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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 January 31, 2004   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 of
incorporation or organization)
  (I.R.S. Employer Identification 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      ü      No                .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes                 No      ü     .

9,717,913 shares of common stock of the Registrant were outstanding at January 31, 2004.

 


 

Champion Industries, Inc.

INDEX

         
    Page No.
Part I. Financial Information
       
Item 1. Financial Statements
       
Consolidated Balance Sheets (Unaudited)
    3  
Consolidated Statements of Income (Unaudited)
    5  
Consolidated Statements of Cash Flows (Unaudited)
    6  
Notes to Consolidated Financial Statements
    7  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    14  
Item 3a. Quantitative and Qualitative Disclosure About Market Risk
    17  
Item 4. Controls and Procedures
    17  
Part II. Other Information
       
Item 6. Exhibits and Reports on Form 8-K
    18  
Signatures
    19  

2


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Champion Industries, Inc. and Subsidiaries

Consolidated Balance Sheets
(Unaudited)
                 
ASSETS   January 31,   October 31,
    2004
  2003
                 
Current assets:
               
Cash and cash equivalents
  $ 2,653,685     $ 2,171,713  
Accounts receivable, net of allowance of $1,185,000 and $1,191,000
    16,826,430       20,142,812  
Inventories
    10,952,800       11,349,929  
Other current assets
    1,228,379       739,560  
Deferred income tax assets
    1,059,520       1,059,520  
 
   
 
     
 
 
Total current assets
    32,720,814       35,463,534  
Property and equipment, at cost:
               
Land
    2,063,373       2,063,373  
Buildings and improvements
    7,888,883       7,445,219  
Machinery and equipment
    38,067,506       37,682,530  
Equipment under capital leases
    983,407       983,407  
Furniture and fixtures
    3,018,370       2,965,389  
Vehicles
    3,225,033       3,262,861  
 
   
 
     
 
 
 
    55,246,572       54,402,779  
Less accumulated depreciation
    (35,799,639 )     (34,964,006 )
 
   
 
     
 
 
 
    19,446,933       19,438,773  
Cash surrender value of officers’ life insurance
    988,134       1,020,795  
Goodwill and other intangibles, net of accumulated amortization
    2,235,390       2,114,390  
Other assets
    384,578       431,343  
 
   
 
     
 
 
 
    3,608,102       3,566,528  
 
   
 
     
 
 
Total assets
  $ 55,775,849     $ 58,468,835  
 
   
 
     
 
 

See notes to consolidated financial statements.

3


 

Champion Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)

(Unaudited)

                 
LIABILITIES AND SHAREHOLDERS’ EQUITY   January 31,   October 31,
    2004
  2003
                 
Current liabilities:
               
Accounts payable
  $ 2,437,487     $ 3,283,222  
Accrued payroll
    963,974       1,500,165  
Taxes accrued and withheld
    1,133,867       1,259,853  
Accrued income taxes
    94,939       707,119  
Accrued expenses
    652,253       789,676  
Current portion of long-term debt:
               
Notes payable
    646,533       744,662  
Capital lease obligations
    213,949       202,309  
 
   
 
     
 
 
Total current liabilities
    6,143,002       8,487,006  
Long-term debt, net of current portion:
               
Notes payable, line of credit
    2,000,000       1,705,668  
Notes payable, term
    1,985,770       2,103,569  
Capital lease obligations
    94,021       156,718  
Other liabilities
    423,179       424,233  
Deferred income tax liabilities
    2,900,807       2,900,807  
 
   
 
     
 
 
Total liabilities
    13,546,779       15,778,001  
 
   
 
     
 
 
Shareholders’ equity:
               
Common stock, $1 par value, 20,000,000 shares authorized; 9,717,913 and 9,713,913 shares issued and outstanding
    9,717,913       9,713,913  
Additional paid-in capital
    22,248,567       22,242,047  
Retained earnings
    10,262,590       10,734,874  
 
   
 
     
 
 
Total shareholders’ equity
    42,229,070       42,690,834  
 
   
 
     
 
 
Total liabilities and shareholders’ equity
  $ 55,775,849     $ 58,468,835  
 
   
 
     
 
 

See notes to consolidated financial statements.

4


 

Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Income

(Unaudited)

                 
    Three Months Ended January 31,
    2004
  2003
Revenues:
               
Printing
  $ 22,997,892     $ 22,606,647  
Office products and office furniture
    6,315,581       6,012,294  
 
   
 
     
 
 
Total revenues
    29,313,473       28,618,941  
Cost of sales:
               
Printing
    17,023,500       16,533,926  
Office products and office furniture
    4,324,101       4,167,266  
 
   
 
     
 
 
Total cost of sales
    21,347,601       20,701,192  
 
   
 
     
 
 
Gross profit
    7,965,872       7,917,749  
Selling, general and administrative expenses
    7,921,054       7,455,685  
 
   
 
     
 
 
Income from operations
    44,818       462,064  
Other income (expense):
               
Interest income
    1,618       1,452  
Interest expense
    (46,679 )     (52,024 )
Other
    23,034       25,524  
 
   
 
     
 
 
 
    (22,027 )     (25,048 )
 
   
 
     
 
 
Income before income taxes
    22,791       437,016  
Income tax expense
    (9,178 )     (182,700 )
 
   
 
     
 
 
Net income
  $ 13,613     $ 254,316  
 
   
 
     
 
 
Earnings per share
               
Basic
  $ 0.00     $ 0.03  
 
   
 
     
 
 
Diluted
  $ 0.00     $ 0.03  
 
   
 
     
 
 
Weighted average shares outstanding:
               
Basic
    9,717,000       9,714,000  
 
   
 
     
 
 
Diluted
    9,826,000       9,730,000  
 
   
 
     
 
 
Dividends per share
  $ 0.05     $ 0.05  
 
   
 
     
 
 

See notes to consolidated financial statements.

5


 

Champion Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(Unaudited)

                 
    Three Months Ended January 31,
    2004
  2003
Cash flows from operating activities:
               
Net income
  $ 13,613     $ 254,316  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation and amortization
    975,126       1,006,795  
Gain on sale of assets
    (1,107 )     (1,677 )
Increase in deferred compensation
    2,681       3,575  
Bad debt expense
    124,209       66,700  
Changes in assets and liabilities:
               
Accounts receivable
    3,192,173       1,049,242  
Inventories
    397,129       (83,986 )
Other current assets
    (488,819 )     (463,978 )
Accounts payable
    (845,735 )     (428,386 )
Accrued payroll
    (536,191 )     (628,276 )
Taxes accrued and withheld
    (125,986 )     (249,527 )
Income taxes
    (612,180 )     (528,198 )
Accrued expenses
    (137,423 )     (30,931 )
Other liabilities
    (3,735 )     (4,976 )
 
   
 
     
 
 
Net cash provided by (used in) operating activities
    1,953,755       (39,307 )
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,009,258 )     (472,462 )
Proceeds from sales of property
    58,064       37,527  
Goodwill additions
    (130,814 )      
Decrease in cash surrender value life insurance
    32,661       24,284  
Other assets
    25,594       23,421  
 
   
 
     
 
 
Net cash used in investing activities
    (1,023,753 )     (387,230 )
Cash flows from financing activities:
               
Net borrowings of notes payable
    1,000,000        
Payments of notes payable
    (705,668 )      
Proceeds from term debt and leases
          122,500  
Principal payments on long-term debt
    (266,985 )     (766,004 )
Proceeds from exercise of stock options
    10,520        
Dividends paid
    (485,897 )     (485,693 )
 
   
 
     
 
 
Net cash used in financing activities
    (448,030 )     (1,129,197 )
 
   
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    481,972       (1,555,734 )
Cash and cash equivalents, beginning of period
    2,171,713       4,507,139  
 
   
 
     
 
 
Cash and cash equivalents, end of period
  $ 2,653,685     $ 2,951,405  
 
   
 
     
 
 

See notes to consolidated financial statements.

6


 

Champion Industries, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

January 31, 2004

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 of America (“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, 2003, and related notes thereto contained in Champion Industries, Inc.’s Form 10-K dated January 26, 2004. The accompanying interim financial information is unaudited. The balance sheet information as of October 31, 2003 was derived from our audited financial statements.

Certain prior-year amounts have been reclassified to conform to the current-year Financial Statement presentation.

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 109,000 and 16,000 shares for the three months ended January 31, 2004 and 2003. The Company also had 34,000 and 77,000 outstanding options that were anti-dilutive for the three months ended January 31, 2004 and January 31, 2003 because the option exercise price exceeded the stock price.

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.

7


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

Inventories consisted of the following:

                 
    January 31,   October 31,
    2004
  2003
Printing:
               
Raw materials
  $ 2,213,540     $ 2,203,228  
Work in process
    2,031,885       2,022,420  
Finished goods
    3,697,408       3,680,184  
Office products and office furniture
    3,009,967       3,444,097  
 
   
 
     
 
 
 
  $ 10,952,800     $ 11,349,929  
 
   
 
     
 
 

4. Goodwill and other intangibles

Goodwill and other intangibles increased by $130,814 during the three months ended January 31, 2004 as a result of the payment of contingent consideration of a prior acquisition.

5. Long-Term Debt

Long-term debt consisted of the following:

                 
    January 31,   October 31,
    2004
  2003
Installment notes payable to banks
  $ 2,632,303     $ 2,848,231  
Capital lease obligations
    307,970       359,027  
 
   
 
     
 
 
 
    2,940,273       3,207,258  
Less current portion
    860,482       946,971  
 
   
 
     
 
 
Long-term debt, net of current portion
  $ 2,079,791     $ 2,260,287  
 
   
 
     
 
 

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 the prime rate of interest. The line of credit expires in July 2006 and contains certain restrictive financial covenants. The Company had outstanding borrowings under this facility of $2.0 million and $1.7 million at January 31, 2004 and October 31, 2003.

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 expires in April 2004 and contains certain financial covenants. There were no borrowings outstanding under this facility at January 31, 2004 and October 31, 2003.

The Company’s non-cash financing activities for the three months ended January 31, 2003 included vehicle purchases of approximately $96,000 which were financed by a bank. There were no non-cash financing activities for the three months ended January 31, 2004.

8


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

6. Shareholders’ Equity

The Company paid a dividend of five cents per share on December 26, 2003 to stockholders of record on December 1, 2003. Also, the Company declared a dividend of five cents per share to be paid on March 22, 2004 to stockholders of record on March 5, 2004.

7. 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.

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.

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.

The Company was advised on February 3, 2004 that the Court of Appeals of the State of Mississippi has reversed the aforementioned judgment and jury verdict rendered against the Company and has remanded the case for new trial. As a result of this action plaintiffs had 14 days from February 3, 2004 to petition the appeals court for rehearing of its ruling. The plaintiffs filed their petition for rehearing on February 17, 2004. The Company had 7 days to respond to such a petition and the Company’s response was filed on February 24, 2004. Unless the appeals court reverses its order upon petition, the effect of the appeals court is to negate the lower court’s award of damages and attorney’s fees previously granted against the Company, and grant a new trial on plaintiff’s claims. If the appeals court does not reverse its order, plaintiffs may seek an appeal to the Mississippi Supreme Court. Similarly, if the appeals court reverses its order, the Company may seek an appeal to the Mississippi Supreme Court.

The Company has been advised that it has no insurance coverage for this award. If upon final resolution of the appeals process, the verdict is not overturned, the impact on the operating results of the Company could be material.

9


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

As of January 31, 2004 the Company had contractual obligations in the form of leases and debt as follows:

                                                         
    Payments Due by Fiscal Year
Contractual Obligations
  2004
  2005
  2006
  2007
  2008
  Residual
  Total
Non-cancelable operating leases
  $ 820,239     $ 838,513     $ 751,053     $ 555,103     $ 399,594     $ 6,000     $ 3,370,502  
Revolving line of credit
                2,000,000                         2,000,000  
Term debt
    646,533       343,434       263,675       258,492       139,169       981,000       2,632,303  
Obligations under capital leases
    213,949       94,021                               307,970  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
  $ 1,680,721     $ 1,275,968     $ 3,014,728     $ 813,595     $ 538,763     $ 987,000     $ 8,310,775  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
 

8. Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure”. Statement 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation.

The Company has elected to follow the intrinsic value method in accounting for its employee stock options. Accordingly, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003 and 2002, respectively: risk-free interest rates of 4.03% and 3.97%; dividend yields of 4.21% and 7.22%; volatility factors of the expected market price of the Company’s common stock of 54.0% and 46.4%; and a weighted-average expected life of the option of 4 years.

10


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

The following pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is expensed in the year granted since the options vest immediately. The Company’s pro forma information for the quarters ended January 31 are as follows:

                 
    Quarter Ended January 31
    2004
  2003
Net Income, as reported
  $ 13,613     $ 254,316  
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects
    109,962       47,200  
 
   
 
     
 
 
Pro Forma net income (loss)
  $ (96,349 )   $ 207,116  
 
   
 
     
 
 
Earnings (loss) per share:
               
Basic, as reported
  $ 0.00     $ 0.03  
Basic, pro forma
    (0.01 )     0.02  
Diluted, as reported
  $ 0.00     $ 0.03  
Diluted, pro forma
    (0.01 )     0.02  

Since the Company had a pro-forma net loss as shown above for the three months ended January 31, 2004 the dilutive effect of 109,000 stock options were anti-dilutive on a pro-forma basis for the three months ended January 31, 2004.

9. 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.

11


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

The table below presents information about reported segments for the three months ended January 31:

                         
            Office Products    
2004 Quarter 1
  Printing
  & Furniture
  Total
Revenues
  $ 25,530,021     $ 7,689,954     $ 33,219,975  
Elimination of intersegment revenue
    (2,532,129 )     (1,374,373 )     (3,906,502 )
 
   
 
     
 
     
 
 
Consolidated revenues
  $ 22,997,892     $ 6,315,581     $ 29,313,473  
 
   
 
     
 
     
 
 
Operating income
    177,384       (132,566 )     44,818  
Depreciation & amortization
    961,696       13,430       975,126  
Capital expenditures
    993,549       15,709       1,009,258  
Identifiable assets
    45,995,910       9,779,939       55,775,849  
Goodwill
    1,774,344       286,442       2,060,786  
                         
            Office Products    
2003 Quarter 1
  Printing
  & Furniture
  Total
Revenues
  $ 25,234,276     $ 7,218,148     $ 32,452,424  
Elimination of intersegment revenue
    (2,627,629 )     (1,205,854 )     (3,833,483 )
 
   
 
     
 
     
 
 
Consolidated revenues
  $ 22,606,647     $ 6,012,294     $ 28,618,941  
 
   
 
     
 
     
 
 
Operating income
    629,376       (167,312 )     462,064  
Depreciation & amortization
    973,645       33,150       1,006,795  
Capital expenditures
    534,537       34,390       568,927  
Identifiable assets
    47,381,901       9,480,467       56,862,368  
Goodwill
    1,439,499       286,442       1,725,941  

12


 

Champion Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) (continued)

A reconciliation of total segment revenues and of total segment operating income to income before income taxes, for the three months ended January 31, 2004 and 2003, is as follows:

                 
    Three months ended January 31,
    2004
  2003
Revenues:
               
Total segment revenues
  $ 33,219,975     $ 32,452,424  
Elimination of intersegment revenue
    (3,906,502 )     (3,833,483 )
 
   
 
     
 
 
Consolidated revenue
  $ 29,313,473     $ 28,618,941  
 
   
 
     
 
 
Operating Income:
               
Total segment operating income
  $ 44,818     $ 462,064  
Interest income
    1,618       1,452  
Interest expense
    (46,679 )     (52,024 )
Other income
    23,034       25,524  
 
   
 
     
 
 
Consolidated income before income taxes
  $ 22,791     $ 437,016  
 
   
 
     
 
 
Identifiable assets:
               
Total segment identifiable assets
  $ 55,775,849     $ 56,862,368  
Elimination of intersegment assets
           
 
   
 
     
 
 
Total consolidated assets
  $ 55,775,849     $ 56,862,368  
 
   
 
     
 
 

13


 

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.

                                 
    Three Months Ended January 31,
    2004
  2003
    ($ in thousands)
Revenues:
                               
Printing
  $ 22,998       78.5 %   $ 22,607       79.0 %
Office products and office furniture
    6,316       21.5       6,012       21.0  
 
   
 
     
 
     
 
     
 
 
Total revenues
    29,314       100.0       28,619       100.0  
Cost of sales:
                               
Printing
    17,024       58.1       16,534       57.8  
Office products and office furniture
    4,324       14.7       4,167       14.5  
 
   
 
     
 
     
 
     
 
 
Total cost of sales
    21,348       72.8       20,701       72.3  
 
   
 
     
 
     
 
     
 
 
Gross profit
    7,966       27.2       7,918       27.7  
Selling, general and administrative expenses
    7,921       27.0       7,456       26.1  
 
   
 
     
 
     
 
     
 
 
Income from operations
    45       0.2       462       1.6  
 
   
 
     
 
     
 
     
 
 
Interest income
    2       0.0       1       0.0  
Interest expense
    (47 )     (0.1 )     (52 )     (0.2 )
Other income
    23       0.0       26       0.1  
 
   
 
     
 
     
 
     
 
 
Income before taxes
    23       0.1       437       1.5  
Income taxes
    (9 )     (0.0 )     (183 )     (0.6 )
 
   
 
     
 
     
 
     
 
 
Net income
  $ 14       0.1 %   $ 254       0.9 %
 
   
 
     
 
     
 
     
 
 

Three Months Ended January 31, 2004 Compared to Three Months Ended January 31, 2003

Revenues

Total revenues increased 2.4% in the first quarter of 2004 compared to the same period in 2003 from $28.6 million to $29.3 million. Printing revenue increased 1.7% in the first quarter of 2004 to $23.0 million from $22.6 million in the first quarter of 2003. Office products and office furniture revenue increased 5.0% in the first quarter of 2004 to $6.3 million from $6.0 million in the first quarter of 2003. The revenue increase for the office product and office supply segment was primarily attributable to an increase in furniture sales in 2004 due in part to the additional sales derived from the purchase of certain assets of Contract Business Interiors in June 2003. The increase in printing sales was primarily due to the addition of a new large customer subsequent to the first quarter of 2003 and additional sales derived primarily from the operations of certain assets purchased from Integrated Marketing Solutions in July 2003.

14


 

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 increased 3.1% in the first quarter of 2004 to $21.3 million from $20.7 million in the first quarter of 2003. Printing cost of sales in the first quarter of 2004 increased $500,000 over the prior year and increased as a percentage of printing sales from 73.1% in 2003 to 74.0% in 2004 primarily due to increased material and outside purchase costs. The dollar increase resulted from the increased material and outside purchase costs as a percentage of sales and the increase in sales. Office products and office furniture cost of sales increased 3.8% or approximately $157,000 in 2004 to $4.3 million from $4.2 million in 2003 but decreased as a percent of sales from 69.3% in 2003 to 68.5% in 2004. The increase in office products and office furniture cost of sales is attributable to the increase in sales. The decrease in office products and office furniture as a percent of sales is reflective of reduced costs resulting from an import program, margin enhancements on sales growth and new pricing programs for the calendar year, one month of which was included in the first quarter.

Operating Expenses

In the first quarter of 2004, selling, general and administrative expenses increased on a gross dollar basis to $7.9 million from $7.5 million in 2003 an increase of $465,000 or 6.2%. As a percentage of sales the expenses increased on a quarter to quarter basis in 2004 to 27.0% from 26.1% in 2003 of total sales.

The increase in selling, general and administrative expenses is primarily the result of increased payroll expenses to support the sales growth and increased professional fees during the quarter.

Income from Operations and Other Income and Expenses

Income from operations decreased 90.3% in the first quarter of 2004 to $45,000 from $462,000 in the first quarter of 2003. This decrease is the result of increased selling, general and administrative expenses partially offset by an increase in sales and gross profit. Other expense (net), decreased approximately $3,000 from 2003 to 2004.

Income Taxes

The Company’s effective income tax rate was 40.3% for the first quarter of 2004 and 41.8% for the first quarter of 2003. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate.

Net Income

Net income for the first quarter of 2004 was $14,000 compared to net income of $254,000 in the first quarter of 2003. Basic and diluted earnings per share for the three months ended January 31, 2004 and 2003 were $0.00 and $0.03.

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.

15


 

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Seasonality

Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second 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 three months ended January 31, 2004, was $2.0 million compared to net cash used in operations of $39,000 during the same period in 2003. This change in net cash from operations is due primarily to timing changes in assets and liabilities including a reduction of inventories in 2004 compared to an increase in inventories in 2003 and an increase in cash generated from accounts receivable collections representing $3.2 million in 2004 compared to $1.0 million in 2003.

Net cash used in investing activities for the three months ended January 31, 2004 was $1.0 million compared to $387,000 during the same period in 2003. The net cash used in investing activities during the first three months of 2004 and 2003 primarily relates to equipment purchases and building improvements.

During the first quarter of 2004, the Company entered into purchase agreements with an equipment manufacturer for the purchase of three printing presses in the aggregate amount of approximately $1.7 million. As a result of this commitment the Company paid this manufacturer a deposit of $170,000.

Net cash used in financing activities for the three months ended January 31, 2004 was $448,000 compared to $1.1 million during the same period in 2003. This change is primarily due to an increase in net borrowings of $170,000 and a $500,000 reduction of principal payments in 2003.

Working capital on January 31, 2004 was $26.6 million, a decrease of $400,000 from October 31, 2003. 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 facilities and anticipated cash flows from operations will provide sufficient capital resources for the foreseeable future. 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.

16


 

Champion Industries, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)

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.

ITEM 3a. Quantitative and Qualitative Disclosure About Market Risk

The Company does not have any significant exposure relating to market risk.

ITEM 4. Controls and Procedures

Company management, including the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There were no changes in internal controls over financial reporting during the last fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

17


 

PART II — OTHER INFORMATION

Item 6. Exhibits and reports on Form 8-K

  a)   Exhibits:

             
(31.1)
  Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 — Marshall T. Reynolds   Exhibit 31.1   Page Exhibit 33.1-p1
 
           
(31.2)
  Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 — Todd R. Fry   Exhibit 31.2   Page Exhibit 31.2-p1
 
           
(31.3)
  Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 — Kirby J. Taylor   Exhibit 31.3   Page Exhibit 31.3-p1
 
           
(32)
  Marshall T. Reynolds, Todd R. Fry and Kirby J. Taylor Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002   Exhibit 32   Page Exhibit 32-p1

  b)   The following reports on Form 8-K were filed during the quarter for which this report is filed:

Form 8-K dated January 7, 2004, filed January 7, 2004 regarding Champion’s press release titled “CHAMPION ANNOUNCES 2003 YEAR END AND FOURTH QUARTER EARNINGS.”

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: March 12, 2004
  /s/ Marshall T. Reynolds
 
 
  Marshall T. Reynolds
Chief Executive Officer
 
 
   
Date: March 12, 2004
  /s/ Kirby J. Taylor
 
 
  Kirby J. Taylor
President and Chief Operating Officer
 
 
   
Date: March 12, 2004
  /s/ Todd R. Fry
 
 
  Todd R. Fry
Vice President and Chief Financial Officer
 
 
   

19