Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002 Commission File No. 0-21084
-------------------
CHAMPION INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
West Virginia 55-0717455
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
2450-90 1st Avenue
P.O. Box 2968
Huntington, WV 25728
(Address of principal executive offices)
(Zip Code)
(304) 528-2700
(Registrant's telephone number,
including area code)
-------------------
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___.
9,713,913 shares of common stock of the Registrant were outstanding at July 31,
2002.
CHAMPION INDUSTRIES, INC.
INDEX
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.............................................................2
Consolidated Statements of Operations...................................................4
Consolidated Statements of Cash Flows...................................................5
Notes to Consolidated Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................................18
Signatures......................................................................................19
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS JULY 31, OCTOBER 31,
2002 2001
--------------------------------
Current assets:
Cash and cash equivalents $ 3,815,968 $ 5,764,716
Accounts receivable, net of allowance of $1,705,000 and $1,432,000 18,269,426 19,165,773
Inventories 11,156,552 11,764,195
Other current assets 790,049 769,034
Deferred income tax assets 1,111,018 1,111,018
Income tax receivable - 279,271
--------------------------------
Total current assets 35,143,013 38,854,007
Property and equipment, at cost:
Land 1,028,372 825,220
Buildings and improvements 6,104,818 5,562,762
Machinery and equipment 34,714,989 34,421,518
Equipment under capital leases 2,583,407 2,583,407
Furniture and fixtures 2,813,917 2,480,050
Vehicles 3,935,733 3,031,861
--------------------------------
51,181,236 48,904,818
Less accumulated depreciation (30,564,050) (27,743,183)
--------------------------------
20,617,186 21,161,635
Assets held for sale 675,316 1,057,216
Cash surrender value of officers' life insurance 947,955 885,852
Goodwill, net of accumulated amortization 1,349,368 1,334,183
Other assets 587,521 657,021
--------------------------------
3,560,160 3,934,272
--------------------------------
Total assets $59,320,359 $63,949,914
================================
See notes to consolidated financial statements.
2
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY JULY 31, OCTOBER 31,
2002 2001
------------------------------
Current liabilities:
Accounts payable $ 2,730,495 $ 4,343,291
Accrued payroll 1,912,997 2,107,377
Taxes accrued and withheld 1,567,999 1,289,560
Accrued income taxes 58,520 -
Accrued expenses 880,568 1,218,575
Current portion of long-term debt:
Notes payable 2,841,883 3,329,627
Capital lease obligations 254,885 524,316
------------------------------
Total current liabilities 10,247,347 12,812,746
Long-term debt, net of current portion:
Notes payable 2,274,363 3,994,555
Capital lease obligations 409,262 554,514
Deferred income tax liability 3,554,169 3,554,169
Other liabilities 430,351 433,044
------------------------------
Total liabilities 16,915,492 21,349,028
Shareholders' equity:
Common stock, $1 par value, 20,000,000 shares authorized;
9,713,913 shares issued and outstanding 9,713,913 9,713,913
Additional paid-in capital 22,242,047 22,242,047
Retained earnings 10,448,907 10,644,926
------------------------------
Total shareholders' equity 42,404,867 42,600,886
------------------------------
Total liabilities and shareholders' equity $59,320,359 $63,949,914
==============================
See notes to consolidated financial statements.
3
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2002 2001 2002 2001
----------------------------------------------------------------
Revenues:
Printing $23,132,608 $23,430,094 $70,632,037 $72,491,601
Office products and office
furniture 7,715,023 6,806,446 20,675,164 20,438,265
----------------------------------------------------------------
Total revenues 30,847,631 30,236,540 91,307,201 92,929,866
Cost of sales:
Printing 16,802,540 17,835,322 50,816,294 53,160,188
Office products and office
furniture 5,604,388 4,827,742 14,713,491 14,247,969
----------------------------------------------------------------
Total cost of sales 22,406,928 22,663,064 65,529,785 67,408,157
----------------------------------------------------------------
Gross profit 8,440,703 7,573,476 25,777,416 25,521,709
Selling, general and administrative
expenses 7,943,061 8,342,357 23,388,093 24,266,227
Restructuring and other charges - 2,052,692 - 2,052,692
Asset impairment charges - 3,060,706 - 3,060,706
----------------------------------------------------------------
Income (loss) from operations 497,642 (5,882,279) 2,389,323 (3,857,916)
Other income (expense):
Interest income 1,927 8,208 11,712 54,692
Interest expense (84,833) (183,056) (315,392) (683,206)
Other 15,355 32,537 71,938 503,394
----------------------------------------------------------------
(67,551) (142,311) (231,742) (125,120)
----------------------------------------------------------------
Income (loss) before income taxes 430,091 (6,024,590) 2,157,581 (3,983,036)
Income (taxes) benefit (177,368) 1,778,188 (896,512) 953,505
----------------------------------------------------------------
Net income (loss) $ 252,723 ($ 4,246,402) 1,261,069 ($ 3,029,531)
================================================================
Earnings (loss) per share
Basic $0.03 ($0.44) $0.13 ($0. 31)
================================================================
Diluted $0.03 ($0.44) $0.13 ($0. 31)
================================================================
Weighted average shares outstanding:
Basic 9,714,000 9,714,000 9,714,000 9,714,000
================================================================
Diluted 9,728,000 9,714,000 9,730,000 9,714,000
================================================================
Dividends per share $0.05 $0.05 $0.15 $0.15
================================================================
See notes to consolidated financial statements.
4
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
JULY 31,
2002 2001
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,261,069 ($3,029,531)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,115,570 3,360,089
Loss (gain) on sale of assets 8,523 (16,849)
Gain on sale of division - (407,515)
Other 13,404 16,531
Restructuring and other charges - 3,030,592
Asset impairment charges - 3,060,706
Bad debt expense 404,087 421,451
Changes in assets and liabilities:
Accounts receivable 492,260 3,768,155
Inventories 607,643 265,510
Other current assets (35,931) (32,194)
Accounts payable (1,612,796) (1,202,022)
Accrued payroll (194,380) (701,948)
Taxes accrued and withheld 278,439 232,846
Accrued income taxes 337,791 (1,874,592)
Accrued expenses (338,007) 211,716
Other liabilities (16,097) (16,625)
--------------------------------
Net cash provided by operating activities 4,321,575 7,086,320
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,558,792) (1,072,001)
Deposit on asset purchase (875,000) --
Proceeds from sales of property 443,908 158,062
Proceeds from sale of division - 264,700
Business acquisitions, net of cash received - (1,169,722)
Decrease (increase) in other assets 26,333 (8,600)
Other assets (62,103) 35,188
--------------------------------
Net cash used in investing activities (2,025,654) (1,792,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit 500,000 1,500,000
Payments on line of credit (500,000) (1,500,000)
Proceeds from term debt and leases - 1,192,397
Principal payments on long-term debt (2,787,581) (3,441,017)
Dividends paid (1,457,088) (1,457,088)
--------------------------------
Net cash used in financing activities (4,244,669) (3,705,708)
--------------------------------
Net (decrease) increase in cash (1,948,748) 1,588,239
Cash and cash equivalents, beginning of period 5,764,716 3,173,587
--------------------------------
Cash and cash equivalents, end of period $3,815,968 $4,761,826
================================
See notes to consolidated financial statements.
5
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 2002
1. BASIS OF PRESENTATION AND BUSINESS OPERATIONS
The foregoing financial information has been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP") and rules
and regulations of the Securities and Exchange Commission for interim financial
reporting. The preparation of the financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. In the opinion of management, the financial
information reflects all adjustments (consisting of items of a normal recurring
nature) necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. These interim financial
statements should be read in conjunction with the consolidated financial
statements for the year ended October 31, 2001, and related notes thereto
contained in the Champion Industries, Inc.'s Form 10-K dated January 25, 2002.
The accompanying interim financial information is unaudited.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average shares of common stock outstanding for the period and excludes any
dilutive effects of stock options. Diluted earnings per share is computed by
dividing net income by the weighted average shares of common stock outstanding
for the period plus the shares that would be outstanding assuming the exercise
of dilutive stock options. The dilutive effect of stock options was 14,000 and
16,000 shares for the three and nine months ended July 31, 2002. Stock options
outstanding for the three and nine months ended July 31, 2001 were
anti-dilutive.
3. INVENTORIES
Inventories are principally stated at the lower of first-in, first-out cost or
market. Manufactured finished goods and work in process inventories include
material, direct labor and overhead based on standard costs, which approximate
actual costs. The Company utilizes an estimated gross profit method for
determining cost of sales in interim periods.
6
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. INVENTORIES (CONTINUED)
Inventories consisted of the following:
JULY 31, OCTOBER 31,
2002 2001
---------------- ----------------
Printing:
Raw materials $ 2,376,887 $ 2,460,218
Work in process 1,640,848 1,698,374
Finished goods 3,790,653 3,923,549
Office products and office furniture 3,348,164 3,682,054
---------------------------------
$11,156,552 $11,764,195
=================================
4. ASSET HELD FOR SALE
The Company has a building in Charleston, West Virginia currently being held for
sale. This building was used in the Company's printing segment and is classified
as assets held for sale. The building is being held for sale as a result of
certain initiatives implemented by the Company in 2001. This asset was sold in
August 2002, at its approximate carrying value.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
JULY 31, OCTOBER 31,
2002 2001
---------------- ---------------
Unsecured term note payable $ 3,125,161 $ 4,464,449
Installment notes payable to banks 1,991,085 2,859,733
Capital lease obligations 664,147 1,078,830
---------------------------------
5,780,393 8,403,012
Less current portion 3,096,768 3,853,943
---------------------------------
Long-term debt, net of current portion $ 2,683,625 $ 4,549,069
=================================
The Company has an unsecured revolving line of credit with a bank for borrowings
to a maximum of $10,000,000 with interest payable monthly at interest rates at
LIBOR plus 1% to 1.5% for a total rate of 3.28% at July 31, 2002. This line of
credit was renewed for a three year period, expiring in April 2005 and contains
certain restrictive financial covenants. The Company had no outstanding
borrowings under this facility at July 31, 2002.
The Company has an unsecured revolving line of credit with a bank for borrowings
to a maximum of $1,000,000 with interest payable monthly at the Wall Street
Journal prime rate. The line of credit
7
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
expires in October 2002 and contains certain financial covenants. There were no
borrowings outstanding under this facility at July 31, 2002.
The Company's non-cash activities for the nine months ended July 31, 2002 and
2001 included vehicle purchases of approximately $165,000 and $659,000 which
were financed by a bank.
6. SHAREHOLDERS' EQUITY
The Company declared a dividend of five cents per share to be paid on September
23, 2002 to stockholders of record on September 6, 2002.
7. RELATED PARTY TRANSACTION
In the first quarter of 2002, the Company made a deposit to purchase a
fractional ownership in an aircraft from an entity controlled by its Chief
Executive Officer for approximately $1.2 million of which $875,000 had been paid
as of July 31, 2002. The Company believes that the terms of its related party
transactions are no less favorable to the Company than could be obtained with an
independent third party. The company anticipates the transaction to be completed
and the airplane be available for use under the terms of this agreement during
the fourth quarter of 2002.
8. COMMITMENTS AND CONTINGENCIES
On February 16, 2002 a jury verdict was rendered against the Company in a civil
action brought against the Company in state court in Jackson, Mississippi.
The plaintiffs in this civil action asserted that the Company and its Dallas
Printing Company, Inc. subsidiary had engaged in unfair competition and other
wrongful acts in hiring certain of its employees. The jury awarded the
plaintiffs $1,745,000 in actual damages and $750,000 in punitive damages.
The Company has been advised that it has no insurance coverage for this award.
The Company under Mississippi law has a guaranteed right to appeal. The Company
has been advised by counsel that it has multiple grounds for an appeal and a
reasonable basis for believing that an appeal would be successful in eliminating
the jury award. However, there can be no assurance that the jury award will be
overturned upon appeal. If the verdict is not overturned, the impact on the
operating results of the Company could be material.
On March 1, 2002 the plaintiffs in the civil action filed a motion for
attorney's fees and costs in the amount of $889,401. On July 16, 2002, the court
entered an order granting plaintiff $645,119 in attorney fees and expenses, and
ordered that interest on the amount of the jury award accrue from February 22,
2002.
8
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
On July 17, 2002 the company filed a notice of appeal from the jury verdict. The
appeal involves both the jury award and the attorney's fee and expense award. If
the company is not successful on appeal, Mississippi law provides that it is
liable for an additional 15% of the total award.
9. NEW ACCOUNTING PRONOUNCEMENTS AND SIGNIFICANT ACCOUNTING POLICY UPDATES
Business Combinations, Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets (FAS 142), effective for fiscal years
beginning after December 15, 2001. The Company adopted these standards with its
fiscal year beginning November 1, 2001 in accordance with the provisions of the
standards. 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 in accordance with the Statements except in the year of
adoption where companies are required to complete a two step process. The first
step is a screen for potential impairment and is required to be completed within
six months of adopting FAS 142. The second step measures the amount of
impairment, if any. The Company completed step 1 of the process during the 2nd
quarter of 2002 and the adoption did not have a significant impact on the
Company's financial position and results of operations. Other intangible assets
will continue to be amortized over their useful lives. Application of the
nonamortization provisions of the Statement will result in an increase in net
income of $50,000 or approximately $0.01 per share per year.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted FAS
144 as of November 1, 2001 and the adoption did not have a significant impact on
the Company's financial position and results of operations.
10. RESTRUCTURING CHARGE, ASSET IMPAIRMENT CHARGE AND OTHER CHARGES
In the third quarter of 2001, the Company recorded charges related to a
restructuring and profitability enhancement plan. This plan was implemented to
effectuate certain key initiatives including plant and office consolidations,
headcount reductions, asset impairment issues and a general response to a
deteriorating economic environment. The third quarter of 2001 pre-tax charge
resulting from these actions was $6.1 million ($4.3 million after-tax or $0.44
per share on a basic and diluted basis.) The charge related to approximately
$3.1 million from asset impairments including goodwill, facility and equipment
write-downs. The Company recorded charges for restructuring and other special
charges of $3.0 million comprised primarily of severance payments, charge-offs
related to duplicative facility leases, increases in allowance for doubtful
accounts and inventory obsolescence and valuation reserves, costs related to the
impairment of the Company's information systems hardware and software, charges
related to termination and related fees of a pension plan of an acquired
Company, and other charges and expenses related to plant consolidations and
restructuring.
9
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
As a result of the Company's restructuring plan, approximately 35 employees were
terminated from the Company primarily as a result of plant and office
consolidations at the Company's Carolina Cut Sheets operation, Chapman Printing
Lexington location and the Garrison Brewer division of Stationers. In addition,
the Company anticipates the elimination of additional positions resulting from
retirements and normal attrition within the next twelve to eighteen months. As
of October 31, 2001 35 employees were notified of their termination and one
retired position was eliminated.
The cash and non-cash elements of the Company's restructuring charge, asset
impairment charge, and other unusual charges approximated $1.5 million in cash
and $4.6 million non-cash. The printing segment charges approximated $3.5
million and the office products and furniture segment charges approximated $2.6
million. Details of the approximated charges and the status of the related
obligations are as follows as of July 31, 2002:
Utilized
Ended balance
Original accrual Cash Noncash July 31, 2002
---------------- ---- ------- -------------
Write-down of goodwill,
facilities and equipment $ 3,060,000 $ 168,000 $ 2,892,000 $ --
Employee severance and
termination benefits 55,000 25,000 -- 30,000
Inventory obsolescence
and valuation reserves 978,000 -- 978,000 --
Restructuring and other
charges 1,998,000 760,000 768,000 470,000
----------------------------------------------------------------------------
Total $ 6,091,000 $ 953,000 $ 4,638,000 $ 500,000
============================================================================
11. INDUSTRY SEGMENT INFORMATION
The Company operates principally in two industry segments organized on the basis
of product lines: the production, printing and sale, principally to commercial
customers, of printed materials (including brochures, pamphlets, reports, tags,
continuous and other forms), and the sale of office products and office
furniture including interior design services.
10
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The table below presents information about reported segments for the three and
nine months ending July 31:
OFFICE PRODUCTS
2002 QUARTER 3 PRINTING & FURNITURE TOTAL
-------------- ----------------------------------------------------
Revenues $ 25,311,734 $ 8,715,975 $ 34,027,709
Elimination of intersegment revenue (2,179,126) (1,000,952) (3,180,078)
----------------------------------------------------
Consolidated revenues $ 23,132,608 $ 7,715,023 $ 30,847,631
====================================================
Operating income 164,102 333,540 497,642
Depreciation & amortization 1,008,713 32,761 1,041,474
Capital expenditures 378,357 76,155 454,512
Identifiable assets 47,541,234 11,779,125 59,320,359
OFFICE PRODUCTS
2001 QUARTER 3 PRINTING & FURNITURE TOTAL
-------------- ----------------------------------------------------
Revenues $ 25,554,645 $ 7,475,187 $ 33,029,832
Elimination of intersegment revenue (2,124,551) (668,741) (2,793,292)
----------------------------------------------------
Consolidated revenues $ 23,430,094 $ 6,806,446 $ 30,236,540
====================================================
Operating income (loss) (3,339,896) (2,542,383) (5,882,279)
Depreciation & amortization 1,061,964 68,483 1,130,447
Capital expenditures 559,440 22,854 582,294
Identifiable assets 53,508,288 10,955,338 64,463,626
OFFICE PRODUCTS
2002 YEAR TO DATE PRINTING & FURNITURE TOTAL
----------------- ----------------------------------------------------
Revenues $ 77,244,035 $ 23,227,228 $100,471,263
Elimination of intersegment revenue (6,611,998) (2,552,064) (9,164,062)
----------------------------------------------------
Consolidated revenues $ 70,632,037 $ 20,675,164 $ 91,307,201
====================================================
Operating income 1,768,844 620,479 2,389,323
Depreciation & amortization 3,034,438 81,132 3,115,570
Capital expenditures 2,462,541 136,211 2,598,752
Identifiable assets 47,541,234 11,779,125 59,320,359
11
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
OFFICE PRODUCTS
2001 YEAR TO DATE PRINTING & FURNITURE TOTAL
----------------- ----------------------------------------------------
Revenues $ 79,345,532 $ 22,601,150 $101,946,682
Elimination of intersegment revenue (6,853,931) (2,162,885) (9,016,816)
----------------------------------------------------
Consolidated revenues $ 72,491,601 $ 20,438,265 $ 92,929,866
====================================================
Operating income (loss) (1,604,275) (2,253,641) (3,857,916)
Depreciation & amortization 3,159,647 200,442 3,360,089
Capital expenditures 1,652,136 78,567 1,730,703
Identifiable assets 53,508,288 10,955,338 64,463,626
A reconciliation of total segment revenues and of total segment operating income
to income before income taxes, for the three and nine months ended July 31, 2002
and 2001, is as follows:
THREE MONTHS NINE MONTHS
2002 2001 2002 2001
-----------------------------------------------------------------
Revenues:
Total segment revenues $ 34,027,709 $ 33,029,832 $100,471,263 $101,946,682
Elimination of intersegment revenue (3,180,078) (2,793,292) (9,164,062) (9,016,816)
-----------------------------------------------------------------
Consolidated revenue $ 30,847,631 $ 30,236,540 $ 91,307,201 $ 92,929,866
=================================================================
Operating Income (loss):
Total segment operating income (loss) $ 497,642 $ (5,882,279) $ 2,389,323 $ (3,857,916)
Interest income 1,927 8,208 11,712 54,692
Interest expense (84,833) (183,056) (315,392) (683,206)
Other income 15,355 32,537 71,938 503,394
-----------------------------------------------------------------
Consolidated income (loss) before
income taxes $ 430,091 $ (6,024,590) $ 2,157,581 $ (3,983,036)
=================================================================
Identifiable assets:
Total segment identifiable assets $ 59,320,359 $ 64,463,626 $ 59,320,359 $ 64,463,626
Elimination of intersegment assets -- -- -- --
-----------------------------------------------------------------
Total consolidated assets $ 59,320,359 $ 64,463,626 $ 59,320,359 $ 64,463,626
=================================================================
12
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Consolidated Income Statements as a percentage of total revenues.
PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2002 2001 2002 2001
------------------------------------------------------------
Revenues:
Printing 75.0% 77.5% 77.4% 78.0%
Office products and office furniture 25.0 22.5 22.6 22.0
------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales:
Printing 54.5 59.0 55.7 57.2
Office products and office furniture 18.1 16.0 16.1 15.3
------------------------------------------------------------
Total cost of sales 72.6 75.0 71.8 72.5
------------------------------------------------------------
Gross profit 27.4 25.0 28.2 27.5
Selling, general and administrative
expenses 25.8 27.6 25.6 26.1
Restructuring and other charges 6.5 2.2
Asset impairment charges 10.4 3.4
------------------------------------------------------------
Income (loss) from operations 1.6 (19.5) 2.6 (4.2)
Interest income 0.0 0.1 0.1 0.1
Interest (expense) (0.3) (0.6) (0.4) (0.7)
Other income 0.1 0.1 0.1 0.5
------------------------------------------------------------
Income (loss) before taxes 1.4 (19.9) 2.4 (4.3)
Income tax expense (0.6) 5.9 (1.0) 1.0
------------------------------------------------------------
Net income (loss) 0.8% (14.0%) 1.4% (3.3%)
============================================================
THREE MONTHS ENDED JULY 31, 2002 COMPARED TO THREE MONTHS ENDED JULY 31, 2001
Revenues
Total revenues increased 2.0% in the third quarter of 2002 compared to the same
period in 2001 from $30.2 million to $30.8 million. Printing revenue decreased
1.3% in the third quarter of 2002 to $23.1 million from $23.4 million in the
third quarter of 2001. Office products and office furniture revenue increased
13.4% in the third quarter of 2002 to $7.7 million from $6.8 million in the
third quarter of 2001. The decrease in revenues for the printing segment was due
primarily to a weakened economic outlook in many of the geographic regions
served by the company. The increase in revenues for the office products and
office furniture segment was primarily attributable to an increase in office
furniture sales during the third quarter primarily in one of the company's
geographic regions.
13
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cost of Sales
Total cost of sales decreased 1.1% in the third quarter of 2002 to $22.4 million
from $22.7 million in the third quarter of 2001. Printing cost of sales
decreased 5.8% in the third quarter of 2002 to $16.8 million from $17.8 million
in the third quarter of 2001. Office products and office furniture cost of sales
increased 16.1% in the third quarter of 2002 to $5.6 million from $4.8 million
in the third quarter of 2001. The increase in office products and office
furniture cost of sales is directly attributable to the increased sales
discussed above. The decrease in the printing cost of sales is attributable to
inventory obsolescence and valuation reserves recorded by the company in 2001
resulting from the company's adoption of a corporate-wide restructuring and
profitability enhancement plan.
Operating Expenses
In the third quarter of 2002, selling, general and administrative expenses
decreased as a percentage of sales from 27.6% for the three months ended July
31, 2001 to 25.8% for the three months ended July 31, 2002. Total selling,
general and administrative expenses decreased $399,000 to $7.9 million in the
third quarter of 2002 from $8.3 million in the third quarter of 2001. The
decrease in selling, general and administrative expenses is a result of the
Company's adoption of a restructuring and profitability enhancement plan in the
third quarter of 2001. In addition, the Company adopted SFAS No. 142, which
resulted in an increase in net income of approximately $12,500, net of tax, per
quarter in 2002.
Income (loss) from Operations and Other Income and Expenses
Income from operations increased 6.4 million in the third quarter of 2002 to
$500,000 from a loss of ($5.9) million in the third quarter of 2001. This
increase is primarily the result of charges related to asset impairment and
restructuring charges recorded in the third quarter of 2001. Other income
increased $75,000 due primarily to lower interest expense.
Income Taxes
The Company's effective income tax rate was 41.2% for the third quarter of 2002,
up from a tax benefit of 29.5% in the third quarter of 2001. The effective
income tax rate in 2002 approximates the combined federal and state, net of
federal benefit, statutory income tax rate and is partially impacted by the
geographic profitability mix of the Company's operations. The company recorded a
tax benefit in the third quarter of 2001 as a result of restructuring and asset
impairment charges. The rate in 2001 is reflective of certain tax attributes of
non-deductible goodwill resulting from asset impairment charges.
Net Income (loss)
Net income for the third quarter of 2002 was $253,000 compared to a net loss of
($4,246,000) in the third quarter of 2001. Basic and diluted earnings (loss) per
share for the three months ended July 31, 2002 and 2001 were $0.03 and ($0.44),
respectively.
14
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED JULY 31, 2002 COMPARED TO NINE MONTHS ENDED JULY 31, 2001
Revenues
Total revenues decreased 1.7% in the first nine months of 2002 compared to the
same period in 2001 to $91.3 million from $92.9 million. Printing revenue
decreased 2.6% in the nine month period ended July 31, 2002 to $70.6 million
from $72.5 million in the same period in 2001. Office products and office
furniture revenue increased 1.2% in the nine month period ended July 31, 2002 to
$20.7 million from $20.4 million in the same period in 2001. The revenues in the
printing segment decreased primarily due to an overall sluggish market in most
of the geographic regions served by the Company. The office products and office
furniture segment recorded a modest increase in revenues primarily due to an
increase in furniture sales during the third quarter of 2002.
Cost of Sales
Total cost of sales decreased 2.8% in the nine months ended July 31, 2002 to
$65.5 million from $67.4 million in the nine months ended July 31, 2001.
Printing cost of sales decreased 4.4% in the nine months ended July 31, 2002 to
$50.8 million from $53.2 million in the nine months ended July 31, 2001, due
primarily to the decrease in printing sales noted above and the recording of
inventory obsolescence and valuation reserves in the third quarter of 2001.
Office products and office furniture cost of sales increased 3.3% in the nine
months ended July 31, 2002 to $14.7 million from $14.2 million in the nine
months ended July 31, 2001. The increase in office products and office furniture
cost of sales is attributable to an increase in office products and office
furniture sales coupled with lower gross margin percentages.
Operating Expenses
During the nine months ended July 31, 2002 compared to the same period in 2001,
selling, general, and administrative expenses decreased as a percentage of sales
to 25.6% from 26.1%. Total selling, general and administrative expenses
decreased $878,000 to $23.4 million in 2002 from $24.3 million in 2001. The
decrease in selling, general and administrative expenses is a result of the
Company's adoption of a restructuring and profitability enhancement plan in the
third quarter of 2001. In addition, the Company adopted SFAS No. 142, which
resulted in an increase in net income of approximately $12,500, net of tax, per
quarter in 2002.
Income (loss) from Operations and Other Income and Expenses
Income from operations increased $6.2 million in the nine month period ended
July 31, 2002 to $2.4 million from a loss of ($3.9) million in the same period
of 2001. This increase is primarily the result of charges related to asset
impairment and restructuring charges in the third quarter of 2001. Other income
decreased approximately $100,000 primarily due to a gain resulting from the
strategic alliance with Xpedx in 2001, partially offset by a reduction in
interest expense.
Income Taxes
The Company's effective income tax rate was 41.6% for the nine months ended July
31, 2002, down from a benefit of 23.9% in the same period of 2001. The effective
income tax rate in 2002 approximates
15
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the combined federal and state, net of federal benefit, statutory income tax
rate and is partially impacted by the geographic profitability mix of our
operations. The company recorded a tax benefit in the third quarter of 2001 as a
result of restructuring and asset impairment charges. The rate is reflective of
certain tax attributes of non-deductible goodwill resulting from asset
impairment charges.
Net Income (loss)
Net income for the first nine months of 2002 increased $4.3 million to
$1,261,069 from a net loss of ($3,029,531) in the same period of 2001 due to the
reasons discussed above. Basic and diluted earnings (loss) per share for the
nine months ended July 31, 2002 and 2001, were $0.13 and ($0.31).
INFLATION AND ECONOMIC CONDITIONS
Management believes that the effect of inflation on the Company's operations has
not been material and will continue to be immaterial for the foreseeable future.
The Company does not have long-term sales and purchase contracts; therefore, to
the extent permitted by competition, it has the ability to pass through to the
customer most cost increases resulting from inflation, if any.
SEASONALITY
Historically, the Company has experienced a greater portion of its annual sales
and net income in the second and fourth quarters than in the first and third
quarters. The third quarter generally reflects increased orders for printing of
corporate annual reports and proxy statements. A post-Labor Day increase in
demand for printing services and office products coincides with the Company's
fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the nine months ended July 31, 2002, was
$4.3 million compared to $7.1 million during the same period in 2001. This
change in net cash from operations is due primarily to timing changes in assets
and liabilities, and the impact of the Company's, restructuring and
profitability enhancement plan in the nine months ended July 31, 2001.
Net cash used in investing activities for the nine months ended July 31, 2002
was $2.0 million compared to $1.8 million during the same period in 2001. The
net cash used in investing activities during 2002 primarily related to equipment
purchases including a deposit to purchase a fractional ownership of an aircraft
from an entity controlled by its Chief Executive Officer of which $875,000 had
been paid as of July 31, 2002 and the purchase of a building, previously leased
by the company, for approximately $600,000. The equipment and building
purchases were partially offset by the sale of a building held for sale near
Huntington, WV for approximately $360,000, net of selling expenses. In 2001, the
net cash used in investing activities primarily related to equipment purchases
and cash used for the purchase of certain assets of Cordage partially offset
with proceeds from a strategic alliance with Xpedx.
Net cash used in financing activities for the nine months ended July 31, 2002
was $4.2 million compared to net cash used in financing activities of $3.7
million during the same period in 2001. This change is primarily due to a
decrease in debt borrowings in 2002.
16
CHAMPION INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Working capital on July 31, 2002 was $24.9 million, a decrease of $1.1 million
from October 31, 2001. Management believes that working capital and operating
ratios remain at acceptable levels.
The Company expects that the combination of funds available from working
capital, borrowings available under the Company's credit facility and
anticipated cash flows from operations will provide sufficient capital resources
for the foreseeable future including through fiscal 2004 when most of the
Company's interest bearing obligations are due. The Company renewed its
revolving line of credit with a bank for $10.0 million for a three year period,
expiring in April 2005. In the event the Company seeks to accelerate internal
growth or make acquisitions beyond these sources, additional financing would be
necessary.
ENVIRONMENTAL REGULATION
The Company is subject to the environmental laws and regulations of the United
States, and the states in which it operates, concerning emissions into the air,
discharges into the waterways and the generation, handling and disposal of waste
materials. The Company's past expenditures relating to environmental compliance
have not had a material effect on the Company. These laws and regulations are
constantly evolving, and it is impossible to predict accurately the effect they
may have upon the capital expenditures, earnings, and competitive position of
the Company in the future. Based upon information currently available,
management believes that expenditures relating to environmental compliance will
not have a material impact on the financial position of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q, including without limitation
statements including the word "believes," "anticipates," "intends," "expects" or
words of similar import, constitute "forward-looking statements" within the
meaning of section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements of the Company expressed or
implied by such forward-looking statements. Such factors include, among others,
general economic conditions, changes in business strategy or development plans,
and other factors referenced in this Form 10-Q. Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Marshall T. Reynolds
99.2 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Todd R. Fry
b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
Form 8-K dated July 16, 2002, filed July 17, 2002 regarding Champion's
announcement of an appeal of a jury verdict and fee award in a civil
action against the Company.
18
SIGNATURES
Pursuant to the requirement 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.
CHAMPION INDUSTRIES, INC.
Date: September 13, 2002 /s/ Marshall T. Reynolds
-------------------------------------------
Marshall T. Reynolds
Chief Executive Officer
Date: September 13, 2002 /s/ Kirby J. Taylor
-------------------------------------------
Kirby J. Taylor
President and Chief Operating Officer
Date: September 13, 2002 /s/ Todd R. Fry
-------------------------------------------
Todd R. Fry
Vice President and Chief Financial Officer
19
CERTIFICATIONS
I, Marshall T. Reynolds, Chairman of the Board of Directors and Chief
Executive Officer of Champion Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Champion
Industries, 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; and
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.
Date: September 13, 2002 /s/ Marshall T. Reynolds
-------------------------------------------
Marshall T. Reynolds
Chairman of the Board of Directors
Chief Executive Officer
20
CERTIFICATIONS
I, Kirby J. Taylor, President and Chief Operating Officer of Champion
Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Champion
Industries, 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; and
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.
Date: September 13, 2002 /s/ Kirby J. Taylor
-------------------------------------------
Kirby J. Taylor
President and Chief Operating Officer
21
CERTIFICATIONS
I, Todd R. Fry, Vice President and Chief Financial Officer of Champion
Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Champion
Industries, 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; and
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.
Date: September 13, 2002 /s/ Todd R. Fry
-------------------------------------------
Todd R. Fry
Vice President and Chief Financial Officer
22