PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
July
31, |
|
October
31, |
|
|
|
2005
(unaudited) |
|
2004
(audited) |
|
Current
assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
2,681,076 |
|
$ |
1,745,457 |
|
Accounts
receivable, net of allowance of $1,456,000
and $1,422,000 |
|
|
18,316,652 |
|
|
21,318,016 |
|
Inventories |
|
|
10,979,254 |
|
|
11,269,514 |
|
Other
current assets |
|
|
878,301 |
|
|
973,832 |
|
Deferred
income tax assets |
|
|
1,175,756 |
|
|
1,144,943 |
|
Total
current assets |
|
|
34,031,039 |
|
|
36,451,762 |
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost: |
|
|
|
|
|
|
|
Land |
|
|
2,006,375 |
|
|
2,006,375 |
|
Buildings
and improvements |
|
|
8,448,023 |
|
|
8,253,573 |
|
Machinery
and equipment |
|
|
45,121,701 |
|
|
43,228,587 |
|
Equipment
under capital leases |
|
|
426,732 |
|
|
983,407 |
|
Furniture
and fixtures |
|
|
3,478,868 |
|
|
3,361,100 |
|
Vehicles
|
|
|
3,654,090 |
|
|
3,523,467 |
|
|
|
|
63,135,789 |
|
|
61,356,509 |
|
Less
accumulated depreciation |
|
|
(43,852,229 |
) |
|
(41,020,327 |
) |
|
|
|
19,283,560 |
|
|
20,336,182
|
|
|
|
|
|
|
|
|
|
Cash
surrender value of officers’ life insurance |
|
|
1,039,514 |
|
|
1,039,514 |
|
Goodwill
|
|
|
2,060,786 |
|
|
2,060,786 |
|
Other
intangibles, net of accumulated amortization |
|
|
3,590,299 |
|
|
3,812,051 |
|
Other
assets |
|
|
301,347 |
|
|
449,589 |
|
|
|
|
6,991,946 |
|
|
7,361,940 |
|
Total
assets |
|
$ |
60,306,545 |
|
$ |
64,149,884 |
|
|
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets (continued)
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
July
31, |
|
October
31, |
|
|
|
2005
(unaudited) |
|
2004
(audited) |
|
Current
liabilities: |
|
|
|
|
|
Accounts
payable |
|
$ |
2,436,175 |
|
$ |
3,618,051 |
|
Accrued
payroll |
|
|
1,369,486 |
|
|
1,778,736 |
|
Taxes
accrued and withheld |
|
|
1,825,891 |
|
|
1,289,524 |
|
Accrued
income taxes |
|
|
98,672 |
|
|
135,556 |
|
Accrued
expenses |
|
|
983,681 |
|
|
1,028,246 |
|
Current
portion of long-term debt: |
|
|
|
|
|
|
|
Notes
payable |
|
|
1,833,787 |
|
|
1,555,911 |
|
Capital
lease obligations |
|
|
24,552 |
|
|
132,518 |
|
Total
current liabilities |
|
|
8,572,244 |
|
|
9,538,542 |
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion: |
|
|
|
|
|
|
|
Notes
payable, line of credit |
|
|
1,000,000 |
|
|
2,300,000 |
|
Notes
payable, term |
|
|
5,408,312 |
|
|
5,940,323 |
|
Capital
lease obligations |
|
|
- |
|
|
16,484 |
|
Other
liabilities |
|
|
402,469 |
|
|
428,366 |
|
Deferred
income tax liability |
|
|
4,285,496 |
|
|
4,375,357 |
|
Total
liabilities |
|
|
19,668,521 |
|
|
22,599,072 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity: |
|
|
|
|
|
|
|
Common
stock, $1 par value, 20,000,000 shares authorized;
9,733,913
shares issued and outstanding |
|
|
9,733,913 |
|
|
9,733,913 |
|
Additional
paid-in capital |
|
|
22,278,110 |
|
|
22,278,110 |
|
Retained
earnings |
|
|
8,626,001 |
|
|
9,538,789 |
|
Total
shareholders’ equity |
|
|
40,638,024 |
|
|
41,550,812 |
|
Total
liabilities and shareholders’ equity |
|
$ |
60,306,545 |
|
$ |
64,149,884 |
|
|
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Income
(Unaudited)
|
|
Three
Months Ended
July
31, |
|
Nine
Months Ended
July
31, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Printing |
|
$ |
23,769,526 |
|
$ |
23,011,690 |
|
$ |
72,591,117 |
|
$ |
70,147,035 |
|
Office
products and office furniture |
|
|
8,485,145 |
|
|
7,086,529 |
|
|
27,655,827 |
|
|
19,765,555 |
|
Total
revenues |
|
|
32,254,671 |
|
|
30,098,219 |
|
|
100,246,944 |
|
|
89,912,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing |
|
|
17,072,434 |
|
|
16,913,725 |
|
|
52,921,808 |
|
|
51,420,528 |
|
Office
products and office furniture |
|
|
5,793,595 |
|
|
4,850,670 |
|
|
19,067,611 |
|
|
13,304,564 |
|
Total
cost of sales |
|
|
22,866,029 |
|
|
21,764,395 |
|
|
71,989,419 |
|
|
64,725,092 |
|
Gross
profit |
|
|
9,388,642 |
|
|
8,333,824 |
|
|
28,257,525 |
|
|
25,187,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
|
8,568,008 |
|
|
8,247,988 |
|
|
26,956,237 |
|
|
24,780,503 |
|
Income
from operations |
|
|
820,634 |
|
|
85,836 |
|
|
1,301,288 |
|
|
406,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
3,152 |
|
|
1,079 |
|
|
12,791 |
|
|
3,877 |
|
Interest
expense |
|
|
(149,488 |
) |
|
(78,462 |
) |
|
(420,791 |
) |
|
(181,729 |
) |
Other
income (expense) |
|
|
(7,203 |
) |
|
121,577 |
|
|
68,481 |
|
|
194,656 |
|
|
|
|
(153,539 |
) |
|
44,194 |
|
|
(339,519 |
) |
|
16,804 |
|
Income
before income taxes |
|
|
667,095 |
|
|
130,030 |
|
|
961,769 |
|
|
423,799 |
|
Income
taxes |
|
|
(285,622 |
) |
|
(52,689 |
) |
|
(414,470 |
) |
|
(171,689 |
) |
Net
income |
|
$ |
381,473 |
|
$ |
77,341 |
|
$ |
547,299 |
|
$ |
252,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
$ |
0.01 |
|
$ |
0.06 |
|
$ |
0.03 |
|
Diluted |
|
$ |
0.04 |
|
$ |
0.01 |
|
$ |
0.06 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
9,734,000 |
|
|
9,734,000 |
|
|
9,734,000 |
|
|
9,727,000 |
|
Diluted |
|
|
9,812,000 |
|
|
9,832,000 |
|
|
9,806,000 |
|
|
9,841,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share |
|
$ |
0.05 |
|
$ |
0.05 |
|
$ |
0.15 |
|
$ |
0.15 |
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
July
31, |
|
|
|
2005 |
|
2004 |
|
Cash
flows from operating activities: |
|
|
|
|
|
Net
income |
|
$ |
547,299 |
|
$ |
252,110 |
|
Adjustments
to reconcile net income to cash
provided
by operating activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
3,536,056 |
|
|
3,223,193 |
|
Gain
on sale of assets |
|
|
(11,406 |
) |
|
(102,925 |
) |
Deferred
income tax |
|
|
(120,674 |
) |
|
|
|
Increase
in deferred compensation |
|
|
5,362 |
|
|
8,042 |
|
Bad
debt expense |
|
|
394,160 |
|
|
317,539 |
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
2,607,204 |
|
|
934,996 |
|
Inventories |
|
|
290,260 |
|
|
489,091 |
|
Other
current assets |
|
|
95,531 |
|
|
(421,760 |
) |
Accounts
payable |
|
|
(1,181,876 |
) |
|
86,076 |
|
Accrued
payroll |
|
|
(409,250 |
) |
|
(49,915 |
) |
Taxes
accrued and withheld |
|
|
536,367 |
|
|
125,394 |
|
Accrued
income taxes |
|
|
(36,884 |
) |
|
(701,613 |
) |
Accrued
expenses |
|
|
(44,565 |
) |
|
79,308 |
|
Other
liabilities |
|
|
(31,259 |
) |
|
(5,638 |
) |
Net
cash provided by operating activities |
|
|
6,176,325 |
|
|
4,233,898 |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
|
(2,043,395 |
) |
|
(3,987,220 |
) |
Proceeds
from sales of property |
|
|
155,481 |
|
|
789,702 |
|
Businesses
acquired, net of cash received |
|
|
- |
|
|
(346,556 |
) |
Goodwill
and other intangibles |
|
|
(34,685 |
) |
|
(227,161 |
) |
Change
in other assets |
|
|
97,590 |
|
|
(48,434 |
) |
Decrease
in cash surrender value life insurance |
|
|
- |
|
|
32,661 |
|
Net
cash used in investing activities |
|
|
(1,825,009 |
) |
|
(3,787,008 |
) |
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
Borrowings
on line of credit |
|
|
5,024,000 |
|
|
4,205,000 |
|
Payments
on line of credit |
|
|
(6,324,000 |
) |
|
(2,936,668 |
) |
Proceeds
from term debt and leases |
|
|
605,000 |
|
|
1,000,000 |
|
Principal
payments on long-term debt |
|
|
(1,260,610 |
) |
|
(838,667 |
) |
Proceeds
from exercise of stock options |
|
|
- |
|
|
56,063 |
|
Dividends
paid |
|
|
(1,460,087 |
) |
|
(1,459,086 |
) |
Net
cash provided by (used in) financing activities |
|
|
(3,415,697 |
) |
|
26,642 |
|
Net
increase in cash and cash equivalents |
|
|
935,619 |
|
|
473,532 |
|
Cash
and cash equivalents, beginning of period |
|
|
1,745,457 |
|
|
2,171,713 |
|
Cash
and cash equivalents, end of period |
|
$ |
2,681,076 |
|
$ |
2,645,245 |
|
|
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
July
31, 2005
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, 2004, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 17, 2005. The
accompanying interim financial information is unaudited. The balance sheet
information as of October 31, 2004 was derived from our audited financial
statements.
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 78,000 and 72,000 shares
for the three and nine months ended July 31, 2005 and 98,000 and 113,000 shares
for the three and nine months ended July 31, 2004.
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.
Inventories
consisted of the following:
|
|
July
31, |
|
October
31, |
|
|
|
2005 |
|
2004 |
|
Printing: |
|
|
|
|
|
|
|
Raw
materials |
|
$ |
2,406,024 |
|
$ |
2,326,821 |
|
Work
in process |
|
|
2,066,862 |
|
|
1,998,824 |
|
Finished
goods |
|
|
3,578,638 |
|
|
3,460,834 |
|
Office
products and office furniture |
|
|
2,927,730 |
|
|
3,483,035 |
|
|
|
$ |
10,979,254 |
|
$ |
11,269,514 |
|
|
|
|
|
|
|
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
4.
Long-Term Debt
Long-term
debt consisted of the following:
|
|
July
31, |
|
October
31, |
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Secured
term note payable to banks |
|
$ |
3,250,129 |
|
$ |
3,920,000 |
|
Installment
notes payable to banks |
|
|
3,991,970 |
|
|
3,576,234 |
|
Capital
lease obligations |
|
|
24,552 |
|
|
149,002 |
|
|
|
|
7,266,651 |
|
|
7,645,236 |
|
Less
current portion |
|
|
1,858,339 |
|
|
1,688,429 |
|
Long-term
debt, net of current portion |
|
$ |
5,408,312 |
|
$ |
5,956,807 |
|
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. This line of credit expires in July 2008 and contains certain
restrictive financial covenants. There was $1,000,000 and $2,300,000 outstanding
under this facility at July 31,
2005 and October 31, 2004.
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 October 2005 and contains certain
financial covenants. There were no borrowings outstanding under this facility at
July 31, 2005 and October 31, 2004.
During
the third quarter of 2005, the Company financed certain equipment with a term
note for $605,095 at the Wall Street Journal prime rate.
The
Company’s non-cash activities for the nine months ended July 31, 2005 and 2004
included vehicle purchases of approximately $277,000 and $0, which were financed
by a bank.
5.
Shareholders’ Equity
The
Company paid a dividend of five cents per share on June
24, 2005 to
stockholders of record on June
3, 2005. Also,
the Company declared a dividend of five cents per share to be paid on September
21, 2005 to stockholders of record on September 2, 2005.
6.
Commitments and Contingencies
As
reported in Form 8-K filed May 11, 2005, on May 6, 2005, the Company entered
into an agreement to settle all claims in a Mississippi lawsuit asserting that
the Company and its Dallas Printing Company, Inc. subsidiary had engaged in
unfair competition and other wrongful acts in hiring certain employees of
National Forms & Systems Group, Inc.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
Following
trial of this matter, titled National Forms & Systems Group, Inc. v. Timothy
V. Ross; Todd Ross and Champion Industries, Inc.; and Timothy V. Ross v.
National Forms & Systems Group, Inc. and Mickey McCardle; in the Circuit
Court of the First Judicial District of Hinds County, Mississippi; Case No.
251-00-942-CIV, on February 16, 2002, a jury had awarded plaintiff $1,745,000 in
actual damages and $750,000 in punitive damages. Additionally, the trial court
had granted plaintiff $645,119 in attorney fees and expenses, and ordered that
interest on the amount of the jury award accrue from February 22,
2002.
The
Company successfully appealed the jury award and attorney fee and expense award
in both the Court of Appeals of the State of Mississippi and the Supreme Court
of Mississippi, with the appellate courts’ rulings having the effect of
reversing the jury’s award of damages and the trial court’s award of attorney
fees and expenses, and granting a new trial on plaintiff’s claims.
Terms of
the settlement call for all parties’ claims to be dismissed with prejudice, as
fully compromised and released. The Company has paid plaintiff $440,000 cash and
will forego collection of and release its $60,276 cost judgment awarded as a
result of the reversal on appeal.
As of
July 31, 2005, the Company had contractual obligations in the form of leases and
debt as follows:
|
|
Payments
Due by Fiscal Year |
|
Contractual
Obligations |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Residual |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable
operating leases |
|
$ |
353,777 |
|
$ |
1,231,948 |
|
$ |
945,183 |
|
$ |
701,474 |
|
$ |
253,340 |
|
$ |
- |
|
$ |
3,485,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt |
|
|
487,633
|
|
|
1,796,424 |
|
|
1,790,394 |
|
|
1,705,549
|
|
|
445,910
|
|
|
1,016,189
|
|
|
7,242,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
under capital leases |
|
|
24,552
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
865,962 |
|
$ |
3,028,372 |
|
$ |
2,735,577 |
|
$ |
3,407,023 |
|
$ |
699,250 |
|
$ |
1,016,189 |
|
$ |
11,752,373 |
|
7.
Accounting for Stock-Based Compensation
In
December 2004, the SFAS issued SFAS No. 123R (revised 2004), “Share-Based
Payment”. This statement revises SFAS No. 123, “Accounting for Stock-Based
Compensation”, and requires companies to expense the value of employee stock
options and similar awards. The effective date of this standard is November 1,
2005.
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.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
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 2004,
risk-free interest rates of 4.03%; dividend yields of 4.21%; volatility factors
of the expected market price of the Company's common stock of 54.0%; and a
weighted-average expected life of the option of 4 years.
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 and nine months ended July 31 are as
follows:
|
|
Three
Months Ended
July
31, |
|
Nine
Months Ended
July
31, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported |
|
$ |
381,473 |
|
$ |
77,341 |
|
$ |
547,299 |
|
$ |
252,110 |
|
Deduct:
Total stock-based employee compensation expense determined under fair
value method for all awards, net of related tax effects |
|
|
— |
|
|
— |
|
|
— |
|
|
109,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income |
|
$ |
381,473 |
|
$ |
77,341 |
|
$ |
547,299 |
|
$ |
142,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic,
as reported |
|
$ |
0.04 |
|
$ |
0.01 |
|
$ |
0.06 |
|
$ |
0.03 |
|
Basic,
pro forma |
|
|
0.04 |
|
|
0.01 |
|
|
0.06 |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported |
|
$ |
0.04 |
|
$ |
0.01 |
|
$ |
0.06 |
|
$ |
0.03 |
|
Diluted,
pro forma |
|
|
0.04 |
|
|
0.01 |
|
|
0.06 |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
Acquisitions
On
September 7, 2004 the Company acquired all the issued and outstanding capital
stock of Syscan Corporation (“Syscan”), a West Virginia corporation, for a cash
price of $3,500,000 and a contingent purchase price, dependent upon satisfaction
of certain conditions, not to exceed the amount of $1,500,000.
The
Williams Land Corporation has the option to put the 3000 Washington Street
building, occupied by Syscan, to the Company for a price of $1.5 million and the
Company has the option to purchase the building for $1.5 million at the
conclusion of the five year lease term commencing September 1, 2009. This option
may be exercised no later than 60 days prior to the end of the lease and closing
of said purchase cannot exceed 45 days from the end of the lease.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
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.
The table
below presents information about reported segments for the three and nine months
ended July 31:
|
|
|
|
Office
Products |
|
|
|
2005
Quarter 3 |
|
Printing |
|
&
Furniture |
|
Total |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
27,073,545 |
|
$ |
10,862,695 |
|
$ |
37,936,240 |
|
Elimination
of intersegment revenue |
|
|
(3,304,019 |
) |
|
(2,377,550 |
) |
|
(5,681,569 |
) |
Consolidated
revenues |
|
$ |
23,769,526 |
|
$ |
8,485,145 |
|
$ |
32,254,671 |
|
Operating
income |
|
|
708,280
|
|
|
112,354
|
|
|
820,634
|
|
Depreciation
& amortization |
|
|
1,096,947
|
|
|
79,223 |
|
|
1,176,170
|
|
Capital
expenditures |
|
|
720,282 |
|
|
11,750
|
|
|
732,032 |
|
Identifiable
assets |
|
|
50,579,411 |
|
|
9,727,134 |
|
|
60,306,545 |
|
Goodwill |
|
|
1,774,344 |
|
|
286,442 |
|
|
2,060,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Products |
|
|
|
2004
Quarter 3 |
|
|
Printing |
|
&
Furniture |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,155,556 |
|
$ |
8,540,074 |
|
$ |
34,695,630 |
|
Elimination
of intersegment revenue |
|
|
(3,143,866 |
) |
|
(1,453,545 |
) |
|
(4,597,411 |
) |
Consolidated
revenues |
|
$ |
23,011,690 |
|
$ |
7,086,529 |
|
$ |
30,098,219 |
|
Operating
income (loss) |
|
|
(47,535 |
) |
|
133,371
|
|
|
85,836
|
|
Depreciation
& amortization |
|
|
1,065,400
|
|
|
34,455 |
|
|
1,099,855
|
|
Capital
expenditures |
|
|
261,226 |
|
|
17,769
|
|
|
278,995 |
|
Identifiable
assets |
|
|
48,691,447 |
|
|
9,597,794 |
|
|
58,289,241 |
|
Goodwill |
|
|
1,774,344 |
|
|
286,442 |
|
|
2,060,786 |
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
|
|
|
|
|
Office
Products |
|
|
|
2005
Year to date |
|
|
Printing |
|
&
Furniture |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
82,971,580 |
|
$ |
33,667,921 |
|
$ |
116,639,501 |
|
Elimination
of intersegment revenue |
|
|
(10,380,463 |
) |
|
(6,012,094 |
) |
|
(16,392,557 |
) |
Consolidated
revenues |
|
$ |
72,591,117 |
|
$ |
27,655,827 |
|
$ |
100,246,944 |
|
Operating
income |
|
|
738,149 |
|
|
563,139 |
|
|
1,301,288 |
|
Depreciation
& amortization |
|
|
3,302,189
|
|
|
233,867
|
|
|
3,536,056 |
|
Capital
expenditures |
|
|
2,187,115 |
|
|
133,305 |
|
|
2,320,420 |
|
Identifiable
assets |
|
|
50,579,411 |
|
|
9,727,134 |
|
|
60,306,545 |
|
Goodwill |
|
|
1,774,344 |
|
|
286,442 |
|
|
2,060,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Products |
|
|
|
2004
Year to date |
|
|
Printing |
|
&
Furniture |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
78,754,355 |
|
$ |
24,138,607 |
|
$ |
102,892,962 |
|
Elimination
of intersegment revenue |
|
|
(8,607,320 |
) |
|
(4,373,052 |
) |
|
(12,980,372 |
) |
Consolidated
revenues |
|
$ |
70,147,035 |
|
$ |
19,765,555 |
|
$ |
89,912,590 |
|
Operating
income (loss) |
|
|
427,430 |
|
|
(20,435 |
) |
|
406,995 |
|
Depreciation
& amortization |
|
|
3,116,547
|
|
|
106,646
|
|
|
3,223,193 |
|
Capital
expenditures |
|
|
3,943,903 |
|
|
43,317 |
|
|
3,987,220 |
|
Identifiable
assets |
|
|
48,691,447 |
|
|
9,597,794 |
|
|
58,289,241 |
|
Goodwill |
|
|
1,774,344 |
|
|
286,442 |
|
|
2,060,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and nine months ended July 31, 2005
and 2004, is as follows:
|
|
Three
months |
|
Nine
months |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Total
segment revenues |
|
$ |
37,936,240 |
|
$ |
34,695,630 |
|
$ |
116,639,501 |
|
$ |
102,892,962 |
|
Elimination
of intersegment revenue |
|
|
(5,681,569 |
) |
|
(4,597,411 |
) |
|
(16,392,557 |
) |
|
(12,980,372 |
) |
Consolidated
revenue |
|
$ |
32,254,671 |
|
$ |
30,098,219 |
|
$ |
100,246,944 |
|
$ |
89,912,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income |
|
$ |
820,634 |
|
$ |
85,836 |
|
$ |
1,301,288 |
|
$ |
406,995 |
|
Interest
income |
|
|
3,152 |
|
|
1,079 |
|
|
12,791 |
|
|
3,877 |
|
Interest
expense |
|
|
(149,488 |
) |
|
(78,462 |
) |
|
(420,791 |
) |
|
(181,729 |
) |
Other
income (expense) |
|
|
(7,203 |
) |
|
121,577 |
|
|
68,481 |
|
|
194,656 |
|
Consolidated
income before income taxes |
|
$ |
667,095 |
|
$ |
130,030 |
|
$ |
961,769 |
|
$ |
423,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment identifiable assets |
|
$ |
60,306,545 |
|
$ |
58,289,241 |
|
$ |
60,306,545 |
|
$ |
58,289,241 |
|
Elimination
of intersegment assets |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total
consolidated assets |
|
$ |
60,306,545 |
|
$ |
58,289,241 |
|
$ |
60,306,545 |
|
$ |
58,289,241 |
|
10.
Subsequent Events
On
September 6, 2005, the Company announced that its Consolidated Graphics New
Orleans plant was closed as a result of Hurricane Katrina. However, while the
Company’s Consolidated Graphics Baton Rouge location sustained both wind and
water damage, it is fully functional and is operating. The Company is unable to
estimate the economic impact of the hurricane on its Louisiana operations at
this time.
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
July
31, |
|
Nine
Months Ended
July
31, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Printing |
|
|
73.7 |
% |
|
76.5 |
% |
|
72.4 |
% |
|
78.0 |
% |
Office
products and office furniture |
|
|
26.3 |
|
|
23.5 |
|
|
27.6 |
|
|
22.0 |
|
Total
revenues |
|
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing |
|
|
52.9 |
|
|
56.2 |
|
|
52.8 |
|
|
57.2 |
|
Office
products and office furniture |
|
|
18.0 |
|
|
16.1 |
|
|
19.0 |
|
|
14.8 |
|
Total
cost of sales |
|
|
70.9 |
|
|
72.3 |
|
|
71.8 |
|
|
72.0 |
|
Gross
profit |
|
|
29.1 |
|
|
27.7 |
|
|
28.2 |
|
|
28.0 |
|
Selling,
general and administrative
expenses |
|
|
26.6 |
|
|
27.4 |
|
|
26.9 |
|
|
27.5 |
|
Income
from operations |
|
|
2.5 |
|
|
0.3 |
|
|
1.3 |
|
|
0.5 |
|
Interest
income |
|
|
0.0 |
|
|
0.0 |
|
|
0.0 |
|
|
0.0 |
|
Interest
(expense) |
|
|
(0.4 |
) |
|
(0.3 |
) |
|
(0.4 |
) |
|
(0.2 |
) |
Other
income |
|
|
0.0 |
|
|
0.4 |
|
|
0.1 |
|
|
0.2 |
|
Income
before taxes |
|
|
2.1 |
|
|
0.4 |
|
|
1.0 |
|
|
0.5 |
|
Income
tax expense |
|
|
(0.9 |
) |
|
(0.1 |
) |
|
(0.4 |
) |
|
(0.2 |
) |
Net
income |
|
|
1.2 |
% |
|
0.3 |
% |
|
0.6 |
% |
|
0.3 |
% |
Three
Months Ended July
31, 2005 Compared to Three Months Ended July 31, 2004
Revenues
Total
revenues increased 7.2% in the third quarter of 2005 compared to the same period
in 2004 from $30.1 million to $32.3 million. Printing revenue increased 3.3% in
the third quarter of 2005 to $23.8 million from $23.0 million in the third
quarter of 2004. Office products and office furniture revenue increased 19.7% in
the third quarter of 2005 to $8.5 million from $7.1 million in the third quarter
of 2004. The increase in printing revenue was primarily due to additional sales
derived from the Syscan acquisition offset by quarterly print sales reductions
across several divisions. The revenue increase in the office products and office
furniture segment was primarily related to the Syscan acquisition partially
offset by a reduction in core furniture sales.
Cost
of Sales
Total
cost of sales increased from $21.8 million for the third quarter of 2004 to
$22.9 million in the third quarter of 2005. Printing cost of sales in the third
quarter of 2005 increased $200,000 and decreased as a
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
percentage
of printing sales from 73.5% in 2004 to 71.8% in 2005 primarily due to lower
material and outside purchase costs as a percent of printing sales. Office
products and office furniture cost of sales increased 19.4% or $900,000 in 2005
to $5.8 million from $4.9 million in 2004. As a percentage of office products
and office furniture sales, cost of sales decreased to 68.3% in 2005 from 68.4%
in 2004. The increase in office products and office furniture cost of sales is
attributable to the higher sales discussed above.
Operating
Expenses
In the
third quarter of 2005, selling, general and administrative expenses increased on
a gross dollar basis to $8.6 million from $8.2 million in 2004, an increase of
$320,000 or 3.9%. Selling, general and administrative expenses as a percentage
of sales decreased to 26.6% in 2005 from 27.4% in 2004.
The
increase in selling, general and administrative expenses is primarily due to
additional costs incurred as a result of the acquisition of Syscan in September
2004, partially offset by reduced selling, general and administrative expenses
associated with the Company’s other divisions.
Income
from Operations and Other Income and Expenses
Income
from operations increased 856.1% in the third quarter of 2005 to $821,000 from
$86,000 in the third quarter of 2004. This increase is primarily the result of
increased sales and gross profit contribution dollars coupled with improved
gross profit percent in both the printing and office products and office
furniture segments, as well as decreased selling, general and administrative
expenses as a percent of sales.
Other
income/expense (net) changed $198,000 from income of $44,000 in 2004 to expense
of ($154,000) in 2005. This change was the result of a gain on the sale of the
Company’s Knoxville facility of approximately $100,000 recorded in 2004 and
higher interest expense resulting from higher interest rates and outstanding
borrowings in 2005.
Income
Taxes
The
Company’s effective income tax rate was 42.8% for the third quarter
of 2005 and 40.5% for the third quarter of 2004. The increase in income taxes as
a percentage of income before taxes is primarily related to the nondeductibility
of certain selling related expenses. The effective income tax rate approximates
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.
Net
Income
Net
income for the third quarter
of 2005 increased 393.2% to $381,000 up from $77,000 in 2004. Basic and diluted
earnings per share for the three months ended July 31, 2005 were $0.04 up from
$0.01 in 2004.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Nine
Months Ended July 31, 2005 Compared to Nine Months Ended July 31,
2004
Revenues
Total
revenues increased 11.5% in the first nine months of 2005 compared to the same
period in 2004 to $100.2 million from $89.9 million. Printing revenue increased
3.5% in the nine month period ended July 31, 2005 to $72.6 million from $70.1
million in the same period in 2004. Office products and office furniture revenue
increased 39.9% in the nine month period ended July 31, 2005 to $27.7 million
from $19.8 million in the same period in 2004. The revenue increase for the
office products and office furniture segment was attributable to an increase in
furniture sales in 2005 due in part to the additional sales derived from the
purchase of Syscan coupled with organic growth and additional office product
sales resulting from the Syscan acquisition. The increase in printing sales was
primarily due to additional sales derived from the Syscan acquisition offset by
print sales reductions across several divisions.
Cost
of Sales
Total
cost of sales increased 11.2% in the nine months ended July 31, 2005 to $72.0
million from $64.7 million in the nine months ended July 31, 2004. Printing cost
of sales increased 2.9% in the nine months ended July 31, 2005 to $52.9 million
from $51.4 million in the nine months ended July 31, 2004 and decreased as a
percent of printing sales to 72.9% in 2005 from 73.3% in 2004 due primarily to
increased sales coupled with an improvement in gross margin. Office products and
office furniture cost of sales increased 43.3% in the nine months ended July 31,
2005 to $19.1 million from $13.3 million in the nine months ended July 31, 2004
and increased as a percent of office products and office furniture sales to
68.9% from 67.3%. The increase in office products and office furniture cost of
sales is attributable to an increase in office products and office furniture
sales. The increase in office products and office furniture cost of sales as a
percent of sales is reflective of higher furniture costs as a percent of
furniture sales and wholesale pricing factors at Syscan for office
supplies.
Operating
Expenses
During
the nine months ended July 31, 2005 compared to the same period in 2004,
selling, general and administrative expenses decreased as a percentage of sales
to 26.9% from 27.5%. Total selling, general and administrative expenses
increased $2.2 million. The increase in selling, general and administrative
expenses is primarily due to additional costs associated with the acquisition of
Syscan in September 2004 and approximately $800,000 in legal related costs
associated with various legal settlements, accruals and expenses, including a
$440,000 settlement related to a Mississippi lawsuit.
Income
from Operations and Other Income and Expenses
Income
from operations increased 219.7% in the nine month period ended July 31, 2005 to
$1.3 million from $400,000 in the same period of 2004. This increase is
primarily the result of increased sales and gross profit contribution dollars
coupled with improved gross profit percent in total and in the printing segment
as well as decreased selling, general and administrative expenses as a percent
of sales. Other income (expense) changed approximately $356,000 from income of
$17,000 to an expense of ($340,000) primarily due to a $239,000 increase in
interest expense resulting from higher borrowings
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
primarily
related to the acquisition of Syscan in September 2004 coupled with an increase
in interest rates and gains on sale of property in 2004.
Income
Taxes
The
Company’s effective income tax rate was 43.1% for the nine months ended July 31,
2005, up from 40.5% in the same period of 2004. The increase in income taxes as
a percentage of income before taxes is primarily related to the nondeductibility
of certain selling related expenses. The effective income tax rate approximates
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.
Net
Income
Net
income for the first nine months of 2005 increased 117.1% to $547,000 from
$252,000 in the same period of 2004 due to the reasons discussed above. Basic
and diluted earnings per share for the nine months ended July 31, 2005 and 2004,
were $0.06 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.
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 nine months ended July 31, 2005, was $6.2 million
compared to $4.2 million during the same period in 2004. This increase primarily
relates to timing changes in assets and liabilities, increased depreciation
expense and higher net income.
Net cash
used in investing activities for the nine months ended July 31, 2005 was $1.8
million compared to $3.8 million during the same period in 2004. The net cash
used in investing activities during the first nine months of 2005 primarily
related to vehicle and equipment additions, including pre-press expenditures at
three of the Company’s sheetfed plants and print on demand expenditures. The
2004 expenditures are primarily related to equipment purchases and expenditures
for building improvements and expansion including the purchase of new sheetfed
presses, partially offset by the sales of buildings in Knoxville, Tennessee and
Baton Rouge, Louisiana.
Net cash
used in financing activities for the nine months ended July 31, 2005 was $3.4
million compared to net cash provided by financing activities of $27,000 during
the same period in 2004. This change is attributable to net payments on the
Company’s lines of credit versus net borrowings in 2004, a reduction
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
in
proceeds from term debt and an increase in principal payments of term debt. The
increase in principal payments of term debt is primarily related to increased
indebtedness associated with the acquisition of Syscan in September
2004.
The
Company’s off balance sheet arrangements at July 31, 2005 relate to the Syscan
acquisition and are associated with potential contingent purchase price
consideration of $1.5 million payable in October 2006 and a put option from
Williams Land Corporation to sell a building to the Company for $1.5 million.
This option may be exercised no later than 60 days prior to the end of the lease
and closing of said purchase cannot exceed 45 days from the end of the lease.
The lease term concludes effective September 1, 2009.
Working
capital on July 31, 2005 was $25.5 million, a decrease of $1.5 million from
October 31, 2004. 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.
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.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
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 quarterly 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
quarterly 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.
PART
II - OTHER INFORMATION
Item
6. Exhibits
a)
Exhibits: |
|
|
|
|
|
10.1 |
|
$605,095
term note together with commercial security agreement and
cross-collateralization and cross-default agreement between Champion
Industries, Inc. and First Century Bank dated as of July 25,
2005 |
|
|
|
31.1 |
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Marshall T. Reynolds |
|
|
|
31.2 |
|
Principal
Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Todd R. Fry |
|
|
|
31.3 |
|
Principal
Operating Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley act of 2002 - Toney K. Adkins |
|
|
|
32
|
|
Marshall
T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley act of 2002 |
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 9,
2005 |
/s/
Marshall T. Reynolds |
|
Marshall
T. Reynolds |
|
Chief
Executive Officer |
|
|
|
|
Date:
September 9,
2005 |
/s/
Toney K. Adkins |
|
Toney
K. Adkins |
|
President
and Chief Operating Officer |
|
|
|
|
Date:
September 9,
2005 |
/s/
Todd R. Fry |
|
Todd
R. Fry |
|
Senior
Vice President and Chief Financial Officer |