, except for
Segment Assets, for the three and nine months ended November
30, 2002 was de minimis. 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, 2002 and 2001 were as follows (in
thousands):
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
----- ----- ----- --------- ------
Three months ended November 30, 2002:
Net sales $28,045 $17,830 $13,276 $ -- $ 59,151
Depreciation 443 579 777 408 2,207
Amortization -- -- -- -- --
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
Three months ended November 30, 2001:
Net sales $28,050 $18,084 $13,324 $ -- $ 59,458
Depreciation 549 584 844 126 2,103
Amortization 27 96 272 -- 395
Segment earnings
(loss) before
income tax 5,318 1,732 814 (1,610) 6,254
Segment assets 55,501 38,424 43,607 5,242 142,774
Capital expenditures 75 61 322 46 504
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
Amortization -- -- -- -- --
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
Nine months ended November 30, 2001:
Net sales $85,561 $55,664 $36,751 $ -- $177,976
Depreciation 1,826 1,743 2,539 396 6,504
Amortization 80 298 837 -- 1,215
Segment earnings
(loss) before
income tax 15,644 5,526 1,904 (4,508) 18,566
Segment assets 55,501 38,424 43,607 5,242 142,774
Capital expenditures 442 310 402 382 1,536
"Post-it" is a registered trademark of 3M.
7
6. Purchase of Calibrated
----------------------
Effective 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. The purchase price for the transaction was
$22,000,000 less liabilities assumed of $7,195,060 and was
evidenced by two promissory notes bearing interest at 3.75%
per annum maturing on 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
Ennis, is employed as General Manager of Calibrated on a full-
time basis during the entire fiscal year for which the earn-
out is paid. The results of operations for Calibrated are
included in the Company's condensed consolidated financial
statements from the date of acquisition. The impact on net
sales and earnings for the three and nine months ended
November 30, 2002 is de minimis.
The transaction was accounted for under the purchase method of
accounting and was financed by utilizing funds from the
Company's working capital. The purchase price has been
allocated to assets acquired and liabilities assumed based on
estimated fair market value at the date of the acquisition.
These allocations include $12.5 million recorded as goodwill.
The purchase price allocation for this acquisition is
preliminary and further refinements are likely to be made
based on the completion of final valuation studies.
7. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
Effective March 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133).
This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. It requires that all derivatives be 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.
The Company utilized swap agreements related to the term loan
and revolving credit facility to effectively fix the interest
rate at 6.89% 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 $11,350,000 at November 30,
8
2002. The fair value of the swap at November 30, 2002 was
approximately ($162,000) and the change in the fair value of
the loss from March 1, 2002, net of tax, has been charged to
Accumulated other comprehensive loss.
8. Goodwill and Other Intangible Assets
------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards No. 141,
"Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS No.142),
effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets
will continue to be amortized over their useful lives.
The Company adopted SFAS No. 142 effective March 1, 2002.
Upon adoption of SFAS No. 142, the Company no longer
amortizes goodwill. The following table reflects net income
adjusted to exclude amortization expense (including any
related tax effects) recognized in the periods presented
related to goodwill.
(In thousands) Three months Nine months
ended ended
November 30, November 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $3,675 $3,870 $10,792 $11,325
Goodwill amortization, net
of tax benefit -- 244 -- 741
----- ----- ------ ------
Adjusted net income $3,675 $4,114 $10,792 $12,066
Diluted earnings per share:
Reported net income $ .22 $ .24 $ .65 $ .69
Goodwill amortization,
net of tax benefit -- .01 -- .05
----- ----- ------ ------
Adjusted diluted earnings
per share $ .22 $ .25 $ .65 $ .74
===== ===== ====== ======
9. Subsequent Events
-----------------
On January 3, 2003, the Company executed an amendment to its
existing credit facility whereby the Revolving Credit
Facility was increased to $30,000,000 and the outstanding
balance of the term loan was merged into the Revolving Credit
Facility with an interest rate of LIBOR plus .75% and a
maturity date of January 3, 2006. The Company utilized funds
from this facility to retire the promissory notes and related
liabilities of $7,195,060 resulting from the acquisition of
Calibrated.
On December 2, 2002, the Company entered into a deferred
interest rate swap agreement totaling $15,000,000 effective
July 1, 2003, and ending on January 3, 2006 to effectively
fix the interest rate on variable debt at 3.20%.
9
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, 2002, of $29,371,000, a decrease
of 24.1% from the beginning of the year, and a current ratio of
1.7 to 1. The decrease is due to the purchase of all of the
outstanding stock of Calibrated Forms Co., Inc. (Calibrated) on
November 13, 2002, effective as of November 14, 2002. The
purchase price for the transaction was $22,000,000, less
liabilities assumed of $7,195,060 and was evidenced by two
promissory notes bearing interest at 3.75% per annum maturing on
January 3, 2003. By January 3, 2003, the Company paid off the
promissory notes and the related liabilities of $7,195,060.
Effective January 3, 2003, the Company executed an amendment to
its existing credit facility whereby the Revolving Credit
Facility was increased to $30,000,000 and the outstanding balance
of the term loan was merged into the Revolving Credit Facility
with an interest rate of LIBOR plus .75% and a maturity date of
January 3, 2006. The Company has $21,510,000 in cash and cash
equivalents and $7,986,000 in long-term debt, less current
installments. The Company made scheduled payments of $2,690,000
and pre-paid $3,000,000 of the debt financing for the nine months
ended November 30, 2002. 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 for the nine months
totaled $3,100,000. For the full fiscal year, capital
expenditures are expected to be between $3,000,000 and
$5,000,000, 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.
Accounting Standards
- --------------------
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards No. 141,
"Business Combinations" (SFAS No. 141), and No. 142, "Goodwill
and Other Intangible Assets" (SFAS No. 142), effective for fiscal
years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets would be amortized
over their useful lives. Effective March 1, 2002, the Company
adopted the provisions of SFAS No. 142. Accordingly, the Company
stopped amortization of goodwill effective at the date of
adoption. Adoption of SFAS No. 142, resulted in an increase to
after tax earnings of $.01 per diluted share in the quarter ended
November 30, 2002, $.05 per diluted share for the nine months
ended November 30, 2002 and is estimated to increase after-tax
earnings by approximately $.06 per diluted share for the fiscal
year 2003. The Company tested for impairment using projected
cash flows and representative earnings multiples for the industry
on March 1, 2002. Based on the test, no impairment of goodwill
was indicated or recorded.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
impairment or Disposal of Long-Lived Assets" (SFAS No. 144) which
is effective for the Company beginning March 1, 2002 and
supercedes, "Accounting for the impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS No. 121). SFAS
No. 144 provides a single method of accounting for long-lived
assets to be disposed of and retains requirements found in SFAS
No. 121 with regard to the impairment of long-lived assets. The
adoption of SFAS No. 144 had no effect on the financial
statements for the quarter ended November 30, 2002.
10
Results of Operations 2002
- --------------------------
Net sales for the three and nine months ended November 30, 2002
decreased .5% and 2.5%, respectively, from the corresponding
periods in the prior year. The decline for the three months ended
November 30, 2002 resulted from a decrease in the consolidated
net sales contribution from the Promotional Solutions Group of
..4% due to declines in the general economy. The decline for the
nine months ended November 30, 2002 resulted primarily from the
decline in the consolidated net sales contributions from the
Forms Solutions Group of 1.9% and the Promotional Solutions Group
of .9%, again due to the general economy and in the case of the
Forms Solutions Group the industry as well. This was mitigated
by a .3% increase in contribution to consolidated net sales from
the Financial Solutions Group for the months ending November 30,
2002 in spite of weak economic conditions. On November 13, 2002,
effective as of November 14, 2002, the Company completed its
acquisition of Calibrated Forms Co., Inc, which became part of
the Forms Solutions Group. The impact on net sales and earnings
for the three and nine months ended November 30, 2002 is de
minimis.
Gross profit margins decreased from 28.1% in the three months
ended November 30, 2001 to 26.4% in the three months ended
November 30, 2002. Gross profit margins decreased from 28.0% in
the nine months ended November 30, 2001 to 26.6% in the nine
months ending November 30, 2002. The decrease is the result of a
combination of factors. The Forms Solutions Group gross profit
margin decreased from 31.3% in the three months ended November
30, 2001 to 27.8% in the three months ended November 30, 2002,
and from 30.4% in the nine months ended November 30, 2001 to
29.2% in the nine months ended November 30, 2002. The decrease
is a result of less fixed cost absorption due to decreased sales.
The general weakness in the economy and the decline in the forms
industry contributed to decreased sales volume and lower prices
in the Forms Solutions Group. The Financial Solutions Group
gross profit margin decreased from 27.2% in the three months
ending November 30, 2001 to 26.8% in the three months ending
November 30, 2002, and from 28.3% in the nine months ending
November 30, 2001 to 25.7% in the nine months ending November 30,
2002. The decrease is 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. In addition,
a move to a new operating facility in one of the locations, which
was completed in July of 2002, exacerbated the reduction in
margins due to costs incurred for the move and incurrence of
operational inefficiencies during the move period. Finally, the
Promotional Solutions Group had relatively flat gross profit
margins for the three and nine months ended November 30, 2002
when compared to the prior respective periods.
Selling, general and administrative expenses decreased 7.3% for
the three months ended November 30, 2002 and 7.2% for the nine
months ended November 30, 2002 when compared to the corresponding
periods in the prior year. For the three and nine months ended
November 30, 2002, $395,000 and $1,215,000 of the decrease,
respectively, is due to the elimination of goodwill expense
resulting from the adoption of SFAS No. 142. The remainder is
mostly due to effective cost reduction programs implemented in
the Promotional Solutions and Forms Solutions Groups offset with
an increase in depreciation related to the Company's Enterprise
Resource Planning Software (ERP) System.
11
Interest expense decreased from $422,000 in the three months
ended November 30, 2001 to $299,000 in the three months ended
November 30, 2002, and from $1,577,000 in the nine months ending
November 30, 2001 to $937,000 in the nine months ending November
30, 2002 as a result of reductions of Northstar financing debt.
Investment and other income decreased from $41,000 in the three
months ended November 30, 2001 to ($34,000) in the three months
ended November 30, 2002, and from $349,000 in the nine months
ending November 30, 2001 to ($43,000) in the nine months ended
November 30, 2002 due to decreases in interest rates.
The effective rate of the Federal and state income tax expense
was 38.0% and 39.00% for the nine months ended November 30, 2002
and November 30, 2001, respectively. The primary reason for the
decrease is due to the elimination of non-deductible goodwill
expense for the quarter and nine months ended November 30, 2002
as a result of the adoption of SFAS No. 142.
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. 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.
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
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.
12
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 January 10, 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 Note 7 of the Notes to
the Consolidated Financial Statements for period ended November
30, 2002.
The Company's net exposure to interest rate risk consists of a
floating rate debt instrument that is benchmarked to 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 $12.02 million at November
30, 2002. 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 November 30, 2002 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.
13
Item 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the
Company's Chairman, President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, the Company's Chairman, President and Chief
Executive Officer along with the Company's Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the
Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-k
- -----------------------------------------------
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification Pursuant to 18.U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on November
15, 2002 regarding Acquisition or Disposition of
Assets and Financial Statements and Exhibits
pursuant to Items 2 and 7, respectively, of such
Form.
15
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 January 10, 2003 /s/Robert M. Halowec
----------------- --------------------------------
Robert M. Halowec
Vice President Finance
and Chief Financial Officer
Date January 10, 2003 /s/Harve Cathey
----------------- --------------------------------
Harve Cathey
Secretary and Treasurer
Principal Accounting Officer
16
CERTIFICATION
I, Keith S. Walters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ennis
Business Forms, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Keith S. Walters
Keith S. Walters
Chief Executive Officer
January 10, 2003
17
CERTIFICATION
I, Robert M. Halowec, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ennis
Business Forms, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Robert M. Halowec
Robert M. Halowec
Chief Financial Officer
January 10, 2003
18
INDEX TO EXHIBITS
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18.U.S.C.
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19