UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended April 30,
2006
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from
_________to_________
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 a large accelerated filer, an accelerated
filer,
or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act). Yes _____No ü
.
Indicate
the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding
at April 30, 2006
|
Common
stock, $1.00 par value per share
|
|
9,745,913
shares
|
Champion
Industries, Inc.
INDEX
|
Page
No.
|
Part I. Financial
Information |
|
Item
1. Financial Statements |
|
Consolidated
Balance Sheets (Unaudited) |
3
|
Consolidated
Statements of Operations (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
3. Quantitative
and Qualitative Disclosure About Market Risk |
19
|
Item
4. Controls
and Procedures |
19
|
Part
II. Other
Information |
|
Item 4. Submission
of Matters to a Vote of Security Holders |
20
|
Item
6. Exhibits
|
20
|
Signatures |
21
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets
ASSETS
|
|
April
30,
|
|
|
|
October
31,
|
|
|
|
2006
(Unaudited)
|
|
|
|
2005
(Audited)
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
1,699,245
|
|
|
|
$
3,661,622
|
|
Accounts
receivable, net of allowance of $1,353,000
and $1,410,000
|
|
22,451,112
|
|
|
|
19,300,453
|
|
Inventories
|
|
10,625,183
|
|
|
|
11,079,726
|
|
Other
current assets
|
|
1,047,848
|
|
|
|
629,381
|
|
Deferred
income tax assets
|
|
1,168,526
|
|
|
|
1,168,526
|
|
Total
current assets
|
|
36,991,914
|
|
|
|
35,839,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
2,023,375
|
|
|
|
2,006,375
|
|
Buildings
and improvements
|
|
8,464,316
|
|
|
|
8,368,720
|
|
Machinery
and equipment
|
|
44,822,232
|
|
|
|
43,668,900
|
|
Equipment
under capital leases
|
|
-
|
|
|
|
426,732
|
|
Furniture
and fixtures
|
|
3,560,895
|
|
|
|
3,492,535
|
|
Vehicles
|
|
3,460,446
|
|
|
|
3,629,268
|
|
|
|
62,331,264
|
|
|
|
61,592,530
|
|
Less
accumulated depreciation
|
|
(44,486,614
|
)
|
|
|
(42,894,910
|
)
|
|
|
17,844,650
|
|
|
|
18,697,620
|
|
|
|
|
|
|
|
|
|
Cash
surrender value of officers’ life insurance
|
|
1,117,484
|
|
|
|
1,117,484
|
|
Goodwill
|
|
2,060,786
|
|
|
|
2,060,786
|
|
Other
intangibles, net of accumulated amortization
|
|
3,516,799
|
|
|
|
3,697,368
|
|
Other
assets
|
|
282,940
|
|
|
|
232,204
|
|
|
|
6,978,009
|
|
|
|
7,107,842
|
|
Total
assets
|
|
$
61,814,573
|
|
|
|
$
61,645,170
|
|
See
notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Balance Sheets (continued)
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
April
30,
|
|
October
31,
|
|
|
2006
(Unaudited)
|
|
2005
(Audited)
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
3,694,822
|
|
|
$
3,584,323
|
|
Accrued
payroll
|
|
1,502,254
|
|
|
1,714,078
|
|
Taxes
accrued and withheld
|
|
1,459,248
|
|
|
1,106,910
|
|
Accrued
income taxes
|
|
785,595
|
|
|
681,763
|
|
Accrued
expenses
|
|
1,104,254
|
|
|
987,228
|
|
Current
portion of long-term debt:
|
|
|
|
|
|
|
Notes
payable
|
|
1,743,974
|
|
|
1,667,797
|
|
Capital
lease obligations
|
|
-
|
|
|
16,483
|
|
Total
current liabilities
|
|
10,290,147
|
|
|
9,758,582
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion:
|
|
|
|
|
|
|
Notes
payable, line of credit
|
|
1,024,000
|
|
|
1,612,000
|
|
Notes
payable, term
|
|
3,895,686
|
|
|
5,148,503
|
|
Other
liabilities
|
|
388,665
|
|
|
388,930
|
|
Deferred
income tax liabilities
|
|
3,714,351
|
|
|
3,984,934
|
|
Total
liabilities
|
|
19,312,849
|
|
|
20,892,949
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
Common
stock, $1 par value, 20,000,000 shares authorized;
9,745,913
shares issued and outstanding
|
|
9,745,913
|
|
|
9,745,913
|
|
Additional
paid-in capital
|
|
22,297,670
|
|
|
22,297,670
|
|
Retained
earnings
|
|
10,458,141
|
|
|
8,708,638
|
|
Total
shareholders’ equity
|
|
42,501,724
|
|
|
40,752,221
|
|
Total
liabilities and shareholders’ equity
|
|
$
61,814,573
|
|
|
$
61,645,170
|
|
See
notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
$
|
27,841,677
|
|
$
|
24,384,970
|
|
$
|
54,007,326
|
|
$
|
48,821,591
|
|
Office
products and office furniture
|
|
|
9,578,892
|
|
|
9,167,312
|
|
|
19,704,951
|
|
|
19,170,682
|
|
Total
revenues
|
|
|
37,420,569
|
|
|
33,552,282
|
|
|
73,712,277
|
|
|
67,992,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
19,155,034
|
|
|
17,866,111
|
|
|
37,705,574
|
|
|
35,637,374
|
|
Office
products and office furniture
|
|
|
6,753,428
|
|
|
6,478,517
|
|
|
13,897,176
|
|
|
13,636,473
|
|
Total
cost of sales
|
|
|
25,908,462
|
|
|
24,344,628
|
|
|
51,602,750
|
|
|
49,273,847
|
|
Gross
profit
|
|
|
11,512,107
|
|
|
9,207,654
|
|
|
22,109,527
|
|
|
18,718,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
8,727,944
|
|
|
9,260,093
|
|
|
17,441,611
|
|
|
18,237,773
|
|
Hurricane
and relocation costs, net of recoveries
|
|
|
(43,733
|
)
|
|
-
|
|
|
(301,693
|
) |
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
2,827,896 |
|
|
(52,439 |
) |
|
4,969,609 |
|
|
480,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,383
|
|
|
4,574
|
|
|
14,125
|
|
|
9,640
|
|
Interest
expense
|
|
|
(168,828
|
)
|
|
(133,938
|
)
|
|
(340,570
|
)
|
|
(271,303
|
)
|
Other
|
|
|
3,042
|
|
|
13,011
|
|
|
2,928
|
|
|
75,685
|
|
|
|
|
(158,403
|
)
|
|
(116,353
|
)
|
|
(323,517
|
)
|
|
(185,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
2,669,493
|
|
|
(168,792
|
) |
|
4,646,092
|
|
|
294,675
|
|
Income
tax (expense) benefit
|
|
|
(1,091,079
|
) |
|
71,493
|
|
|
(1,922,000
|
)
|
|
(128,848
|
)
|
Net
income (loss)
|
|
$
|
1,578,414
|
|
$
|
(97,299
|
) |
$
|
2,724,092
|
|
$
|
165,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
(0.01
|
) |
$
|
0.28
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.16
|
|
$
|
(0.01
|
) |
$
|
0.28
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,746,000
|
|
|
9,734,000
|
|
|
9,746,000
|
|
|
9,734,000
|
|
Diluted
|
|
|
9,947,000
|
|
|
9,734,000
|
|
|
9,889,000
|
|
|
9,803,000
|
|
Dividends
per share
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.10
|
|
$
|
0.10
|
|
See
notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Six
Months Ended April 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,724,092
|
|
$
|
165,827
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,069,677
|
|
|
2,359,886
|
|
Loss (gain)
on sale of assets
|
|
|
11,686
|
|
|
(3,997
|
)
|
Deferred income taxes |
|
|
(270,583
|
) |
|
(120,674 |
) |
Increase
in deferred compensation
|
|
|
1,787
|
|
|
3,575
|
|
Bad
debt expense
|
|
|
357,269
|
|
|
296,381
|
|
Hurricane
and relocation costs, net of recoveries |
|
|
(301,693 |
) |
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(3,430,251
|
) |
|
2,417,600
|
|
Inventories
|
|
|
260,370
|
|
|
410,147
|
|
Other
current assets
|
|
|
(418,467
|
)
|
|
(210,920
|
)
|
Accounts
payable
|
|
|
528,686
|
|
|
(855,526
|
)
|
Accrued
payroll
|
|
|
(211,824
|
)
|
|
(456,886
|
)
|
Taxes
accrued and withheld
|
|
|
352,338
|
|
|
173,719
|
|
Income
taxes
|
|
|
103,832
|
|
|
(62,840
|
)
|
Accrued
expenses
|
|
|
117,026
|
|
|
666,365
|
|
Other
liabilities
|
|
|
(2,052
|
)
|
|
(16,110
|
)
|
Net
cash provided by operating activities
|
|
|
1,891,893
|
|
|
4,766,547
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,109,538
|
)
|
|
(1,588,388
|
)
|
Proceeds
from sales of property
|
|
|
67,713
|
|
|
51,174
|
|
Other
assets
|
|
|
(56,735
|
) |
|
76,830
|
|
Net
cash used in investing activities
|
|
|
(1,098,560
|
)
|
|
(1,460,384
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
on line of credit
|
|
|
7,517,000
|
|
|
2,217,000
|
|
Payments
on line of credit
|
|
|
(8,105,000
|
)
|
|
(2,717,000
|
)
|
Proceeds
from term debt |
|
|
80,010 |
|
|
- |
|
Principal
payments on long-term debt
|
|
|
(1,273,132
|
)
|
|
(855,400
|
)
|
Dividends
paid
|
|
|
(974,588
|
)
|
|
(973,391
|
)
|
Net
cash used in financing activities
|
|
|
(2,755,710
|
)
|
|
(2,328,791
|
)
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,962,377
|
) |
|
977,372
|
|
Cash
and cash equivalents, beginning of period
|
|
|
3,661,622
|
|
|
1,745,457
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,699,245
|
|
$
|
2,722,829
|
|
See
notes
to consolidated financial statements.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
April
30, 2006
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, 2005, and related notes thereto
contained in Champion Industries, Inc.’s Form 10-K dated January 16, 2006. The
accompanying interim financial information is unaudited. The results of
operations for the period are not necessarily indicative of the results to
be
expected for the full year. The balance sheet information as of October 31,
2005
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 201,000 and 143,000
shares for the three and six months ended April 30, 2006 and 0 and 69,000
shares for the three and six months ended April 2005.
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:
|
|
April
30,
|
|
October
31,
|
|
|
|
2006
|
|
2005
|
|
Printing:
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,239,937
|
|
$
|
2,198,882
|
|
Work
in process
|
|
|
1,799,851
|
|
|
1,766,862
|
|
Finished
goods
|
|
|
4,087,969
|
|
|
4,013,041
|
|
Office
products and office furniture
|
|
|
2,497,426
|
|
|
3,100,941
|
|
|
|
$
|
10,625,183
|
|
$
|
11,079,726
|
|
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
4.
Long-Term Debt
Long-term
debt consisted of the following:
|
|
April
30,
|
|
October
31,
|
|
|
|
2006
|
|
2005
|
|
Secured
term note
payable |
|
$ |
2,154,978 |
|
$ |
3,024,861 |
|
Installment notes payable to banks
|
|
|
3,484,682
|
|
|
3,791,439
|
|
Capital
lease obligations
|
|
|
-
|
|
|
16,483
|
|
|
|
|
5,639,660
|
|
|
6,832,783
|
|
Less
current portion
|
|
|
1,743,974
|
|
|
1,684,280
|
|
Long-term
debt, net of current portion
|
|
$
|
3,895,686
|
|
$
|
5,148,503
|
|
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 2008 and contains certain
restrictive financial covenants. The Company had outstanding borrowings under
this facility of approximately $1.0 million and $1.6 million at April 30,
2006 and October 31, 2005.
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 2007 and contains certain
financial covenants. There were no borrowings outstanding under this facility
at
April 30, 2006 and October 31, 2005.
There
were no non-cash financing activities for the three and six months ended
April
30, 2006 and 2005.
5.
Shareholders’ Equity
The
Company paid a dividend of five cents per share on
March
27,
2006 to
stockholders of record on
March
10,
2006.
Also, the Company declared a dividend of five cents per share to be paid
on June
26, 2006 to stockholders of record on June 9, 2006.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
6.
Commitments
and Contingencies
As
of
April 30, 2006 the Company had contractual obligations in the form of leases
and
debt as follows:
|
|
Payments
Due by Fiscal Year
|
|
Contractual
Obligations
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Residual
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable
operating leases
|
|
$
|
529,048
|
|
$
|
977,046
|
|
$
|
786,387
|
|
$
|
402,503
|
|
$
|
149,163
|
|
$
|
89,303
|
|
$
|
2,933,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit
|
|
|
-
|
|
|
-
|
|
|
1,024,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,024,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
debt
|
|
|
791,294
|
|
|
1,773,052
|
|
|
1,566,066
|
|
|
484,598
|
|
|
1,024,650
|
|
|
-
|
|
|
5,639,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
purchase obligations |
|
|
1,515,150
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,515,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,835,492
|
|
$
|
2,750,098
|
|
$
|
3,376,453
|
|
$
|
887,101
|
|
$
|
1,173,813
|
|
$
|
89,303
|
|
$
|
11,112,260
|
|
During
the second quarter of 2006, the Company entered into a purchase commitment
with
an equipment manufacturer for the purchase of a printing press for $1,130,725.
As a result of this commitment the Company paid this manufacturer a deposit
of
$127,575 during the second quarter of 2006. The Company also entered into
a
purchase commitment for pre-press equipment with a manufacturer for $642,000.
As
a result of this commitment the Company paid this manufacturer a deposit of
$130,000 during the second quarter of 2006.
7.
Accounting
for Stock-Based Compensation
In
December 2004, the FASB 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 initially was for interim and
annual
periods beginning after June 15, 2005.
On
April
14, 2005, the United States Securities and Exchange Commission amended
the
effective date of this standard to the beginning of a company’s fiscal year that
begins after June 15, 2005. Therefore, the effective date of this standard
for
the Company was November 1, 2005. Since the Company’s outstanding employee stock
options vested immediately in the year granted, the initial adoption of
this
standard had no effect on the Company’s financial statements. However, the
Company will be required to expense the fair value of the employee stock
options
when future options are granted or
when
existing options are modified or repurchased pursuant to the provisions
of SFAS
No. 123R.
The
Company did not issue any employee stock options for
the three and six months ended April 30, 2006 and 2005.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
|
|
Three
Months Ended
April
30
|
Six
Months Ended
April
30
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss), as reported
|
|
$
|
1,578,414
|
|
$
|
(97,299
|
) |
$
|
2,724,092
|
|
$
|
165,827
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value method for all awards, net of related tax effects
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
1,578,414
|
|
$
|
(97,299
|
) |
$
|
2,724,092
|
|
$
|
165,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
0.16
|
|
$
|
(0.01
|
) |
$
|
0.28
|
|
$
|
0.02
|
|
Basic,
pro forma
|
|
|
0.16
|
|
|
(0.01
|
) |
|
0.28
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
$
|
0.16
|
|
$
|
(0.01
|
) |
$
|
0.28
|
|
$
|
0.02
|
|
Diluted,
pro forma
|
|
|
0.16
|
|
|
(0.01
|
) |
|
0.28
|
|
|
0.02
|
|
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 ending 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.
9.
Accounting for Costs Associated with
Exit or Disposal Activities and Impact of Hurricane
Katrina
During
the second quarter of 2005, the Company
relocated its Chapman Printing Company Charleston division to a facility
leased
by the Company as a result of the acquisition of Syscan. The Company is
currently evaluating its facility needs in Charleston, West Virginia and
the
future use, if any, of the building formerly occupied by the Chapman Printing
Charleston division.
The
Company moved its Dallas operations to an
existing facility in Baton Rouge, Louisiana in August 2005. The Company is
currently evaluating its options regarding the Dallas facility.
On
August 29, 2005, Hurricane Katrina made landfall
and subsequently caused extensive flooding and destruction along the
coastal
areas of the Gulf of Mexico, including New Orleans and other communities
in
Louisiana and Mississippi in which Champion conducts business. Operations
in many of the Company's markets were disrupted by both the evacuation
of large
portions of the population as well as damage and/or lack of access to
the
Company's operating facility in New Orleans.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
The
Company has filed insurance claims related to
both actual and contingent losses. The Company received an advance to
claim from
an insurance company of $300,000 in February 2006. A second advance to
claim of
$200,000 was received in April 2006 and a check in the amount of $78,000 in
full settlement of any and all claims was received in May 2006. The Company
recorded all of the payments as insurance recoveries for the six
months ended April 30, 2006.
The
Company has categorized the costs associated with Hurricane Katrina as
follows:
1.)
Personnel costs representing costs associated with payment of personnel
primarily in New Orleans during the time period the city was essentially
shut
down;
2.)
Plant
costs represent all facilities, equipment and inventory charges incurred
as a
result of the hurricane using the most current available
information;
3.)
The
allowance for doubtful accounts charge represents accounts receivable
specifically reserved based on a collectibility analysis performed by the
Company using the most current available information for customers located
in the New Orleans area;
4.)
The
relocation costs represent costs of closing the New Orleans production
facility
and associated costs of moving equipment.
The
following table summarizes the cumulative costs incurred as of April 30,
2006
relating to Hurricane Katrina.
Personnel
|
|
$
|
88,423
|
|
Plant
|
|
|
745,035
|
|
Allowance
for doubtful accounts
|
|
|
208,310
|
|
Moving
and relocation costs
|
|
|
255,215
|
|
|
|
|
|
|
Total
pre-tax hurricane expense
|
|
|
1,296,983
|
|
|
|
|
|
|
Insurance
recoveries
|
|
|
577,677
|
|
|
|
|
|
|
Cumulative
impact of Hurricane Katrina, net
|
|
$
|
719,306
|
|
The
Company recorded costs of $1,020,999 for the three months ended October
31, 2005
and costs of $275,984 and recoveries of $577,677 for the six months ending
April 30, 2006 relating to Hurricane Katrina.
The
costs
and recoveries associated with Hurricane Katrina are reflected in the
consolidated statements of operations in the category “Hurricane and relocation
costs, net of recoveries” and are part of the printing segment.
Champion
Industries, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Unaudited)
(continued)
10.
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 months ended
April 30:
|
|
Office
Products
|
|
2006
Quarter 2
|
|
Printing
|
|
&
Furniture
|
|
Total
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
32,014,163
|
|
$
|
11,838,155
|
|
$
|
43,852,318
|
|
Elimination
of intersegment revenue
|
|
|
(4,172,486
|
)
|
|
(2,259,263
|
)
|
|
(6,431,749
|
)
|
Consolidated
revenues
|
|
$
|
27,841,677
|
|
$
|
9,578,892
|
|
$
|
37,420,569
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,220,966
|
|
|
606,930
|
|
|
2,827,896
|
|
Depreciation
& amortization
|
|
|
979,864
|
|
|
39,672
|
|
|
1,019,536
|
|
Capital
expenditures
|
|
|
793,197
|
|
|
81,920
|
|
|
875,117
|
|
Identifiable
assets
|
|
|
51,534,191
|
|
|
10,280,382
|
|
|
61,814,573
|
|
Goodwill
|
|
|
1,774,344
|
|
|
286,442
|
|
|
2,060,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Products
|
|
2005
Quarter 2
|
|
Printing
|
|
&
Furniture
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
27,812,058
|
|
$
|
11,276,457
|
|
$
|
39,088,515
|
|
Elimination
of intersegment revenue
|
|
|
(3,427,088
|
)
|
|
(2,109,145
|
)
|
|
(5,536,233
|
)
|
Consolidated
revenues
|
|
$
|
24,384,970
|
|
$
|
9,167,312
|
|
$
|
33,552,282
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(508,299
|
) |
|
455,860
|
|
|
(52,439
|
) |
Depreciation
& amortization
|
|
|
1,132,788
|
|
|
74,987
|
|
|
1,207,775
|
|
Capital
expenditures
|
|
|
684,085
|
|
|
48,768
|
|
|
732,853
|
|
Identifiable
assets
|
|
|
51,415,546
|
|
|
9,933,810
|
|
|
61,349,356
|
|
Goodwill
|
|
|
1,774,344
|
|
|
286,442
|
|
|
2,060,786
|
|
|
|
|
|
|
|
Office
Products
|
|
2006
Year to Date
|
|
Printing
|
|
&
Furniture
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
61,702,192
|
|
$
|
24,300,439
|
|
$
|
86,002,631
|
|
Elimination
of intersegment revenue
|
|
|
(7,694,866
|
)
|
|
(4,595,488
|
)
|
|
(12,290,354
|
)
|
Consolidated
revenues
|
|
$
|
54,007,326
|
|
$
|
19,704,951
|
|
$
|
73,712,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,668,714
|
|
|
1,300,895
|
|
|
4,969,609
|
|
Depreciation
& amortization
|
|
|
1,994,962
|
|
|
74,715
|
|
|
2,069,677
|
|
Capital
expenditures
|
|
|
1,005,440
|
|
|
104,098
|
|
|
1,109,538
|
|
Identifiable
assets
|
|
|
51,534,191
|
|
|
10,280,382
|
|
|
61,814,573
|
|
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
|
|
$
|
55,898,035
|
|
$
|
22,805,226
|
|
$
|
78,703,261
|
|
Elimination
of intersegment revenue
|
|
|
(7,076,444
|
)
|
|
(3,634,544
|
)
|
|
(10,710,988
|
)
|
Consolidated
revenues
|
|
$
|
48,821,591
|
|
$
|
19,170,682
|
|
$
|
67,992,273
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(666,646
|
) |
|
1,147,299
|
|
|
480,653
|
|
Depreciation
& amortization
|
|
|
2,205,242
|
|
|
154,644
|
|
|
2,359,886
|
|
Capital
expenditures
|
|
|
1,466,833
|
|
|
121,555
|
|
|
1,588,388
|
|
Identifiable
assets
|
|
|
51,415,546
|
|
|
9,933,810
|
|
|
61,349,356
|
|
Goodwill
|
|
|
1,774,344
|
|
|
286,442
|
|
|
2,060,786
|
|
A
reconciliation of total segment revenues and of total segment operating income
(loss) to consolidated income (loss) before income taxes, for the three and
six months ended April 30, 2006 and 2005, is as follows:
|
|
|
Six
months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment revenues
|
|
$
|
43,852,318
|
|
$
|
39,088,515
|
|
$
|
86,002,631
|
|
$
|
78,703,261
|
|
Elimination
of intersegment revenue
|
|
|
(6,431,749
|
)
|
|
(5,536,233
|
)
|
|
(12,290,354
|
)
|
|
(10,710,988
|
)
|
Consolidated
revenue
|
|
$
|
37,420,569
|
|
$
|
33,552,282
|
|
$
|
73,712,277
|
|
$
|
67,992,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating income (loss)
|
|
$
|
2,827,896
|
|
$
|
(52,439
|
) |
$
|
4,969,609
|
|
$
|
480,653
|
|
Interest
income
|
|
|
7,383
|
|
|
4,574
|
|
|
14,125
|
|
|
9,640
|
|
Interest
expense
|
|
|
(168,828
|
)
|
|
(133,938
|
)
|
|
(340,570
|
)
|
|
(271,303
|
)
|
Other
income
|
|
|
3,042
|
|
|
13,011
|
|
|
2,928
|
|
|
75,685
|
|
Consolidated
income (loss) before income taxes
|
|
$
|
2,669,493
|
|
$
|
(168,792
|
) |
$
|
4,646,092
|
|
$
|
294,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment identifiable assets
|
|
$
|
61,814,573
|
|
$
|
61,349,356
|
|
$
|
61,814,573
|
|
$
|
61,349,356
|
|
Elimination
of intersegment assets
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
consolidated assets
|
|
$
|
61,814,573
|
|
$
|
61,349,356
|
|
$
|
61,814,573
|
|
$
|
61,349,356
|
|
11.
Subsequent Event
On May 21, 2006 a collective bargaining
agreement
covering 72 employees or approximately 10% of the Company's workforce, was
ratified by the bargaining unit. The Company expects a final agreement to
be signed during the third quarter of 2006 with an effective date of June
1,
2006 and expiring May 31, 2010. The previous collective bargaining agreement
for
this workforce expired on May 31, 2006.
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 Statements of Operations as a percentage of total
revenues.
|
|
Percentage
of Total Revenues
|
|
|
Three
Months Ended
April
30,
|
Six
Months Ended
April
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
74.4
|
%
|
|
72.7
|
%
|
|
73.3
|
%
|
|
71.8
|
%
|
Office
products and office furniture
|
|
|
25.6
|
|
|
27.3
|
|
|
26.7
|
|
|
28.2
|
|
Total
revenues
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
51.2
|
|
|
53.3
|
|
|
51.2
|
|
|
52.4
|
|
Office
products and office furniture
|
|
|
18.0
|
|
|
19.3
|
|
|
18.8
|
|
|
20.1
|
|
Total
cost of sales
|
|
|
69.2
|
|
|
72.6
|
|
|
70.0
|
|
|
72.5
|
|
Gross
profit
|
|
|
30.8
|
|
|
27.4
|
|
|
30.0
|
|
|
27.5
|
|
Selling,
general and administrative expenses
|
|
|
23.3
|
|
|
27.6
|
|
|
23.7
|
|
|
26.8
|
|
Hurricane
and relocation costs, net of recoveries |
|
|
(0.1
|
) |
|
- |
|
|
(0.4 |
) |
|
- |
|
Income
(loss) from operations
|
|
|
7.6
|
|
|
(0.2
|
) |
|
6.7
|
|
|
0.7
|
|
Interest
income
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Interest
expense
|
|
|
(0.5
|
)
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Other
income
|
|
|
0.0
|
|
|
0.1
|
|
|
0.0
|
|
|
0.1
|
|
Income
(loss) before taxes
|
|
|
7.1
|
|
|
(0.5
|
) |
|
6.3
|
|
|
0.4
|
|
Income
tax (expense) benefit
|
|
|
(2.9
|
) |
|
0.2
|
|
|
(2.6
|
)
|
|
(0.2
|
)
|
Net
income (loss)
|
|
|
4.2
|
%
|
|
(0.3
|
)%
|
|
3.7
|
%
|
|
0.2
|
%
|
The
following table is a reconciliation of net income (loss) as reported
to core net
income (loss), which is defined as generally accepted accounting principles
(GAAP) net income (loss) adjusted for insurance recoveries, net of expenses
associated with Hurricane Katrina. The Company believes that events
associated
with Hurricane Katrina require additional disclosure and therefore,
the Company
has disclosed additional non-GAAP financial measures in an effort to
make the
quarterly financial statements more useful to investors.
|
|
Three
Months Ended April
30,
|
Six
Months Ended April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Net
income (loss)
|
|
$ |
1,578,000
|
|
$ |
(97,000
|
) |
$ |
2,724,000
|
|
$ |
166,000
|
|
Insurance
recoveries, net of expenses |
|
|
26,000
|
|
|
-
|
|
|
176,000
|
|
|
-
|
|
Core
net income (loss) |
|
$ |
1,552,000
|
|
$ |
(97,000
|
) |
$ |
2,548,000
|
|
$ |
166,000
|
|
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Three
Months Ended April 30, 2006 Compared to Three Months Ended April 30,
2005
Revenues
Total
revenues increased 11.5% in the second quarter of 2006 compared to the
same
period in 2005 from $33.6 million to $37.4 million. Printing revenue increased
14.2% in the second quarter of 2006 to $27.8 million from $24.4 million
in
the second quarter of 2005. Office products and office furniture revenue
increased 4.5% in the second quarter of 2006 to $9.6 million from $9.2
million
in the second quarter of 2005. The increase in printing sales as well as
office products and office furniture sales was primarily due to organic
growth
since there were no new acquisitions since the fourth quarter of
2004.
Cost
of Sales
Total
cost of sales increased 6.4% in the second quarter of 2006 to $25.9 million
from
$24.3 million in the first quarter of 2005. Printing cost of sales in the
second
quarter of 2006 increased $1.3 million over the prior year and decreased as
a percentage of printing sales from 73.3% in 2005 to 68.8% in 2006. The printing
gross margin dollar increase resulted from increased sales volume and was
partially offset by lower cost of goods sold as percentage of sales
resulting from lower material and outside purchase costs as a percentage
of
sales coupled with improved labor and overhead absorption. Office products
and
office furniture cost of sales increased in 2006 from 2005 levels due to
increased sales and decreased as a percent of sales from 70.7% in 2005 to
70.5%
in 2006.
Operating
Expenses
In
the
second quarter of 2006, selling, general and administrative expenses decreased
on a gross dollar basis to $8.7 million from $9.3 million in 2005, a decrease
of
$500,000 or 5.7%. As a percentage of total sales, the expenses decreased
on a
quarter to quarter basis in 2006 to 23.3% from 27.6% in 2005.
The
decrease in selling, general and administrative expenses is primarily the
result
of $777,000 of legal settlements, accruals and expenses including $440,000
to
settle a lawsuit in Mississippi that were present in the second
quarter of 2005. In addition, the Company benefited from the consolidation
of
Chapman Printing Charleston and Syscan in 2005, the closing of the Company's
facility in Jackson, Mississippi and the consolidation of the Company's New
Orleans plant into the Company's Baton Rouge facility. These decreases were
offset by additional costs associated with revenue growth of 11.5% for the
second quarter of 2006 compared to the second quarter of 2005.
On
August
29, 2005, Hurricane Katrina made landfall and subsequently caused extensive
flooding and destruction along the coastal areas of the Gulf of Mexico,
including New Orleans and other communities in Louisiana and Mississippi
in
which Champion conducts business. Operations in many of the Company’s markets
were disrupted by both the evacuation of large portions of the population
as
well as damage and/or lack of access to the Company’s operating facility in New
Orleans.
The
Company has filed insurance claims related to both actual and contingent
losses. The Company received an advance to claim payment from an
insurance company of $300,000 in February 2006 and final settlement claims
of
$278,000 in April and May 2006. The Company recorded the $300,000
payment as an insurance recovery and related receivable at January 31, 2006.
The
Company recorded additional charges of approximately $42,000 in the first
quarter of 2006 associated with Hurricane Katrina. The
Company
received a second advance to claim check in April of 2006 in the amount of
$200,000 and a full and final settlement of any and all claims check of $78,000
in May of 2006. The Company recorded the aggregate amount of these checks
as an
insurance recovery and the $78,000 as a related receivable at April 30, 2006.
The Company incurred additional charges of $234,000, primarily related to
additional inventory valuation reserves and costs associated with relocation
in
the second quarter of 2006.
The
Company is currently unable to accurately assess
the short and long term effects of Hurricane Katrina on its business and
on the
macro operating environment in the Gulf States in which the Company
operates.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
Income
from Operations and Other Income and Expenses
Income
from operations increased in the second quarter of 2006 to $2.8
million from a loss of $(52,000) in the second quarter of 2005. This
increase is the result of increased sales and gross profit and gross
profit
percent, coupled with a decrease in selling, general and administrative
expenses
(S,G & A) and a decrease in S,G & A as a percent of sales. Other expense
(net), increased approximately $42,000 from 2005 to 2006 primarily due
to
increases in interest expense resulting from increased interest
rates.
Income
Taxes
The
Company’s effective income tax rate was 40.9% for the second quarter
of 2006 and 42.4% for the second quarter of 2005. The decrease in income
taxes
as a percentage of income before taxes is primarily related to improved
absorption regarding 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.
Net
Income
Net
income for the second quarter
of 2006 was $1,578,000 compared to a net loss of $(97,000) in the second
quarter
of 2005. Basic and diluted earnings (loss) per share for the three months
ended
April 30, 2006 and 2005 were $0.16 and $(0.01). The Company reported core
net
income of $1,552,000 or $0.16 per share on a basic and diluted basis for
the
three months ended April 30, 2006. Core net income does not include the
insurance recovery, net of expenses. (See Explanatory Table in "Results
of
Operations" section.)
Six
Months Ended April 30, 2006 Compared to Six Months Ended April 30,
2005
Revenues
Total
revenues increased 8.4% in the first six months of 2006 compared to the
same
period in 2005 to $73.7 million from $68.0 million. Printing revenue increased
10.6% in the six month period ended April 30, 2006 to $54.0 million from
$48.8
million in the same period in 2005. Office products and office furniture
revenue
increased 2.8% in the six month period ended April 30, 2006 to $19.7 million
from $19.2 million in the same period in 2005. The increase in printing
sales as
well as office products and office furniture sales was primarily due to
organic
growth since there were no new acquisitions since the fourth quarter of
2004.
Cost
of Sales
Total
cost of sales increased 4.7% in the six months ended April 30, 2006 to
$51.6
million from $49.3 million in the six months ended April 30, 2005. Printing
cost
of sales increased 5.8% in the six months ended April 30, 2006 to $37.7
million
from $35.6 million in the six months ended April 30, 2005. The increase
in
printing cost of sales was primarily due to the increase in printing sales
noted
above partially offset by gross margin improvement resulting from lower
material
and outside purchase costs as a percentage of sales coupled with improved
labor
and overhead absorption. Office products and office furniture cost of sales
increased 1.9% in the six months ended April 30, 2006 to $13.9 million
from
$13.6 million in the six months ended April 30, 2005 and decreased as a
percent
of sales from 71.1% in 2005 to 70.5% in 2006. The increase in office products
and office furniture cost of sales is attributable to an increase in office
products and office furniture sales. The decrease in office products and
office
furniture cost of sales as a percent of sales is reflective of wholesale
pricing
factors at Syscan for office supplies in 2005 mitigated via the office
products
consolidation during the second quarter of 2005 of which the benefits were
fully
reflected in the six months ended April 30, 2006, partially offset by higher
furniture costs as a percent of furniture sales.
Operating
Expenses
During
the six months ended April 30, 2006 compared to the same period in 2005,
selling, general and administrative expenses decreased as a percentage
of sales
to 23.7% from 26.8%. Total selling, general and administrative expenses
(S,G
& A) decreased $800,000. The
decrease in selling, general and administrative expenses is primarily due
to 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, which were incurred during 2005.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
The
decrease in S,G& A as a percent of sales is reflective of the $800,000 in
legal costs not being present in the current year coupled with the consolidation
of Chapman Printing Charleston and Syscan in 2005, the closing of the
Company's
facility in Jackson, Mississippi and the consolidation of the Company's
New
Orleans plant into the Company's Baton Rouge facility. These decreases
were
offset by additional costs associated with revenue growth of 8.4% for
the second
quarter of 2006 compared to the second quarter of 2005.
On
August
29, 2005, Hurricane Katrina made landfall and subsequently caused extensive
flooding and destruction along the coastal areas of the Gulf of Mexico,
including New Orleans and other communities in Louisiana and Mississippi
in
which Champion conducts business. Operations in many of the Company’s markets
were disrupted by both the evacuation of large portions of the population
as
well as damage and/or lack of access to the Company’s operating facility in New
Orleans.
The
Company has filed insurance claims related to both actual and contingent
losses. The Company received an advance to claim payment from an
insurance company of $300,000 in February 2006 and final settlement
claims of
$278,000 in April and May 2006. The Company recorded the $300,000
payment as an insurance recovery and related receivable at January
31, 2006. The
Company recorded additional charges of approximately $42,000 in the
first
quarter of 2006 associated with Hurricane Katrina. The
Company
received a second advance to claim check in April of 2006 in the amount
of
$200,000 and a full and final settlement of any and all claims check
of $78,000
in May of 2006. The Company recorded the aggregate amount of these
checks as an
insurance recovery and the $78,000 as a related receivable at April
30, 2006.
The Company incurred additional charges of $234,000, primarily related
to
additional inventory valuation reserves and costs associated with relocation
in
the second quarter of 2006.
The
Company is currently unable to accurately assess
the short and long term effects of Hurricane Katrina on its business
and on the
macro operating environment in the Gulf States in which the Company
operates.
Income
from Operations and Other Income and Expenses
Income
from operations increased 933.9% in the six month period ended April
30, 2006 to
$5.0 million from $481,000 in the same period of 2005. This
increase is the result of increased gross profit contribution due to
increased
sales and improved gross margins discussed above as well as decreases
in
S,G&A and a reduction of S,G&A as a percent of sales in 2006 compared to
2005. Other expense increased $138,000 to $324,000 in 2006 from $186,000
in
2005. This increase is primarily due to a $69,000 increase in interest
expense
resulting from higher interest rates for 2006 compared to 2005
and a reduction of other income of approximately
$73,000.
Income
Taxes
The
Company’s effective income tax rate was 41.4% for the six months ended April 30,
2006, down from 43.7% in the same period of 2005. The
decrease in income taxes as a percentage of income before taxes is primarily
related to improved absorption regarding 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 six months of 2006 increased 1542.7% to $2.7
million from $166,000 in the same period of 2005 due to the reasons
discussed above. Basic and diluted earnings per share for the six months
ended
April 30, 2006 and 2005, were $0.28 and 0.02. The Company reported core
net
income of $2,548,000 or $0.26 per share on a basic and diluted basis for
the six
months ended April 30, 2006. Core net income does not include the insurance
recovery, net of expenses. (See Explanatory Table in "Results of Operations"
section.)
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.
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 six months ended April 30, 2006, was $1.9
million
compared to net cash provided by operations of $4.8 million during the
same
period in 2005. This change in net cash from operations is due primarily
to
timing changes in assets and liabilities primarily related to an increase
in accounts receivable in 2006 compared to a decrease in accounts receivable
in
2005.
Net
cash
used in investing activities for the six months ended April 30, 2006
was $1.1
million compared to $1.5 million during the same period in 2005. The net
cash used in investing activities during the first six months of 2006,
primarily
relates to equipment and vehicle purchases including mail service equipment
upgrades, software purchases in the office products and office furniture
segment, press additions and upgrades and numerous information technology
related expenditures. The net cash used in investing activities during
the first
six months of 2005 primarily related to vehicle and equipment additions
including pre-press expenditures at two of the Company's sheetfed plants
and
print on demand expenditures.
Net
cash
used in financing activities for the six months ended April 30, 2006
was $2.8
million compared to $2.3 million during the same period in 2005. This
change is primarily due to net payments on the Company’s term debt of $1.3
million compared with net payments on the Company's term debt of
approximately $900,000 in 2005.
The
Company’s off balance sheet arrangements at April 30, 2006 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 April 30, 2006 was $26.7 million, an increase of $600,000 from
October 31, 2005. Management believes that working capital and operating
ratios
remain at acceptable levels.
During
the second quarter of 2006, the Company entered into a purchase commitment
with
an equipment manufacturer for the purchase of a printing press for $1,130,725.
As a result of this commitment the Company paid this manufacturer a deposit
of
$127,575. The Company also entered into a purchase commitment for pre-press
equipment with a manufacturer for $642,000. As a result of this commitment
the
Company paid this manufacturer a deposit of $130,000.
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.
Champion
Industries, Inc. and Subsidiaries
Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations (continued)
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 and business conditions,
general
economic and business conditions in the Company’s market areas affected by
Hurricane Katrina, changes in business strategy or development plans and
other
factors referenced in this Form 10-Q , including without limitations under
the captions “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business.” 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
3. 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
4. Submission of Matters to a Vote of Security Holders
At
the
annual meeting of shareholders held March 20, 2006, the following matters
were
voted upon:
a) |
Fixing
the number of directors at seven (7) and election of the following
nominees as directors, with votes “for” and “withheld,” as well as broker
non-votes, as follows:
|
Director
|
Votes
“For”
|
Votes
“Withheld”
|
Broker
Non-votes
|
Louis
J. Akers
|
9,152,764
|
182,108
|
-0-
|
Philip
E. Cline
|
9,295,014
|
39,858
|
-0-
|
Harley
F. Mooney, Jr.
|
9,315,607
|
19,265
|
-0-
|
A.
Michael Perry
|
9,320,407
|
14,465
|
-0-
|
Marshall
T. Reynolds
|
9,321,807
|
13,065
|
-0-
|
Neal
W. Scaggs
|
9,295,054
|
39,818
|
-0-
|
Glenn
W. Wilcox, Sr.
|
9,320,407
|
14,465
|
-0-
|
Item
6. 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 31.1-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 - Toney K. Adkins
|
Exhibit
31.3 Page Exhibit 31.3-p1
|
(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
|
Exhibit
32 Page Exhibit 32-p1
|
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:
June 2,
2006
|
/s/
Marshall T. Reynolds
|
|
Marshall
T. Reynolds
|
|
Chief
Executive Officer
|
|
|
|
|
Date:
June 2,
2006
|
/s/
Toney K. Adkins
|
|
Toney
K. Adkins
|
|
President
and Chief Operating Officer
|
|
|
|
|
Date:
June 2,
2006
|
/s/
Todd R. Fry
|
|
Todd
R. Fry
|
|
Senior
Vice President and Chief Financial
Officer
|